Riot Platforms, Inc 8-K/A, filed Feb 16, 2022
Riot Platforms, Inc. (RIOT)
About this 8-K/A
Riot Platforms, Inc filed this 8-K/A on February 16, 2022, reporting on events of December 1, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
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Explanatory Note
On December 1, 2021, Riot Blockchain, Inc. (“Riot,” “us,” “we,” “our” or the “Corporation”) filed with the Securities and Exchange Commission a Current Report on Form 8-K (the “Initial Form 8-K”) reporting that, on December 1, 2021, Riot entered into a Membership Interest Purchase Agreement with Electrode Acquisition Corp., a wholly owned subsidiary of Riot, Steven R. Ferrie, David P. Franzmann and the seller representative party thereto, and completed the acquisition (the “Acquisition”) of all of the issued and outstanding equity interests of Ferrie Franzmann Industries, LLC (d/b/a ESS Metron) (“ESS Metron”) pursuant to the terms and subject to the conditions thereof.
This Current Report on Form 8-K/A (the “Current Report”) amends the Initial Form 8-K to include the financial statements and the pro forma combined financial information required by Item 9.01 of Form 8-K.
The pro forma financial information included in this Current Report has been presented for informational purposes only, as required by Item 9.01 of Form 8-K. It does not purport to represent the actual results of operations that Riot and ESS Metron would have achieved had the companies been combined during the periods presented in the pro forma financial information and is not intended to project the future results of operations that the combined company may achieve following the Acquisition.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited combined financial statements of Ferrie Franzmann Industries as of and for the year ended December 31, 2020, and the notes related thereto, are filed herewith as Exhibit 99.1 and are incorporated by reference herein.
The unaudited combined financial statements of Ferrie Franzmann Industries as of and for the nine months ended October 2, 2021, and the notes related thereto, are filed herewith as Exhibit 99.2 and are incorporated by reference herein.
The accompanying audited combined financial statements of Ferrie Franzmann Industries as of and for the year ended December 31, 2020, and the unaudited combined financial statements of Ferrie Franzmann Industries as of and for the nine months ended October 2, 2021, and the notes related thereto include the accounts of Ferrie Franzmann Industries, LLC, (doing business as ESS Metron), as well as Tecknit Shielding Systems, Inc. (“TSSI”) (which are controlled by the same owners). The December 1, 2021, acquisition of Ferrie Franzmann Industries, LLC, (doing business as ESS Metron by Riot excluded the TSSI entity and its assets, liabilities and operations, as further described in Exhibit 99.3 to this form 8-K.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined balance sheet of Riot as of September 30,2021, the unaudited pro forma condensed combined statements of operations of Riot for the nine months ended September 30, 2021 and the unaudited pro forma condensed combined statements of operations of Riot for the year ended December 31, 2020, and the notes related thereto, all giving effect to the Acquisition, are filed herewith as Exhibit 99.3 and are incorporated by reference herein.
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S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| RIOT BLOCKCHAIN, INC. | ||
| By: | /s/ Jeffrey McGonegal | |
| Jeffrey McGonegal | ||
| Chief Financial Officer | ||
Date: February 16, 2022
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITOR
We consent to the incorporation by reference in Registration Statements No. 333-261086 and No. 333-235355 on Form S-8, and No. 333-259212 and No. 333-259039 on Form S-3, of Riot Blockchain, Inc. of our report dated March 24, 2021, on the combined financial statements of Ferrie Franzmann Industries, which is included in this Current Report on Form 8-K.
/s/ Crowe LLP
Crowe LLP
Denver, Colorado
February 15, 2022
Exhibit 99.1
FERRIE FRANZMANN INDUSTRIES
COMBINED FINANCIAL STATEMENTS
Year Ended December 31, 2020
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FERRIE FRANZMANN INDUSTRIES
Denver, Colorado
COMBINED FINANCIAL STATEMENTS
Year Ended December 31, 2020
CONTENTS
| INDEPENDENT AUDITOR’S REPORT | 1 |
| COMBINED FINANCIAL STATEMENTS: | |
| COMBINED BALANCE SHEET | 2 |
| COMBINED STATEMENT OF INCOME | 4 |
| COMBINED STATEMENT OF CHANGES IN EQUITY | 5 |
| COMBINED STATEMENT OF CASH FLOWS | 6 |
| NOTES TO COMBINED FINANCIAL STATEMENTS | 7 |
| |
 |
Crowe LLP Independent Member Crowe Global |
INDEPENDENT AUDITOR’S REPORT
Owners and Management
Ferrie Franzmann Industries
Denver, Colorado
Report on the Financial Statements
We have audited the accompanying combined financial statements of Ferrie Franzmann Industries, which comprise the combined balance sheet as of December 31, 2020, and the related combined statements of income, changes in equity, and cash flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Ferrie Franzmann Industries as of December 31, 2020, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
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| Crowe LLP |
Denver, Colorado
March 24, 2021
| 1 |
FERRIE FRANZMANN INDUSTRIES
COMBINED BALANCE SHEET
December 31, 2020
| ASSETS | ||||
| Current assets: | ||||
| Cash | $ | 4,758,518 | ||
| Accounts receivable, net of allowance for doubtful accounts | ||||
| of $20,000 | 6,494,325 | |||
| Costs and estimated earnings in excess of billings | ||||
| on uncompleted contracts | 4,776,934 | |||
| Inventories | 722,142 | |||
| Prepaid expenses and other | 259,301 | |||
| Total current assets | 17,011,220 | |||
| Property and equipment: | ||||
| Land | 509,798 | |||
| Building | 2,972,235 | |||
| Building improvements | 2,775,481 | |||
| Machinery and equipment | 5,061,961 | |||
| Furniture and office equipment | 1,063,280 | |||
| 12,382,755 | ||||
| Less accumulated depreciation and amortization | (7,425,954 | ) | ||
| Total property and equipment | 4,956,801 | |||
| Total assets | $ | 21,968,021 | ||
See Accompanying Notes to Combined Financial Statements
(Continued)
| 2 |
FERRIE FRANZMANN INDUSTRIES
COMBINED BALANCE SHEET (CONTINUED)
December 31, 2020
| LIABILITIES AND EQUITY | ||||
| Current liabilities: | ||||
| Current portion of long-term debt | $ | 206,449 | ||
| Accounts payable | 5,610,490 | |||
| Billings in excess of costs and estimated earnings | 1,962,657 | |||
| Current portion of long-term extended warranty | 5,306 | |||
| Accrued expenses: | ||||
| Compensation and profit sharing | 720,459 | |||
| Taxes, other than income | 209,629 | |||
| Other | 184,107 | |||
| Total current liabilities | 8,899,097 | |||
| Long-term liabilities: | ||||
| Long-term extended warranty | 11,600 | |||
| Long-term debt, less current portion | 6,564,076 | |||
| Total liabilities | 15,474,773 | |||
| Equity: | ||||
| Common stock | 186 | |||
| Members' capital and retained earnings | 6,493,062 | |||
| Total equity | 6,493,248 | |||
| Total liabilities and equity | $ | 21,968,021 | ||
See Accompanying Notes to Combined Financial Statements
| 3 |
FERRIE FRANZMANN INDUSTRIES
COMBINED STATEMENT OF INCOME
Year Ended December 31, 2020
| Net revenue recognized from contracts with customers | $ | 50,227,761 | ||
| Cost of goods sold | 40,972,329 | |||
| Gross profit | 9,255,432 | |||
| Operating expenses: | ||||
| Selling | 2,991,676 | |||
| General, administrative and engineering | 5,411,955 | |||
| Total operating expenses | 8,403,631 | |||
| Operating income | 851,801 | |||
| Other income (expense): | ||||
| Interest expense | (251,444 | ) | ||
| Paycheck Protection Program income | 2,376,100 | |||
| Other income | 16,238 | |||
| Total other income | 2,140,894 | |||
| Income from operations before income taxes | 2,992,695 | |||
| Income tax expense | (81,370 | ) | ||
| Net income | $ | 2,911,325 | ||
See Accompanying Notes to Combined Financial Statements
| 4 |
FERRIE FRANZMANN INDUSTRIES
COMBINED STATEMENT OF CHANGES IN EQUITY
Year Ended December 31, 2020
| Members' | ||||||||||||
| capital and | ||||||||||||
| Common | retained | |||||||||||
| Total | stock | earnings | ||||||||||
| Balances - January 1, 2020 | 5,821,824 | 186 | 5,821,638 | |||||||||
| Distributions to members | (2,239,901 | ) | — | (2,239,901 | ) | |||||||
| Net income | 2,911,325 | — | 2,911,325 | |||||||||
| Balances - December 31, 2020 | $ | 6,493,248 | $ | 186 | $ | 6,493,062 | ||||||
See Accompanying Notes to Combined Financial Statements
| 5 |
FERRIE FRANZMANN INDUSTRIES
COMBINED STATEMENT OF CASH FLOWS
Year Ended December 31, 2020
| Net income | $ | 2,911,325 | ||
| Cash flows from operating activities: | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation | 709,398 | |||
| Change in operating assets and liabilities: | ||||
| Accounts receivable | (1,064,132 | ) | ||
| Costs and estimated earnings in excess of billings | 153,140 | |||
| Inventories | (231,266 | ) | ||
| Prepaid expenses and other | (6,051 | ) | ||
| Accounts payable, accrued expenses and other | 714,018 | |||
| Net cash provided by operating activities | 3,186,432 | |||
| Cash flows used in investing activities: | ||||
| Purchase of property and equipment | (1,424,177 | ) | ||
| Net cash used in investing activities | (1,424,177 | ) | ||
| Cash flows from financing activities: | ||||
| Proceeds from notes payable | 1,000,000 | |||
| Payments on notes payable | (197,372 | ) | ||
| Tax and other distributions to Members | (2,239,901 | ) | ||
| Net cash used in financing activities | (1,437,273 | ) | ||
| Net increase in cash | 324,982 | |||
| Cash, beginning | 4,433,536 | |||
| Cash, ending | $ | 4,758,518 | ||
| Supplemental disclosures of cash flow information: | ||||
| Cash paid for interest | $ | 251,444 | ||
| Cash paid for income taxes | $ | 29,547 | ||
See Accompanying Notes to Combined Financial Statements
| 6 |
FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Year Ended December 31, 2020
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Ferrie Franzmann Industries consists of Ferrie Franzmann Industries, LLC (“FFI”) and Tecknit Shielding Systems, Inc. (“TSSI”) (collectively, the “Company” or “FFI”) and is engaged in the manufacture and sale of custom electrical controls, including but not limited to electrical components, switchgear and power distribution equipment. The Company’s products are sold to distributors, contractors and end users throughout the United States. The operating agreement of FFI provides that it will continue in existence until the members make a determination to dissolve the LLC. The members’ liability is limited to their contributions. Pursuant to the operating agreement, the members are not required to provide or loan capital to the LLC but are not prohibited from doing so at their discretion. There is one class of member units, 100 units are authorized and issued. TSSI has 2,500 shares of no-par value common stock authorized and has 2,000 shares issued and outstanding as of December 31, 2020.
TSSI had no significant operations as of or for the year ended December 31, 2020 and its operating assets and liabilities consist primarily of real property and buildings used by FFI, and intercompany balances.
Principles of combination: The financial statements include the accounts of FFI, doing business as ESSMetron, as well as TSSI (which is controlled by the same owners as FFI). All significant intercompany accounts and transactions have been eliminated.
Revenue and cost recognition: Substantially all revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts with one identified performance obligation. Revenues are recognized over time as performance creates or enhances an asset with no alternative use, and for which FFI has an enforceable right to receive compensation as defined under the contract.
To determine the amount of revenue to recognize over time, FFI utilizes the cost-to-cost method as management believes cost incurred best represents the amount of work completed and remaining on projects. As the cost-to-cost method is driven by incurred cost, FFI calculates the percentage of completion by dividing costs incurred to date by the total estimated cost. The percentage of completion is then multiplied by estimated revenues to determine inception-to-date revenue. Approved changes to design plans are generally recognized as an adjustment to the percentage of completion calculation on a catch-up basis. Revenue recognized for the period is the current inception-to-date recognized revenue less the prior period inception-to-date recognized revenue. If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined, and the amount of the loss is updated in subsequent reporting periods. Additionally, contract costs incurred to date and expected total contract costs are continuously monitored during the term of the contract.
Changes in the job performance, job conditions and final contract settlements are factors that influence management’s assessment of total contract value and the total estimated costs to complete those contracts, and therefore, profit and revenue recognition. Any costs to obtain a contract are not material to FFI’s financial statements and would be expensed as incurred. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The length of time for the Company to complete a custom product varies but is typically between four to twelve weeks.
Customers are typically required to make periodic progress payments to the Company based on contractually agreed-upon milestones. Invoices are due net 30 days, and retainage, if any, is generally due 30 days after delivery. Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales.
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FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Year Ended December 31, 2020
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FFI primarily offers an assurance-type standard warranty that the product will conform to certain specifications for a defined period of time or period of usage after delivery. This type of warranty does not represent a separate performance obligation.
The Company accrues for estimated warranty costs at the time of sale and updates based on experience. The Company uses historical experience to develop estimated liability for warranty programs. Historically, these costs have not been material.
The Company also generates revenues from its service and repair business where the Company performs ad-hoc maintenance and repair services on the customers custom-built products. Revenue from maintenance and repairs is recognized over time as the services are rendered to the customer. Payment from customers is typically due 30 days after the services are complete.
The Company recognizes trade receivables, net, contract assets and unearned revenues from contracts with customers due to differences in timing between revenue recognition, billings and cash collections. Trade receivables are recognized upon billing. Contract assets consist of costs and estimated earnings in excess of billings on uncompleted contracts, and unearned revenue consists of billings in excess of costs and estimated earnings on uncompleted contracts (See Note 5).
Accounts receivable: The Company extends unsecured credit to its customers in the ordinary course of business. The Company mitigates the associated credit risk by performing ongoing credit evaluations of its customers. Accounts receivable are carried at original invoice amount less an estimate of an allowance made for doubtful accounts based on a review of all outstanding amounts on a periodic basis. Management determines the allowance for doubtful accounts by periodically evaluating individual accounts receivable and considering a customer’s financial condition, credit history and current economic conditions.
Accounts receivable are written off to allowance for doubtful accounts or bad debt expense when deemed uncollectible. Recoveries of trade receivables, previously written off, are recorded when received. Accounts receivable are generally considered to be past due, with certain exceptions, when the balance is outstanding for more than 90 days.
Inventories: Inventories are valued at the lower of cost or net realizable value. Cost is determined by use of the first-in, first-out method. Inventory reserves for obsolescence are mainly related to raw materials. At December 31, 2020, the reserve for obsolescence was not significant.
Property and equipment: Property and equipment except buildings are stated at cost and are depreciated over their estimated useful lives of three to ten years. Buildings are stated at cost and depreciated over their estimated useful lives of 31.5 years. Depreciation is provided using the straight-line method for buildings and improvements and accelerated methods for other property and equipment. Maintenance and repairs are expensed as incurred and improvements are capitalized.
Long-lived assets: Management assesses the carrying value of its long-lived assets for impairment when circumstances indicate that such amounts will not be recoverable from future operations. Generally, assets to be held and used are considered impaired if the sum of expected undiscounted future cash flows is less than the carrying amount of the assets. At December 31, 2020, management believes that no impairment has occurred on long-lived assets.
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FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Year Ended December 31, 2020
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes: FFI is a limited liability company, and TSSI is an S corporation. As such, these entities are not subject to income taxes; such taxes are the responsibility of its members and owners. Income tax expense in 2020 is primarily related to Texas and California franchise taxes.
The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. Management does not believe that there are any current tax positions that would result in an asset or liability being recognized in the accompanying combined financial statements.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense. As of December 31, 2020, the Company did not have any accrued interest or penalty associated with any unrecognized tax positions, nor was any interest expense or penalties recognized during the year ended December 31, 2020.
Research and development: Research and development costs are charged to operations when incurred and consist primarily of salaries and expenses related to engineering, development and enhancement of product technologies. The amount charged in 2020 was approximately $290,000, and is included in general, administrative and engineering expenses.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from these estimates.
Impact of COVID-19: In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has rapidly changed market and economic conditions globally and may continue to create significant uncertainty in the macroeconomic environment. Such macroeconomic volatility, in addition to other unforeseen effects of this pandemic, impacted the Company’s business, results of operations and overall financial performance beginning in the first quarter and through the first month of the third quarter of fiscal 2020, primarily due to COVID-19-imposed construction site shutdowns. These restrictions were, for the most part, lifted during the third quarter, and the Company’s business, results of operations and overall financial performance recovered to pre-COVID levels through the end of 2020 and through the date the Company’s combined financial statements were available to be issued.
It is difficult to predict the impact of COVID-19 on the Company in future periods. The extent to which the COVID-19 pandemic will impact the Company’s business, financial condition, and results of operations in the future is highly uncertain and will be affected by a number of factors including any further closures of the Company’s and the Company’s customers’ offices and facilities and any additional project delays or shutdowns. Customers may also slow down decision-making, delay planned work or seek to terminate existing agreements. The Company will continue to evaluate the effect of COVID-19 on its business.
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FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Year Ended December 31, 2020
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Company’s financial instruments that are at times exposed to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains cash in bank accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Management believes that the Company is not exposed to significant credit risk relating to cash because the Company maintains its cash with high credit quality institutions.
At December 31, 2020, three individual customers represented 46% of accounts receivable (individual concentrations were approximately 17%, 15%, and 14%). For the year ended December 31, 2020, three individual customers represented 41% of revenue (individual concentrations were approximately 14%, 14%, and 12%). As revenue for new and existing customers varies based on project needs, management does not consider these concentrations to be significant to ongoing operations. In addition, at December 31, 2020, one vendor represented 35% of accounts payable and for the year ended December 31, 2020, 15% of total purchases.
NOTE 3 - INVENTORIES
At December 31, 2020, inventories consist of the following:
| $ | 1,1339 | |||
| Work in process | 720,803 | |||
| Raw materials | $ | 722,142 |
NOTE 4 - DEBT
Long-term debt consists of the following at December 31, 2020:
| Debt held with a bank: | ||||
| Revolving credit agreements, with variable interest rates based on prime and the leverage ratio of the Company (4.50% at December 31, 2020) until maturity [A] | $ | 1,000,000 | ||
| Note payable, due in monthly installments of $36,867, including interest at 4.10% at December 31, 2020, matures in October 2024; collateralized by all assets of FFI | 5,770,525 | |||
| 6,770,525 | ||||
| Less current portion of long-term debt | (206,449 | ) | ||
| Long-term debt, less current portion | $ | 6,564,076 | ||
| 10 |
FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Year Ended December 31, 2020
NOTE 4 – DEBT (Continued)
[A] The Company has available two revolving credit facilities as of December 31, 2020 for borrowings up to $3,000,000 and $4,000,000, respectively. Under the revolving credit agreements, the Company may borrow the lesser of the sum of 80% of eligible accounts receivable plus 50% of eligible inventory, as defined, up to the maximum borrowing base of $7 million. The revolving credit borrowings are collateralized by inventory, accounts receivable, equipment and general intangibles of the Company. At December 31, 2020, the Company has the ability to draw approximately $4.4 million under the agreements. Amounts drawn on the $3,000,000 credit facility are payable in full in May 2021. Amounts drawn on the $4,000,000 Credit facility are due on demand. If no demand is made then any amount drawn on the $4,000,000 credit facility is payable in full in May 2021. There was no amount drawn on the $4,000,000 credit facility as of December 31, 2020. In March 2021, the Company and the bank agreed to extend the maturity date on the amount drawn on the $3,000,000 credit facility and on the $4,000,000 credit facility from May 2021 to May 2022.
The revolving credit and term loan agreements require the Company to meet certain monthly financial ratios and covenants, including minimum tangible net worth, debt service coverage ratio and debt to tangible net worth ratio. At December 31, 2020, the Company was in compliance with required financial covenants.
As a result of the economic uncertainty stemming from the impact of the COVID-19 pandemic, on April 10, 2020, the Company received a loan from UMB Bank in the amount of $2,376,100 under the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP loan has a stated interest rate of 1% per annum and no payments of principal or interest are required until the end of a statutorily provided deferral period, which occurs when the SBA concludes on the amount of the loan that will be forgiven. The contractual maturity date of the loan is April 20, 2022.
Under the terms of the Paycheck Protection Program, a PPP loan provides for conditional forgiveness if the Company utilizes the loan proceeds on admissible expenses, including qualifying payroll, rent, and utility expenses, and maintains employment and compensation levels for a specified period of time. Although the Company believes it is reasonably assured the PPP loan will be forgiven, ultimate forgiveness is also conditioned upon the US Small Business Administration (SBA) concurring with management’s good-faith assessment that the current economic uncertainty made the loan request necessary to support ongoing operations and the loan proceeds were used for admissible expenses. If the Company is later determined to have violated the provisions of the Paycheck Protection Program, the Company may be required to repay the PPP loan in its entirety and/or be subject to additional penalties.
The Company has elected to account for its PPP loan as an in-substance grant in accordance with International Accounting Standard (IAS 20), Accounting for Government Grants and Disclosure of Government Assistance. Under IAS 20, the PPP loan proceeds were initially recorded as a deferred grant income liability and subsequently recognized on a systematic basis into other income when the expenses for which the grant was intended to compensate were incurred and forgiveness of the loan was reasonably assured. While formal forgiveness has not yet been obtained, as of December 31, 2020, the Company has recognized the entire loan balance of $2,376,100 into other income consistent with the amount of qualifying expenses incurred during the period. Cash inflows and cash outflows from the PPP loan are classified as operating cash flows.
| 11 |
NOTE 4 – DEBT (Continued)
Maturities of long-term debt are as follows:
| Year ending December 31, | Amount | |||||
| 2021 | 206,449 | |||||
| 2022 | 1,215,196 | |||||
| 2023 | 224,314 | |||||
| 2024 | 5,124,566 | |||||
| Total | $ | 6,770,525 | ||||
NOTE 5 - UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts at December 31, 2020, are summarized as follows:
| Cost incurred on uncompleted contracts | $ | 14,172,865 | ||
| Estimated earnings | 3,709,844 | |||
| 17,882,709 | ||||
| Less: billings to date | 15,068,432 | |||
| $ | 2,814,277 | |||
| Costs and estimated earnings in excess of billings | $ | 4,776,934 | ||
| Billings and estimated earnings in excess of costs | (1,962,657 | ) | ||
| $ | 2,814,277 |
NOTE 6 - COMMITMENTS
Equity plans: In January 2013, the Company adopted two discretionary Equity Appreciation Plans (the “Plans”) for certain employees of the Company. Awards are discretionary based on a performance assessment by the Administrator of the Plans. Payment of any award under the Plans is triggered by a Qualifying Event, as defined in the Plan agreements. The Company will expense any award earned under the Plans when it is probable an amount will be paid and the amount can be reasonably determined. No awards have been made through 2020.
Employee benefit plan: The Company has a defined contribution 401(k) plan which covers substantially all employees. At the discretion of management, the Company may make discretionary contributions to eligible participants, as defined. No discretionary employer contributions were made during 2020.
NOTE 7 - SUBSEQUENT EVENTS
The Company evaluated subsequent events through March 24, 2021, the date the Company’s combined financial statements were available to be issued.
| 12 |
Exhibit 99.2
FERRIE FRANZMANN INDUSTRIES
COMBINED FINANCIAL STATEMENTS
Nine-Month Period Ended October 2, 2021
| |
FERRIE FRANZMANN INDUSTRIES
Denver, Colorado
COMBINED FINANCIAL STATEMENTS
Nine-Month Period Ended October 2, 2021
CONTENTS
| COMBINED FINANCIAL STATEMENTS: | |
| COMBINED BALANCE SHEET | 2 |
| COMBINED STATEMENT OF INCOME | 4 |
| COMBINED STATEMENT OF CHANGES IN EQUITY | 5 |
| COMBINED STATEMENT OF CASH FLOWS | 6 |
| NOTES TO COMBINED FINANCIAL STATEMENTS | 7 |
| 1 |
FERRIE FRANZMANN INDUSTRIES
COMBINED BALANCE SHEET
October 2, 2021
| ASSETS | ||||
| Current assets: | ||||
| Cash | $ | 3,341,921 | ||
| Accounts receivable, net of allowance for doubtful accounts | ||||
| of $20,000 | 9,951,949 | |||
| Costs and estimated earnings in excess of billings | ||||
| on uncompleted contracts | 10,948,068 | |||
| Inventories | 1,245,352 | |||
| Prepaid expenses and other | 244,802 | |||
| Total current assets | 25,732,092 | |||
| Deposits | 13,313 | |||
| Property and equipment: | ||||
| Land | 509,798 | |||
| Building | 2,972,235 | |||
| Building improvements | 2,861,002 | |||
| Machinery and equipment | 5,133,842 | |||
| Furniture and office equipment | 1,077,502 | |||
| 12,554,379 | ||||
| Less accumulated depreciation and amortization | (8,072,091 | ) | ||
| Total property and equipment | 4,482,288 | |||
| Total assets | $ | 30,227,693 | ||
See Accompanying Notes to Combined Financial Statements
| 2 |
FERRIE FRANZMANN INDUSTRIES
COMBINED BALANCE SHEET (CONTINUED)
October 2, 2021
| LIABILITIES AND EQUITY | ||||
| Current liabilities: | ||||
| Current portion of long-term debt | $ | 215,196 | ||
| Accounts payable | 7,846,921 | |||
| Billings in excess of costs and estimated earnings | 8,998,297 | |||
| Current portion of long-term extended warranty | 29,885 | |||
| Accrued expenses: | ||||
| Compensation and profit sharing | 645,089 | |||
| Taxes, other than income | 195,606 | |||
| Other | 166,182 | |||
| Total current liabilities | 18,097,176 | |||
| Long-term liabilities: | ||||
| Long-term extended warranty | 79,364 | |||
| Long-term debt, less current portion | 5,401,464 | |||
| Total liabilities | 23,578,004 | |||
| Equity: | ||||
| Common stock | 186 | |||
| Members' capital and retained earnings | 6,649,503 | |||
| Total equity | 6,649,689 | |||
| Total liabilities and equity | $ | 30,227,693 | ||
See Accompanying Notes to Combined Financial Statements
| 3 |
FERRIE FRANZMANN INDUSTRIES
COMBINED STATEMENT OF INCOME
Nine-Month Period Ended October 2, 2021
| Net revenue recognized from contracts with customers | $ | 44,439,090 | ||
| Cost of goods sold | 35,981,144 | |||
| Gross profit | 8,457,946 | |||
| Operating expenses: | ||||
| Selling | 1,936,529 | |||
| General, administrative and engineering | 4,077,578 | |||
| Total operating expenses | 6,014,107 | |||
| Operating income | 2,443,839 | |||
| Other income (expense): | ||||
| Interest expense | (184,871 | ) | ||
| Other income | 1,164 | |||
| Total other expense | (183,707 | ) | ||
| Income from operations before income taxes | 2,260,132 | |||
| Income tax expense | (102,557 | ) | ||
| Net income | $ | 2,157,575 | ||
See Accompanying Notes to Combined Financial Statements
| 4 |
FERRIE FRANZMANN INDUSTRIES
COMBINED STATEMENT OF CHANGES IN EQUITY
Nine-Month Period Ended October 2, 2021
| Members' | ||||||||||||
| capital and | ||||||||||||
| Common | retained | |||||||||||
| Total | stock | earnings | ||||||||||
| Balances - January 1, 2021 | $ | 6,493,248 | $ | 186 | $ | 6,493,062 | ||||||
| Distributions to members | (2,001,134 | ) | — | (2,001,134 | ) | |||||||
| Net income | 2,157,575 | — | 2,157,575 | |||||||||
| Balances - October 2, 2021 | $ | 6,649,689 | $ | 186 | $ | 6,649,503 | ||||||
See Accompanying Notes to Combined Financial Statements
| 5 |
FERRIE FRANZMANN INDUSTRIES
COMBINED STATEMENT OF CASH FLOWS
Nine-Month Period Ended October 2, 2021
| Net income | $ | 2,157,575 | ||
| Cash flows from operating activities: | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation | 646,137 | |||
| Change in operating assets and liabilities: | ||||
| Accounts receivable | (3,457,624 | ) | ||
| Costs and estimated earnings in excess of billings | 864,506 | |||
| Inventories | (523,210 | ) | ||
| Prepaid expenses and other | 1,186 | |||
| Accounts payable, accrued expenses and other | 2,221,456 | |||
| Net cash provided by operating activities | 1,910,026 | |||
| Cash flows used in investing activities: | ||||
| Purchase of property and equipment | (171,624 | ) | ||
| Net cash used in investing activities | (171,624 | ) | ||
| Cash flows from financing activities: | ||||
| Payments on notes payable | (1,153,865 | ) | ||
| Tax and other distributions to Members | (2,001,134 | ) | ||
| Net cash used in financing activities | (3,154,999 | ) | ||
| Net decrease in cash | (1,416,597 | ) | ||
| Cash, beginning | 4,758,518 | |||
| Cash, ending | $ | 3,341,921 | ||
| Supplemental disclosures of cash flow information: | ||||
| Cash paid for interest | $ | 184,871 | ||
| Cash paid for income taxes | $ | 112,380 | ||
See Accompanying Notes to Combined Financial Statements
| 6 |
FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Nine-Month Period Ended October 2, 2021
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Ferrie Franzmann Industries consists of Ferrie Franzmann Industries, LLC (“FFI”) and Tecknit Shielding Systems, Inc. (“TSSI”) (collectively, the “Company” or “FFI”) and is engaged in the manufacture and sale of custom electrical controls, including but not limited to electrical components, switchgear and power distribution equipment. The Company’s products are sold to distributors, contractors and end users throughout the United States. The operating agreement of FFI provides that it will continue in existence until the members make a determination to dissolve the LLC. The members’ liability is limited to their contributions. Pursuant to the operating agreement, the members are not required to provide or loan capital to the LLC but are not prohibited from doing so at their discretion. There is one class of member units, 100 units are authorized and issued. TSSI has 2,500 shares of no-par value common stock authorized and has 2,000 shares issued and outstanding as of October 2, 2021.
TSSI had no significant operations as of or for the nine-month period ended (“period ended”) October 2, 2021 and its operating assets and liabilities consist primarily of real property and buildings used by FFI, and intercompany balances.
Principles of combination: The financial statements include the accounts of FFI, doing business as ESSMetron, as well as TSSI (which is controlled by the same owners as FFI). All significant intercompany accounts and transactions have been eliminated.
Revenue and cost recognition: Substantially all revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts with one identified performance obligation. Revenues are recognized over time as performance creates or enhances an asset with no alternative use, and for which FFI has an enforceable right to receive compensation as defined under the contract.
To determine the amount of revenue to recognize over time, FFI utilizes the cost-to-cost method as management believes cost incurred best represents the amount of work completed and remaining on projects. As the cost-to-cost method is driven by incurred cost, FFI calculates the percentage of completion by dividing costs incurred to date by the total estimated cost. The percentage of completion is then multiplied by estimated revenues to determine inception-to-date revenue. Approved changes to design plans are generally recognized as an adjustment to the percentage of completion calculation on a catch-up basis. Revenue recognized for the period is the current inception-to-date recognized revenue less the prior period inception-to-date recognized revenue. If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined, and the amount of the loss is updated in subsequent reporting periods. Additionally, contract costs incurred to date and expected total contract costs are continuously monitored during the term of the contract.
Changes in the job performance, job conditions and final contract settlements are factors that influence management’s assessment of total contract value and the total estimated costs to complete those contracts, and therefore, profit and revenue recognition. Any costs to obtain a contract are not material to FFI’s financial statements and would be expensed as incurred. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The length of time for the Company to complete a custom product varies but is typically between four to twelve weeks.
Customers are typically required to make periodic progress payments to the Company based on contractually agreed-upon milestones. Invoices are due net 30 days, and retainage, if any, is generally due 30 days after delivery. Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales.
| 7 |
FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Nine-Month Period Ended October 2, 2021
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FFI primarily offers an assurance-type standard warranty that the product will conform to certain specifications for a defined period of time or period of usage after delivery. This type of warranty does not represent a separate performance obligation.
The Company accrues for estimated warranty costs at the time of sale and updates based on experience. The Company uses historical experience to develop estimated liability for warranty programs. Historically, these costs have not been material.
The Company also generates revenues from its service and repair business where the Company performs ad-hoc maintenance and repair services on the customers custom-built products. Revenue from maintenance and repairs is recognized over time as the services are rendered to the customer. Payment from customers is typically due 30 days after the services are complete.
The Company recognizes trade receivables, net, contract assets and unearned revenues from contracts with customers due to differences in timing between revenue recognition, billings and cash collections. Trade receivables are recognized upon billing. Contract assets consist of costs and estimated earnings in excess of billings on uncompleted contracts, and unearned revenue consists of billings in excess of costs and estimated earnings on uncompleted contracts (See Note 5).
Accounts receivable: The Company extends unsecured credit to its customers in the ordinary course of business. The Company mitigates the associated credit risk by performing ongoing credit evaluations of its customers. Accounts receivable are carried at original invoice amount less an estimate of an allowance made for doubtful accounts based on a review of all outstanding amounts on a periodic basis. Management determines the allowance for doubtful accounts by periodically evaluating individual accounts receivable and considering a customer’s financial condition, credit history and current economic conditions.
Accounts receivable are written off to allowance for doubtful accounts or bad debt expense when deemed uncollectible. Recoveries of trade receivables, previously written off, are recorded when received. Accounts receivable are generally considered to be past due, with certain exceptions, when the balance is outstanding for more than 90 days.
Inventories: Inventories are valued at the lower of cost or net realizable value. Cost is determined by use of the first-in, first-out method. Inventory reserves for obsolescence are mainly related to raw materials. At October 2, 2021, the reserve for obsolescence was not significant.
Property and equipment: Property and equipment except buildings are stated at cost and are depreciated over their estimated useful lives of three to ten years. Buildings are stated at cost and depreciated over their estimated useful lives of 31.5 years. Depreciation is provided using the straight-line method for buildings and improvements and accelerated methods for other property and equipment. Maintenance and repairs are expensed as incurred and improvements are capitalized.
Long-lived assets: Management assesses the carrying value of its long-lived assets for impairment when circumstances indicate that such amounts will not be recoverable from future operations. Generally, assets to be held and used are considered impaired if the sum of expected undiscounted future cash flows is less than the carrying amount of the assets. At October 2, 2021, management believes that no impairment has occurred on long-lived assets.
| 8 |
FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Nine-Month Period Ended October 2, 2021
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes: FFI is a limited liability company, and TSSI is an S corporation. As such, these entities are not subject to income taxes; such taxes are the responsibility of its members and owners. Income tax expense during the period ended October 2, 2021 is primarily related to Texas and California franchise taxes.
The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. Management does not believe that there are any current tax positions that would result in an asset or liability being recognized in the accompanying combined financial statements.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense. As of October 2, 2021, the Company did not have any accrued interest or penalty associated with any unrecognized tax positions, nor was any interest expense or penalties recognized during the period ended October 2, 2021.
Research and development: Research and development costs are charged to operations when incurred and consist primarily of salaries and expenses related to engineering, development and enhancement of product technologies. The amount charged during the period ended October 2, 2021 was approximately $30,000 and is included in general, administrative and engineering expenses.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates.
Impact of COVID-19: In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has rapidly changed market and economic conditions globally and may continue to create significant uncertainty in the macroeconomic environment. Such macroeconomic volatility, in addition to other unforeseen effects of this pandemic, impacted the Company’s business, results of operations and overall financial performance in 2020, primarily due to COVID-19-imposed construction site shutdowns. These restrictions were, for the most part, lifted during the third quarter of 2020, and the Company’s business, results of operations and overall financial performance recovered to pre-COVID levels by the end of 2020 and from January 1, 2021 through the date the Company’s combined interim financial statements were available to be issued.
It is difficult to predict the impact of COVID-19 on the Company in future periods. The extent to which the COVID-19 pandemic will impact the Company’s business, financial condition, and results of operations in the future is highly uncertain and will be affected by a number of factors including any further closures of the Company’s and the Company’s customers’ offices and facilities and any additional project delays or shutdowns. Customers may also slow down decision-making, delay planned work or seek to terminate existing agreements. The Company will continue to evaluate the effect of COVID-19 on its business.
| 9 |
FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Nine-Month Period Ended October 2, 2021
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Company’s financial instruments that are at times exposed to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains cash in bank accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Management believes that the Company is not exposed to significant credit risk relating to cash because the Company maintains its cash with high credit quality institutions.
At October 2, 2021, four individual customers represented 65% of accounts receivable (individual concentrations were approximately 30%, 13%, 12% and 10%). For the period ended October 2, 2021, three individual customers represented 56% of revenue (individual concentrations were approximately 32%, 14%, and 10%). As revenue for new and existing customers varies based on project needs, management does not consider these concentrations to be significant to ongoing operations. At October 2, 2021, three vendors represented 48% of accounts payable (individual concentrations were approximately 17%, 16% and 16%). For the period ended October 2, 2021, one vendor represented 31% of total purchases.
NOTE 3 - INVENTORIES
At October 2, 2021, inventories consist of the following:
| $ | 7,319 | |||
| Work in process | 1,238,033 | |||
| Raw materials | $ | 1,245,352 |
| 10 |
FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Nine-Month Period Ended October 2, 2021
NOTE 4 - DEBT
Long-term debt consists of the following at October 2, 2021:
| Debt held with a bank: | ||||
| Revolving credit agreements, with variable interest rates based on prime and the leverage ratio of the Company (4.50% at December 31, 2020) until maturity [A] | $ | — | ||
| Note payable, due in monthly installments of $36,867, including interest at 4.10% at December 31, 2020, matures in October 2024; collateralized by all assets of FFI | 5,616,660 | |||
| 5,616,660 | ||||
| Less current portion of long-term debt | (215,196 | ) | ||
| Long-term debt, less current portion | $ | 5,401,464 | ||
[A] The Company has available two revolving credit facilities as of October 2, 2021 for borrowings up to $3,000,000 and $4,000,000, respectively. Under the revolving credit agreements, the Company may borrow the lesser of the sum of 80% of eligible accounts receivable plus 50% of eligible inventory, as defined, up to the maximum borrowing base of $7 million. The revolving credit borrowings are collateralized by inventory, accounts receivable, equipment and general intangibles of the Company. At October 2, 2021, the Company has the ability to draw approximately $7 million under the agreements. Amounts drawn on the $3,000,000 credit facility are payable in full in May 2022. Amounts drawn on the $4,000,000 Credit facility are due on demand. If no demand is made then any amount drawn on the $4,000,000 credit facility is payable in full in May 2022. There were no amounts drawn on the credit facilities as of October 2, 2021.
The revolving credit and term loan agreements require the Company to meet certain monthly financial ratios and covenants, including minimum tangible net worth, debt service coverage ratio and debt to tangible net worth ratio. At October 2, 2021, the Company was in compliance with required financial covenants.
Maturities of long-term debt are as follows:
| Amount | ||||||
| 2022 | 215,196 | |||||
| 2023 | 224,314 | |||||
| 2024 | 5,177,150 | |||||
| Total | $ | 5,616,660 | ||||
NOTE 5 - UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts at October 2, 2021, are summarized as follows:
| Cost incurred on uncompleted contracts | $ | 23,317,435 | ||
| Estimated earnings | 5,411,824 | |||
| 28,729,259 | ||||
| Less: billings to date | 26,779,488 | |||
| $ | 1,949,771 | |||
| Costs and estimated earnings in excess of billings | $ | 10,948,068 | ||
| Billings and estimated earnings in excess of costs | (8,998,297 | ) | ||
| $ | 1,949,771 |
| 11 |
FERRIE FRANZMANN INDUSTRIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Nine-Month Period Ended October 2, 2021
NOTE 6 - COMMITMENTS
Equity plans: In January 2013, the Company adopted two discretionary Equity Appreciation Plans (the “Plans”) for certain employees of the Company. Awards are discretionary based on a performance assessment by the Administrator of the Plans. Payment of any award under the Plans is triggered by a Qualifying Event, as defined in the Plan agreements. On December 1, 2021, certain payments totaling approximately $3,535,000 were made pursuant to the terms of the Plans in connection with the sale of all membership interests of Ferrie Franzmann Industries, LLC (Note 7). The payments were effectively made by the members of FFI via a reduction in transaction sale price.
Employee benefit plan: The Company has a defined contribution 401(k) plan which covers substantially all employees. At the discretion of management, the Company may make discretionary contributions to eligible participants, as defined. No discretionary employer contributions were made during the period ended October 2, 2021.
NOTE 7 - SUBSEQUENT EVENTS
On December 1, 2021, Electrode Acquisition Corp., a wholly owned subsidiary of Riot Blockchain, Inc., acquired all membership interests of Ferrie Franzmann Industries, LLC. The accompanying unaudited combined financial statements of Ferrie Franzmann Industries as of and for the nine months ended October 2, 2021, and the notes related thereto include the accounts of Ferrie Franzmann Industries, LLC, (doing business as ESS Metron), as well as TSSI (which are controlled by the same owners). The December 1, 2021, acquisition of Ferrie Franzmann Industries, LLC, (doing business as ESS Metron), by Riot excluded the TSSI entity and its assets, liabilities and operations.
On December 15, 2021, the entity name, Ferrie Franzmann Industries, LLC was effectively changed to ESS Metron, LLC.
The Company evaluated subsequent events through February 15, 2022, the date the Company’s combined financial statements were available to be issued.
Exhibit 99.3
RIOT BLOCKCHAIN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
| Page | |
| INDEX | |
| Unaudited Pro Forma Condensed Combined Financial Information | 1 |
| Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2021 | 3 |
| Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine Months Ended September 30, 2021 | 4 |
| Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 2020 | 5 |
| Notes to the Unaudited Pro Forma Condensed Combined Financial Information | 6 |
| |
Riot Blockchain, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Financial Information
On December 1, 2021, Riot Blockchain, Inc. (“we,” “us,” “our,” the “Company,” “Riot Blockchain, Inc.,” and “Riot”) entered into a Membership Interest Purchase (the “Membership Interest Purchase Agreement”) with Electrode Acquisition Corp., a wholly owned subsidiary of Riot (the “Riot Acquisition Entity”), Steven R. Ferrie and David P. Franzmann (collectively, the “Sellers”) and the seller representative party thereto, and completed the acquisition (the “Acquisition”) of all of the issued and outstanding equity interests of Ferrie Franzmann Industries, LLC (d/b/a ESS Metron) (“ESS Metron”) (the “Acquisition”). We completed the Acquisition on December 1, 2021 (the “Acquisition Date”). The consideration payable to the Sellers for the Acquisition consisted of $25,000,000 in cash, subject to customary adjustments set forth in the Membership Interest Purchase Agreement (the “Cash Consideration”), and 715,413 shares of the common stock, no par value, of Riot (“Common Stock” and, such shares payable as a portion of the consideration for the Acquisition, the “Share Consideration”). At the closing of the Acquisition (the “Closing”), Riot paid to the Sellers the Cash Consideration and issued to the Sellers a portion of the Share Consideration consisting of 645,248 shares of Common Stock. The remainder of the Share Consideration, consisting of 70,165 shares of Common Stock (the “Holdback Share Consideration”), was withheld by Riot at the Closing as security for the Sellers’ indemnification obligations under the Membership Interest Purchase Agreement, and will be reduced by the value of the amount, if any, of applicable indemnifiable damages and issued to the Sellers after the date that is 18 months following the Closing, pursuant to the terms and subject to the conditions set forth in the Membership Interest Purchase Agreement.
Separately, as disclosed in our 8-K/A filed on August 12, 2021, on April 8, 2021, Riot entered into a stock purchase agreement with Northern Data AG, a German stock corporation (the “Whinstone Seller”), and Whinstone US, Inc., a Delaware corporation and a wholly owned subsidiary of the Seller (“Whinstone”), which provided for Riot to acquire all of the issued and outstanding equity interests of Whinstone (the “Whinstone Acquisition”). We completed the Acquisition on May 26, 2021 (the “Whinstone Acquisition Date”). At the closing of the Acquisition, Riot paid to the Seller $80.0 million in cash, adjusted for net working capital and other items, and issued to the Seller 11,800,000 shares of Riot’s common stock, no par value. As part of cash at closing, net debt outstanding from Whinstone to its parent (Whinstone seller) totaling $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 in additional consideration when and if certain future power credits are realized by Whinstone. The Whinstone Acquisition met the definition of a significant business acquisition as defined by Rule 3-05 and Article 11 of U.S. Securities and Exchange Commission Regulation S-X and as a result, Riot filed an 8-K/A on August 12, 2021, which included historical audited financial statements of Whinstone US, Inc. and unaudited pro forma condensed combined statements giving effect to the acquisition by Riot of Whinstone.
Because both the ESS Metron acquisition and the Whinstone Acquisition were deemed significant business acquisitions during the year ended December 31, 2021, we believe presenting the pro forma information required by Item 9.01 of Form 8-K on a disaggregated basis is most appropriate due to the material nature of each transaction.
The unaudited pro forma condensed combined financial statements (“pro forma financial information”) have been prepared based on the historical financial statements of Riot and Ferrie Franzmann Industries and are intended to provide you with information about how the Acquisition might have affected our historical financial statements. The accompanying unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021, and for the year ended December 31, 2020, combine the historical consolidated statements of operations of Riot for the corresponding periods, derived from the Company’s Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission (“SEC”) on November 15, 2021, Annual Report on Form 10-K filed with the SEC on March 31, 2021 and Current Report on Form 8-K/A filed with the SEC on August 12, 2021, with the respective historical statement of operations information of ESS Metron, which have been derived from the combined financial statements of Ferrie Franzmann Industries as indicated below as if the Acquisition had occurred on January 1, 2020. The accompanying unaudited pro forma condensed combined balance sheet as of September 30, 2021, combines the historical unaudited condensed consolidated balance sheet of Riot, derived from the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 15, 2021 and Current Report on Form 8-K/A filed with the SEC on August 12, 2021, and due to Ferrie Franzmann Industries’ reporting fiscal quarter end, the historical unaudited balance sheet of Ferrie Franzmann Industries as of October 2, 2021, as if the Acquisition had occurred on September 30, 2021.
The unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma financial information and:
| · | the historical unaudited financial statements of Riot for the nine months ended September 30, 2021, included in Riot’s Quarterly Report on Form 10-Q filed with the SEC on November 15, 2021; and |
| · | the historical audited financial statements of Riot for the year ended December 31, 2020, included in Riot’s Annual Report on Form 10-K filed with the SEC on March 31, 2021; and
| |
| · | the unaudited pro forma condensed combined balance sheet of Riot Blockchain, Inc. as of March 31, 2021, the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2021, and for the year ended December 31, 2020, and the notes related thereto, all giving effect to the acquisition by Riot Blockchain, Inc. of Whinstone US, Inc.. |
| · | the audited combined financial statements of Ferrie Franzmann Industries as of and for the year ended December 31, 2020, and the notes related thereto, included in this Form 8-K at Exhibit 99.1; and |
| · | the unaudited combined financial statements of Ferrie Franzmann Industries as of and for the nine months ended October 2, 2021, and the notes related thereto, included in this Form 8-K at Exhibit 99.2. |
| 1 |
The unaudited pro forma condensed combined financial statements are presented using the acquisition method of accounting, with Riot as the acquirer. The unaudited pro forma condensed combined financial statements will differ from our final acquisition accounting for a number of reasons, including that our estimates of fair values of assets acquired, liabilities assumed and consideration transferred, are preliminary and subject to change during the measurement period when our formal valuation is finalized. The differences that will occur between the preliminary estimates and the final acquisition accounting could be material.
The unaudited pro forma condensed combined financial statements are presented for informational purposes only. They have been prepared in accordance with Article 11 of Regulation S-X of the SEC and are not necessarily indicative of what our financial position or results of operations actually would have been had we completed the Acquisition as of the dates indicated, nor do they purport to project the future financial position or operating results of the combined company. The pro forma financial information is presented for illustrative purposes only and does not reflect the costs of any integration activities or cost savings or synergies that may be achieved as a result of the Acquisition.
| 2 |
Riot Blockchain, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Balance Sheets
As of September 30, 2021
| (in thousands, except for share and per share amounts) | Riot as
of September 30, 2021 (including the acquisition of Whinstone on May 26, 2021) | Transaction Accounting Adjustments (acquisition of Whinstone) | Notes | Pro Forma Combined (adjusted for acquisition of Whinstone) | ESS Metron
as of October 2, 2021 (As Adjusted) (Note 2) | Transaction Accounting Adjustments | Notes | Pro Forma Combined | ||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||
| Current assets | ||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 57,880 | $ | 426 | 5.(a)., 5.(b). | $ | 58,306 | $ | 3,342 | $ | (37,515 | ) | 3, 4.(e)., 4.(g). | $ | 24,133 | |||||||||||||||
| Accounts receivable | 3,632 | — | 3,632 | 9,952 | (797 | ) | 4.(c). | 12,787 | ||||||||||||||||||||||
| Inventories and work in process | — | — | — | 1,245 | — | 1,245 | ||||||||||||||||||||||||
| Costs and estimated earnings in excess of billings | — | — | — | 10,948 | — | 10,948 | ||||||||||||||||||||||||
| Prepaid expenses and other current assets | 1,552 | — | 1,552 | 245 | — | 1,797 | ||||||||||||||||||||||||
| Cryptocurrencies | 102,313 | — | 102,313 | — | — | 102,313 | ||||||||||||||||||||||||
| Investment in marketable equity securities, at fair value | 13,647 | — | 13,647 | — | — | 13,647 | ||||||||||||||||||||||||
| Total current assets | 179,024 | 426 | 179,450 | 25,732 | (38,312 | ) | 166,870 | |||||||||||||||||||||||
| Property and equipment, net | 200,751 | — | 200,751 | 3,478 | 1,127 | 4.(b). | 205,356 | |||||||||||||||||||||||
| Deposits | 94,416 | — | 94,416 | 13 | — | 94,429 | ||||||||||||||||||||||||
| Long-term investments | 310 | — | 310 | — | — | 310 | ||||||||||||||||||||||||
| Right of use assets | 6,692 | — | 6,692 | — | 6,801 | 4.(e). | 13,493 | |||||||||||||||||||||||
| Derivative asset | 37,773 | — | 37,773 | — | — | 37,773 | ||||||||||||||||||||||||
| Intangible assets, net | 84,807 | — | 84,807 | — | 13,900 | 4.(a). | 98,707 | |||||||||||||||||||||||
| Goodwill | 267,237 | — | 267,237 | — | 37,427 | 3, 4.(d). | 304,664 | |||||||||||||||||||||||
| Future power credits | 83,397 | — | 83,397 | — | — | 83,397 | ||||||||||||||||||||||||
| Total assets | $ | 954,407 | $ | 426 | $ | 954,833 | $ | 29,223 | $ | 20,943 | $ | 1,004,999 | ||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||||||||
| Accounts payable | $ | 14,651 | $ | — | $ | 14,651 | $ | 7,847 | $ | 453 | 4.(c). | $ | 22,951 | |||||||||||||||||
| Accrued expenses | 7,252 | — | 7,252 | 1,007 | — | 8,259 | ||||||||||||||||||||||||
| Billings in excess of costs and estimated earnings | — | — | — | 8,998 | — | 8,998 | ||||||||||||||||||||||||
| Warrany liability, current portion | — | — | — | 30 | — | 30 | ||||||||||||||||||||||||
| Deferred revenue, current portion | 2,546 | — | 2,546 | — | — | 2,546 | ||||||||||||||||||||||||
| Operating lease liability, current portion | 1,125 | — | 1,125 | — | 573 | 4.(e). | 1,698 | |||||||||||||||||||||||
| Long-term debt, current portion | — | — | — | 215 | (215 | ) | 4.(g). | — | ||||||||||||||||||||||
| Total current liabilities | 25,574 | — | 25,574 | 18,097 | 811 | 44,482 | ||||||||||||||||||||||||
| Deferred revenue, less current portion | 20,256 | — | 20,256 | — | — | 20,256 | ||||||||||||||||||||||||
| Operating lease liability, less current portion | 7,254 | — | 7,254 | — | 6,228 | 4.(e). | 13,482 | |||||||||||||||||||||||
| Long-term debt, less current portion | — | — | — | 5,401 | (5,401 | ) | 4.(g). | — | ||||||||||||||||||||||
| Contingent consideration liability - future power credits | 83,397 | — | 83,397 | — | — | 83,397 | ||||||||||||||||||||||||
| Deferred tax liability | 41,491 | — | 41,491 | — | — | 41,491 | ||||||||||||||||||||||||
| Other long-term liabilities | 6,120 | — | 6,120 | — | — | 6,120 | ||||||||||||||||||||||||
| Warranty liability, less current portion | — | — | — | 80 | — | 80 | ||||||||||||||||||||||||
| Affiliate payable | — | — | — | 1,250 | (1,250 | ) | 4.(c). | — | ||||||||||||||||||||||
| Total liabilities | 184,092 | — | 184,092 | 24,828 | 388 | 209,308 | ||||||||||||||||||||||||
| Stockholders' equity | ||||||||||||||||||||||||||||||
| Preferred stock | 11 | — | 11 | — | — | 11 | ||||||||||||||||||||||||
| Common stock | 988,692 | — | 988,692 | — | 26,735 | 4.(h). | 1,015,427 | |||||||||||||||||||||||
| Additional paid-in capital | — | — | — | 2,410 | (2,410 | ) | 4.(h). | — | ||||||||||||||||||||||
| Retained earnings (accumulated deficit) | (218,388 | ) | 426 | 5.(a)., 5.(b). | (217,962 | ) | 1,985 | (3,770 | ) | 4.(h). | (219,747 | ) | ||||||||||||||||||
| Total stockholders' equity | 770,315 | 426 | 770,741 | 4,395 | 20,555 | 795,691 | ||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 954,407 | $ | 426 | $ | 954,833 | $ | 29,223 | $ | 20,943 | $ | 1,004,999 | ||||||||||||||||||
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements
| 3 |
Riot Blockchain, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Nine Months Ended September 30, 2021
| (in thousands, except for share and per share amounts) | Riot Nine Months Ended September 30, 2021 (includes Whinstone from May 26, 2021) | Transaction Accounting Adjustments (acquisition of Whinstone) | Notes | Pro Forma Combined (adjusted for acquisition of Whinstone) | ESS Metron Nine Months Ended October 2, 2021 (As Adjusted) (Note 2) | Transaction Accounting Adjustments (acquisition of ESS Metron) | Notes | Pro Forma Combined | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||
| Revenue, net - cryptocurrency mining | $ | 108,213 | — | $ | 108,213 | $ | — | $ | — | $ | 108,213 | |||||||||||||||||||
| Revenue, net - data center hosting | 14,067 | — | 14,067 | — | — | 14,067 | ||||||||||||||||||||||||
| Revenue, net - ESS Metron | — | — | — | 44,439 | (6,848 | ) | 4.(c). | 37,591 | ||||||||||||||||||||||
| Other revenue | 73 | — | 73 | — | — | 73 | ||||||||||||||||||||||||
| Total revenue | 122,353 | — | 122,353 | 44,439 | (6,848 | ) | 159,944 | |||||||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||||||||
| Cost of revenues, cryptocurrency mining (exclusive of depreciation and amortization shown below) | 29,893 | — | 29,893 | — | — | 29,893 | ||||||||||||||||||||||||
| Cost of revenues, data center hosting (exclusive of depreciation and amortization shown below) | 16,317 | — | 16,317 | — | — | 16,317 | ||||||||||||||||||||||||
| Cost of revenues, ESS Metron (exclusive of depreciation and amortization shown below) | — | — | — | 36,207 | (4,685 | ) | 4.(c). | 31,522 | ||||||||||||||||||||||
| Acquisition-related costs | 18,894 | — | 18,894 | — | — | 18,894 | ||||||||||||||||||||||||
| Selling, general and administrative | 47,971 | (75 | ) | 5.(a). | 47,896 | 5,459 | 275 | 4.(e). | 53,630 | |||||||||||||||||||||
| Depreciation and amortization | 20,791 | — | 20,791 | 502 | 1,089 | 4.(a)., 4.(b). | 22,382 | |||||||||||||||||||||||
| Change in fair value of derivative asset | (27,456 | ) | — | (27,456 | ) | — | — | (27,456 | ) | |||||||||||||||||||||
| Change in fair value of contingent consideration | 444 | — | 444 | — | — | 444 | ||||||||||||||||||||||||
| Impairment of cryptocurrencies | 17,507 | — | 17,507 | — | — | 17,507 | ||||||||||||||||||||||||
| Total costs and expenses | 124,361 | (75 | ) | 124,286 | 42,168 | (3,321 | ) | 163,133 | ||||||||||||||||||||||
| Operating income (loss) | (2,008 | ) | 75 | (1,933 | ) | 2,271 | (3,527 | ) | (3,189 | ) | ||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||
| Interest income | 295 | — | 295 | — | — | 295 | ||||||||||||||||||||||||
| Interest expense | — | 351 | 5.(b). | 351 | (185 | ) | 185 | 4.(g). | 351 | |||||||||||||||||||||
| Other income (expense) | 1,425 | — | 1,425 | 1 | — | 1,426 | ||||||||||||||||||||||||
| Realized gain on sale of long-term investment | 26,260 | — | 26,260 | — | — | 26,260 | ||||||||||||||||||||||||
| Realized gain on sale/exchange of cryptocurrencies | 94 | — | 94 | — | — | 94 | ||||||||||||||||||||||||
| Unrealized loss on marketable equity securities | (10,812 | ) | — | (10,812 | ) | — | — | (10,812 | ) | |||||||||||||||||||||
| Total other income (expense) | 17,262 | 351 | 17,613 | (184 | ) | 185 | 17,614 | |||||||||||||||||||||||
| Deferred income tax expense | (3,730 | ) | — | (3,730 | ) | (103 | ) | — | (3,833 | ) | ||||||||||||||||||||
| Net income (loss) | $ | 11,524 | $ | 426 | $ | 11,950 | $ | 1,984 | $ | (3,342 | ) | $ | 10,592 | |||||||||||||||||
| Basic net income (loss) per share | $ | 0.13 | $ | 0.13 | $ | 0.13 | ||||||||||||||||||||||||
| Diluted net income (loss) per share | $ | 0.13 | $ | 0.13 | $ | 0.13 | ||||||||||||||||||||||||
| Basic weighted average number of shares outstanding | 89,350,180 | 89,350,180 | 645,248 | 3. | 89,995,428 | |||||||||||||||||||||||||
| Diluted weighted average number of shares outstanding | 89,896,374 | 89,896,374 | 645,248 | 3. | 90,541,622 | |||||||||||||||||||||||||
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements
| 4 |
Riot Blockchain, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Year Ended December 31, 2020
| (in thousands, except for share and per share amounts) | Riot | Whinstone | Transaction Accounting Adjustments (acquisition of Whinstone) | Notes | Pro Forma Combined (adjusted for acquisition of Whinstone) | ESS Metron (As Adjusted) (Note 2) | Transaction Accounting Adjustments (acquisition of ESS Metron) | Notes | Pro Forma Combined | |||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||||
| Revenue, net - cryptocurrency mining | $ | 11,984 | $ | — | $ | — | $ | 11,984 | $ | — | $ | — | $ | 11,984 | ||||||||||||||||||||
| Revenue, net - data center hosting | — | 11,815 | — | 11,815 | — | — | 11,815 | |||||||||||||||||||||||||||
| Revenue, net - ESS Metron | — | — | — | — | 50,228 | (516 | ) | 4.(c). | 49,712 | |||||||||||||||||||||||||
| Other revenue | 97 | — | — | 97 | — | — | 97 | |||||||||||||||||||||||||||
| Total revenue | 12,081 | 11,815 | — | 23,896 | 50,228 | (516 | ) | 73,608 | ||||||||||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||||||||||||
| Cost of revenues, cryptocurrency mining (exclusive of depreciation and amortization shown below) | 6,251 | — | — | 6,251 | — | — | 6,251 | |||||||||||||||||||||||||||
| Cost of revenues, data center hosting (exclusive of depreciation and amortization shown below) | — | 22,596 | 468 | 5.(c). | 23,064 | — | — | 23,064 | ||||||||||||||||||||||||||
| Cost of revenues, ESS Metron (exclusive of depreciation and amortization shown below) | — | — | — | — | 41,273 | (218 | ) | 4.(c). | 41,056 | |||||||||||||||||||||||||
| Acquisition-related costs | — | — | 18,342 | 5.(d). | 18,342 | — | 2,096 | 4.(f). | 20,438 | |||||||||||||||||||||||||
| Selling, general and administrative | 10,251 | 7,620 | 168 | 5.(a). | 18,039 | 7,816 | 315 | 4.(e). | 26,170 | |||||||||||||||||||||||||
| Depreciation and amortization | 4,494 | 2,664 | 13 | 5.(c). | 7,171 | 517 | 1,452 | 4.(a)., 4.(b). | 9,141 | |||||||||||||||||||||||||
| Impairment of long-term investment | 9,413 | — | — | 9,413 | — | — | 9,413 | |||||||||||||||||||||||||||
| Impairment of cryptocurrencies | 989 | — | — | 989 | — | — | 989 | |||||||||||||||||||||||||||
| Derivative power transactions expense (income) | — | (3,110 | ) | — | (3,110 | ) | — | — | (3,110 | ) | ||||||||||||||||||||||||
| Total costs and expenses | 31,398 | 29,770 | 18,991 | 80,159 | 49,606 | 3,646 | 133,411 | |||||||||||||||||||||||||||
| Operating income (loss) | (19,317 | ) | (17,955 | ) | (18,991 | ) | (56,263 | ) | 622 | (4,162 | ) | (59,803 | ) | |||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||||
| Reversal of registration rights penalty | 1,358 | — | — | 1,358 | — | — | 1,358 | |||||||||||||||||||||||||||
| Gain (loss) on sale of equipment | 29 | — | — | 29 | — | — | 29 | |||||||||||||||||||||||||||
| Interest expense - related party | — | (408 | ) | 408 | 5.(b). | — | — | — | — | |||||||||||||||||||||||||
| Interest income | 85 | 120 | — | 205 | — | — | 205 | |||||||||||||||||||||||||||
| Interest expense | — | (1,161 | ) | — | (1,161 | ) | (252 | ) | 252 | 4.(g). | (1,161 | ) | ||||||||||||||||||||||
| Other income (expense) | (6 | ) | — | — | (6 | ) | 2,392 | — | 2,386 | |||||||||||||||||||||||||
| Realized gain on sale/exchange of cryptocurrencies | 5,184 | — | — | 5,184 | — | — | 5,184 | |||||||||||||||||||||||||||
| Total other income (expense) | 6,650 | (1,449 | ) | 408 | 5,609 | 2,140 | 252 | 8,001 | ||||||||||||||||||||||||||
| Deferred income tax expense | — | — | — | — | (81 | ) | — | (81 | ) | |||||||||||||||||||||||||
| Net income (loss) | $ | (12,667 | ) | $ | (19,404 | ) | $ | (18,583 | ) | $ | (50,654 | ) | $ | 2,681 | $ | (3,910 | ) | $ | (51,883 | ) | ||||||||||||||
| Net (income) loss attributable to non-controlling interest | (7 | ) | — | — | (7 | ) | — | — | (7 | ) | ||||||||||||||||||||||||
| Net (income) loss attributable to Riot Blockchain | $ | (12,674 | ) | $ | (19,404 | ) | $ | (18,583 | ) | $ | (50,661 | ) | $ | 2,681 | $ | (3,910 | ) | $ | (51,890 | ) | ||||||||||||||
| Basic and diluted net income (loss) per share | $ | (0.30 | ) | $ | (0.94 | ) | $ | (0.95 | ) | |||||||||||||||||||||||||
| Basic and diluted weighted average number of shares outstanding | 41,976,704 | 11,800,000 | 53,776,704 | 645,248 | 3. | 54,421,952 | ||||||||||||||||||||||||||||
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements
| 5 |
Note 1. Basis of Presentation
The unaudited pro forma condensed combined balance sheet as of September 30, 2021, combines our historical condensed consolidated balance sheet with the historical condensed balance sheet of ESS Metron, which have been derived from the combined financial statements of Ferrie Franzmann Industries and has been prepared as if our acquisition of ESS Metron had occurred on September 30, 2021. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021, and for the year ended December 31, 2020, combine our historical condensed consolidated statements of operations with Ferrie Franzmann Industries’ historical statements of operations and have been prepared as if the acquisition had occurred on January 1, 2020.
We have accounted for the acquisition in this unaudited pro forma condensed combined financial information using the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). In accordance with ASC 805, we use our best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the Acquisition Date. Goodwill as of the Acquisition Date is measured as the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired.
The pro forma adjustments described below were developed based on Riot management’s assumptions and estimates, including assumptions relating to the consideration paid and the allocation thereof to the assets acquired and liabilities assumed from ESS Metron based on preliminary estimates of fair value. The final allocation of the purchase consideration will differ from that reflected in the unaudited pro forma condensed combined financial information after final valuation procedures are performed and amounts are finalized following the completion of the acquisition.
The unaudited pro forma condensed combined financial information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of the combined company would have been had the acquisition occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or financial position.
The unaudited pro forma condensed combined financial information does not reflect any integration activities or cost savings from operating efficiencies, synergies, or other restructurings that could result from the Acquisition.
| 6 |
Note 2. Adjustment to historical Ferrie Franzmann Industries financial statements
The historical combined balance sheet of Ferrie Franzmann Industries as of October 2, 2021, has been revised on a pro forma basis to reflect the removal of Tecknit Shielding System, Inc. (“TSSI”), which Riot did not purchase in the Acquisition, to reflect only the balance sheet of ESS Metron, the entity that Riot acquired. TSSI had no significant operations as of or for the nine-month period ended October 2, 2021 and for the year ended December 31, 2020. Its operating assets and liabilities consist primarily of real property and buildings used by ESS Metron, and intercompany balances. The impact on the Ferrie Franzmann Industries’ historical balance sheet as of October 2, 2021, is as follows:
| (In thousands) | Ferrie Franzmann Industries (Historical) | TSSI (Historical) | ESS Metron (As Adjusted) | |||||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | $ | 3,342 | $ | — | $ | 3,342 | ||||||
| Accounts receivable | 9,952 | — | 9,952 | |||||||||
| Inventories and work in process | 1,245 | — | 1,245 | |||||||||
| Costs and estimated earnings in excess of billings | 10,948 | — | 10,948 | |||||||||
| Prepaid expenses and other current assets | 245 | — | 245 | |||||||||
| Total current assets | 25,732 | — | 25,732 | |||||||||
| Property and equipment, net | 4,482 | 1,004 | 3,478 | |||||||||
| Deposits | 13 | — | 13 | |||||||||
| Total assets | $ | 30,227 | $ | 1,004 | $ | 29,223 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable | $ | 7,847 | $ | — | $ | 7,847 | ||||||
| Accrued expenses | 1,007 | — | 1,007 | |||||||||
| Billings in excess of costs and estimated earnings | 8,998 | — | 8,998 | |||||||||
| Warranty liability, current portion | 30 | — | 30 | |||||||||
| Long-term debt, current portion | 215 | — | 215 | |||||||||
| Total current liabilities | 18,097 | — | 18,097 | |||||||||
| Long-term debt, less current portion | 5,401 | — | 5,401 | |||||||||
| Warranty liability, less current portion | 79 | — | 79 | |||||||||
| Affiliate payable | — | (1,250 | ) | 1,250 | ||||||||
| Total liabilities | 23,577 | (1,250 | ) | 24,827 | ||||||||
| Stockholders' equity | ||||||||||||
| Additional paid-in capital | — | (2,410 | ) | 2,410 | ||||||||
| Retained earnings (accumulated deficit) | 6,650 | 4,665 | 1,985 | |||||||||
| Total stockholders' equity | 6,650 | 2,255 | 4,395 | |||||||||
| Total liabilities and stockholders' equity | $ | 30,227 | $ | 1,004 | $ | 29,223 | ||||||
| 7 |
The impact on the Ferrie Franzmann Industries’ historical combined statement of income for the nine months ended October 2, 2021, is as follows:
| (In thousands) | Ferrie Franzmann Industries (Historical) | TSSI (Historical) | ESS Metron (As Adjusted) | |||||||||
| Revenue, net – ESS Metron | $ | 44,439 | $ | — | $ | 44,439 | ||||||
| Costs of revenues, ESS Metron (exclusive of depreciation and amortization shown below) | 35,981 | (226 | ) | 36,207 | ||||||||
| Selling, general and administrative | 6,014 | 555 | 5,459 | |||||||||
| Depreciation and amortization | — | (502 | ) | 502 | ||||||||
| Total costs and expenses | 41,995 | (173 | ) | 42,168 | ||||||||
| Operating income (loss) | 2,444 | 173 | 2,271 | |||||||||
| Other income (expense): | ||||||||||||
| Other income | 1 | — | 1 | |||||||||
| Interest expense | (185 | ) | — | (185 | ) | |||||||
| Total other income (expense) | (184 | ) | — | (184 | ) | |||||||
| Income tax expense | (103 | ) | — | (103 | ) | |||||||
| Net income (loss) | $ | 2,157 | $ | 173 | $ | 1,984 | ||||||
The impact on the Ferrie Franzmann Industries’ historical combined statement of income for the year ended December 31, 2020, is as follows:
| (In thousands) | Ferrie Franzmann Industries (Historical) | TSSI (Historical) | ESS Metron (As Adjusted) | |||||||||
| Revenue, net – ESS Metron | $ | 50,228 | $ | — | $ | 50,228 | ||||||
| Costs of revenues, ESS Metron (exclusive of depreciation and amortization shown below) | 40,972 | (301 | ) | 41,273 | ||||||||
| Selling, general and administrative | 8,404 | 588 | 7,816 | |||||||||
| Depreciation and amortization | — | (517 | ) | 517 | ||||||||
| Total costs and expenses | 49,376 | (230 | ) | 49,606 | ||||||||
| Operating income (loss) | 852 | 230 | 622 | |||||||||
| Other income (expense): | ||||||||||||
| Interest expense | (252 | ) | — | (252 | ) | |||||||
| Other income (expense) | 2,392 | — | 2,392 | |||||||||
| Total other income (expense) | 2,140 | — | 2,140 | ) | ||||||||
| Income tax expense | (81 | ) | — | (81 | ) | |||||||
| Net income (loss) | $ | 2,911 | $ | 230 | $ | 2,681 | ||||||
| 8 |
Note 3. Preliminary Purchase Consideration and Related Allocation
Pursuant to the Agreement, Riot paid to the Seller $25.0 million in cash, (plus $5.3 million of net working capital and other adjustments) and agreed to issue to the Seller 715,413 shares of Riot’s common stock, no par value. At the closing of the Acquisition, Riot paid to the Sellers the Cash Consideration and issued to the Sellers a portion of the Share Consideration consisting of 645,248 shares of Common Stock. The remainder of the Share Consideration, consisting of 70,165 shares of Common Stock (the “Holdback Share Consideration”), was withheld by Riot at the Closing as security for the Sellers’ indemnification obligations under the Membership Interest Purchase Agreement, and will be reduced by the value of the amount of applicable indemnifiable damages and issued to the Sellers after the date that is 18 months following the Closing, pursuant to the terms and subject to the conditions set forth in the Membership Interest Purchase Agreement. The following table summarizes the components of the purchase consideration transferred (in thousands):
Purchase Consideration:
| Cash (including $3.7 million of certain Seller transaction costs) | $ | 30,116 | ||
| Common stock (645,248 shares at $37.37 per share) | 24,113 | |||
| Holdback Share Consideration (70,165 shares at $37.37 per share) | 2,622 | |||
| $ | 56,851 | |||
The pro forma cash utilized in the transaction totaled $30.1 million, consisting of the net purchase cash of $26.4 million plus closing expenses of $3.7 million.
The Acquisition will be accounted for using the acquisition method of accounting, which requires an allocation of the purchase price to the net assets acquired, based on their fair values as of the date of the Acquisition. Pro forma purchase price allocation adjustments have been made for the purpose of providing pro forma financial information based on current estimates and currently available information. These amounts are preliminary and subject to revision based on final determination of fair value and the final allocation of the purchase price to the assets and liabilities of ESS Metron, and the revisions could be material. 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. The Company expects to finalize the valuation of acquired assets and liabilities assumed, and consideration transferred, as soon as practicable but not later than one year from the acquisition date.
The following table summarizes the preliminary allocation of the assets acquired and liabilities assumed based on their fair values on the assumed acquisition date (in thousands):
| Purchase Price Allocation: | ||||
| Cash and cash equivalents | $ | 3,344 | ||
| Accounts receivable | 9,952 | |||
| Inventories and work in process | 1,246 | |||
| Costs and estimated earnings in excess of billings | 10,948 | |||
| Prepaid and other current assets | 258 | |||
| Property and equipment | 4,603 | |||
| Intangible assets | 13,900 | |||
| Right of use asset | 6,714 | |||
| Accounts payable | (7,847 | ) | ||
| Accrued expenses | (1,007 | ) | ||
| Billings in excess of costs and estimated earnings | (8,998 | ) | ||
| Operating lease liabilities | (6,714 | ) | ||
| Warranty liability | (109 | ) | ||
| Long-term debt, current portion | (215 | ) | ||
| Long-term debt, less current portion | (5,401 | ) | ||
| Affiliate payable | (1,250 | ) | ||
| Total identifiable assets and liabilities acquired | 19,422 | |||
| Goodwill (1) | 37,427 | |||
| Total purchase consideration | $ | 56,851 | ||
| (1) | Goodwill represents the excess of Purchase Consideration over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at ESS Metron and synergies expected to be achieved from the combined operations of Riot and ESS Metron. |
| 9 |
Note 4. Transaction Accounting Adjustments
The pro forma adjustments included in the unaudited pro forma condensed combined financial information are as follows:
| (a) |
The pro forma adjustment of $13.9 million to intangible assets reflects the identifiable intangible assets acquired, consisting of customer relationships, trademark and UL Listings. Customer relationships are assigned an estimated useful life of approximately 10 years based on the low attrition of the customer base, in part due to the customized nature of the Company’s products. Fair value of the customer relationships 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 25%.
The trademark was assigned a 10-year life due to the Company obtaining more data center customers where the longevity of the projects may be shorter than have been historically. Fair value of the trademark was estimated by applying the relief from royalty rate method. The fair value was determined by applying an estimated royalty rate to revenues, measuring the value the Company would pay in royalties to a market participant if it did not own the trademark and had to license it from a third party.
UL Listings were assigned a 12-year life. Although the UL Listing certifications do not expire, due to technological improvements in similar products, particularly in the data center industry, a 12-year life was assumed. Fair value of the UL Listings was estimated by applying an estimated developer’s profit margin of approximately 4.5% to estimated costs to be incurred over an estimated six months to re-acquire the UL Listings. The Company applied a discount rate of 15%, which reflected the short time necessary to re-acquire the asset.
The straight-line amortization related to the identifiable intangible assets is reflected as a pro forma adjustment in the unaudited statements of operations at the rate of approximately $0.3 million per quarter. |
| (b) |
The pro forma adjustment of $1.1 million to property and equipment, net reflects an adjustment to estimated fair value. The associated pro forma adjustment to record the recognition of new depreciation expense based on the fair value of the property and equipment at its estimated remaining useful lives calculated on a straight-line basis is reflected as a pro forma adjustment in the unaudited statements of operations at the rate of approximately $0.1 million per quarter.
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| (c) |
Whinstone, a wholly-owned subsidiary of Riot, is a customer of ESS Metron. The pro forma adjustments of $0.8 million to accounts receivable and accounts payable eliminate the balance due from Whinstone to ESS Metron for purchases in the ordinary course of business. The pro forma adjustment of $6.8 million to revenue, net – ESS Metron and $4.7 million to cost of revenues, ESS Metron (exclusive of depreciation and amortization shown below) for the nine months ended September 30, 2021, eliminate the revenue and cost of revenue from ESS Metron’s historical financial statements for sales to Whinstone for what would have been intercompany profits had both entities been consolidated. For the year ended December 31, 2020, the pro forma adjustments were $0.5 million to revenue, net – ESS Metron and $0.2 million to cost of revenues, ESS Metron (exclusive of depreciation and amortization shown below).
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| (d) | The goodwill arising from the Acquisition will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment exists. In the event that Riot determines that the value of goodwill has become impaired, we will incur an accounting charge for the amount of the impairment during the period in which the determination is made. The goodwill is not deductible for tax purposes. |
| (e) | The pro forma adjustments to other long-term assets, other current liabilities and other long-term liabilities include the right of use assets from acquired leases and the associated amortization to reflect as if ESS Metron had adopted ASU 2016-02, Leases (Topic 842). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by the fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. The standard was effective for Riot on January 1, 2019, but since ESS Metron was not a public business enterprise (more specifically, it was a private company), it was not required to adopt the guidance until the acquisition by Riot, when the lease classification was assessed. |
| (f) | The transaction expenses totaling approximately $2.1 million is recorded as a pro forma adjustment in the pro forma combined statement of operations as acquisition-related costs for the year ended December 31, 2020. For the pro forma balance sheet as of September 30, 2021, the transaction expenses totaling approximately $1.8 million is recorded as a use of cash and as an increase in the accumulated deficit. | |
| (g) | The pro forma adjustments to long-term debt, current portion and long-term debt, less current portion reflect the payoff of the third-party note payable by the Seller subsequent to September 30, 2021 but prior to December 1, 2021. The pro forma adjustments to interest expense totaling $0.2 million and $0.3 million, for the periods ended September 30, 2021 and December 31, 2020, respectively, eliminate the interest paid since the debt was paid in full. |
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| (h) | The pro forma adjustments to stockholders’ equity are as follows: |
| (In thousands) | Common stock | Additional paid-in capital | Retained earnings (deficit) | |||||||||
| Value of Riot common shares issued in acquisition | $ | 26,735 | $ | — | $ | — | ||||||
| Accrual of transaction fees and expenses | — | — | (1,785 | ) | ||||||||
| Elimination of ESS Metron historical members’ capital | — | (2,410 | ) | (1,985 | ) | |||||||
| $ | 26,735 | $ | (2,410 | ) | $ | (3,770 | ) | |||||
Note 5. Whinstone Transaction Accounting Adjustments
The pro forma adjustments included in the unaudited pro forma condensed combined financial information are as follows:
| (a) | The pro forma adjustments to cash and selling, general and administrative expense eliminates the $15 thousand per month management fees Whinstone was historically required to pay to its parent, the Whinstone Seller. | |
| (b) |
The pro forma adjustments to cash and interest expense eliminates the interest paid to the Whinstone Seller since the debt was paid in full as provided in the purchase agreement, in connection with the closing of the Whinstone Acquisition on May 26, 2021.
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| (c) |
The pro forma adjustments to cost of revenues (exclusive of depreciation and amortization shown below) include the amortization of the right of use assets from acquired leases and the associated amortization to reflect as if Whinstone had adopted ASU 2016-02, Leases (Topic 842). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by the fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. The standard was effective for Riot on January 1, 2019, but since Whinstone was not a public business enterprise (more specifically, it was a private company), it was not required to adopt the guidance until the acquisition by Riot, when the lease classification was assessed.
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| (d) | The transaction expenses totaling approximately $18 million is recorded as a pro forma adjustment in the pro forma combined statement of operations as of January 1, 2020, as selling, general and administrative expense for the year ended December 31, 2020. | |
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