Riot Blockchain, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2019. The filing identifies the registrant as Riot Blockchain, Inc. (ticker: RIOT), a digital-currency mining company pursuing development of the RiotX exchange platform. Financial statements are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $2.47 million | $2.79 million | $3.90 million | $3.72 million |
| Operating loss | $1.37 million | $23.88 million | $4.59 million | $43.32 million |
| Net loss attributable to Riot | $1.28 million | $24.02 million | $14.81 million | $40.37 million |
| Net loss per share | $0.08 | $1.81 | $0.97 | $3.18 |
| Cash used in operating activities | Not presented separately | Not presented separately | $8.18 million | $9.51 million from continuing operations |
Mining revenue was $2.44 million in Q2 and $3.85 million for the first half; license-fee revenue was $24,000 and $48,000, respectively. Gross profit before separately reported depreciation and amortization was approximately $879,000 for Q2 (36% of revenue) and $838,000 for the first half (22%). The filing does not report these margins directly.
For the first half, cash provided by investing activities was $3.16 million, principally from digital-currency sales. Financing activities provided $20.90 million, including $18.85 million net proceeds from the at-the-market share offering and $3.00 million from convertible notes, partly offset by debt repayments and offering costs. Cash increased by $15.89 million to $16.11 million.
Liquidity, capital and material changes
- At June 30, cash and cash equivalents were $16.11 million, digital currencies were $1.92 million, working capital was approximately $14.6 million, total assets were $30.97 million, and stockholders’ equity was $26.14 million. Accumulated deficit was $212.01 million.
- Current liabilities were $3.80 million. The company reported no notes payable at quarter-end after all 2019 senior secured convertible notes were converted; operating lease liabilities totaled approximately $950,000.
- The company issued 6.03 million shares through its ATM offering during the first half, receiving approximately $18.9 million net proceeds. The program allows sales of up to $100 million. It reported a further $2.6 million in gross proceeds from July sales. Common shares outstanding were 22.63 million at June 30 and 23.56 million as of August 8.
- Revenue declined about 12% year over year in Q2 but increased about 5% for the first half. Lower SG&A and the absence of the prior-year large mining-equipment and digital-currency impairments substantially reduced reported losses. Cost of revenue rose, reflecting mining-facility and electricity costs.
- In April, Riot’s ownership of Tess fell from approximately 50% to 9%, resulting in deconsolidation and a reported gain of approximately $1.14 million. Settlements of liabilities generated approximately $808,000 of other income in the first half.
Outlook, risks and unusual items
- Management expects near-term operating losses, potentially significant, and says it is monitoring cash, needs and spending. Plans include adjusting mining expansion to digital-currency prices, evaluating acquisitions and strategic options, developing RiotX, and controlling costs. No quantified revenue, profit or cash-flow guidance is provided.
- Management says future funding depends substantially on mining revenue and digital-currency prices and that additional equity or debt may be required. Bitcoin-price volatility, regulatory uncertainty, power requirements, competition, cybersecurity and the uncertain prospects and costs of RiotX are highlighted risks.
- The 2019 notes and associated warrants were measured at fair value. The company recorded a $6.15 million loss on issuance and $6.77 million in first-half fair-value remeasurement losses; the notes were converted into 1.81 million common shares during Q2. These noncash and financing-related items materially affected the first-half loss.
- Disclosure controls and internal control over financial reporting were deemed ineffective because of material weaknesses, including entity/activity-level control deficiencies and gaps in IT access, change-management and physical-security controls affecting financial systems and digital-currency assets. Management described remediation efforts and expected remediation before year-end 2019; effectiveness had not yet been established through sufficient operating time and testing.
- Material legal matters include a consolidated securities class action and shareholder derivative claims, as well as an ongoing SEC investigation for which the company says it is cooperating. The company could not reasonably estimate the likelihood or magnitude of loss in the class action or derivative matters.
Investor verification priorities
- Track cash burn and available funding, including subsequent ATM share sales, remaining authorization and dilution.
- Assess mining economics: realized digital-currency prices, output, electricity and facility costs, and whether mining operations generate positive cash margins.
- Review RiotX development costs, launch status, regulatory requirements and prospects for generating revenue.
- Monitor remediation and independent testing of the disclosed material weaknesses, especially controls over digital-currency wallets and mining equipment.
- Follow the securities litigation and SEC matter for developments that could affect liabilities, costs or operations.