Riot Blockchain, Inc. (now identified in the request as Riot Platforms, Inc.) — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. The filing reports the company as Riot Blockchain, Inc.
Business context and reporting period
The company had shifted its focus to cryptocurrency mining and blockchain-related activities. At quarter-end it reported approximately 8,000 miners operating at its Oklahoma City facility, and was investigating a U.S. digital currency exchange under the RiotX name. Its former BiOptix diagnostics business is presented as discontinued operations.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $2.37 million | $24,000 | $6.16 million | $73,000 |
| Cryptocurrency mining revenue | $2.34 million | $0 | $6.09 million | $0 |
| Operating loss, continuing operations | $(6.46) million | $(591,000) | $(50.01) million | $(2.68) million |
| Net loss attributable to Riot Blockchain | $(6.23) million | $(5.30) million | $(46.60) million | $(10.97) million |
| Net loss per share | $(0.46) | $(0.98) | $(3.56) | $(2.18) |
Q3 mining cost of revenue was $2.03 million, excluding separately reported depreciation and amortization; this implies a roughly 13% gross margin before depreciation and amortization. The filing does not provide a comparable mining margin for 2017, when mining revenue was zero. Nine-month expenses included $26.86 million of miner impairment and $3.37 million of digital-currency impairment. A $3.53 million deferred tax benefit reduced the nine-month continuing-operations loss.
- Cash and liquidity: Cash was $1.61 million at September 30, down from $41.65 million at December 31, 2017. Current assets were $6.86 million and current liabilities $8.04 million, yielding a $1.18 million working-capital deficit.
- Cash flow: Net cash used in operating activities was $15.96 million for the first nine months of 2018, versus $3.16 million in 2017. Investing activities used $26.86 million; financing activities provided $2.78 million.
- Balance sheet: Total assets were $25.70 million, liabilities $9.17 million, and stockholders’ equity $16.53 million. Accumulated deficit was $185.80 million.
- Debt and obligations: Current liabilities included a $1.70 million demand note at subsidiary 1172767 and $1.35 million of deferred BMSS purchase price. The filing reports no current notes and other obligations at September 30, apart from those separately presented items.
- Digital currencies and capital spending: Digital currencies on the balance sheet totaled $1.72 million. Nine-month property and equipment purchases were $20.31 million. Long-term investments were $9.41 million, including the company’s Coinsquare investment.
Material changes versus prior comparable period
- Mining began contributing revenue in 2018; the 2017 comparison reflects no cryptocurrency mining operations and is not a like-for-like operating comparison.
- Nine-month SG&A rose to $16.30 million from $2.69 million, reflecting higher stock compensation, consulting, legal and public-company costs, and expenses of acquired or formed subsidiaries.
- Depreciation and amortization increased to $5.69 million from $56,000, while $26.86 million of miner impairments were recorded in 2018.
- Cash declined substantially as the company funded operations, equipment, digital-currency purchases, and investments. Common shares outstanding increased to 14.29 million at quarter-end from 11.62 million at year-end 2017.
Outlook, management commentary, risks and unusual items
- Going concern and funding: Management reported recurring losses and negative operating cash flows, stated that additional debt or equity capital is needed to meet obligations over the next 12 months, and warned that without it the company may have to reduce or cease operations. Management said there is substantial doubt about the company’s ability to continue as a going concern. No quantified earnings or revenue guidance was provided.
- Mining economics: Results and ability to fund operations depend on cryptocurrency prices, mining output, power and operating costs, and the ability to convert mined coins into cash. Management expects near-term operating losses.
- Impairments and bitcoin price: The company recorded $26.86 million of miner impairment following bitcoin price declines and weaker projected cash flows. After quarter-end, bitcoin had fallen to approximately $5,200; management warned continued weakness could cause further material impairment.
- Exchange plans: RiotX remained under development. The company had obtained certain federal and Florida licenses and, in October 2018, signed a banking-services agreement with SynapseFi, but still needed other providers and additional state licenses. Launch, compliance, and operating costs remained uncertain.
- Regulatory and legal matters: An SEC investigation disclosed in the filing remained ongoing, with continuing information requests. Securities class actions and shareholder derivative suits were pending; potential outcomes and financial exposure were not quantified. The filing also describes SEC scrutiny of cryptocurrency accounting and possible Investment Company Act issues.
- Other unusual items and governance: The company recorded a $1.36 million nine-month contingency expense related to a late registration statement. John O’Rourke resigned as CEO and chairman on September 8, 2018; Christopher Ensey became interim CEO. The company also reported curtailing certain Digital Green activities after quarter-end.
Important facts for investors to verify
- Whether the company secured sufficient financing after the reported $1.61 million quarter-end cash balance, and the terms and dilution or covenants attached.
- Subsequent bitcoin prices, mining costs and utilization, and whether further miner or digital-currency impairments were recorded.
- Current status and cost of the RiotX launch, required licenses, vendor arrangements, and compliance obligations.
- Developments in the SEC investigation and shareholder litigation, including any resulting costs, restrictions, or liabilities.
- Whether the company’s cash-flow reporting, BMSS payment schedule, and lease costs are consistent with subsequent filings; the filing describes Oklahoma facility rent of approximately $666,000 monthly when 12 MW of power is available.