Riot Blockchain, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. The filing identifies the issuer as Riot Blockchain, Inc. (not Riot Platforms, Inc.). The company had shifted from its legacy life-sciences business toward cryptocurrency mining and blockchain-related activities. Approximately 8,000 miners were installed and operating in Oklahoma City at quarter-end.
Financial performance and position
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 |
|---|---|---|---|
| Revenue | $2.793 million | $3.718 million | $24,174 and $48,349, respectively |
| Net loss | $24.434 million | $40.999 million | $1.312 million and $5.666 million, respectively |
| Net loss per share | $(1.81) | $(3.18) | $(0.26) and $(1.17), respectively |
| Operating cash flow | Not separately stated for the quarter | $(9.580) million | $(2.576) million |
- Q2 cryptocurrency mining revenue was $2.769 million; mining cost of revenue was $1.478 million, implying gross profit of about $1.291 million before separately reported depreciation and amortization.
- Q2 operating loss was $23.877 million. It included $15.378 million of impairment expense and $2.871 million of depreciation and amortization. Six-month impairment expense was $26.858 million.
- Cash and cash equivalents were $1.654 million at June 30, down from $41.652 million at December 31, 2017. Working capital was $2.874 million. Total assets were $28.394 million, total liabilities $7.727 million, and total stockholders’ equity $20.667 million.
- Cash used in investing activities was $31.806 million in the first half, principally for mining equipment, Coinsquare investments, digital currencies and security deposits. Financing activities provided $1.389 million.
- Digital currencies, consisting of bitcoin, were valued at $4.889 million at quarter-end. The company recorded a $2.979 million fair-value loss on digital currencies for the first half.
Changes and significant developments
- Mining revenue began to contribute materially compared with 2017, when the company had not yet adopted its cryptocurrency strategy. The periods are therefore not directly comparable.
- Second-quarter SG&A increased to $6.423 million from $1.062 million, reflecting higher compensation, consulting, legal, investor-relations and public-company costs. First-half SG&A was $10.329 million versus $2.095 million.
- The company acquired 3,800 miners from Prive and 3,000 from BMSS. Falling bitcoin prices and lower projected miner cash flows led to impairment charges across Prive, BMSS and Kairos equipment.
- The company acquired 92.5% of Logical Brokerage and invested an additional $6.4 million in Coinsquare, bringing its reported Coinsquare ownership to approximately 12.9%.
- Outstanding common shares were 13,645,198 at June 30, 2018; 14,035,198 were reported outstanding on August 8, 2018.
Outlook, risks and contingencies
- Management expects near-term operating losses and states that current working capital should cover estimated operating cash needs for at least a year and a day from the filing. It also says expansion and growth plans may require additional capital, which may not be available on favorable terms and could dilute shareholders.
- Plans include expanding mining, evaluating blockchain-sector investments, pursuing a U.S. digital-currency exchange, and conserving cash. The proposed exchange had no signed third-party service-provider agreements; successful launch was not assured. RiotX was pursuing additional state money-transmitter licenses.
- Mining economics depend heavily on volatile cryptocurrency prices, electricity and facility costs, and the ability to convert digital currencies to cash. Mining accounting and fair-value measurement involve significant judgment; the filing notes that authoritative accounting guidance was unsettled.
- The Oklahoma facility lease provides for approximately $330,000 monthly initial rent; an amendment would raise rent to approximately $650,000–$665,760 monthly when additional power becomes available. The filing also describes plans to expand energy capacity.
- A $1.5 million BMSS purchase-price balance was due in August 2018, and the company said it was negotiating revised terms. A separate $775,555 Tess demand note was outstanding.
- The company accrued $1.020 million of registration-rights expense in Q2 and $1.357 million for the first half after missing a registration effectiveness deadline. It also disclosed shareholder class and derivative lawsuits and SEC review matters. On July 30, 2018, the SEC issued an order for an examination of specified registration statements; management said it would cooperate and could not estimate the ultimate impact.
- A $4 million consulting payment to Ingenium covered mining deployment and related services; the filing notes connections between the consultant’s principals and company shareholders. Subsequent to quarter-end, Tess completed a merger transaction and was expected to cease being consolidated once the company’s ownership fell below 50%.
Most important facts to verify
- Whether available cash, working capital, bitcoin holdings and subsequent cash flows support management’s stated liquidity runway and planned spending.
- Actual mining output, operating costs, power availability and utilization, and whether miners’ carrying values require further impairment.
- Timing and payment or renegotiation of the $1.5 million BMSS balance, and terms and settlement of the Tess demand note.
- SEC examination and litigation developments, including potential financial, registration or operating consequences.
- Lease costs when expanded power becomes available, additional capital needs, and whether the proposed exchange obtains required licenses and launches.
- Effects of Tess’s post-quarter merger on consolidation, reported results and Riot’s ownership interest.