Commitments and Contingencies
|6 Months Ended|
Jun. 30, 2023
|Commitments and Contingencies Disclosure [Abstract]|
|Commitments and Contingencies||
Note 16. Commitments and Contingencies
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 term of the agreement, including the impact of the amendment, runs through January 2032, followed by three ten-year renewal periods, and requires annual payments of approximately $2.1 million.
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 June 30, 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 the Company’s contingent consideration liability:
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, the Company used one credit rating lower than BB in the 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.
Approximately $1.2 million of remaining future power credits to be received are estimated to be received over a period of 12 years. The Company determined the value of the contingent consideration as of June 30, 2023, using a discount rate of approximately 8.0%, which was based on the factors above, including the recent increase in interest rates.
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, as described in the 2022 Annual Report, as supplemented by the following:
Northern Data Working Capital Disputes
On September 7, 2022, the Company filed a complaint against Northern Data AG (“Northern Data”) disputing the purchase price of Whinstone and seeking declaratory relief and specific performance of the stock purchase agreement. Northern Data filed an answer and counterclaims alleging that the Company and Whinstone withheld certain energy credit payments and that the Company is improperly seeking to introduce indemnification claims into the contractual process to resolve the parties’ dispute. On March 31, 2023, the Parties filed a stipulation agreeing to dismiss all claims without prejudice and to submit the dispute for final determination to an independent accountant. The Company placed $29.5 million in escrow pending the final determination.
On June 9, 2023, the independent accountant rendered a written final determination finding in favor of the Company on disputed issues totaling approximately $27.1 million, which were released from escrow and distributed to the Company on June 13, 2023. The remaining amount in escrow was allocated to Northern Data. As a result, we recognized a Deferred gain on acquisition post-close dispute settlement of $26.0 million on the Condensed Consolidated Balance Sheets.
Following the final determination almost entirely in favor of the Company, on June 23, 2023, Northern Data filed a complaint against the Company seeking a declaratory judgment that (1) certain parts of the independent accountant’s determination constitute manifest error and are thus null and void, (2) the Company improperly introduced an indemnification claim into the purchase price adjustment process, and (3) the Company pay Northern Data the amounts awarded to the Company or, alternatively, the court order a new purchase price adjustment process. The Company intends to vigorously oppose Northern Data’s complaint to set aside the independent accountant’s final determination. The Company filed a motion to dismiss the complaint on July 17, 2023, and subject to approval from the Court, the parties agreed that briefing on the motion to dismiss will be completed by October 17, 2023. Although the Company entirely disagrees with the allegations and arguments raised by Northern Data and considers its complaint to be without merit, the Company cannot accurately predict the outcome of ongoing litigation.
Legacy Hosting Customer Disputes
On May 2, 2023, Whinstone filed a petition against Rhodium 30MW, LLC, Rhodium JV, LLC, Air HPC LLC, and Jordan HPC, LLC (collectively, “Rhodium”) and later amended the petition asserting breach of contract claims for Rhodium’s failure to pay hosting and service fees under certain hosting agreements. Additionally, the amended petition seeks a declaration that certain hosting agreements with Rhodium are terminated and that no power credits are owed to Rhodium under any agreement. Whinstone seeks recovery of more than $26 million, plus reasonable attorneys’ fees and costs, expenses, and pre- and post-judgment interest. On June 12, 2023, Rhodium answered and, along with non-parties Rhodium Encore LLC, Rhodium 2.0 LLC, and Rhodium 10mw LLC (collectively, the “Non-Parties”), filed counterclaims for breach of contract and moved to compel arbitration seeking recovery of at least $7-$10 million in alleged unpaid energy sale credits and between seven to eight figures in lost profits. Whinstone believes Rhodium’s claims are without merit and intends to vigorously contest them, as appropriate. A hearing on the parties’ arguments is set for August 25, 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.
SBI Crypto Co.
On April 5, 2023, SBI Crypto Co., Ltd. (“SBI”) filed a complaint against Whinstone alleging breach of contract, fraud/fraudulent inducement, fraud by nondisclosure, and negligent bailment claims. Whinstone filed a motion to dismiss SBI’s complaint and on July 7, 2023, SBI filed an amended complaint asserting breach of contract, fraud/fraudulent inducement, and fraud by nondisclosure. On July 21, 2023, Whinstone filed a motion to dismiss the amended complaint. SBI seeks recovery of at least $15 million in lost profits, at least $16 million for equipment damage, reasonable attorneys’ fees and costs, expenses, costs, and pre- and post-judgment
interest. While a preliminary investigation of the merits of SBI’s claims has commenced, Whinstone believes many of the claims are barred or waived and substantively lack merit, and Whinstone plans to vigorously contest the same. 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.
On June 13, 2022, GMO Gamecenter USA, Inc. and its parent GMO Internet, Inc. (collectively “GMO”), filed a complaint against Whinstone alleging breach of contract under the colocation services agreement between GMO and Whinstone, seeking damages in excess of $150 million. Whinstone has responded to GMO’s claims and raised counterclaims of its own, alleging GMO itself breached the colocation services agreement, seeking a declaratory judgment and damages in excess of $25 million. At this preliminary stage, the Company believes that GMO’s claims lack merit. 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.
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 October 26, 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 made nearly identical allegations, which were similar to the allegations contained in the shareholder class action complaints. The shareholder derivative plaintiffs also sought 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. The court entered an order consolidating the Gaft and Kish actions, which was styled as In re Riot Blockchain, Inc. Shareholder Derivative Litigation, Case No. A-18-774890-B. On January 18, 2023, the court entered an order voluntarily dismissing the consolidated action without prejudice.
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. 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.
The entire disclosure for commitments and contingencies.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef