Note 16. Commitments and Contingencies

Commitments

Operating Leases

The Company leases its primary office locations and data center hosting facilities, as well as a ground lease, under noncancelable lease agreements that expire on varying dates through 2032. See Note 12. Leases.

Water Reservation Agreement

The Company has a water reservation agreement with the lessor of its ground lease to obtain a certain quantity of non-potable water from a nearby lake to be used by the Company for evaporative cooling purposes at our Rockdale Facility.

The Company concluded that the water reservation agreement was not a lease or a derivative instrument. Because the Company obtained an additional right of use for the reserved water amount, and the charges were increased by a standalone price commensurate with the additional water use rights and at market rates, the water reservation agreement was determined to be a lease modification accounted for as a separate contract. As such, the fees of the water reservation agreement were excluded from the lease payments of the ground lease and the water reservation agreement was accounted for as a separate executory contract.

Contingent Consideration Liability

Upon the acquisition of Whinstone in May 2021, the Company was obligated to pay up to $86.0 million, net of income taxes, (undiscounted) of consideration if certain power credits were received or realized by the Company arising from a severe weather event in Texas in February 2021. Through March 31, 2023, portions of the power credits were received, and a portion of the obligation was settled.

The following table presents the changes in the estimated fair value of our contingent consideration liability:

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The estimated fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement.

The Company estimated the fair value of the contingent consideration using a discounted cash flow analysis, which includes estimates of both the timing and amounts of potential future power credits. These estimates were determined using the Company’s historical consumption quantities and patterns combined with management’s expectations of its future consumption requirements, which require significant judgment and depend on various factors outside the Company’s control, such as construction delays. The discount rate of approximately 2.5% includes observable market inputs, such as TXU’s parent company’s Standard & Poor’s credit rating of BB, but also includes unobservable inputs such as interest rate spreads, which were estimated based on qualitative judgment related to company-specific risk factors. Specifically, due to the power credits being subordinated obligations for TXU’s parent, we used one credit rating lower than BB in our yield curve to estimate a reasonable interest rate spread to determine the cost of debt input. Although these estimates are based on management’s best knowledge of current events, the estimates could change significantly from period to period.

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Contingencies

Legal Proceedings

The Company, and its subsidiaries, are subject at times to various claims, lawsuits and governmental proceedings relating to the Company’s business and transactions arising in the ordinary course of business. The Company cannot predict the final outcome of any such proceedings; however, it assesses the probability of an unfavorable outcome of any material litigation, claims or

proceedings to determine whether a liability had been incurred. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including, consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Certain of the claims, lawsuits and proceedings arising in ordinary course of business are covered by the Company’s insurance program. The Company maintains property and various types of liability insurance to protect the Company from such claims. In terms of any matters where no insurance coverage is available to the Company, or where coverage is available and the Company maintains a retention or deductible associated with such insurance, the Company may establish an accrual for such loss, retention or deductible based on current available information. In accordance with accounting guidance, if it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial statements, and the amount of loss is reasonably estimable, then an accrual for the cost to resolve or settle these claims is recorded by the Company in the accompanying condensed consolidated balance sheets. If it is reasonably possible that an asset may be impaired as of the date of the financial statement, then the Company discloses the range of possible loss. Expenses related to the defense of such claims are recorded by the Company as incurred and included in the accompanying consolidated statements of operations. Management, with the assistance of outside counsel, may from time to time adjust such accruals according to new developments in the matter, court rulings, or changes in the strategy affecting the Company’s defense of such matters. Based on current information, the Company does not believe there is a reasonable possibility that, other than with regard to the Class Actions and Related Claims described below, a material loss, if any, will result from claims, lawsuits or proceedings to which the Company is subject to either individually, or in the aggregate.

Northern Data Working Capital Dispute

Riot Blockchain, Inc. v. Northern Data AG. On September 7, 2022, the Company filed a complaint against Northern Data AG (“Northern Data”) in the Delaware Court of Chancery seeking declaratory relief and specific performance under the Stock Purchase Agreement (the “SPA”) that Northern Data entered into with Riot for the purchase of Whinstone. The SPA requires a post-closing true-up of the purchase price and provides specific procedures to resolve disputes over the same, including a mechanism for submitting any objections to an independent accounting expert for resolution. The complaint alleged that Northern Data failed to engage in a contractually prescribed process to resolve disputes over the acquisition price. Accordingly, the Company sought an order affirmatively declaring that it is entitled to initiate the engagement of an independent accounting expert pursuant to the terms of the SPA, as well as an order compelling specific performance from Northern Data to engage an accounting expert or through the court’s appointment of one of the experts proposed by the Company.

On September 26, 2022, Northern Data filed its Answer, Affirmative Defenses, and Verified Counterclaims and Third-Party Claims, alleging that Riot and Whinstone breached the SPA by withholding certain energy credit payments. Northern Data further alleged that Riot is improperly seeking to introduce indemnification claims into the contractual process to resolve the parties’ dispute over purchase price. Northern Data sought damages in an unspecified amount, a declaration that Riot may not withhold payments for energy credits pending the resolution of the purchase price dispute, and specific performance that Riot may not introduce indemnification claims into the purchase price dispute. On November 10, 2022, the Company timely filed its answer and affirmative defenses denying Northern Data’s counterclaims.

Northern Data filed a motion for partial summary judgment on its claims for specific performance of the SPA’s provision for payment of certain energy credits by the Company. The Company filed its answering brief in opposition to the motion on February 3, 2023. Northern Data’s deadline to file any reply in support of the motion was extended until March 31, 2023, while the Parties discussed terms of a settlement to resolve the Delaware litigation and proceed forward with submitting the Parties’ purchase-price dispute to a mutually agreed-upon independent accountant.  

On March 31, 2023, the Parties filed a stipulation and proposed order stating that they had entered into a settlement agreement, and that the Parties agreed to dismiss all claims and counterclaims in the Delaware litigation without prejudice in order to submit the disputed accounting matters to the independent accountant pursuant to the terms of the Agreement. As of March 31, 2023, the Company held $29.5 million in escrow related to this dispute, which will be held in escrow until final settlement and composes the entire balance of Restricted Cash on the Condensed Consolidated Balance Sheets. The Court entered the stipulation and order on April 4, 2023, dismissing the case without prejudice.  

On April 5, 2023, the Parties submitted their initial written statements of their positions to the independent accountant. According to the Parties’ agreed schedule, briefing to the independent accountant should be completed by May 24, 2023. The independent accountant should render a written final determination of the disputed matters by June 9, 2023.

Legacy Hosting Customer Disputes

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Rhodium

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On May 2, 2023, Whinstone file a petition against Rhodium 30MW, LLC, Rhodium JV, LLC, Air HPC LLC, and Jordan HPC, LLC (collectively, “Rhodium”) in Cause No. CV41873 in the 20th District Court of Milam County, Texas.  Whinstone filed an amended petition on May 3, 2023.  In the amended petition, Whinstone asserts breach of contract claims for Rhodium’s failure to pay certain hosting and service fees under certain hosting agreements and seeks a declaration that certain hosting agreements with Rhodium are terminated and that no power credits are owed to Rhodium under any agreement.  Riot seeks recovery of more than $26 million, plus reasonable attorneys’ fees and costs, expenses, and pre- and post-judgment interest. Rhodium was served with the lawsuit on May 8, 2023, and the current deadline to answer is May 30, 2023. Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.

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SBI Crypto Co.

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On April 5, 2023, SBI Crypto Co., Ltd. (“SBI”) filed a complaint against Whinstone US, Inc. (“Whinstone”) in Civil Action No. 6:23-cv-252, in the United States District Court for the Western District of Texas—Waco Division.  SBI asserts breach of contract, fraud/fraudulent inducement, fraud by nondisclosure, and negligent bailment claims.  SBI seeks recovery of at least $15 million in lost profits, at least $16 million for equipment damage, recovery of its reasonable attorneys’ fees and costs, expenses, costs, and pre- and post-judgment interest.  The deadline for Whinstone to answer or otherwise respond to the complaint is May 25, 2023. Whinstone plans to vigorously contest these claims. Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.

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GMO

On June 13, 2022, GMO Gamecenter USA, Inc., a California corporation, and GMO Internet, Inc., a corporation organized and existing under the laws of Tokyo, Japan (collectively “GMO”), filed a complaint against Whinstone US, Inc. in the Supreme Court of the State of New York, County of New York: Commercial Division, Index No.: 656762/2022, subsequently removed to the United States District Court, S.D.N.Y., Case No. 1:22-cv-05974-JPC (the “Complaint”). In the Complaint, GMO alleges Whinstone breached the W Colocation Services Agreement (Texas), entered into by GMO and Whinstone on October 16, 2019 (the “Colocation Services Agreement”), by failing to indemnify GMO for certain contractual loss of profit and causing additional damages including loss of revenue, lost profits and loss of savings. GMO is seeking – without substantiation – compensatory damages in excess of $50 million, and pre- and post-judgment interest.

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Whinstone’s Answer and Counterclaims were filed on August 22, 2022. In the Answer and Counterclaims, Whinstone denies the substantive allegations of the Complaint and has asserted counterclaims seeking a declaratory judgment due to GMO’s failure to negotiate in good faith in accordance with the terms of the Colocation Services Agreement, as well as compensatory damages in excess of $25 million, including damages from loss of revenue, breach of contract, pre- and post-judgment interest, and attorneys’ fees and costs in connection with GMO’s breach of the Colocation Services Agreement. On September 12, 2022, GMO filed its answer and affirmative defenses to Whinstone’s counterclaims, as well as an amended complaint (subsequently further amended to correct the caption) that included additional claims against Whinstone, as permitted under the applicable local rules. On November 1, 2022, Whinstone filed an answer and counterclaims to GMO’s amended complaint.

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The Company intends to vigorously defend Whinstone against GMO’s claims, and to vigorously enforce Whinstone’s claims against GMO. Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any

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Class Actions and Related Claims

On February 17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company’s stockholders in the United District Court for the District of New Jersey, Takata v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-02293. The complaint asserts violations of federal securities laws under Section 10(b) and Section 20(a) of the Exchange Act on behalf of a putative class of stockholders that purchased stock from November 13, 2017 through February 15, 2018. The complaint alleges that the Company and certain of its officers and directors made, caused to be made, or failed to correct false and/or misleading

statements in press releases and public filings regarding its business plan in connection with its cryptocurrency business. The complaint requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.

On April 18, 2018, Joseph J. Klapper, Jr., filed a complaint against Riot Blockchain, Inc., and certain of its officers and directors in the United District Court for the District of New Jersey (Klapper v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-8031). The complaint contained substantially similar allegations and the same claims as those filed by Mr. Takata, and requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.

On November 6, 2018, the court in the Takata action issued an order consolidating Takata with Klapper into a single putative class action. The court also appointed Dr. Golovac as Lead Plaintiff and Motely Rice as Lead Counsel of the consolidated class action.

Lead Plaintiff filed a consolidated complaint on January 15, 2019. Defendants filed motions to dismiss on March 18, 2019. In lieu of opposing defendants’ motions to dismiss, Lead Plaintiff filed another amended complaint on May 9, 2019. Defendants filed multiple motions to dismiss the amended complaint starting on September 3, 2019. On April 30, 2020, the court granted the motions to dismiss, which resulted in the dismissal of all claims without prejudice.

On December 24, 2020, Lead Plaintiff filed another amended complaint. Defendants filed multiple motions to dismiss the amended complaint starting on February 8, 2021, which were fully briefed. On February 28, 2022, the court issued an order instructing the parties to submit supplemental briefing by March 14, 2022 on particular issues raised in the motions to dismiss. On May 27, 2022, Lead Plaintiff filed the third amended consolidated complaint. Defendants submitted motions to dismiss on July 18, 2022. Briefing on the motions to dismiss was completed in October 2022. Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.

Shareholder Derivative Actions

On April 5, 2018, Michael Jackson filed a shareholder derivative complaint on behalf of the Company in the Supreme Court of the State of New York, County of Nassau, against certain of the Company’s officers and directors, as well as against an investor (Jackson v. Riot Blockchain, Inc., et al., Case No. 604520/18). The complaint contains similar allegations to those contained in the shareholder class action complaints and seeks recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement. The complaint seeks unspecified monetary damages and corporate governance changes. At the last preliminary conference, the court adjourned the conference until June 27, 2023 in lieu of staying the action. Defendants do not anticipate any other activity on this case until the next preliminary conference.

On May 22, 2018, two additional shareholder derivative complaints were filed on behalf of the Company in the Eighth Judicial District Court of the State of Nevada in and for the County of Clark (Kish v. O’Rourke, et al., Case No. A-18-774890-B & Gaft v. O’Rourke, et al., Case No. A-18-774896-8). The two complaints make identical allegations, which are similar to the allegations contained in the shareholder class action complaints. The shareholder derivative plaintiffs also seek recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, and aiding abetting a breach of fiduciary duty. The complaints seek unspecific monetary damages and corporate governance changes.

On September 24, 2018, the court entered an order consolidating the Gaft and Kish actions, which is now styled as In re Riot Blockchain, Inc. Shareholder Derivative Litigation, Case No. A-18-774890-B. The plaintiffs filed a consolidated complaint on March 15, 2019. The consolidated action has been temporarily stayed until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.

On October 9, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Eastern District of New York (Rotkowitz v. O’Rourke, et al., Case No. 2:18-cv-05632). As with the other shareholder derivative actions, the shareholder plaintiff alleges breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. The parties filed a motion with the court to temporarily stay this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey. In response, the court dismissed the action without prejudice with leave to refile a complaint following the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.

On October 22, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Southern District of New York (Finitz v. O’Rourke, et al., Case No. 1:18-cv-09640). The shareholder plaintiffs allege breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties’ stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.

On December 13, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Northern District of New York (Monts v. O’Rourke, et al., Case No. 1:18-cv-01443). The shareholder plaintiffs allege claims for violation of Section 14(a) of the Exchange Act, breach of fiduciary duties, unjust enrichment, waste of corporate assets, and aiding and abetting against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties’ stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.

Defendants intend to vigorously contest plaintiffs’ allegations in the shareholder derivative actions and plaintiffs’ right to bring the action in the name of Riot Blockchain. But because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.