Note 4. Acquisitions

Acquisition of Whinstone US, Inc.

On May 26, 2021, the Company acquired 100% of the equity interests of Whinstone US, Inc., the owner and operator of what is believed to be North America’s largest Bitcoin mining and hosting facility, for approximately $460 million. The acquisition of Whinstone diversifies Riot’s revenues and catapults Riot into a market-leading position in the Bitcoin mining and hosting business. The assets and operations of Whinstone will increase the scale and scope of Riot’s operations, which is a foundational element in the Company’s strategy to become an industry-leading Bitcoin mining platform on a global scale.

The acquisition-date fair value of the total consideration transferred was comprised of $80 million of cash, adjusted for net working capital and other items, and 11.8 million shares of the Company’s common stock, no par value, with a value of approximately $326 million. As part of cash at closing, net debt outstanding from Whinstone to its parent (Seller) totaling approximately $38 million was repaid as part of cash paid and certain seller transaction costs were paid. The Company also agreed to pay Seller up to approximately $86 million (undiscounted) in additional consideration if certain future power credits are realized by Whinstone.

The purchase price was funded through a combination of existing cash and issuance of equity securities.

The Whinstone Acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, which requires recognition of assets acquired and liabilities assumed at their respective fair values on the date of acquisition. As of June 30, 2021, the Company has completed a preliminary allocation of the purchase consideration. Therefore, the allocation of the purchase price to assets acquired and liabilities assumed is based on provisional estimates and is subject to continuing management analysis, with assistance from third party valuation advisors. The Company expects to finalize the valuation of these assets and liabilities, and consideration transferred, as soon as practicable, but not later than one year from the Acquisition Date. Any changes to the preliminary estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.

Riot Blockchain, Inc. and Subsidiaries

Notes to the Condensed Interim Consolidated Financial Statements

(Unaudited)

The preliminary purchase price allocation is as follows (in thousands):

The $460,384 total purchase price consideration consisted of $326.2 million fair value of Riot common shares issued, a $53.0 million cash payment (including $38.1 million of debt payoff and certain Seller transaction costs), an $83.0 million contingent purchase price payable to the Seller and other net items of $(1.7 million).

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Riot Blockchain, Inc. and Subsidiaries

Notes to the Condensed Interim Consolidated Financial Statements

(Unaudited)

As part of the share purchase agreement Riot entered into with the Seller in connection with the Whinstone Acquisition, Riot is obligated to Seller to pay up to a maximum amount of $86 million, net of income taxes as defined under the stock purchase agreement (undiscounted) of additional consideration if certain power credits are received or realized by Whinstone. Those power credits arose from the February weather event. The purchase price included the estimated fair value of the contingent consideration at the Whinstone Acquisition Date of approximately $83 million. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The significant assumptions used to estimate the fair value are described in Note 14, “Fair Value Measurements”. These assumptions for the power credits whose utilization by Whinstone is contingent on ERCOT’s future power billings), include the timing of receipt or realization of the power credits, estimates of future power consumption, the discount rate and credit risk of the Company and the owing party (ERCOT).

The fair value of the acquired trade receivables was determined to be the net realizable amount of the closing date book value of $1.0 million.

The fair value of the acquired long-term other asset of approximately $83 million relates to the estimated amount of power credits due Whinstone from the February weather event. We estimated the fair value of the power credits to be the same as that of the contingent consideration arrangement because the Company is required to remit to the Seller in cash as additional consideration the amount of such power credits received or realized by Whinstone. See discussion above on contingent consideration.

Intangible assets acquired consist of customer contracts, with an estimated useful average life of approximately 8.5 years based on the remaining lives of the customer contracts. Fair value of the contracts was estimated by applying an income approach – multi period excess earnings method. The fair value was determined by calculating the present value of estimated future operating cash flows generated from the existing customers less costs to realize the revenue. The Company applied a discount rate of 21%, which reflected the nature of the assets as they relate to the risk and uncertainty of the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer contracts include an assumed income tax rate of 21% and for expiring contracts an estimated renewal probability of 80%. The future quarterly straight-line amortization of the identified intangible assets is estimated to be approximately $2.6 million.

The derivative asset acquired pertains to Whinstone’s Power Supply Agreement. Fair value of the contract of approximately $14 million was estimated by applying a discounted debt-free cash flow approach. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The significant assumptions used to estimate fair value of the derivative contract include a discount rate of 21%, which reflected the nature of the contract as it relates to the risk and uncertainty of the estimated future mark-to-market adjustments, forward price curves of the power supply, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors.

The fair value of property and equipment was estimated by applying the cost approach. The cost approach uses the replacement or reproduction cost as an indicator of fair value. The assumptions of the cost approach include replacement cost new, projected capital expenditures, and physical deterioration factors including economic useful life, remaining useful life, age, and effective age.

The operating results of Whinstone have been included in the Company's unaudited condensed interim consolidated statements of operations since the Acquisition Date. During the three and six months ended June 30, 2021, the Company recognized $17.0 million and $18.3 million, respectively, of acquisition-related costs that were expensed as incurred.

Riot Blockchain, Inc. and Subsidiaries

Notes to the Condensed Interim Consolidated Financial Statements

(Unaudited)

The financial results of the acquisition have been included in the Company’s consolidated financial statements from the closing of the acquisition. From the May 26, 2021 acquisition date through June 30, 2021, Whinstone’s total revenue and net income was approximately $2.9 million and $12.6 million, respectively. Amortization expense amounted to approximately $0.9 million for the three months ended June 30, 2021.

Pro Forma Information (Unaudited)

The following unaudited pro forma financial information summarizes the combined results of operations for Riot and Whinstone as if the companies were combined as of January 1, 2020. The unaudited pro forma information does not reflect the effect of costs or synergies that may result from the acquisition. The pro forma information excludes acquisition-related costs of $17.0 million and $18.3 million during the three and six months ended June 30, 2021, respectively. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred on January 1, 2020, or of future results of the consolidated entities. This unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of future operating results of the combined company.