Riot Blockchain, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The filing is under the name Riot Blockchain, Inc. The company focused on digital-currency mining in Oklahoma and investigated a U.S. exchange platform, RiotX.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $1.430 million | $0.926 million |
| Mining revenue | $1.406 million | $0.901 million |
| Cost of revenue, excluding depreciation and amortization | $1.471 million | $0.349 million |
| Operating loss | $3.217 million | $19.439 million |
| Net loss | $13.750 million | $16.565 million |
| Net loss attributable to Riot | $13.529 million | $16.350 million |
| Net loss per share | $0.94 | $1.35 |
| Cash used in operating activities | $3.185 million | $5.630 million |
- Revenue increased about 55%. Mining cost of revenue exceeded revenue by approximately $41,000, compared with a roughly $577,000 excess of revenue over cost in Q1 2018, before depreciation and amortization.
- SG&A declined 19% to $3.152 million. Depreciation and amortization fell to $24,000 from $2.156 million; Q1 2018 included $11.480 million of property and equipment impairment and $2.468 million of digital-currency impairment, neither recorded in Q1 2019.
- Q1 2019 net loss included a $6.155 million loss on issuance of convertible notes, plus $4.398 million of fair-value expense for the notes and related warrant liability. These were substantially noncash items.
- At March 31, cash was $1.016 million and digital currencies were $1.085 million. Current assets were $2.895 million against current liabilities of $21.455 million, producing an $18.561 million working-capital deficit. Total liabilities were $24.216 million and total stockholders’ equity was negative $8.769 million.
- Operating cash outflow improved from Q1 2018. Investing activities provided $0.975 million, primarily from digital-currency sales; financing provided $3.000 million from the January note financing. Ending cash was $1.016 million.
Material changes, financing and subsequent events
- On January 28, the company issued senior secured convertible notes with $3.358 million aggregate principal, receiving $3.000 million in cash, and warrants for up to 1,908,144 shares. The notes carry 8% interest, mature in 12 months, and have conversion-price provisions tied to the stock’s trading price. The financing is secured by company assets and may cause dilution.
- After quarter-end, holders converted $2.364 million of notes into 1,181,750 common shares. The filing also reports subsequent sales of 250 bitcoin and 498 bitcoin cash for approximately $1.372 million.
- In April, Tess issued shares for CAD $1.2 million, reducing Riot’s ownership to approximately 9%; Tess was expected to cease being consolidated.
- The company adopted lease accounting on January 1, 2019, recording approximately $1.5 million of right-of-use assets and lease liabilities at adoption. Q1 total rent expense was $1.381 million, including $0.776 million of variable lease cost.
Outlook, risks and unusual matters
- Management expects near-term operating losses, potentially significant, and states additional debt or equity capital is needed to meet obligations over the next 12 months. Management says failure to obtain adequate capital could force reduced or ceased operations; the filing concludes substantial doubt exists about the company’s ability to continue as a going concern.
- Management’s stated plans include mining expansion subject to digital-currency prices, development of RiotX, potential acquisitions and other strategic options, asset monetization or partnerships, and cost controls. No quantified revenue, earnings or cash-flow guidance is provided.
- Mining economics are exposed to bitcoin prices, production levels, electricity and facility costs, regulation, cybersecurity and the ability to liquidate mined currency. Management notes that mining costs exceeded mining revenue in Q1 and RiotX development and expansion could require significant additional spending.
- Convertible notes and warrants are measured using Level 3 fair-value models with significant unobservable inputs; changes can materially affect reported earnings. The filing reports a $7.975 million note liability on the balance sheet, while Note 7 describes the March 31 fair value as $7.795 million, an apparent inconsistency to verify.
- Pending matters include a securities class action and shareholder derivative litigation; management says it cannot reasonably estimate the likelihood or magnitude of an unfavorable outcome. The company reported continued cooperation with an SEC subpoena investigation, while the SEC had completed its review of specified filings on April 5, 2019.
- Disclosure controls and internal control over financial reporting were not effective at March 31 because of material weaknesses in control activities and IT general controls, including access, change-management and physical security controls for digital-currency assets and systems. Management expected remediation before year-end 2019, subject to effective operation and testing.
Most important facts for investors to verify
- Near-term liquidity and whether additional financing was obtained on terms sufficient to fund operations.
- The note liability’s correct March 31 fair value and the assumptions behind Level 3 note and warrant valuations.
- Mining profitability after electricity, rent and other operating costs, and the effect of bitcoin prices and production changes.
- Actual dilution from note conversions, warrants and other potentially issuable shares.
- Progress on internal-control remediation and developments in the securities litigation and SEC matters.
- RiotX development costs, regulatory readiness and whether the exchange launched or generated revenue.