Business Context and Reporting Period
This Form 8-K, dated August 31, 2018, reports on Riot Blockchain, Inc. (the "Company") and its subsidiary RiotX, Holdings, Inc. ("RiotX"). The filing details the entry into a Material Definitive Agreement with goNumerical Ltd. (d.b.a. Coinsquare) to launch a branded cryptocurrency exchange in the United States. The Company is an emerging growth company incorporated in Nevada.
Key Financial Metrics and Transaction Terms
This filing does not report standard periodic financial metrics such as revenue, profit, cash flow, or debt levels. Instead, it outlines the financial terms of the new agreement and prior investments:
- Equity Consideration: RiotX will pay Coinsquare a one-time fee of 450,000 common shares of Riot Blockchain, Inc. plus shares equal to 9.9% of the total issued and outstanding shares of RiotX Holdings, Inc.
- Cash Consideration: Integration fees for platform customization are anticipated to be approximately $485,331 USD, payable in three tranches (25% on execution, 25% seven days prior to development, and 50% upon delivery).
- Recurring Fees: A fee of 0.1% will be paid to Coinsquare for each deposit and withdrawal of fiat currency.
- Prior Investments: The Company previously invested $3.0 million (10.9% stake) in Coinsquare in 2017 and an additional $6.4 million in February 2018 (comprising $2.8 million equity and $3.6 million warrant exercise). Current ownership is approximately 12.9%.
Material Changes and Strategic Developments
The primary material change is the strategic expansion into the U.S. market through a "white-label" partnership. RiotX will utilize Coinsquare's software to launch a branded exchange supporting Bitcoin, Bitcoin Cash, Ethereum, and Litecoin. This agreement represents a shift from the Company's previous minority investment in the Canadian platform to an operational partnership for U.S. deployment.
Outlook, Risks, and Contingencies
Outlook and Obligations: The agreement has an initial term of 60 months with automatic 12-month renewals. RiotX must meet "Trading Volume Minimums" to be agreed upon within three months of the exchange launch. Failure to meet these minimums for any consecutive six-month period (starting six months after acceptance) allows Coinsquare to terminate with 30 days' notice.
Risks and Contingencies:
- Regulatory Compliance: RiotX is solely responsible for compliance with all applicable laws, including Anti-Money Laundering (AML) and Securities Laws. The agreement requires internal audits every odd-numbered anniversary and external audits by a Qualified Auditor every even-numbered anniversary.
- Termination Triggers: Coinsquare may terminate immediately if RiotX undergoes a change of control without consent, becomes insolvent, or if activities violate applicable law. RiotX may terminate with 60 days' notice during the initial term.
- Liability: RiotX bears sole responsibility for funding/withdrawal errors and losses resulting from the addition or removal of cryptocurrencies. Coinsquare is not liable for losses from unauthorized access to its software.
Key Facts for Investor Verification
- Verify the exact number of RiotX shares issued to Coinsquare, as the 9.9% stake depends on the total outstanding shares immediately following execution.
- Confirm the specific "Trading Volume Minimums" once agreed upon, as failure to meet these is a material termination risk.
- Monitor the status of RiotX's Money Transmitter Licenses in states beyond Florida, as the agreement requires authorization in jurisdictions where services are offered.
- Review the upcoming internal and external AML audit reports to ensure compliance with the strict reporting schedule mandated by the agreement.
- Assess the impact of the 0.1% transaction fee on the projected margins of the new U.S. exchange operations.