Riot Blockchain, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter report. The company’s primary business was cryptocurrency mining, principally bitcoin, at its Oklahoma City facility.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $6.84 million | $7.85 million |
| Cryptocurrency mining revenue | $6.74 million | $7.75 million |
| Cost of revenue | $6.10 million | $5.82 million |
| Operating loss | $10.08 million | $59.37 million |
| Net loss | $20.30 million | $60.21 million |
| Net loss attributable to Riot | $20.04 million | $58.01 million |
| Basic and diluted loss per share | $1.02 | $4.33 |
Mining revenue less cost of revenue was approximately $0.74 million, or about 10.8% of total revenue, before depreciation, corporate expenses and other items. SG&A fell 56.1% to $9.16 million; depreciation and amortization fell to $0.12 million, largely because mining equipment had been substantially impaired in 2018. 2019 impairment charges totaled $1.54 million, including cryptocurrency and Logical Brokerage assets.
Other expense was $10.36 million, including $6.16 million related to issuing convertible notes and $6.77 million from fair-value changes in the notes and warrant liability. The notes were converted to common shares during 2019. Other items included a $1.14 million gain on deconsolidating Tess and gains on cryptocurrency sales and liability settlements.
Cash flow, balance sheet and capital
- Cash and cash equivalents were $7.44 million at year-end, versus $0.23 million a year earlier; working capital was $9.3 million.
- Operating cash outflow was $16.86 million; investing cash outflow was $1.80 million; financing cash inflow was $25.88 million. Financing included $23.83 million net proceeds from the at-the-market equity offering.
- Total assets were $30.38 million, total liabilities $4.15 million, and stockholders’ equity $26.24 million. No notes payable remained outstanding at year-end; operating lease liabilities were $0.37 million.
- Cryptocurrency assets were carried at $3.84 million, with a $0.84 million impairment charge in 2019. The company held approximately 514 BTC, 3,449 LTC and 1 BCH at year-end.
- In December 2019, Riot bought 4,000 Bitmain S17 Pro miners for approximately $6.3–$6.4 million. Three thousand were received but not yet in service at year-end; the remaining 1,000 were received in early 2020. The filing reports the new miners operational in February 2020.
- After year-end, the company raised approximately $9.5 million gross from the sale of 5,995,559 shares under its sales agreement.
Changes, outlook and material risks
- Revenue declined about 12.9% year over year, while the net loss narrowed substantially from 2018, when the company recorded large mining-equipment and other impairments. Management expects near-term operating losses to continue and says it is monitoring cash, spending and financing needs.
- Management’s stated plans include adjusting mining expansion to cryptocurrency prices, evaluating sector acquisitions and financing, considering options to monetize or license assets, and controlling costs. The filing provides no specific earnings or revenue guidance.
- Management reported that network hash rate rose from 40.16 EH/s in 2018 to 98.67 EH/s in 2019, increasing competitive and difficulty pressures. Bitcoin’s next halving was expected in May 2020, potentially reducing block rewards by half.
- The Oklahoma City mining lease was extended through May 15, 2020; renewal beyond that date was uncertain in the filing. The company operated a single mine, making power, facility, outage and relocation risks significant.
- Riot reported recurring losses and negative operating cash flow, and stated it may need additional debt or equity financing. Further equity issuance could dilute shareholders. Management believed cash on hand was sufficient for at least 12 months from issuance of the financial statements, while also warning that additional funding would be needed to support its strategy.
- COVID-19-related restrictions and supply-chain disruption, particularly for China-sourced mining equipment, could impair operations. The company also highlighted cryptocurrency price volatility, regulation, cybersecurity and custody, mining-pool dependence, hardware obsolescence, energy costs and halving risks.
- The SEC notified Riot in January 2020 that it had concluded its investigation and did not intend to recommend an enforcement action based on information then available. Securities class-action and shareholder derivative litigation remained unresolved; Riot said potential outcomes could not be reasonably estimated.
- Management identified material weaknesses in IT access and change controls, third-party data validation, and segregation of duties for electronic cash disbursements. Management’s and the auditor’s assessments found internal control over financial reporting ineffective; the auditor issued an adverse opinion on controls. The auditor gave an unqualified opinion on the financial statements.
- Riot discontinued plans to develop its RiotX/Logical Brokerage business and recorded a $0.7 million impairment. Its ownership in Tess fell to 8.8%, resulting in deconsolidation.
Important facts for investors to verify
- Whether the S17 miners achieved the stated operating capacity and efficiency, and how post-halving mining economics compare with electricity, rent and other operating costs.
- Whether the Oklahoma City lease was renewed beyond May 15, 2020, and on what terms.
- Actual cash burn and financing runway, including proceeds and share dilution from post-year-end ATM sales and any further capital raises.
- Progress in remediating the disclosed material weaknesses and whether controls are subsequently tested and found effective.
- Developments and any eventual financial exposure from the pending securities and derivative litigation.
- Cryptocurrency balances and valuation: holdings are accounted for as indefinite-lived intangible assets, with impairment losses not reversed under the stated policy.
- The filing contains differing descriptions of the miners’ installation and operational status; confirm the year-end status against the subsequent-event disclosures and later filings.