Business context and reporting period
Riot Blockchain, Inc. (the company named in this historical filing) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Its principal focus was bitcoin and cryptocurrency mining, with miners operated at Coinmint’s New York facility under a co-location services agreement. The company had completed a miner upgrade and was shifting from its former Oklahoma City facility.
Key financial metrics
| Metric | Three months ended September 30, 2020 | Nine months ended September 30, 2020 |
|---|---|---|
| Revenue | $2.46 million | $6.79 million |
| Cost of revenue, excluding depreciation and amortization | $1.30 million | $4.15 million |
| Gross profit before depreciation and amortization | $1.16 million | $2.64 million |
| Operating loss | $2.11 million | $18.49 million |
| Net loss attributable to Riot | $1.72 million | $16.58 million |
| Net loss per share, basic and diluted | $0.04 | $0.46 |
| Cash used in operating activities | Not presented for the quarter | $8.82 million |
At September 30, cash and cash equivalents were $30.1 million, cryptocurrency holdings were $9.0 million, working capital was $39.3 million, and total stockholders’ equity was $60.7 million. Total liabilities were $2.0 million. The balance sheet reported no interest-bearing debt. Nine-month cash used in investing activities was $16.5 million, while financing provided $48.0 million, principally from common-stock sales. Gross profit before depreciation and amortization was approximately 47% of revenue for the quarter and 39% for the nine-month period; these are calculated figures, not company-reported margins.
Material changes versus prior comparable periods
- Third-quarter revenue increased to $2.46 million from $1.74 million in 2019; nine-month revenue increased to $6.79 million from $5.64 million. Nine-month bitcoin mining revenue rose despite production declining to 730 bitcoins from 803, mainly because the average bitcoin price was higher.
- Third-quarter net loss narrowed to $1.72 million from $1.83 million. Nine-month net loss attributable to Riot was nearly flat year over year, at $16.58 million versus $16.64 million, although operating loss widened to $18.49 million from $6.48 million.
- Nine-month results included a $9.4 million impairment of the Coinsquare investment, a $1.0 million cryptocurrency impairment, and a $1.4 million reversal of a registration-rights penalty accrual. 2019 results included substantial losses related to convertible notes and warrants that did not recur in 2020.
- Depreciation and amortization rose as new mining equipment entered service. Common shares outstanding increased to 48.9 million at September 30 from 25.1 million at December 31, 2019, principally reflecting equity offerings and compensation-related issuances.
- Bitcoin production was affected by the May 2020 block-reward halving and the move to Coinmint. The company reported 222 bitcoins produced in the third quarter versus 157 in 2019.
Outlook, risks, contingencies and unusual items
- Management expected near-term operating losses and said it could require further equity or debt financing. It stated that cash on hand was expected to cover operating and capital requirements for at least 12 months from issuance of the financial statements.
- The company had purchase agreements for 16,600 S19 Pro miners totaling $37.2 million; $12.8 million had been deposited and $24.4 million remained payable over the delivery schedule through the second quarter of 2021. Management projected a total fleet of 22,640 miners and hash-rate capacity of approximately 2.3 EH/s by June 2021. These are plans and estimates, not guaranteed outcomes.
- After quarter-end, Riot received approximately $8.1 million gross from sales of 2.0 million shares under a new ATM offering, received and deployed 1,003 additional miners, and sold 100 bitcoins for approximately $1.55 million. The new ATM program permitted up to $100 million of additional share sales.
- Key exposures include bitcoin-price volatility, mining-reward changes, global mining competition, electricity and operating costs, regulatory uncertainty, cybersecurity, and dependence on continued access to capital. Management said it did not then expect a material COVID-19 impact but continued monitoring the situation.
- The Coinsquare investment was fully impaired after an Ontario securities-regulator settlement involving admitted misconduct by Coinsquare and certain executives. Riot said it was evaluating recovery options and had engaged litigation counsel.
- Shareholder class-action litigation had been dismissed without prejudice; a motion seeking leave to amend remained pending. Other shareholder derivative, indemnification, and Kashwise matters were also pending. The company said it could not reasonably estimate the likelihood or magnitude of loss for these matters.
- Disclosure controls and internal control over financial reporting were reported ineffective due to material weaknesses involving system access and segregation of duties, program-change management, and completeness and accuracy of third-party data. Remediation was underway; management said controls would not be considered remediated until they operated effectively for a sufficient period and were tested.
Important facts for investors to verify
- Whether miner deliveries, deployment, and the projected 2.3 EH/s capacity were achieved on schedule, and how actual mining economics compare with the company’s targets.
- Whether operating cash use, bitcoin holdings, and remaining miner purchase payments are consistent with management’s liquidity assessment and whether additional share issuance is needed.
- The effect of bitcoin prices, network difficulty, block rewards, and Coinmint power and service costs on revenue and mining margins.
- Developments in the Coinsquare recovery effort and pending litigation or indemnification demands, including any material change in expected exposure.
- Whether the disclosed internal-control weaknesses were remediated and independently tested in subsequent filings.
- The cash-flow statement heading in the supplied filing text says “Nine Months Ended June 30,” while the filing period and reported figures refer to September 30; verify the original filing presentation.