Riot Blockchain, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. The company was then named Riot Blockchain, Inc. (not Riot Platforms). Figures below are in U.S. dollars unless noted.
Business context
Riot had shifted from its legacy life-sciences businesses to blockchain and digital currency activities. Its main operating business was bitcoin mining at a leased Oklahoma City facility; it was also developing a proposed U.S. exchange under the RiotX name and held investments in Coinsquare and other blockchain-related businesses. Approximately 7,731 of its 8,000 miners were operating at year-end. The planned exchange had no customers and had not begun business.
Financial performance and position
| Metric | FY 2018 / Dec. 31, 2018 | FY 2017 / Dec. 31, 2017 |
|---|---|---|
| Total revenue | $7.845 million | $0.270 million |
| Digital-currency mining revenue | $7.749 million | $0.173 million |
| Cost of revenue, excluding depreciation and impairment | $5.820 million | $0.025 million |
| Gross profit before depreciation and impairment (derived) | $2.025 million; approximately 25.8% of revenue | $0.244 million; approximately 90.7% of revenue |
| SG&A | $20.857 million | $7.314 million |
| Depreciation and amortization | $5.267 million | $0.891 million |
| Asset impairment charges | $35.266 million | $5.218 million |
| Operating loss from continuing operations | $59.366 million | $13.154 million |
| Net loss attributable to Riot | $58.008 million; $4.33 per share | $19.846 million; $3.30 per share |
| Cash used in operating activities | $19.052 million | $4.440 million |
| Cash and cash equivalents | $0.225 million | $41.652 million |
| Total assets | $13.860 million | $52.336 million |
| Total liabilities | $9.369 million | $2.708 million |
| Total stockholders’ equity | $4.491 million | $49.627 million |
The derived gross-profit measure subtracts reported cost of revenue only; it excludes separately reported depreciation and impairment and should not be read as operating profitability.
At year-end, working capital was negative $4.348 million. Current liabilities were $6.659 million against current assets of $2.311 million. The balance sheet included a $1.696 million Tess demand note and a $1.200 million deferred BMSS purchase price. The filing states BMSS payments were not timely and the parties were discussing resolution.
Cash flows were also affected by investing outflows of $24.862 million and financing inflows of $2.487 million. Investing included $20.195 million of property and equipment purchases, $6.413 million of additional Coinsquare investment, and digital-currency purchases and sales. In January 2019, the company sold 240 bitcoin and 3,110 litecoin for approximately $1.004 million.
Material changes versus 2017
- Revenue rose sharply as mining operations expanded, but costs and losses grew substantially. SG&A increased by approximately 185%, driven in part by consulting, legal, compensation, stock-based compensation, and public-company costs.
- The company recorded $35.266 million of impairments: $29.238 million on mining equipment and improvements, $3.501 million on digital currencies, and $2.527 million on goodwill and acquired intangible rights.
- Cash fell from $41.652 million to $0.225 million, while operating cash use increased from $4.440 million to $19.052 million.
- The former business strategy was substantially wound down; the filing reported $0.096 million of income from discontinued operations in 2018 versus a $3.543 million loss in 2017.
Outlook, risks and unusual items
- Going concern and funding: Management expects continued near-term operating losses and says additional debt or equity capital is needed to meet obligations over the next 12 months. The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. In January 2019, the company issued secured convertible notes with aggregate principal of $3.358 million for net proceeds of $3.000 million, at 8% interest with a 12-month maturity, along with warrants and restricted shares.
- Mining economics: Profitability depends on digital-currency prices, network difficulty, mining rewards, electricity costs, hardware performance, and uptime. The company identified the expected 2020 bitcoin reward halving as a risk; it gave no quantified production or earnings guidance.
- Exchange plans and regulation: RiotX remained in development and depended on further licensing, third-party providers, funding, and regulatory interpretation. The SEC’s subpoena-related investigation remained ongoing; SEC staff had also raised questions involving digital-currency accounting and possible Investment Company Act implications.
- Legal matters: A consolidated securities class action and several shareholder derivative cases were pending. The company could not estimate the likelihood or magnitude of an unfavorable outcome in the class and derivative litigation.
- Internal controls: Management found material weaknesses in entity-level risk controls and IT access, change-management, and physical safeguards for financial systems, mining equipment, and digital-currency wallets. The auditor issued an adverse opinion on internal control over financial reporting; management targeted remediation by the end of 2019.
- Other unusual items: A $1.350 million expense was recorded for a registration-rights penalty contingency. Digital currencies were accounted for as indefinite-lived intangible assets, carried at cost less impairment; impairment losses could not be reversed. The filing notes that authoritative accounting guidance for digital currencies was unsettled.
Important facts for investors to verify
- Whether Riot obtained sufficient financing after the January 2019 notes, and the resulting conversion, warrant, dilution, and repayment terms.
- Current cash, working capital, liabilities, and status of the BMSS deferred purchase-price discussions and Tess note.
- Mining fleet uptime and output, power and lease costs, and whether mining revenue covers cash operating costs.
- Progress on RiotX licensing, launch readiness, and its ability to secure banking and service-provider relationships.
- Developments in the SEC investigation and shareholder litigation, including potential costs or outcomes.
- Whether internal-control remediation was completed and whether digital-currency accounting or related regulatory interpretations changed.