UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
☐TRANSITION REPORT PURSUANT TOUNDER 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 | ||
( | ||
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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitionsdefinition of "large“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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 the 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 November 13, 20176, 2020 was 8,321,137.50,927,171.
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, | 5 | ||||||
Condensed Interim Consolidated Statements of Operations for the Three and Nine Months Ended September 30, | 6 | ||||||
Condensed Interim Consolidated | 7 | ||||||
Condensed Interim Consolidated Statements of Cash Flows for the Nine Months Ended September 30, | 9 | ||||||
Notes to the Condensed Interim Consolidated Financial Statements | 10 | ||||||
Item 2. | 20 | ||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 25 | |||||
Item 4. | Controls and Procedures | 25 | |||||
PART II | |||||||
Item 1. | Legal Proceedings | 27 | |||||
Item 1A. | Risk Factors | 27 | |||||
Item | 27 | ||||||
Item 3.Defaults Upon Senior Securities | 27 | ||||||
Item 4.Mine Safety Disclosures | 27 | ||||||
Item 5.Other Information | 27 | ||||||
Item 6.Exhibits | 27 | ||||||
Signatures | 29 | ||||||
2
RIOT BLOCKCHAIN, INC.
As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “we,” “us,” “our,” the “Company,” the “Registrant,” “Riot Blockchain, Inc.,” and “Riot” mean Riot Blockchain, Inc. and its consolidated subsidiaries, unless otherwise indicated.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report, including in Management's Discussion and Analysis of Financial Condition and Results of Operations, contains certain statements that are, forward-looking statementsor may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “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 financial performance and involve knowninclude statements regarding expectations, beliefs, plans, intentions and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievementsstrategies of the Company or its industry to be materially different from those expressed or implied by any forward-looking statements.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. Please seeThese forward-looking statements are made based on management's expectations and beliefs concerning future events affecting the "Risk Factors" in Part II, Item 1ACompany 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. We make certain assumptions when making forward-looking statements, any of which could prove inaccurate, including assumptions about our future operating results and business plans. Therefore, we can give no assurance that the results implied by these forward-looking statements will be realized. Furthermore, the inclusion of forward-looking information should not be regarded as a representation by the Company or any other person that future events, plans or expectations contemplated by the Company will be achieved. Accordingly, you should not place undue reliance on Form 10-Qthese 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:
•
our history of operating losses and our ability to achieve or sustain profitability;
•
our shift to a new business and our ability to succeed in this new business;
•
our recent transition to a co-location arrangement for operating our miners;
•
intense competition;
•
general economic conditions in the U.S. and globally;
•
our ability to maintain the value and reputation of our brand;
•
our ability to attract and retain senior management and other qualified personnel;
•
cryptocurrency-related risks, including regulatory changes or actions and uncertainty regarding acceptance and/or widespread use of virtual currency;
•
risks relating to our virtual currency mining operations, including among others, risks associated with the need for significant electrical power, cybersecurity risks and risk of increased world-wide competition for a fixed number of bitcoin reward levels;
•
our dependence in large part upon the value of virtual currencies, especially bitcoin, which have historically been subject to significant volatility in their market prices;
•
our ability to protect our intellectual property rights;
•
volatility in the trading price of our common stock;
•
our ability to maintain the Nasdaq listing of our common stock;
•
our investments in other virtual currency and blockchain focused companies may not be realizable;
•
our expectation regarding the impact of a novel strain of coronavirus (“COVID-19”);
•
our strategic decision to concentrate on and make capital investments in cryptocurrency mining; and
•
legal proceedings and/or regulatory action to which we are subject, or associated with, including actions by private plaintiffs and the U.S. Securities and Exchange Commission (“SEC”), for which we may face significant potential liability that may not be adequately covered by insurance or indemnity.
For a further list and description of the various risks, factors and uncertainties that could cause future results to differ materially from those express or implied in our forward-looking statements, see Part II, Item 1A. “Risk Factors” included in this Quarterly Report and Part I, Item 1A of the Company's1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 for2019, as amended (the “2019 Annual Report”), and any subsequent reports on Form 10-Q and Form 8-K, and other filings we make with the SEC.
Accordingly, you should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. Additional 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 discussionmaterial adverse effect on our business, financial condition, results of certain important factors that relate tooperations and cash flows. The forward-looking statements contained in this report. AlthoughQuarterly Report speak only as of the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Unlessdate 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.
PART I — FINANCIAL INFORMATION
Item 1. Condensed Interim Consolidated Financial Statements
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
September 30, 2020 | December 31, 2019 | |||||||
ASSETS | (Unaudited) | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 30,086 | $ | 7,440 | ||||
Prepaid expenses and other current assets | 1,516 | 1,349 | ||||||
Cryptocurrencies | 8,987 | 3,839 | ||||||
Total current assets | 40,589 | 12,628 | ||||||
Property and equipment, net | 8,568 | 5,051 | ||||||
Right of use assets | - | 367 | ||||||
Deposits on equipment | 12,803 | 1,449 | ||||||
Long-term investments | 310 | 9,723 | ||||||
Security deposits | - | 703 | ||||||
Patents, net | 361 | 459 | ||||||
Total assets | $ | 62,631 | $ | 30,380 | ||||
| ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 780 | $ | 717 | ||||
Accrued expenses | 383 | 2,187 | ||||||
Operating lease liability, current portion | - | 368 | ||||||
Deferred revenue, current portion | 97 | 97 | ||||||
Total current liabilities | 1,260 | 3,369 | ||||||
| ||||||||
Deferred revenue, less current portion | 703 | 776 | ||||||
Total liabilities | 1,963 | 4,145 | ||||||
| ||||||||
Commitments and contingencies - Note 10 | ||||||||
| ||||||||
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, 2020 and December 31, 2019 | - | - | ||||||
0% Series B Convertible stock, 1,750,001 shares authorized; 4,199 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively, liquidation preference over common stock, equal to carrying value | 22 | 22 | ||||||
Common stock, no par value; 170,000,000 shares authorized; 48,922,790 and 25,082,872 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 294,475 | 243,458 | ||||||
Accumulated deficit | (233,822 | ) | (217,238 | ) | ||||
Total Riot Blockchain stockholders' equity | 60,675 | 26,242 | ||||||
Non-controlling interest | (7 | ) | (7 | ) | ||||
Total stockholders' equity | 60,668 | 26,235 | ||||||
Total liabilities and stockholders' equity | $ | 62,631 | $ | 30,380 | ||||
September 30, 2017 | December 31, 2016 | |||||||
| (Unaudited) | (Reclassified) | |||||||
| ASSETS | ||||||||
| Current assets (Note 1): | ||||||||
| Cash and cash equivalents | $ | 13,139,722 | $ | 5,529,848 | ||||
| Short-term investments | - | 7,506,761 | ||||||
| Prepaid expenses and other current assets | 295,059 | 219,991 | ||||||
| Current assets of discontinued operations (Note 9) | 11,532 | 486,890 | ||||||
| Total current assets | 13,446,313 | 13,743,490 | ||||||
| Property and equipment, net (Note 3) | 4,113 | 5,538 | ||||||
| Investment in Coinsquare (Note 2) | 3,000,000 | - | ||||||
| Other long term assets, net (Note 4) | 899,319 | 938,038 | ||||||
| Noncurrent assets of discontinued operations (Note 9) | - | 2,353,749 | ||||||
| Total assets | $ | 17,349,745 | $ | 17,040,815 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 248,820 | $ | 253,817 | ||||
| Accrued compensation | 4,659 | 1,520 | ||||||
| Accrued expenses | 122,990 | 304,675 | ||||||
| Notes and other obligations, current portion (Note 5) | 215,712 | 139,611 | ||||||
| Deferred revenue, current portion (Note 8) | 96,698 | 96,698 | ||||||
| Current liabilities of discontinued operations (Note 9) | 202,080 | 258,819 | ||||||
| Total current liabilities | 890,959 | 1,055,140 | ||||||
| Deferred revenue, less current portion (Note 8) | 992,792 | 1,065,316 | ||||||
| Total liabilities | 1,883,751 | 2,120,456 | ||||||
| Commitments and contingencies (Notes 6, 8 and 10) | ||||||||
| Stockholders' equity (Notes 6 and 7): | ||||||||
| Preferred Stock, no par value, 15,000,000 (2017) and 0 (2016) shares authorized; 2,000,000 (2017) and 0 (2016) shares designated as 2% Series A Convertible Stock, 19,194.72 shares issued and outstanding (2017) | 4,798,671 | - | ||||||
| Common stock, no par value, 170,000,000 (2017) and 60,000,000 (2016) shares authorized; shares issued and outstanding 5,447,792 (2017) and 4,503,971 (2016) | 131,490,219 | 124,775,635 | ||||||
| Accumulated deficit | (120,822,896 | ) | (109,855,276 | ) | ||||
| Total stockholders’ equity | 15,465,994 | 14,920,359 | ||||||
| Total liabilities and stockholders' equity | $ | 17,349,745 | $ | 17,040,815 | ||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Operations
(in thousands, except for share and Nine Months Ended September 30,per share amounts)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue: | ||||||||||||||||
Revenue, net - cryptocurrency mining | $ | 2,437 | $ | 1,715 | $ | 6,717 | $ | 5,564 | ||||||||
License fees | 25 | 25 | 73 | 73 | ||||||||||||
Total Revenue | 2,462 | 1,740 | 6,790 | 5,637 | ||||||||||||
| ||||||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of revenues (exclusive of depreciation and amortization shown below) | 1,302 | 1,476 | 4,149 | 4,535 | ||||||||||||
Selling, general and administrative | 2,000 | 1,762 | 7,964 | 7,140 | ||||||||||||
Depreciation and amortization | 1,267 | 24 | 2,761 | 71 | ||||||||||||
Impairment of long-term investment | - | - | 9,413 | - | ||||||||||||
Impairment of cryptocurrencies | - | 372 | 989 | 372 | ||||||||||||
Total costs and expenses | 4,569 | 3,634 | 25,276 | 12,118 | ||||||||||||
Operating loss | (2,107 | ) | (1,894 | ) | (18,486 | ) | (6,481 | ) | ||||||||
| ||||||||||||||||
Other income (expense): | ||||||||||||||||
Loss on issuance of convertible notes, common stock and warrants | - | - | - | (6,155 | ) | |||||||||||
Change in fair value of warrant liability | - | - | - | (2,870 | ) | |||||||||||
Change in fair value of convertible notes | - | - | - | (3,895 | ) | |||||||||||
Reversal of registration rights penalty | - | - | 1,358 | - | ||||||||||||
Gain on deconsolidation of Tess | - | - | - | 1,139 | ||||||||||||
Gain (loss) on sale of equipment | (5 | ) | - | 31 | - | |||||||||||
Interest income | 12 | - | 27 | - | ||||||||||||
Interest expense | - | (4 | ) | - | (119 | ) | ||||||||||
Other income | (2 | ) | 40 | (5 | ) | 854 | ||||||||||
Realized gain on exchange of cryptocurrencies | 385 | 24 | 491 | 665 | ||||||||||||
Total other income (expense) | 390 | 60 | 1,902 | (10,381 | ) | |||||||||||
| ||||||||||||||||
Net loss | (1,717 | ) | (1,834 | ) | (16,584 | ) | (16,862 | ) | ||||||||
| ||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | 221 | ||||||||||||
| ||||||||||||||||
Net loss attributable to Riot Blockchain | $ | (1,717 | ) | $ | (1,834 | ) | $ | (16,584 | ) | $ | (16,641 | ) | ||||
| ||||||||||||||||
Basic and diluted net loss per share: | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.46 | ) | $ | (0.93 | ) | ||||
| ||||||||||||||||
Basic and diluted weighted average number of shares outstanding | 44,773,870 | 23,371,856 | 36,017,927 | 17,971,541 | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Other revenue – fee (Note 8) | $ | 24,175 | $ | 24,175 | $ | 72,524 | $ | 72,524 | ||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 597,018 | 1,480,141 | 2,694,211 | 3,333,102 | ||||||||||||
| Research and development | 17,658 | 52,963 | 63,008 | 498,634 | ||||||||||||
| Total operating expenses | 614,676 | 1,533,104 | 2,757,219 | 3,831,736 | ||||||||||||
| Operating loss from continuing operations | (590,501 | ) | (1,508,929 | ) | (2,684,695 | ) | (3,759,212 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Gain on property and equipment sale (Note 3) | - | 13,062 | - | 1,933,335 | ||||||||||||
| Interest expense | (4,773,397 | ) | (2,384 | ) | (4,802,296 | ) | (28,130 | ) | ||||||||
| Investment income | 30,903 | 23,639 | 83,247 | 103,031 | ||||||||||||
| Total other income (expense) | (4,742,494 | ) | 34,317 | (4,719,049 | ) | 2,008,236 | ||||||||||
| Loss from continuing operations | (5,332,995 | ) | (1,474,612 | ) | (7,403,744 | ) | (1,750,976 | ) | ||||||||
| Discontinued operations (Note 9): | ||||||||||||||||
| Income (loss) from operations | 30,922 | (236,473 | ) | (944,557 | ) | (236,473 | ) | |||||||||
| Escrow forfeiture gain (Note 6) | - | - | 134,812 | - | ||||||||||||
| Impairment (loss) | - | - | (2,754,131 | ) | - | |||||||||||
| Total income (loss) from discontinued operations | 30,922 | (236,473 | ) | (3,563,876 | ) | (236,473 | ) | |||||||||
| Net loss | $ | (5,302,073 | ) | $ | (1,711,085 | ) | $ | (10,967,620 | ) | $ | (1,987,449 | ) | ||||
| Basic and diluted net income (loss) per share (Note 1) | ||||||||||||||||
| Continuing operations | $ | (0.99 | ) | $ | (0.37 | ) | $ | (1.47 | ) | $ | (0.45 | ) | ||||
| Discontinued operations | 0.01 | (0.06 | ) | (0.71 | ) | (0.06 | ) | |||||||||
| Basic and diluted net loss per share (Note 1) | $ | (0.98 | ) | $ | (0.43 | ) | $ | (2.18 | ) | $ | (0.51 | ) | ||||
| Basic and diluted weighted average number of shares outstanding (Note 1) | 5,401,552 | 3,999,637 | 5,037,764 | 3,918,151 | ||||||||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated StatementStatements of Stockholders’ Equity
Three Months Ended September 30, 2017
2020 and 2019
(in thousands, except for share and per share amounts)
(Unaudited)
Preferred Stock | Common Stock | Accumulated | Total Riot Blockchain stockholders' | Non-controlling | Total stockholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | deficit | equity | interest | equity | |||||||||||||||||||||||||
Balance as of July 1, 2020 |
| 4,199 |
|
| $ | 22 |
|
|
| 36,559,279 |
|
| $ | 259,899 |
|
| $ | (232,105 | ) |
| $ | 27,816 |
|
| $ | (7 | ) |
| $ | 27,809 |
| |
Delivery of common stock underlying restricted stock units, net of tax withholding settlement | - | - | 93,913 | (130 | ) | - | (130 | ) | - | (130 | ) | |||||||||||||||||||||
Delivery of common stock underlying restricted stock units for consulting and advisory services | - | - | 40,634 | - | - | - | - | - | ||||||||||||||||||||||||
Issuance of common stock, net of offering costs/At-the-market offering | - | - | 12,028,964 | 33,851 | - | 33,851 | - | 33,851 | ||||||||||||||||||||||||
Issuance of common stock related to exercise of warrant | - | - | 200,000 | 388 | - | 388 | - | 388 | ||||||||||||||||||||||||
Stock-based compensation | - | - | - | 467 | - | 467 | - | 467 |
| |||||||||||||||||||||||
Net loss | - | - | - | - | (1,717 | ) | (1,717 | ) | - | (1,717 | ) | |||||||||||||||||||||
Balance as of September 30, 2020 | 4,199 | $ | 22 | 48,922,790 | $ | 294,475 | $ | (233,822 | ) | $ | 60,675 | $ | (7 | ) | $ | 60,668 |
| |||||||||||||||
Preferred Stock | Common Stock | Accumulated | Total Riot Blockchain stockholders' | Non-controlling | Total stockholders' equity | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | deficit | equity | interest | (deficit) | |||||||||||||||||||||||||
Balance as of July 1, 2019 | 4,999 | $ | 26 | 22,625,111 | $ | 238,083 | $ | (212,006 | ) | $ | 26,103 |
| $ | 35 |
| $ | 26,138 |
| ||||||||||||||
Preferred stock converted to common stock | (800 | ) | (4 | ) | 800 | 4 | - | - | - | - |
| |||||||||||||||||||||
Stock-based compensation | - | - | - | 81 | - | 81 | - | 81 |
| |||||||||||||||||||||||
Issuance of common stock, net of offering costs/At-the-market offering | - | - | 1,580,484 | 3,806 | - | 3,806 | - | 3,806 |
| |||||||||||||||||||||||
Net loss | - | - | - | - | (1,834 | ) | (1,834 | ) | - | (1,834 | ) | |||||||||||||||||||||
Balance as of September 30, 2019 | 4,199 | $ | 22 | 24,206,395 | $ | 241,974 | $ | (213,840 | ) | $ | 28,156 | $ | 35 | $ | 28,191 |
| ||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Deficit | Total | |||||||||||||||||||
| Balance, January 1, 2017 | — | $ | — | 4,503,971 | $ | 124,775,635 | $ | (109,855,276 | ) | $ | 14,920,359 | |||||||||||||
| Private placement of Common Stock (Note 6) | — | — | 900,000 | 1,913,509 | — | 1,913,509 | ||||||||||||||||||
| Common Shares in escrow forfeited and retired (Note 6) | — | — | (32,801 | ) | (134,812 | ) | — | (134,812 | ) | |||||||||||||||
| Equity rights redemption (Note 6) | — | — | — | (291,995 | ) | — | (291,995 | ) | ||||||||||||||||
| Discount on Convertible Debt arising from values of (Note 6): | ||||||||||||||||||||||||
| Warrants | — | — | — | 2,325,151 | — | 2,325,151 | ||||||||||||||||||
| Beneficial conversion feature | — | — | — | 2,424,849 | — | 2,424,849 | ||||||||||||||||||
| Preferred Stock issued upon Notes payable conversion (Note 6) | 19,194.72 | 4,798,671 | — | — | — | 4,798,671 | ||||||||||||||||||
| Exercise of stock options | — | — | 34,000 | 98,260 | — | 98,260 | ||||||||||||||||||
| Stock-based compensation issued for services | — | — | 42,622 | 379,622 | — | 379,622 | ||||||||||||||||||
| Net loss for the period | — | — | — | — | (10,967,620 | ) | (10,967,620 | ) | ||||||||||||||||
| Balance, September 30, 2017 | 19,194.72 | $ | 4,798,671 | 5,447,792 | $ | 131,490,219 | $ | (120,822,896 | ) | $ | 15,465,994 | |||||||||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
Nine Months Ended September 30,
2020 and 2019
(in thousands, except for share and per share amounts)
(Unaudited)
Preferred Stock | Common Stock | Accumulated | Total Riot Blockchain stockholders' | Non-controlling | Total stockholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | deficit | equity | interest | equity | |||||||||||||||||||||||||
Balance as of January 1, 2020 | 4,199 | $ | 22 | 25,082,872 | $ | 243,458 | $ | (217,238 | ) | $ | 26,242 | $ | (7 | ) | $ | 26,235 |
| |||||||||||||||
Issuance of common stock to settle executive compensation | - | - | 122,377 | 175 | - | 175 | - | 175 |
| |||||||||||||||||||||||
Delivery of common stock underlying restricted stock units to settle executive compensation | - | - | 5,000 | - | - | - | - | - | ||||||||||||||||||||||||
Delivery of common stock underlying restricted stock units, net of tax withholding settlement | - | - | 1,461,812 | (352 | ) | - | (352 | ) | - | (352 | ) | |||||||||||||||||||||
Delivery of common stock underlying restricted stock units for consulting and advisory services | - | - | 40,634 | - | - | - | - | - | ||||||||||||||||||||||||
Issuance of common stock, net of offering costs/At-the-market offering | - | - | 22,210,095 | 47,958 | - | 47,958 | - | 47,958 |
| |||||||||||||||||||||||
Issuance of common stock related to exercise of warrant | - | - | 200,000 | 388 | - | 388 | - | 388 | ||||||||||||||||||||||||
Cancellation of Prive Escrow shares | - | - | (200,000 | ) | - | - | - | - | - |
| ||||||||||||||||||||||
Stock-based compensation | - | - | - | 2,848 | - | 2,848 | - | 2,848 |
| |||||||||||||||||||||||
Net loss | - | - | - | - | (16,584 | ) | (16,584 | ) | - | (16,584 | ) | |||||||||||||||||||||
Balance as of September 30, 2020 | 4,199 | $ | 22 | 48,922,790 | $ | 294,475 | $ | (233,822 | ) | $ | 60,675 | $ | (7 | ) | $ | 60,668 |
| |||||||||||||||
Preferred Stock | Common Stock | Accumulated | Total Riot Blockchain stockholders' | Non-controlling | Total stockholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | deficit | equity | interest | equity | |||||||||||||||||||||||||
Balance as of January 1, 2019 | 13,000 | $ | 69 | 14,519,058 | $ | 202,917 | $ | (197,199 | ) | $ | 5,787 |
| $ | (1,296 | ) | $ | (4,491 | ) | ||||||||||||||
Delivery of common stock underlying restricted stock units | - | - | 106,251 | - | - | - | - | - |
| |||||||||||||||||||||||
Common stock issued with convertible notes | - | - | 150,000 | 255 | - | 255 | - | 255 |
| |||||||||||||||||||||||
Common stock issued in connection with conversion of notes payable | - | - | 1,813,500 | 10,226 | - | 10,226 | - | 10,226 |
| |||||||||||||||||||||||
Reclassification of warrant liability to equity | - | - | - | 5,439 | - | 5,439 | - | 5,439 |
| |||||||||||||||||||||||
Preferred stock converted to common stock | (8,801 | ) | (47 | ) | 8,801 | 47 | - | - | - | - |
| |||||||||||||||||||||
Stock-based compensation | - | - | - | 431 | - | 431 | - | 431 |
| |||||||||||||||||||||||
Issuance of common stock, net of offering costs/At-the-market offering | - | - | 7,608,785 | 22,659 | - | 22,659 | - | 22,659 |
| |||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | (221 | ) | (221 | ) | ||||||||||||||||||||||
Deconsolidation of Tess | - | - | - | - | - | - | 1,552 | 1,552 |
| |||||||||||||||||||||||
Net loss | - | - | - | - | (16,641 | ) | (16,641 | ) | - | (16,641 | ) | |||||||||||||||||||||
Balance as of September 30, 2019 | 4,199 | $ | 22 | 24,206,395 | $ | 241,974 | $ | (213,840 | ) | $ | 28,156 | $ | 35 | $ | 28,191 |
| ||||||||||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Continuing operations: | ||||||||
| Net (loss) | $ | (10,967,620 | ) | $ | (1,987,449 | ) | ||
| (Loss) from discontinued operations | (3,563,876 | ) | (236,473 | ) | ||||
| (Loss) from continuing operations | (7,403,744 | ) | (1,750,976 | ) | ||||
| 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 for services | 379,622 | 368,459 | ||||||
| Depreciation and amortization | 55,899 | 74,098 | ||||||
| Amortization of license fees | (72,524 | ) | (72,524 | ) | ||||
| Other non-cash (credits) charges | - | 200,108 | ||||||
| Gain on sale of property and equipment | - | (1,933,335 | ) | |||||
Change in: | ||||||||
| Prepaid expenses and other current assets | 192,071 | 222,474 | ||||||
| Accounts payable | (4,997 | ) | (483,410 | ) | ||||
| Accrued compensation | 3,139 | (120,775 | ) | |||||
| Accrued expenses | (133,014 | ) | 30,042 | |||||
| Net cash (used in) operating activities of continuing operations | (2,233,548 | ) | (3,465,839 | ) | ||||
| Net cash (used in) operating activities of discontinued operations | (930,323 | ) | (375,228 | ) | ||||
| Net cash (used in) operating activities | (3,163,871 | ) | (3,841,067 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Continuing operations: | ||||||||
| Purchases of short-term investments | - | (13,818,949 | ) | |||||
| Proceeds from sales of short-term investments | 7,506,761 | 16,522,853 | ||||||
| Investment in Coinsquare | (3,000,000 | ) | - | |||||
| Proceeds from sale of property and equipment | - | 1,799,143 | ||||||
| Purchases of patent and trademark application costs | (14,255 | ) | (14,378 | ) | ||||
| Net cash provided by investing activities of continuing operations | 4,492,506 | 4,488,669 | ||||||
| Net cash provided by investing activities of discontinued operations | 4,004 | 16,673 | ||||||
| Net cash provided by investing activities | 4,496,510 | 4,505,342 | ||||||
| Cash flows from financing activities: | ||||||||
| Continuing operations: | ||||||||
| Net proceeds from issuance of convertible notes | 4,750,000 | - | ||||||
| Net proceeds from issuance of common stock, net of $336,491 in offering expenses | 1,913,509 | - | ||||||
| Net proceeds from exercise of stock options | 98,260 | - | ||||||
| Redemption of equity rights | (291,995 | ) | - | |||||
| Repayment of notes payable and other obligations | (192,539 | ) | (229,238 | ) | ||||
| Net cash provided by (used in) financing activities of continuing operations | 6,277,235 | (229,238 | ) | |||||
| Net increase in cash and cash equivalents | 7,609,874 | 435,037 | ||||||
| Cash and cash equivalents at beginning of period | 5,529,848 | 2,012,283 | ||||||
| Cash and cash equivalents at end of period | $ | 13,139,722 | $ | 2,447,320 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | 1,571 | $ | 33,331 | ||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Conversion of notes payable and accrued interest to preferred stock | $ | 4,798,671 | $ | - | ||||
| Liability payoffs upon property sale | $ | - | $ | 2,064,758 | ||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
Riot Blockchain, Inc. and Subsidiaries
Condensed Interim Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (16,584 | ) | $ | (16,862 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation | 2,848 | 431 | ||||||
Depreciation and amortization | 2,761 | 70 | ||||||
Amortization of license fee revenue | (73 | ) | (73 | ) | ||||
Amortization of right of use assets | 367 | 1,727 | ||||||
Impairment of long-term investment | 9,413 | - | ||||||
Impairment of cryptocurrencies | 989 | 372 | ||||||
Loss on issuance of convertible notes, common stock and warrants | - | 6,155 | ||||||
Change in fair value of convertible notes | - | 3,895 | ||||||
Change in fair value of warrant liability | - | 2,870 | ||||||
Gain on deconsolidation of Tess | - | (1,139 | ) | |||||
Reversal of registration rights penalty | (1,358 | ) | - | |||||
Gain on extinguishment of accounts payable, other liabilities and accrued expenses | - | (843 | ) | |||||
Realized gain on exchange of cryptocurrencies | (491 | ) | (665 | ) | ||||
Gain on sale of equipment | (31 | ) | - | |||||
Accrued interest on Verady investment | - | (20 | ) | |||||
Changes in assets and liabilities: | ||||||||
Prepaid expenses and other current assets | 536 | (756 | ) | |||||
Cryptocurrencies - mining, net of mining pool operating fees | (6,623 | ) | (5,453 | ) | ||||
Accounts payable | 63 | (1,798 | ) | |||||
Accrued expenses | (271 | ) | 882 | |||||
Lease liability | (368 | ) | (1,725 | ) | ||||
Net cash used in operating activities | (8,822 | ) | (12,932 | ) | ||||
| ||||||||
Cash flows from investing activities | ||||||||
Proceeds from sale of cryptocurrencies | 1,029 | 3,196 | ||||||
Proceeds from sale of equipment | 96 | - | ||||||
Deposits on equipment | (11,354 | ) | - | |||||
Purchases of property and equipment | (6,265 | ) | (9 | ) | ||||
Patent costs incurred | (31 | ) | (26 | ) | ||||
Net cash (used in) provided by investing activities | (16,525 | ) | 3,161 | |||||
| ||||||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of convertible notes | - | 3,000 | ||||||
Repayment of notes payable and other obligations | - | (950 | ) | |||||
Proceeds from the issuance of common stock / At-the-market offering | 49,551 | 23,611 | ||||||
Offering costs for the issuance of common stock / At-the-market offering | (1,594 | ) | (952 | ) | ||||
Proceeds from exercise of common stock warrants | 388 | - | ||||||
Repurchase of common shares to pay employee withholding taxes | (352 | ) | - | |||||
Net cash provided by financing activities | 47,993 | 24,709 | ||||||
| ||||||||
Net increase in cash and cash equivalents | 22,646 | 14,938 | ||||||
Cash and cash equivalents at beginning of period | 7,440 | 225 | ||||||
Cash and cash equivalents at end of period | $ | 30,086 | $ | 15,163 | ||||
| ||||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for taxes | $ | - | $ | - | ||||
| ||||||||
Supplemental disclosure of noncash investing and financing activities: | ||||||||
Issuance of common stock to settle previously accrued executive compensation | $ | 175 | - | |||||
Cryptocurrencies received from sale of equipment | $ | 52 | - | |||||
Conversion of notes payable to common stock | $ | - | $ | 10,226 | ||||
Reclassification of warrant liability to equity | $ | - | $ | 5,439 | ||||
Conversion of preferred stock to common stock | $ | - | $ | 47 | ||||
Common stock issued in connection with conversion of notes payable | $ | - | 255 | |||||
Cryptocurrencies used to purchase miners | $ | - | $ | 99 | ||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
9
Riot Blockchain, Inc., (f/k/ and Subsidiaries
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
Note 1. Organization
Nature of operations:
Riot Blockchain, Inc. operates a Bioptix, Inc.cryptocurrency mining operation, which utilizes specialized computers (also known as “Miners”) (the "Company," "we," or "Riot Blockchain") have been prepared in accordance withthat generate cryptocurrency (primarily bitcoin) from the instructions to quarterly reportsBlockchain. The Company was originally organized on Form 10-Q. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in financial position at September 30, 2017 and for all periods presented have been made. Certain information and footnote data necessary for fair presentation of financial position and results of operations in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted. It is therefore suggested that these consolidated financial statements be read in conjunction with the summary of significant accounting policies and notes to financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the period ended September 30, 2017 are not necessarily an indication of operating results for the full year.
Mining equipment:
The Company’s current focus is on its cryptocurrency mining operation, and during the nine months ended September 30, 2020, it completed a full network upgrade of its Miners with the objective to increase the Company’s operational efficiency and performance. The Company’s Miners are being operated pursuant to a co-location mining services agreement with Coinmint, LLC (“Coinmint”) at Coinmint’s facility in New York (the “Coinmint Facility”).
As previously disclosed the Company has recently entered into four additional purchase agreements with Bitmain for the acquisition of 16,600 model (110 TH/s) S19-Pro Antminers for an aggregate purchase price of $37.2 million, payable in installments. The Company has experienced recurring lossesexpects delivery of the first 3,500 of these new miners to occur in the fourth quarter 2020, with the remaining 13,100 miners to be delivered in monthly installments starting during the first half of 2021.
Note 2. Liquidity and negative cash flows from operations. Financial Condition
At September 30, 2017,2020, the Company had approximate balances of cash and cash equivalents of $13,140,000,$30.1 million, cryptocurrencies of $9.0 million, working capital of $12,555,000,$39.3 million, total stockholders' equity of $15,466,000$60.7 million and an accumulated deficit of $120,823,000.$233.8 million. To date, the Company has, in large part, relied on equity and debt financing to fund its operations.
As of September 30, 2020, the Company has executed purchase agreements for the purchase of Miners from Bitmain for a total of 16,600 new S19 Pro miners. The recently announced
2019 ATM Offering
As disclosed in Note 8, the Company entered into an At-The-Market Sales Agreement with H.C. Wainwright & Co., LLC (“Kairos”H.C. Wainwright”), Tess, Inc.dated May 24, 2019 (the “Sales Agreement”), (“TESS”) and goNumerical, Inc. (d/b/a “Coinsquare”) acquisitions, as well as our new name, reflect a new focus (in additionrelating to veterinary and life science oriented businessesthe sale by the Company through its sales agent, H.C. Wainwright, of up to $100.0 million in shares of the Company) being pursued by the Company. The decision to invest in companies exposed to blockchain and digital currency related risks is a strategic decision by the Company. The Company’s strategy will be to continue to pursue opportunistic investments and controlling positions in these new and emerging technologies which will continue to expose the Company to the numerous risks and volatility associated with this sector.
| December 31, 2016 | ||||||||
| Cost | Fair Value | |||||||
| Certificates of deposit / commercial paper | $ | 2,378,222 | $ | 2,373,891 | ||||
| Corporate bonds | 5,138,182 | 5,132,870 | ||||||
| Total trading securities | $ | 7,516,404 | $ | 7,506,761 | ||||
| 2017 | 2016 | |||||||
| Interest income | $ | 84,177 | $ | 101,236 | ||||
| Realized (losses) | (21 | ) | (2,893 | ) | ||||
| Unrealized gains | 11,575 | 21,501 | ||||||
| Management fee expenses | (12,484 | ) | (16,813 | ) | ||||
| Net investment income | $ | 83,247 | $ | 103,031 | ||||
The Company accounts for financial instrumentsreceived proceeds on sales of 22,210,095 shares of common stock under Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic ("ASC") 820, Fair Value Measurements. This statement defines fair value, establishesthe Sales Agreement of approximately $49.6 million (excluding commissions and expenses of $1.6 million), at a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
2020 ATM Offering
As of October 15, 2020, the Company and H.C. Wainwright entered into the first amendment to the Sales Agreement (the “First Amendment to the Sales Agreement”). Pursuant to the First Amendment to the Sales Agreement, the Company may sell, through H.C. Wainwright as its sales agent, up to $100.0 million in shares of the Company’s common stock from time to time in an at-the-market offering (the “2020 ATM Offering”). According to the First Amendment to the Sales Agreement, the Company shall pay H.C. Wainwright a commission of up to 3.0% of the aggregate gross proceeds the Company receives from all sales of its common stock in the 2020 ATM Offering.
Sales of shares of the Company’s common stock in the 2020 ATM Offering will be made pursuant to the prospectus and prospectus supplement filed with and forming a part of the discontinuedCompany’s shelf registration statement on Form S-3 (Registration No. 333-249356), filed with the SEC on October 7, 2020 and declared effective as of October 15, 2020 (the “2020 Registration Statement”).
Termination of 2019 ATM Offering
Effective as of October 15, 2020, the Company and H.C. Wainwright terminated the 2019 ATM Offering and replaced it with the 2020 ATM Offering under the terms of the First Amendment to the Sales Agreement. As of its termination, the Company had cumulatively sold 30.6 million shares of its common stock, for an aggregate gross sales price of approximately $74 million pursuant to the 2019 ATM Offering. With the termination of the 2019 ATM Offering, no additional securities will be sold by the Company pursuant to the prospectus supplement relating to the 2019 Registration Statement.
COVID-19
The COVID-19 global pandemic has been unprecedented and unpredictable and is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Based on the Company’s current assessment, however, the Company does not expect any material impact on its long-term strategic plans, its operations, or its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and industry.
The Company believes its current cash on hand is sufficient to meet its operating and capital requirements for at least the next twelve months from the date these financial statements are issued.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
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 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. Amounts are in thousands except for share, per share and miner amounts.
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, 2020 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, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 25, 2020.
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.
Significant Accounting Policies:
For a detailed discussion about the Company’s significant accounting policies, see the Company’s December 31, 2019 consolidated financial statements included in its 2019 Annual Report.
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 reported amounts of revenue and 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 recoverability of long-lived assets, impairment loss.analysis of intangibles, stock-based compensation, assumptions used in estimating the fair value of convertible notes and warrants, and the valuation allowance associated with the Company’s deferred tax assets.
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 because of related contingencies and including them would result in anti-dilution.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
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, 2020 and 2019 because their inclusion would be anti-dilutive are as follows:
September 30, | ||||||||
2020 | 2019 | |||||||
Warrants to purchase common stock | 3,354,257 | 3,574,257 | ||||||
Options to purchase common stock | 12,000 | 12,000 | ||||||
Escrow shares | - | 200,000 | ||||||
Unvested restricted stock awards | 1,217,893 | 38,917 | ||||||
Convertible Series B preferred shares | 4,199 | 4,199 | ||||||
Total | 4,588,349 | 3,829,373 | ||||||
Recently issued and adopted accounting pronouncements:
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's condensed consolidated financial statements properly reflect the change.
In May 2014,December 2019, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting StandardStandards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers2019-12, “Income Taxes (Topic 606) ("ASU 2041-09"), which supersedes nearly all existing revenue recognition guidance. The standard's core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard creates a five-step model to achieve its core principle: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction's price to the separate performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition, entities must disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative disclosures are required about: (i) the entity's contracts with customers; (ii) the significant judgments, and changes in judgments, made in applying the guidance to those contracts; and (iii) any assets recognized from the costs to obtain or fulfill a contract with a customer.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share ("EPS") with a reconciliationcalculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company is currently evaluating the impact this ASU will have on its condensed consolidated financial statements and related disclosures.
Note 4. Acquisitions - Prive share escrow status
In February 2020, the conditions were not achieved by the date specified to provide for the release of 200,000 shares of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issueCompany’s common stock, which shares were exercised or converted into common stock or resultedbeing held in the issuance of common stock that then sharedescrow in the earnings of the entity.
Note 5. Cryptocurrencies
The fair value of the warrants were determinedfollowing table presents additional information about cryptocurrencies (in thousands):
Beginning balance, January 1, 2020 | $ | 3,839 | ||
Revenue recognized from cryptocurrencies mined | 6,717 | |||
Mining pool operating fees | (94) | |||
Proceeds from sale of cryptocurrencies | (1,029 | ) | ||
Realized gain on sale/exchange of cryptocurrencies | 491 | |||
Impairment of cryptocurrencies | (989 | ) | ||
Cryptocurrencies received from sale of equipment | 52 | |||
Ending balance, September 30, 2020 | $ | 8,987 |
Riot Blockchain, Inc. and Subsidiaries
Notes to be de minimis. The Company has evaluated the guidance ASC 325-20 Investments – Other, in determining to account for the investment on the cost method since the equity securities are not marketable and do not give us significant influence over Coinsquare. As of September 30, 2017, the Company considers the fair value of the investment to approximate the cost of the investment due to the proximity of the time of the investment to period end.
(Unaudited)
Note 3.6. Property and equipment:
Property and equipment consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
| Office and computer equipment | $ | 114,309 | $ | 116,510 | ||||
| Less accumulated depreciation | 110,196 | 110,972 | ||||||
| $ | 4,113 | $ | 5,538 | |||||
September 30, 2020 | December 31, 2019 | |||||||
(Unaudited) |
| |||||||
Miners | $ | 11,135 | $ | 5,010 |
| |||
Leasehold improvements | - | 38 |
| |||||
Office and computer equipment | 83 | 103 |
| |||||
Total cost of property and equipment | 11,218 | 5,151 |
| |||||
Less accumulated depreciation | (2,650 | ) | (100 | ) | ||||
Property and equipment, net | $ | 8,568 | $ | 5,051 |
| |||
Beginning Balance (December 31, 2016) | Additions | Impairments | Ending Balance (September 30, 2017) | |||||||||||||
| Cost: | ||||||||||||||||
| Patents | $ | 1,032,982 | $ | 14,255 | $ | — | $ | 1,047,237 | ||||||||
| Goodwill | 447,951 | — | — | 447,951 | ||||||||||||
| Total | 1,480,933 | 14,255 | — | 1,495,188 | ||||||||||||
| Accumulated Amortization: | ||||||||||||||||
| Patents | (482,183 | ) | (52,974 | ) | — | (535,157 | ) | |||||||||
| Goodwill | (60,712 | ) | — | — | (60,712 | ) | ||||||||||
| Total | (542,895 | ) | (52,974 | ) | — | (595,869 | ) | |||||||||
| Net Other Long Term Assets | $ | 938,038 | $ | (38,719 | ) | $ | — | $ | 899,319 | |||||||
During the patents have been issued,three months ended September 30, 2020, the Company amortizes these costs overreceived 2,040 new next generation S19 and S19 Pro Miners from Bitmain at the shorterCoinmint Facility and the related $4.5 million prepayment recorded as a deposit was reclassified as of the legal life of the patent or its estimated economic life using the straight-line method. Based upon the current status of the above intangible assets, the aggregateSeptember 30, 2020 to property and equipment.
Depreciation and amortization expense is estimated to betotaled approximately $71,000 for each$1.3 million (including $0.1 million of the next five fiscal years. The Company tests intangible assets with finite lives for impairment upon significant changes in the Company's business environment. The testing resulted in no patent impairmentamortization) for the three months ended September 30, 2020. Depreciation and amortization expense was nominal for the three months ended September 30, 2019. Depreciation and amortization expense totaled approximately $2.8 million (including $0.1 million of patent amortization) for the nine months ended September 30, 20172020. Depreciation and $32,000 and $200,000,amortization expense was nominal for the three and nine months ended September 30, 2016, respectively. The impairment charges2019. Depreciation is computed on the straight-line basis for the periods the assets are related to the Company's ongoing analysis of which specific country patents in its portfolio are determined as potentially worth pursuing.
As of September 30, 2017 and December 31, 2016, respectively.
Agreement Date |
| Contractual Obligation |
| Deposits Paid |
| Expected Shipping | ||||
June 1, 2020 | $ | 2,293 | $ | 2,293 | Fourth Quarter 2020 | |||||
August 12, 2020 | 17,549 | 7,085 | First - Second Quarter 2021 | |||||||
August 25, 2020 | 11,187 | 3,356 | First - Second Quarter 2021 | |||||||
September 30, 2020 | 6,124 | - | Fourth Quarter 2020 | |||||||
Freight and other costs | - | 69 | ||||||||
Total | $ | 37,153 |
|
| $ | 12,803 | ||||
* Pursuant to waive the release conditions and the cash proceeds and securities were released from escrow. Subsequently, upon the successful completion of conditions specified in the offering documents, and as further described in Note 6, the notes automatically converted into shares of Series A Preferred Stock. The convertible notes accrued interest at 2% per annum commencingCompany’s agreements with their execution andBitmain, the Company recorded interest expense of $48,671 through the date of conversion, which was also exchangedis responsible for shares of preferred stock. See Note 6.
Note 7. Investments
Coinsquare
As of Nevada.
During June 2020, the Company completedbecame aware of allegations brought by the Ontario Securities Commission (the “OSC”) that Coinsquare and certain of its executives and directors engaged in systematic “wash trading” of cryptocurrencies on its Coinsquare market to manipulate the market’s trading volume during 2018 and 2019.
Subsequently, on July 21, 2020, a common stock unit financing private placement totaling $2,250,000, with certain accredited investors. The purchase price was $2.50 per unit (the “Units”). Each Unit consisted of one sharehearing panel of the Company's common stockOSC entered an order (the “Order”) approving the settlement agreement between OSC, Coinsquare, and a three-year warrantcertain of its executives and directors (the “Settlement Agreement”), in which they admitted to purchase one sharebreaches of Ontario securities laws and/or conduct contrary to the public interest including, market manipulation through reporting inflated trading volumes on its Coinsquare Market, misleading its clients and investors about these trading volumes, and taking reprisal against an internal whistleblower who brought this conduct to the attention of the Company's common stock at an exercise price of $3.50 per share.named executives and directors. The fair valueOrder requires certain oversight and governance procedures and to prohibit the named executives and directors from engaging in certain activities with respect to Coinsquare; additionally, the named executives and directors were required to resign from Coinsquare and Coinsquare and the named executives and directors were required to pay penalties and costs totaling approximately CAD 2.2 million.
Accordingly, the Company determined there were indicators that would cause a 100% impairment of the 900,000 warrantsCoinsquare investment and observed price changes, which was estimated to be approximately $2,114,000, using the Black-Scholes option-pricing model using the assumptionsrecorded as of a three year term, expected price volatility of 114%, dividend yield of 0% and a risk free interest rate of 1.66%.June 30, 2020. The Company sold 900,000 units consistingtherefore recorded an impairment expense of an aggregate$9.4 million for its investment in Coinsquare during the nine months ended September 30, 2020, as reflected in the accompanying unaudited condensed interim consolidated statements of 900,000 shares of common stock and 900,000 warrants, of which 400,000 units for $1,000,000 were released tooperations.
During the respective parties in March 2017, and the balance of 500,000 units for $1,250,000 were released in May 2017. The offering net of $336,491 of offering expenses, resulted in proceeds of $1,913,509 recorded as additional equity.
13
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
Verady
The Series A Preferred Stock are convertible into shares of common stock based on a conversion calculation equal to the stated value ($250.00 per share) of such shares of Series A Preferred Stock,investment in Verady, Inc. (“Verady”) is valued at cost, less any impairment, plus all accrued and unpaid dividends, if any, on such shares of Series A Preferred Stock, divided by the conversion price of $2.50, subject to adjustments. The shares of Series A Preferred Stock are subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. Shares of capital stock of the Company shall be junior in rank to all shares of Series A Preferred Stock with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding-up of the Company. Each holder of shares of Series A Preferred Stock shall be entitled to receive dividends, which dividends shall be paid by the Company out of funds legally available therefor, payable, subject to the conditions and other terms hereof, in shares of common stock or cash on the stated value of such shares of Series A Preferred Stock at the dividend rate of two percent (2%) per annum, which shall be cumulative and shall continue to accrue and compound monthly whether or not declared. Holders of shares of Series A Preferred Stock, shall be entitled to vote on any proposals voted on by the common shareholders.
Tess
As of September 30, 2017, 42,622 restricted common2020, and December 31, 2019, the fair value of the TessPay Inc. shares had vested and been issued. See owned by the Company is approximately $0.1 million, calculated based upon the April 10, 2019 funding price.
Note 7.
At-the-Market Equity Offering:
During the nine months ended September 30, 2017,2020, the Company received proceeds under the Sales Agreement of approximately $49.6 million (excluding commissions and expenses of $1.6 million), at a weighted average price of $2.23 per share, from sales of 22,210,095 shares of its common stock sold pursuant to the 2019 ATM Offering. The Company paid H.C. Wainwright a commission of 3.0% of the aggregate gross proceeds the Company received from all sales of the Company's common stock under the Sales Agreement.
As previously disclosed, effective as of October 15, 2020, the Company entered into the First Amendment to the Sales Agreement with H.C. Wainwright relating to the Company’s 2020 ATM Offering. Pursuant to the 2020 ATM Offering, the Company may sell, through H.C. Wainwright as its sales agent, up to $100.0 million in shares of the Company’s common stock from time to time on an agreement betweenat-the-market basis pursuant to the prospectus and prospectus supplement filed with and forming a part of the 2020 Registration Statement. According to the terms of the First Amendment to the Sales Agreement, the Company pays H.C. Wainwright a commission of up to 3.0% of the aggregate gross proceeds the Company receives from sales of shares of its common stock in the 2020 ATM Offering.
As part of the First Amendment to the Sales Agreement, the Company and oneH.C. Wainwright agreed to terminate the 2019 ATM Offering and replace it with the 2020 ATM Offering. Accordingly, effective as of October 15, 2020, the selling shareholders from the Company’s 2016 acquisition of BDI, rights to 32,801 common shares held in escrow on behalf of the selling shareholder were waived by the shareholder2019 ATM Offering was terminated and returnedno additional sales may be made pursuant to the Company where they were cancelled. Under the agreement each party mutually released each other from any and all claims that might relate to or arise from the acquisition of BDI. As a result of this cancellation, $134,812, which was the estimated fair market value of the 32,801 common shares, based upon $4.11 per share, was recorded as a gain in the BDI discontinued operations and a reduction in common stock.
Common Stock:
During the nine months ended September 30, 2017,2020, the Company negotiated and executed agreements with holders200,000 shares of common stock rights (stock options and restricted shares) to have such holders waive their rights to the stock rightsheld in exchange for a one time cash payment. The majority of the holders had previously terminated from the Company or the agreements were made as part of separation agreements upon the individuals’ termination from the Company. Under the agreements, a total of 532,911 rights were forfeited, consisting of; 494,578 stock optionsescrow under the Company's 2002 StockEscrow Deposit Agreement were voided and cancelled. See Note 4.
During the nine months ended September 30, 2020, 122,377 shares of common stock were issued to a Company executive under an employment agreement in settlement of $175,000 of previously accrued compensation under the Company’s 2019 Riot Blockchain, Inc. Equity Incentive Plan (the “2002“Equity Plan”), 37,500 non-qualified optionsand 5,000 shares of common stock were issued outsidein settlement of fully vested restricted stock rights previously granted and previously expensed under the Company’s 2017 Equity Incentive Plan.
During the nine months ended September 30, 2020, 1,638,467 shares of common stock were issued to members of the 2002 PlanCompany’s board of directors, officers and 833employees of the Company in settlement of an equal number of fully vested restricted common shares. The total considerationstock units awarded to such individuals by the Company pursuant to grants made under the agreements was $299,500. For financial reporting purposes the amounts paid to each holder was compared to theCompany’s Equity Plan. The Company withheld 176,655 of these shares at a fair value of approximately $0.35 million, to cover the stock rights forfeited using a Black-Scholes valuation andwithholding taxes related to the extentsettlement of these restricted stock units.
During the amount paid exceeded the value of the stock rights forfeited, the payment amount was charged to stock-based compensation. For purposes of the Black-Scholes valuation,nine months ended September 30, 2020, the Company assumedissued 40,634 shares of its common stock to a dividend yieldconsultant and advisors in settlement of 0%, expected price volatilityfully vested restricted stock units granted under its Equity Plan.
On August 20, 2020, the Company issued 200,000 shares of 49%its common stock related to 99% risk free interest ratesthe exercise of 0.8% to 2.3%200,000 common stock warrants for cash of approximately $0.4 million or $1.94 per share.
Note 9. Stock Options, Warrants and expected terms based upon the remaining lives of the instruments. Of the total amount paid, $291,995 was charged to stockholders’ equity and $7,505 was charged to compensation expense.
Stock based compensation:
The Company recognized total expenses forCompany’s stock-based compensation expenses recognized during the three and nine months ended September 30, 20172020 and 20162019, were attributable to selling, general and administrative expenses, which are included in the accompanying unaudited condensed interim consolidated statements of operations,operations.
The Company recognized total stock-based compensation expense during the three and nine months ended September 30, 2020 and 2019, granted under the Equity Plan, from the following categories:categories (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Restricted stock awards under the Plan | $ | 467 | $ | 81 | $ | 2,848 | $ | 373 | ||||||||
Stock option awards under the Plan | - | - | - | 58 | ||||||||||||
Total stock-based compensation | $ | 467 | $ | 81 | $ | 2,848 | $ | 431 | ||||||||
14
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Restricted stock awards under the Plan | $ | 100,396 | $ | — | $ | 188,572 | $ | — | ||||||||
| Stock option awards under the Plan | 8,172 | 137,367 | 103,430 | 361,639 | ||||||||||||
| Non-qualified stock option awards | — | 6,820 | 87,620 | 6,820 | ||||||||||||
| Total stock-based compensation | $ | 108,568 | $ | 144,187 | $ | 379,622 | $ | 368,459 | ||||||||
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
Restricted common stock awards:
A summary of the Company’s unvested restricted common stock awards activity in the nine months ended September 30, 20172020 is presented here:
Number of Shares | Weighted Average Grant-Date Fair Value | ||||||||
Unvested at January 1, 2020 | 1,524,499 | $ | 1.37 |
| |||||
Vested | (1,850,965) | $ | 1.36 |
| |||||
Granted | 1,544,359 | $ | 1.27 |
| |||||
Unvested at September 30, 2020 | 1,217,893 | $ | 1.27 |
| |||||
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Unvested at January 1, 2017 | - | $ | - | |||||
| Granted | 422,000 | 3.69 | ||||||
| Vested | (42,622 | ) | 3.20 | |||||
| Forfeited | (40,000 | ) | 3.13 | |||||
| Unvested at September 30, 2017 | 339,378 | $ | 3.75 | |||||
On February 7, 2020, the Company granted 402,000issued 122,377 shares of common stock under a February 2019 employment agreement as disclosed above, and 5,000 vested restricted sharesstock units to members ofthe Company’s Chief Executive Officer pursuant to the Equity Plan.
On February 7, 2020, in relation to its Board of Directorsamended and 20,000 restricted shares to an officer. Upon the separation of two Directors, 40,000 restricted shares were subsequently forfeited, including 833 restricted shares that were re-acquired byrestated employment agreement with its Chief Executive Officer and Chief Financial Officer, the Company awarded 209,790 restricted common stock units, which vest in 4 equal quarterly installments, with each quarterly installment vesting as part of the equity rights terminations (see Note 6). end of each quarter pursuant to the Equity Plan.
On February 27, 2020, for 2020 services the Company awarded 1,212,192 restricted common stock units vesting over a one-year period to directors and certain employees of the Company issued pursuant to the Equity Plan.
The weighted-average grant datetotal fair value of restricted sharesstock rights granted during the nine months ended September 30, 20172020 was $3.69 per shareapproximately $2.0 million. The fair value of each restricted stock right was based upon the shareclosing stock price as ofon the date of grant. grant date.
The total fair value of restricted stock granted, net of forfeitures, during the nine months ended September 30, 2017 was approximately $1,431,000, including approximately $136,000 which vested in the period.
Stock incentive plan options:
As of September 30, 2020, 12,000 stock options were outstanding under the Company's 2017 Equity Incentive Plan, (the "Plan"),with a weighted average exercise price of $4.09, and a weighted average remaining contractual term of approximately 3.0 years. The stock options are 100% vested with non-qualified options and0 intrinsic value.
Other common stock purchase warrants:
Following is a summary of outstanding warrants that were issued outside of the Plan. During August 2017, the Company's shareholders approved the Plan including reservation of 895,000 shares of common stock under the Plan. The Company estimates the fair value of the share-based awards on the date of grant using the Black-Scholes option-pricing model (the "Black-Scholes model"). Using the Black-Scholes model, the value of the award that is ultimately expected to vest is recognized over the requisite service period in the statement of operations. Option forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company attributes compensation to expense using the straight-line single option method for all options granted.
| 2017 | 2016 | |||||||
| Dividend yield | 0 | % | 0 | % | ||||
| Expected price volatility | 101 | % | 99-100 | % | ||||
| Risk free interest rate | 1.92 | % | 1.20 | % | ||||
| Expected term | 5 years | 5 years | ||||||
Shares Underlying Options/Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2020 | 3,574,257 | $ | 19.48 |
| 2.9 |
| $ | - |
| |||||||
Exercised | (200,000 | ) | $ | 1.94 | - | |||||||||||
Forfeited | (20,000) | $ | 3.50 |
| - |
|
| |||||||||
Outstanding at September 30, 2020 | 3,554,257 | $ | 20.62 |
| 2.1 |
| $ | 1,298,189 |
| |||||||
|
|
|
| |||||||||||||
Exercisable at September 30, 2020 | 3,554,257 | $ | 20.62 |
| 2.1 |
| $ | 1,298,189 |
| |||||||
Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2017 | 566,747 | $ | 20.46 | |||||||||||||
| Granted | 20,000 | 4.02 | ||||||||||||||
| Exercised | (34,000 | ) | 2.89 | |||||||||||||
| Forfeited | (495,414 | ) | 22.98 | |||||||||||||
| Outstanding at September 30, 2017 | 57,333 | $ | 3.32 | 9.1 | $ | 105,700 | ||||||||||
| Exercisable at September 30, 2017 | 27,500 | $ | 3.07 | 8.8 | $ | 57,500 | ||||||||||
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company'sCompany’s closing stock price on September 30, 20172020 and the exercise price, multiplied by the number of in-the-money options)warrants) that would have been received by the optionwarrant holders, had all optionwarrant holders been able to, and in fact had, exercised their optionswarrants on September 30, 2017.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
Note 10. Commitments and Contingencies
Commitments:
Coinmint Co-location Mining Services Agreement
On April 8, 2020, the Company entered into an agreement with Coinmint, (the “Coinmint Agreement”), pursuant to which Coinmint agreed to provide up to approximately 9.5 MW of power and to perform all maintenance necessary to operate Riot’s miners at the Coinmint facility. In exchange, Coinmint is reimbursed for direct production expenses and receives a performance fee based on the net cryptocurrencies generated by Riot’s miners deployed at the Coinmint facility. The initial term of the Coinmint Agreement was six months with automatic renewals for subsequent three (3) month terms until and unless terminated as provided in the agreement.
The Company determined the agreement with Coinmint does not meet the definition of a lease in accordance with Accounting Standards Codification (“ASC”) 842, Leases.
Oklahoma Lease Agreement
On January 8, 2020, Kairos entered into a third amendment to the OKC Lease to extend the lease term through May 15, 2020, with all other terms remaining substantially the same as the second amendment to the OKC Lease.
On April 10, 2020, Kairos entered into a fourth amendment to the OKC Lease to extend the lease term through June 30, 2020, with all other terms remaining substantially unchanged. During the ninethree months ended June 30, 2020, the Company relocated its miners to the Coinmint facility and vacated the OKC facility. As of June 30, 2020, the Company has a refundable lease deposit of approximately $0.7 million related to its OKC Lease which is included as prepaid expenses and other current assets on the accompanying condensed consolidated balance sheet. The OKC Lease terminated by its terms effective as of June 30, 2020, and the Company received a full refund of its deposit, less applicable electricity charges on July 2, 2020.
Corporate Lease Agreement
On April 9, 2018, the Company entered into a commercial lease agreement (the “Florida Lease”) with W-Crocker Fin Place Owner VII, LLC, a Delaware limited liability company, pursuant to which the Company leased approximately 1,700 rentable square feet of office and common area space in Fort Lauderdale, Florida. Pursuant to the terms of the Florida Lease, the initial term was for thirty-nine (39) months expiring on August 9, 2021, with one, five-year option to renew, and the initial base rent was $4,659 per month (or $2.75 per sq. ft. per month) which escalated at the rate of 3.0% per annum. Additionally, common operating expenses were prorated and charged monthly as additional rent.
During May 2020, an agreement was reached to terminate the Florida Lease, and the Company expensed the termination payments for the Florida Lease.
Operating Leases
At September 30, 2020, the Company did not have any significant operating lease liabilities or right of use assets.
The following summarizes quantitative information about the Company’s operating leases (dollars in thousands):
Lease cost | Nine Months Ended September 30, 2020 | |||
Operating lease cost | $ | 1,240 | ||
Variable lease cost | 1,040 | |||
Operating lease expense | 2,280 | |||
Short-term lease rent expense | 9 | |||
Total rent expense | $ | 2,289 | ||
| ||||
Other information | ||||
Operating cash flows from operating leases | $ | 1,207 | ||
Right of use assets exchanged for new operating lease liabilities | $ | - | ||
Weighted-average remaining lease term – operating leases | - | |||
Weighted-average discount rate – operating leases | 0 | % | ||
Rent expense including electric power costs, recorded on a straight-line basis, was approximately $0 million and $1.3 million for the three months ended September 30, 2017, 20,000 options were issued to2020 and 2019, respectively. Rent expense including electric power costs, recorded on a director under the Plan, exercisable at $4.02 per share with a grant date fair value of $3.04 per share. The options expire ten years from the date of grant and vest monthly in arrears, over a 24 month period.
| Nonvested Shares | Nonvested Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Grant Date Fair Value | |||||||||
| Nonvested at January 1, 2017 | 97,738 | $ | 3.51 | $ | 2.58 | |||||||
| Granted | 20,000 | 4.02 | 3.04 | |||||||||
| Vested | (30,905 | ) | 4.92 | 3.57 | ||||||||
| Forfeited | (57,000 | ) | 2.92 | 2.16 | ||||||||
| Nonvested at September 30, 2017 | 29,833 | $ | 3.54 | $ | 2.67 | |||||||
Riot Blockchain, Inc. and $6,820, respectively, relatedSubsidiaries
Notes to stock-based compensation.
(Unaudited)
Contingencies:
The Company, and its subsidiaries, are subject at times to various claims, lawsuits and governmental proceedings relating to the Company’s business and transactions arising in the ordinary course of outstanding optionsbusiness. The Company cannot predict the final outcome of such proceedings. Where appropriate, the Company vigorously defends such claims, lawsuits and warrantsproceedings. Some of these claims, lawsuits and proceedings seek damages, including, consequential, exemplary or punitive damages, in amounts that were issued outsidecould, if awarded, be significant. Certain of the Plan for the nine months ended September 30, 2017:
Shares Underlying Options / Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2017 | 527,003 | $ | 13.36 | |||||||||||||
| Granted | 2,800,000 | 3.54 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | (169,074 | ) | 18.62 | |||||||||||||
| Outstanding at September 30, 2017 | 3,157,929 | $ | 4.37 | 2.3 | $ | 4,534,000 | ||||||||||
| Exercisable at September 30, 2017 | 3,157,929 | $ | 4.37 | 2.3 | $ | 4,534,000 | ||||||||||
Shareholder Class Action Suit
On February 17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company's animal health assets, (c)stockholders in the Licensee's discretion uponUnited 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 changeputative class of stockholders 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 controlpress 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.
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., 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. On November 6, 2018, the court in the Takata action issued an order consolidating Takata with Klapper into a single putative class action. The court also appointed Dr. Golovac as Lead Plaintiff and Motely Rice as Lead Counsel of the consolidated class action.
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.
On April 30, 2020, the court granted the motions to dismiss, which resulted in the dismissal of all claims without prejudice. On June 1, 2020, Lead Plaintiff filed a motion for leave to file another amended complaint. The motion for leave to amend has been fully briefed and is pending before the court. If the court grants Lead Plaintiff leave to amend, defendants intend to continue to vigorously contest Lead Plaintiff’s amended allegations. Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
Shareholder Derivative Cases
On April 5, 2018, Michael Jackson filed a shareholder derivative complaint on behalf of the Company (d)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., Case No. 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 unspecified monetary damages and corporate governance changes. At the last preliminary conference, the court adjourned the conference until January 14, 2021 in lieu of staying the action. Defendants do not anticipate any other activity on this case until the next preliminary conference.
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 v. O'Rourke, et al., Case No. A-18-774890-B & Gaft v. O'Rourke, et al., Case No. 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 material breach of fiduciary duty. The complaints seek unspecific monetary damages and corporate governance changes.
On September 24, 2018, the Licensecourt entered an order consolidating the Gaft and Kish actions, which is now styled as In 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.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
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.
On October 22, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Southern District of New 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 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. Upon the parties' stipulation, the court issued an order temporarily staying 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.
On December 13, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Northern District of New York (Monts v. O'Rourke, et al., Case No. 1:18-cv-01443). The shareholder plaintiffs allege claims for violation of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, unjust enrichment, waste of corporate assets, and aiding and abetting 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. Upon the parties' stipulation, the court issued an order temporarily staying 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.
Defendants intend to vigorously contest plaintiffs’ allegations in the shareholder derivative actions and plaintiffs’ right to bring the action in the name of Riot Blockchain. But because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
Indemnification Demands
On April 3, 2020, a complaint was filed against Riot Blockchain, Inc. (“Riot”) by Barry C. Honig and GRQ Consultants, Inc. (“GRQ”) in the United States District Court for the Southern District of New York, Honig v. Riot Blockchain, Inc., Case No. 20-cv-02808-NRB. Mr. Honig and GRQ allege that Riot has failed to indemnify them pursuant to terms of the Securities Purchase Agreement (“SPA”) and Registration Rights Agreement (“RRA”), both dated March 16, 2017. Mr. Honig and GRQ allege declaratory judgment and breach of contract claims, seeking fees and expenses they incurred in connection with litigation and a SEC investigation involving Riot. On July 9, 2020, Riot filed a motion to dismiss both of the claims, which has been fully briefed. The court heard oral argument on the motion on October 29, 2020.
In addition to the suit filed by Mr. Honig and GRQ, other purported parties and beneficiaries of the SPA and RRA have also recently demanded indemnification from Riot related to the same litigation and SEC investigation. Riot believes that it does not owe an indemnification obligation to Mr. Honig, GRQ, or the other purported parties and beneficiaries of the SPA and RRA that have made an indemnification demand. Riot intends to vigorously contest Mr. Honig and GRQ claims, as well as the other demands for indemnification. Nevertheless, since this litigation and demands for indemnification are still in an early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
Kashwise Demand
On February 18, 2020, the Company received a demand letter from Kashwise Global Funding, Inc. (“Kashwise”) for the payment of fees pursuant to an alleged arrangement between the Company and Kashwise in connection with the January 2019 private exempt offering of the Company’s securities to a group of accredited investors (the “Kashwise Demand”). The Company timely responded to the Kashwise Demand; however, on April 13, 2020, Kashwise Global Funding Solutions, Inc. filed suit against the Company in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida (the “Kashwise Suit”) alleging substantially similar claims as in the Kashwise Demand. The Company has removed the Kashwise Suit to Federal District Court in and for the Southern District of Florida where it remains pending with a scheduled trial date (if not delayed by the COVID-19) pandemic in June of 2021. The Company or (e)continues to vigorously dispute the allegations made in the Licensee's discretion, ifKashwise Suit and the parties are in the midst of the formal discovery period. However, because this litigation is still in an early stage, the Company becomes insolvent. The License Agreement is also terminable bycannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
SEC Subpoena and Other Matters
SEC Subpoena
On April 9, 2018, the Company if there isreceived a material breachsubpoena from the SEC, requesting documents and information. The Company fully cooperated with the SEC in that investigation. On January 29, 2020, the SEC notified the Company that it had concluded its investigation as to Riot, and based on the information the SEC had as of the License Agreement by the Licensee, or if the Licensee challenges the Company's ownership of designated intellectual property. The License Agreement includes a sublicensedate of the technology licensedletter, it did not intend to recommend an enforcement action against Riot.
Beneficial Ownership
Pursuant to the rules of the 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 Section 13(d)(3) of the Securities and Exchange Act of 1934 (the “Exchange Act”) who is known to the Company by WU. Underto be the termsbeneficial owner of more than 5% of the WU License Agreement, a portion of license fees and royalties theCompany’s common stock. The Company receives from sublicensing agreements will be paid to WU. The obligation for such license fees due to WU is included in accrued expenses at September 30, 2017.
| Category | Totals | |||
| License fees and milestone amounts paid / achieved | $ | 1,920,000 | ||
| Third party obligations recorded, including WU | (363,700 | ) | ||
| Deferred revenue balance | 1,556,300 | |||
| Revenue amortization to September 30, 2017 | (466,810 | ) | ||
| Net deferred revenue balance at September 30, 2017 | $ | 1,089,490 | ||
Riot Blockchain, Inc. and the issuance represented approximately 14% of the Company’s then outstanding common stock at the closing. The Purchase Agreement contained customary representations and warranties of the parties, including BDI, and the Sellers have customary indemnification obligationsSubsidiaries
Notes to the Company relating to BDI, which are subject to certain limitations described further in the Purchase Agreement. The issuance of the SharesCondensed Interim Consolidated Financial Statements
(Unaudited)
On September 7, 2018, a complaint was effected as a private placement of securities. The Company also entered into a registration rights agreement with the Sellers.
| Cash and cash equivalents | $ | 17,000 | ||
| Accounts receivable | 21,000 | |||
| Inventory | 379,000 | |||
| Prepaid and other assets | 51,000 | |||
| Equipment | 1,000 | |||
| Identifiable intangible assets: | ||||
| Trademarks (5 year estimated useful life) | 99,000 | |||
| Customer base (6 year estimated useful life) | 37,000 | |||
| Developed technology (4 year estimated useful life) | 1,864,000 | |||
| Total identifiable intangible assets | 2,000,000 | |||
| Goodwill | 430,000 | |||
| Accounts payable | (118,000 | ) | ||
| Accrued and other liabilities | (175,000 | ) | ||
| Non-controlling interest | (29,000 | ) | ||
| Purchase price | $ | 2,577,000 |
| Trademarks | $ | 99,000 | ||
| Customer base | 37,000 | |||
| Developed technology | 1,864,000 | |||
| Total | 2,000,000 | |||
| Less accumulated amortization | (148,264 | ) | ||
| Balance at December 31, 2016 | $ | 1,851,736 |
| September 30, 2017 | December 31, 2016 | |||||||
| Current assets: | ||||||||
| Accounts receivable | $ | 8,000 | $ | 5,000 | ||||
| Inventories | - | 416,000 | ||||||
| Prepaid expenses | 4,000 | 66,000 | ||||||
| Total current assets | $ | 12,000 | $ | 487,000 | ||||
| Equipment and furnishings, net | $ | - | $ | 36,000 | ||||
| Intangible assets, net | - | 2,281,000 | ||||||
| Deposit | - | 37,000 | ||||||
| Total noncurrent assets | $ | - | $ | 2,354,000 | ||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 37,000 | $ | 174,000 | ||||
| Accrued expenses | 28,000 | 85,000 | ||||||
| Deferred revenue | 137,000 | - | ||||||
| Total current liabilities | $ | 202,000 | $ | 259,000 | ||||
| Three Months | Nine Months | |||||||
| Sales | $ | 7,000 | $ | 37,000 | ||||
| Cost of sales | 2,000 | 6,000 | ||||||
| Gross margin | 5,000 | 31,000 | ||||||
| Operating expenses (credit) | (26,000 | ) | 975,000 | |||||
| Operating income (loss) | 31,000 | (944,000 | ) | |||||
| Escrow forfeiture gain | - | 135,000 | ||||||
| Impairment (loss) | - | (2,754,000 | ) | |||||
| Income (loss) from discontinued operations | $ | 31,000 | $ | (3,563,000 | ) | |||
On March 9, 2020, the U.S. District Court for the Southern District of New York entered final consent judgments against Mr. O’Rourke as well as other individuals and entities, some of whom were previously disclosed by the Company as beneficial owners. This settlement order followed a prior bifurcated settlement on an as converted basis. The cash dividend totaled approximately $9,562,000July 10, 2019, with a record daterespect to other subjects of the close of business on October 13, 2017SEC’s complaint. Without admitting or denying the SEC’s allegations, the defendants agreed to pay disgorgement, prejudgment interest and payment date of October 18, 2017.
Registration Rights Penalty
During that period 620,000 warrants were exercised for cash, as described below. Any such warrant holder who exercises such warrants for cash at the reduced price shall not be entitled to the benefit of any cashless exercise feature on such exercised warrants for cash. The fair value of the temporary modification of the exercise price will be recorded as an additional expense and a credit to capital in the fourth quarter of 2017. The fair value will be computed based upon the 620,000 warrants actually exercised times the increase in value of the warrants immediately before and immediately after the reduction in exercise price.
On January 5, 2018, pursuant to December 2017 Registration Rights Agreements, the Company filed a registration statement within three monthson Form S-3 to register the resaleshares underlying the Units.
Subsequently, in April 2018, the Company received a subpoena from the SEC as part of 25,000an investigation, requesting documents and information. In July 2018, the SEC issued an Order Directing Examination and Designating Officers Pursuant to Section 8(e) of the Securities Act with respect to certain of the Company’s registration statements, including the registration statement on Form S-3 it filed pursuant to the December 2017 Registration Rights Agreements. On October 12, 2018, the Company filed for withdrawal of this registration statement on Form S-3, as well as other of its registration statements. On October 22, 2018, the Company was notified by SEC staff that the SEC had terminated the Section 8(e) examination with respect to the above-referenced registration statements. On January 29, 2020, the SEC notified the Company that it had concluded its investigation as to Riot, and based on the information the SEC had as of the date of the letter, it did not intend to recommend an enforcement action against Riot.
Following the conclusion of the SEC’s activities as described above, the Company has evaluated its performance of its obligations under the December 2017 Registration Rights Agreements and has determined that it substantially complied with its requirements, and that its ultimate inability to cause the registration of the shares (of 75,000 shares)underlying the Units as required by the December 2017 Registration Rights Agreements was due to actions taken by the SEC. The Company has therefore determined to reverse the accrual pursuant to ASC 450-20 related to the December 2017 Registration Rights Agreements for its condensed consolidated financial statements as of Common Stock issuedJune 30, 2020.
Note 11. Subsequent Events:
Financing
Subsequent to TESS. September 30, 2020, in connection with the Company’s Sales Agreement with H.C. Wainwright, the Company received gross proceeds of approximately $8.1 million from the sale of 2.0 million shares of common stock via the 2020 ATM Offering sold pursuant to the prospectus relating to the 2020 Registration Statement (Registration No. 333-249356).
ATM Sales Agreement
As disclosed under Note 2, Liquidity and Financial Resources, effective as of October 20, 2017 TESS has net tangible assets of approximately $10,000 and the Company expects that the purchase price will be allocated to intangible assets including in-process research and development and goodwill.
Delivery of Miners
Subsequent to September 30, 2020, the sharesCompany received and deployed at the Coinmint facility 1,003 next generation S19 Pro Miners purchased from Bitmain.
Sale of common stock issued and outstanding asCryptocurrencies
Subsequent to September 30, 2020, the Company sold 100 bitcoins generating total cash proceeds of the date of the Agreement, subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the common stock that occur after the date of the Agreement.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and basisanalysis 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 presentation:
Overview
The Company’s current focus is on its cryptocurrency mining operation, and during the nine months ended September 30, 2020, it completed a full network upgrade of its Miners with the objective to increase the Company’s operational efficiency and performance.
In December 2019, Riot procured 4,000 model S17 Pro Miners from Bitmain, which were fully deployed at its former Oklahoma City, Oklahoma mining facility (the “OKC Facility”), increasing Riot’s overall hash rate capacity to approximately 240 Ph/s in the first quarter of 2020. During the second quarter of 2020, Riot purchased 1,040 model S19 Miners and 2,000 model S19 Pro Miners from Bitmain. 2,040 of the new miners were received and deployed during the third quarter of 2020 and the remainder during the fourth quarter of 2020, resulting in an estimated aggregate hash rate capacity of approximately 566 Ph/s, representing a 460% increase over the Company’s 2019 hash rate capacity.
The Company has experienced recurring lossesrecently entered into three additional purchase agreements with Bitmain for the acquisition of 15,600 model S19 Pro (110 Th/s) Miners for an aggregate purchase price of $34.9 million, payable in installments as described in the agreements as disclosed. The Company expects delivery of the first 2,500 of these new S19 Pro Miners to occur in December 2020, with the remaining 13,100 S19 Pro Miners to be delivered in monthly installments during the first half of 2021.
With the full deployment of these 15,600 additional S19 Pro Miners, Riot’s total fleet will comprise 22,640 total Miners that have substantially greater hash rate capacities and negative cash flowsuse electric power more efficiently than the model S9 Miners Riot previously operated. Combined with the previously disclosed purchases of Miners from operations. At September 30, 2017,Bitmain, the Company had approximate balancesnow expects to achieve a total hash rate capacity of cash2.3 Eh/s by June 2021, with 22,640 total Miners deployed, representing a 2,176% increase over the Company’s 2019 hash rate capacity.
After evaluating the power costs and cash equivalents of $13,140,000, working capital of $12,555,000, total stockholders' equity of $15,466,000 and an accumulated deficit of $120,823,000. To date,the environmental operating issues at the OKC Facility, the Company hasmade the strategic decision to exit the OKC Facility and relocate its Miners to the Coinmint Facility. During the second quarter of 2020, Riot relocated its mining operations to the Coinmint Facility for a number of benefits, the largest of which was to reduce overhead and take advantage of the more competitive electricity costs in large part reliedthe New York ISO market.
Strategic Opportunities
The Company engaged XMS Capital Partners (“XMS”) to assist with evaluating strategic growth opportunities. XMS is an independent global financial services firm with expertise in M&A and strategic advisory. The Company engaged XMS to help with navigating the dynamic bitcoin landscape and advise the Company on equity financing to fund itspotential strategic transactions in bitcoin mining related operations. The Company expectsdoes not have a defined timeline for any transaction and cannot provide any assurance whether or when a transaction may be announced or consummated.
COVID-19
The COVID-19 global pandemic has been unpredictable and unprecedented and is likely to continue to incur losses fromresult in significant national and global economic disruption, which may adversely affect our business. Based on the Company’s current assessment, however, the Company does not expect any material impact on its long-term development, its operations, or its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and industry.
Summary of Mining Results
The following table presents additional information about our cryptocurrency mining activities in coins and amounts ($ in thousands) at January 1, 2020 and September 30, 2020:
Quantities (in coins) | Cryptocurrencies | |||||||||||||||
BTC | LTC | BCH | Amounts | |||||||||||||
Balance at January 1, 2020 | 514 | 3,449 | 1 | $ | 3,839 |
| ||||||||||
Revenue recognized from cryptocurrencies mined | 730 | 21 | - | 6,717 |
| |||||||||||
Mining pool operating fees | - | - | - | (94 | ) | |||||||||||
Proceeds from sale of cryptocurrencies | (100 | ) | - | - | (1,029 | ) | ||||||||||
Realized gain on sale/exchange of cryptocurrencies | 26 | (3,470 | ) | - | 491 |
| ||||||||||
Impairment of cryptocurrencies | - | - | - | (989 | ) | |||||||||||
Cryptocurrencies received from sale of equipment | 5 | - | - | 52 | ||||||||||||
Balance at September 30, 2020 | 1,175 | - | 1 | $ | 8,987 |
| ||||||||||
Results of Operations Comparative Results for the near-termThree Months Ended September 30, 2020 and these losses could be2019
Revenue for the three months ended September 30, 2020 and 2019, consisted of our cryptocurrency mining revenue of $2.4 million, and $1.7 million, respectively. The change in mining revenue was due to slightly higher bitcoin values in the 2020 period, averaging $10,823 per coin as compared to $10,462 per coin in the 2019 period. Bitcoins produced in 2020 totaled 222 as compared to 157 in the 2019 period. The 2020 period production was impacted by the May 2020 halving. During the 2020 period, we were mining with the 7,040 new more powerful model S17 Pro, S19 and S19 Pro Miners acquired from Bitmain, as compared to the older model S9 Miners previously used in 2019. Other revenue consisting of license fees was not significant as we incurin either period.
Cost of revenue for the three months ended September 30, 2020 and 2019 of $1.3 million and $1.5 million, respectively, consisted primarily of direct production costs of the mining operations, including rent and expenses associated with our recentutilities, but excluding depreciation and potential future acquisitionsamortization which are separately stated. There were no significant changes in cost of revenue between the periods ended 2020 and investments, as well as public company2019. During the 2019 period, production was at the OKC Facility and the 2020 period production was at the Coinmint Facility.
Selling, general and administrative expenses during the three months ended September 30, 2020 and 2019, totaled $2.0 million and $1.8 million, respectively. Selling, general and administrative expenses consists of stock-based compensation, legal and professional fees and other personnel and related costs. During the 2020 period as compared to the 2019 period, compensation expenses decreased by $0.2 million due primarily to employee reductions, stock-based compensation increased by $0.4 million following the late 2019 approval of the new equity plan and legal fees increased by $0.3 million due primarily to higher litigation related expenses are incurredin the 2020 period net of the prior termination of the SEC investigation and winding-down BDI’s operations. The Company believes its upcoming near-term cash needs relativegeneral overhead expenses in the 2020 period were less due to less travel, the closure of the OKC facility and the discontinuance of RiotX.
Depreciation and amortization expenses during the three months ended September 30, 2020 totaled $1.3 million, which is an increase of approximately $1.2 million, as compared to the recent acquisitions will be covered by cashthree months ended September 30, 2019. The increase is primarily due to higher depreciation expenses recognized for our recently acquired inMiners.
Interest income and interest expense was nominal for the acquisitions combined withthree months ended September 30, 2020 and 2019.
During the Company’s available cash. The Company believes that its current working capital position will be sufficient to meet its estimated cash needsthree months ended September 30, 2020 we recorded a gain on exchange of cryptocurrencies of approximately $0.4 million. For the three months ended September 30, 2019 the gain on sale of cryptocurrencies was nominal.
Other income for at least a yearthe three months ended September 30, 2020 and a day from this filing. The Company is closely monitoring its cash balances, cash needs and expense levels.
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Comparative Results for the Nine Months Ended September 30, 20172020 and 2016
Revenue for the nine months ended September 30, 2017 totaled $4,802,000,2020 and 2019, consisted of our cryptocurrency mining revenue of $6.7 million, and $5.6 million, respectively. The change in mining revenue was primarily due to higher bitcoin values in the 2020 period, averaging $9,064 per coin as compared to $28,000$6,434 per coin in the 20162019 period. Bitcoins produced in 2020 totaled 730 as compared to 803 in the 2019 period. The interest expense2020 period production was also impacted by the May 2020 halving combined with the relocation to the Coinmint Facility. During the 2020 period, we commenced mining with the new model S17 Pro, S19 and S19 Pro Miners as compared to the older S9 Miners used in 2019. Other revenue consisting of license fees was not significant in either period.
Cost of revenue for the nine months ended September 30, 2020 and 2019 of $4.1 million and $4.5 million, respectively, consisted primarily of direct production costs of the mining operations, including rent and utilities, but excluding depreciation and amortization which are separately stated. There were no significant changes in cost of revenue between the periods ended 2020 and 2019. During the 2019 period, production was at the OKC Facility and the 2020 period there were certain duplicated or excess costs, including the base rent for our OKC Facility as a result of the relocation from OKC to Coinmint.
Selling, general and administrative expenses during the nine months ended September 30, 2020 totaled $8.0 million, which is approximately $0.8 million, or an 11.5% increase, as compared to $7.1 million in the 20172019 period. Stock-based compensation increased by approximately $2.4 million for the nine months ended September 30, 2020, as compared to the 2019 period. Legal fees decreased approximately $0.4 million due to additional legal matters associated with the litigation and SEC investigation matters in the 2019 period. Audit fees decreased approximately $0.3 million for the nine months ended September 30, 2020. Compensation related expense decreased by approximately $0.8 million due primarily to reduced personnel in the period ended September 30, 2020 and the compensation expense reported for Tess in the 2019 period, which in 2020 is no longer reported in our consolidated financial statements.
Depreciation and amortization expenses during the nine months ended September 30, 2020 totaled $2.8 million, which is an increase of approximately $2.7 million, as compared to the nine months ended September 30, 2019. The increase is primarily due to higher depreciation expenses recognized for our recently acquired Miners.
Impairment of long-term investments of $9.4 million recognized during the nine months ended September 30, 2020 were recorded in connection with the impairment of our investment in Coinsquare. As discussed in Note 7, Investments, to Part I of this Quarterly Report, the Company recorded this 100% impairment as a result of the OSC Order and Settlement Agreement in which Coinsquare and certain of its executives and directors admitted to violations of Ontario securities laws and conduct contrary to the public interest in connection with their operation of the Coinsquare Market.
Impairment charges for cryptocurrencies was $1.0 million for the nine months ended September 30, 2020, which was recorded to recognize an impairment of our cryptocurrencies during the period.
During the nine months ended September 30, 2020, we recognized income of approximately $1.4 million in connection with the reversal of our registration rights penalty.
During the nine months ended September 30, 2019, we recognized losses related to the accrualissuance of interest onnotes totaling $6.2 million and expenses totaling $6.8 million to revalue the March 2017 convertible note offering combined withnotes and the interestrelated warrant liability to fair value. No such expense was recognized in the period fromended September 30, 2020.
During the accretion of values allocated tonine months ended September 30, 2020 and 2019, interest income and interest expense was nominal.
During the value of the warrants and the beneficial conversion feature computed upon the release of the securities from escrow. Interest in 2016, primarily related to the mortgage loansnine months ended September 30, 2020 we recorded a gain on the building that was paid off in the first quartersale / exchange of 2016 upon the building’s sale.cryptocurrencies of approximately $0.5 million. For the nine months ended September 30, 2017,2019 the Company recorded investment income of approximately $83,000, compared to investment income of $103,000 in the 2016 period, with the difference resulting from an average lower invested balances and lower ratesgain on average investments with shorter maturities.
Other income tax benefit was recorded on the net loss for the nine months ended September 30, 2017 and 2016, as management2020 was unable to determine that it was more likely than not that such benefit would be realized.
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Liquidity and Capital Resources
At September 30, 2017,2020, we had working capital of $12,555,000,approximately $39.3 million, which included cash and cash equivalents of $13,140,000.$30.1 million. We reported a net loss of $10,968,000, consisting of a net loss from continuing operations of $7,404,000 and a net loss from discontinued operations of $3,564,000,$16.6 million, during the nine months ended September 30, 2017.2020. The net loss from continuing operations included $5,113,000$14.4 million in non-cash items consisting of amortizationthe impairment of debt discount to interestour investment in Coinsquare of $4,750,000,$9.4 million, stock-based compensation totaling $380,000,$2.8 million, impairment to our cryptocurrencies of $1.0 million, depreciation and amortization totaling $56,000,$2.8 million, and amortization of our right of use assets of $0.4 million, offset by $1.4 million for the reversal of our accrual for the registration rights penalty and $0.5 million related to the gain from the exchange of cryptocurrencies, net of amortization of license fees totaling $73,000.
As of 900,000 warrants.
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 our recent and potential future investments,acquisitions, as well as public company, legal and administrative related expenses are incurred and any possible expenses which may be incurred from final shutdown of BDI’s operations. We believe that our current working capital position will be sufficient to meet our estimated cash needs for at least a year and a day from this filing. We may pursue potential additional financing opportunities. However, there can be no assurance that we will be able to obtain sufficient additional financing on terms acceptable to us, if at all.being incurred. We are closely monitoring our cash balances, cash needs and expense levels. The accompanying financial statements do not include any adjustments to reflect
Halving
Further affecting the possible future effects onindustry, and particularly for the recoverability and classification of assets orbitcoin blockchain, the amounts and classification of liabilities that might result in our possible inability to continue ascryptocurrency reward for solving a going concern.
Revenue from Mining Operations
Funding our operations on a go-forward basis will rely significantly on our ability to continue to mine cryptocurrency and the spot or market price of the cryptocurrency we mine. We expect to generate ongoing revenues from the production of cryptocurrencies, primarily bitcoin, in our mining facilities. Our ability to liquidate bitcoin at future values will be evaluated from time to time to generate cash for operations. Generating bitcoin, 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 our cryptocurrency assets, we may need to raise additional capital in the form of equity or debt to fund our operations and pursue our business strategy.
The ability to raise funds as equity, debt or conversion of cryptocurrency 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 such volatility has recently been lower and future prices cannot be predicted.
If we are unable to generate sufficient revenue from our bitcoin production when needed or secure additional sources of funding, it may be necessary to significantly reduce our current rate of spending or explore other strategic alternatives.
Coverage for Claims
The Company has been named a defendant in a class action suit, which has recently been dismissed, but is subject to appeal by the Licensee (a) for convenience on 180 days prior written notice, (b)plaintiffs and other investor related lawsuits as more fully described in Part II – Item 1. Legal Proceedings, of this Quarterly Report. While the Licensee's discretion in the eventCompany maintains policies of a sale or other disposalinsurance, such policies may not cover all of the Company's Animal Health Assets, (c) in the Licensee's discretion upon a change in control ofcosts 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.
At-the-Market Offering
As disclosed under Note 2, Liquidity and Financial Condition, the Company (d) for a material breach of the License Agreement by us, or (e) in the Licensee's discretion, if we become insolvent. The License Agreement is also terminable by us if there is a material breach of the License Agreement by the Licensee, or if the Licensee challenges our ownership of designated intellectual property. The License Agreement includes a sublicense of the technology licensed to the Company by WU. Under the terms of the WU license agreement, a portion of license fees and royalties we receivereceived proceeds from sublicensing agreements will be paid to WU. The obligation for such license fees due to WU is included in accrued expenses at September 30, 2017.
Effective October 15, 2020, the Company entered into the First Amendment to the Sales Agreement with H.C. Wainwright, relating to the Company’s 2020 ATM Offering. Pursuant to the 2020 ATM Offering, 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 its sales agent pursuant to the First Amendment to the Sales Agreement. The Company pays H.C. Wainwright a commission of up to 3.0% of the aggregate gross proceeds the Company receives from sales of shares of its common stock under the First Amendment to the Sales Agreement.
Pursuant to the First Amendment to the Sales Agreement, the Company and Wainwright agreed, effective as of October 15, 2020, to terminate the 2019 ATM Offering. Accordingly, effective as of October 15, 2020, the 2019 ATM Offering was terminated and no additional sales may be made pursuant to the 2019 ATM Offering.
Operating Activities
Net cash used in operating activities was $8.8 million during the nine months ended September 30, 2020. Cash was consumed from continuing operations by the loss of $7,404,000,$16.6 million, less non-cash items of $5,113,000 in non-cash items$14.4 million, consisting of amortizationthe impairment of debt discount to interest of $4,750,000,our investment in Coinsquare totaling $9.4 million, stock-based compensation totaling $380,000,$2.8 million, impairment to our cryptocurrencies of $1.0 million, depreciation and amortization totaling $56,000,$2.8 million, and amortization of our right of use assets of $0.4 million, offset by, $1.4 million for the reversal of our accrual for the registration rights penalty and $0.5 million related to the gain from the exchange of cryptocurrencies, net of amortization of license fees totaling $73,000. Decreases inother immaterial items. Cryptocurrencies increased by $6.6 million and prepaid expenses and other current assets decreased $0.5 million, offset by, a decrease in our lease liability of $192,000 provided cash, primarily related to reductions in operating activities. There was$0.4 million and a net $135,000 decrease in accounts payable and accrued expenses in the nine months ended September 30, 2017, primarily due to reductionsof $0.2 million.
Net cash used in operating activities and the payment of 2016 litigation settlement accrual in early 2017.
Investing Activities
Net cash inflows fromused in investing activities provided cash of $4,497,000, consisting of $4,493,000 from continuing operations and a cash inflow of $4,000 from discontinued operations during the nine months ended September 30, 2017. Sales2020 was $16.5 million, consisting of marketable securities investments totaling approximately $7,507,000 provided cash. Cashdeposits on equipment of $3,000,000 was used in$11.4 million, purchases of property and equipment of $6.3 million, offset by proceeds received from the Coinsquare investment. A $14,000 usesale of cash was attributable to additional costs incurredcryptocurrencies of $1.0 million and proceeds received from patent filings.
Net cash inflows fromprovided by investing activities provided cash of $4,505,000, consisting of $4,489,000 from continuing operations and a cash inflow of $17,000 from discontinued operations during the nine months ended September 30, 2016. Sales2019 was $3.2 million, consisting of marketable securities investments totaling approximately $16,523,000 provided cash, net of marketable securities purchased totaling approximately $13,819,000. A $14,000 use of cash was attributable to additional costs incurredproceeds from patent filings. Thethe sale of cryptocurrencies of $3.2 million, offset by $27,000 for the land, buildingamortization of patent costs, and assets generated approximately $1,799,000 in cash. As part$8,000 for the purchase of the BDI acquisition $17,000 in cash was acquired.
Financing Activities
Net cash inflows fromprovided by financing activities provided $6,277,000 from continuing operations,was $48.0 million during the nine months ended September 30, 2017 consisting2020, which consisted of net proceeds of $4,750,000 from convertible notes payable, $2,012,000 from the saleissuance of our common stock in connection with our 2019 ATM Offering of $48.0 million and proceeds received from the exercise of common stock warrants of $0.4 million, offset by the repurchase of common stock to pay director and exerciseemployee withholding taxes of warrants and options, net of $193,000 in scheduled payments under debt agreements, and $292,000 consumed from the redemption of equity rights payments.
Net cash outflows fromprovided by financing activities consumed $229,000was $24.7 million during the nine months ended September 30, 20162019, which consisted of net proceeds from the issuance of our common stock in scheduled payments under debt agreements.
Critical Accounting Policies
Our critical accounting policies follows:
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing excess cash in highly liquid debt and equity investments of highly rated entities which are classified as trading securities. As of September 30, 2017, 100% of the investment portfolio was in cash and cash equivalents with very short-term maturities and therefore not subject to any significant interest rate fluctuations. We have no investments denominated in foreign currencies and therefore our investments are not subject to foreign currency exchange risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Securities 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 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 1934 Rule 13a-15(e))our disclosure controls and procedures as of September 30, 2020, pursuant to Rule 13a-15(b) under the last day of the period of the accompanying financial statements.Exchange Act. Based on that evaluation, theour Chief Executive Officer and Chief Financial Officer concluded that, ouras of the end of the period covered by this Quarterly Report, the Company's disclosure controls and procedures arewere not effective as of September 30, 2017.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, our principal executive and principal financial and accounting officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
•
Pertain to the maintenance of records that occurredin 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 system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2020. 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, 2020, we concluded that our internal control over financial reporting is not effective due to the following material weaknesses identified:
1)
The Company did not design and/or implement 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.
2)
The Company did not design and implement 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 to validate that data produced by its relevant IT system(s) were complete and accurate. Such data is relied on by the Company in recording amounts pertaining to revenue and cryptocurrency assets.
3)
The Company did not properly design or implement controls to ensure that data received from third parties is complete and accurate. Such data is relied on by the Company in determining amounts pertaining to revenue and cryptocurrency assets is complete and accurate.
Remediation
Our management has been implementing and 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 the above actions, once fully implemented, will remediate the material weaknesses noted above. The weaknesses 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.
Additionally, modifications to our processes pertaining to the authorized signers and access to complete electronic funds transfers from the Company’s bank accounts were made in July 2020 and August 2020. These modifications enhance segregation of duties relating to the execution and recording of cash transactions. Due to these enhancements, we believe the past reported material weakness is considered remediated as of September 30, 2020.
Changes in Internal Control over Financial Reporting
The remediations described above are the only changes in our internal control over financial reporting during the fiscal quarter to which this report relatesthree months ended September 30, 2020, that hashave materially affected, or isare reasonably likely to materially affect, the Company'sour internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Disclosure under this Item is incorporated by reference to any legal proceedings, the adverse outcome of which would,disclosure provided in our management's opinion, have a material adverse effect on our business, financial conditionthis report under Part I, Item 1., Financial Statements in Note 10, commitments and results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors discussed under the heading “Risk Factors” included in Part I, Item 1A of the risks asour 2019 Annual Report, and those disclosed below or as disclosed
Item 2. Unregistered Sales of cryptocurrencies in particular, is subject to a high degreeEquity Securities and Use of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may occur and is unpredictable. The factors include, but are not limited to:
None.
Item 3. Defaults Upon Senior Securities
N/A number of companies that provide bitcoin and/or other cryptocurrency-related services have been unable to find banks or financial institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions. We also may be unable to obtain or maintain these services for our business. The difficulty that many businesses that provide bitcoin and/or other cryptocurrency-related services have and may continue to have in finding banks and financial institutions willing to provide them services may be decreasing the usefulness of cryptocurrencies as a payment system and harming public perception of cryptocurrencies and could decrease its usefulness and harm its public perception in the future. Similarly, the usefulness of cryptocurrencies as a payment system and the public perception of cryptocurrencies could be damaged if banks or financial institutions were to close the accounts of businesses providing bitcoin and/or other cryptocurrency-related services. This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national stock and commodities exchanges, the over the counter market and the Depository Trust Company, which, if any of such entities adopts or implements similar policies, rules or regulations, could result in the inability of our investors to open or maintain stock or commodities accounts, including the ability to deposit, maintain or trade the Company’s securities. Such factors would have a material adverse effect the ability of the Company to continue as a going concern or to pursue this segment at all, which would have a material adverse effect on the business, prospects or operations of the Company and harm investors.
Item 4. Mine Safety Disclosures
N/A professionalized mining operation may be more likely to sell a higher percentage of its newly mined bitcoin rapidly if it is operating at a low profit margin—and it may partially or completely cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold more rapidly, thereby potentially reducing bitcoin prices. Lower bitcoin prices could result in further tightening of profit margins, particularly for professionalized mining operations with higher costs and more limited capital reserves, creating a network effect that may further reduce the price of bitcoin until mining operations with higher operating costs become unprofitable and remove mining power. The network effect of reduced profit margins resulting in greater sales of newly mined bitcoin could result in a reduction in the price of bitcoin that could adversely impact the Company.
Item 5. Other Information
N/A hacking occurred in July 2017 and a hacker exploited a critical flaw to drain three large wallets that had a combined total of over $31 million worth of Ethereum. If left undetected, the hacker could have been able to steal an additional $150 million. Such events would have a material adverse effect on the ability of the Company to continue as a going concern or to pursue this segment at all, which would have a material adverse effect on the business, prospects or operations of the Company and potentially the value of any cryptocurrencies the Company holds or expects to acquire for its own account.
Item 6. Exhibits
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
Riot Blockchain, Inc. (Registrant) | |
Dated: November | /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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