Riot Blockchain, Inc. (now Riot Platforms, Inc.) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The filing reports unaudited interim results. The company’s principal business was digital-currency mining, with plans to develop the RiotX exchange platform and pursue other blockchain-related opportunities.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1.74 million | $2.37 million | $5.64 million | $6.16 million |
| Operating loss | $1.89 million | $6.46 million | $6.48 million | $50.01 million |
| Net loss attributable to Riot | $1.83 million | $6.23 million | $16.64 million | $46.60 million |
| Net loss per share | $0.08 | $0.46 | $0.93 | $3.56 |
| Net cash used in operating activities | Not presented for the quarter | Not presented for the quarter | $12.93 million | $15.96 million |
Mining generated nearly all revenue; license fees were about $24,000 for Q3 and $73,000 for the nine-month period. Mining revenue declined 27% in Q3 and 9% year over year for the nine months. Cost of revenue was $1.48 million for Q3 and $4.54 million for the nine months. On that basis, gross profit before depreciation and amortization was approximately $263,000 (15% of revenue) in Q3 and $1.10 million (20%) for the nine months, versus approximately $335,000 (14%) and $2.23 million (36%), respectively, in 2018.
Q3 net loss narrowed year over year, mainly alongside lower selling, general and administrative expenses and depreciation. The nine-month loss included $6.15 million of financing-related issuance loss and $6.77 million of fair-value expense for convertible notes and warrants. The company also recorded a $1.14 million gain on deconsolidating Tess and $843,000 in gains from settling liabilities. The 2018 comparison included substantial miner and digital-currency impairments.
Liquidity, cash flow and capital
- At September 30, 2019, cash and equivalents were $15.16 million, digital currencies were $3.16 million, working capital was approximately $16.52 million, and total stockholders’ equity was $28.19 million. Accumulated deficit was $213.84 million.
- Cash increased from $225,000 at year-end 2018, primarily due to financing. Nine-month operating cash use was $12.93 million; investing activities provided $3.16 million, largely from digital-currency sales; financing activities provided $24.71 million.
- The company raised approximately $22.7 million net through its at-the-market offering during the first nine months, issuing 7.61 million shares at a reported weighted-average price of $3.10. The agreement authorized up to $100 million of stock sales. Subsequent to quarter-end, it sold 494,820 shares for approximately $859,000 gross.
- All January 2019 convertible notes were converted into 1,813,500 common shares and were satisfied in full. Notes payable were zero at September 30; operating lease liabilities totaled approximately $939,000. The company also had 3.57 million outstanding warrants, with a reported weighted-average exercise price of $19.48.
Changes, outlook and risks
Mining production shifted by currency: the company mined 802.95 bitcoin in the first nine months of 2019, compared with 710.34 in 2018, while bitcoin cash production fell to 500.11 from 1,496.21. Q3 bitcoin production was 157.24, versus 319.26 in the prior-year quarter. The company reduced its Tess ownership to approximately 9% in April and stopped consolidating Tess.
Management expected near-term operating losses to continue and said losses could be significant. It stated that existing cash was sufficient for at least 12 months from issuance of the financial statements, while also noting that future operations and strategy would require revenue from mining and potentially additional equity or debt financing. Plans included expanding mining as appropriate, developing the RiotX exchange, evaluating acquisitions and strategic alternatives, and controlling costs. No quantitative earnings or revenue guidance was provided.
- Market and operating exposure: Results and funding depend substantially on volatile cryptocurrency prices, mining economics, electricity needs, competition, and the ability to convert mined currency to cash.
- RiotX and financing uncertainty: Exchange development and expansion could require significant spending; the filing cautioned there was no assurance of launch or profitability. Further equity financing could dilute shareholders; debt could restrict operations.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective due to material weaknesses in entity/activity-level controls and IT controls, including access, change-management, and physical security for digital-currency wallets and mining equipment. Remediation was underway but not yet considered complete.
- Legal and regulatory matters: A securities class action and shareholder derivative suits remained pending or stayed, and the company continued cooperating with an SEC investigation. Management could not reasonably estimate the class-action outcome or potential loss.
- Other notable items: The Oklahoma mining-facility lease was extended through February 15, 2020. Management disclosed recurring operating losses and negative operating cash flows; the statements also included fair-value estimates based on Level 3 inputs for the now-converted notes and warrants.
Most important facts for investors to verify
- Whether cash, future ATM proceeds, and mining cash generation support the stated liquidity outlook given recurring losses and operating cash burn.
- Mining output, electricity and facility costs, realized cryptocurrency prices, and the effect of cryptocurrency-price volatility on margins.
- RiotX launch progress, regulatory requirements, expected investment, and any evidence of sustainable exchange revenue.
- Actual remediation and independent testing of the disclosed material weaknesses, particularly controls protecting digital assets and financial reporting systems.
- Potential dilution from additional ATM sales and outstanding warrants, and developments in the class action, derivative litigation, and SEC investigation.