IPO Update: Rhodium Enterprises Aims For $100 Million IPO

Summary

• Rhodium Enterprises has filed to raise $100 million in a U.S. IPO.
• The firm is a growing Bitcoin mining company based in Texas.
• RHDM is well-placed in a growing industry, but the IPO looks richly priced, so I'll watch it from the sidelines and wait for a lower entry point.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

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A Quick Take On Rhodium Enterprises

Rhodium Enterprises (RHDM) has filed to raise $100 million from the sale of its Class A common stock in an IPO, according to an amended registration statement.

The company operates computer mining facilities to mine Bitcoin in the state of Texas.

I'm bullish on the price of Bitcoin and on the profitability outlook for mining firms such as RHDM, but I'm concerned about management's proposed valuation for the IPO, which appears priced for perfection.

Given its high pricing expectations, I'll pass on the IPO, although I would be interested in the stock at around $10.00 per share.

Company & Technology

Fort Worth, Texas-based Rhodium was founded to acquire and operate various infrastructure assets for Bitcoin mining operations.

Management is headed by co-founder and CEO Nathan Nichols, who has been with the firm since inception and was previously VP Business Development at an unnamed liquid cooling product company.

Below is a brief overview video of an example of liquid cooling technologies:

(Source)

Rhodium has received at least $225 million in equity, debt, and convertible notes from investors, including Imperium Investments Holdings.

The firm currently operates approximately Bitcoin mining computers at its initial Texas facility with 125 MW of power capacity producing around 2.7 exahashes of mining capacity as of December 31, 2021.

Selling, G&A expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:

Selling, G&A	Expenses vs. Revenue
Period	Percentage
Nine Mos. Ended June 30, 2021	9.9%
From April 1, 2020 to Dec. 31, 2020	46.2%
2019 - No activity	--%

Click to enlarge

(Source)

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, rose sharply to 10.1x in the most recent reporting period, as shown in the table below:

Selling, G&A	Efficiency Rate
Period	Multiple
Nine Mos. Ended June 30, 2021	10.1
From April 1, 2020 to Dec. 31, 2020	2.2

Click to enlarge

(Source - SEC Filing)

Rhodium's Market & Competition

The global market for Bitcoin mining is currently in significant flux, with the recent bans on mining in China causing a large amount of that country's hashpower to exit the network while those operators look for a more suitable location.

The market value for mining depends on the price of Bitcoin, since the majority of value going to the miner is a function of the current Bitcoin reward rate of 6.25 Bitcoin per successfully mined block.

At a price of $50,000 per Bitcoin, the annual mining rewards would be approximately $16.425 billion.

Major competitive or other industry participants include:

• Bitfarms

• Argo Blockchain

• DMG Blockchain

• Hive Blockchain

• Hut 8 Mining

• HashChain Technology

• DPW Holdings

• Layer1 Technologies

• Riot Blockchain

• Marathon Patent Corp.

• Stronghold Digital Mining

• Others

Rhodium Enterprises Financial Performance

The company's recent financial results can be summarized as follows:

• Sharply growing topline revenue.

• Similar gross profit trajectory and high gross margin.

• A swing to operating profit and net profit.

• High cash used in operations.

Below are relevant financial results derived from the firm's registration statement:

Total Revenue
Period	Total Revenue
Nine Mos. Ended June 30, 2021	$ 82,097,000
From April 1, 2020 to Dec. 31, 2020	$ 5,150,000
Gross Profit (Loss)
Period	Gross Profit (Loss)
Nine Mos. Ended June 30, 2021	$ 72,834,000
From April 1, 2020 to Dec. 31, 2020	$ 4,527,000
Gross Margin
Period	Gross Margin
Nine Mos. Ended June 30, 2021	88.72%
From April 1, 2020 to Dec. 31, 2020	87.90%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Nine Mos. Ended June 30, 2021	$ 23,615,000	28.8%
From April 1, 2020 to Dec. 31, 2020	$ (874,000)	-17.0%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
Nine Mos. Ended June 30, 2021	$ 12,813,000	15.6%
From April 1, 2020 to Dec. 31, 2020	$ (287,000)	-0.3%
Cash Flow From Operations
Period	Cash Flow From Operations
Nine Mos. Ended June 30, 2021	$ (23,953,000)
From April 1, 2020 to Dec. 31, 2020	$ (3,010,000)
(Glossary Of Terms)

Click to enlarge

(Source - SEC Filing)

As of Sept. 30, 2021, Rhodium had $104 million in cash and $189 million in total liabilities.

Free cash flow during the 12 months ended June 30, 2021, was negative ($153.2 million).

Rhodium's IPO Details

RHDM intends to sell 7.7 million shares of Class A common stock at a proposed midpoint price of $13.00 per share for gross proceeds of approximately $100 million, not including the sale of customary underwriter options.

No existing or potentially new shareholders have indicated an interest to purchase shares at the IPO price.

Class A and Class B common stockholders will be entitled to one vote per share. Class A shareholders will have full economic rights while Class B shareholders will not have economic rights but will have the right to convert to Class A shares on a one-for-one basis.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company's enterprise value at IPO (excluding underwriter options) would approximate $1.5 billion.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 6.19%. A figure under 10% is generally considered a 'low float' stock which can be subject to significant price volatility.

Per the firm's most recent regulatory filing, it plans to use the net proceeds as follows:

We intend to contribute the net proceeds of this offering to Rhodium Holdings in exchange for Rhodium Units. Rhodium Holdings will use such proceeds to repay our outstanding borrowings and accrued interest under the Bridge Loan, totaling approximately $31.0 million as of September 30, 2021, to construct new sites and for general corporate purposes, including the purchase of miners. We used the proceeds from the Bridge Loan to purchase miners and for general corporate purposes.

(Source)

Management's presentation of the company roadshow is available here until the IPO is completed.

Regarding outstanding legal proceedings, management believes that any legal claims would not have a material adverse effect on its financial condition or operations.

Listed underwriters of the IPO are B. Riley Securities, Cowen (COWN) and other investment banks.

Valuation Metrics For Rhodium

Below is a table of the firm's relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:

Measure [TTM]	Amount
Market Capitalization at IPO	$1,616,423,341
Enterprise Value	$1,505,133,341
Price / Sales	18.55
EV / Revenue	17.27
EV / EBITDA	62.30
Earnings Per Share	$0.11
Operating Margin	27.72%
Net Margin	15.23%
Float To Outstanding Shares Ratio	6.19%
Proposed IPO Midpoint Price per Share	$13.00
Net Free Cash Flow	-$153,214,000
Free Cash Flow Yield Per Share	-9.48%
(Glossary Of Terms)

Click to enlarge

(Source - SEC Filing)

As a reference, a potential public comparable would be Hut 8 (HUT); shown below is a comparison of their primary valuation metrics:

Metric	Hut 8 (HUT)	Rhodium Enterprises (RHDM)	Variance
Price / Sales	8.07	18.55	129.8%
EV / Revenue	9.56	17.27	80.7%
EV / EBITDA	24.29	62.30	156.5%
Earnings Per Share	$0.41	$0.11	-74.2%
(Glossary Of Terms)

Click to enlarge

(S-1/A and Seeking Alpha)

Commentary About Rhodium's IPO

Rhodium is seeking public investment capital to fund further mining computer purchases and continue its facility buildout plans.

The company's financials show strongly growing topline revenue, similar gross profit trajectory and high gross margin, a swing to operating profit and net profit and substantial cash used in operations.

Free cash flow for the 12 months ended June 30, 2021, was negative ($153.2 million).

Selling, G&A expenses as a percentage of total revenue have dropped markedly, and its Selling, G&A efficiency rate rose to 10.1 in the most recent nine-month reporting period.

The market opportunity for mining Bitcoin is quite large and profitable at recent price ranges.

B. Riley Securities is the lead underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of negative (40.3%) since their IPO. This is a lower-tier performance for all major underwriters during the period.

The primary risk to the company's outlook is the volatile nature of the price of Bitcoin which has a direct effect on the profitability of its operations.

As for valuation, compared to Hut 8, the IPO appears priced at significantly higher multiples across major financial metrics.

The company is one of several firms in the Bitcoin mining space that have taken advantage of a favorable public market environment for mining companies, where capital is comparatively inexpensive given the current high return environment partially as a result of the Chinese mining ban.

I'm bullish on the price of Bitcoin over the near and medium term and on the profitability outlook for mining firms such as RHDM, but I'm concerned about management's proposed valuation for the IPO, which appears priced for perfection.

Given its high pricing expectations, I'll watch the IPO from the sidelines, although I would be interested in the stock at around $10.00 per share.

Expected IPO Pricing Date: January 19, 2022.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.