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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2020

OR

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

For the transition period from __________ to __________

Commission file number: 001-33675

Riot Blockchain, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada

84-1553387

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

202 6th Street, Suite 401, Castle Rock, CO 80104

(Address of principal executive offices) (Zip Code)

 

(303) 794-2000

(Registrant’s telephone number, including area code)

 

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

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

Large Accelerated Filer

 

Accelerated Filer

Non-accelerated Filer

 

Smaller Reporting Company

Emerging growth company

 

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

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No ☒

The number of shares of no par value common stock outstanding as of November 6, 2020 was 50,927,171.

Title of each class:

 

Trading Symbol

 

Name of each exchange on which registered:

Common Stock, no par value

RIOT

Nasdaq Capital Market


RIOT BLOCKCHAIN, INC.

Page

PART I – FINANCIAL INFORMATION

 

Item 1.Condensed Interim Consolidated Financial Statements (Unaudited)

 

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

5

 

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

6

 

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

7

 

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

9

 

Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)

10

 

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

20

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

25

 

Item 4.Controls and Procedures

25

 

PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings

27

 

Item 1A.Risk Factors

27

 

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

27

 

Item 3.Defaults Upon Senior Securities

27

 

Item 4.Mine Safety Disclosures

27

 

Item 5.Other Information

27

 

Item 6.Exhibits

27

 

Signatures

29

2


Index

RIOT BLOCKCHAIN, INC.

As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “we,” “us,” “our,” the “Company,” the “Registrant,” “Riot Blockchain, Inc.,” and “Riot” mean Riot Blockchain, Inc. and its consolidated subsidiaries, unless otherwise indicated.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report, including in Management's Discussion and Analysis of Financial Condition and Results of Operations, contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor created thereby. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements relate to future events or the Company's future 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 shift to a new business and our ability to succeed in this new business;  

our recent transition to a co-location arrangement for operating our miners;  

intense competition;  

general economic conditions in the U.S. and globally;  

our ability to maintain the value and reputation of our brand;  

our ability to attract and retain senior management and other qualified personnel;  

cryptocurrency-related risks, including regulatory changes or actions and uncertainty regarding acceptance and/or widespread use of virtual currency;  

risks relating to our virtual currency mining operations, including among others, risks associated with the need for significant electrical power, cybersecurity risks and risk of increased world-wide competition for a fixed number of bitcoin reward levels;  

3


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;  

our ability to protect our intellectual property rights;  

volatility in the trading price of our common stock;  

our ability to maintain the Nasdaq listing of our common stock;  

our investments in other virtual currency and blockchain focused companies may not be realizable;  

our expectation regarding the impact of a novel strain of coronavirus (“COVID-19”);  

our strategic decision to concentrate on and make capital investments in cryptocurrency mining; and  

legal proceedings and/or regulatory action to which we are subject, or associated with, including actions by private plaintiffs and the U.S. Securities and Exchange Commission (“SEC”), for which we may face significant potential liability that may not be adequately covered by insurance or indemnity.  

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

Accordingly, you should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. Additional risks and uncertainties not known to us or that we currently believe not to be material may adversely impact our business, financial condition, results of operations and cash flows. Should any risks or uncertainties develop into actual events, these developments could have a 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.

4


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, 2020

December 31, 2019

ASSETS

(Unaudited)

Current assets

Cash and cash equivalents

$

30,086

$

7,440

Prepaid expenses and other current assets

1,516

1,349

Cryptocurrencies

8,987

3,839

Total current assets

40,589

12,628

Property and equipment, net

8,568

5,051

Right of use assets

-

367

Deposits on equipment

12,803

1,449

Long-term investments

310

9,723

Security deposits

-

703

Patents, net

361

459

Total assets

$

62,631

$

30,380

 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

$

780

$

717

Accrued expenses

383

2,187

Operating lease liability, current portion

-

368

Deferred revenue, current portion

97

97

Total current liabilities

1,260

3,369

 

Deferred revenue, less current portion

703

776

Total liabilities

1,963

4,145

 

Commitments and contingencies - Note 10

 

Stockholders' equity

Preferred stock, no par value, 15,000,000 shares authorized:

2% Series A Convertible stock, 2,000,000 shares authorized; no shares issued and outstanding as of September 30, 2020 and December 31, 2019

-

-

0% Series B Convertible stock, 1,750,001 shares authorized; 4,199 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively, liquidation preference over common stock, equal to carrying value

22

22

Common stock, no par value; 170,000,000 shares authorized; 48,922,790 and 25,082,872 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

294,475

243,458

Accumulated deficit

(233,822

)

(217,238

)

Total Riot Blockchain stockholders' equity

60,675

26,242

Non-controlling interest

(7

)

(7

)

Total stockholders' equity

60,668

26,235

Total liabilities and stockholders' equity

$

62,631

$

30,380

See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements

5


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

6


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

7


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

8


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

9


Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

Note 1. Organization

Nature of operations:

Riot Blockchain, Inc. operates a cryptocurrency mining operation, which utilizes specialized computers (also known as “Miners”) that generate cryptocurrency (primarily bitcoin) from the 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’s current focus is on its cryptocurrency mining operation, and during the nine months ended September 30, 2020, it completed a full network upgrade of its Miners with the objective to increase the Company’s operational efficiency and performance. The Company’s Miners are being operated pursuant to a co-location mining services agreement with Coinmint, LLC (“Coinmint”) at Coinmint’s facility in New York (the “Coinmint Facility”).

As previously disclosed the Company has recently entered into four additional purchase agreements with Bitmain for the acquisition of 16,600 model (110 TH/s) S19-Pro Antminers for an aggregate purchase price of $37.2 million, payable in installments. The Company expects delivery of the first 3,500 of these new miners to occur in the fourth quarter 2020, with the remaining 13,100 miners to be delivered in monthly installments starting during the first half of 2021.

Note 2. Liquidity and Financial Condition

At September 30, 2020, the Company had approximate balances of cash and cash equivalents of $30.1 million, cryptocurrencies of $9.0 million, working capital of $39.3 million, total stockholders' equity of $60.7 million and an accumulated deficit of $233.8 million. To date, the Company has, in large part, relied on equity and debt financing to fund its operations.

As of September 30, 2020, the Company has executed purchase agreements for the purchase of Miners from Bitmain for a total of 16,600 new S19 Pro miners. The purchase commitment totals $37.2 million, with $12.8 million in deposits paid and the remaining $24.4 million due to be paid over the delivery schedule through the second quarter of 2021.

2019 ATM Offering

As disclosed in Note 8, the Company 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 part of 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 “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 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 gross proceeds the Company receives from all sales of its common stock in the 2020 ATM Offering.

Sales of shares of the Company’s common stock in the 2020 ATM Offering will be made pursuant to the prospectus and prospectus supplement filed with and forming a part of the 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 unpredictable and is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Based on the Company’s current assessment, however, the Company does not expect any material impact on its long-term strategic plans, its operations, or its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and industry.

The Company believes its current cash on hand is sufficient to meet its operating and capital requirements for at least the next twelve months from the date these financial statements are issued.

10


Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

Note 3. Basis of presentation, summary of significant accounting policies and recent accounting pronouncements

Basis of presentation and principles of consolidation

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. In the opinion of management, the accompanying unaudited condensed interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results. Amounts are in thousands except for share, per share and miner amounts.

The results for the unaudited condensed interim consolidated statement of operations are not necessarily indicative of results to be expected for the year ending December 31, 2020 or for any future interim period. The unaudited condensed interim consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 25, 2020.

The accompanying interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Significant Accounting Policies:

For a detailed discussion about the Company’s significant accounting policies, see the Company’s December 31, 2019 consolidated financial statements included in its 2019 Annual Report.

Use of estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company's unaudited condensed interim consolidated financial statements include estimates associated with revenue recognition, asset valuations, the useful lives and recoverability of long-lived assets, impairment analysis of intangibles, stock-based compensation, assumptions used in estimating the fair value of convertible notes and warrants, and the valuation allowance associated with the Company’s deferred tax assets.

Loss per share:

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

11


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, 2020 and 2019 because their inclusion would be anti-dilutive are as follows:

September 30,

2020

2019

Warrants to purchase common stock

3,354,257

3,574,257

Options to purchase common stock

12,000

12,000

Escrow shares

-

200,000

Unvested restricted stock awards

1,217,893

38,917

Convertible Series B preferred shares

4,199

4,199

Total

4,588,349

3,829,373

Recently issued and adopted accounting pronouncements:

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's condensed consolidated financial statements properly reflect the change.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to 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, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related 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. 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 cryptocurrencies (in thousands):

Beginning balance, January 1, 2020

$

3,839

Revenue recognized from cryptocurrencies mined

6,717

Mining pool operating fees

(94)

Proceeds from sale of cryptocurrencies

(1,029

)

Realized gain on sale/exchange of cryptocurrencies

491

Impairment of cryptocurrencies

(989

)

Cryptocurrencies received from sale of equipment

52

Ending balance, September 30, 2020

$

8,987

12


Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

Note 6. Property and Equipment

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

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 received 2,040 new next generation S19 and S19 Pro Miners from Bitmain at the Coinmint Facility and 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 delivery of the 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 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 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 OSC entered an order (the “Order”) approving the settlement agreement between OSC, Coinsquare, and certain of 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 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.

Accordingly, the Company determined there were indicators that would cause a 100% impairment of the Coinsquare investment and observed price changes, which was recorded as of June 30, 2020. The Company therefore recorded an impairment expense of $9.4 million for its investment in Coinsquare during the nine months ended September 30, 2020, as reflected in the accompanying unaudited condensed interim consolidated statements of operations.

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 recover its investment in Coinsquare and the Company has engaged Canadian based litigation counsel to assist with this matter.

13


Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

Verady

The investment in Verady, Inc. (“Verady”) is valued at cost, less any impairment, plus or minus changes resulting from observable price changes. During the nine months ended September 30, 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

As of September 30, 2020, and December 31, 2019, the fair value of the TessPay Inc. shares owned by the Company is approximately $0.1 million, calculated based upon the April 10, 2019 funding price.

Note 8. Stockholders’ Equity

At-the-Market Equity Offering:

During the nine months ended September 30, 2020, the Company received proceeds under the Sales Agreement of approximately $49.6 million (excluding commissions and expenses of $1.6 million), at a weighted average price of $2.23 per share, from sales of 22,210,095 shares of its common stock sold pursuant to the 2019 ATM Offering. The Company paid H.C. Wainwright a commission of 3.0% of the aggregate gross proceeds the Company received from all sales of the Company's common stock under the Sales Agreement.

As previously disclosed, effective as of October 15, 2020, the Company entered into the First Amendment to the Sales Agreement with H.C. Wainwright relating to the Company’s 2020 ATM Offering. Pursuant to the 2020 ATM Offering, the Company may sell, through H.C. Wainwright as its sales agent, up to $100.0 million in shares of the Company’s common stock from time to time on an at-the-market basis pursuant to the prospectus and prospectus supplement filed with and forming a part of the 2020 Registration Statement. According to the terms of the First Amendment to the Sales Agreement, the Company pays H.C. Wainwright a commission of up to 3.0% of the aggregate gross proceeds the Company receives from sales of shares of its common stock in the 2020 ATM Offering.

As part of the First Amendment to the Sales Agreement, the Company and 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.

Common Stock:

During the nine months ended September 30, 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 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.

During the nine months ended September 30, 2020, 1,638,467 shares of 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 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 advisors in settlement of fully vested restricted stock units granted under its Equity Plan.

On August 20, 2020, the Company issued 200,000 shares of its common stock related to 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

Stock based compensation:

The Company’s stock-based compensation expenses recognized during the three and nine months ended September 30, 2020 and 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, 2020 and 2019, granted under the Equity Plan, from the following categories (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

Restricted stock awards under the Plan

$

467

$

81

$

2,848

$

373

Stock option awards under the Plan

-

-

-

58

Total stock-based compensation

$

467

$

81

$

2,848

$

431

14


Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

Restricted common stock awards:

A summary of the Company’s unvested restricted common stock awards activity in the nine months ended September 30, 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

 

On February 7, 2020, the Company issued 122,377 shares of common stock under a February 2019 employment agreement as disclosed above, and 5,000 vested restricted stock units to 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 four 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, 2020 was approximately $2.0 million. The fair value of each restricted stock right was based upon the closing stock price on the grant date.

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, 2020, there was approximately $0.8 million of unrecognized compensation cost related to unvested restricted common stock awards, which is expected to be recognized over a remaining weighted-average vesting period of approximately 2.6 months.

Stock incentive plan options:

As of September 30, 2020, 12,000 stock options were outstanding under the Equity Plan, with a weighted average exercise price of $4.09, and a weighted average remaining contractual term of approximately 3.0 years. The stock options are 100% vested with zero 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, 2020:

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, 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, 2020.

15


Index

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

Note 10. Commitments and Contingencies

Commitments:

Coinmint Co-location Mining Services Agreement

On April 8, 2020, the Company entered into an agreement with Coinmint, (the “Coinmint Agreement”), pursuant to which Coinmint agreed to provide up to approximately 9.5 MW of power and to perform all maintenance necessary to operate Riot’s miners at the Coinmint facility. In exchange, Coinmint is reimbursed for direct production expenses and receives a performance fee based on the net cryptocurrencies generated by Riot’s miners deployed at the Coinmint facility. The initial term of the Coinmint Agreement was six months with automatic renewals for subsequent three (3) month terms until and unless terminated as provided in the agreement.

The Company determined the agreement with Coinmint does not meet the definition of a lease in accordance with Accounting Standards Codification (“ASC”) 842, Leases.

Oklahoma Lease Agreement

On January 8, 2020, Kairos entered into a third amendment to the OKC Lease to extend the lease term through May 15, 2020, with all other terms remaining substantially the same as the second amendment to the OKC Lease.

On April 10, 2020, Kairos entered into a fourth amendment to the OKC Lease to extend the lease term through June 30, 2020, with all other terms remaining substantially unchanged. During the 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 is included as prepaid expenses and other current assets on the accompanying condensed consolidated balance sheet. The OKC Lease terminated by its terms effective as of June 30, 2020, and the Company received a full refund of its deposit, less applicable electricity charges on July 2, 2020.

Corporate Lease Agreement

On April 9, 2018, the Company entered into a commercial lease agreement (the “Florida Lease”) with W-Crocker Fin Place Owner VII, LLC, a Delaware limited liability company, pursuant to which the Company leased approximately 1,700 rentable square feet of office and common area space in Fort Lauderdale, Florida. Pursuant to the terms of the Florida Lease, the initial term was for thirty-nine (39) months expiring on August 9, 2021, with one, five-year option to renew, and the initial base rent was $4,659 per month (or $2.75 per sq. ft. per month) which escalated at the rate of 3.0% per annum. Additionally, common operating expenses were prorated and charged monthly as additional rent.

During May 2020, an agreement was reached to terminate the Florida Lease, and the Company expensed the termination payments for the Florida Lease.

Operating Leases

At September 30, 2020, the Company did not have any significant operating lease liabilities or right of use assets.

The following summarizes quantitative information about the Company’s operating leases (dollars in thousands):

Lease cost

Nine Months

Ended

September 30,

2020

Operating lease cost

$

1,240

Variable lease cost

1,040

Operating lease expense

2,280

Short-term lease rent expense

9

Total rent expense

$

2,289

 

Other information

Operating cash flows from operating leases

$

1,207

Right of use assets exchanged for new operating lease liabilities

$

-

Weighted-average remaining lease term – operating leases

-

Weighted-average discount rate – operating leases

0

%

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

16


Index

Riot Blockchain, Inc. and Subsidiaries

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. Expenses related to the defense of such claims are recorded by the Company as incurred 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.

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.

On April 18, 2018, Joseph J. Klapper, Jr., filed a complaint against Riot Blockchain, Inc., and certain of its officers and directors in the United District Court for the District of New Jersey (Klapper v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-8031). The complaint contained substantially similar allegations and the same claims as those filed by Mr. Takata, and requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief. On November 6, 2018, the court in the Takata action issued an order consolidating Takata with Klapper into a single putative class action. The court also appointed Dr. Golovac as Lead Plaintiff and Motely Rice as Lead Counsel of the consolidated class action.

Lead Plaintiff filed a consolidated complaint on January 15, 2019. Defendants filed motions to dismiss on March 18, 2019. In lieu of opposing defendants’ motions to dismiss, Lead Plaintiff filed another amended complaint on May 9, 2019. Defendants filed multiple motions to dismiss the amended complaint starting on September 3, 2019.

On April 30, 2020, the court granted the motions to dismiss, which resulted in the dismissal of all claims without prejudice. On June 1, 2020, Lead Plaintiff filed a motion for leave to file another amended complaint. The motion for leave to amend has been fully briefed and is pending before the court. If the court grants Lead Plaintiff leave to amend, defendants intend to continue to vigorously contest Lead Plaintiff’s amended allegations. Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.

Shareholder Derivative Cases

On April 5, 2018, Michael Jackson filed a shareholder derivative complaint on behalf of the Company in the Supreme Court of the State of New York, County of Nassau, against certain of the Company's officers and directors, as well as against an investor (Jackson v. Riot Blockchain, Inc., et al., Case No. 604520/18). The complaint contains similar allegations to those contained in the shareholder class action complaints and seeks recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement. The complaint seeks unspecified monetary damages and corporate governance changes. At the last preliminary conference, the court adjourned the conference until January 14, 2021 in lieu of staying the action. Defendants do not anticipate any other activity on this case until the next preliminary conference.

On May 22, 2018, two additional shareholder derivative complaints were filed on behalf of the Company in the Eighth Judicial District Court of the State of Nevada in and for the County of Clark (Kish v. O'Rourke, et al., Case No. A-18-774890-B & Gaft v. O'Rourke, et al., Case No. A-18-774896-8). The two complaints make identical allegations, which are similar to the allegations contained in the shareholder class action complaints. The shareholder derivative plaintiffs also seek recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, and aiding abetting a breach of fiduciary duty. The complaints seek unspecific monetary damages and corporate governance changes.

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

17


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.

On October 22, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Southern District of New York (Finitz v. O'Rourke, et al., Case No. 1:18-cv-09640). The shareholder plaintiffs allege breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain of the Company's officers, directors, and an investor. The complaint's allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties' stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.

On December 13, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Northern District of New York (Monts v. O'Rourke, et al., Case No. 1:18-cv-01443). The shareholder plaintiffs allege claims for violation of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, unjust enrichment, waste of corporate assets, and aiding and abetting against certain of the Company's officers, directors, and an investor. The complaint's allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties' stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.

Defendants intend to vigorously contest plaintiffs’ allegations in the shareholder derivative actions and plaintiffs’ right to bring the action in the name of Riot Blockchain. But because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.

Indemnification Demands

On April 3, 2020, a complaint was filed against Riot Blockchain, Inc. (“Riot”) by Barry C. Honig and GRQ Consultants, Inc. (“GRQ”) in the United States District Court for the Southern District of New York, Honig v. Riot Blockchain, Inc., Case No. 20-cv-02808-NRB. Mr. Honig and GRQ allege that Riot has failed to indemnify them pursuant to terms of the Securities Purchase Agreement (“SPA”) and Registration Rights Agreement (“RRA”), both dated March 16, 2017. Mr. Honig and GRQ allege declaratory judgment and breach of contract claims, seeking fees and expenses they incurred in connection with litigation and a SEC investigation involving Riot. On July 9, 2020, Riot filed a motion to dismiss both of the claims, which has been fully briefed. The court heard oral argument on the motion on October 29, 2020.

In addition to the suit filed by Mr. Honig and GRQ, other purported parties and beneficiaries of the SPA and RRA have also recently demanded indemnification from Riot related to the same litigation and SEC investigation. Riot believes that it does not owe an indemnification obligation to Mr. Honig, GRQ, or the other purported parties and beneficiaries of the SPA and RRA that have made an indemnification demand. Riot intends to vigorously contest Mr. Honig and GRQ claims, as well as the other demands for indemnification. Nevertheless, since this litigation and demands for indemnification are still in an early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.

Kashwise Demand

On February 18, 2020, the Company received a demand letter from Kashwise Global Funding, Inc. (“Kashwise”) for the payment of fees pursuant to an alleged arrangement between the Company and Kashwise in connection with the January 2019 private exempt offering of the Company’s securities to a group of accredited investors (the “Kashwise Demand”). The Company timely responded to the Kashwise Demand; however, on April 13, 2020, Kashwise Global Funding Solutions, Inc. filed suit against the Company in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida (the “Kashwise Suit”) alleging substantially similar claims as in the Kashwise Demand. The Company has removed the Kashwise Suit to Federal District Court in and for the Southern District of Florida where it remains pending with a scheduled trial date (if not delayed by the COVID-19) pandemic in June of 2021. The Company 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 Company fully cooperated with the SEC in that investigation. On January 29, 2020, the SEC notified the Company that it had concluded its investigation as to Riot, and based on the information the SEC had as of the 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.

18


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.

Registration Rights Penalty

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”), as previously disclosed by the 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 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, in accordance with 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 its condensed consolidated financial statements as of June 30, 2020.

Note 11. Subsequent Events:

Financing

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

ATM Sales Agreement

As disclosed under Note 2, Liquidity and Financial Resources, effective as of October 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, 2020, the Company received and deployed at the Coinmint facility 1,003 next generation S19 Pro Miners purchased from Bitmain.

Sale of Cryptocurrencies

Subsequent to September 30, 2020, the Company sold 100 bitcoins generating total cash proceeds of approximately $1.55 million.

19


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.”

Overview

The Company’s current focus is on its cryptocurrency mining operation, and during the nine months ended September 30, 2020, it completed a full network upgrade of its Miners with the objective to increase the Company’s operational efficiency and performance.

In December 2019, Riot procured 4,000 model S17 Pro Miners from Bitmain, which were fully deployed at its former Oklahoma City, Oklahoma mining facility (the “OKC Facility”), increasing Riot’s overall hash rate capacity to approximately 240 Ph/s in the first quarter of 2020. During the second quarter of 2020, Riot purchased 1,040 model S19 Miners and 2,000 model S19 Pro Miners from Bitmain. 2,040 of the new miners were received and deployed during the third quarter of 2020 and the remainder during the fourth quarter of 2020, resulting in an estimated aggregate hash rate capacity of approximately 566 Ph/s, representing a 460% increase over the Company’s 2019 hash rate capacity.

The Company 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.

20


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 result in significant national and global economic disruption, which may adversely affect our business. Based on the Company’s current assessment, however, the Company does not expect any material impact on its long-term development, its operations, or its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and industry.

Summary of Mining Results

The following table presents additional information about our cryptocurrency mining activities in coins and amounts ($ in thousands) at January 1, 2020 and September 30, 2020:

Quantities (in coins)

Cryptocurrencies

BTC

LTC

BCH

Amounts

Balance at January 1, 2020

514

3,449

1

$

3,839

 

Revenue recognized from cryptocurrencies mined

730

21

-

6,717

 

Mining pool operating fees

-

-

-

(94

)

Proceeds from sale of cryptocurrencies

(100

)

-

-

(1,029

)