Riot Blockchain, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing is under the name Riot Blockchain, Inc. (the company identified in the request as Riot Platforms). Financial statements are unaudited.
Business context
The company was shifting from its legacy life-sciences business to cryptocurrency mining and related blockchain activities. It reported approximately 8,000 miners owned at quarter-end, of which 3,500 were installed and operating in its Oklahoma City facility. It also held a minority investment in Coinsquare and acquired 92.5% of futures introducing broker Logical Brokerage, while investigating a U.S. digital-currency exchange and futures brokerage.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $925,554 | $24,175 |
| Operating loss from continuing operations | $(19.44) million | $(1.03) million |
| Loss from continuing operations | $(16.66) million | $(1.01) million |
| Net loss attributable to Riot | $(16.35) million | $(4.35) million |
| Basic and diluted net loss per share | $(1.35) | $(0.95) |
| Net cash used in operating activities | $(5.63) million | $(1.66) million |
Cryptocurrency mining revenue was $901,380; other fee revenue was about $24,000. Cost of revenue was $349,011, leaving approximately $577,000 of revenue less cost of revenue (about 62%); this excludes separately reported depreciation and amortization. Results are not directly comparable with 2017, when the company had no mining revenue and its former business was being discontinued.
- Major expenses and unusual items: $11.48 million impairment charge on mining equipment, $2.47 million loss from revaluing digital currencies, and $2.16 million depreciation and amortization. A $3.05 million deferred income-tax benefit reduced the reported continuing-operations loss; it was not an operating cash inflow.
- Cash flows: Investing activities used $32.21 million, principally for mining equipment, Coinsquare investment and digital currencies. Financing activities provided $1.44 million. Cash and cash equivalents fell by $36.39 million to $5.26 million.
- Balance sheet and liquidity: Total assets were $49.58 million and total liabilities $6.35 million at March 31, 2018. Working capital was $8.92 million; digital currencies were carried at $4.26 million. Current liabilities were $4.70 million. These included a $775,074 demand note, a $1.5 million deferred BMSS purchase payment and $54,534 of current notes and other obligations. Stockholders’ equity totaled $43.24 million.
Material changes and management outlook
- In February, the company acquired 3,800 Prive miners and 3,000 BMSS miners. The transactions involved $18 million in cash paid or payable and 1 million common shares issued for the Prive assets, including 200,000 shares held in escrow. The company also paid $4 million in advance for a 12-month consulting arrangement related to mining operations and facility development.
- The Oklahoma City lease covered approximately 107,600 square feet. The filing says rent was approximately $330,000 per month initially and would rise to about $650,000 per month when additional power became available; another lease disclosure specifies approximately $665,760. Confirm the applicable rent and commencement of the higher amount.
- The company reported recurring operating losses and negative operating cash flow, and expected near-term losses to continue. Management believed available working capital would cover estimated cash needs for at least a year and a day from the filing, while also stating that expansion or unexpected needs could require additional capital. Future equity financing could dilute shareholders; debt could restrict operations.
- Management’s plans included expanding mining, evaluating sector investments, pursuing a possible exchange, exploring financing and strategic options, and controlling costs. It emphasized exposure to bitcoin-price volatility, power costs, regulation, cybersecurity, and the uncertain ability to convert mined cryptocurrency to cash.
Risks, contingencies and other notable matters
- Bitcoin-price declines prompted the equipment impairment and a $2.47 million fair-value loss on digital currencies. Management’s results and cash generation depend substantially on cryptocurrency prices and mining economics.
- The company accrued approximately $333,000 related to a registration-rights obligation after failing to meet a March 5, 2018 registration effectiveness date.
- Shareholder litigation alleged securities-law violations concerning statements about the company’s cryptocurrency business. The company also disclosed an SEC subpoena received April 9, 2018, under a formal investigation, and ongoing SEC staff inquiries, including asset classification, Investment Company Act applicability and cryptocurrency accounting. The filing does not quantify potential losses from these matters.
- After quarter-end, the company reported selling 100 bitcoins in May for $957,300. The filing also disclosed April conversions of Series B preferred shares into common stock and a new Florida office lease.
Important facts for investors to verify
- Whether the stated cash runway remains supportable given the $5.26 million quarter-end cash balance, ongoing cash burn, mining-facility costs and planned expansion.
- How many miners are operational, expected deployment timing, actual power availability and the applicable Oklahoma lease rent.
- The sensitivity of mining economics, equipment values and liquidity to bitcoin prices, network conditions, electricity costs and the ability to sell cryptocurrency.
- The status and potential financial or operational impact of the SEC investigation, SEC staff inquiries and shareholder litigation.
- Additional funding needs, dilution risk and the terms and conditions of outstanding preferred shares, warrants, escrow shares and the demand note.
- The reliability of mining-revenue and digital-currency accounting estimates, including the $11.48 million impairment and $2.47 million fair-value loss.