UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
OR
| [_] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________
Commission file number:001-33675
| Riot Blockchain, Inc. | |
(Exact name of registrant as specified in its charter) | |
| Nevada | 84-1553387 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 202 6th Street, Suite 401 Castle Rock, CO 80104 | |
| (Address of principal executive offices) (Zip Code) | |
(303) 794-2000 | |
| (Registrant's telephone number, including area code) | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | Accelerated Filer | |||
| Non-accelerated Filer | | Smaller Reporting Company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒[_]
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The number of shares of no par value common stock outstanding as of March 5,November 8, 2019 was 14,698,809.
| Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||
| Common Stock, no par value | RIOT | Nasdaq Capital Market |
RIOT BLOCKCHAIN, INC.
| Page | ||||||||
| PART I - | ||||||||
| FINANCIAL INFORMATION | ||||||||
| Item 1. | Condensed Interim Consolidated Financial Statements | (Unaudited) | ||||||
| Condensed Consolidated Balance Sheets as of September 30, | 2018 | 2 | ||||||
| Condensed Interim Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 | (Unaudited) | 3 | ||||||
| Condensed Interim Consolidated | (Unaudited) | 4 | ||||||
| Condensed Interim Consolidated Statements of Cash Flows for the Nine Months Ended September 30, | ||||||||
| Notes to the Condensed Interim Consolidated Financial Statements | 10 | |||||||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 25 | ||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 4. | Controls and Procedures | |||||||
| PART II - | ||||||||
| Item 1. | Legal Proceedings | |||||||
| Item 1A. | Risk Factors | |||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| Item 3. | Defaults Upon Senior Securities | |||||||
| Item 4. | Mine Safety Disclosures | |||||||
| Item 5. | Other Information | |||||||
| Item 6. | Exhibits | |||||||
| Signatures | ||||||||
| 1 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q as amended,(this “Quarterly Report”) including in Management's Discussion and Analysis of Financial Condition and Results of Operations, aremay be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), and are subject to the safe harbor created thereby. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements relate to future events or the Company's future performance and include statements regarding expectations, beliefs, plans, intentions and strategies of the Company. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential"“may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or other comparable terminology. These forward-looking statements are made based on management's expectations and beliefs concerning future events affecting the Company as of the date of the filing of this Quarterly Report and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict and many of which are beyond management's control. ActualAccordingly, you should not place undue reliance on these forward-looking statements, as actual results, performance and achievements could differ materially from those expressed in, or implied by, these forward-looking statements due to a variety of risks, uncertainties and other factors, including, but not limited to, the following:
Accordingly, you should read this reportQuarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. UnlessAdditional risks and uncertainties not known to us or that we currently believe not to be material may adversely impact our business, financial condition, results of operations and cash flows. Should any risks or uncertainties develop into actual events, these developments could have a material adverse effect on our business, financial condition, results of operations and cash flows. The forward-looking statements contained in this Quarterly Report speak only as of the date of filing of this Quarterly Report and, unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
| 2 |
PART I — FINANCIAL INFORMATION
Item 1. Condensed Interim Consolidated Financial Statements
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| September 30, 2018 | December 31, 2017 | |||||||
| ASSETS | (Interim) | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,607,085 | $ | 41,651,965 | ||||
| Prepaid contracts | 1,584,699 | - | ||||||
| Prepaid expenses and other current assets | 1,955,819 | 538,812 | ||||||
| Digital currencies | 1,715,309 | 200,164 | ||||||
| Current assets of discontinued operations | - | 44 | ||||||
| Total current assets | 6,862,912 | 42,390,985 | ||||||
| Property and equipment, net | 4,853,744 | 4,294,166 | ||||||
| Intangible rights acquired | 1,985,587 | 754,244 | ||||||
| Long-term investments | 9,412,726 | 3,000,000 | ||||||
| Security deposits | 703,275 | - | ||||||
| Other long-term assets, net: | ||||||||
| Patents, net | 498,670 | 509,649 | ||||||
| Goodwill | 1,186,496 | 1,186,496 | ||||||
| Convertible note | 200,000 | 200,000 | ||||||
| Total assets | $ | 25,703,410 | $ | 52,335,540 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 3,393,970 | $ | 410,029 | ||||
| Accrued expenses | 1,487,996 | 216,883 | ||||||
| Deferred purchase price - BMSS | 1,350,000 | - | ||||||
| Demand note | 1,696,083 | - | ||||||
| Notes and other obligations, current | - | 135,574 | ||||||
| Deferred revenue, current portion | 96,698 | 96,698 | ||||||
| Current liabilities of discontinued operations | 16,340 | 181,340 | ||||||
| Total current liabilities | 8,041,087 | 1,040,524 | ||||||
| Deferred revenue, less current portion | 896,094 | 968,617 | ||||||
| Deferred income tax liability | 234,709 | 699,000 | ||||||
| Total liabilities | 9,171,890 | 2,708,141 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, no par value, 15,000,000 share authorized: | ||||||||
| 2% Series A Convertible stock shares authorized 2,000,000 and no shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | - | - | ||||||
| 0% Series B Convertible stock, 1,750,001 shares authorized; 104,946 and 1,458,001 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | 555,109 | 7,745,266 | ||||||
| Common stock, no par value; 170,000,000 shares authorized; 14,293,702 and 11,622,112 shares outstanding as of September 30, 2018 and December 31, 2017, respectively | 201,793,176 | 180,387,518 | ||||||
| Accumulated deficit | (185,796,070 | ) | (139,263,480 | ) | ||||
| Total Riot Blockchain stockholders' equity | 16,552,215 | 48,869,304 | ||||||
| Non-controlling interest | (20,695 | ) | 758,095 | |||||
| Total stockholders' equity | 16,531,520 | 49,627,399 | ||||||
| Total liabilities and stockholders' equity | $ | 25,703,410 | $ | 52,335,540 | ||||
| September 30, 2019 | December 31, 2018 | |||||||
| ASSETS | (Unaudited) | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 15,162,781 | $ | 225,390 | ||||
| Prepaid expenses and other current assets | 2,004,237 | 1,378,534 | ||||||
| Digital currencies | 3,157,218 | 706,625 | ||||||
| Total current assets | 20,324,236 | 2,310,549 | ||||||
| Property and equipment, net | 127,581 | 26,269 | ||||||
| Right of use assets | 937,395 | — | ||||||
| Intangible rights acquired | 700,167 | 700,167 | ||||||
| Long-term investments | 9,723,100 | 9,412,726 | ||||||
| Security deposits | 703,275 | 703,275 | ||||||
| Patents, net | 469,548 | 507,342 | ||||||
| Convertible note and accrued interest | — | 200,000 | ||||||
| Total assets | $ | 32,985,302 | $ | 13,860,328 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 815,713 | $ | 3,829,315 | ||||
| Accrued expenses | 1,984,775 | 1,516,252 | ||||||
| Deferred purchase price - BMSS | — | 1,200,000 | ||||||
| Operating lease liability, current | 890,904 | — | ||||||
| Deferred revenue, current portion | 96,698 | 96,698 | ||||||
| Current liabilities of discontinued operations | 16,340 | 16,340 | ||||||
| Total current liabilities | 3,804,430 | 6,658,605 | ||||||
| Notes payable | — | 1,696,083 | ||||||
| Operating lease liability, less current portion | 47,644 | — | ||||||
| Deferred revenue, less current portion | 799,396 | 871,919 | ||||||
| Deferred income tax liability | 142,709 | 142,709 | ||||||
| Total liabilities | 4,794,179 | 9,369,316 | ||||||
| Commitments and contingencies - Note 14 | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, no par value, 15,000,000 shares authorized: | ||||||||
| 2% Series A Convertible stock, 2,000,000 shares authorized; no shares issued and outstanding as of September 30, 2019 and December 31, 2018 | — | — | ||||||
| 0% Series B Convertible stock, 1,750,001 shares authorized; 4,199 and 13,000 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively, liquidation preference over common stock, equal to carrying value | 22,306 | 69,059 | ||||||
| Common stock, no par value; 170,000,000 shares authorized; 24,206,395 and 14,519,058 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | 241,974,307 | 202,917,443 | ||||||
| Accumulated deficit | (213,840,661 | ) | (197,199,197 | ) | ||||
| Total Riot Blockchain stockholders' equity | 28,155,952 | 5,787,305 | ||||||
| Non-controlling interest | 35,171 | (1,296,293 | ) | |||||
| Total stockholders' equity | 28,191,123 | 4,491,012 | ||||||
| Total liabilities and stockholders' equity | $ | 32,985,302 | $ | 13,860,328 | ||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
| 3 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Operations
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenue: | ||||||||||||||||
| Revenue - Cryptocurrency mining | $ | 2,342,508 | $ | - | $ | 6,087,405 | $ | - | ||||||||
| Other revenue - fee | 24,175 | 24,175 | 72,524 | 72,524 | ||||||||||||
| Total Revenue | 2,366,683 | 24,175 | 6,159,929 | 72,524 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
Cost of revenues (exclusive of depreciation and amortization shown below) | 2,031,885 | - | 3,933,381 | - | ||||||||||||
| Selling, general and administrative | 5,970,411 | 596,544 | 16,299,491 | 2,691,286 | ||||||||||||
| Research and development | - | - | 14,532 | 10,034 | ||||||||||||
| Depreciation and amortization | 658,338 | 18,132 | 5,685,664 | 55,899 | ||||||||||||
| Impairment of property, plant & equipment | - | - | 26,858,023 | - | ||||||||||||
| Impairment of digital currencies | 163,837 | - | 3,374,976 | - | ||||||||||||
| Total costs and expenses | 8,824,471 | 614,676 | 56,166,067 | 2,757,219 | ||||||||||||
| Operating loss from continuing operations | (6,457,788 | ) | (590,501 | ) | (50,006,138 | ) | (2,684,695 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (21,836 | ) | (4,773,397 | ) | (37,998 | ) | (4,802,296 | ) | ||||||||
| Realized gain on sale of digital currencies | 219,247 | - | 451,341 | - | ||||||||||||
| Other expenses | (1,746 | ) | - | (1,358,924 | ) | - | ||||||||||
| Loss on extinguishment of BMSS payable | (265,500 | ) | - | (265,500 | ) | - | ||||||||||
| Investment income | 683 | 30,903 | 69,959 | 83,247 | ||||||||||||
| Total other expense | (69,152 | ) | (4,742,494 | ) | (1,141,122 | ) | (4,719,049 | ) | ||||||||
| Loss from continuing operations before income taxes | (6,526,940 | ) | (5,332,995 | ) | (51,147,260 | ) | (7,403,744 | ) | ||||||||
| Deferred income tax benefit | - | - | 3,525,000 | - | ||||||||||||
| Loss from continuing operations | (6,526,940 | ) | (5,332,995 | ) | (47,622,260 | ) | (7,403,744 | ) | ||||||||
| Discontinued operations | ||||||||||||||||
| Income (loss) from operations | - | 30,922 | 96,132 | (944,557 | ) | |||||||||||
| Escrow forfeiture gain | - | - | - | 134,812 | ||||||||||||
| Impairment loss | - | - | - | (2,754,131 | ) | |||||||||||
| Income (loss) from discontinued operations | - | 30,922 | 96,132 | (3,563,876 | ) | |||||||||||
| Net loss | (6,526,940 | ) | (5,302,073 | ) | (47,526,128 | ) | (10,967,620 | ) | ||||||||
| Net loss attributable to non-controlling interest | 296,982 | - | 929,158 | - | ||||||||||||
| Net loss attributable to Riot Blockchain | $ | (6,229,958 | ) | $ | (5,302,073 | ) | $ | (46,596,970 | ) | $ | (10,967,620 | ) | ||||
| Basic and diluted net loss per share: | ||||||||||||||||
| Continuing operations attributable to Riot Blockchain | $ | (0.46 | ) | $ | (0.99 | ) | $ | (3.57 | ) | $ | (1.47 | ) | ||||
| Discontinued operations attributable to Riot Blockchain | - | 0.01 | 0.01 | (0.71 | ) | |||||||||||
| Net loss per share | $ | (0.46 | ) | $ | (0.98 | ) | $ | (3.56 | ) | $ | (2.18 | ) | ||||
| Basic and diluted weighted average number of shares outstanding | 14,197,763 | 5,401,552 | 13,340,122 | 5,037,764 | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenue: | ||||||||||||||||
| Revenue - digital currency mining | $ | 1,714,991 | $ | 2,342,508 | $ | 5,563,952 | $ | 6,087,405 | ||||||||
| License fees | 24,174 | 24,175 | 72,523 | 72,524 | ||||||||||||
| Total Revenue | 1,739,165 | 2,366,683 | 5,636,475 | 6,159,929 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown below) | 1,476,135 | 2,031,885 | 4,535,456 | 3,933,381 | ||||||||||||
| Selling, general and administrative | 1,762,021 | 5,970,411 | 7,139,658 | 16,314,023 | ||||||||||||
| Depreciation and amortization | 23,414 | 658,338 | 70,482 | 5,685,664 | ||||||||||||
| Impairment of property and equipment | — | — | — | 26,858,023 | ||||||||||||
| Impairment of digital currencies | 372,124 | 163,837 | 372,124 | 3,374,976 | ||||||||||||
| Total costs and expenses | 3,633,694 | 8,824,471 | 12,117,720 | 56,166,067 | ||||||||||||
| Operating loss from continuing operations | (1,894,529 | ) | (6,457,788 | ) | (6,481,245 | ) | (50,006,138 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Loss on issuance of convertible notes, common stock and warrants | — | — | (6,154,660 | ) | — | |||||||||||
| Change in fair value of warrant liability | — | — | (2,869,726 | ) | — | |||||||||||
| Change in fair value of convertible notes | — | — | (3,895,233 | ) | — | |||||||||||
| Gain on deconsolidation of Tess | — | — | 1,138,787 | — | ||||||||||||
| Non-compliance penalty for SEC registration requirement | — | — | — | (1,358,043 | ) | |||||||||||
| Interest expense | (2,129 | ) | (21,836 | ) | (119,311 | ) | (37,998 | ) | ||||||||
| Gain on extinguishment of debt | 34,899 | — | 842,925 | — | ||||||||||||
| Investment income | 5,765 | 683 | 25,868 | 69,959 | ||||||||||||
| Loss on extinguishment of BMSS payable | — | (265,500 | ) | — | (265,500 | ) | ||||||||||
| Realized gain on sale of digital currencies | 23,608 | 219,247 | 665,218 | 451,341 | ||||||||||||
| Other expense | (1,734 | ) | (1,746 | ) | (15,471 | ) | (881 | ) | ||||||||
| Total other income (expense) | 60,409 | (69,152 | ) | (10,381,603 | ) | (1,141,122 | ) | |||||||||
| Loss from continuing operations before income taxes | (1,834,120 | ) | (6,526,940 | ) | (16,862,848 | ) | (51,147,260 | ) | ||||||||
| Deferred income tax benefit | — | — | — | 3,525,000 | ||||||||||||
| Loss from continuing operations | (1,834,120 | ) | (6,526,940 | ) | (16,862,848 | ) | (47,622,260 | ) | ||||||||
| Discontinued operations | ||||||||||||||||
| Income from operations | — | — | — | 96,132 | ||||||||||||
| Income from discontinued operations | — | — | — | 96,132 | ||||||||||||
| Net loss | (1,834,120 | ) | (6,526,940 | ) | (16,862,848 | ) | (47,526,128 | ) | ||||||||
| Net (income) loss attributable to non-controlling interest | (19 | ) | 296,982 | 221,384 | 929,158 | |||||||||||
| Net loss attributable to Riot Blockchain | $ | (1,834,139 | ) | $ | (6,229,958 | ) | $ | (16,641,464 | ) | $ | (46,596,970 | ) | ||||
| Basic and diluted net loss per share: | ||||||||||||||||
| Continuing operations attributable to Riot Blockchain | $ | (0.08 | ) | $ | (0.46 | ) | $ | (0.93 | ) | $ | (3.57 | ) | ||||
| Discontinued operations attributable to Riot Blockchain | — | — | — | 0.01 | ||||||||||||
| Net loss per share | $ | (0.08 | ) | $ | (0.46 | ) | $ | (0.93 | ) | $ | (3.56 | ) | ||||
| Basic and diluted weighted average number of shares outstanding | 23,371,856 | 14,197,763 | 17,971,541 | 13,340,122 | ||||||||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
| 4 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statement of Stockholders’ Equity
Three Months Ended September 30, 2018
(Unaudited)
| Total | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | Riot Blockchain stockholders' | Non-controlling | Total stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | deficit | equity | interest | equity | |||||||||||||||||||||||||
| Balance as of December 31, 2017 | 1,458,001 | $ | 7,745,266 | 11,622,112 | $ | 180,387,518 | $ | (139,263,480 | ) | $ | 48,869,304 | $ | 758,095 | $ | 49,627,399 | |||||||||||||||||
| Common stock issued for asset purchase - Prive | - | - | 800,000 | 8,480,000 | - | 8,480,000 | - | 8,480,000 | ||||||||||||||||||||||||
| Common stock escrow shares issued for asset purchase - Prive | - | - | 200,000 | - | - | - | - | - | ||||||||||||||||||||||||
| Preferred stock converted to Common stock | (1,353,505 | ) | (7,190,157 | ) | 1,353,505 | 7,190,157 | - | - | - | - | ||||||||||||||||||||||
| Exercise of warrants | - | - | 100,000 | 350,000 | - | 350,000 | - | 350,000 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | - | 4,147,190 | - | 4,147,190 | - | 4,147,190 | ||||||||||||||||||||||||
| Exercise of stock options | - | - | 19,533 | 78,522 | - | 78,522 | - | 78,522 | ||||||||||||||||||||||||
| Common stock issued for services | - | - | 20,754 | 277,940 | - | 277,940 | - | 277,940 | ||||||||||||||||||||||||
| Refund of escrow dividend | - | - | - | - | 64,380 | 64,380 | - | 64,380 | ||||||||||||||||||||||||
| Sale of Riot shares held by 1172767 B.C. Ltd. | - | - | - | 505,729 | - | 505,729 | - | 505,729 | ||||||||||||||||||||||||
| Stock issued for the extinguishment of the BMSS payable | - | - | 50,000 | 265,500 | - | 265,500 | - | 265,500 | ||||||||||||||||||||||||
| Cashless exercise of stock purchase warrants | - | - | 3,215 | - | - | - | - | - | ||||||||||||||||||||||||
| Delivery of common stock underlying restricted stock units | - | - | 124,583 | - | - | - | - | - | ||||||||||||||||||||||||
| Non-controlling interest - Logical Brokerage | - | - | - | - | - | 40,542 | 40,542 | |||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | - | - | - | - | (929,158 | ) | (929,158 | ) | ||||||||||||||||||||||
| Sale of common shares by 1172767 B.C. Ltd. | - | - | - | 110,620 | - | 110,620 | 109,826 | 220,446 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | (46,596,970 | ) | (46,596,970 | ) | - | (46,596,970 | ) | |||||||||||||||||||||
| Balance as of September 30, 2018 | 104,496 | $ | 555,109 | 14,293,702 | $ | 201,793,176 | $ | (185,796,070 | ) | $ | 16,552,215 | $ | (20,695 | ) | $ | 16,531,520 | ||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Riot Blockchain | Total | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | stockholders' equity | Non-controlling | stockholders' equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | deficit | (deficit) | interest | (deficit) | |||||||||||||||||||||||||
| Balance as of July 1, 2019 | 4,999 | $ | 26,556 | 22,625,111 | $ | 238,082,374 | $ | (212,006,522 | ) | $ | 26,102,408 | $ | 35,152 | $ | 26,137,560 | |||||||||||||||||
| Preferred stock converted to common stock | (800 | ) | (4,250 | ) | 800 | 4,250 | — | — | — | — | ||||||||||||||||||||||
| Stock-based compensation | — | — | — | 81,362 | — | 81,362 | — | 81,362 | ||||||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | — | — | 1,580,484 | 3,806,321 | — | 3,806,321 | — | 3,806,321 | ||||||||||||||||||||||||
| Net income attributable to non-controlling interest | — | — | — | — | — | — | 19 | 19 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | (1,834,139 | ) | (1,834,139 | ) | — | (1,834,139 | ) | |||||||||||||||||||||
| Balance as of September 30, 2019 | 4,199 | $ | 22,306 | 24,206,395 | $ | 241,974,307 | $ | (213,840,661 | ) | $ | 28,155,952 | $ | 35,171 | $ | 28,191,123 | |||||||||||||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
| 5 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statement of Stockholders’ Equity
Three Months Ended September 30, 2018
(Unaudited)
| Total | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | Riot Blockchain stockholders' | Non-controlling | Total stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | deficit | equity | interest | equity | |||||||||||||||||||||||||
| Balance as of July 1, 2018 | 703,000 | $ | 3,734,512 | 13,645,198 | $ | 196,396,764 | $ | (179,630,492 | ) | $ | 20,500,784 | $ | 166,460 | $ | 20,667,244 | |||||||||||||||||
| Preferred stock converted to Common stock | (598,504 | ) | (3,179,403 | ) | 598,504 | 3,179,403 | — | — | — | — | ||||||||||||||||||||||
| Stock-based compensation | — | — | — | 1,655,160 | — | 1,655,160 | — | 1,655,160 | ||||||||||||||||||||||||
| Refund of escrow dividend | — | — | — | — | 64,380 | 64,380 | — | 64,380 | ||||||||||||||||||||||||
| Sale of Riot shares held by Tess Pay, Inc. | — | — | — | 185,729 | — | 185,729 | — | 185,729 | ||||||||||||||||||||||||
| Stock issued for the extinguishment of the BMSS payable | — | — | 50,000 | 265,500 | — | 265,500 | — | 265,500 | ||||||||||||||||||||||||
| Sale of common shares by Tess Pay, Inc. | — | — | — | 110,620 | — | 110,620 | 109,827 | 220,447 | ||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | — | — | — | — | — | — | (296,982 | ) | (296,982 | ) | ||||||||||||||||||||||
| Net loss | — | — | — | — | (6,229,958 | ) | (6,229,958 | ) | — | (6,229,958 | ) | |||||||||||||||||||||
| Balance as of September 30, 2018 | 104,496 | $ | 555,109 | 14,293,702 | $ | 201,793,176 | $ | (185,796,070 | ) | $ | 16,552,215 | $ | (20,695 | ) | $ | 16,531,520 | ||||||||||||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
| 6 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statement of Stockholders’ Equity
Nine Months Ended September 30, 2019
(Unaudited)
| Total | ||||||||||||||||||||||||||||||||
| Riot Blockchain | Total | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | stockholders' | Non-controlling | stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | deficit | equity | interest | equity | |||||||||||||||||||||||||
| Balance as of January 1, 2019 | 13,000 | $ | 69,059 | 14,519,058 | $ | 202,917,443 | $ | (197,199,197 | ) | $ | 5,787,305 | $ | (1,296,293 | ) | $ | 4,491,012 | ||||||||||||||||
| Delivery of common stock underlying restricted stock units | — | — | 106,251 | — | — | — | — | — | ||||||||||||||||||||||||
| Common stock issued with convertible notes | — | — | 150,000 | 255,000 | — | 255,000 | — | 255,000 | ||||||||||||||||||||||||
| Common stock issued in connection with conversion of notes payable | — | — | 1,813,500 | 10,225,959 | — | 10,225,959 | — | 10,225,959 | ||||||||||||||||||||||||
| Reclassification of warrant liability to equity | — | — | — | 5,438,660 | — | 5,438,660 | — | 5,438,660 | ||||||||||||||||||||||||
| Preferred stock converted to common stock | (8,801 | ) | (46,753 | ) | 8,801 | 46,753 | — | — | — | — | ||||||||||||||||||||||
| Stock-based compensation | — | — | — | 431,430 | — | 431,430 | — | 431,430 | ||||||||||||||||||||||||
| Issuance of common stock, net of offering costs/At-the-market offering | — | — | 7,608,785 | 22,659,062 | — | 22,659,062 | — | 22,659,062 | ||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | — | — | — | — | — | — | (221,384 | ) | (221,384 | ) | ||||||||||||||||||||||
| Deconsolidation of Tess | — | — | — | — | — | — | 1,552,848 | 1,552,848 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | (16,641,464 | ) | (16,641,464 | ) | — | (16,641,464 | ) | |||||||||||||||||||||
| Balance as of September 30, 2019 | 4,199 | $ | 22,306 | 24,206,395 | $ | 241,974,307 | $ | (213,840,661 | ) | $ | 28,155,952 | $ | 35,171 | $ | 28,191,123 | |||||||||||||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
| 7 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statement of Stockholders’ Equity
Nine Months Ended September 30, 2018
(Unaudited)
| Total | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | Riot Blockchain stockholders' | Non-controlling | Total stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | deficit | equity | interest | equity | |||||||||||||||||||||||||
| Balance as of January 1, 2018 | 1,458,001 | $ | 7,745,266 | 11,622,112 | $ | 180,387,518 | $ | (139,263,480 | ) | $ | 48,869,304 | $ | 758,095 | $ | 49,627,399 | |||||||||||||||||
| Common stock issued for asset purchase - Prive | — | — | 800,000 | 8,480,000 | — | 8,480,000 | — | 8,480,000 | ||||||||||||||||||||||||
| Common stock escrow shares issued for asset purchase - Prive | — | — | 200,000 | — | — | — | — | — | ||||||||||||||||||||||||
| Preferred stock converted to Common stock | (1,353,505 | ) | (7,190,157 | ) | 1,353,505 | 7,190,157 | — | — | — | — | ||||||||||||||||||||||
| Exercise of warrants | — | — | 100,000 | 350,000 | — | 350,000 | — | 350,000 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 4,147,190 | — | 4,147,190 | — | 4,147,190 | ||||||||||||||||||||||||
| Exercise of stock options | — | — | 19,533 | 78,522 | — | 78,522 | — | 78,522 | ||||||||||||||||||||||||
| Common stock issued for services | — | — | 20,754 | 277,940 | — | 277,940 | — | 277,940 | ||||||||||||||||||||||||
| Refund of escrow dividend | — | — | — | — | 64,380 | 64,380 | 64,380 | |||||||||||||||||||||||||
| Sale of Riot shares held by Tess Pay, Inc. | — | — | — | 505,729 | — | 505,729 | — | 505,729 | ||||||||||||||||||||||||
| Stock issued for the extinguishment of the BMSS payable | — | — | 50,000 | 265,500 | — | 265,500 | — | 265,500 | ||||||||||||||||||||||||
| Cashless exercise of stock purchase warrants | — | — | 3,215 | — | — | — | — | — | ||||||||||||||||||||||||
| Delivery of common stock underlying restricted stock units | — | — | 124,583 | — | — | — | — | — | ||||||||||||||||||||||||
| Sale of common shares by Tess Pay, Inc. | — | �� | — | — | 110,620 | — | 110,620 | 109,826 | 258720,446 | |||||||||||||||||||||||
| Non-controlling interest - Logical Brokerage | — | — | — | — | — | — | 40,542 | 40,542 | ||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | — | — | — | — | — | — | (929,158 | ) | (929,158 | ) | ||||||||||||||||||||||
| Net loss | — | — | — | — | (46,596,970 | ) | (46,596,970 | ) | — | (46,596,970 | ) | |||||||||||||||||||||
| Balance as of September 30, 2018 | 104,496 | $ | 555,109 | 14,293,702 | $ | 201,793,176 | $ | (185,796,070 | ) | $ | 16,552,215 | $ | (20,695 | ) | $ | 16,531,520 | ||||||||||||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
| 8 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (47,526,128 | ) | $ | (10,967,620 | ) | ||
| Income (loss) from discontinued operations | 96,132 | (3,563,876 | ) | |||||
| Loss from continuing operations | (47,622,260 | ) | (7,403,744 | ) | ||||
| Adjustments to reconcile net loss from continuing operations to net cash used in operating activities of continuing operations: | ||||||||
| Amortization of discount on convertible debt | - | 4,750,000 | ||||||
| Stock-based compensation | 4,147,189 | 379,622 | ||||||
| Depreciation and amortization | 5,685,664 | 55,899 | ||||||
| Deferred income tax benefit | (3,525,000 | ) | - | |||||
| Amortization of license fee revenue | (72,523 | ) | (72,524 | ) | ||||
| Common stock issued for services | 277,940 | - | ||||||
| Stock issued for the extinguishment of the BMSS payable | 265,500 | - | ||||||
| Property, plant & equipment impairment charge | 26,858,023 | - | ||||||
| Impairment of digital currencies | 3,374,976 | - | ||||||
| Realized gain on sale of digital currencies | (451,341 | ) | - | |||||
| Changes in assets and liabilities: | ||||||||
| Prepaid contracts | (1,584,699 | ) | - | |||||
| Prepaid expenses and other current assets | (1,417,007 | ) | 192,071 | |||||
| Digital currencies - Mining | (6,087,405 | ) | - | |||||
| Accounts payable | 2,983,941 | (4,997 | ) | |||||
| Accrued expenses | 1,271,114 | (129,875 | ) | |||||
| Net cash used in operating activities of continuing operations | (15,895,888 | ) | (2,233,548 | ) | ||||
| Net cash used in operating activities of discontinued operations | (68,824 | ) | (930,323 | ) | ||||
| Net cash used in operating activities | (15,964,712 | ) | (3,163,871 | ) | ||||
| Cash flows from investing activities - continuing operations: | ||||||||
| Purchase of digital currencies | (5,722,545 | ) | - | |||||
| Proceeds from sale of digital currencies | 7,371,172 | - | ||||||
| Purchases of property and equipment | (20,311,436 | ) | - | |||||
| Purchases of other investments | (6,412,726 | ) | - | |||||
| Proceeds from sale of short-term investments | - | 7,506,761 | ||||||
| Security deposits | (703,275 | ) | - | |||||
| Purchases of patent and trademark application costs | (32,850 | ) | (14,255 | ) | ||||
| Investment in Coinsquare | - | (3,000,000 | ) | |||||
| Investment in Logical Brokerage, net of cash acquired | (516,918 | ) | - | |||||
| Purchase of developed technology by 1172767 | (531,176 | ) | - | |||||
| Net cash (used in) provided by investing activities of continuing operations | (26,859,754 | ) | 4,492,506 | |||||
| Net cash provided by investing activities of discontinued operations | - | 4,004 | ||||||
| Net cash (used in ) provided by investing activities | (26,859,754 | ) | 4,496,510 | |||||
| Cash flows from financing activities - continuing operations: | ||||||||
| Proceeds from issuance of convertible notes | - | 4,750,000 | ||||||
| Proceeds from issuance of common stock, net of $336,491 in offering expenses | - | 1,913,509 | ||||||
| Redemption of equity rights | - | (291,995 | ) | |||||
| Proceeds from notes payable | 1,696,083 | - | ||||||
| Repayment of notes payable and other obligations | (135,574 | ) | (192,539 | ) | ||||
| Proceeds from exercise of warrants | 350,000 | - | ||||||
| Proceeds from exercise of stock options | 78,522 | 98,260 | ||||||
| Proceeds from sale of Riot shares held by 1172767 | 505,729 | - | ||||||
| Proceeds from common shares sold by 1172767, net | 220,446 | - | ||||||
| Refund of escrow dividend | 64,380 | - | ||||||
| Net cash provided by financing activities of continuing operations | 2,779,586 | 6,277,235 | ||||||
| Net increase (decrease) in cash and cash equivalents | (40,044,880 | ) | 7,609,874 | |||||
| Cash and cash equivalents at beginning of period | 41,651,965 | 5,529,848 | ||||||
| Cash and cash equivalents at end of period | $ | 1,607,085 | $ | 13,139,722 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 6,585 | $ | 1,571 | ||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Conversion of notes payable and accrued interest to preferred stock | $ | - | $ | 4,798,671 | ||||
| Value of shares issued for Prive asset acquisition | $ | 8,480,000 | $ | - | ||||
| Conversion of Preferred stock to Common stock | $ | 7,190,157 | $ | - | ||||
| Deferred purchase price for BMSS | $ | 1,350,000 | $ | - | ||||
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (16,862,848 | ) | $ | (47,526,128 | ) | ||
| Income from discontinued operations | — | 96,132 | ||||||
| Loss from continuing operations | (16,862,848 | ) | (47,622,260 | ) | ||||
| Adjustments to reconcile net loss from continuing operations to net cash used in operating activities of continuing operations: | ||||||||
| Stock-based compensation | 431,430 | 4,147,189 | ||||||
| Depreciation and amortization | 70,482 | 5,685,664 | ||||||
| Deferred income tax benefit | — | (3,525,000 | ) | |||||
| Amortization of license fee revenue | (72,523 | ) | (72,523 | ) | ||||
| Amortization of right of use assets | 1,726,731 | — | ||||||
| Common stock issued for services | — | 277,940 | ||||||
| Common stock issued for the extinguishment of the BMSS payable | — | 265,500 | ||||||
| Loss on issuance of convertible notes, common stock and warrants | 6,154,660 | — | ||||||
| Change in fair value of convertible notes | 3,895,233 | — | ||||||
| Change in fair value of warrant liability | 2,869,726 | — | ||||||
| Gain on deconsolidation of Tess | (1,138,787 | ) | — | |||||
| Gain on extiguishment of accounts payable, other liabilities and accrued interest | (842,925 | ) | — | |||||
| Impairment of property and equipment | — | 26,858,023 | ||||||
| Impairment of digital currencies | 372,124 | 3,374,976 | ||||||
| Realized gain on sale of digital currencies | (665,218 | ) | (451,341 | ) | ||||
| Accrued interest on Verady investment | (20,200 | ) | — | |||||
| Changes in assets and liabilities: | ||||||||
| Prepaid contracts | — | (1,584,699 | ) | |||||
| Prepaid expenses and other current assets | (756,135 | ) | (1,417,007 | ) | ||||
| Digital currencies - mining, net of mining pool operating fees | (5,452,674 | ) | (6,087,405 | ) | ||||
| Accrued interest | — | — | ||||||
| Accounts payable | (1,798,539 | ) | 2,983,941 | |||||
| Accrued expenses | 882,195 | 1,271,114 | ||||||
| Lease liability | (1,725,578 | ) | — | |||||
| Net cash used in operating activities of continuing operations | (12,932,846 | ) | (15,895,888 | ) | ||||
| Net cash used in operating activities of discontinued operations | — | (68,824 | ) | |||||
| Net cash used in operating activities | (12,932,846 | ) | (15,964,712 | ) | ||||
| Cash flows from investing activities - continuing operations: | ||||||||
| Proceeds from sale of digital currencies | 3,196,310 | 7,371,172 | ||||||
| Purchase of digital currencies | — | (5,722,545 | ) | |||||
| Purchases of property and equipment | (8,569 | ) | (20,311,436 | ) | ||||
| Purchases of other investments | — | (6,412,726 | ) | |||||
| Security deposits | — | (703,275 | ) | |||||
| Patent costs incurred | (26,566 | ) | (32,850 | ) | ||||
| Investment in Logical Brokerage, net of cash acquired | — | (516,918 | ) | |||||
| Purchase of developed technology by Tess Pay, Inc. | — | (531,176 | ) | |||||
| Net cash provided by (used in) investing activities | 3,161,175 | (26,859,754 | ) | |||||
| Cash flows from financing activities - continuing operations: | ||||||||
| Proceeds from issuance of convertible notes | 3,000,000 | 1,696,083 | ||||||
| Repayment of notes payable and other obligations | (950,000 | ) | (135,574 | ) | ||||
| Proceeds from the issuance of common stock / At-the-market offering | 23,610,642 | — | ||||||
| Offering costs for the issuance of common stock / At-the-market offering | (951,580 | ) | — | |||||
| Proceeds from exercise of warrants | — | 350,000 | ||||||
| Proceeds from exercise of stock options | — | 78,522 | ||||||
| Proceeds from sale of Riot shares held by Tess Pay, Inc. | — | 505,729 | ||||||
| Proceeds form the sale of common shares sold by Tess Pay, Inc. | — | 220,446 | ||||||
| Refund of escrow dividend | — | 64,380 | ||||||
| Net cash provided by financing activities of continuing operations | 24,709,062 | 2,779,586 | ||||||
| Net increase (decrease) in cash and cash equivalents | 14,937,391 | (40,044,880 | ) | |||||
| Cash and cash equivalents at beginning of period | 225,390 | 41,651,965 | ||||||
| Cash and cash equivalents at end of period | $ | 15,162,781 | $ | 1,607,085 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | — | $ | 6,585 | ||||
| Cash paid for taxes | $ | — | $ | — | ||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Conversion of notes payable to common stock | $ | 10,225,959 | $ | — | ||||
| Reclassification of warrant liability to equity | $ | 5,438,660 | $ | — | ||||
| Value of shares issued for Prive asset acquisition | $ | — | $ | 8,480,000 | ||||
| Conversion of preferred stock to common stock | $ | 46,753 | $ | 7,190,157 | ||||
| Common stock issued in connection with conversion of notes payable | $ | 255,000 | $ | — | ||||
| Deferred purchase price for BMSS | $ | — | $ | 1,350,000 | ||||
| Digitial currencies used to purchase miners | $ | 98,865 | $ | — | ||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
| 9 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Financial Statements
(Unaudited)
Note 1. Organization:
Nature of operations:
Riot Blockchain, Inc. (the “Company”(“we,” “us,” “our,” the “Company,” “Riot” or “Riot Blockchain”) was originally organized on July 24, 2000, as a Colorado corporation. Effective October 19, 2017, the Company's name was changed to Riot Blockchain, Inc., from Bioptix, Inc., and as of November 30, 2016, the Company's name was changed to Bioptix, Inc., from Venaxis, Inc. Effective October 19, 2017, the Company changed its state of incorporation to Nevada from Colorado.
The Company operates a cryptocurrencydigital currency mining operation, which utilizes specialized computers (also known as “miners”) that generate cryptocurrencydigital currency (primarily bitcoin) from the Blockchain. As of September 30, 2018, the Company owns approximately 8,000 miners.blockchain. The Company acquired 1,200approximately 8,000 miners as a result ofthrough its acquisition of Kairos Global Technology, Inc., (“Kairos”) in November 2017, and in February 2018, the Company acquired 3,800 miners from Prive Technologies, Inc. (“Prive”), and 3,000 minersseparately from Blockchain Mining Supply & Services Ltd. (“BMSS”).
Note 2. Liquidity and a cost-effective rate for energy for cryptocurrency mining operations and data center projects. Subsequent to September 30, 2018, certain activities of Digital Green were curtailed.
The Company has experienced recurring losses and negative cash flows from operations. At September 30, 2018,2019, the Company had approximate balances of cash and cash equivalents of $1,607,000, a$15.2 million, digital currencies of $3.2 million, working capital deficit of $1,178,000,$16.5 million, total stockholders' equity of $16,532,000$28.2 million and an accumulated deficit of $185,796,000.$213.8 million. To date, the Company has, in large part, relied on equity and debt financing to fund its operations.
The Company’s primary focus is on its cryptocurrency
As disclosed in Note 10, the Company entered into a Sales Agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”) dated May 24, 2019 (the “Sales Agreement”), pursuant to which the Company may, from time to time, sell up to $100.0 million in shares of the Company’s common stock through H.C. Wainwright, acting as the Company’s sales agent and/or principal, in an at-the-market offering (“ATM Offering”). All sales of the shares in connection with the ATM Offering have been made pursuant to an effective shelf registration statement on Form S-3 filed with the U.S. Securities and Exchange Commission (“SEC”). The Company pays H.C. Wainwright a cryptocurrency exchangecommission of approximately 3.0% of the aggregate gross proceeds the Company received from all sales of the Company's common stock under the Sales Agreement. The Company received net proceeds on sales under the Sales Agreement of approximately $22.7 million at a weighted average price of $3.10 (net of commissions) during the nine months ended September 30, 2019.
Note 3. Basis of presentation, summary of significant accounting policies and recent accounting pronouncements:
Basis of presentation and principles of consolidation
The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States. That operational focusStates of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. In the opinion of management, the accompanying unaudited condensed interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results.
The results for the unaudited condensed interim consolidated statement of operations are not necessarily indicative of results to be expected for the year ending December 31, 2019 or for any future interim period. The unaudited condensed interim consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 2, 2019.
The accompanying interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
| 10 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the Company’s recently completed acquisitionsreported amounts of Kairosrevenue and 1172767 B.C. Ltd. (or “1172767”), formerly known as Tess Inc.,expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company's unaudited condensed interim consolidated financial statements include estimates associated with revenue recognition, asset valuations, the useful lives and its investmentrecoverability of long-lived assets, impairment analysis of intangibles, stock-based compensation, assumptions used in goNumerical Ltd., (d/b/a “Coinsquare”), as well asestimating the fair value of convertible notes and warrants, and the valuation allowance associated with the Company’s new name, reflectsdeferred tax assets.
Significant Accounting Policies:
For a strategic decision bydetailed discussion about the Company to operateCompany’s significant accounting policies, see the Company’s December 31, 2018 consolidated financial statements included in the blockchain and digital currency related business sector. The Company's current strategy will continue to expose the Company to the numerous risks and volatility associated within this sector.
Sequencing:
On January 14, 2017,28, 2019, the Company adopted a plansequencing policy under Accounting Standards Codification (“ASC”) 815-40-35Derivatives and Hedging(“ASC 815”) whereby in the event that reclassification of contracts from equity to exitassets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares as a result of certain securities convertible or exchangeable for a potentially indeterminable number of shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, issuances of securities to the Company’s employees or directors are not subject to the sequencing policy.
Notes Payable Fair Value Option:
As described further in Note 9 -Notes and Other Obligations, in January 2019, the Company issued Senior Secured Promissory Notes (the “Notes”) to Oasis Capital, LLC, Harbor Gates Capital, LLC and SG3 Capital, LLC (each an “Investor” and collectively, the “Investors”) in the aggregate principal amount of $3,358,333. The Company has elected the fair value option to account for these Notes due to the complexity and number of embedded features. The fair value of the Notes is classified within Level 3 of the fair value hierarchy because the fair values were estimated utilizing a Monte Carlo simulation model. Accordingly, the Company recorded these Notes at fair value with changes in fair value recorded in the statement of operations. As a result of applying the fair value option, direct costs and fees related to the Notes were recognized in earnings as incurred and were not deferred. The change in fair value of the Notes has been presented as change in value of convertible notes payable on the unaudited condensed interim consolidated statements of operations.
As of September 30, 2019, all of the Notes were converted into 1,813,500 shares of the Company’s common stock valued at their estimated fair value at the time of conversion totaling approximately $10.2 million.
Warrant Liability:
The Company issued Warrants to purchase 1,908,144 shares of its common stock in connection with the Notes issued to the Investors in January 2019, and recorded these outstanding Warrants as a liability at fair value utilizing a Monte Carlo simulation model. This liability is subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company's condensed interim consolidated statements of operations.
As of June 25, 2019, the Company’s Notes had been converted in their entirety and the warrant liability was revalued and reclassified to equity, because the Warrants are no longer subject to the Company’s sequencing policy as described above.
Leases:
Effective January 1, 2019, the Company accounts for its leases under ASC 842,Leases(“ASC 842”). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.
| 11 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components as permitted under ASC 842. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term.
The Company continues to account for leases in the prior period financial statements under ASC Topic 840.
Loss per share:
Basic net loss per share (“EPS”) of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company excludes its unvested restricted shares and escrow shares from the net loss per share calculation. The escrow shares are excluded due to their related contingencies, the inclusion of which would result in anti-dilution.
Since the Company has net losses attributable to Riot Blockchain, basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future were not included in the computation of diluted loss per share at September 30, 2019 and 2018 because their inclusion would be anti-dilutive are as follows:
| September | ||||||||
| 2019 | 2018 | |||||||
| Warrants to purchase common stock | 3,574,257 | 1,671,113 | ||||||
| Options to purchase common stock | 12,000 | 162,000 | ||||||
| Escrow shares | 200,000 | 200,000 | ||||||
| Unvested restricted stock awards | 38,917 | 665,188 | ||||||
| Convertible Series B preferred shares | 4,199 | 104,496 | ||||||
| Total | 3,829,373 | 2,802,797 | ||||||
Recently issued and adopted accounting pronouncements:
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02,Leases (Topic 842) in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, effectively allowing entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11,Leases(Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Based on the analysis, on January 1, 2019, the Company recorded right of use assets and lease liabilities of approximately $1.5 million.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year 2020 and is required to be applied prospectively. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
| 12 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
In August 2018, the FASB issued ASU 2018-15, “Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is A Service Contract” (“ASU 2018-15”). This update clarifies the accounting treatment for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of BiOptix Diagnosticsadoption. The Company is still evaluating the prospective impact of this guidance on its future consolidated financial statements and related disclosures.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer for a promised good or service that is distinct within the collaborative arrangement. The guidance also precludes entities from presenting amounts related to transactions with a collaborative arrangement participant that is not a customer as revenue, unless those transactions are directly related to third-party sales. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.
Note 4. Digital Currencies:
The following table presents additional information about digital currencies:
| Beginning balance, January 1, 2019 | $ | 706,625 | ||
| Revenue recognized from digital currencies mined | 5,563,952 | |||
| Mining pool operating fees | (111,278 | ) | ||
| Purchase of miner equipment with digital currencies | (98,865 | ) | ||
| Sale of digital currencies | (3,196,310 | ) | ||
| Realized gain on sale of digital currencies | 665,218 | |||
| Impairment of digital currencies | (372,124 | ) | ||
| Ending balance, September 30, 2019 | $ | 3,157,218 |
Note 5.Fair value measurements:
On January 28, 2019 the Company issued the Notes and Warrants in connection with the Notes. The Notes and Warrants were classified as liabilities and measured at fair value on the issuance date, with changes in fair value recognized as other expense on the consolidated statements of operations and disclosed in the unaudited condensed interim consolidated financial statements. As of June 27, 2019, in accordance with their original terms, all of the Notes were converted into a total of 1,813,500 shares of the Company’s common stock by their holders.
A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s Notes and Warrants at the issuance date of January 28, 2019 and during the conversion of the Notes as of June 27, 2019, are as follows:
Senior Secured Promissory Notes:
| January 28, 2019 | As of June 27 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Dividend yield | 0% | 0% | ||||||
| Expected price volatility | 119.5% | 122.2%-127.1% | ||||||
| Risk free interest rate | 2.60% | 2.07%-2.44% | ||||||
| Expected term | 1 year | — | ||||||
| 13 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
Warrants:
| January 28, 2019 | As of June 27, 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Dividend yield | 0% | 0 | ||||||
| Expected price volatility | 111.6% | 119.9%-120.5% | ||||||
| Risk free interest rate | 2.58% | 2.23%-2.58% | ||||||
| Expected term | 5 years | 4 years, 10 months | ||||||
There were no assets or liabilities measured at fair value during the nine months ended September 30, 2018.
Unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category.
The following table presents changes in Level 3 liabilities measured at fair value for the nine months ended September 30, 2019.
| Convertible Notes | Warrant Liability | |||||||
| Issuance of senior secured convertible notes | $ | 6,330,726 | $ | — | ||||
| Issuance of warrants in connection with convertible notes | — | 2,568,934 | ||||||
| Balance at January 28, 2019 | 6,330,726 | 2,568,934 | ||||||
| Change in fair value | 1,644,582 | 2,753,228 | ||||||
| Balance at March 31, 2019 | 7,975,308 | 5,322,162 | ||||||
| Change in fair value | 2,250,651 | 116,498 | ||||||
| Conversion of convertible notes to common stock | (10,225,959 | ) | — | |||||
| Reclassification of warrant liability to equity | — | (5,438,660 | ) | |||||
| Balance at September 30, 2019 | $ | — | $ | — | ||||
Note 6. Investment in Coinsquare:
In September 2017, the Company acquired a minority interest for $3.0 million in Coinsquare, which operates a digital crypto-currency exchange platform in Canada. During February 2018, the Company invested an additional $6.4 million to acquire additional common stock of Coinsquare. The investment included an additional equity investment of $2.8 million that was part of an approximate $24 million financing by Coinsquare. Additionally, warrants acquired in the original investment were exercised in exchange of a cash payment of $3.6 million. These additional investments resulted in a current ownership in Coinsquare by the Company of approximately 12% based upon Coinsquare’s issued and outstanding shares. The Company has evaluated the guidance in ASU 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities, and elected to account for the investment using the measurement alternative as the equity securities are without a readily determinable fair value and do not give the Company significant influence over Coinsquare. The investment is valued at cost, less any impairment, plus or minus changes resulting from observable price changes. As of September 30, 2019 and December 31, 2018, the Company considered the cost of the investment to not exceed the fair value of the investment and did not observe price changes.
Note 7. Investment in Tess:
In October 2017, the Company acquired approximately 52.01% of TessPay Inc. (formerly 1172767 B.C. Ltd) (“BDI”Tess”), which is developing blockchain solutions for telecommunications companies. During the year ended December 31, 2018, Tess issued approximately 189,000 of its common shares, reducing the investment percentage held by the Company from 52.01% to 50.2%. On April 10, 2019, Tess closed on a funding agreement under which approximately 23.8 million shares of Tess were issued for CAD $1.2 million. As a result of this funding, the Company’s ownership in Tess was reduced to approximately 9% and subsequently Tess was no longer being consolidated in the Company’s consolidated financial statements.
| 14 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
As of June 30, 2019, the Company evaluated its remaining interest in Tess under the guidance of ASU 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities, and determined it should remeasure its retained interest at fair value upon deconsolidation to establish a new cost basis. As of April 10, 2019, the fair value of the Tess shares owned by the Company is approximately $0.1 million, calculated based upon the April 10, 2019 funding price as follows:
| April 10, 2019 | ||||
| Tess shares held by Riot Blockchain, Inc. | 2,708,333 | |||
| Per share fair value | $ | 0.03 | ||
| Fair value of Tess shares held by Riot Blockchain, Inc. | $ | 90,174 | ||
The Company accounts for deconsolidation of subsidiaries in which it loses controlling interest in the financial interest of the subsidiary in accordance with Accounting Standards Codification (“ASC”) 810-10-40 – “Consolidation”.
The deconsolidation of Tess resulted in a gain of approximately $1.1 million calculated as follows:
| Current assets | $ | 130,432 | ||
| Less: | ||||
| Accounts payable | 761,875 | |||
| Accrued expenses | 273,935 | |||
| Convertible notes | 1,696,083 | |||
| Net liabilities | (2,601,461 | ) | ||
| Non-controlling interest share | 1,552,848 | |||
| Sub-total | (1,048,613 | ) | ||
| Less: fair value of shares owned by Riot Blockchain | 90,174 | |||
| Gain on deconsolidation of Tess | $ | (1,138,787 | ) |
Note 8. Investment in Verady:
During November 2017, the Company made a $200,000 investment in a convertible note as part of a series of notes issued by Verady, LLC (“Verady”). The notes are unsecured, subordinated to other approved liabilities, mature December 31, 2022, bear interest at 6%, unless previously repaid or converted and contain other conditions and restrictions, all as defined under the subscription documents. The Verady convertible note was previously recorded at fair value (which approximates cost). The conversion rate of the convertible note is defined based upon the possible occurrence of certain defined events which may or may not occur. The Company has no other relationship or rights associated with Verady. Founded in 2016, Verady is privately held and recently launched VeraNet, a decentralized network of financial reporting and accounting tools targeted to the needs of the digital currency community.
During the three months ended September 30, 2019, Verady completed a financing that under the terms of the Company’s original investment, resulted in the automatic conversion of the Company’s convertible note plus accrued interest totaling approximately $220,000, into equity of Verady. The automatic conversion resulted in a current ownership in Verady by the Company of approximately 1%. The Company has evaluated the guidance in ASU 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities, and elected to account for the investment using the measurement alternative as the equity securities are without a readily determinable fair value and do not give the Company significant influence over Verady. The investment is valued at cost, less any impairment, plus or minus changes resulting from observable price changes. During the three months ended September 30, 2019, there were no price changes in orderly transactions for identical or similar investments in Verady.
| 15 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
Note 9. Notes and Other Obligations:
Senior Secured Convertible Promissory Notes and Warrants
On January 28, 2019, in connection with a private financing (the “Private Financing”), the Company issued the Notes, to investors (collectively, the “Investors” and each an “Investor”) for an aggregate principal amount of $3,358,333, along with Warrants for the purchase of and equal value of shares of the Company’s common stock in exchange for $3,000,000 of private financing. The Notes were convertible into shares of the Company’s common stock at any time after the issuance date, provided that at no time would the Company be required to issue shares in excess of the aggregate number of shares of its commons stock outstanding. The Notes were set to mature twelve months from date of issuance and accrue interest at a rate of 8% per annum, with twelve months of interest guaranteed. The Notes were subject to prepayment penalties, default conditions and other terms and conditions, as further defined in the Financing Agreements (the “Financing Agreements”) as disclosed in the Company’s current report on Form 8-K filed with the SEC on February 1, 2019. As additional consideration for the investment, the Company issued a total of 150,000 restricted common shares to the Investors.
The Notes were convertible into shares of the common stock of the Company at a price equal to the lower of $2.00 or 80% of the lowest volume-weighted adjusted price of shares of the Company’s common stock in the twenty trading days prior to the conversion date, subject to adjustments in certain cases as defined in the Financing Agreements. Provided, however, that according to the Notes, the cumulative shares of the Company’s common stock issuable upon conversion of the Notes cannot exceed 19.99% of the total number of the Company’s outstanding common stock as of January 28, 2019. Pursuant to the Financing Agreements between the Company and the Investors, the Company granted the Investors a security interest in its assets to secure repayment of the Notes. Further to the Financing Agreements, the Company also reserved a number of shares of its common stock equal to 300% of the total number of shares issuable upon full conversion of the Notes.
Due to the complexity and number of embedded features within the Notes and as permitted under applicable accounting guidance, the Company elected to account for the Notes and all the embedded features under the fair value option, which records the Notes at fair value rather than at historical cost, with changes in fair value recorded in the condensed interim consolidated statements of operations. Direct costs and fees incurred to issue the Notes were recognized in earnings as incurred and were not deferred. On the initial measurement date of January 28, 2019, the fair value of the Notes was estimated at $6,330,726. Upfront costs and fees related to items for which the fair value option was elected were approximately $358,333 and were recorded as a component of other expenses for the nine months ended September 30, 2019.
In connection with the Notes, the Company entered into registration rights agreement with the Investors. The Company filed a registration statement with the SEC covering the equity rights and any other shares issuable in connection with the Notes on March 14, 2019 and the registration statement was declared effective on April 29, 2019.
During the nine months ended September 30, 2019, holders of the Notes issued on January 28, 2019, converted 100% of the Notes into 1,813,500 shares of the Company’s common stock. The aggregate fair value of the Notes converted during the nine months ended September 30, 2019 was $10.2 million, an increase in fair value of $3.9 million, which is reflected on the interim condensed consolidated statements of operations for the nine months ended September 30, 2019, as change in fair value of convertible note (See Note 5 to the unaudited condensed interim consolidated financial statements). Accordingly, having satisfied the Notes in full, the Company’s obligations under the Notes have been cancelled.
In connection with the Private Financing, the Company also issued the Warrants to the Investors to acquire up to an aggregate of 1,908,144 shares of the Company’s common stock at an exercise price of $1.94 per share. The Warrants are exercisable by the Investors beginning on July 29, 2019, through the fifth year anniversary of the effective date of the Private Financing; provided, however, each Investor’s beneficial ownership of the Company’s common stock may not exceed 4.99% of the total outstanding shares of the Company’s common stock without first providing sixty days’ notice to the Company, and, in any event, the ownership, including beneficial ownership, of shares of the Company’s common stock by each of the Investors, shall not exceed 9.99% of the total outstanding shares of our common stock.
| 16 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
Tess Investment
As of March 28, 2018, Tess, a subsidiary of the Company, entered into a note purchase agreement with a private investor under which a convertible promissory note issued by Tess in the principal amount CAD $2.2 million (the “Tess Convertible Note”) and commencedcash proceeds of CAD $2.2 million were placed into a significant reductionthird-party controlled escrow account. Upon the successful achievement of conditions defined under the escrow agreement relating to closing of a transaction between Tess and Cresval Capital Corp, (“Cresval”) whereby Tess and Cresval would merge as provided in the workforce.merger agreements and Tess would become publicly traded on the TSX-V exchange, the then-remaining cash and the Tess Convertible Note would be issued to Tess and the investor, respectively. The Tess Convertible Note was convertible at $0.10 per share of the merged entity, as defined, subject to certain adjustments. On February 15, 2019, Cresval terminated its definitive agreement with Tess due to Tess’s inability to complete one of the specified closing conditions in the agreement.
The interim release consisted of CAD $1.0 million (USD $775,555) of cash released to Tess and an unsecured promissory note issued by Tess (“Tess Promissory Note”) released to the investor. The Tess Promissory Note bears interest at 5%, is unsecured and due in 2021. On August 23, 2018, the final release from escrow occurred. Tess received approximately USD $921,000, bringing the total Tess Promissory Note balance to approximately USD $1,696,000. During the nine months ended September 30, 2019, the Company’s ownership in Tess was reduced to 9% and as a result, Tess is no longer consolidated in the Company’s unaudited interim condensed consolidated financial statements (see Note 7).
BMSS and Other Liabilities Settlements
On February 21, 2018, the Company completed an asset purchase under an agreement (the "BMSS Purchase Agreement") with BMSS, to purchase the 3,000 AntMiner S9 bitcoin mining machines owned by BMSS Equipment (the "BMSS Equipment"). Pursuant to the BMSS Purchase Agreement, the Company purchased the BMSS Equipment for aggregate consideration of Eight Million Five Hundred Thousand Dollars ($8,500,000). As of June 27, 2019, in connection with the BMSS agreement, the Company owed approximately $1,340,000 of principal and interest and the Company and BMSS agreed to a one-time settlement payment totaling $950,000. The remaining $390,000 was recorded as a gain on extinguishment of notes and interest, and included in other income in the accompanying interim consolidated statement of operations for the nine months ended September 30, 2019.
During the nine months ended September 30, 2019, the Company reached agreements with certain creditors to settle the amounts of outstanding liabilities at a discount. The computed value of the modifications as compared to the liability balances were recorded as other income from the gains on extinguishment of debt. The liabilities settled excluding BMSS, during the period totaled approximately $2,082,000 in exchange for cash payments of $1,629,000, resulting in a gain of approximately $453,000 recognized in the nine months ended September 30, 2019.
Note 10. Stockholders’ equity:
Preferred Stock:
During the nine months ended September 30, 2019, 8,801 shares of the Company’s Series B preferred stock were converted into 8,801 shares of the Company’s common stock. During the nine months ended September 30, 2018, 1,353,505 shares of the Company’s Series B preferred stock were converted into 1,353,505 shares of the Company’s common stock.
At-the-Market Equity Offering:
The Company entered into a Sales Agreement with H.C. Wainwright dated May 24, 2019, pursuant to which the Company may, from time to time, sell up to $100 million in shares of the Company’s common stock through H. C. Wainwright, as the Company’s sales agent and/or principal, in the ATM Offering. All sales of the shares have been made pursuant to an effective shelf registration statement on Form S-3 filed with the SEC. The Company pays H.C. Wainwright a commission of approximately 3.0% of the aggregate gross proceeds the Company received from all sales of the Company's common stock under the Sales Agreement. The Company received net proceeds on sales of 7,608,785 shares of common stock under the Sales Agreement of approximately $22.7 million at a weighted average price of $3.10 (excluding commissions) during the nine months ended September 30, 2019.
| 17 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
Restricted Stock:
During the nine months ended September 30, 2019, 106,251 shares of common stock were issued, related to fully vested restricted stock rights previously granted under the Company’s 2017 Equity Incentive Plan. Additionally, a total of 48,500 restricted stock rights were awarded to a consultant and advisory board members. The shares vest monthly over one to two year periods.
Note 11. Stock based compensation, options and warrants:
Stock based compensation:
The Company’s stock-based compensation expenses recognized during the nine months ended September 30, 2019 and 2018, were attributable to selling, general and administrative expenses, which are included in the accompanying unaudited condensed interim consolidated statements of operations.
The Company recognized total stock-based compensation expense during the three and nine months ended September 30, 2019 and 2018, granted under the Company’s 2017 equity incentive plan (the “Plan”), from the following categories:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Restricted stock awards under the Plan | $ | 81,362 | $ | 1,434,650 | $ | 372,932 | $ | 3,634,193 | ||||||||
| Stock option awards under the Plan | — | 220,510 | 58,498 | 512,997 | ||||||||||||
| Total stock-based compensation | $ | 81,362 | $ | 1,655,160 | $ | 431,430 | $ | 4,147,190 | ||||||||
Restricted stock rights:
A summary of the Company’s unvested restricted stock rights activity in the nine months ended September 30, 2019 is presented here:
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||||
| Unvested at January 1, 2019 | 95,939 | $ | 12.49 | |||||||
| Vested | (50,522 | ) | $ | 8.23 | ||||||
| Granted | 48,500 | $ | 3.78 | |||||||
| Forfeited | (55,000 | ) | $ | 14.95 | ||||||
| Unvested at September 30, 2019 | 38,917 | $ | 3.68 | |||||||
During the nine months ended September 30, 2019, the Company granted 48,500 shares of restricted stock rights to consultants. The total fair value of restricted stock rights granted during the nine months ended September 30, 2019 was approximately $0.2 million. The fair value of each restricted stock right was based upon the closing stock price on the grant date.
During the nine months ended September 30, 2019, forfeitures of restricted common stock rights totaled 55,000, which consisted of rights forfeited due to the termination of three of the Company’s officers.
The fair value of restricted stock rights is measured based on their fair value on the date of grant and amortized over the vesting period of twelve to twenty-four months. As of September 30, 2019, there was approximately $0.1 million of unrecognized compensation cost related to unvested restricted stock rights, which is expected to be recognized over a remaining weighted-average vesting period of approximately 10 months.
| 18 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
Stock incentive plan options:
A summary of activity under the Plan for the nine months ended September 30, 2019 is presented below:
| Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||||
| Outstanding at January 1, 2019 | 62,000 | $ | 15.71 | 8.2 | $ | — | ||||||||||||
| Forfeited | (50,000 | ) | $ | 18.50 | — | — | ||||||||||||
| Outstanding at September 30, 2019 | 12,000 | $ | 4.09 | 4.0 | $ | — | ||||||||||||
| Exercisable at September 30, 2019 | 12,000 | $ | 4.09 | 4.0 | $ | — | ||||||||||||
Aggregate intrinsic value represents the total intrinsic value (the difference between the Company’s closing stock price on September 30, 2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders been able to, and in fact had, exercised their options on September 30, 2019.
Other common stock purchase warrants:
Following is a summary of outstanding warrants that were issued outside of the Plan for the nine months ended September 30, 2019:
| Shares Underlying Options/Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||||
| Outstanding at January 1, 2019 | 1,671,113 | $ | 39.47 | 2.0 | $ | — | ||||||||||||
| Granted | 1,908,144 | $ | 1.94 | 5.2 | $ | — | ||||||||||||
| Forfeited | (5,000 | ) | $ | 7.90 | — | $ | — | |||||||||||
| Outstanding at September 30, 2019 | 3,574,257 | $ | 19.48 | 3.1 | $ | — | ||||||||||||
| Exercisable at September 30, 2019 | 3,574,257 | $ | 19.48 | 3.1 | $ | — | ||||||||||||
The Company granted Warrants to purchase 1,908,144 shares of its common stock with an exercise price of $1.94, in connection with the Notes issued on January 28, 2019. (See Note 9).
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on September 30, 2019 and the exercise price, multiplied by the number of in-the-money warrants) that would have been received by the warrant holders, had all warrant holders exercised their warrants on September 30, 2019.
Note 12. Discontinued Operations:
During the quarter ended March 31, 2017, the Company made the decision to discontinue the operations of its wholly-owned subsidiary BDI. BDI had developed a proprietary Enhanced Surface Plasmon Resonance technology platform for the detection of molecular interactions. The decision to adopt this plan was made following an evaluation by the Company's Board of Directors in January 2017 of the estimated results of operations projected during the near to mid-term period for BDI, including consideration of product development required and updated sales forecasts, and estimated additional cash resources required. Accordingly, the historical results of BDI have been classified as discontinued operations for all periods presented.
| September 30, 2018 | ||||
| Deferred tax liability as of January 1, 2018 | $ | 699,000 | ||
| Deferred tax liability recorded on the Prive acquisition | 2,918,000 | |||
| Deferred tax liability recorded on the Logical Brokerage acquisition | 142,709 | |||
| Impairment and depreciation on Prive and Kairos acquisitions | (3,525,000 | ) | ||
| Deferred tax liability as of September 30, 2018 | $ | 234,709 | ||
| September 30, | ||||||||
| 2018 | 2017 | |||||||
| Warrants to purchase common stock | 1,671,113 | 1,257,929 | ||||||
| Options to purchase common stock | 162,000 | 106,333 | ||||||
| Unvested restricted stock units | 665,188 | 157,000 | ||||||
| Escrow shares of common stock | 200,000 | - | ||||||
| Convertible preferred shares | 104,496 | - | ||||||
| 2,802,797 | 1,521,262 | |||||||
| September 30, 2018 | ||||
| Cash consideration | $ | 11,000,000 | ||
| Fair value of common stock | 8,480,000 | |||
| Deferred tax liability | 2,918,000 | |||
| Other expenses | 2,000 | |||
| $ | 22,400,000 | |||
| September 30, 2018 | ||||
| Cash, net of cash acquired | $ | 500,000 | ||
| Deferred tax liability | 142,709 | |||
| Non-controlling interest | 40,541 | |||
| Legal expense | 16,918 | |||
| $ | 700,168 | |||
Three Months Ended September 30, 2018 (unaudited) | Nine Months Ended September 30, 2018 (unaudited) | |||||||
| Prive miners | $ | - | $ | 18,264,759 | ||||
| BMSS miners | - | 5,796,179 | ||||||
| Kairos miners | - | 2,797,085 | ||||||
| Total impairment charge | $ | - | $ | 26,858,023 | ||||
September 30, 2018 (unaudited) | December 31, 2017 | |||||||
| Cryptocurrency machines, net of impairment | 4,118,675 | $ | 4,700,575 | |||||
| Leasehold improvements | 2,069,259 | - | ||||||
| Office and computer equipment | 92,840 | 61,670 | ||||||
| Total cost of property and equipment | 6,280,774 | 4,762,245 | ||||||
| Less accumulated depreciation | (1,427,030 | ) | (468,079 | ) | ||||
| Property and equipment, net | $ | 4,853,744 | $ | 4,294,166 | ||||
| Cost: | September 30, 2018 (unaudited) | December 31, 2017 | ||||||
| Patents | $ | 1,092,681 | $ | 1,059,832 | ||||
| Goodwill | 1,186,496 | 1,186,496 | ||||||
| Convertible note investment | 200,000 | 200,000 | ||||||
| Total | 2,479,177 | 2,446,328 | ||||||
| Accumulated amortization: | ||||||||
| Patents | (594,011 | ) | (550,183 | ) | ||||
| Total | (594,011 | ) | (550,183 | ) | ||||
| Net other long-term assets | $ | 1,885,166 | $ | 1,896,145 | ||||
| September 30, 2018 | ||||
| Patents at January 1, 2018, net | $ | 509,649 | ||
| Additions | 32,849 | |||
| Less: amortization expense | 43,828 | |||
| Patents at September 30, 2018, net | $ | 498,670 | ||
For the year ended December 31, | Estimated amortization expense | |||
| 2018 | $ | (492,183 | ) | |
| 2019 | $ | 58,000 | ||
| 2020 | $ | 58,000 | ||
| 2021 | $ | 58,000 | ||
| 2022 | $ | 1,146,845 | ||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Selling, general and administrative expenses | $ | 1,655,160 | $ | 108,568 | $ | 4,147,189 | $ | 379,622 | ||||||||
| Total stock-based compensation | $ | 1,655,160 | $ | 108,568 | $ | 4,147,189 | $ | 379,622 | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Restricted stock awards under the Plan | $ | 1,434,650 | $ | 100,396 | $ | 3,634,192 | $ | 188,572 | ||||||||
| Stock option awards under the Plan | 220,510 | 8,172 | 512,997 | 103,430 | ||||||||||||
| Non-qualified stock option awards | - | - | - | 87,620 | ||||||||||||
| Total stock-based compensation | $ | 1,655,160 | $ | 108,568 | $ | 4,147,189 | $ | 379,622 | ||||||||
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Unvested at January 1, 2018 | 342,070 | $ | 5.97 | |||||
| Granted | 431,000 | 10.46 | ||||||
| Vested | (201,421 | ) | 7.48 | |||||
| Forfeited | (290,147 | ) | 6.53 | |||||
| Delivered | (124,583 | ) | 5.42 | |||||
| Unvested at September 30, 2018 | 156,919 | $ | 13.37 | |||||
| Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2018 | 119,533 | $ | 9.02 | |||||||||||||
| Granted | 62,000 | 15.71 | ||||||||||||||
| Exercised | (19,533 | ) | 4.02 | |||||||||||||
| Outstanding at September 30, 2018 | 162,000 | $ | 12.19 | 9.2 | $ | - | ||||||||||
| Exercisable at September 30, 2018 | 145,335 | $ | 11.46 | 9.2 | $ | - | ||||||||||
| Shares Underlying Options/Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2017 | 1,944,895 | $ | 35.06 | 2.7 | $ | 6,135,000 | ||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | (113,009 | ) | 3.50 | |||||||||||||
| Forfeited | (160,773 | ) | 10.88 | |||||||||||||
| Outstanding at September 30, 2018 | 1,671,113 | $ | 39.47 | 2.2 | $ | 3,000 | ||||||||||
| Exercisable at September 30, 2018 | 1,671,113 | $ | 39.47 | 2.2 | $ | 3,000 | ||||||||||
| September 30, 2018 | ||||
| Digital currencies balance - January 1, 2018 | $ | 200,164 | ||
| Additions of digital currencies | 6,087,405 | |||
| Purchase of digital currencies | 5,722,547 | |||
| Sale of digital currencies | (7,371,172 | ) | ||
| Realized gain on sale of digital currencies | 451,341 | |||
| Impairment of digital currencies | (3,374,976 | ) | ||
| Digital currencies balance - September 30, 2018 | $ | 1,715,309 | ||
The Company’sCompany's historical financial statements have been revised to present the operating results of the BDI business as a discontinued operation. Assets and liabilitiesLiabilities related to the discontinued operations of BDI weretotaled approximately as follows$16,000 in accounts payable as of September 30, 2018 (unaudited)2019 and December 31, 2017:2018, respectively.
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| Current Liabilities | September 30, 2018 | December 31, 2017 | ||||||
| Accounts payable | $ | 16,000 | $ | 16,000 | ||||
| Accrued expenses | - | 28,000 | ||||||
| Deferred revenue | - | 137,000 | ||||||
| Total current liabilities | $ | 16,000 | $ | 181,000 | ||||
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
There were no results of discontinued operations for the three and nine months ended September 30, 2019 and the three months ended September 30, 2018. Summarized results of the discontinued operation are as follows for the three and nine months ended September 30, 2018 and 2017 (unaudited):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenue | $ | - | $ | 7,000 | $ | 137,000 | $ | 37,000 | ||||||||
| Cost of revenue | - | 2,000 | 41,000 | 6,000 | ||||||||||||
| Gross margin | - | 5,000 | 96,000 | 31,000 | ||||||||||||
| Operating expenses | - | (26,000 | ) | - | 975,000 | |||||||||||
| Operating income (loss) | - | 31,000 | 96,000 | (944,000 | ) | |||||||||||
| Escrow forfeiture gain | - | - | - | 135,000 | ||||||||||||
| Impairment loss | - | - | - | (2,754,000 | ) | |||||||||||
| Income (loss) from discontinued operations, net of tax | $ | - | $ | 31,000 | $ | 96,000 | $ | (3,563,000 | ) | |||||||
| Revenue | $ | 137,000 | ||
| Cost of revenue | 41,000 | |||
| Gross margin | 96,000 | |||
| Operating expenses | — | |||
| Operating income | 96,000 | |||
| Income from discontinued operations, net of tax | $ | 96,000 |
Note 12. Commitments and contingencies:
Oklahoma Lease Agreement.
On February 27, 2018, Kairos entered into a lease agreement (the “Lease”) with 7725 Reno #1, LLC (the “Landlord”), pursuant to which Kairos leaseslease an approximately 107,600 square foot warehouse located in Oklahoma City, Oklahoma, including improvements thereon. Pursuant toUnder the terms of the Lease, the initial term of one year terminates on February 15, 2019, unless terminated earlier pursuant to the terms of the Lease, subject to Kairos’ options to renew the Lease. Kairos has four one-year renewal options that may be exercised so long as Kairos is not in default, subject to increases in base rent. Kairos has the right to operate from the premises on a 24 hour/seven day a week basis. At least three months, but no more than six months, priorThe initial term of the Lease was scheduled to terminate on February 15, 2019; however the term of the Lease was extended by agreement of the parties as discussed below.
Prior to the expirationfirst amendment of the initial Lease term or renewal term, as applicable, Kairos shall give Landlord written notice of its intent to exercisediscussed below, the applicable renewal option, which also includes incremental payment for additional electric capacity delivery. If Kairos does not elect to exercise a renewal option, all remaining renewal options, if any, shall terminate.
On March 26, 2018, Kairos entered into a first amendment to the above lease,Lease, whereby the Landlord agreed to increase the electrical power available for Kairos’s use from 6MW to 12MW, and, the base rent under the lease was increased to approximately $665,760 per month, effective as of the date when such additional power is available. The Company is currently in discussions withbecame available for use, the Landlord concerning possible additional amendmentsbase rent under the Lease was increased to approximately $664,760 per month.
Effective November 29, 2018, Kairos entered into the second amendment to the Lease.Lease which provides the following:
On December 19, 2017,May 15, 2019, the Company accepted subscriptionsrenewed the Lease for the salefirst renewal term of $37,000,000 of units of its securities, with each unit consisting of one share of Common Stock and one warrant to purchase one share of Common Stock, at a per unit price of $22.50.three months, extending the lease through November 15, 2019.
On December 21, 2017,August 15, 2019, the Company accepted subscriptions for an additional $37,528 of units. On December 21, 2017,renewed the Company closed on the sale of $37,037,528 of units of its securities and issued 1,646,113 shares of Common Stock and warrants to purchase up to 1,646,113 shares of Common Stock.
Corporate Lease Agreement
On April 9, 2018, the Company entered into a commercial lease covering 1,694 rentable square feet of office space in Fort Lauderdale, Florida, with a third-party. The lease is for an initial term of thirty-nine months, with one five-year option to renew. The lease requires initial monthly rent of approximately $7,000, including base rent and associated operating expenses.
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Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
Operating Leases
At September 30, 2019, the Company entered intohad operating lease liabilities of approximately $0.9 million and right of use assets of approximately $0.9 million, which are included in the condensed interim consolidated balance sheet.
The following summarizes quantitative information about the Company’s operating leases:
| Lease cost | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | ||||||
| Operating lease cost | $ | 592,593 | $ | 1,793,778 | ||||
| Variable lease cost | 711,113 | 2,348,448 | ||||||
| Operating lease expense | 1,303,706 | 4,142,226 | ||||||
| Short-term lease rent expense | 4,620 | 13,860 | ||||||
| Total rent expense | $ | 1,308,326 | $ | 4,156,086 | ||||
| Other information | ||||||||
| Operating cash flows from operating leases | $ | 584,395 | $ | 1,792,625 | ||||
| Right of use assets exchanged for new operating lease liabilities | $ | 558,314 | $ | 2,664,126 | ||||
| Weighted-average remaining lease term – operating leases | 0.6 years | 0.6 years | ||||||
| Weighted-average discount rate – operating leases | 10.00 | % | 10.00 | % | ||||
Maturities of the Company’s operating lease liabilities, are as follows (unaudited):
| For the three months ended December 31, 2019 | $ | 584,395 | ||
| For the year ended December 31, 2020 | 343,731 | |||
| For the year ended December 31, 2021 | 35,040 | |||
| Total | $ | 963,166 | ||
| Less present value discount | (24,618 | ) | ||
| Operating lease liabilities | $ | 938,548 |
Rent expense, recorded on a Consulting Agreement with Ingenium International LLC (the “Consultant”)straight-line basis, was approximately $1.3 million and $1.9 million for the three months ended September 30, 2019 and 2018, respectively; and was approximately $4.2 million and $3.7 million for the nine months ended September 30, 2019 and 2018, respectively.
Note 14. Commitments and contingencies:
Contingencies:
The Company, and its subsidiaries, are subject at times to provide consulting services relatedvarious claims, lawsuits and governmental proceedings relating to the Company’s business for a twelve-month period. Pursuantand transactions arising in the ordinary course of business. The Company cannot predict the final outcome of such proceedings. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including, consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Certain of the claims, lawsuits and proceedings arising in ordinary course of business are covered by the Company’s insurance program. The Company maintains property, and various types of liability insurance in an effort to protect the Company from such claims. In terms of any matters where there is no insurance coverage available to the Consulting Agreement, Consultant’s services are defined as follows: complete the installation and deployment of 8,000+ ASIC cryptocurrency miners, which included the Prive EquipmentCompany, or where coverage is available and the BMSS Equipment; assist in managing and monitoringCompany maintains a retention or deductible associated with such insurance, the operationCompany may establish an accrual for such loss, retention or deductible based on current available information. In accordance with accounting guidance, if it is probable that an asset has been impaired or a liability has been incurred as of the 8,000+ cryptocurrency miners ondate of the financial statements, and the amount of loss is reasonably estimable, then an ongoing basis; promptly respondingaccrual for the cost to and troubleshooting any issues as they ariseresolve or settle these claims is recorded by the Company in the management and monitoringaccompanying consolidated balance sheets. If it is reasonably possible that an asset may be impaired as of the operations; continuingdate of the buildoutfinancial statement, then the Company discloses the range of uppossible loss. Paid expenses related to 40 Megawattsthe defense of energy capacity,such claims are recorded by the Company as incurred and paid and included in the accompanying consolidated statements of operations. Management, with the ultimate goalassistance of outside counsel, may from time to secure the power and build the location for uptime adjust such accruals according to 80 Megawatts of energy capacity; and to make strategic introductions to other cryptocurrency business opportunities and contactsnew developments in the sector. In connection withmatter, court rulings, or changes in the Consulting Agreementstrategy affecting the Company’s defense of such matters. On the basis of current information, the Company madedoes not believe there is a lump sum payment of $4,000,000reasonable possibility that, other than with regard to the Consultant.
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Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of the previous acquisitions of Kairos and Prive (See Note 3).
(Unaudited)
On February 17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company's shareholdersstockholders in the United District Court for the District of New Jersey,Takata v. Riot Blockchain Inc., et al., Case No. 3:18-cv-02293. The complaint asserts violations of federal securities laws under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of shareholdersstockholders that purchased stock from November 13, 2017 through February 15, 2018. The complaint alleges that the Company and certain of its officers and directors made, caused to be made, or failed to correct false and/or misleading statements in press releases and public filings regarding its business plan in connection with its cryptocurrency business. The complaint requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.
Two additional, nearly identical complaints were subsequently filed by Richard Roys and Bruce Greenawalt in the United District States Court for the Southern District of Florida (Roys v. Riot Blockchain Inc., et al., Case No. 9:18-cv-80225) and the United States District Court for the District of Colorado (Greenawalt(Greenawalt v. Riot Blockchain Inc., et al., Case No. 1:18-cv-00440), respectively. On March 27, 2018, the court closed the Roys case for administrative purposes. On April 2, 2018, Mr. Greenawalt filed a notice of voluntary dismissal of his action, which the court entered on the same date.
On April 18, 2018, Joseph J. Klapper, Jr., filed a complaint against Riot Blockchain, Inc., and certain of its officers and directors in the United District Court for the District of New Jersey (Klapper v. Riot Blockchain Inc., et al.al., Case No. 3:18-cv-8031). The complaint contained substantially similar allegations and the same claims as those filed by Mr. Takata, and requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.
Lead Plaintiff filed a consolidated complaint on January 15, 2019. Defendants filed motions to dismiss on March 18, 2019. In lieu of opposing defendants’ motions to dismiss, Lead Plaintiff filed another amended complaint on May 9, 2019. Defendants filed multiple motions to dismiss the amended complaint starting on September 3, 2019. Briefing on the motions to dismiss is expected to be completed on November 18, 2019. Subject to the outcome of the pending motions, defendants intend to continue to vigorously contest Lead Plaintiff’s consolidated complaintallegations. Because this litigation is due onstill at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or before January 7, 2019.
Shareholder Derivative Cases
On April 5, 2018, Michael Jackson filed a shareholder derivative complaint on behalf of the Company in the Supreme Court of the State of New York, County of Nassau, against certain of the Company's officers and directors, as well as against an investor (Jackson v. Riot Blockchain, Inc., et al.al., Case NoNo. 604520/18). The complaint contains similar allegations to those contained in the shareholder class action complaints and seeks recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement. The complaint seeks unspecificunspecified monetary damages and corporate governance changes.
On May 22, 2018, two additional shareholder derivative complaints were filed on behalf of the Company in the Eighth Judicial District Court of the State of Nevada in and for the County of Clark (Kish(Kish v. O’Rourke,O'Rourke, et al., Case No. A-18-774890-B &Gaft v. O’Rourke,O'Rourke, et al., Case No. A-18-774896-B)A-18-774896-8). The two complaints make identical allegations, which are similar to the allegations contained in the shareholder class action complaints. The shareholder derivative plaintiffs also seek recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, and aiding abetting a breach of fiduciary duty. The complaints seek unspecific monetary damages and corporate governance changes.
On September 24, 2018, the court entered an order consolidating theGaft andKish actions, which is now styled asIn re Riot BlockChain, Inc. Shareholder Derivative Litigation, Case No. A-18-774890-B. The plaintiffs filed a consolidated complaint on March 15, 2019. The consolidated action has been temporarily stayed until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
On October 9, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Eastern District of New York (Rotkowitz v. O'Rourke, et al., Case No. 2:18-cv-05632). As with the other shareholder derivative actions, the shareholder plaintiff alleges breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain of the Company's officers, directors, and an investor. The complaint's allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. The parties filed a motion with the court to temporarily stay this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey. In response, the court dismissed the action without prejudice with leave to refile a complaint following the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
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Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
On October 22, 2018, a fifth shareholder derivative complaint was filed on behalf of the Company received several comment letters (the “Comment Letters”) fromin the DivisionUnited District Court for the Southern District of Corporation FinanceNew York (Finitz v. O'Rourke, et al., Case No. 1: 18-cv-09640). The shareholder plaintiffs allege breach of fiduciary duty, waste of corporate assets, and the Division of Investment Managementunjust enrichment against certain of the SecuritiesCompany's officers, directors, and Exchange Commission (“SEC”).an investor. The Comment Letters have beencomplaint's allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties' stipulation, the court issued onan order temporarily staying this action until the Company’s periodic reports on Form 10-Qresolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the quarter ended March 31, 2018, Annual Report on Form 10-K for the fiscal year ended December 31, 2017, amendmentDistrict of New Jersey.
Defendants intend to Annual Report on Form 10-K/A for the fiscal year ended December 31, 2017 and current report on Form 8-K filed October 4, 2017. The comments raise matters related to, among other things, the unsettled nature of accounting treatment for the Company’s cryptocurrency mining and the fair value method selected by the Company (as opposed to intangible accounting methods proposed by some experts) and applicability to the Company of the Investment Company Act of 1940, particularly as relates to the Company’s minority interest in goNumerical, Inc. a/k/a Coinsquare. The Company continues to engage in conversations with the staff of the Division of Enforcement, Division of Investment Management, Division of Corporation Finance, and Office of the Chief Accountant regarding the issues raisedvigorously contest plaintiffs’ allegations in the comment letters.
SEC Subpoena and Other Matters
On July 30,April 9, 2018, the Company received a lettersubpoena from the SEC, (the “Letter”) that the Commission has issued an Order Directing Examinationrequesting documents and Designating Officers Pursuant to Section 8(e) of the Securities Act of 1933 with respect to the following registration statements: (1) a Form S-8 filed on July 19, 2017 (File No. 333-219357); (2) a Form S-3 initially filed January 5, 2018 and subsequently amended on February 7, 2018 (File No. 333-222450); and (3) a Form S-3 filed on July 10, 2018 (File No. 333-226111). The Letter stated, “while the Section 8(e) examination is pending, the Division of Corporation Finance will not take any further action on the Registration Statements, and all communications with regard to the Registration Statements and the Section 8(e) examination should be made to the Commission’s Division of Enforcement.”
Beneficial Ownership
Pursuant to the rules of the Securities and Exchange Commission (the “SEC”),SEC, the Company has consistently reported its beneficial ownership positions in its proxy and other filings where beneficial ownership disclosures are presented, for certain beneficial owners with respect to any person (including any “group” as that term is used in sectionSection 13(d)(3) of the Securities and Exchange Act of 1934 (the “Exchange Act”)) who is known to the Company to be the beneficial owner of more than 5% of the Company’s common stock. The Company has relied on each person who has reported to the SEC beneficial ownership of more than 5% of our common stock to provide complete and accurate information regarding their ownership, based on the reports filedfiled by these persons.
On September 7, 2018, a complaint was filed by the SEC (Case 1:18-cv-08175) and as subsequently amended, (the “Complaint”) against, among others, a number of individuals and entities some of whom the Company has previously disclosed as its beneficial owners, as well as, Mr. John O’Rourke III, the Company’s former chairman of the board of directors and chief executive officer who resigned from the Company on September 8, 2018, as disclosed in the Current Periodic Report on Form 8-K filed September 10, 2018. Other persons named in the Complaint have previously reported that they were beneficial owners of the Company’s common stock, however, the Company has no basis to determine whether any such persons may have operated as a control group, collectively beneficially owning more than 5% of the Company’s common stock.
Note 13.15. Tess Related Party Transactions
Tess related parties include: Powercases Inc., and 2227470 Ontario Inc., (companies that are wholly-owned by Jeffrey Mason, President and Chief Executive Officer of Tess), 1038088 Ontario Limited (a company that is wholly-owned by Fraser Mason, Chairman and Chief Financial Officer of Tess), and JLM Strategic Marketing (a proprietorship owned by Jennifer Mason, Manager Corporate Communications of Tess).
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Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
The following table provides the total amount of transactions that have been entered into with the SecuritiesTess related parties and Exchange Commission, each of Barry Honig (togetheroutstanding balances with other group members) and Catherine Johanna DeFrancesco during a portion of 2017 beneficially owned greater than 10% of the dispositive and voting power of the Company’s common stock. Mr. Honig reported beneficial ownership of approximately 11.2% of the Company’s common stockTess related parties as of January 5, 2017 and Ms. DeFrancesco reported beneficial ownershipfor the periods identified:
| Period Ended | ||||||||
| Services to Tess provided by (1): | September 30, 2019 | September 30, 2018 | ||||||
| Powercases Inc. | $ | 231,328 | $ | 379,385 | ||||
| JLM Strategic Marketing | $ | — | $ | 267,304 | ||||
| 1038088 Ontario Limited | $ | 45,062 | $ | 110,123 | ||||
| Payable to: | September 30, 2019 | December 31, 2018 | ||||||
| Powercases Inc. | $ | — | $ | 37,250 | ||||
| JLM Strategic Marketing | $ | — | $ | 9,483 | ||||
| 1038088 Ontario Limited | $ | — | $ | 52,053 | ||||
| (1) | - 2019 amounts provided by related parties are up to the date of de-consolidation. |
During the period ended June 30, 2019 (up to the point of de-consolidation) and six months ended June 30, 2018, included in Tess's recorded services from related parties was approximately 11.45% of the Company’s common stock as of January 10, 2017. Mr. Honig invested $1,750,000 in the Company’s March 2017 Convertible $260,000 and $180,000, respectively for Tess's key management personnel salaries.
Note Private Placement. GRQ Consultants, Inc., a related party of Mr. Honig, received a cash payment of $50,000 for diligence services16. Subsequent Events:
Financing
Subsequent to September 30, 2019, in connection with the Company’s September 2017 investment in Coinsquare. Each of Mr. Honig and Ms. DeFrancesco was a shareholder of Kairos at the time of its acquisition bySales Agreement with H.C. Wainwright, the Company with Mr. Honig having ownedreceived gross proceeds of approximately 8.6%$859,000 from the sale of Kairos and Ms. DeFrancesco having owned approximately 6.3%494,820 shares of Kairos. Each of Mr. Honig and Ms. DeFrancesco invested in the December 2017 common stock.
Common Share Private Placement, with Mr. Honig investing $500,000 and Ms. DeFrancesco investing $360,000. See also disclosures in Notes 3, 12 and 14.
Subsequent to September 30, 2018, 202,8332019, 30,000 shares of restricted common stock related to fully vested shares of restricted stock units were delivered to former officers and employees for services performed in 2017 and 2018.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes in “Item 1. Condensed Interim Consolidated Financial Statements.” The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and should not be construed either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. See “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors.”
Management’s plans and basis of presentation:
The Company has experienced recurring losses and negative cash flows from operations. At September 30, 2018,2019, the Company had approximate balances of cash and cash equivalents of $1,607,000, a$15.2 million, working capital deficit of $1,178,000$16.5 million, total stockholders’stockholders' equity of $16,532,000$28.2 million and an accumulated deficit of $185,796,000.$213.8 million. To date, the Company has in large part relied on debt and equity financing to fund its operations.
During the launch of RiotX as a cryptocurrency exchange in the United States. That operational focus and the Company’s recently completed acquisitions of Kairos and 1172767 B.C. Ltd. (or “1172767”), formerly known as Tess Inc., and its investment in goNumerical Ltd., (d/b/a “Coinsquare”), as well as the Company’s new name, reflects a strategic decision by the Company to operate in the blockchain and digital currency related business sector. The Company's current strategy will continue to expose the Company to the numerous risks and volatility associated within this sector.
The Company expects to continue to incur losses from operations for the near-term and these losses could be significant as the Company incurs costs and expenses associated with recent and potential future acquisitions and development of the RiotX exchange platform, as well as public company, legal and administrative related expenses being incurred. The Company is closely monitoring its cash balances, cash needs and expense levels.
Management's strategic plans include the following:
| • | continuing expansion | |
| • | continuing to evaluate opportunities for | |
| • | establishing a | |
| • | exploring other possible strategic options and financing opportunities available to the Company; | |
| • | evaluating options to monetize, partner or license the Company's assets; and | |
| • | continuing to implement cost control initiatives to conserve cash. |
Results of Operations
Comparative Results for the Three Months Ended September 30, 20182019 and 2017
Revenue for the three months ended September 30, 20182019 and 2017,2018 consisted of our cryptocurrency mining revenue of $2,343,000,$1,715,000, and $0,$2,343,000, respectively, and other revenue consisting of amortization of license payments of $24,000 in each period.
Cost of revenue for the three months ended September 30, 2019 and 2018 of $1,476,000 and $2,032,000, respectively, consisted primarily of direct production costs of the mining operations, including rent and utilities, but excluding depreciation and amortization which are separately stated. ThereDuring November 2018 the lease for our Oklahoma City, Oklahoma mining facility was no cost of revenue recognized during the period ended September 30, 2017.amended whereby monthly base rent was reduced and monthly electricity usage was charged at actual usage.
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Selling, general and administrative expenses in the three months ended September 30, 20182019 totaled $5,970,000,$1,762,000, which is approximately $5,374,000,$4,208,000, or a 900% increase,70.5% decrease, as compared to $597,000$5,970,000 in the 2017 period, when only limited operations were occurring. Stock2018 period. Stock-based compensation increaseddecreased by approximately $1,547,000$1,754,000 for the three months ended September 30, 20182019, as compared to the 20172018 period. Consulting fees increased bydecreased approximately $1,036,000$1,000,000 for services related to our cryptocurrency machines. Investor, public relations and publicminers. Public company expenses increased by approximately $149,000 related to expanded public company activities in the 2018 period. Legal fees increased approximately $1,345,000, due to legal matters associated with the increased level of regulatory matters, litigation and general corporate activities, in the 2018 period. Selling, general and administrative expenses increased by approximately $898,000 in$403,000 for the three months ended September 30, 2019, compared to $222,000 in comparable expenses for the 2018 period primarily related to consulting fees for improvements to the Company’s internal control procedures. Legal fees decreased approximately $1,336,000 due to legal matters associated primarily to expenses incurred by subsidiaries acquired or formed subsequent to September 30, 2017.
Depreciation and amortization expense totaled $658,000 inexpenses during the three months ended September 30, 20182019 totaled $23,000, which is a decrease of approximately $635,000, as compared to $18,000 inwith $658,000 during the 2017 period, an increase of $640,000.three months ended September 30, 2018. The increase wasdecrease is primarily due to, lower depreciation expenses recognized for our cryptocurrency machines, which is a result of $29,238,000 impairment charges recorded during the depreciation associated withyear ended December 31, 2018.
Impairment charges for digital currencies totaled $372,000 and $164,000 for the assets acquired afterthree months ended September 30, 2017, for the cryptocurrency mining operations.
Interest expense for the three months ended September 30, 2019 and 2018 decreasedwas $2,000 and $22,000, respectively.
Other income was $35,000 for the three months ended September 30, 2019, which was due to approximately $22,000 compared to approximately $4,773,000 ina gain on forgiveness of accounts payable. There was no other income recognized for the 2017 period. three months ended September 30, 2018.
For the three months ended September 30, 2019 and 2018, the Company recorded a loss of $266,000 related to the computed value of the modification of the BMSS deferred purchase price which was recorded as a loss on extinguishment of debt. For the three months ended September 30, 2018, the Companywe recorded investment income of approximately $6,000 and $1,000, compared to investment income of approximately $31,000 in the comparable 2017 period, generally due to a lower level of average outstanding interest-bearing debt. For the three months ended September 30, 2018, the Company recorded a gain on sale of digital currencies of approximately $218,000.
Other expenses for the three months ended September 30, 2019 and 2018 was approximately $2,000 in each period, respectively.
Comparative Results for the Nine Months Ended September 30, 2019 and 2018
Revenue for the nine months ended September 30, 2019 and 2018, consisted of cryptocurrency mining revenue of $5,564,000, and $6,087,000, respectively, and other revenue consisting of license payments of $73,000 in each period. Mining production for the nine months ended September 30, 2019, was 802.95 bitcoin, 500.11 bitcoin cash and 2,692.68 litecoin, as compared to 710.34 bitcoin, 1,496.21 bitcoin cash and 471.53 litecoin, mined during the nine months ended September 30, 2018.
Cost of revenue for the nine months ended September 30, 2019 and 2018 of $1,800 represents$4,535,000 and $3,933,000, respectively, consisted primarily of direct production costs of the mining operations, including rent and utilities, but excluding depreciation and amortization which are separately stated. The approximate $602,000 increase related primarily to the Oklahoma City mining facility not commencing operations until February 2018, net of base rent reductions and monthly electricity usage being charged at actual usage following the November 2018 Lease amendment.
Selling, general and administrative expenses in the nine months ended September 30, 2019 totaled $7,140,000, which is approximately $9,174,000, or a 56.2% decrease, as compared to $16,314,000 in the 2018 period. Stock-based compensation decreased by approximately $4,141,000 for the nine months ended September 30, 2019, as compared to the 2018 period. Consulting fees decreased approximately $2,343,000 for services related to our miners. Investor, public relations and public company expenses reduced to $699,000 for the nine months ended September 30, 2019 compared to $1,272,000 in comparable expenses for the 2018 period. Legal fees decreased by approximately $1,289,000 due to legal matters associated primarily with the fees for the class action and derivative suits and special SEC related matters being higher in the 2018 period. Audit fees increased approximately $155,000 due to the increased level of financial activities and the audit of internal controls over financial reporting for the year ended December 31, 2018, which were primarily incurred in the 2019 period. Compensation related expense decreased by approximately $463,000 due primarily to staff reductions in early 2019, net of severance costs in the period ended September 30, 2019.
Depreciation and amortization expenses during the nine months ended September 30, 2019 totaled $70,000, which is a decrease of approximately $5,615,000, as compared with $5,685,000 during the nine months ended September 30, 2018. The decrease is primarily due to, lower depreciation expenses recognized for our cryptocurrency machines, which is a result of $29,238,000 impairment charges recorded during the year ended December 31, 2018.
There were no asset impairment charges recorded during the nine months ended September 30, 2019. Asset impairment charges of $26,858,000 were recognized for the nine months ended September 30, 2018 to record our miners at their fair value.
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There were $372,000 of impairment charges for digital currencies for the nine months ended September 30, 2019, compared to $3,375,000 for the nine months ended September 30, 2018.
During the nine months ended September 30, 2019, we recognized losses related to the issuance of our Senior Secured Convertible Notes (the “Notes”) of $6,155,000. We also recognized expenses totaling $6,765,000 to revalue the Notes and the related warrant liability to fair value at September 30, 2019.
During the nine months ended September 30, 2019, we recorded a gain of $1,139,000 on the deconsolidation of Tess, due to our reduced ownership interest from 50.2% to 9%.
Interest expense for the nine months ended September 30, 2019 and 2018 was $119,000 and $38,000, respectively.
Other income was $843,000 for the nine months ended September 30, 2019, due to a $390,000 gain on forgiveness of our payable and interest in connection with our agreement with BMSS, and a $453,000 gain on forgiveness of various accounts payable balances. There was no other income recognized for the nine months ended September 30, 2018.
For the nine months ended September 30, 2019 and 2018, we recorded investment income of approximately $26,000 and $70,000, respectively.
During the nine months ended September 30, 2018 we recorded $1,358,000 for the penalty accrual related to our registration rights agreement associated with our December 19, 2017 private placement. The agreement provided that the Company register our securities by the effectiveness date of March 5, 2018. The registration rights were not registered by the effectiveness date and the Company recognized a contingency.
Liquidity and Capital Resources
At September 30, 20182019, we had working capital of approximately $16,520,000, which included cash and 2017.
Funding our operations on a go-forward basis will rely significantly on our ability to continue to mine digital currency and the spot or market price of the digital currency we mine. We expect to generate ongoing revenues from the production of digital currencies, in our mining facilities and our ability to liquidate digital currency rewards at future values will be evaluated from time to time to generate cash for operations. Generating bitcoin currency rewards, for example, which exceed our production and overhead costs will determine our ability to report profit margins related to such mining operations, although accounting for our reported profitability is significantly complex. Furthermore, regardless of our ability to generate revenue from the sale of our digital currency assets, we will need to raise additional capital in the form of equity or debt to fund our operations and pursue our business strategy.
The time and costs to advance development of the RiotX exchange are expected to grow as and if the exchange’s operations grow and expansion into additional states is pursued. Such costs include expenses for additional development, current and additional service providers, insurance and bonding requirements, sales and marketing activities to support the launch and general overhead and associated with our December 19, 2017 private placement. The agreement providedinformation technology (“IT”) costs. Such costs could be significant and there is no assurance that the Company register our securities by the effectiveness date of March 5, 2018. The registration rights were not registered by the effectiveness dateRiotX exchange will be launched and, the Company recognized a contingency.
We expect to continue to incur losses from operations for the near-term and these losses could be significant as we incur costs and expenses associated with recent and potential future acquisitions and development of the RiotX exchange platform, as well as public company, legal and administrative-relatedadministrative related expenses being incurred. We are closely monitoring our cash balances, cash needs and expense levels.
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The ability to raise funds as equity, debt or conversion of September 30,digital currency to maintain our operations is subject to many risks and uncertainties and, even if we were successful, future equity issuances would result in dilution to our existing stockholders and any future debt or debt securities may contain covenants that limit our operations or ability to enter into certain transactions. Our ability to realize revenue through bitcoin production and successfully convert bitcoin into cash or fund overhead with bitcoin is subject to a number of risks, including regulatory, financial and business risks, many of which are beyond our control. Additionally, the value of bitcoin currency rewards has been extremely volatile recently and, although and such volatility has reduced recently, future prices cannot be predicted with any reasonable degree of accuracy.
During 2018, the Company had approximate balanceswas named a defendant in several lawsuits seeking class action status, and other lawsuits as more fully described in Part II – Item 1. Legal Proceedings, of cash and cash equivalents of $1,607,000, a working capital deficit of $1,178,000, total stockholders’ equity of $16,532,000 and an accumulated deficit of $185,796,000. To date,this report. In addition, the Company has received comments, inquiries and subpoenas from regulatory bodies, including NASDAQ and the SEC, which are costly and time consuming to respond to. While the Company maintains policies of insurance, such policies may not cover all of the costs or expenses associated with responding to such matters or any liability or settlement associated with any lawsuits and are subject to significant deductible or retention amounts.
If we are unable to generate sufficient revenue from our bitcoin production when needed or secure additional sources of funding, or if certain contingent liabilities become due and are not adequately covered by our insurance policies, it may be necessary to significantly reduce our current rate of spending or explore other strategic alternatives.
Operating Activities
Net cash used in large part relied on debt and equity financing to fund its operations. As ofoperating activities was $12,933,000 during the nine months ended September 30, 2018,2019. Cash was consumed from continuing operations by the Company has been closely monitoring its cash and cash equivalents and has reduced its operating expenses, as needed,loss of $16,863,000, less non-cash items of $12,781,000, consisting of a loss on the issuance of our convertible notes of $6,155,000, the change in order to continue to execute the Company’s strategy. Management believes that the Company will require additional capital to meet its obligations arising from normal business operations for the next twelve months. Without additional capital, the Company’s ability to continue to operate as a going concern will be limited. If unable to obtain adequate capital, the Company could be forced to reduce or cease its operations. The Company is currently pursuing capital transactions in the formfair value of debt and equity; however, management cannot provide any assurance that we will be successful in its plans.
Net cash used in operating activities was $15,965,000, consisting of $15,986,000$15,896,000 from continuing operations and $69,000 from discontinued operations during the nine months ended September 30, 2018. Cash was consumed from continuing operations by the loss of $47,526,000, less non-cash items of $36,560,000 consisting of an asset impairment for the Company’s miners of $26,858,000, impairment of our digital currencies of $3,143,000,$3,375,000, depreciation and amortization totaling $5,686,000, stock-based compensation totaling $4,147,000, and other non-cash charges totaling $92,000, net of deferred income tax benefit of $3,375,000$3,525,000, realized gain on sale of digital currencies of $451,000 and amortization of license fee revenue totaling $73,000, stock issued for the extinguishment of the BMSS payable of $266,000 and common stock issued for services totaling $278,000. Prepaid contracts increased $1,585,000 due to the advance consulting payment made to Ingenium, for future services associated with the set-up of the new mining facility and its operations and other services, digital currencies increased $6,087,000, accounts payable and accrued expenses increased $4,255,000 related to the significant expansion of the Company’s operating activities in 2018, offset by a slight decrease in prepaid and other current assets.
Investing Activities
Net cash consumedprovided by operatinginvesting activities was $3,164,000, consisting of $2,234,000 from continuing operations and $930,000 from discontinued operations during the nine months ended September 30, 2017. Cash2019 was consumed from continuing operations by the loss of $7,404,000, less non-cash items of $5,113,000 in non-cash items$3,161,000, consisting of proceeds from the sale of digital currencies of $3,196,000, offset by $27,000 for the amortization of debt discount to interestpatent costs, and $8,000 for the purchase of $4,750,000, stock-based compensation totaling $380,000, depreciation and amortization totaling $56,000, net of amortization of license fees totaling $73,000. Decreases in prepaid and other current assets of $192,000 provided cash, primarily related to reductions in operating activities. There was a net $135,000 decrease in accounts payable and accrued expenses in the nine months ended September 30, 2017, primarily due to reductions in operating activities and the payment of 2016 litigation settlement accrual in early 2017.
Net cash used in investing activities during the nine months ended September 30, 2018 was $26,860,000 primarily consisting of purchases of digital currencies of $5,723,000, purchases of property and equipment of $20,311,000 related to the Company’s cryptocurrency miners, an additional investment in Coinsquare of $6,413,000, security deposits of $703,000, purchases of patent and trademark application costs of $33,000, an investment in Logical Brokerage of $517,000 and a purchase of developed technology of $531,000, offset by proceeds from the sale of digital currencies of $7,371,000.
Financing Activities
Net cash inflows from investingprovided by financing activities provided cash of $4,497,000, consisting of $4,493,000 from continuing operations and a cash inflow of $4,000 from discontinued operationswas $24,709,000 during the nine months ended September 30, 2017. Sales2019, which consisted of marketable securities investments totaling approximately $7,507,000 provided cash. Cashnet proceeds from the issuance of our common stock in connection with our ATM Offering of $22,659,000, the proceeds received from the issuance of our Notes and Warrants of $3,000,000, was used inoffset by the Coinsquare investment. A $14,000 userepayment of cash was attributablethe principal balance related to additional costs incurred from patent filings. our agreement with BMSS of $950,000, net of the $390,000 gain recorded on extinguishment of the BMSS balance.
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Net cash provided by financing activities was $2,780,000 during the nine months ended September 30, 2018, primarily consisting of $1,696,000 of proceeds from a convertible demand note issued by 1172767,Tess, $350,000 from the exercise of warrants, $506,000 from the sale of the Company’s shares of common stock held by 1172767,Tess, $220,000 from the sale of common shares by 1172767,Tess, $79,000 from the exercise of stock options and $64,000 from a refund of previously escrowed dividend, offset by $136,000 used in scheduled payments under debt agreements.
Critical Accounting Policies and Significant Judgments and Estimates
Our critical accounting policies and significant estimates are detailed in our 20172018 Annual Report. Our critical accounting policies and significant estimates have not changed from those previously disclosed in our 20172018 Annual Report, except for those accounting subjects mentioned in the section of the notes to the condensed interim consolidated financial statements titled Adoption of RecentRecently Issued and Adopted Accounting Pronouncements.
Recently issued and adopted accounting pronouncements
:The Company has evaluated all recently issued accounting pronouncements and believes such pronouncements do not have a material effect on the Company's financial statements. See Note 23 of the condensed interim consolidated financial statements at September 30, 2018.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for a smaller reporting company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of ourmaintain disclosure controls and procedures (as such term is defined in RulesRule 13a-15(e) and 15d-15(e)of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act)Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and that information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer) as appropriate, to allow timely decisions regarding required disclosures. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as ofQuarterly Report, the end of such period, ourCompany's disclosure controls and procedures were not effective due to provide reasonable assurance that information required to be disclosed by usmaterial weaknesses in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time frames specified in the SEC's rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Management is reasonably likely to materially affect, the Company's internal control over financial reporting.
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | ||
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and | ||
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
A control system of controls, no matter how well conceiveddesigned and operated, cancannot provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system,are met, and no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within oura company have been detected. These inherent limitations include the realities that judgments in decision-makingTherefore, even those systems determined to be effective can be faultyprovide only reasonable assurance with respect to financial statement preparation and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projectionspresentation. Also, projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time,the risk that controls may become inadequate because of changes in conditions or deterioration inthat the degree of compliance with the policies or procedures may deteriorate.
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Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2019. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on our assessment, as of September 30, 2019, we concluded that our internal control over financial reporting are not effective due to the following material weaknesses identified:
| 1) | We did not implement or properly maintain control activities at either the entity or activity level that were designed or were operating effectively to identify and address (i) all significant risks that could have a material adverse impact on the Company’s ongoing operations and (ii) all likely sources that could result in a material misstatement to the financial statements. |
| 2) | We did not design or maintain effective general IT controls over certain information systems that are relevant to the mitigation of the risk pertaining to the misappropriation of assets and to the preparation of the consolidated financial statements. Specifically, we did not design and implement: |
| a. | User access controls to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to the appropriate Company personnel; |
| b. | Program change management controls for certain financially relevant systems to ensure that IT program and data changes affecting the Company’s (i) financial IT applications, (ii) digital currency mining equipment, (iii) digital currency hardware wallets, and (iv) underlying accounting records, are identified, tested, authorized and implemented appropriately; and |
| c. | Physical security controls to ensure that the (i) digital currency hardware wallets, (ii) digital currency hardware wallet master seed phrases, (iii) digital currency hardware wallet pin codes, and (iv) the digital currency mining equipment were safeguarded, monitored, validated, and restorable, both physically and electronically. |
Remediation
Our management has been implementing and procedures.continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) creating and filling an information technology compliance oversight function; (ii) developing a training program addressing Information Technology General Controls (“ITGC”) and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to user access and change-management over information technology systems impacting financial reporting; (iii) developing and maintaining documentation underlying ITGCs to enhance control knowledge across the entire IT organization; (iv) developing enhanced risk assessment procedures and controls related to changes in information technology systems; (v) implementing an information technology management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes; and (vi) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Company’s Board of Directors.
We believe that these actions will remediate the material weaknesses. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and our management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Disclosure under this Item is incorporated by reference to the disclosure provided in this report under Part I, Item 1., Financial Statements in Note 12.,14, commitments and contingencies.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors set forth below, there are no material changes fromdiscussed under the risk factors previously disclosedheading “Risk Factors” included in Part I, – Item 1A – “Risk Factors” of our Annual Report on Form 10-K as amended on Form 10-K/A, for the year ended December 31, 2017,2018, as well as in Part II – Other Information – Item 1A – “Risk Factors” of our Quarterly Reportsamended by Amendment No. 1 on Form 10-Q for the periods ended March 31, 2018 and June 30, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Other than those previously disclosed by the Company issued 19,533 shares of common stock uponin its current reports on Form 8-K as filed with the exercise of employee stock options.
Item 3. Defaults Upon Senior Securities
N/A - none
Item 4. Mine Safety Disclosures
N/A - none
Item 5. Other Information
N/A - none
Item 6. Exhibits
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 2 to its quarterly reportQuarterly Report on Form 10-Q/A10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the cityCity of Castle Rock, Colorado on March 6,November 12, 2019.
Riot Blockchain, Inc. (Registrant) | |
| Dated: | /s/ Jeffrey G. McGonegal |
Jeffrey G. McGonegal Chief Executive Officer |
and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer) |
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