Commitments and Contingencies |
Note 16. Commitments and Contingencies Commitments Operating Leases The Company leases its primary office locations and has a ground lease for its Rockdale Facility under noncancelable lease agreements that expire on varying dates through 2032. See Note 12. Leases, for additional information. Water Reservation Agreement The Company has a water reservation agreement, as amended, with the lessor of its ground lease to secure a certain quantity of non-potable water from a nearby lake to be used by the Company at its Rockdale Facility. The water reservation agreement runs through January 2032 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 to the seller if certain power credits were received or realized by the Company arising from a severe weather event in Texas in February 2021. Through September 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: | | | | Balance as of December 31, 2022 | | $ | 24,935 | Change in contingent consideration | | | (24,026) | Change in fair value of contingent consideration | | | — | Balance as of September 30, 2023 | | $ | 909 |
The estimated fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. Upon the acquisition of Whinstone, the Company estimated the fair value of the contingent consideration using a discounted cash flow analysis, which included 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 required significant judgment and depend on various factors outside the Company’s control, such as construction delays. The discount rate of approximately 2.5% included observable market inputs, but also included unobservable inputs such as interest rate spreads, which were estimated based on qualitative judgment related to company-specific risk factors. Specifically, the Company used S&P Global’s B credit rating in the yield curve to estimate a reasonable interest rate spread to determine the cost of debt input because the power credits are subordinated obligations for the Company’s counterparty. 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 September 30, 2023, using a discount rate of approximately 8.0%, which was based on the factors above, including the recent increase in interest rates. 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, 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”) in the Delaware Court of Chancery (Case No. C.A. No. 2022-0792-LWW) disputing the purchase price of Whinstone and seeking declaratory relief and specific performance of the stock purchase agreement. 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 of the independent accountant, and, 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. Accordingly, $27.1 million of the escrowed amount was released from escrow and distributed to the Company on June 13, 2023, with the remaining $2.4 million held in escrow allocated to Northern Data. As a result, the Company recognized a Deferred gain on acquisition post-close dispute settlement of $26.0 million on the Condensed Consolidated Balance Sheets. Following the final determination, Northern Data filed a complaint against the Company in the Delaware Court of Chancery on July 23, 2023 (Case No. C.A. No. 2023-0650-LWW) challenging the independent accountant’s written final determination and seeking to re-litigate the purchase price adjustment process. The Company contests Northern Data’s right to bring this new complaint and entirely disagrees with the allegations and arguments it raises, and the Company filed a motion to dismiss the complaint on July 17, 2023, which is set to be heard on February 13, 2024.While the Company considers Northern Data’s new complaint to be without merit and intends to vigorously oppose such complaint, as appropriate, the Company cannot accurately predict the outcome of such ongoing litigation, or estimate the magnitude of such outcome, due to its early stage. Legacy Hosting Customer Disputes Rhodium On May 2, 2023, Whinstone filed a petition in the District Court for the 20th Judicial District of Milam County, Texas (Case No. CV41873), which it later amended, against Rhodium 30MW, LLC, Rhodium JV, LLC, Air HPC LLC, and Jordan HPC, LLC (collectively, “Rhodium”) asserting breach of contract claims for Rhodium’s failure to pay amounts due under Rhodium’s colocation agreements with Whinstone. The amended petition also seeks a declaration that certain superseded 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”), moved to compel arbitration and filed counterclaims for breach of contract seeking recovery of at least $7-$10 million in power credits allegedly owed to Rhodium under the superseded agreements, as well as lost profits. On August 2, 2023, Rhodium disclosed the amount of damages it seeks to recover for these claims, which includes at least $42 million in alleged energy credits, at least $1 million in alleged lost profits for power diversion, and at least $0.7 million in alleged direct damages for breach of contract, plus lost profits and reasonable and necessary attorneys’ fees. On August 28, 2023, the district court granted Rhodium’s motion to compel arbitration and stay litigation. On October 24, 2023, Whinstone filed a petition for writ of mandamus with the Court of Appeal for the Third District of Texas, Austin Division (Case No. 03-23-00717-CV), requesting that the appellate court vacate the district court’s order compelling arbitration or, alternatively, the portion of its order staying litigation as to all claims arising under agreements without mandatory arbitration provisions. Whinstone believes Rhodium’s claims are without merit and intends to vigorously contest them, as appropriate. Because this litigation is still at this early stage, the Company 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 in the United States District Court for the Western District of Texas (Case No. 6:23-cv-252), which it later amended, against Whinstone alleging breach of contract, fraud, and negligent bailment claims. On July 21, 2023, Whinstone filed a motion to dismiss the amended complaint, which was denied on October 25, 2023. 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. Whinstone believes many of the claims are barred or waived and substantively lack merit, and Whinstone plans to vigorously contest the same, as appropriate. While a preliminary investigation of the merits of SBI’s claims has commenced, because this litigation is still at this early stage, the Company cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any. GMO On June 13, 2022, GMO Gamecenter USA, Inc. and its parent, GMO Internet, Inc., (collectively “GMO”) filed a complaint in the United States District Court for the Southern District of New York (Case No. 1:22-cv-05974-JPC) 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. On October 19, 2023, GMO filed its fourth amended complaint claiming an additional $496 million in damages, for loss of profit and profit sharing, based on Whinstone’s alleged wrongful termination of the colocation services agreement as of June 29, 2023. At this preliminary stage, the Company believes that GMO’s claims lack merit; however, because this litigation is still at this early stage, the Company cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any. Class Actions and Related Shareholder Derivative Actions On February 17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company’s stockholders in the United States District Court for the District of New Jersey, Takata v. Riot Blockchain Inc., et al. (Case No. 3: 18-cv-02293). On August 25, 2023, the United States District Court for the District of New Jersey dismissed the Takata action, with prejudice, dismissing all of Takata’s claims. Following the commencement of the Takata action, several shareholder derivative complaints were filed against the Company, all of which have been dismissed without prejudice. 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)). Following dismissal of the Takata action, on October 23, 2023, the parties filed a joint stipulation of discontinuance dismissing all Jackson’s claims without prejudice. 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 (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 two shareholder derivative complaints 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)). Following dismissal of the Takata action, on October 6, 2023, Plaintiff filed a notice of voluntary dismissal without prejudice dismissing all Finitz’s claims. Finally, on December 13, 2018, a 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)). Following dismissal of the Takata action, on September 26, 2023, Plaintiff filed a notice of voluntary dismissal without prejudice dismissing all Monts’ claims.
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