Riot Blockchain, Inc. — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Riot’s focus was cryptocurrency mining, primarily bitcoin. In February, all 4,000 Antminer S17 Pro machines purchased in late 2019 were installed and operational; most older miners were taken offline as Riot evaluated their future use.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $2.386 million | $1.430 million; up 67% |
| Cryptocurrency mining revenue | $2.362 million | $1.406 million |
| Cost of revenues | $1.407 million | $1.471 million |
| Operating loss | $4.408 million | $3.217 million |
| Net loss | $4.277 million | $13.750 million |
| Loss per share, basic and diluted | $0.15 | $0.94 |
| Net cash used in operating activities | $2.659 million | $3.184 million |
Mining revenue increased mainly because average bitcoin prices were higher ($8,287 versus $3,791); bitcoin production declined to 280 from 330. Cost of revenues, primarily mining rent and utilities, was broadly unchanged. Revenue less cost of revenues was $979,000, or approximately 41% of revenue, before separately reported depreciation, amortization, and cryptocurrency impairment. Selling, general and administrative expense rose 18% to $3.735 million, including $1.914 million of stock-based compensation. Depreciation and amortization increased to $663,000, and cryptocurrency impairment was $989,000.
The year-over-year reduction in net loss primarily reflects Q1 2019 charges: a $6.155 million loss on issuance of convertible notes, common stock and warrants, plus $4.398 million of fair-value losses on notes and warrants. These items were absent in Q1 2020.
At March 31, cash and cash equivalents were $13.956 million, cryptocurrencies were $5.282 million, working capital was approximately $17.0 million, and total stockholders’ equity was $33.231 million. Total liabilities were $3.843 million; the balance sheet listed no outstanding borrowing, while operating lease liabilities totaled about $356,000. Cash increased $6.516 million during the quarter, including $9.184 million net proceeds from the ATM share offering. The company reported recurring operating losses and negative operating cash flow.
Changes, outlook, risks, and unusual items
- Funding and dilution: Riot sold 6,024,059 shares through its ATM program during Q1, generating approximately $9.5 million gross proceeds and $9.184 million net of offering costs. After quarter-end it received approximately $4.3 million gross from a further 3,507,072 shares. The filing says cash on hand should fund operating and capital requirements for at least 12 months from issuance of the financial statements, while also noting continued losses and possible need for additional capital. Form S-3 sales were subject to public-float limits.
- Operations and plans: Management expected near-term operating losses, potentially significant, and said it would monitor cash, costs, and spending. Riot ended development of its planned RiotX exchange to concentrate resources on mining. It engaged XMS Capital Partners to evaluate strategic opportunities, without a defined transaction timeline or assurance of a deal.
- Post-quarter activity: Riot signed a six-month hosting agreement with Coinmint for up to 4,000 S17 Pro miners, intended to reduce operating costs and potentially expand hashing capacity. The filing reports a subsequent purchase of 2,040 Antminer S19 Pro machines for $4.4 million, expected by early July; another MD&A passage refers to an additional 1,000 S19 units. This quantity difference is unclear in the filing text.
- Industry and COVID-19: Bitcoin’s block reward was expected to halve from 12.5 to 6.25 in May 2020; management said future price effects were unknown. Riot did not expect a material impact from COVID-19 based on its then-current assessment, but said impacts were unpredictable and disclosed it might be required to reduce or cease operations if government actions required it. The company had not been designated an essential business as of the filing.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective due to four material weaknesses: access and segregation-of-duties controls, IT change management, validation of third-party data, and electronic cash-disbursement segregation. Remediation was underway but not yet considered complete.
- Legal matters: On April 30, 2020, the court dismissed the securities class action claims without prejudice; plaintiffs could seek to amend. Several derivative actions, indemnification demands, and a Kashwise suit remained, with outcomes not reasonably estimable. The SEC notified Riot in January that it did not intend to recommend enforcement action against the company based on information then available.
Important facts for investors to verify
- Bitcoin production, realized prices, mining costs, and the operating impact of the May 2020 reward halving.
- Actual S19 purchase quantity and delivery timing, and whether Coinmint hosting achieves expected cost and capacity benefits.
- Cash runway, capital spending, ATM capacity restrictions, and potential dilution from future equity issuance.
- Progress in remediating material weaknesses and any subsequent changes in control effectiveness.
- Developments in shareholder, indemnification, and Kashwise litigation, including any potential financial exposure.