UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~[X]~~

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2019~~

2020

~~[_]~~

~~TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

☐TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~_________~~__________ to __________

Commission file number:001-33675

Riot Blockchain, Inc.
(Exact name of registrant as specified in its charter)

Nevada	84-1553387
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

202 6th Street, Suite 401, Castle Rock, CO 80104
(Address of principal executive offices) (Zip Code)

(303) 794-2000
(~~Registrant's~~Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ~~[X]~~☒ No ~~[_];~~

☐;

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ~~[X]~~☒ No ~~[_]~~

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	~~[_]~~ ☐	Accelerated Filer	~~[X]~~ ☒
Non-accelerated Filer	~~[_]~~ ☐	Smaller Reporting Company	~~[X]~~ ☒
Emerging growth company	~~[_]~~ ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ~~[_]~~

☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ~~[_]~~☐ No ~~[X]~~

☒

The number of shares of no par value common stock outstanding as of November ~~8, 2019~~6, 2020 was ~~24,731,215.~~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
		~~Page~~ PART I – FINANCIAL INFORMATION
~~PART I - FINANCIAL INFORMATION~~

Item 1.	Condensed Interim Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of September 30, ~~2019~~2020 (Interim and Unaudited) and December 31, ~~2018~~2019		2	5

	Condensed Interim Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 ~~and 2018~~ (Unaudited)		3	6

	Condensed Interim Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 ~~and 2018~~ (Unaudited)		4	7

	Condensed Interim Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 ~~and 2018 (unaudited)~~(Unaudited)		8	9

	Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)		10

Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations		25	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29	25

Item 4.	Controls and Procedures		29	25

PART II -– OTHER INFORMATION

Item 1.	Legal Proceedings		31	27

Item 1A.	Risk Factors		31	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31	27

Item 3.	Defaults Upon Senior Securities		31	27

Item 4.	Mine Safety Disclosures		31	27

Item 5.	Other Information		31	27

Item 6.Exhibits	~~Exhibits~~		31	27

Signatures	~~Signatures~~		32

Index

RIOT BLOCKCHAIN, INC.

~~CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS~~

~~Certain statements~~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, or may be ~~forward-looking statements~~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 performance and include statements regarding expectations, beliefs, plans, intentions and strategies of the Company. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or other comparable terminology. These forward-looking statements are made based on management's expectations and beliefs concerning future events affecting the Company as of the date of the filing of this Quarterly Report and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict and many of which are beyond management's control. 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 these forward-looking statements, as actual results, performance and achievements could differ materially from those expressed in, or implied by, these forward-looking statements due to a variety of risks, uncertainties and other factors, including, but not limited to, the following:

•

our history of operating losses and our ability to achieve or sustain profitability;

•

our ~~recent~~ shift to ~~an entirely~~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;

•

~~our ability to raise additional capital needed to finance our business;~~

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;

Index

•

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;

•

~~risks relating to our planned establishment of a virtual currency exchange, including, among others, regulatory requirements and challenges and security threats;~~

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 ~~SEC,~~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;~~indemnity.

For a further list and

description of the various risks, factors and uncertainties ~~discussed~~that could cause future results to differ materially from those express or implied in our forward-looking statements, see Part ~~II.~~II, Item 1A. “Risk Factors” included in this Quarterly Report and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, as amended (the ~~“2018~~“2019 Annual Report”), and any subsequent reports on Form 10-Q and Form 8-K, and other ~~reports filed or which will be filed by~~filings we make with the ~~Company.~~

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 material adverse effect on our business, financial condition, results of operations and cash flows. The forward-looking statements contained in this Quarterly Report speak only as of the date of filing of this Quarterly Report and, unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

Index

PART I — FINANCIAL INFORMATION

Item 1. Condensed Interim Consolidated Financial Statements (Unaudited)

Riot Blockchain, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except for share and per share amounts)

	September 30, 2019			December 31, 2018			September 30, 2020			December 31, 2019
ASSETS		(Unaudited)						(Unaudited)
Current assets
Cash and cash equivalents	$	15,162,781		$	225,390		$	30,086		$	7,440
Prepaid expenses and other current assets		2,004,237			1,378,534			1,516			1,349
Digital currencies		3,157,218			706,625
Cryptocurrencies								8,987			3,839
Total current assets		20,324,236			2,310,549			40,589			12,628
Property and equipment, net		127,581			26,269			8,568			5,051
Right of use assets		937,395			—			-			367
Intangible rights acquired		700,167			700,167
Deposits on equipment								12,803			1,449
Long-term investments		9,723,100			9,412,726			310			9,723
Security deposits		703,275			703,275			-			703
Patents, net		469,548			507,342			361			459
Convertible note and accrued interest		—			200,000
Total assets	$	32,985,302		$	13,860,328		$	62,631		$	30,380

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	815,713		$	3,829,315		$	780		$	717
Accrued expenses		1,984,775			1,516,252			383			2,187
Deferred purchase price - BMSS		—			1,200,000
Operating lease liability, current		890,904			—
Operating lease liability, current portion								-			368
Deferred revenue, current portion		96,698			96,698			97			97
Current liabilities of discontinued operations		16,340			16,340
Total current liabilities		3,804,430			6,658,605			1,260			3,369

Notes payable		—			1,696,083
Operating lease liability, less current portion		47,644			—
Deferred revenue, less current portion		799,396			871,919			703			776
Deferred income tax liability		142,709			142,709
Total liabilities		4,794,179			9,369,316			1,963			4,145

Commitments and contingencies - Note 14
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, 2019 and December 31, 2018		—			—
0% Series B Convertible stock, 1,750,001 shares authorized; 4,199 and 13,000 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively, liquidation preference over common stock, equal to carrying value		22,306			69,059
Common stock, no par value; 170,000,000 shares authorized; 24,206,395 and 14,519,058 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		241,974,307			202,917,443
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		(213,840,661	)		(197,199,197	)		(233,822	)		(217,238	)
Total Riot Blockchain stockholders' equity		28,155,952			5,787,305			60,675			26,242
Non-controlling interest		35,171			(1,296,293	)		(7	)		(7	)
Total stockholders' equity		28,191,123			4,491,012			60,668			26,235
Total liabilities and stockholders' equity	$	32,985,302		$	13,860,328		$	62,631		$	30,380

See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements

Index

Riot Blockchain, Inc. and Subsidiaries

Condensed Interim Consolidated Statements of Operations

(in thousands, except for share and 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

See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements

Index

Riot Blockchain, Inc. and Subsidiaries

Condensed Interim Consolidated Statements of Stockholders’ Equity

Three 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 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

See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements

Index

Riot Blockchain, Inc. and Subsidiaries

Condensed Interim Consolidated Statements of Stockholders’ Equity - Continued

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

See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements

Index

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

Index

Riot Blockchain, Inc. and Subsidiaries

~~Condensed Interim Consolidated Statements of Operations~~

~~(Unaudited)~~

Three Months Ended  September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Revenue:
Revenue - digital currency mining $ 1,714,991 $ 2,342,508 $ 5,563,952 $ 6,087,405
License fees 24,174 24,175 72,523 72,524
Total Revenue 1,739,165 2,366,683 5,636,475 6,159,929

Costs and expenses:
Cost of revenues  (exclusive of depreciation and
amortization shown below) 1,476,135 2,031,885 4,535,456 3,933,381
Selling, general and administrative 1,762,021 5,970,411 7,139,658 16,314,023
Depreciation and amortization 23,414 658,338 70,482 5,685,664
Impairment of property and equipment —   —   —   26,858,023
Impairment of digital currencies 372,124 163,837 372,124 3,374,976
Total costs and expenses 3,633,694 8,824,471 12,117,720 56,166,067
Operating loss from continuing operations (1,894,529 ) (6,457,788 ) (6,481,245 ) (50,006,138 )

Other income (expense):
Loss on issuance of convertible notes, common stock and warrants —   —   (6,154,660 ) —
Change in fair value of warrant liability —   —   (2,869,726 ) —
Change in fair value of convertible notes —   —   (3,895,233 ) —
Gain on deconsolidation of Tess —   —   1,138,787 —
Non-compliance penalty for SEC registration requirement —   —   —   (1,358,043 )
Interest expense (2,129 ) (21,836 ) (119,311 ) (37,998 )
Gain on extinguishment of debt 34,899 —   842,925 —
Investment income 5,765 683 25,868 69,959
Loss on extinguishment of BMSS payable —   (265,500 ) —   (265,500 )
Realized gain on sale of digital currencies 23,608 219,247 665,218 451,341
Other expense (1,734 ) (1,746 ) (15,471 ) (881 )
Total other income (expense) 60,409 (69,152 ) (10,381,603 ) (1,141,122 )

Loss from continuing operations before income taxes (1,834,120 ) (6,526,940 ) (16,862,848 ) (51,147,260 )

Deferred income tax benefit —   —   —   3,525,000

Loss from continuing operations (1,834,120 ) (6,526,940 ) (16,862,848 ) (47,622,260 )

Discontinued operations
Income from operations —   —   —   96,132
Income from discontinued operations —   —   —   96,132

Net loss (1,834,120 ) (6,526,940 ) (16,862,848 ) (47,526,128 )

Net (income) loss attributable to non-controlling interest (19 ) 296,982 221,384 929,158

Net loss attributable to Riot Blockchain $ (1,834,139 ) $ (6,229,958 ) $ (16,641,464 ) $ (46,596,970 )

Basic and diluted net loss per share:
Continuing operations attributable to Riot Blockchain $ (0.08 ) $ (0.46 ) $ (0.93 ) $ (3.57 )
Discontinued operations attributable to Riot Blockchain —   —   —   0.01
Net loss per share $ (0.08 ) $ (0.46 ) $ (0.93 ) $ (3.56 )

Basic and diluted weighted average number of shares outstanding 23,371,856 14,197,763 17,971,541 13,340,122

~~See Accompanying~~ Notes to ~~Unaudited~~ Condensed Interim Consolidated Financial Statements

(Unaudited)

Note 1. Organization

Nature of operations:

Riot Blockchain, Inc. ~~and Subsidiaries~~

~~Condensed Interim Consolidated Statement of Stockholders’ Equity~~

~~Three Months Ended September 30, 2019~~

~~(Unaudited)~~

Total
Riot Blockchain Total
Preferred Stock Common Stock Accumulated
stockholders'
equity
Non-controlling
stockholders'
equity
Shares Amount Shares Amount deficit (deficit) interest (deficit)
Balance as of July 1, 2019 4,999 $ 26,556 22,625,111 $ 238,082,374 $ (212,006,522 ) $ 26,102,408 $ 35,152 $ 26,137,560
Preferred stock converted to common stock (800 ) (4,250 ) 800 4,250 —   —   —   —
Stock-based compensation —   —   —   81,362 —   81,362 —   81,362
Issuance of common stock, net of offering costs/At-the-market offering —   —   1,580,484 3,806,321 —   3,806,321 —   3,806,321
Net income attributable to non-controlling interest —   —   —   —   —   —   19 19
Net loss —   —   —   —   (1,834,139 ) (1,834,139 ) —   (1,834,139 )
Balance as of September 30, 2019 4,199 $ 22,306 24,206,395 $ 241,974,307 $ (213,840,661 ) $ 28,155,952 $ 35,171 $ 28,191,123

~~See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements~~

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statement of Stockholders’ Equity~~

~~Three Months Ended September 30, 2018~~

~~(Unaudited)~~

Total
Preferred Stock Common Stock Accumulated Riot Blockchain stockholders' Non-controlling Total stockholders'
Shares Amount Shares Amount deficit equity interest equity
Balance as of July 1, 2018 703,000 $ 3,734,512 13,645,198 $ 196,396,764 $ (179,630,492 ) $ 20,500,784 $ 166,460 $ 20,667,244
Preferred stock converted to Common stock (598,504 ) (3,179,403 ) 598,504 3,179,403 —   —   —   —
Stock-based compensation —   —   —   1,655,160 —   1,655,160 —   1,655,160
Refund of escrow dividend —   —   —   —   64,380 64,380 —   64,380
Sale of Riot shares held by Tess Pay, Inc. —   —   —   185,729 —   185,729 —   185,729
Stock issued for the extinguishment of the BMSS payable —   —   50,000 265,500 —   265,500 —   265,500
Sale of common shares by Tess Pay, Inc. —   —   —   110,620 —   110,620 109,827 220,447
Net loss attributable to non-controlling interest —   —   —   —   —   —   (296,982 ) (296,982 )
Net loss —   —   —   —   (6,229,958 ) (6,229,958 ) —   (6,229,958 )
Balance as of September 30, 2018 104,496 $ 555,109 14,293,702 $ 201,793,176 $ (185,796,070 ) $ 16,552,215 $ (20,695 ) $ 16,531,520

~~See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements~~

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statement of Stockholders’ Equity~~

~~Nine Months Ended September 30, 2019~~

~~(Unaudited)~~

Total
Riot Blockchain Total
Preferred Stock Common Stock Accumulated stockholders' Non-controlling stockholders'
Shares Amount Shares Amount deficit equity interest equity
Balance as of January 1, 2019 13,000 $ 69,059 14,519,058 $ 202,917,443 $ (197,199,197 ) $ 5,787,305 $ (1,296,293 ) $ 4,491,012
Delivery of common stock underlying restricted stock units —   —   106,251 —   —   —   —   —
Common stock issued with convertible notes —   —   150,000 255,000 —   255,000 —   255,000
Common stock issued in connection with conversion of notes payable —   —   1,813,500 10,225,959 —   10,225,959 —   10,225,959
Reclassification of warrant liability to equity —   —   —   5,438,660 —   5,438,660 —   5,438,660
Preferred stock converted to common stock (8,801 ) (46,753 ) 8,801 46,753 —   —   —   —
Stock-based compensation —   —   —   431,430 —   431,430 —   431,430
Issuance of common stock, net of offering costs/At-the-market offering —   —   7,608,785 22,659,062 —   22,659,062 —   22,659,062
Net loss attributable to non-controlling interest —   —   —   —   —   —   (221,384 ) (221,384 )
Deconsolidation of Tess —   —   —   —   —   —   1,552,848 1,552,848
Net loss —   —   —   —   (16,641,464 ) (16,641,464 ) —   (16,641,464 )
Balance as of September 30, 2019 4,199 $ 22,306 24,206,395 $ 241,974,307 $ (213,840,661 ) $ 28,155,952 $ 35,171 $ 28,191,123

~~See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements~~

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statement of Stockholders’ Equity~~

~~Nine Months Ended September 30, 2018~~

~~(Unaudited)~~

Total
Preferred Stock Common Stock Accumulated Riot Blockchain stockholders' Non-controlling
Total
stockholders'
Shares Amount Shares Amount deficit equity interest equity
Balance as of January 1, 2018 1,458,001 $ 7,745,266 11,622,112 $ 180,387,518 $ (139,263,480 ) $ 48,869,304 $ 758,095 $ 49,627,399
Common stock issued for asset purchase - Prive —   —   800,000 8,480,000 —   8,480,000 —   8,480,000
Common stock escrow shares issued for asset purchase - Prive —   —   200,000 —   —   —   —   —
Preferred stock converted to Common stock (1,353,505 ) (7,190,157 ) 1,353,505 7,190,157 —   —   —   —
Exercise of warrants —   —   100,000 350,000 —   350,000 —   350,000
Stock-based compensation —   —   —   4,147,190 —   4,147,190 —   4,147,190
Exercise of stock options —   —   19,533 78,522 —   78,522 —   78,522
Common stock issued for services —   —   20,754 277,940 —   277,940 —   277,940
Refund of escrow dividend —   —   —   —   64,380 64,380 64,380
Sale of Riot shares held by Tess Pay, Inc. —   —   —   505,729 —   505,729 —   505,729
Stock issued for the extinguishment of the BMSS payable —   —   50,000 265,500 —   265,500 —   265,500
Cashless exercise of stock purchase warrants —   —   3,215 —   —   —   —   —
Delivery of common stock underlying restricted stock units —   —   124,583 —   —   —   —   —
Sale of common shares by Tess Pay, Inc. —   �� —   —   110,620 —   110,620 109,826 258720,446
Non-controlling interest - Logical Brokerage —   —   —   —   —   —   40,542 40,542
Net loss attributable to non-controlling interest —   —   —   —   —   —   (929,158 ) (929,158 )
Net loss —   —   —   —   (46,596,970 ) (46,596,970 ) —   (46,596,970 )
Balance as of September 30, 2018 104,496 $ 555,109 14,293,702 $ 201,793,176 $ (185,796,070 ) $ 16,552,215 $ (20,695 ) $ 16,531,520

~~See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements~~

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

Nine Months Ended September 30,
2019 2018
Cash flows from operating activities
Net loss $ (16,862,848 ) $ (47,526,128 )
Income from discontinued operations —   96,132
Loss from continuing operations (16,862,848 ) (47,622,260 )
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities of continuing operations:
Stock-based compensation 431,430 4,147,189
Depreciation and amortization 70,482 5,685,664
Deferred income tax benefit —   (3,525,000 )
Amortization of license fee revenue (72,523 ) (72,523 )
Amortization of right of use assets 1,726,731 —
Common stock issued for services —   277,940
Common stock issued for the extinguishment of the BMSS payable —   265,500
Loss on issuance of convertible notes, common stock and warrants 6,154,660 —
Change in fair value of convertible notes 3,895,233 —
Change in fair value of warrant liability 2,869,726 —
Gain on deconsolidation of Tess (1,138,787 ) —
Gain on extiguishment of accounts payable, other liabilities and accrued interest (842,925 ) —
Impairment of property and equipment —   26,858,023
Impairment of digital currencies 372,124 3,374,976
Realized gain on sale of digital currencies (665,218 ) (451,341 )
Accrued interest on Verady investment (20,200 ) —
Changes in assets and liabilities:
Prepaid contracts —   (1,584,699 )
Prepaid expenses and other current assets (756,135 ) (1,417,007 )
Digital currencies - mining, net of mining pool operating fees (5,452,674 ) (6,087,405 )
Accrued interest —   —
Accounts payable (1,798,539 ) 2,983,941
Accrued expenses 882,195 1,271,114
Lease liability (1,725,578 ) —
Net cash used in operating activities of continuing operations (12,932,846 ) (15,895,888 )
Net cash used in operating activities of discontinued operations —   (68,824 )
Net cash used in operating activities (12,932,846 ) (15,964,712 )

Cash flows from investing activities - continuing operations:
Proceeds from sale of digital currencies 3,196,310 7,371,172
Purchase of digital currencies —   (5,722,545 )
Purchases of property and equipment (8,569 ) (20,311,436 )
Purchases of other investments —   (6,412,726 )
Security deposits —   (703,275 )
Patent costs incurred (26,566 ) (32,850 )
Investment in Logical Brokerage, net of cash acquired —   (516,918 )
Purchase of developed technology by Tess Pay, Inc. —   (531,176 )
Net cash provided by (used in) investing activities 3,161,175 (26,859,754 )

Cash flows from financing activities - continuing operations:
Proceeds from issuance of convertible notes 3,000,000 1,696,083
Repayment of notes payable and other obligations (950,000 ) (135,574 )
Proceeds from the issuance of common stock / At-the-market offering 23,610,642 —
Offering costs for the issuance of common stock / At-the-market offering (951,580 ) —
Proceeds from exercise of warrants —   350,000
Proceeds from exercise of stock options —   78,522
Proceeds from sale of Riot shares held by Tess Pay, Inc. —   505,729
Proceeds form the sale of common shares sold by Tess Pay, Inc. —   220,446
Refund of escrow dividend —   64,380
Net cash provided by financing activities of continuing operations 24,709,062 2,779,586

Net increase (decrease) in cash and cash equivalents 14,937,391 (40,044,880 )
Cash and cash equivalents at beginning of period 225,390 41,651,965
Cash and cash equivalents at end of period $ 15,162,781 $ 1,607,085

Supplemental disclosure of cash flow information:
Cash paid for interest $ —   $ 6,585
Cash paid for taxes $ —   $ —

Supplemental disclosure of noncash investing and financing activities:
Conversion of notes payable to common stock $ 10,225,959 $ —
Reclassification of warrant liability to equity $ 5,438,660 $ —
Value of shares issued for Prive asset acquisition $ —   $ 8,480,000
Conversion of preferred stock to common stock $ 46,753 $ 7,190,157
Common stock issued in connection with conversion of notes payable $ 255,000 $ —
Deferred purchase price for BMSS $ —   $ 1,350,000
Digitial currencies used to purchase miners $ 98,865 $ —

~~See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements~~

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

~~Note 1. Organization:~~

~~Nature of operations:~~

~~Riot Blockchain, Inc. (“we,” “us,” “our,”~~operates a cryptocurrency mining operation, which utilizes specialized computers (also known as “Miners”) that generate cryptocurrency (primarily bitcoin) from the ~~“Company,” “Riot” or “Riot Blockchain”)~~Blockchain. The Company was originally organized on July 24, 2000, as a Colorado corporation. Effective October 19, 2017, the Company's name was changed to Riot Blockchain, Inc., from Bioptix, Inc., and effective October 19, 2017, the Company changed its state of incorporation to Nevada from Colorado.

Mining equipment:

The ~~Company operates a digital currency~~Company’s current focus is on its cryptocurrency mining operation, ~~which utilizes specialized computers (also known as “miners”~~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”) ~~that generate digital currency (primarily bitcoin) from~~at Coinmint’s facility in New York (the “Coinmint Facility”).

As previously disclosed the ~~blockchain.~~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 ~~acquired approximately 8,000~~expects delivery of the first 3,500 of these new miners ~~through its acquisition~~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 Kairos Global Technology, Inc. (“Kairos”) in November 2017, and from Prive Technologies, Inc. (“Prive”), and separately from Blockchain Mining Supply & Services Ltd. (“BMSS”) in February 2018.2021.

Note 2. Liquidity and Financial ~~Condition:~~Condition

~~The Company has experienced recurring losses and negative cash flows from operations.~~ At September 30, ~~2019,~~2020, the Company had approximate balances of cash and cash equivalents of ~~$15.2~~$30.1 million, ~~digital currencies~~cryptocurrencies of ~~$3.2~~$9.0 million, working capital of ~~$16.5~~$39.3 million, total stockholders' equity of ~~$28.2~~$60.7 million and an accumulated deficit of ~~$213.8~~$233.8 million. To date, the Company has, in large part, relied on equity and debt financing to fund its operations.

~~The~~As of September 30, 2020, the Company ~~expects to continue to incur losses from operations~~has executed purchase agreements for the ~~near-term~~purchase of Miners from Bitmain for a total of 16,600 new S19 Pro miners. The purchase commitment totals $37.2 million, with $12.8 million in deposits paid and ~~these losses could~~the remaining $24.4 million due to be ~~significant as~~paid over the ~~Company incurs costs and expenses associated with recent and potential future acquisitions, and development~~delivery schedule through the second quarter of ~~the RiotX exchange platform, as well as public company, legal and administrative related expenses being incurred.~~ 2021.

2019 ATM Offering

As disclosed in Note ~~9, during January 2019,~~8, the Company ~~issued~~entered into an At-The-Market Sales Agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”), dated May 24, 2019 (the “Sales Agreement”), relating to the sale by the Company through its sales agent, H.C. Wainwright, of up to $100.0 million in shares of the Company’s common stock from time to time in an at-the-market offering (“2019 ATM Offering”). All sales of the Company��s common stock in the 2019 ATM Offering were made pursuant to the prospectus forming a ~~series~~part of ~~Senior Secured Convertible Promissory Notes~~the Company’s shelf registration statement on Form S-3, as amended (Registration No. 333-226111), which was declared effective as of May 8, 2019 (the ~~“Notes”~~“2019 Registration Statement”).

The Company received proceeds on sales of 22,210,095 shares of common stock 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, during the nine months ended September 30, 2020. According to ~~investors for~~the terms of the Sales Agreement, the Company paid H.C. Wainwright a commission of 3.0% of the aggregate gross proceeds the Company received from sales of its common stock in the 2019 ATM Offering.

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 ~~principal amount~~gross proceeds the Company receives from all sales of ~~$3,358,333 and an equal value of warrants for~~its common stock in the ~~purchase~~2020 ATM Offering.

Sales of shares of the Company’s common stock ~~(the “Warrants”)~~ in ~~exchange for~~the 2020 ATM Offering will be made pursuant to the prospectus and prospectus supplement filed with and forming a ~~total investment of $3,000,000. During the nine months ended September 30, 2019, all~~part of the ~~Notes were converted into~~Company’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 ~~have been satisfied~~unpredictable and is likely to continue to result in ~~full. The~~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 ~~closely~~actively monitoring this situation and the possible effects on its ~~cash balances, cash needs~~financial condition, liquidity, operations, suppliers, and ~~expense levels.~~ 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.

~~As disclosed in Note~~

10 ~~the Company entered into a Sales Agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”) dated May 24, 2019 (the “Sales Agreement”), pursuant~~

Index

Riot Blockchain, Inc. and Subsidiaries

Notes to which the Company may, from time to time, sell up to $100.0 million in shares of the Company’s common stock through H.C. Wainwright, acting as the Company’s sales agent and/or principal, in an at-the-market offering (“ATM Offering”). All sales of the shares in connection with the ATM Offering have been made pursuant to an effective shelf registration statement on Form S-3 filed with the U.S. Securities and Exchange Commission (“SEC”). The Company pays H.C. Wainwright a commission of approximately 3.0% of the aggregate gross proceeds the Company received from all sales of the Company's common stock under the Sales Agreement. The Company received net proceeds on sales under the Sales Agreement of approximately $22.7 million at a weighted average price of $3.10 (net of commissions) during the nine months ended September 30, 2019.Condensed Interim Consolidated Financial Statements

(Unaudited)

Note 3. Basis of presentation, summary of significant accounting policies and recent accounting ~~pronouncements:~~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, ~~2019~~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, ~~2018~~2019 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on ~~April 2, 2019.~~

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.

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

Use of estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the 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 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.

~~Significant Accounting Policies:~~

For a detailed discussion about the Company’s significant accounting policies, see the Company’s December 31, 2018 consolidated financial statements included in its December 31, 2018 Annual Report on Form 10-K.

~~Sequencing:~~

~~On January 28, 2019, the Company adopted a sequencing policy under Accounting Standards Codification (“ASC”) 815-40-35~~~~Derivatives and Hedging~~(“ASC 815”) whereby in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares as a result of certain securities convertible or exchangeable for a potentially indeterminable number of shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, issuances of securities to the Company’s employees or directors are not subject to the sequencing policy.

~~Notes Payable Fair Value Option:~~

~~As described further in Note 9 -~~~~Notes and Other Obligations,~~ in January 2019, the Company issued Senior Secured Promissory Notes (the “Notes”) to Oasis Capital, LLC, Harbor Gates Capital, LLC and SG3 Capital, LLC (each an “Investor” and collectively, the “Investors”) in the aggregate principal amount of $3,358,333. The Company has elected the fair value option to account for these Notes due to the complexity and number of embedded features. The fair value of the Notes is classified within Level 3 of the fair value hierarchy because the fair values were estimated utilizing a Monte Carlo simulation model. Accordingly, the Company recorded these Notes at fair value with changes in fair value recorded in the statement of operations. As a result of applying the fair value option, direct costs and fees related to the Notes were recognized in earnings as incurred and were not deferred. The change in fair value of the Notes has been presented as change in value of convertible notes payable on the unaudited condensed interim consolidated statements of operations.

As of September 30, 2019, all of the Notes were converted into 1,813,500 shares of the Company’s common stock valued at their estimated fair value at the time of conversion totaling approximately $10.2 million.

~~Warrant Liability:~~

The Company issued Warrants to purchase 1,908,144 shares of its common stock in connection with the Notes issued to the Investors in January 2019, and recorded these outstanding Warrants as a liability at fair value utilizing a Monte Carlo simulation model. This liability is subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company's condensed interim consolidated statements of operations.

As of June 25, 2019, the Company’s Notes had been converted in their entirety and the warrant liability was revalued and reclassified to equity, because the Warrants are no longer subject to the Company’s sequencing policy as described above.

~~Leases:~~

~~Effective January 1, 2019, the Company accounts for its leases under ASC 842,~~~~Leases~~(“ASC 842”). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components as permitted under ASC 842. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term.

~~The Company continues to account for leases in the prior period financial statements under ASC Topic 840.~~

Loss per ~~share~~:

Basic net loss per share (“EPS”) of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company excludes its unvested restricted shares and escrow shares from the net loss per share calculation. The escrow shares are excluded ~~due to their~~because of related contingencies ~~the inclusion of which~~and including them would result in anti-dilution.

Index

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, ~~2019~~2020 and ~~2018~~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

September
2019 2018
Warrants to purchase common stock 3,574,257 1,671,113
Options to purchase common stock 12,000 162,000
Escrow shares 200,000 200,000
Unvested restricted stock awards 38,917 665,188
Convertible Series B preferred shares 4,199 104,496
Total 3,829,373 2,802,797

Recently issued and adopted accounting pronouncements:

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 ~~February 2016,~~December 2019, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2016-02,~~~~Leases~~No. 2019-12, “Income Taxes (Topic 842) in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, effectively allowing entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11,~~Leases~~(Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Based on the analysis, on January 1, 2019, the Company recorded right of use assets and lease liabilities of approximately $1.5 million.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles - Goodwill and Other (Topic 350)~~740): Simplifying the Accounting for ~~Goodwill Impairment~~. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year 2020 and is required to be applied prospectively. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

~~In August 2018, the FASB issued ASU 2018-15, “~~~~Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is A Service Contract~~Income Taxes” (“ASU ~~2018-15”~~2019-12”). This update clarifies the accounting treatment for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance, which is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The amendments may be applied either retrospectively or prospectivelyintended to all implementation costs incurred after the date of adoption. The Company is still evaluating the prospective impact of this guidance on its future consolidated financial statements and related disclosures.

~~In November 2018, the FASB issued ASU 2018-18, C~~~~ollaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606,~~ which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer for a promised good or service that is distinct within the collaborative arrangement. The guidance also precludes entities from presenting amountssimplify various aspects related to ~~transactions with a collaborative arrangement participant that is not a customer as revenue, unless those transactions are directly related~~accounting for income taxes. ASU 2019-12 removes certain exceptions to ~~third-party sales. The new standard~~the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2019,~~2020, with early adoption permitted. The Company is currently evaluating the ~~effect that the~~impact of this standard ~~will have~~ on its consolidated financial statements and related ~~disclosures~~.disclosures.

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 calculation 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. ~~Digital Currencies:~~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 Company’s common stock, which shares were being held in escrow in connection with the Prive acquisition pursuant to the Escrow Deposit Agreement. After receiving notification on March 4, 2020 that the conditions set forth in the Escrow Deposit Agreement were not timely met, the Escrow Agent returned and canceled the 200,000 shares.

Note 5. Cryptocurrencies

The following table presents additional information about ~~digital currencies:~~

cryptocurrencies (in thousands):

Beginning balance, January 1, 2019 $ 706,625
Revenue recognized from digital currencies mined 5,563,952
Mining pool operating fees (111,278 )
Purchase of miner equipment with digital currencies (98,865 )
Sale of digital currencies (3,196,310 )
Realized gain on sale of digital currencies 665,218
Impairment of digital currencies (372,124 )
Ending balance, September 30, 2019 $ 3,157,218

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

Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

Note 5.~~Fair value measurements:~~6. Property and Equipment

Property and equipment consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):

~~On January 28, 2019~~

	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

During the three months ended September 30, 2020, the Company ~~issued~~received 2,040 new next generation S19 and S19 Pro Miners from Bitmain at the ~~Notes~~Coinmint Facility and ~~Warrants~~the related $4.5 million prepayment recorded as a deposit was reclassified as of September 30, 2020 to property and equipment.

Depreciation and amortization expense totaled approximately $1.3 million (including $0.1 million of patent amortization) 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, 2020. Depreciation and amortization expense was nominal for the nine months ended September 30, 2019. Depreciation is computed on the straight-line basis for the periods the assets are in service.

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, to be delivered beginning in the fourth quarter of 2020. A summary of the purchase agreement commitments, deposits paid and expected delivery timing (remaining balances are payable in advance of shipping) is summarized as follows (dollars in thousands):

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 the Company’s agreements with Bitmain, the Company is responsible for all shipping charges incurred in connection with the ~~Notes. The Notes and Warrants were classified as liabilities and measured at fair value on~~delivery of the ~~issuance date, with changes in fair value recognized as other expense on the consolidated statements of operations and disclosed in the unaudited condensed interim consolidated financial statements.~~ Miners.

Note 7. Investments

Coinsquare

As of December 31, 2019, the Company’s cost investment in Coinsquare Ltd. (“Coinsquare”) totaled approximately $9.4 million representing approximately an 11.8% ownership on a fully diluted basis. The Company is a non-affiliated shareholder in Coinsquare, which represents a passive investment made by the Company.

During June ~~27, 2019,~~2020, the Company became aware of allegations brought by the Ontario Securities Commission (the “OSC”) that Coinsquare and certain of its executives and directors engaged in ~~accordance with their original terms, all~~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 hearing panel of the ~~Notes were converted into a total~~OSC entered an order (the “Order”) approving the settlement agreement between OSC, Coinsquare, and certain of ~~1,813,500 shares~~its executives and directors (the “Settlement Agreement”), in which they admitted to breaches 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 by their holders.~~named executives and directors. The Order 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.

~~A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring~~Accordingly, the ~~Company’s Notes and Warrants at the issuance date of January 28, 2019 and during the conversion~~Company determined there were indicators that would cause a 100% impairment of the ~~Notes~~Coinsquare investment and observed price changes, which was recorded as of June ~~27, 2019, are as follows:~~

~~Senior Secured Promissory Notes:~~

January 28, 2019
As of June 27
2019
(Unaudited) (Unaudited)
Dividend yield 0% 0%
Expected price volatility 119.5% 122.2%-127.1%
Risk free interest rate 2.60% 2.07%-2.44%
Expected term 1 year —

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements~~30, 2020. The Company therefore recorded an impairment expense of ~~Cash Flows~~

~~(Unaudited)~~

~~Warrants:~~

January 28, 2019 As of June 27, 2019
(Unaudited) (Unaudited)
Dividend yield 0% 0
Expected price volatility 111.6% 119.9%-120.5%
Risk free interest rate 2.58% 2.23%-2.58%
Expected term 5 years 4 years, 10 months

~~There were no assets or liabilities measured at fair value~~$9.4 million for its investment in Coinsquare during the nine months ended September 30, ~~2018.~~2020, as reflected in the accompanying unaudited condensed interim consolidated statements of operations.

~~Unobservable inputs were used~~During the quarter ended September 30, 2020, the Company notified Coinsquare that based upon the OSC settlement related issues, it is evaluating all options to ~~determine the fair value of positions that~~recover its investment in Coinsquare and the Company has ~~classified within the Level 3 category.~~

~~The following table presents changes in Level 3 liabilities measured at fair value for the nine months ended September 30, 2019.~~

Convertible Notes Warrant Liability
Issuance of senior secured convertible notes $ 6,330,726 $ —
Issuance of warrants in connection with convertible notes —   2,568,934
Balance at January 28, 2019 6,330,726 2,568,934
Change in fair value 1,644,582 2,753,228
Balance at March 31, 2019 7,975,308 5,322,162
Change in fair value 2,250,651 116,498
Conversion of convertible notes to common stock (10,225,959 ) —
Reclassification of warrant liability to equity —   (5,438,660 )
Balance at September 30, 2019 $ —   $ —

~~Note 6. Investment in Coinsquare:~~

In September 2017, the Company acquired a minority interest for $3.0 million in Coinsquare, which operates a digital crypto-currency exchange platform in Canada. During February 2018, the Company invested an additional $6.4 millionengaged Canadian based litigation counsel to acquire additional common stock of Coinsquare. The investment included an additional equity investment of $2.8 million that was part of an approximate $24 million financing by Coinsquare. Additionally, warrants acquired in the original investment were exercised in exchange of a cash payment of $3.6 million. These additional investments resulted in a current ownership in Coinsquare by the Company of approximately 12% based upon Coinsquare’s issued and outstanding shares. The Company has evaluated the guidance in ASU 2016-01,~~Recognition and Measurement of Financial Assets and Financial Liabilities~~, and elected to account for the investment using the measurement alternative as the equity securities are without a readily determinable fair value and do not give the Company significant influence over Coinsquare. The investment is valued at cost, less any impairment, plus or minus changes resulting from observable price changes. As of September 30, 2019 and December 31, 2018, the Company considered the cost of the investment to not exceed the fair value of the investment and did not observe price changes.

~~Note 7. Investment in Tess:~~

In October 2017, the Company acquired approximately 52.01% of TessPay Inc. (formerly 1172767 B.C. Ltd) (“Tess”), which is developing blockchain solutions for telecommunications companies. During the year ended December 31, 2018, Tess issued approximately 189,000 of its common shares, reducing the investment percentage held by the Company from 52.01% to 50.2%. On April 10, 2019, Tess closed on a funding agreement under which approximately 23.8 million shares of Tess were issued for CAD $1.2 million. As a result ofassist with this ~~funding, the Company’s ownership in Tess was reduced to approximately 9% and subsequently Tess was no longer being consolidated in the Company’s consolidated financial statements.~~

matter.

Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements ~~of Cash Flows~~

(Unaudited)

~~As of June 30, 2019, the Company evaluated its remaining interest in Tess under the guidance of ASU 2016-01,~~~~Recognition and Measurement of Financial Assets and Financial Liabilities~~, and determined it should remeasure its retained interest at fair value upon deconsolidation to establish a new cost basis. As of April 10, 2019, the fair value of the Tess shares owned by the Company is approximately $0.1 million, calculated based upon the April 10, 2019 funding price as follows:

April 10, 2019
Tess shares held by Riot Blockchain, Inc. 2,708,333
Per share fair value $ 0.03
Fair value of Tess shares held by Riot Blockchain, Inc. $ 90,174

Verady

The Company accounts for deconsolidation of subsidiaries in which it loses controlling interest in the financial interest of the subsidiary in accordance with Accounting Standards Codification (“ASC”) 810-10-40 – “Consolidation”.

~~The deconsolidation of Tess resulted in a gain of approximately $1.1 million calculated as follows:~~

Current assets $ 130,432
Less:
Accounts payable 761,875
Accrued expenses 273,935
Convertible notes 1,696,083
Net liabilities (2,601,461 )
Non-controlling interest share 1,552,848
Sub-total (1,048,613 )
Less: fair value of shares owned by Riot Blockchain 90,174
Gain on deconsolidation of Tess $ (1,138,787 )

~~Note 8. Investment in Verady:~~

~~During November 2017, the Company made a $200,000~~ investment in ~~a convertible note as part of a series of notes issued by~~ Verady, ~~LLC~~Inc. (“Verady”). The notes are unsecured, subordinated to other approved liabilities, mature December 31, 2022, bear interest at 6%, unless previously repaid or converted and contain other conditions and restrictions, all as defined under the subscription documents. The Verady convertible note was previously recorded at fair value (which approximates cost). The conversion rate of the convertible note is defined based upon the possible occurrence of certain defined events which may or may not occur. The Company has no other relationship or rights associated with Verady. Founded in 2016, Verady is privately held and recently launched VeraNet, a decentralized network of financial reporting and accounting tools targeted to the needs of the digital currency community.

During the three months ended September 30, 2019, Verady completed a financing that under the terms of the Company’s original investment, resulted in the automatic conversion of the Company’s convertible note plus accrued interest totaling approximately $220,000, into equity of Verady. The automatic conversion resulted in a current ownership in Verady by the Company of approximately 1%. The Company has evaluated the guidance in ASU 2016-01,~~Recognition and Measurement of Financial Assets and Financial Liabilities~~, and elected to account for the investment using the measurement alternative as the equity securities are without a readily determinable fair value and do not give the Company significant influence over Verady. The investment is valued at cost, less any impairment, plus or minus changes resulting from observable price changes. During the ~~three~~nine months ended September 30, ~~2019,~~2020 the investment in Verady totaled approximately $0.2 million, and the Company determined there were no indicators that would cause an impairment. There were no price changes in orderly transactions for identical or similar investments in Verady.

Tess

~~Riot Blockchain, Inc.~~As of September 30, 2020, and ~~Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

~~Note 9. Notes and Other Obligations:~~

~~Senior Secured Convertible Promissory Notes and Warrants~~

On January 28, 2019, in connection with a private financing (the “Private Financing”), the Company issued the Notes, to investors (collectively, the “Investors” and each an “Investor”) for an aggregate principal amount of $3,358,333, along with Warrants for the purchase of and equal value of shares of the Company’s common stock in exchange for $3,000,000 of private financing. The Notes were convertible into shares of the Company’s common stock at any time after the issuance date, provided that at no time would the Company be required to issue shares in excess of the aggregate number of shares of its commons stock outstanding. The Notes were set to mature twelve months from date of issuance and accrue interest at a rate of 8% per annum, with twelve months of interest guaranteed. The Notes were subject to prepayment penalties, default conditions and other terms and conditions, as further defined in the Financing Agreements (the “Financing Agreements”) as disclosed in the Company’s current report on Form 8-K filed with the SEC on February 1, 2019. As additional consideration for the investment, the Company issued a total of 150,000 restricted common shares to the Investors.

The Notes were convertible into shares of the common stock of the Company at a price equal to the lower of $2.00 or 80% of the lowest volume-weighted adjusted price of shares of the Company’s common stock in the twenty trading days prior to the conversion date, subject to adjustments in certain cases as defined in the Financing Agreements. Provided, however, that according to the Notes, the cumulative shares of the Company’s common stock issuable upon conversion of the Notes cannot exceed 19.99% of the total number of the Company’s outstanding common stock as of January 28, 2019. Pursuant to the Financing Agreements between the Company and the Investors, the Company granted the Investors a security interest in its assets to secure repayment of the Notes. Further to the Financing Agreements, the Company also reserved a number of shares of its common stock equal to 300% of the total number of shares issuable upon full conversion of the Notes.

Due to the complexity and number of embedded features within the Notes and as permitted under applicable accounting guidance, the Company elected to account for the Notes and all the embedded features under the fair value option, which records the Notes at fair value rather than at historical cost, with changes in fair value recorded in the condensed interim consolidated statements of operations. Direct costs and fees incurred to issue the Notes were recognized in earnings as incurred and were not deferred. On the initial measurement date of January 28,December 31, 2019, the fair value of the Notes was estimated at $6,330,726. Upfront costs and fees related to items for which the fair value option was elected were approximately $358,333 and were recorded as a component of other expenses for the nine months ended September 30, 2019.

~~In connection with the Notes,~~TessPay Inc. shares owned by the Company ~~entered into registration rights agreement with~~is approximately $0.1 million, calculated based upon the ~~Investors. The Company filed a registration statement with the SEC covering the equity rights and any other shares issuable in connection with the Notes on March 14,~~April 10, 2019 ~~and the registration statement was declared effective on April 29, 2019.~~funding price.

Note 8. Stockholders’ Equity

At-the-Market Equity Offering:

During the nine months ended September 30, ~~2019, holders~~2020, the Company received proceeds under the Sales Agreement of ~~the Notes issued on January 28, 2019, converted 100%~~approximately $49.6 million (excluding commissions and expenses of ~~the Notes into 1,813,500~~$1.6 million), at a weighted average price of $2.23 per share, from sales of 22,210,095 shares of ~~the Company’s~~its common stock. The aggregate fair value of the Notes converted during the nine months ended September 30, 2019 was $10.2 million, an increase in fair value of $3.9 million, which is reflected on the interim condensed consolidated statements of operations for the nine months ended September 30, 2019, as change in fair value of convertible note (See Note 5stock sold pursuant to the ~~unaudited condensed interim consolidated financial statements). Accordingly, having satisfied the Notes in full, the Company’s obligations under the Notes have been cancelled.~~

In connection with the Private Financing, the Company also issued the Warrants to the Investors to acquire up to an aggregate of 1,908,144 shares of the Company’s common stock at an exercise price of $1.94 per share. The Warrants are exercisable by the Investors beginning on July 29, 2019 through the fifth year anniversary of the effective date of the Private Financing; provided, however, each Investor’s beneficial ownership of the Company’s common stock may not exceed 4.99% of the total outstanding shares of the Company’s common stock without first providing sixty days’ notice to the Company, and, in any event, the ownership, including beneficial ownership, of shares of the Company’s common stock by each of the Investors, shall not exceed 9.99% of the total outstanding shares of our common stock.

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

~~Tess Investment~~

As of March 28, 2018, Tess, a subsidiary of the Company, entered into a note purchase agreement with a private investor under which a convertible promissory note issued by Tess in the principal amount CAD $2.2 million (the “Tess Convertible Note”) and cash proceeds of CAD $2.2 million were placed into a third-party controlled escrow account. Upon the successful achievement of conditions defined under the escrow agreement relating to closing of a transaction between Tess and Cresval Capital Corp, (“Cresval”) whereby Tess and Cresval would merge as provided in the merger agreements and Tess would become publicly traded on the TSX-V exchange, the then-remaining cash and the Tess Convertible Note would be issued to Tess and the investor, respectively. The Tess Convertible Note was convertible at $0.10 per share of the merged entity, as defined, subject to certain adjustments. On February 15, 2019, Cresval terminated its definitive agreement with Tess due to Tess’s inability to complete one of the specified closing conditions in the agreement.

The interim release consisted of CAD $1.0 million (USD $775,555) of cash released to Tess and an unsecured promissory note issued by Tess (“Tess Promissory Note”) released to the investor. The Tess Promissory Note bears interest at 5%, is unsecured and due in 2021. On August 23, 2018, the final release from escrow occurred. Tess received approximately USD $921,000, bringing the total Tess Promissory Note balance to approximately USD $1,696,000. During the nine months ended September 30, 2019, the Company’s ownership in Tess was reduced to 9% and as a result, Tess is no longer consolidated in the Company’s unaudited interim condensed consolidated financial statements (see Note 7).

~~BMSS and Other Liabilities Settlements~~

On February 21, 2018, the Company completed an asset purchase under an agreement (the "BMSS Purchase Agreement") with BMSS, to purchase the 3,000 AntMiner S9 bitcoin mining machines owned by BMSS Equipment (the "BMSS Equipment"). Pursuant to the BMSS Purchase Agreement, the Company purchased the BMSS Equipment for aggregate consideration of Eight Million Five Hundred Thousand Dollars ($8,500,000). As of June 27, 2019, in connection with the BMSS agreement, the Company owed approximately $1,340,000 of principal and interest and the Company and BMSS agreed to a one-time settlement payment totaling $950,000. The remaining $390,000 was recorded as a gain on extinguishment of notes and interest, and included in other income in the accompanying interim consolidated statement of operations for the nine months ended September 30, 2019.

During the nine months ended September 30, 2019, the Company reached agreements with certain creditors to settle the amounts of outstanding liabilities at a discount. The computed value of the modifications as compared to the liability balances were recorded as other income from the gains on extinguishment of debt. The liabilities settled excluding BMSS, during the period totaled approximately $2,082,000 in exchange for cash payments of $1,629,000, resulting in a gain of approximately $453,000 recognized in the nine months ended September 30, 2019.

~~Note 10. Stockholders’ equity:~~

~~Preferred Stock:~~

During the nine months ended September 30, 2019, 8,801 shares of the Company’s Series B preferred stock were converted into 8,801 shares of the Company’s common stock. During the nine months ended September 30, 2018, 1,353,505 shares of the Company’s Series B preferred stock were converted into 1,353,505 shares of the Company’s common stock.

~~At-the-Market Equity Offering:~~

ATM Offering. The Company entered into a Sales Agreement with H.C. Wainwright dated May 24, 2019, pursuant to which the Company may, from time to time, sell up to $100 million in shares of the Company’s common stock through H. C. Wainwright, as the Company’s sales agent and/or principal, in the ATM Offering. All sales of the shares have been made pursuant to an effective shelf registration statement on Form S-3 filed with the SEC. The Company payspaid H.C. Wainwright a commission of ~~approximately~~ 3.0% of the aggregate gross proceeds the Company received from all sales of the Company's common stock under the Sales Agreement. ~~The~~

As previously disclosed, effective as of October 15, 2020, the Company ~~received net proceeds on sales of 7,608,785 shares of common stock under~~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 ~~approximately $22.7 million at~~the Company’s common stock from time to time on an at-the-market basis pursuant to the prospectus and prospectus supplement filed with and forming a ~~weighted average price~~part of ~~$3.10 (excluding commissions) during~~ the ~~nine months ended September 30, 2019.~~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 H.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 2019 ATM Offering was terminated and no additional sales may be made pursuant to the 2019 ATM Offering.

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

~~Restricted~~Common Stock:

During the nine months ended September 30, ~~2019, 106,251~~2020, the 200,000 shares of common stock held in escrow under the Escrow 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 ~~related~~ 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 “Equity Plan”), and 5,000 shares of common stock were issued in settlement of fully vested restricted stock rights previously granted and previously expensed under the Company’s 2017 Equity Incentive Plan. ~~Additionally, a total~~

During the nine months ended September 30, 2020, 1,638,467 shares of ~~48,500~~common stock were issued to members of the Company’s board of directors, officers and employees of the Company in settlement of an equal number of fully vested restricted stock ~~rights were~~units awarded to such individuals by the Company pursuant to grants made under the Company’s Equity Plan. The Company withheld 176,655 of these shares at a fair value of approximately $0.35 million, to cover the withholding taxes related to the settlement of these restricted stock units.

During the nine months ended September 30, 2020, the Company issued 40,634 shares of its common stock to a consultant and ~~advisory board members. The~~advisors in settlement of fully vested restricted stock units granted under its Equity Plan.

On August 20, 2020, the Company issued 200,000 shares ~~vest monthly over one~~of its common stock related to ~~two year periods.~~the exercise of 200,000 common stock warrants for cash of approximately $0.4 million or $1.94 per share.

Note 9. Stock Options, Warrants and Restricted Common Stock

~~Note 11. Stock based compensation, options and warrants:~~

Stock based compensation:

The Company’s stock-based compensation expenses recognized during the three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, were attributable to selling, general and administrative expenses, which are included in the accompanying unaudited condensed interim consolidated statements of operations.

The Company recognized total stock-based compensation expense during the three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, granted under the ~~Company’s 2017 equity incentive plan (the “Plan”),~~Equity Plan, from the following ~~categories:~~

categories (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Restricted stock awards under the Plan	$	81,362	$	1,434,650	$	372,932	$	3,634,193	$	467	$	81	$	2,848	$	373
Stock option awards under the Plan		—		220,510		58,498		512,997		-		-		-		58
Total stock-based compensation	$	81,362	$	1,655,160	$	431,430	$	4,147,190	$	467	$	81	$	2,848	$	431

Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

Restricted common stock ~~rights:~~

awards:

A summary of the Company’s unvested restricted common stock ~~rights~~awards activity in the nine months ended September 30, ~~2019~~2020 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, 2019 95,939 $ 12.49
Vested (50,522 ) $ 8.23
Granted 48,500 $ 3.78
Forfeited (55,000 ) $ 14.95
Unvested at September 30, 2019 38,917 $ 3.68

~~During the nine months ended September 30, 2019,~~On February 7, 2020, the Company ~~granted 48,500~~issued 122,377 shares of common stock under a February 2019 employment agreement as disclosed above, and 5,000 vested restricted stock ~~rights~~units to ~~consultants.~~ the Company’s Chief Executive Officer pursuant to the Equity Plan.

On February 7, 2020, in relation to its amended and restated 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 of the 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 total fair value of restricted stock rights granted during the nine months ended September 30, ~~2019~~2020 was approximately ~~$0.2~~$2.0 million. The fair value of each restricted stock right was based upon the closing stock price on the grant date.

During the nine months ended September 30, 2019, forfeitures of restricted common stock rights totaled 55,000, which consisted of rights forfeited due to the termination of three of the Company’s officers.

The fair value of restricted stock rights is measured based on their fair value on the date of grant and amortized over the vesting period of twelve to twenty-four months. As of September 30, ~~2019,~~2020, there was approximately ~~$0.1~~$0.8 million of unrecognized compensation cost related to unvested restricted common stock ~~rights,~~awards, which is expected to be recognized over a remaining weighted-average vesting period of approximately 102.6 months.

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

Stock incentive plan options:

~~A summary~~As of ~~activity~~September 30, 2020, 12,000 stock options were outstanding under the Equity Plan, ~~for the nine months ended September 30, 2019 is presented below:~~

Shares Underlying Options Weighted Average Exercise Price Weighted Average Remaining Contractual
Term (Years) Aggregate Intrinsic Value
Outstanding at January 1, 2019 62,000 $ 15.71 8.2 $ —
     Forfeited (50,000 ) $ 18.50 —   —
Outstanding at September 30, 2019 12,000 $ 4.09 4.0 $ —

Exercisable at September 30, 2019 12,000 $ 4.09 4.0 $ —

~~Aggregate intrinsic value represents the total intrinsic value (the difference between the Company’s closing stock price on September 30, 2019 and the~~with a weighted average exercise price ~~multiplied by the number~~ of ~~in-the-money options) that would have been received by the option holders, had all option holders been able to,~~$4.09, and ~~in fact had, exercised their~~a weighted average remaining contractual term of approximately 3.0 years. The stock options ~~on September 30, 2019.~~are 100% vested with 0 intrinsic value.

Other common stock purchase warrants:

Following is a summary of outstanding warrants that were issued outside of the Equity Plan for the nine months ended September 30, ~~2019:~~

2020:

Shares Underlying Options/Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual
Term (Years) Aggregate Intrinsic Value
Outstanding at January 1, 2019 1,671,113 $ 39.47 2.0 $ —
Granted 1,908,144 $ 1.94 5.2 $ —
Forfeited (5,000 ) $ 7.90 —   $ —
Outstanding at September 30, 2019 3,574,257 $ 19.48 3.1 $ —

Exercisable at September 30, 2019 3,574,257 $ 19.48 3.1 $ —

~~The Company granted Warrants to purchase 1,908,144 shares of its common stock with an exercise price of $1.94, in connection with the Notes issued on January 28, 2019. (See Note 9).~~

	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

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on September 30, ~~2019~~2020 and the exercise price, multiplied by the number of in-the-money warrants) that would have been received by the warrant holders, had all warrant holders exercised their warrants on September 30, ~~2019.~~

~~Note 12. Discontinued Operations:~~

During the quarter ended March 31, 2017, the Company made the decision to discontinue the operations of its wholly-owned subsidiary BDI. BDI had developed a proprietary Enhanced Surface Plasmon Resonance technology platform for the detection of molecular interactions. The decision to adopt this plan was made following an evaluation by the Company's Board of Directors in January 2017 of the estimated results of operations projected during the near to mid-term period for BDI, including consideration of product development required and updated sales forecasts, and estimated additional cash resources required. The Company substantially disposed of the assets and operations during 2017 by selling the assets and licensing the intellectual property rights. The Company has recognized the exit of BDI in accordance with ASC 205-20, ~~Discontinued Operations~~~~. As such, the historical results of BDI, following its 2016 acquisition, have been classified as discontinued operations.~~

The Company's historical financial statements have been revised to present the operating results of the BDI business as a discontinued operation. Liabilities related to the discontinued operations of BDI totaled approximately $16,000 in accounts payable as of September 30, 2019 and December 31, 2018, respectively.

2020.

Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements ~~of Cash Flows~~

(Unaudited)

Note 10. Commitments and Contingencies

Commitments:

There were no results of discontinued operations for the three and nine months ended September 30, 2019 and the three months ended September 30, 2018. Summarized results of the discontinued operation are as follows for the nine months ended September 30, 2018:

Revenue $ 137,000
Cost of revenue 41,000
Gross margin 96,000
Operating expenses —
Operating income 96,000
Income from discontinued operations, net of tax $ 96,000

~~Note 13. Leases:~~

~~Oklahoma Lease Agreement.~~

Coinmint Co-location Mining Services Agreement

On ~~February 27, 2018, Kairos~~April 8, 2020, the Company entered into ~~a lease~~an agreement with Coinmint, (the ~~“Lease”~~“Coinmint Agreement”) ~~with 7725 Reno #1, LLC (the “Landlord”)~~, pursuant to ~~lease an~~which Coinmint agreed to provide up to approximately ~~107,600 square foot warehouse located in Oklahoma City, Oklahoma, including improvements thereon. Under the Lease, Kairos has the right~~9.5 MW of power and to perform all maintenance necessary to operate ~~from~~Riot’s miners at the ~~premises~~Coinmint facility. In exchange, Coinmint is reimbursed for direct production expenses and receives a performance fee based on ~~a 24 hour/seven day a week basis.~~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 ~~was scheduled to terminate on February 15, 2019; however the term of the Lease was extended by agreement of the parties as discussed below.~~

Prior to the first amendment of the Lease discussed below, the base rent for the facility was equal to $55.95/kW per month for a total of 4 Megawatts (MW) of available electrical power, or $223,800 per month.

Agreement

On ~~March 26, 2018,~~January 8, 2020, Kairos entered into a ~~first~~third amendment to the OKC Lease ~~whereby~~to extend the ~~Landlord agreed to increase~~lease term through May 15, 2020, with all other terms remaining substantially the ~~electrical power available for Kairos’s use from 6MW to 12MW, and, effective~~same as ~~of the date when such additional power became available for use, the base rent under the Lease was increased to approximately $664,760 per month.~~

~~Effective November 29, 2018, Kairos entered into~~ 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 three 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 ~~provides~~is included as prepaid expenses and other current assets on the ~~following:~~

~~extends the initial term~~accompanying condensed consolidated balance sheet. The OKC Lease terminated by its terms effective as of ~~the Lease through August 19, 2019;~~

~~monthly base rent of $235,000 for December 2018, $230,000 for January~~June 30, 2020, and ~~$190,000 per month thereafter for the duration of the Lease, including any renewals;~~

~~changes the monthly electricity usage charges; and~~

~~Kairos shall have the option to renew the Lease for up to two, three-month periods after expiration of the initial term.~~

~~On May 15, 2019,~~ the Company ~~renewed the Lease for the first renewal term~~received a full refund of ~~three months, extending the lease through November 15, 2019.~~

~~On August 15, 2019, the Company renewed the Lease for the second renewal term of three months, extending the lease through February 15,~~its deposit, less applicable electricity charges on July 2, 2020.

Corporate Lease Agreement

On April 9, 2018, the Company entered into a commercial lease ~~covering 1,694~~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 ~~with a third-party. The lease is for an~~Lease, the initial term ofwas for thirty-nine (39) months expiring on August 9, 2021, with one, five-year option to ~~renew. The lease requires~~renew, and the initial ~~monthly rent of approximately $7,000, including~~ 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 ~~associated operating expenses.~~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.

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

Operating Leases

At September 30, ~~2019,~~2020, the Company ~~had~~did not have any significant operating lease liabilities ~~of approximately $0.9 million and~~or right of use ~~assets of approximately $0.9 million, which are included in the condensed interim consolidated balance sheet.~~

assets.

The following summarizes quantitative information about the Company’s operating ~~leases:~~

leases (dollars in thousands):

Lease cost Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Operating lease cost $ 592,593 $ 1,793,778
Variable lease cost 711,113 2,348,448
Operating lease expense 1,303,706 4,142,226
Short-term lease rent expense 4,620 13,860
Total rent expense $ 1,308,326 $ 4,156,086

Other information
Operating cash flows from operating leases $ 584,395 $ 1,792,625
Right of use assets exchanged for new operating lease liabilities $ 558,314 $ 2,664,126
Weighted-average remaining lease term – operating leases 0.6 years 0.6 years
Weighted-average discount rate – operating leases 10.00 % 10.00 %

~~Maturities of the Company’s operating lease liabilities, are as follows (unaudited):~~

For the three months ended December 31, 2019 $ 584,395
For the year ended December 31, 2020 343,731
For the year ended December 31, 2021 35,040
Total $ 963,166
Less present value discount (24,618 )
Operating lease liabilities $ 938,548

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 ~~$1.3~~$0 million and ~~$1.9~~$1.3 million for the three months ended September 30, 2020 and 2019, ~~and 2018, respectively; and~~respectively. Rent expense including electric power costs, recorded on a straight-line basis, was approximately ~~$4.2~~$2.3 million (up to lease termination as of June 30, 2020) and ~~$3.7~~$4.2 million for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

Index

Riot Blockchain, Inc. and Subsidiaries

~~Note 14. Commitments and contingencies:~~Notes to Condensed Interim Consolidated Financial Statements

(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 business. The Company cannot predict the final outcome of such proceedings. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including, consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Certain of the claims, lawsuits and proceedings arising in ordinary course of business are covered by the Company’s insurance program. The Company maintains property and various types of liability insurance in an effort to protect the Company from such claims. In terms of any matters where there is no insurance coverage available to the Company, or where coverage is available and the Company maintains a retention or deductible associated with such insurance, the Company may establish an accrual for such loss, retention or deductible based on current available information. In accordance with accounting guidance, if it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial statements, and the amount of loss is reasonably estimable, then an accrual for the cost to resolve or settle these claims is recorded by the Company in the accompanying consolidated balance sheets. If it is reasonably possible that an asset may be impaired as of the date of the financial statement, then the Company discloses the range of possible loss. ~~Paid expenses~~Expenses related to the defense of such claims are recorded by the Company as incurred ~~and paid~~ and included in the accompanying consolidated statements of operations. Management, with the assistance of outside counsel, may from time to time adjust such accruals according to new developments in the matter, court rulings, or changes in the strategy affecting the Company’s defense of such matters. On the basis of current information, the Company does not believe there is a reasonable possibility that, other than with regard to the Class Action described below, any material loss, if any, will result from any claims, lawsuits and proceedings to which the Company is subject to either individually, or in the aggregate.

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

Shareholder Class Action Suit

On February 17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company's stockholders in the United District Court for the District of New Jersey,Takata v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-02293. The complaint asserts violations of federal securities laws under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of 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 press releases and public filings regarding its business plan in connection with its cryptocurrency business. The complaint requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.

~~Two additional, nearly identical complaints were subsequently filed by Richard Roys and Bruce Greenawalt in the United District States Court for the Southern District of Florida (~~~~Roys v. Riot Blockchain Inc., et al.~~~~, Case No. 9:18-cv-80225) and the United States District Court for the District of Colorado (~~~~Greenawalt v. Riot Blockchain Inc., et al.~~, Case No. 1:18-cv-00440), respectively. On March 27, 2018, the court closed the Roys case for administrative purposes. On April 2, 2018, Mr. Greenawalt filed a notice of voluntary dismissal of his action, which the court entered on the same date.

On April 18, 2018, Joseph J. Klapper, Jr., filed a complaint against Riot Blockchain, Inc., and certain of its officers and directors in the United District Court for the District of New Jersey (Klapper v. Riot Blockchain Inc., et al., 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. ~~Briefing on~~

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 ~~expected~~pending before the court. If the court grants Lead Plaintiff leave to ~~be completed on November 18, 2019. Subject to the outcome of the pending motions,~~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 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 ~~9, 2020~~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 breach of fiduciary duty. The complaints seek unspecific monetary damages and corporate governance changes.

On September 24, 2018, the court entered an order consolidating theGaft andKish actions, which is now styled asIn re Riot BlockChain, Inc. Shareholder Derivative Litigation, Case No. A-18-774890-B. The plaintiffs filed a consolidated complaint on March 15, 2019. The consolidated action has been temporarily stayed until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.

Index

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.

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

On October 22, 2018, ~~a fifth~~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 continues to vigorously dispute the allegations made in the Kashwise 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 cannot 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 received a subpoena from the SEC, requesting documents and information. The ~~SEC has continued to request information from the~~ Company ~~and the Company has been~~ fully ~~cooperating~~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 date of the letter, 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 to be the beneficial owner of more than 5% of the Company’s common stock. The Company has relied on each person who has reported to the SEC beneficial ownership of more than 5% of our common stock to provide complete and accurate information regarding their ownership, based on the reports filed by these persons.

Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

On September 7, 2018, a complaint was filed by the SEC (Case 1:18-cv-08175) and as subsequently amended, (the “Complaint”) against, among others, a number of individuals and entities some of whom the Company has previously disclosed as its beneficial owners, as well as, Mr. John O’Rourke III, the Company’s former chairman of the board of directors and chief executive officer who resigned from the Company on September 8, 2018, as disclosed in the Current Periodic Report on Form 8-K filed September 10, 2018. Other persons named in the Complaint have previously reported that they were beneficial owners of the Company’s common stock, however, the Company has no basis to determine whether any such persons may have operated as a control group, collectively beneficially owning more than 5% of the Company’s common stock.

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 July 10, 2019, with respect to other subjects of the SEC’s complaint. Without admitting or denying the SEC’s allegations, the defendants agreed to pay disgorgement, prejudgment interest and civil penalties.

~~Note 15. Tess Related Party Transactions:~~Registration Rights Penalty

~~Tess related parties include: Powercases Inc.~~During December 2017, the Company closed on the sale of approximately $37 million of units comprised of 1,646,113 shares of its common stock and warrants to purchase up to 1,646,113 shares of its common stock (the “Units”) in a private exempt offering (the “December 2017 Private Placement”) to certain accredited investors (the “December 2017 Investors”), ~~and 2227470 Ontario Inc., (companies that are wholly-owned~~as previously disclosed by Jeffrey Mason, President and Chief Executive Officer of Tess), 1038088 Ontario Limited (a company that is wholly-owned by Fraser Mason, Chairman and Chief Financial Officer of Tess), and JLM Strategic Marketing (a proprietorship owned by Jennifer Mason, Manager Corporate Communications of Tess).

~~Riot Blockchain, Inc. and Subsidiaries~~

~~Condensed Interim Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

~~The following table provides~~ the ~~total amount of transactions that have been~~Company on its Current Report on Form 8-K filed with the SEC on December 19, 2017. In connection with the December 2017 Private Placement, the Company entered into registration rights agreements (the “December 2017 Registration Rights Agreements”) with ~~Tess related parties~~the December 2017 Investors, pursuant to which the Company agreed to take certain steps to register the shares underlying the Units. The Company accounted for the December 2017 Registration Rights Agreements in accordance with ASC 825-20, “Registration Payment Arrangements.” ASC 825-20 addresses an issuer’s accounting for registration payment arrangements and, ~~outstanding balances~~in accordance with ~~Tess related parties~~ASC 450-20 “Loss Contingencies,” the Company recorded approximately $1,358,000 for this contingent liability in 2018.

On January 5, 2018, pursuant to December 2017 Registration Rights Agreements, the Company filed a registration statement on Form S-3 to register the shares underlying the Units.

Subsequently, in April 2018, the Company received a subpoena from the SEC as part of an 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 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 ~~the periods identified:~~

Period Ended
Services to Tess provided by (1): September 30, 2019 September 30, 2018
Powercases Inc. $ 231,328 $ 379,385
JLM Strategic Marketing $ —   $ 267,304
1038088 Ontario Limited $ 45,062 $ 110,123

Payable to: September 30, 2019 December 31, 2018
Powercases Inc. $ —   $ 37,250
JLM Strategic Marketing $ —   $ 9,483
1038088 Ontario Limited $ —   $ 52,053

~~(1)~~

~~- 2019 amounts provided by related parties are up to the date~~its condensed consolidated financial statements as of ~~de-consolidation.~~

~~During the period ended~~ June 30, 2019 (up to the point of de-consolidation) and six months ended June 30, 2018, included in Tess's recorded services from related parties was approximately $260,000 and $180,000, respectively for Tess's key management personnel salaries.2020.

Note ~~16.~~11. Subsequent Events:

Financing

Subsequent to September 30, ~~2019,~~2020, in connection with the Company’s Sales Agreement with H.C. Wainwright, the Company received gross proceeds of approximately ~~$859,000~~$8.1 million from the sale of ~~494,820~~2.0 million shares of common ~~stock.~~stock via the 2020 ATM Offering sold pursuant to the prospectus relating to the 2020 Registration Statement (Registration No. 333-249356).

ATM Sales Agreement

~~Common Stock~~As disclosed under Note 2, Liquidity and Financial Resources, effective as of October 15, 2020, the Company and H.C. Wainwright entered into the First Amendment to the Sales Agreement, relating to the sale by the Company via its sales agent, H.C. Wainwright, of up to $100.0 million in shares of the Company’s common stock in the 2020 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 pursuant to the First Amendment to the Sales Agreement. Accordingly, as of October 15, 2020, no further sales of shares of the Company’s common stock may be made pursuant to the 2019 ATM Offering.

Delivery of Miners

Subsequent to September 30, ~~2019, 30,000 shares~~2020, the Company received and deployed at the Coinmint facility 1,003 next generation S19 Pro Miners purchased from Bitmain.

Sale of ~~restricted common stock related~~Cryptocurrencies

Subsequent to ~~fully vested shares~~September 30, 2020, the Company sold 100 bitcoins generating total cash proceeds of ~~restricted stock were issued under the Company’s 2017 Equity Incentive Plan.~~approximately $1.55 million.

Index

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes in “Item 1. Condensed Interim Consolidated Financial Statements.” The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and should not be construed either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. See “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors.”

~~Management’s plans and basis of presentation:~~

Overview

The ~~Company has experienced recurring losses~~Company’s current focus is on its cryptocurrency mining operation, and negative cash flows from operations. At September 30, 2019, the Company had approximate balances of cash and cash equivalents of $15.2 million, working capital of $16.5 million, total stockholders' equity of $28.2 million and an accumulated deficit of $213.8 million. To date, the Company has in large part relied on debt and equity financing to fund its operations.

During the nine months ended September 30, 2019, the Company entered into a Sales Agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”) dated May 24, 2019, pursuant to which the Company may, from time to time, sell up to $100.0 million in shares of the Company’s common stock through H. C. Wainwright, acting as the Company’s sales agent and/or principal, in an at-the-market offering (“ATM Offering”). All sales of the shares have been made pursuant to an effective shelf registration statement on Form S-3 filed with the SEC (File No. 333-226111). The Company pays H.C. Wainwright a commission of approximately 3.0% of the aggregate gross proceeds the Company received from all sales of the Company's common stock under the Sales Agreement. The Company received net proceeds on sales under the Sales Agreement of approximately $22.7 million at a weighted average price of $3.10 (before offering expenses) during the nine months ended September 30, ~~2019.~~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 recently 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 use electric power more efficiently than the model S9 Miners Riot previously operated. Combined with the previously disclosed purchases of Miners from Bitmain, the Company now expects to achieve a total hash rate capacity of 2.3 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 the environmental operating issues at the OKC Facility, the Company made 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 the New York ISO market.

Index

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 potential strategic transactions in bitcoin mining related operations. The Company does 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 from operations for~~result in significant national and global economic disruption, which may adversely affect our business. Based on the ~~near-term and these losses could be significant as~~Company’s current assessment, however, the Company ~~incurs costs and expenses associated with recent and potential future acquisitions and~~does not expect any material impact on its long-term development, its operations, or its liquidity due to the worldwide spread of the ~~RiotX exchange platform, as well as public company, legal and administrative related expenses being incurred. The~~COVID-19 virus. However, the Company is ~~closely~~actively monitoring this situation and the possible effects on its ~~cash balances, cash needs~~financial condition, liquidity, operations, suppliers, and ~~expense levels.~~industry.

Summary of Mining Results

~~Management's strategic plans include the following:~~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:

	•	~~continuing expansion of digital currency mining operations relative to the price of digital currencies;~~
	•	~~continuing to evaluate opportunities for acquisitions in the blockchain and digital currency sector;~~
	•	~~establishing a digital currency exchange;~~
	•	~~exploring other possible strategic options and financing opportunities available to the Company;~~
	•	~~evaluating options to monetize, partner or license the Company's assets; and~~
	•	~~continuing to implement cost control initiatives to conserve cash.~~

	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

Index

Results of Operations

Comparative Results for the Three Months Ended September 30, ~~2019~~2020 and ~~2018~~

2019

Revenue for the three months ended September 30, ~~2019~~2020 and ~~2018~~2019, consisted of our cryptocurrency mining revenue of ~~$1,715,000,~~$2.4 million, and ~~$2,343,000, respectively,~~$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 ~~other~~S19 Pro Miners acquired from Bitmain, as compared to the older model S9 Miners previously used in 2019. Other revenue consisting of license ~~payments of $24,000~~fees was not significant in ~~each~~either period. Mining production for the three months ended September 30, 2019, was 157.24 bitcoin, 0.04 bitcoin cash and 400.17 litecoin, as compared to 319.26 bitcoin, 45.30 bitcoin cash and 1,182.17 litecoin, mined during the three months ended September 30, 2018.

Cost of revenue for the three months ended September 30, 2020 and 2019 of $1.3 million and ~~2018 of $1,476,000 and $2,032,000,~~$1.5 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 ~~November 2018~~ the ~~lease for our Oklahoma City, Oklahoma mining facility~~2019 period, production was ~~amended whereby monthly base rent~~at the OKC Facility and the 2020 period production was ~~reduced and monthly electricity usage was charged~~ at ~~actual usage.~~

the Coinmint Facility.

Selling, general and administrative expenses induring the three months ended September 30, 2020 and 2019, totaled ~~$1,762,000, which is approximately $4,208,000, or a 70.5% decrease, as compared to $5,970,000 in~~$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 ~~2018 period. Stock-based compensation decreased by approximately $1,754,000 for the three months ended September 30, 2019,~~2020 period as compared to the ~~2018 period. Consulting~~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 ~~decreased approximately $1,000,000 for services~~increased by $0.3 million due primarily to higher litigation related ~~to our miners. Public company~~ expenses ~~increased to $403,000 for~~in the ~~three months ended September 30, 2019, compared to $222,000~~2020 period net of the prior termination of the SEC investigation and general overhead expenses in ~~comparable expenses for~~ the ~~2018~~2020 period ~~primarily related to consulting fees for improvements to the Company’s internal control procedures. Legal fees decreased approximately $1,336,000~~were less due to ~~legal matters associated primarily with~~less travel, the ~~fees for~~closure of the ~~class action~~OKC facility and ~~derivative suits and special SEC related matters being higher in~~ the ~~2018 period.~~

discontinuance of RiotX.

Depreciation and amortization expenses during the three months ended September 30, ~~2019~~2020 totaled ~~$23,000,~~$1.3 million, which is ~~a decrease~~an increase of approximately ~~$635,000,~~$1.2 million, as compared ~~with $658,000 during~~to the three months ended September 30, ~~2018.~~2019. The ~~decrease~~increase is primarily due to ~~lower~~higher depreciation expenses recognized for our ~~cryptocurrency machines, which is a result of $29,238,000 impairment charges recorded during the year ended December 31, 2018.~~recently acquired Miners.

~~Impairment charges for digital currencies totaled $372,000~~Interest income and ~~$164,000~~interest expense was nominal for the three months ended September 30, ~~2019~~2020 and ~~2018, respectively.~~2019.

~~Interest expense for~~During the three months ended September 30, ~~2019 and 2018 was $2,000 and $22,000, respectively.~~

~~Other income was $35,000 for the three months ended September 30, 2019, which was due to~~2020 we recorded a gain on ~~forgiveness~~exchange of ~~accounts payable. There was no other income recognized for the three months ended September 30, 2018.~~

cryptocurrencies of approximately $0.4 million. For the three months ended September 30, 2019 ~~and 2018, we recorded investment income~~the gain on sale of ~~approximately $6,000 and $1,000, respectively.~~

cryptocurrencies was nominal.

Other ~~expenses~~income for the three months ended September 30, 2020 and 2019 ~~and 2018~~ was ~~approximately $2,000 in each period, respectively.~~ nominal.

Index

Comparative Results for the Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~

2019

Revenue for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, consisted of our cryptocurrency mining revenue of ~~$5,564,000,~~$6.7 million, and ~~$6,087,000, respectively,~~$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 $6,434 per coin in the 2019 period. Bitcoins produced in 2020 totaled 730 as compared to 803 in the 2019 period. The 2020 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 ~~other~~S19 Pro Miners as compared to the older S9 Miners used in 2019. Other revenue consisting of license ~~payments of $73,000~~fees was not significant in ~~each~~either period. Mining production for the nine months ended September 30, 2019, was 802.95 bitcoin, 500.11 bitcoin cash and 2,692.68 litecoin, as compared to 710.34 bitcoin, 1,496.21 bitcoin cash and 471.53 litecoin, mined during the nine months ended September 30, 2018.

Cost of revenue for the nine months ended September 30, 2020 and 2019 of $4.1 million and ~~2018 of $4,535,000 and $3,933,000,~~$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. ~~The approximate $602,000 increase related primarily to~~There were no significant changes in cost of revenue between the ~~Oklahoma City mining facility not commencing operations until February 2018, net of~~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 ~~reductions and monthly electricity usage being charged at actual usage following~~for our OKC Facility as a result of the ~~November 2018 Lease amendment.~~

relocation from OKC to Coinmint.

Selling, general and administrative expenses induring the nine months ended September 30, ~~2019~~2020 totaled ~~$7,140,000,~~$8.0 million, which is approximately ~~$9,174,000,~~$0.8 million, or ~~a 56.2% decrease,~~an 11.5% increase, as compared to ~~$16,314,000~~$7.1 million in the ~~2018~~2019 period. Stock-based compensation ~~decreased~~increased by approximately ~~$4,141,000~~$2.4 million for the nine months ended September 30, ~~2019,~~2020, as compared to the ~~2018~~2019 period. ~~Consulting~~Legal fees decreased approximately ~~$2,343,000 for services related~~$0.4 million due to ~~our miners. Investor, public relations~~additional legal matters associated with the litigation and ~~public company expenses reduced to $699,000~~SEC investigation matters in the 2019 period. Audit fees decreased approximately $0.3 million for the nine months ended September 30, 2019 compared to $1,272,000 in comparable expenses for the 2018 period. Legal fees decreased by approximately $1,289,000 due to legal matters associated primarily with the fees for the class action and derivative suits and special SEC related matters being higher in the 2018 period. Audit fees increased approximately $155,000 due to the increased level of financial activities and the audit of internal controls over financial reporting for the year ended December 31, 2018, which were primarily incurred in the 2019 period.2020. Compensation related expense decreased by approximately ~~$463,000~~$0.8 million due primarily to ~~staff reductions in early 2019, net of severance costs~~reduced personnel in the period ended September 30, ~~2019.~~

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, ~~2019~~2020 totaled ~~$70,000,~~$2.8 million, which is ~~a decrease~~an increase of approximately ~~$5,615,000,~~$2.7 million, as compared ~~with $5,685,000~~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, ~~2018. The decrease is primarily due~~2020 were recorded in connection with the impairment of our investment in Coinsquare. As discussed in Note 7, Investments, to ~~lower depreciation expenses recognized for our cryptocurrency machines, which is~~Part I of this Quarterly Report, the Company recorded this 100% impairment as a result of ~~$29,238,000 impairment~~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 ~~recorded during the year ended December 31, 2018.~~

~~There were no asset impairment charges recorded during the nine months ended September 30, 2019. Asset impairment charges of $26,858,000 were recognized~~for cryptocurrencies was $1.0 million for the nine months ended September 30, ~~2018~~2020, which was recorded to ~~record~~recognize an impairment of our ~~miners at their fair value.~~cryptocurrencies during the period.

~~There were $372,000 of impairment charges for digital currencies for~~During the nine months ended September 30, ~~2019, compared to $3,375,000 for~~2020, we recognized income of approximately $1.4 million in connection with the ~~nine months ended September 30, 2018.~~

reversal of our registration rights penalty.

During the nine months ended September 30, 2019, we recognized losses related to the issuance of ~~our Senior Secured Convertible Notes (the “Notes”) of $6,155,000. We also recognized~~notes totaling $6.2 million and expenses totaling ~~$6,765,000~~$6.8 million to revalue the ~~Notes~~notes and the related warrant liability to fair ~~value at~~value. No such expense was recognized in the period ended September 30, ~~2019.~~

2020.

During the nine months ended September 30, 2020 and 2019, interest income and interest expense was nominal.

During the nine months ended September 30, 2020 we recorded a gain ~~of $1,139,000~~ on the ~~deconsolidation~~sale / exchange of ~~Tess, due to our reduced ownership interest from 50.2% to 9%.~~cryptocurrencies of approximately $0.5 million. For the nine months ended September 30, 2019 the gain on sale of cryptocurrencies was $0.7 million.

~~Interest expense~~Other income for the nine months ended September 30, 2020 was nominal. Other income for the nine months ended September 30, 2019 ~~and 2018~~ was ~~$119,000 and $38,000, respectively.~~

~~Other income was $843,000 for~~$0.9 million arising from the ~~nine months ended September 30, 2019, due to a $390,000~~ gain on ~~forgiveness~~extinguishment of our payable and interest in connection with our agreement with BMSS, and a $453,000 gain on forgiveness of various accounts payable balances. There was no other income recognized for the nine months ended September 30, 2018.debt.

~~For the nine months ended September 30, 2019 and 2018, we recorded investment income of approximately $26,000 and $70,000, respectively.~~23

Index

During the nine months ended September 30, 2018 we recorded $1,358,000 for the penalty accrual related to our registration rights agreement associated with our December 19, 2017 private placement. The agreement provided that the Company register our securities by the effectiveness date of March 5, 2018. The registration rights were not registered by the effectiveness date and the Company recognized a contingency.

Liquidity and Capital Resources

At September 30, ~~2019,~~2020, we had working capital of approximately ~~$16,520,000,~~$39.3 million, which included cash and cash equivalents of ~~$15,163,000.~~$30.1 million. We reported a net loss of ~~$16,863,000,~~$16.6 million, during the nine months ended September 30, ~~2019.~~2020. The net loss included ~~$12,781,000~~$14.4 million in non-cash items consisting of ~~a loss on~~ the ~~issuance~~impairment of our ~~convertible notes~~investment in Coinsquare of ~~$6,155,000, the change in fair value~~$9.4 million, stock-based compensation totaling $2.8 million, impairment to our cryptocurrencies of ~~our convertible notes~~$1.0 million, depreciation and ~~the related warrant liability of $6,765,000,~~amortization totaling $2.8 million, and amortization of our right of use assets of ~~$1,727,000, stock-based compensation totaling $431,000, impairment to our digital currencies of $372,000, and depreciation and amortization totaling $71,000,~~$0.4 million, offset by ~~a $1,139,000 gain recognized on~~$1.4 million for the ~~deconsolidation of Tess, a $843,000 gain on the extinguishment of notes, interest and accounts payable, other income of approximately $73,000, primarily related to the amortization~~reversal of our ~~deferred revenue related to our legacy animal health business, $665,000~~accrual for the registration rights penalty and $0.5 million related to the gain from the exchange of cryptocurrencies, net of other immaterial items. Subsequently, the Company received gross proceeds of approximately $8.1 million from the sale of ~~digital currencies~~approximately 2.0 million shares of common stock via the 2020 ATM Offering.

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 purchase commitment totals $37.2 million, with $12.8 million in deposits paid and ~~$20,000~~the remaining $24.4 million due to be paid over the delivery schedule through the second quarter of ~~accrued interest~~2021.

We expect to continue to incur losses from operations for the near-term and these losses could be significant as we incur costs and expenses associated with recent and potential future acquisitions, as well as public company, legal and administrative related expenses being incurred. We are closely monitoring our cash balances, cash needs and expense levels.

Halving

Further affecting the industry, and particularly for the bitcoin blockchain, the cryptocurrency reward for solving a block is subject to ~~our investment~~periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in ~~Verady.~~cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “halving.” For bitcoin, the reward was initially set at 50 bitcoin currency rewards per block and this was cut in half to 25 on November 28, 2012 at block 210,000 and again to 12.5 on July 9, 2016 at block 420,000. Halving of bitcoin occurred May 11, 2020 at block 630,000 when the then current 12.5 reward reduced to 6.25. Many factors influence the price of bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.

Revenue from Mining Operations

Funding our operations on a go-forward basis will rely significantly on our ability to continue to mine ~~digital currency~~cryptocurrency and the spot or market price of the ~~digital currency~~cryptocurrency we mine. We expect to generate ongoing revenues from the production of ~~digital currencies,~~cryptocurrencies, primarily bitcoin, in our mining ~~facilities and our~~facilities. Our ability to liquidate ~~digital currency rewards~~bitcoin at future values will be evaluated from time to time to generate cash for operations. Generating bitcoin, ~~currency rewards,~~ for example, which exceed our production and overhead costs will determine our ability to report profit margins related to such mining operations, although accounting for our reported profitability is significantly complex. Furthermore, regardless of our ability to generate revenue from ~~the sale of~~ our ~~digital currency~~cryptocurrency assets, we ~~will~~may need to raise additional capital in the form of equity or debt to fund our operations and pursue our business strategy.

The time and costs to advance development of the RiotX exchange are expected to grow as and if the exchange’s operations grow and expansion into additional states is pursued. Such costs include expenses for additional development, current and additional service providers, insurance and bonding requirements, sales and marketing activities to support the launch and general overhead and associated information technology (“IT”) costs. Such costs could be significant and there is no assurance that the RiotX exchange will be launched and, once it’s operational, that it will be able to generate sufficient revenues needed to achieve profitability.

We expect to continue to incur losses from operations for the near-term and these losses could be significant as we incur costs and expenses associated with recent and potential future acquisitions and development of the RiotX exchange platform, as well as public company, legal and administrative related expenses being incurred. We are closely monitoring our cash balances, cash needs and expense levels.

The ability to raise funds as equity, debt or conversion of ~~digital currency~~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 ~~although and~~ such volatility has ~~reduced~~ recently been lower and future prices cannot be ~~predicted with any reasonable degree~~predicted.

If we are unable to generate sufficient revenue from our bitcoin production when needed or secure additional sources of ~~accuracy.~~funding, it may be necessary to significantly reduce our current rate of spending or explore other strategic alternatives.

Coverage for Claims

~~During 2018, the~~The Company ~~was~~has been named a defendant in ~~several lawsuits seeking~~a class action ~~status,~~suit, which has recently been dismissed, but is subject to appeal by the plaintiffs and other investor related lawsuits as more fully described in Part II – Item 1. Legal Proceedings, of this ~~report. In addition, the Company has received comments, inquiries and subpoenas from regulatory bodies, including NASDAQ and the SEC, which are costly and time consuming to respond to.~~Quarterly Report. While the Company maintains policies of insurance, such policies may not cover all of the costs or expenses associated with responding to such matters or any liability or settlement associated with any lawsuits and are subject to significant deductible or retention amounts.

At-the-Market Offering

~~If we are unable~~As disclosed under Note 2, Liquidity and Financial Condition, the Company received proceeds from sales of 22,210,095 shares of its common stock, 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, during the nine months ended September 30, 2020. These shares were sold pursuant to ~~generate sufficient revenue~~the 2019 ATM Offering. The Company paid H.C. Wainwright a commission of 3.0% of the aggregate gross proceeds the Company received from ~~our bitcoin production when needed or secure~~all sales of the Company's common stock under the Sales Agreement.

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 ~~sources of funding, or if certain contingent liabilities become due and are not adequately covered by our insurance policies, it~~sales may be ~~necessary~~made pursuant to ~~significantly reduce our current rate of spending or explore other strategic alternatives.~~the 2019 ATM Offering.

Operating Activities

Net cash used in operating activities was ~~$12,933,000~~$8.8 million during the nine months ended September 30, 2020. Cash was consumed from continuing operations by the loss of $16.6 million, less non-cash items of $14.4 million, consisting of the impairment of our investment in Coinsquare totaling $9.4 million, stock-based compensation totaling $2.8 million, impairment to our cryptocurrencies of $1.0 million, depreciation and amortization totaling $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 other 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 $0.4 million and a decrease in accounts payable and accrued expenses of $0.2 million.

Index

Net cash used in operating activities was $12.9 million during the nine months ended September 30, 2019. Cash was consumed from continuing operations by the loss of ~~$16,863,000,~~$16.9 million, less non-cash items of ~~$12,781,000,~~$12.8 million, consisting of a loss on the issuance of our convertible notes of ~~$6,155,000,~~$6.2 million, the change in fair value of our convertible notes and the related warrant liability of ~~$6,765,000,~~$6.8 million, amortization of our right of use assets of ~~$1,727,000,~~$1.7 million, stock-based compensation totaling ~~$431,000,~~$0.4 million, impairment to our ~~digital currencies~~cryptocurrencies of ~~$372,000,~~$0.4 million, and depreciation and amortization totaling $71,000, offset by a ~~$1,139,000~~$1.1 million gain recognized on the deconsolidation of Tess, a gain on extinguishment of notes, interest and accounts payable totaling ~~$843,000,~~$0.8 million, the amortization of license fee revenue totaling $73,000, a gain from the sale of our ~~digital currencies~~cryptocurrencies of ~~$665,000~~$0.7 million and accrued interest related to our investment in Verady of $20,000. ~~Digital currencies~~Cryptocurrencies increased by ~~$5,453,000~~$5.5 million and prepaid expenses and other current assets increased ~~$756,000,~~$0.8 million, offset by, a decrease in the lease liability of ~~$1,726,000~~$1.7 million and a decrease in accounts payable and accrued expenses of ~~$916,000.~~$0.9 million.

Investing Activities

Net cash used in ~~operating~~investing activities ~~was $15,965,000, consisting of $15,896,000 from continuing operations and $69,000 from discontinued operations~~ during the nine months ended September 30, ~~2018. Cash~~2020 was ~~consumed from continuing operations by the loss of $47,526,000, less non-cash items of $36,560,000~~$16.5 million, consisting of ~~an asset impairment for~~deposits on equipment of $11.4 million, purchases of property and equipment of $6.3 million, offset by proceeds received from the Company’s miners of $26,858,000, impairment of our digital currencies of $3,375,000, depreciation and amortization totaling $5,686,000, stock-based compensation totaling $4,147,000, net of deferred income tax benefit of $3,525,000, realized gain on sale of ~~digital currencies~~cryptocurrencies of ~~$451,000~~$1.0 million and ~~amortization~~proceeds received from the sale of ~~license fee revenue totaling $73,000, stock issued for the extinguishment~~property and equipment of the BMSS payable of $266,000 and common stock issued for services totaling $278,000. Prepaid contracts increased $1,585,000 due to the advance consulting payment made to Ingenium, for future services associated with the set-up of the new mining facility and its operations and other services, digital currencies increased $6,087,000, accounts payable and accrued expenses increased $4,255,000 related to the significant expansion of the Company’s operating activities in 2018, offset by a slight decrease in prepaid and other current assets.

~~Investing Activities~~

$0.1 million.

Net cash provided by investing activities during the nine months ended September 30, 2019 was ~~$3,161,000,~~$3.2 million, consisting of proceeds from the sale of ~~digital currencies~~cryptocurrencies of ~~$3,196,000,~~$3.2 million, offset by $27,000 for the amortization of patent costs, and $8,000 for the purchase of equipment.

Net cash used in investing activities during the nine months ended September 30, 2018 was $26,860,000 primarily consisting of purchases of digital currencies of $5,723,000, purchases of property and equipment of $20,311,000 related to the Company’s cryptocurrency miners, an additional investment in Coinsquare of $6,413,000, security deposits of $703,000, purchases of patent and trademark application costs of $33,000, an investment in Logical Brokerage of $517,000 and a purchase of developed technology of $531,000, offset by proceeds from the sale of digital currencies of $7,371,000.

Financing Activities

Net cash provided by financing activities was ~~$24,709,000~~$48.0 million during the nine months ended September 30, 2020, which consisted of net proceeds from the issuance 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 employee withholding taxes of $0.4 million.

Net cash provided by financing activities was $24.7 million during the nine months ended September 30, 2019, which consisted of net proceeds from the issuance of our common stock in connection with our 2019 ATM Offering of ~~$22,659,000,~~$22.7 million, the proceeds received from the issuance of our Notes and Warrants of ~~$3,000,000,~~$3.0 million, offset by the repayment of the principal balance related to our agreement with BMSS of ~~$950,000,~~approximately $1.0 million, net of the ~~$390,000~~$0.4 million gain recorded on extinguishment of the BMSS balance.

Net cash provided by financing activities was $2,780,000 during the nine months ended September 30, 2018, primarily consisting of $1,696,000 of proceeds from a convertible demand note issued by Tess, $350,000 from the exercise of warrants, $506,000 from the sale of the Company’s shares of common stock held by Tess, $220,000 from the sale of common shares by Tess, $79,000 from the exercise of stock options and $64,000 from a refund of previously escrowed dividend, offset by $136,000 used in scheduled payments under debt agreements.

Critical Accounting Policies and Significant Judgments and Estimates

Our critical accounting policies and significant estimates are detailed in our ~~2018~~2019 Annual Report. Our critical accounting policies and significant estimates have not changed from those previously disclosed in our ~~2018~~2019 Annual Report, except for those accounting subjects mentioned in the section of the notes to the condensed interim consolidated financial statements titled Recently Issued and Adopted Accounting Pronouncements.

Recently issued and adopted accounting pronouncements:

The Company has evaluated all recently issued accounting pronouncements and believes such pronouncements do not have a material effect on the Company's financial statements. See Note 3 of the condensed interim consolidated financial statements at September 30, ~~2019.~~2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for a Smaller Reporting Company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and that information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer) as appropriate, to allow timely decisions regarding required disclosures. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of September 30, ~~2019,~~2020, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, the Company's disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting as described below.

Index

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 in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;~~

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and

•

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

•

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, ~~2019.~~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, ~~2019,~~2020, we concluded that our internal control over financial reporting ~~are~~is not effective due to the following material weaknesses identified:

We did not implement or properly maintain control activities at either the entity or activity level that were designed or were operating effectively to identify and address (i) all significant risks that could have a material adverse impact on the Company’s ongoing operations and (ii) all likely sources that could result in a material misstatement to the financial statements.

We did not design or maintain effective general IT controls over certain information systems that are relevant to the mitigation of the risk pertaining to the misappropriation of assets and to the preparation of the consolidated financial statements. Specifically, we did not design and implement:

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;

Program change management controls for certain financially relevant systems to ensure that IT program and data changes affecting the Company’s (i) financial IT applications, (ii) digital currency mining equipment, (iii) digital currency hardware wallets, and (iv) underlying accounting records, are identified, tested, authorized and implemented appropriately; and

Physical security controls to ensure that the (i) digital currency hardware wallets, (ii) digital currency hardware wallet master seed phrases, (iii) digital currency hardware wallet pin codes, and (iv) the digital currency mining equipment were safeguarded, monitored, validated, and restorable, both physically and electronically.

~~Remediation~~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.

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.

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.

Index

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 ~~these~~the above actions, once fully implemented, will remediate the material ~~weaknesses.~~weaknesses noted above. The ~~weakness~~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

~~There has been no change~~The remediations described above are the only changes in our internal control over financial reporting during the three months ended September 30, ~~2019,~~2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Disclosure under this Item is incorporated by reference to the disclosure provided in this report under Part I, Item 1., Financial Statements in Note ~~14,~~10, commitments and contingencies.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors discussed under the heading “Risk Factors” included in Part I, Item 1A of our 2019 Annual Report, and those disclosed under Part II, Item 1A of our Quarterly Report on Form ~~10-K~~10-Q for the ~~year~~period ended ~~December~~March 31, ~~2018, as amended by Amendment No. 1 on Form 10-K/A filed on April 23, 2019 (the “2018 Annual Report”) and our Registration Statement on Form S-3, as amended,~~2020, filed on May ~~2, 2019 (File No. 333-226111)~~5, 2020 (the ~~“Registration Statement”~~“Q1 2020 Quarterly Report”)., and our Quarterly Report on Form 10-Q for the period ended June 30, 2020, filed on August 10, 2020 (the “Q2 Quarterly Report”), as well as those we may disclose in subsequent filings with the SEC. For the period ended September 30, ~~2019,~~2020, there have been no material changes to those risk factors disclosed in our ~~2018~~2019 Annual Report, Q1 2020 Quarterly Report, and ~~Registration Statement.~~the Q2 Quarterly Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Other than those previously disclosed by the Company in its current reports on Form 8-K as filed with the SEC, there have been no unregistered sales of the Company’s equity securities during the period covered by this Quarterly Report.None.

Item 3. Defaults Upon Senior Securities

N/A – none.

Item 4. Mine Safety Disclosures

N/A – none.

Item 5. Other Information

N/A – none.

Item 6. Exhibits

EXHIBIT		DESCRIPTION
10.		Material Contracts.
4. 10.01		*~~Instruments Defining the Rights of Security Holders, Including Indentures.~~*
~~4.1~~		~~Form of Senior Secured Promissory Note dated January 28, 2019. (Incorporated by reference~~ Third Amendment to ~~Exhibit 4.1 of the Current Report on Form 8-K, filed February 1, 2019)~~
~~4.2~~		~~Form of Warrant Agreement dated January 28, 2019. (Incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K, filed February 1, 2019)~~
~~10.~~		*~~Material Contracts.~~*
~~10.01~~		~~Form of Securities Purchase Agreement dated January 28, 2019. (Incorporated by reference to Exhibit 10.01 of the Current Report on Form 8-K, filed February 1, 2019)~~
~~10.02~~		~~Form of Security Agreement dated January 28, 2019. (Incorporated by reference to Exhibit 10.02 of the Current Report on Form 8-K, filed February 1, 2019)~~
~~10.03~~		~~Form of Registration Rights Agreement dated January 28, 2019. (Incorporated by reference to Exhibit 10.03 of the Current Report on Form 8-K, filed February 1, 2019)~~
~~10.04~~		~~Jeffrey G. McGonegal Executive Employment Agreement~~Lease, dated as of ~~February 6, 2019.~~January 8, 2020, by and between Kairos Global Technologies, Inc. and 7725 Reno #1, L.L.C. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed January 13, 2020)
10.02		Amended and Restated McGonegal Employment Agreement by and between Riot Blockchain, Inc. and Jeffrey G. McGonegal, dated as of February 7, 2020. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed February 11, ~~2019)~~2020)
~~31.~~ 10.03		*~~Certifications.~~* Coinmint Co-Locating Mining Services Agreement by and between Riot Blockchain, Inc. and Coinmint, LLC, dated effective as of April 8, 2020. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed April 14, 2020)

Index

EXHIBIT		DESCRIPTION
10.04		Fourth Amendment to Lease, dated effective as of April 10, 2020, by and between Kairos Global Technologies, Inc. and 7725 Reno #1, L.L.C. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed April 20, 2020)
~~31.1~~ 10.05		Sale and Purchase Agreement by and between Bitmaintech PTE, LTD. and Riot Blockchain, Inc. dated as of April 28, 2020. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed May 5, 2020)
10.06		Sale and Purchase Agreement by and between Bitmaintech PTE, LTD and Riot Blockchain, Inc., dated as of May 6, 2020. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed May 12, 2020)
10.07		Sale and Purchase Agreement by and between Bitmaintech PTE, LTD and Riot Blockchain, Inc., dated as of June 1, 2020. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed June 5, 2020)
10.08		Sale and Purchase Agreement by and between Bitmaintech PTE, LTD and Riot Blockchain, Inc., dated as of August 12, 2020. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed August 18, 2020)
10.09		Sale and Purchase Agreement by and between Bitmaintech PTE, LTD and Riot Blockchain, Inc., dated as of August 25, 2020. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed August 27, 2020)
10.10		Amendment No. 1 to Sale and Purchase Agreement by and between Bitmaintech PTE, LTD and Riot Blockchain, Inc., dated as of August 25, 2020. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed August 27, 2020)
10.11		Sale and Purchase Agreement by and between Bitmaintech PTE, LTD and Riot Blockchain, Inc., dated as of September 30, 2020. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed October 7, 2020)
31.		Certifications.
31.1		Rule 13a-14(a)/15d-14(a) - Certification of Chief Executive Officer and Chief Financial Officer.*
32		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer furnished herewith Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) the Notes to Condensed Interim Consolidated Financial Statements. *
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

Index

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, in the City of Castle Rock, Colorado on November ~~12, 2019.~~9, 2020.

	Riot Blockchain, Inc. (Registrant)

Dated: November ~~12, 2019~~9, 2020	/s/ Jeffrey G. McGonegal
	Jeffrey G. McGonegal
	Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and ~~Chief~~Principal Financial ~~Officer~~ ~~(Principal Executive Officer~~ and ~~Principal Financial and~~ Accounting Officer)

														Total
														Riot Blockchain					Total
	Preferred Stock						Common Stock				Accumulated			stockholders' equity			Non-controlling		stockholders' equity
	Shares			Amount			Shares		Amount		deficit			(deficit)			interest		(deficit)
Balance as of July 1, 2019		4,999		$	26,556			22,625,111	$	238,082,374	$	(212,006,522	)	$	26,102,408		$	35,152	$	26,137,560
Preferred stock converted to common stock		(800	)		(4,250	)		800		4,250		—			—			—		—
Stock-based compensation		—			—			—		81,362		—			81,362			—		81,362
Issuance of common stock, net of offering costs/At-the-market offering		—			—			1,580,484		3,806,321		—			3,806,321			—		3,806,321
Net income attributable to non-controlling interest		—			—			—		—		—			—			19		19
Net loss		—			—			—		—		(1,834,139	)		(1,834,139	)		—		(1,834,139	)
Balance as of September 30, 2019		4,199		$	22,306			24,206,395	$	241,974,307	$	(213,840,661	)	$	28,155,952		$	35,171	$	28,191,123

	September
	2019		2018
Warrants to purchase common stock		3,574,257		1,671,113
Options to purchase common stock		12,000		162,000
Escrow shares		200,000		200,000
Unvested restricted stock awards		38,917		665,188
Convertible Series B preferred shares		4,199		104,496
Total		3,829,373		2,802,797

Beginning balance, January 1, 2019	$	706,625
Revenue recognized from digital currencies mined		5,563,952
Mining pool operating fees		(111,278	)
Purchase of miner equipment with digital currencies		(98,865	)
Sale of digital currencies		(3,196,310	)
Realized gain on sale of digital currencies		665,218
Impairment of digital currencies		(372,124	)
Ending balance, September 30, 2019	$	3,157,218

	January 28, 2019		As of June 27 2019
		(Unaudited)		(Unaudited)
Dividend yield		0%		0%
Expected price volatility		119.5%		122.2%-127.1%
Risk free interest rate		2.60%		2.07%-2.44%
Expected term		1 year		—

	January 28, 2019		As of June 27, 2019
		(Unaudited)		(Unaudited)
Dividend yield		0%		0
Expected price volatility		111.6%		119.9%-120.5%
Risk free interest rate		2.58%		2.23%-2.58%
Expected term		5 years		4 years, 10 months

	Convertible Notes			Warrant Liability
Issuance of senior secured convertible notes	$	6,330,726		$	—
Issuance of warrants in connection with convertible notes		—			2,568,934
Balance at January 28, 2019		6,330,726			2,568,934
Change in fair value		1,644,582			2,753,228
Balance at March 31, 2019		7,975,308			5,322,162
Change in fair value		2,250,651			116,498
Conversion of convertible notes to common stock		(10,225,959	)		—
Reclassification of warrant liability to equity		—			(5,438,660	)
Balance at September 30, 2019	$	—		$	—

	April 10, 2019
Tess shares held by Riot Blockchain, Inc.		2,708,333
Per share fair value	$	0.03
Fair value of Tess shares held by Riot Blockchain, Inc.	$	90,174

Current assets	$	130,432
Less:
Accounts payable		761,875
Accrued expenses		273,935
Convertible notes		1,696,083
Net liabilities		(2,601,461	)
Non-controlling interest share		1,552,848
Sub-total		(1,048,613	)
Less: fair value of shares owned by Riot Blockchain		90,174
Gain on deconsolidation of Tess	$	(1,138,787	)

	Number of Shares			Weighted Average Grant-Date Fair Value
Unvested at January 1, 2019		95,939		$	12.49
Vested		(50,522	)	$	8.23
Granted		48,500		$	3.78
Forfeited		(55,000	)	$	14.95
Unvested at September 30, 2019		38,917		$	3.68

	Shares Underlying Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2019		62,000		$	15.71		8.2	$	—
Forfeited		(50,000	)	$	18.50		—		—
Outstanding at September 30, 2019		12,000		$	4.09		4.0	$	—

Exercisable at September 30, 2019		12,000		$	4.09		4.0	$	—

	Shares Underlying Options/Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2019		1,671,113		$	39.47		2.0	$	—
Granted		1,908,144		$	1.94		5.2	$	—
Forfeited		(5,000	)	$	7.90		—	$	—
Outstanding at September 30, 2019		3,574,257		$	19.48		3.1	$	—

Exercisable at September 30, 2019		3,574,257		$	19.48		3.1	$	—

Revenue	$	137,000
Cost of revenue		41,000
Gross margin		96,000
Operating expenses		—
Operating income		96,000
Income from discontinued operations, net of tax	$	96,000

Lease cost	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Operating lease cost	$	592,593		$	1,793,778
Variable lease cost		711,113			2,348,448
Operating lease expense		1,303,706			4,142,226
Short-term lease rent expense		4,620			13,860
Total rent expense	$	1,308,326		$	4,156,086

Other information
Operating cash flows from operating leases	$	584,395		$	1,792,625
Right of use assets exchanged for new operating lease liabilities	$	558,314		$	2,664,126
Weighted-average remaining lease term – operating leases		0.6 years			0.6 years
Weighted-average discount rate – operating leases		10.00	%		10.00	%

For the three months ended December 31, 2019	$	584,395
For the year ended December 31, 2020		343,731
For the year ended December 31, 2021		35,040
Total	$	963,166
Less present value discount		(24,618	)
Operating lease liabilities	$	938,548

	Period Ended
Services to Tess provided by (1):	September 30, 2019		September 30, 2018
Powercases Inc.	$	231,328	$	379,385
JLM Strategic Marketing	$	—	$	267,304
1038088 Ontario Limited	$	45,062	$	110,123

Payable to:		September 30, 2019		December 31, 2018
Powercases Inc.	$	—	$	37,250
JLM Strategic Marketing	$	—	$	9,483
1038088 Ontario Limited	$	—	$	52,053