Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Note 1. Organization
Riot Blockchain, Inc. (the “Company”
or “Riot Blockchain”) was originally organized on July 24, 2000, as a Colorado corporation. Effective October
19, 2017, the Company's name was changed to Riot Blockchain, Inc., from Bioptix, Inc. Effective October 19, 2017, the Company changed
its state of incorporation to Nevada from Colorado.
The Company operates a cryptocurrency mining
operation, which utilizes specialized computers (also known as “miners”) that generate cryptocurrency (primarily bitcoin)
from the Blockchain. The Company acquired approximately 8,000 miners through its acquisition of Kairos Global Technology,
Inc., (“Kairos”) in November 2017, and from Prive Technologies, Inc. (“Prive”) Blockchain Mining Supply
& Services Ltd. (“BMSS”) in February 2018. During December 2019, the Company purchased 4,000 next generation Bitmain
S17 Pro Antminers for approximately $6.3 million from BitmainTech PTE. LTD. (“Bitmain”). In December 2019, 3,000 miners
were received at the Company’s Oklahoma City facility, and the remaining 1,000 miners were received in early 2020. During
February 2020, all of the new generation miners were installed and operational. As part of this upgrade, due to power and infrastructure
considerations, virtually all of the previously acquired miners were taken offline and their future use is being evaluated.
Note 2. Liquidity and Financial Condition
The Company has experienced recurring losses
and negative cash flows from operations. At December 31, 2019, the Company had approximate balances of cash and cash
equivalents of $7.4 million, working capital of $9.3 million, total stockholders' equity of $26.2 million and an accumulated deficit
of $217.2 million. To date, the Company has, in large part, relied on equity financings to fund its operations.
The Company expects to continue to incur losses
from operations for the near-term and these losses could be significant as the Company incurs costs and expenses associated with
recent and potential future acquisitions, as well as public company, legal and administrative related expenses being incurred.
As disclosed in Note 10, during January 2019, the Company issued a series of Senior Secured Convertible Promissory Notes (the “Notes”),
to investors for an aggregate principal amount of approximately $3.4 million and an equal value of warrants for the purchase of
shares of the Company’s common stock (the “Warrants”) in exchange for a total investment of $3.0 million. During
the year ended December 31, 2019, all of the Notes were converted into common stock and have been satisfied in full. The Company
is closely monitoring its cash balances, cash needs and expense levels.
As disclosed in Note 11, the Company entered into a Sales Agreement
with H.C. Wainwright & Co., LLC (“H.C. Wainwright”) dated May 24, 2019 (the “Sales Agreement”), pursuant
to which the Company may, from time to time, sell up to $100.0 million in shares of the Company’s common stock through H.C.
Wainwright, acting as the Company’s sales agent and/or principal, in an at-the-market offering (“ATM Offering”).
All sales of the shares in connection with the ATM Offering have been made pursuant to an effective shelf registration statement
on Form S-3 filed with the U.S. Securities and Exchange Commission (“SEC”). The Company pays H.C. Wainwright a 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 $23.8 million at a weighted
average sales price of $2.97 during the year ended December 31, 2019. Subsequent to December 31, 2019, in connection with the Sales
Agreement, the Company received gross proceeds of approximately $9.5 million from the sale of 5,995,559 shares of common stock.
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.
Note 3. Basis of Presentation, Summary of Significant Accounting
Policies and Recent Accounting Pronouncements
Principles of consolidation
The accompanying consolidated financial statements
of the Company include the accounts of the Company and its wholly or majority owned and controlled subsidiaries. Consolidated subsidiaries
results are included from the date the subsidiary was formed or acquired. Intercompany investments, balances and transactions have
been eliminated in consolidation. Non–controlling interests represents the minority equity investment in the Company's subsidiaries,
plus the minority investors' share of the net operating results and other components of equity relating to the non–controlling
interest. The Company's consolidated operating subsidiaries and (percentage owned at December 31, 2019) consisted of; Kairos Global
Technology, Inc., (100%) and Logical Brokerage Corp. (92.5%).
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Use of estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America (“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 financial statements include estimates associated with revenue recognition, asset valuations, the useful lives
and recoverability of long-lived assets, impairment analysis of intangibles and goodwill, stock-based compensation, and the valuation
allowance associated with the Company’s deferred tax assets.
Long-term investments
As described in Note 6 to these consolidated
financial statements, effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2016-01 and
related ASU 2018-03 concerning recognition and measurement of financial assets and financial liabilities. In adopting this new
guidance, the Company has made an accounting policy election to adopt an adjusted cost method measurement alternative for investments
in equity securities without readily determinable fair values.
For equity investments that are accounted for
using the measurement alternative, the Company initially records equity investments at cost but is required to adjust the carrying
value of such equity investments through earnings when there is an observable transaction involving the same or a similar investment
with the same issuer or upon an impairment.
As of December 31, 2019, the Company’s
long-term investments consist of its investments in Coinsquare Ltd., (“Coinsquare”), TessPay Inc. (formerly 1172767
B.C. Ltd) (“Tess”) and Verady, LLC (“Verady”).
Cash, cash equivalents and short-term investments
The Company considers all highly liquid investments
with an original maturity of three months or less at the date of acquisition to be cash equivalents. From time to time, the Company's
cash account balances exceed the balances as covered by the Federal Deposit Insurance System. The Company has never suffered a
loss due to such excess balances. As of December 31, 2019 and 2018, the Company had no cash equivalents or short-term investments.
Fair value of financial instruments
The Company accounts for financial instruments
under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. This statement defines
fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 — quoted prices (unadjusted)
in active markets for identical assets or liabilities;
Level 2 — observable inputs other than
Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable;
and
Level 3 — assets and liabilities whose
significant value drivers are unobservable.
Observable inputs are based on market data
obtained from independent sources, while unobservable inputs are based on the Company's market assumptions. Unobservable
inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability
may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to
be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires
significant management judgment. As of December 31, 2019 there were no financial assets or liabilities measured at fair value.
The carrying amounts of the Company’s financial assets and liabilities, such as cash and cash equivalents, and accounts
payable, approximate fair value due to the short-term nature of these instruments. During the year ended December 31, 2019, the
Company issued convertible notes and warrants in connection with the notes. The notes and warrants were classified as liabilities
and measured at fair value on the issuance date, with changes in fair value recognized as other expense on the consolidated statements
of operations and disclosed in the consolidated financial statements.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Cryptocurrencies
Cryptocurrencies, (including bitcoin,
bitcoin cash and litecoin) are included in current assets in the accompanying consolidated balance sheets. Cryptocurrencies
purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in
connection with the Company’s revenue recognition policy disclosed below.
Cryptocurrencies held are accounted for as
intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed
for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than
not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured
using the quoted price of the cryptocurrency at the time its fair value is being measured. In testing for impairment, the Company
has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists.
If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary.
If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss
is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Purchases of cryptocurrencies by the Company
are included within investing activities in the accompanying consolidated statements of cash flows, while cryptocurrencies awarded
to the Company through its mining activities are included within operating activities on the accompanying consolidated statements
of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying consolidated statements
of cash flows and any realized gains or losses from such sales are included in other income (expense) in the consolidated statements
of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
Deferred revenue
The Company recognized upfront license fees
from Ceva Santé Animale S.A. (“Licensee”) related to its exclusive license agreement (“License Agreement”),
which have been recorded as deferred revenue and are being amortized over the term of the License Agreement. Amortization
of the license fees totaling approximately $1.6 million began in July 2012. As of December 31, 2019, and 2018, each, deferred revenue
of approximately $0.1 million has been classified as a current liability and $0.8 million and $0.9 million, respectively, has been
classified as a long-term liability. The current liability represents the next twelve months' portion of the license fees revenue. For
each of the years ended December 31, 2019 and 2018, approximately $0.1 million, was recorded as the license fee revenue.
Property and equipment
Property and equipment is stated at cost and
depreciated using the straight-line method over the estimated useful lives of the assets, generally two years for cryptocurrency
mining equipment and three years for computer related assets. Estimated useful lives for leasehold improvements are typically the
lesser of the estimated useful life of the asset or the life of the term of the lease.
Patents and other intangible assets
The Company accounts for intangible assets
under ASC 350-30. Patents costs consisting of filing and legal fees incurred are initially recorded at cost. Patents are amortized
over the legal life of the patent or their estimated useful lives, using the straight-line method. Certain patents are in the legal
application process and therefore are not currently being amortized.
Impairment of long-lived assets
Management reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows
expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Based on its reviews,
management determined that its cryptocurrency mining equipment and related improvements were impaired by a total of $29.2 million
based upon an assessment as of December 31, 2018, including consideration of the decline in bitcoin values which occurred commencing in
late December 2017 and continued through December 31, 2018.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Intangible assets acquired in the Tess business
combination consist primarily of in-process research and development (“IPR&D”) assets. The value attributable to
IPR&D projects at the time of acquisition is capitalized as an indefinite-lived intangible asset and tested for impairment
until the project is completed or abandoned. Upon completion of the project, the indefinite-lived intangible asset will be accounted
for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is
abandoned, the indefinite-lived intangible asset will be charged to expense. During the year ended December 31, 2018, management
determined that its intangible assets related to the Tess Investment were impaired and recorded an impairment charge of $1.3 million.
The Company made the decision, effective as
of December 31, 2019 not to pursue its RiotX / Logical Brokerage cryptocurrency exchange development plan, and as of December 31,
2019 recorded an impairment of intangible assets acquired of approximately $0.7 million.
Deferred tax liability
Due to certain acquisitions, temporary differences
between the book fair value and the tax basis of the indefinite life intangible assets and depreciable property and equipment were
recorded. The Company recognized a $0.1 million deferred tax liability related to its Logical Brokerage acquisition during
the year ended December 31, 2018. Subsequently, due to the Company’s decision not to pursue its Logical Brokerage business
and the impairment and depreciation of the Kairos property and equipment, the Company recorded a $0.1 million and $0.7 million
income tax benefit during the years ended December 31, 2019 and 2018, respectively, from the reduction of its existing deferred
tax liability related to its acquisitions. The following is a rollforward of the Company’s deferred tax liability from
January 1, 2018 to December 31, 2019:
|
|
December 31, 2019
|
|
December 31, 2018
|
Beginning Balance
|
|
$
|
143
|
|
|
$
|
699
|
|
Deferred tax liability recorded on the Logical Brokerage acquisition
|
|
|
—
|
|
|
|
143
|
|
Impairment and depreciation on the Kairos acquisition
|
|
|
—
|
|
|
|
(699
|
)
|
Abandonment of Logical Brokerage
|
|
|
(143
|
)
|
|
|
—
|
|
Ending Balance
|
|
$
|
—
|
|
|
$
|
143
|
|
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 10 - 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 approximately $3.4 million. 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 consolidated statements of
operations.
As of December 31, 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 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.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
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.
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.
Revenue recognition
Cryptocurrency mining:
The Company recognizes revenue under ASC 606,
Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
• Step 1: Identify
the contract with the customer
• Step 2: Identify
the performance obligations in the contract
• Step 3: Determine
the transaction price
• Step 4: Allocate
the transaction price to the performance obligations in the contract
• Step 5: Recognize
revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with
a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that
is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of
goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own
or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct),
and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in
the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined
with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration
to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration
promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price,
an entity must consider the effects of all of the following:
|
•
|
Constraining estimates of variable consideration
|
|
•
|
The existence of a significant financing component in the contract
|
|
•
|
Consideration payable to a customer
|
Variable consideration is included in the transaction
price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not
occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated
to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance
obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
The Company has entered into digital asset
mining pools by executing contracts with the mining pool operators to provide computing power to the mining pool. The contracts
are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company
provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional
share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool
operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The Company’s
fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total
computing power contributed by all mining pool participants in solving the current algorithm.
Providing computing power in digital asset
transaction verification services is an output of the Company’s ordinary activities. The provision of providing such computing
power is the only performance obligation in the Company’s contracts with mining pool operators. The transaction consideration
the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is
not materially different than the fair value at contract inception or the time the Company has earned the award from the pools.
The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur,
the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm)
and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant
financing component in these transactions.
Fair value of the cryptocurrency award received
is determined using the quoted price of the related cryptocurrency at the time of receipt.
There is currently no specific definitive guidance
under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management
has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is
enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated
financial position and results from operations.
Cost of revenue
The Company's cost of revenue consists primarily
of direct production costs related to mining operations, including mining pool fees, rent and utilities, but excluding depreciation
and amortization, which are separately stated in the Company’s consolidated statements of operations.
Business combinations
The Company applies the provisions of ASC 805
in the accounting for acquisitions. ASC 805 requires us to recognize separately from goodwill the assets acquired and the liabilities
assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred
over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates
and assumptions to accurately apply preliminary value to assets acquired and liabilities assumed at the acquisition date as well
as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result,
during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments in the current
period, rather than a revision to a prior period. Upon the conclusion of the measurement period or final determination of the values
of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in our consolidated
statements of operations. Accounting for business combinations requires management to make significant estimates and assumptions,
especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, restructuring liabilities,
pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates
we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from
management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets
we have acquired include; future expected cash flows from product sales; customer contracts and acquired technologies; expected
costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects
when completed; and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of
such assumptions, estimates, or actual results.
Income taxes
The Company accounts for income taxes under
the asset and liability method, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment
date. A valuation allowance is required to the extent any deferred tax assets may not be realizable.
ASC Topic 740, Income Taxes, (“ASC 740”),
also clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes
a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim period, disclosure and transition. Based on the Company's evaluation, it has been concluded that there are
no significant uncertain tax positions requiring recognition in the Company's consolidated financial statements. The Company believes
that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result
in material changes to its financial position.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Stock-based compensation
The Company accounts for share-based payment
awards exchanged for services at the estimated grant date fair value of the award. Stock options issued under the Company’s
long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock
at the date of grant and expire up to ten years from the date of grant. These options generally vest on the grant date
or over a one- year period.
The Company estimates the fair value of stock
option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based
awards represent management’s best estimates and involve inherent uncertainties and the application of management’s
judgment.
Expected Term - The expected term of
options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified
method, which is the half-life from vesting to the end of its contractual term.
Expected Volatility - The Company computes
stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free Interest Rate - The Company
bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining
term.
Expected Dividend - The Company has
never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future,
and, therefore, uses an expected dividend yield of zero in its valuation models.
Effective January 1, 2017, the Company elected
to account for forfeited awards as they occur, as permitted by Accounting Standards Update (“ASU”) 2016-09. Ultimately,
the actual expenses recognized over the vesting period will be for those shares that vested. Prior to making this election, the
Company estimated a forfeiture rate for awards at 0%, as the Company did not have a significant history of forfeitures.
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.
Since the Company has only incurred losses,
basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future that
were not included in the computation of diluted loss per share at December 31, 2019 and 2018 because their inclusion would be anti-dilutive
are as follows:
|
|
December 31,
|
|
|
2019
|
|
2018
|
Warrants to purchase common stock
|
|
|
3,574,257
|
|
|
|
1,671,113
|
|
Options to purchase common stock
|
|
|
12,000
|
|
|
|
62,000
|
|
Escrow shares
|
|
|
200,000
|
|
|
|
200,000
|
|
Unvested restricted stock awards
|
|
|
1,524,499
|
|
|
|
95,939
|
|
Convertible Series B preferred shares
|
|
|
4,199
|
|
|
|
13,000
|
|
Total
|
|
|
5,314,955
|
|
|
|
2,042,052
|
|
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Segment reporting
Operating segments are defined as components
of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision
maker, or decision–making group in deciding how to allocate resources and in assessing performance. Our chief operating decision–making
group is composed of the chief executive officer. We currently operate in one segment surrounding our cryptocurrency mining operation.
Subsequent events
The Company has evaluated all events that occurred after the balance
sheet date through the date when the financial statements were issued. See Note 17.
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 consolidated financial statements properly
reflect the change.
In February 2016, the FASB issued
Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) in order to increase transparency and comparability
among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases
classified as operating leases under previous U.S. GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption
is permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to
all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence
of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, effectively allowing
entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases
(Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic
842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019,
using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented,
and elected the package of practical expedients described above. Based on the analysis, on January 1, 2019, the Company recorded
right of use assets and lease liabilities of approximately $1.5 million.
In June 2018, the FASB issued ASU 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted
to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with
the requirements for share-based payments granted to employees. The amendments are effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier
than an entity’s adoption date of Topic 606. The Company adopted this new standard on January 1, 2019 and the adoption did
not have a material impact on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued
ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements
for Fair Value Measurement” (“ASU 2018-13”), which makes a number of changes meant to add, modify or remove
certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3
fair value measurements. This guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The
Company adopted ASU 2018-13 on January 1, 2020 and its adoption did not
have any impact on the Company’s consolidated financial statements and related disclosures.
In
December 2019, the FASB issued 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.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Note 4. Acquisitions
Asset Purchase Agreement with Prive Technologies
LLC
On February 21, 2018, the Company and Kairos,
completed an asset purchase under an agreement (the “Prive Purchase Agreement”) with Prive on behalf of certain persons
and entities who owned certain cryptocurrency mining machines and related operating equipment (the “Prive Equipment”).
Pursuant to the Prive Purchase Agreement, the aggregate consideration for the Prive Equipment consisted of (i) $11.0 million and
(ii) 1,000,000 shares of the Company’s common stock (the “Prive Shares”). Upon closing of the transaction, and
pursuant to the terms of the Prive Purchase Agreement, Kairos became the owner of the Prive Equipment used for the mining of cryptocurrency,
including, but not limited to, 3,800 Bitmain AntMiner S9s. On February 21, 2018, the Prive Equipment was recorded for a purchase
price of approximately $19.5 million, consisting mainly of cash of $11.0 million and 800,000 shares of the Company’s common
stock valued at $10.60 per share (excluding 200,000 shares of common stock currently held in escrow).
The purchase price for the miners was recorded
as follow (in thousands):
Cash consideration
|
|
$
|
11,000
|
|
Fair value of common stock
|
|
|
8,480
|
|
Other expenses
|
|
|
2
|
|
Total
|
|
$
|
19,482
|
|
The 200,000 shares held in escrow (the “Escrow
Shares”) were deposited into an escrow account with Corporate Stock Transfer, Inc., as escrow agent (the “Escrow Agent”),
pursuant to an escrow agreement (the “Escrow Agreement”). Certificates representing the Escrow Shares were deposited
and recorded with the Escrow Agent to be held in escrow and not be transferred, pledged or hypothecated except as provided in the
Escrow Agreement. No value was assigned to the Escrow Shares at the time of the acquisition as they are contingent consideration.
The Escrow Shares will be released to the Sellers upon the Company generating Net Cash Flow (as defined in the Prive Purchase Agreement)
of at least $10.0 million from the equipment. If the Escrow Shares are not released to the Sellers on or before the two-year
anniversary (February 2020) of the Prive Purchase Agreement, the Escrow Shares shall be returned to the Company for cancellation.
As of December 31, 2019 and 2018, no escrow shares have been released based upon not achieving required net cash flow (See Note
17) .
Under the guidance of ASC 360, Impairment or
Disposal of Long-lived Assets, a long-lived asset or asset group (including intangibles) will be tested for recoverability whenever
events or changes in circumstances indicate that its carrying amount may not be recoverable. Based upon the significant
decline in the price of bitcoin during the year ended December 31, 2018 and the decline in projected cash flows over the life of
the miners, the Company performed an analysis to determine if the Prive Equipment was impaired. The undiscounted cash flows
were less than the carrying amount of the miners and therefore, the carrying amount of the assets were compared to the fair value
of the miners, and the Company determined that there were impairment charges to be recorded on the miners purchased from Prive.
Impairment charges for the year ended December 31, 2018 totaled approximately $17.7 million.
Asset Purchase Agreement with Blockchain
Mining Supply & Services Ltd.
On February 21, 2018, the Company completed
an asset purchase under an agreement (the “BMSS Purchase Agreement”) with BMSS which owned 3,000 AntMiner S9 bitcoin
mining machines (the “BMSS Equipment”). Pursuant to the BMSS Purchase Agreement, the Company purchased the BMSS Equipment
for aggregate consideration of $8.5 million. On February 21, 2018, the BMSS Equipment was recorded for purchase price of $8.5 million
paid or payable in cash. $7.0 million of the purchase price was paid at closing and $1.5 million was payable within six-months,
as further defined in the BMSS Purchase Agreement.
On August 21, 2018, the Company and BMSS entered
into a waiver letter, amending the BMSS Purchase Agreement (the “Waiver”) whereby the Company and BMSS agreed to waive
any and all past due amounts payable by the Company to BMSS pursuant to Section 2(b)(ii) of the BMSS Purchase Agreement. Pursuant
to the Waiver, the Company agreed to pay to BMSS the remaining $1.5 million in monthly installments plus accrued and unpaid interest
calculated at a rate equal to 10% per year. In addition to the foregoing, the Company agreed to issue to BMSS 50,000 shares of
the Company’s restricted common stock in connection with the Waiver within seven days of the execution of the Waiver. In
connection with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) under the
Securities Act of 1933, as amended, for transactions not involving a public offering. During the year ended December 31,
2018, a total of $0.3 million in payments were made against the $1.5 million deferred price and the Company recorded a loss of
approximately $0.3 million related to the computed value of the modification of the BMSS deferred purchase price which was recorded
as a loss on extinguishment of debt in connection with the Waiver. All required payments under the amended BMSS agreements have
not been timely made and the Company and BMSS are currently discussing plans to resolve.
Under the guidance of ASC 360, Impairment or
Disposal of Long-lived Assets, a long-lived asset or asset group (including intangibles) will be tested for recoverability whenever
events or changes in circumstances indicate that its carrying amount may not be recoverable. Based upon the significant decline
in the price of bitcoin during the year ended December 31, 2018 and the decline in projected cash flows over the life of the miners,
the Company performed an undiscounted cash flow test to determine if the miners were impaired. The undiscounted cash flows
were less than the carrying amount of the BMSS Equipment and therefore, the carrying amount of the assets were compared to the
fair value of the miners, and the Company determined that there were impairment charges to be recorded on the miners purchased
from BMSS. Impairment charges for the year ended December 31, 2018 totaled approximately $6.7 million.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Acquisition of Logical Brokerage Corp.
On March 26, 2018, the Company entered into
and closed a stock purchase agreement (the “Logical Brokerage Purchase Agreement”) between the Company and Mark Bradley
Fisher (the “Logical Brokerage Seller”). Pursuant to the Logical Brokerage Purchase Agreement, the Company purchased
from the Logical Brokerage Seller 9.25 shares of Logical Brokerage, representing 92.5% of the outstanding capital stock of Logical
Brokerage, for a cash purchase price of $0.6 million. Logical Brokerage, a futures introducing broker headquartered in Miami, Florida
is registered with the CFTC and is a member of the NFA.
The Company considered the provisions of FASB
ASU 2017-01, Business Combinations (Topic 805), and has determined that the Logical Brokerage Purchase Agreement should be accounted
for as an acquisition of assets since the majority of the fair value of the assets acquired was concentrated in a single identifiable
asset (CFTC License), and the acquired assets did not have outputs or employees. The asset recorded at the purchase price of $0.6
million, net of cash received with the asset acquisition of $0.1 million, plus any transaction costs. The CFTC license is included
as intangible rights acquired, within the non-current asset section of the Company’s consolidated balance sheets.
As a result of an asset acquisition through
the acquisition of ownership, temporary differences may arise due to differences between the tax bases of assets acquired and liabilities
assumed (determined by tax law) and the values of those assets and liabilities recognized for financial statement purposes (determined
based on the provisions of ASC 805). ASC 740 requires an entity to recognize deferred tax assets and liabilities for those temporary
differences and acquired operating loss or other tax credit carryforwards that arise as a result of the purchase of an asset. However,
deferred taxes are not recognized for differences related to nondeductible goodwill, leveraged leases, and certain other differences
for which there are specific exceptions. The deferred tax liability represents the difference between the book basis and the tax
basis of Riot Blockchain’s intangible assets, calculated using a 25.6% effective tax rate.
On March 26, 2018, the CFTC license was recorded
as follows (in thousands):
Cash, net of cash acquired
|
|
$
|
500
|
|
Deferred tax liability
|
|
|
143
|
|
Non-controlling interest
|
|
|
40
|
|
Legal costs
|
|
|
17
|
|
Intangible rights acquired
|
|
$
|
700
|
|
In connection with the closing of the Logical
Brokerage Purchase Agreement, on March 26, 2018, the Company entered into a stockholders’ agreement (the “Stockholders
Agreement”) with Logical Brokerage and Mark Bradley Fisher. The Stockholders Agreement provides, among other things, that,
subject to certain exceptions, the Logical Brokerage Seller may not transfer any of his remaining shares of Logical Brokerage without
the written consent of the Company. The Stockholders Agreement also provides that, subject to certain exceptions, in the event
the Company proposes to transfer 35% or more of Logical Brokerage’s total issued and outstanding capital stock, the Logical
Brokerage Seller will be entitled to certain “tag-along” rights.
The Company made the decision, effective as
of December 31, 2019 not to pursue its RiotX / Logical Brokerage business development plan. Under the guidance of ASU 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, the Company determined that the discontinuation
of RiotX / Logical Brokerage did not represent a strategic shift that would have a major effect on the Company’s operations
and financial results. The Company accounted for the discontinuation as an impairment of an intangible asset acquired, and as of
December 31, 2019, recorded an impairment expense of approximately $0.7 million and recorded an income tax benefit of approximately
$0.1 million, which are reflected on the accompanying consolidated statements of operations.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Kairos Global Technology, Inc. Acquisition
On November 3, 2017, the Company closed on
a business combination share exchange agreement (the “Agreement”) with Kairos Global Technology, Inc., a Nevada corporation. Under
the Agreement, the shareholders of Kairos agreed to exchange all outstanding shares of Kairos' common stock to the Company
and the Company agreed to issue an aggregate of One Million Seven Hundred Fifty Thousand and One (1,750,001) newly-designated shares
of Series B Convertible Preferred Stock (the “Series B Preferred Stock”) which are convertible into an aggregate of
One Million Seven Hundred Fifty Thousand and One (1,750,001) shares of the Company's common stock, no par value per share (the
transaction, the “Kairos Transaction”) to such shareholders. See Note 10 for further information about the Series B
Preferred Stock. The 1,750,001 Series B Preferred Shares were valued at approximately $5.31 per share based upon the then
value of the Company's common shares, discounted based upon restrictions associated with the preferred shares, for a total value
of approximately $9.3 million. The shareholders of Kairos also will receive a royalty to be paid from cash flow generated from
operations, as defined in the Agreement, which shall entitle such shareholders to receive 40% of the gross profits generated on
a monthly basis until they have received a total of $1.0 million, at which point the royalty is extinguished. For financial
reporting purposes the royalty liability will be recorded as the contingency is resolved and obligation determined. To date
no royalty amounts have been achieved. Kairos owned certain computer equipment and other assets used for the mining of cryptocurrency,
specifically miners consisting of 700 AntMiner S9s and 500 AntMiner L3s, all manufactured by Bitmain. The acquisition of
Kairos was accounted for as a business combination in accordance with the provisions of ASC 805.
We have completed an allocation of the purchase
consideration. The following is the allocation of the purchase consideration (in thousands):
Cash
|
|
$
|
1,131
|
|
Equipment
|
|
|
10,333
|
|
Accounts payable and accrued expenses
|
|
|
(46
|
)
|
Deferred income tax liability
|
|
|
(2,122
|
)
|
Purchase price
|
|
$
|
9,296
|
|
Based upon the significant decline in the price
of bitcoin during the year ended December 31, 2018 and the decline in projected cash flows over the life of the miners, the Company
performed an undiscounted cash flow test to determine if the miners were impaired. The undiscounted cash flows were less than
the carrying amount of the miners and therefore, the carrying amount of the assets were compared to the fair value of the miners,
and the Company determined that there were impairment charges to be recorded on the miners purchased from Kairos. Impairment charges
for the years ended December 31, 2019 and 2018, totaled approximately nil and $3.0 million, respectively.
Note 5. Cryptocurrencies
The following table presents additional information
about cryptocurrencies (in thousands):
|
|
December 31, 2019
|
|
December 31, 2018
|
Beginning balance
|
|
$
|
707
|
|
|
$
|
200
|
|
Revenue recognized from cryptocurrencies mined
|
|
|
6,741
|
|
|
|
7,749
|
|
Mining pool operating fees
|
|
|
(135
|
)
|
|
|
(155
|
)
|
Purchase of cryptocurrencies
|
|
|
—
|
|
|
|
5,625
|
|
Purchase of miner equipment with cryptocurrencies
|
|
|
(99
|
)
|
|
|
—
|
|
Sale / trade of cryptocurrencies
|
|
|
(3,196
|
)
|
|
|
(9,237
|
)
|
Realized gain on sale of cryptocurrencies
|
|
|
665
|
|
|
|
26
|
|
Impairment of cryptocurrencies
|
|
|
(844
|
)
|
|
|
(3,501
|
)
|
Ending balance
|
|
$
|
3,839
|
|
|
$
|
707
|
|
Note 6. Fair Value Measurements
On January 28, 2019 the Company issued the
notes and warrants which were classified as liabilities and measured at fair value on the issuance date, with changes in fair value
recognized as other expense on the consolidated statements of operations and disclosed in the unaudited condensed interim consolidated
financial statements. As of June 27, 2019, in accordance with their original terms, all of the Notes were converted into a total
of 1,813,500 shares of the Company’s common stock by their holders. See Note 10.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
A summary of weighted average (in aggregate)
significant unobservable inputs (Level 3 inputs) used in measuring the Company’s Notes and Warrants at the issuance date
of January 28, 2019 and during the conversion of the Notes as of June 27, 2019, are as follows:
Senior Secured Promissory Notes
|
January 28, 2019
|
|
As of June 27, 2019
|
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
|
|
-
|
Warrants
|
January 28, 2019
|
|
As of June 27, 2019
|
Dividend yield
|
0%
|
|
0%
|
Expected price volatility
|
111.6%
|
|
119.9%-120.5%
|
Risk free interest rate
|
2.58%
|
|
2.23%-2.58%
|
Expected term
|
5 years
|
|
4 years, 10 months
|
There were no assets or liabilities measured
at fair value during the year ended December 31, 2018.
Unobservable inputs were used to determine
the fair value of positions that the Company has classified within the Level 3 category.
The following table presents changes in Level
3 liabilities measured at fair value for the year ended December 31, 2019 (in thousands):
|
|
Convertible Notes
|
|
Warrant Liability
|
Issuance of senior secured convertible notes
|
|
$
|
6,330
|
|
|
$
|
—
|
|
Issuance of warrants in connection with convertible notes
|
|
|
—
|
|
|
|
2,570
|
|
Balance at January 28, 2019
|
|
|
6,330
|
|
|
|
2,570
|
|
Change in fair value
|
|
|
3,896
|
|
|
|
2,869
|
|
Conversion of convertible notes to common stock
|
|
|
(10,226
|
)
|
|
|
—
|
|
Reclassification of warrant liability to equity
|
|
|
—
|
|
|
|
(5,439
|
)
|
Balance at December 31, 2019
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 7. Property and Equipment
Property and equipment consisted of the following as of December
31, 2019 and 2018 (in thousands):
|
|
December 31, 2019
|
|
December 31, 2018
|
Miners
|
|
$
|
5,010
|
|
|
$
|
—
|
|
Leasehold improvements
|
|
|
38
|
|
|
|
—
|
|
Office and computer equipment
|
|
|
103
|
|
|
|
93
|
|
Total cost of property and equipment
|
|
|
5,151
|
|
|
|
93
|
|
Less accumulated depreciation
|
|
|
(100
|
)
|
|
|
(67
|
)
|
Property and equipment, net
|
|
$
|
5,051
|
|
|
$
|
26
|
|
There were no impairment charges related to
miners for the year ended December 31, 2019. The breakdown of the impairment charges recorded for the year ended December 31, 2018
are as follows (in thousands):
|
|
December 31, 2018
|
Prive miners
|
|
$
|
17,691
|
|
BMSS miners
|
|
|
6,702
|
|
Kairos miners
|
|
|
3,026
|
|
Leasehold improvements
|
|
|
1,819
|
|
Total impairment charge
|
|
$
|
29,238
|
|
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
During December 2019, the Company purchased
4,000 next generation Bitmain S17 Pro Antminers for approximately $6.3 million from Bitmain. In December 2019, 3,000 miners had
been received at the Company’s Oklahoma City facility but not yet placed in service.
The remaining 1,000 miners were received at
its Oklahoma City facility during February 2020 and the related $1.4 million prepayment is recorded as a deposit on the accompanying
consolidated balance sheet.
Depreciation and amortization expense
totaled approximately $0.1 million (including $0.09 million of patent amortization) and $5.2 million, for the years ended December
31, 2019 and 2018, respectively. Depreciation is computed on the straight-line basis for the periods the assets are in service.
Note 8. Investments
Coinsquare
In September 2017, the Company acquired a minority
interest for $3.0 million in Coinsquare, which operates a digital crypto currency exchange platform in Canada. During February
2018, the Company invested an additional $6.4 million to acquire additional common stock of Coinsquare. These additional investments
resulted in a current ownership in Coinsquare by the Company of approximately 11.7% ownership in Coinsquare on a fully diluted
basis. 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 measurement alternative
at cost, less any impairment, plus or minus changes resulting from observable price changes. As of December 31, 2019 and 2018,
the Company considered the cost of the investment to not exceed the fair value of the investment and did not observe price changes.
Tess
In 2017, the Company acquired approximately
52% of Tess which is developing blockchain solutions for telecommunications companies. Under the terms of the Purchase Agreement
(the “Purchase Agreement”) the Company invested cash of approximately $0.3 million in Tess and issued 75,000 shares
of restricted Common Stock to Tess in exchange for 2,708,333 shares of common stock of Tess. The 75,000 shares of Common Stock
were valued at the $8.49 market price as of October 20, 2017 for a total of approximately $0.6 million. Accordingly, Tess
became a majority-owned subsidiary of the Company. As part of the transaction, the Company and Tess entered into a registration
rights agreement pursuant to which the Company agreed to file a registration statement to register the resale of 25,000 shares
(of 75,000 shares) of Common Stock issued to Tess. The 2017 acquisition of Tess was accounted for as a business combination in
accordance with the provisions of ASC 805. The allocation of purchase consideration includes $0.7 million as in-process research
and development (IPR&D) related to the TessPay project. As of December 31, 2018, the Company had $0.6 million of intangibles
related to Tess’s internal technology platform.
In January 2018, following the execution of
a non-binding letter of intent as of December 11, 2017, the parties executed a definitive agreement providing that Tess agreed
to merge with Cresval Capital Corp. (“Cresval”) (TSX-V: CRV). Assuming closing conditions are met, upon closing of
the anticipated merger, Tess would be publicly traded on the TSX Venture Exchange (the “TSXV”).
During the year ended December 31, 2018, Tess
received approximately $0.5 million from the sale of shares of Riot Blockchain common stock held by Tess, which has been recorded
as a credit to the consolidated Common Stock of the Company. Additionally, Tess issued approximately 189,000 of its common shares
in exchange for cash proceeds of approximately $220,000 thereby reducing the investment percentage held by the Company from 52.01%
to 50.2% as of December 31, 2018. Due to the termination of the Cresval Agreement on February 15, 2019, the Company recorded an
impairment loss of $2.1 million consisting of $0.7 million of in process research and development costs, $0.6 million related to
capitalized costs of Tess’s internal technology platform and $0.8 million of goodwill during the year ended December 31,
2018.
On April 10, 2019, Tess closed on a funding agreement under which
approximately 23.8 million shares of Tess were issued for CAD $1.2 million. As a result of this and subsequent funding’s,
the Company’s ownership in Tess was reduced to approximately 8.8%. Subsequently Tess was no longer being consolidated in
the Company’s consolidated financial statements.
As of December 31, 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 December 31,
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 (in thousands except for share and per share amounts):
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
|
|
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
|
|
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 (in thousands) on the date of deconsolidation:
Current assets
|
|
$
|
130
|
|
Less:
|
|
|
|
|
Accounts payable
|
|
|
761
|
|
Accrued expenses
|
|
|
275
|
|
Convertible notes
|
|
|
1,696
|
|
Net liabilities
|
|
|
(2,602
|
)
|
Non-controlling interest share
|
|
|
1,553
|
|
Sub-total
|
|
|
(1,048
|
)
|
Less: fair value of shares owned by Riot Blockchain
|
|
|
90
|
|
Gain on deconsolidation of Tess
|
|
$
|
(1,139
|
)
|
Verady
During November 2017, the Company made a $0.2
million investment in a convertible note as part of a series of notes issued by Verady, LLC (“Verady”). The notes are
unsecured, subordinated to other approved liabilities, mature December 31, 2022, bear interest at 6%, unless previously repaid
or converted and contain other conditions and restrictions, all as defined under the subscription documents. The Verady convertible
note was previously recorded at fair value (which approximates cost). The conversion rate of the convertible note is defined based
upon the possible occurrence of certain defined events which may or may not occur. The Company has no other relationship or rights
associated with Verady. Founded in 2016, Verady is privately held and recently launched VeraNet, a decentralized network of financial
reporting and accounting tools targeted to the needs of the cryptocurrency community.
During the year ended December 31, 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 $0.2 million, into equity of Verady. The automatic
conversion resulted in a current ownership in Verady by the Company of approximately 3.2% on a fully diluted basis. 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 year ended December 31, 2019, there were no price changes
in orderly transactions for identical or similar investments in Verady.
Note 9. Long-Term Assets
Intangible rights acquired
As of December 31, 2019, intangible rights
acquired totaled zero. As of December 31, 2018, intangible rights acquired totaled $0.7 million, which were associated with the
Company’s Logical Brokerage acquisition in March 2018. The Company made the decision, effective as of December 31, 2019 not
to pursue its RiotX / Logical Brokerage business development plan. See Note 4.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Deposits on equipment
During December 2019, the Company purchased
1,000 next generation Bitmain S17 Pro Antminers from Bitmain for approximately $1.4 million. As of December 31, 2019, the Company
has not yet received the miners and recorded the $1.4 million as a deposit on the accompanying consolidated balance sheet.
Patents
The Company’s intangible assets with
finite lives consist of its patents pertaining to its legacy animal health business, which have been out-licensed. For all periods
presented, all of the Company’s identifiable intangible assets were subject to amortization. The carrying amounts related
to acquired intangible assets as of December 31, 2019 and 2018 were as follows (in thousands):
|
|
December 31, 2019
|
|
December 31, 2018
|
Patents
|
|
$
|
1,157
|
|
|
$
|
1,119
|
|
Accumulated amortization
|
|
|
(698
|
)
|
|
|
(612
|
)
|
Patents, net
|
|
|
459
|
|
|
|
507
|
|
Convertible note investment
|
|
|
—
|
|
|
|
200
|
|
Accrued interest convertible note
|
|
|
—
|
|
|
|
—
|
|
Convertible note
|
|
|
—
|
|
|
|
200
|
|
Total
|
|
$
|
459
|
|
|
$
|
707
|
|
The following table represents the total estimated amortization
of intangible assets for the five succeeding years and thereafter (in thousands):
For the year ended December 31,
|
|
Estimated amortization expense
|
|
2020
|
|
|
$
|
86
|
|
|
2021
|
|
|
|
86
|
|
|
2022
|
|
|
|
86
|
|
|
2023
|
|
|
|
86
|
|
|
2024 and thereafter
|
|
|
|
115
|
|
|
Total
|
|
|
$
|
459
|
|
The Company capitalizes legal costs and filing
fees associated with obtaining patents on its new discoveries. Once the patents have been issued, the Company amortizes these costs
over the shorter of the legal life of the patent or its estimated economic life using the straight-line method. Amortization expense
totaled $86,000 and $62,000 for the years ended December 31, 2019 and 2018, respectively. The Company tests intangible assets with
finite lives upon significant changes in the Company’s business environment. The testing resulted in no patent impairment
charges during the years ended December 31, 2019 and 2018.
Note 10. Notes, Warrants 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 approximately $3.4 million along with Warrants for the
purchase of and equal value of shares of the Company’s common stock in exchange for $3.0 million 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.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
The Notes were convertible into shares of the
common stock of the Company at a price equal to the lower of $2.00 or 80% of the lowest volume-weighted adjusted price of shares
of the Company’s common stock in the twenty trading days prior to the conversion date, subject to adjustments in certain
cases as defined in the Financing Agreements. Provided, however, that according to the Notes, the cumulative shares of the Company’s
common stock issuable upon conversion of the Notes cannot exceed 19.99% of the total number of the Company’s outstanding
common stock as of January 28, 2019. Pursuant to the Financing Agreements between the Company and the Investors, the Company granted
the Investors a security interest in its assets to secure repayment of the Notes. Further to the Financing Agreements, the Company
also reserved a number of shares of its common stock equal to 300% of the total number of shares issuable upon full conversion
of the Notes.
Due to the complexity and number of embedded
features within the Notes and as permitted under applicable accounting guidance, the Company elected to account for the Notes and
all the embedded features under the fair value option, which records the Notes at fair value rather than at historical cost, with
changes in fair value recorded in the condensed interim consolidated statements of operations. Direct costs and fees incurred to
issue the Notes were recognized in earnings as incurred and were not deferred. On the initial measurement date of January 28, 2019,
the fair value of the Notes was estimated at approximately $6.3 million. Upfront costs and fees related to items for which the
fair value option was elected were approximately $0.4 million and were recorded as a component of other expenses for the year ended
December 31, 2019.
In connection with the Notes, the Company entered
into registration rights agreement with the Investors. The Company filed a registration statement with the SEC covering the equity
rights and any other shares issuable in connection with the Notes on March 14, 2019 and the registration statement was declared
effective on April 29, 2019.
During the year ended December 31, 2019, holders
of the Notes issued on January 28, 2019, converted 100% of the Notes into 1,813,500 shares of the Company’s common stock.
The aggregate fair value of the Notes converted during the year ended December 31, 2019 was $10.2 million, an increase in fair
value of $3.9 million, which is reflected on the consolidated statements of operations for the year ended December 31, 2019, as
change in fair value of convertible note. Accordingly, having satisfied the Notes in full, the Company’s obligations under
the Notes have been cancelled.
In connection with this Private Financing,
the Company also issued 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.
Tess Convertible Note
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 was issued
by Tess in the principal amount USD $1.7 million (CAD $2.2 million) (the “Tess Convertible Note”). The Tess Convertible
Note bears interest at 5%, is unsecured and due in 2021. During the year ended December 31, 2019, the Company’s ownership
in Tess was reduced to 8.8% and as a result, Tess is no longer consolidated in the Company’s consolidated financial statements.
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 $8.5 million. As of June 27, 2019, in connection with the BMSS agreement,
the Company owed approximately $1.3 million of principal and interest and the Company and BMSS agreed to a one-time settlement
payment totaling $1.0 million. The remaining $0.4 million was recorded as a gain on extinguishment of notes and interest, and included
in other income in the accompanying consolidated statement of operations for the year ended December 31, 2019.
During the year ended December 31, 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 $2.1 million in exchange for cash payments
of $1.6 million, resulting in a gain of approximately $0.5 million recognized during the year ended December 31, 2019.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Note 11. Stockholders' Equity
Preferred Stock
Series B – Preferred Stock
On November 3, 2017, the Company designated
1,750,001 shares of preferred stock as “0% Series B Convertible Preferred Stock” in connection with the filing of the
Certificate of Designation with the Secretary of State of the State of Nevada.
The shares of Series B Preferred Stock are
convertible into shares of common stock based on a conversion calculation equal to the stated value of the Series B Preferred Stock,
plus all accrued and unpaid dividends, if any, on such Series B Preferred Stock, as of such date of determination, divided by the
conversion price. The stated value of each share of Series B Preferred Stock is $6.80 and the initial conversion price is $6.80
per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other
similar events.
The holders of Series B Preferred Stock are
entitled to receive dividends if and when declared by the Company's board of directors. The Series B Preferred Stock will participate
on an “as converted” basis, with all dividends declared on the Company's common stock. Such dividends will be paid
by the Company out of funds legally available therefor, payable, subject to the conditions and other terms hereof, in cash on the
stated value of such Series B Preferred Stock.
The Company is prohibited from effecting a
conversion of the Series B Preferred Stock to the extent that, as a result of such conversion, the holder would beneficially own
more than 4.99% percent of the number of shares of common stock outstanding immediately after giving effect to the issuance of
shares of common stock upon conversion of the Series B Preferred Stock, which beneficial ownership limitation may be increased
by the holder up to, but not exceeding, 9.99% percent. Each holder is entitled to vote on all matters submitted to stockholders
of the Company, and will have the number of votes equal to the number of shares of common stock issuable upon conversion of such
holder's Series B Preferred Stock.
The Series B Preferred Stock contains a blocker
pursuant to which, if the Company has not obtained the approval of its shareholders in accordance with NASDAQ Listing Rule 5635(d),
then the Company may not issue upon conversion of the Series B Preferred Stock a number of shares of common stock, which, when
aggregated with any other shares of common stock underlying the Series B Preferred Stock issued pursuant to the Agreement
would exceed 19.99% of the shares of common stock issued and outstanding as of the date of the Agreement, subject to adjustment
for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the common stock that
occur after the date of the Agreement.
On December 21, 2017, the Company amended the
Certificate of Designation of Rights, Powers, Preferences, Privileges and Restrictions of 0% Series B Convertible Preferred Stock
(the “Amendment”) in order to remove the voting rights of the Series B Preferred Stock.
During the year ended December 31, 2018, holders
of 1,353,505 Series B Preferred Shares elected to convert those shares to 1,353,505 shares of the Company’s common stock
under their original terms. On November 30, 2018, the Company canceled 91,496 shares of its Series B Preferred Stock with a value
at issuance of $5.31 per share, or approximately $0.5 million. As of December 31, 2018, 13,000 shares of Series B Preferred Stock
were outstanding.
During the year ended December 31, 2019, 8,801
shares of the Company’s Series B preferred stock were converted into 8,801 shares of the Company’s common stock. As
of December 31, 2019, 4,199 shares of Series B Preferred Stock were outstanding.
2019 Transactions
Common Stock
As additional consideration for the January
2019 Private Financing, the Company issued a total of 150,000 restricted common shares to three investors at an average fair value
of $1.70 per share. See Note 10.
At-the-Market Equity Offering
The Company entered into a Sales Agreement
with H.C. Wainwright dated May 24, 2019, pursuant to which the Company may, from time to time, sell up to $100 million in shares
of the Company’s common stock through H. C. Wainwright, as the Company’s sales agent and/or principal, in the ATM Offering.
All sales of the shares have been made pursuant to an effective shelf registration statement on Form S-3 filed with the SEC. The
Company pays H.C. Wainwright a commission of approximately 3.0% of the aggregate gross proceeds the Company received from all sales
of the Company's common stock under the Sales Agreement. The Company received net proceeds on sales of 8,351,762 shares of common
stock under the Sales Agreement of approximately $23.8 million at a weighted average sales price of $2.97 during the year ended
December 31, 2019.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Restricted Common Stock
During the year ended December 31, 2019, 239,751
shares of common stock were issued, related to past fully vested restricted stock rights previously granted under the Company’s
2017 Equity Incentive Plan.
During the year ended December 31, 2019, under
the Company’s 2019 Equity Incentive Plan, 1,493,832 restricted stock rights were awarded to advisory board members and employees
of the Company, and under the Company’s 2017 Equity Incentive Plan, 48,500 restricted stock rights were awarded to a consultant
and advisory board members. The restricted stock rights have a grant date fair value of approximately $2.2 million or $1.41 per
share, and vest over a period of three months to two years.
2018 Transactions
Common Stock
On January 4, 2018, the Company issued 19,533
shares of common stock upon the exercise of an employee stock-option.
On January 25, 2018, the Company issued 2,754
shares of common stock at fair value for consulting services at $7.26 per share.
On February 14, 2018, the Company issued 100,000
shares of common stock for the exercise of 100,000 warrants issued in March 2017. The Company received $350,000 from the exercise
of the warrants.
On April 20, 2018, the Company issued 18,000
shares of the Company’s common stock for consulting services at an average fair value of $14.33 per share.
During August 2018, the Company issued 50,000
shares of the Company’s common stock at an average fair value of $5.31 per share, as consideration for the Waiver under the
BMSS Purchase Agreement. See Note 4.
On December 18, 2018, the Company issued 22,523
shares of common stock at a fair value of $5.55 per share, related to a settlement fee for consulting services.
During the year ended December 31, 2018, holders
of 1,353,505 Series B preferred shares elected to convert those shares to 1,353,505 shares of the Company’s common stock
under its original terms.
During the year ended December 31, 2018, warrants
to purchase 13,009 shares of common stock were exercised on a cashless basis for 3,215 shares of common stock.
Common Stock issued in Asset Acquisition
On February 21, 2018, the Company issued 1,000,000
shares of common stock at fair value in connection with the Prive asset purchase agreement, with 200,000 of these shares deposited
into an escrow account with Corporate Stock Transfer, Inc.
Restricted Common Stock
During the year ended December 31, 2018, 327,416
shares of common stock related to fully vested shares of restricted common stock were delivered for services performed.
Note 12. Stock Options, Warrants
and Restricted Common Stock
During the year ended December 31, 2019, the
Company’s shareholders approved its 2019 Equity Incentive Plan (the “2019 Plan”), which reserves a total of 3,600,000
shares of the Company’s common stock plus the remaining shares reserved under the Company’s 2017 Equity Incentive Plan.
On December 5, 2019 the Company registered 3,930,603 shares of common stock under the 2019 Plan. The Company currently provides
stock-based compensation to employees, directors and consultants, under the Company's 2019 Plan, as approved by the Company's shareholders
and non-qualified options and warrants issued outside of the Plan.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Stock-based Compensation
The Company’s stock-based compensation
expenses recognized during the years ended December 31, 2019 and 2018, were attributable to selling, general and administrative
expenses, which are included in the accompanying consolidated statements of operations.
The Company recognized total stock-based compensation
expense during the years ended December 31, 2019 and 2018, from the following categories (in thousands):
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
Restricted stock awards under the Plan
|
|
$
|
687
|
|
|
$
|
3,972
|
|
Stock option awards under the Plan
|
|
|
58
|
|
|
|
688
|
|
Total stock-based compensation
|
|
$
|
745
|
|
|
$
|
4,660
|
|
Restricted common stock awards
A summary of the Company's restricted stock
activity in the years ended December 31, 2019 and 2018 is as follows:
|
|
Number of Shares
|
|
Weighted Average Grant-Date
Fair Value
|
|
Unvested at January 1, 2018
|
|
|
|
496,152
|
|
|
$
|
5.97
|
|
|
Granted
|
|
|
|
431,000
|
|
|
$
|
10.46
|
|
|
Vested
|
|
|
|
(530,065
|
)
|
|
$
|
7.61
|
|
|
Forfeited
|
|
|
|
(301,148
|
)
|
|
$
|
7.68
|
|
|
Unvested at December 31, 2018
|
|
|
|
95,939
|
|
|
$
|
12.49
|
|
|
Vested
|
|
|
|
(58,772
|
)
|
|
$
|
7.66
|
|
|
Granted
|
|
|
|
1,542,332
|
|
|
$
|
1.41
|
|
|
Forfeited
|
|
|
|
(55,000
|
)
|
|
$
|
14.95
|
|
|
Unvested at December 31, 2019
|
|
|
|
1,524,499
|
|
|
$
|
1.37
|
|
The value of restricted common stock grants
are measured based on their fair market value on the date of grant and amortized over their respective vesting periods. As of December
31, 2019, there was approximately $1.8 million of unrecognized compensation cost related to unvested restricted common stock rights,
which is expected to be recognized over a remaining weighted-average vesting period of approximately three months.
Stock Incentive Plan Options
The Company estimates the fair value of the
share-based option awards on the date of grant using the Black-Scholes option-pricing model (the “Black-Scholes model”). Using
the Black-Scholes model, the value of the award that is ultimately expected to vest is recognized over the requisite service period
in the statement of operations. The Company attributes compensation to expense using the straight-line single option method for
all options granted.
The Company's determination of the estimated
fair value of share-based payment awards on the date of grant under the Plan is affected by the following variables and assumptions:
•
|
The grant date exercise price – the closing market price of the Company's common stock on the date of the grant;
|
•
|
Expected option term – based on historical experience with existing option holders estimated at 3-5 years;
|
•
|
Estimated dividend rates – based on historical and anticipated dividends over the life of the option;
|
•
|
Legal term of the option – grants have legal lives of 10 years;
|
•
|
Risk-free interest rates – with maturities that approximate the expected life of the options granted;
|
•
|
Calculated stock price volatility – calculated over the expected life of the options granted, which is calculated based on the daily closing price of the Company's common stock over the period commencing in mid-2017 when the Company changed its strategic focus; and
|
•
|
Option exercise behaviors – based on actual and projected employee stock option exercises and forfeitures.
|
•
|
The Company accounts for forfeitures as they occur.
|
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
The Company currently provides stock-based
compensation to employees, directors and consultants under the Plan. There were no stock options issued during the year
ended December 31, 2019. The Company utilized assumptions in the estimation of fair value of stock-based compensation for the year
ended December 31, 2018, as follows:
|
December 31,
|
|
2018
|
Dividend yield
|
0%
|
Expected price volatility
|
152% - 159%
|
Risk free interest rate
|
2.49% - 2.96%
|
Expected term
|
5 years
|
A summary of stock option activity under the
Plan for options to employees, officers, directors and consultants, for the years ended December 31, 2019 and 2018, is presented
below:
|
|
Shares Underlying Options
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual
Term (Years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding at January 1, 2018
|
|
|
|
119,533
|
|
|
$
|
9.02
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
62,000
|
|
|
$
|
15.71
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(19,533
|
)
|
|
$
|
4.02
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(100,000
|
)
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
|
62,000
|
|
|
$
|
15.71
|
|
|
|
9.2
|
|
|
|
|
|
|
Granted
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(50,000
|
)
|
|
$
|
18.50
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
|
12,000
|
|
|
$
|
4.09
|
|
|
|
3.7
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
|
12,000
|
|
|
$
|
4.09
|
|
|
|
3.7
|
|
|
$
|
—
|
|
The aggregate intrinsic value in the table
above represents the total intrinsic value (the difference between the Company's closing stock price on December 31, 2019 and 2018,
and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders,
had all option holders been able to, and in fact had, exercised their options on December 31, 2019 and 2018, respectively.
As of December 31, 2018, total stock-based
compensation expense related to unvested options not yet recognized totaled approximately $58,000, which was fully amortized in
the first quarter of 2019.
Other common stock purchase warrants
As of December 31, 2019, the Company had outstanding
3,574,257 warrants issued in connection with offerings. The following is a summary of the change in outstanding warrants
during the years ended December 31, 2019 and 2018:
|
|
Shares Underlying Options/Warrants
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual
Term (Years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding at January 1, 2018
|
|
|
|
1,944,895
|
|
|
$
|
35.06
|
|
|
|
2.7
|
|
|
$
|
6,135,000
|
|
|
Issued
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
|
|
(113,009
|
)
|
|
$
|
3.50
|
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(160,773
|
)
|
|
$
|
10.88
|
|
|
|
—
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
|
1,671,113
|
|
|
$
|
39.47
|
|
|
|
2.0
|
|
|
$
|
—
|
|
|
Issued
|
|
|
|
1,908,144
|
|
|
$
|
1.94
|
|
|
|
5.2
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(5,000
|
)
|
|
$
|
7.90
|
|
|
|
—
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
|
3,574,257
|
|
|
$
|
19.48
|
|
|
|
2.9
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
|
3,574,257
|
|
|
$
|
19.48
|
|
|
|
2.9
|
|
|
$
|
—
|
|
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
The Company issued 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. During the
year ended December 31, 2018, 13,009 of the warrants issued in the May 2013 private offering were exercised on a cashless basis
for the issuance of 3,215 shares of common stock, 100,000 warrants issued in March 2018, were exercised for cash proceeds
of approximately $0.4 million and 160,773 warrants were forfeited.
The aggregate intrinsic value in the table
above represents the total intrinsic value (the difference between the Company's closing stock price on December 31, 2019 and the
exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all
option holders been able to, and in fact had, exercised their options on December 31, 2019.
Note 13. Animal Health License
Agreements
Ceva License Agreement
In July 2012, the Company entered into an exclusive
license agreement (the “License Agreement”) with Ceva Santé Animale S.A. (“Licensee”), under which
the Company granted the Licensee an exclusive royalty-bearing license, until December 31, 2028, to the Company's intellectual property
and other assets, including both (a) the Company’s patent rights and know-how, relating to recombinant single chain reproductive
hormone technology for use in non-human mammals (the “Company's Animal Health Assets”) and (b) the technology licensed
to the Company by Washington University in St. Louis (“WU”). The License Agreement contains termination provisions
as defined in the License Agreement.
Under the License Agreement, the Licensee obtained
a worldwide exclusive license to develop, seek regulatory approval for and offer to sell, market, distribute, import and export
luteinizing hormone ('LH') and/or follicle-stimulating hormone (“FSH”) products for bovine (cattle), equine and swine
in the field of the assistance and facilitation of reproduction in bovine, equine and swine animals. The Company also
granted the Licensee an option and right of first refusal to develop additional animal health products outside of the licensed
field of use or any diagnostic pregnancy detection tests for non-human mammals.
Under the License Agreement as of December
31, 2019, the Company would be entitled to receive future payments if Ceva achieves certain regulatory approvals as outlined in
the License Agreement, summarized as follows:
●
|
Payments, totaling up to a potential of $0.9 million in the aggregate, based on the satisfactory conclusion of conditions as defined in the License Agreement;
|
●
|
Potential for payments of up to an additional $2 million for development and receipt of regulatory approval for additional licensed products; and
|
●
|
Royalties, at low double-digit rates, based on sales of licensed products.
|
The upfront license fees received from the
License Agreement have been recorded as deferred revenue and are amortized over the term of the License Agreement. License
fees revenue totaling a net of approximately $1.6 million commenced being amortized in July 2012. As of December 31, 2019, deferred
revenue of $0.1 million has been classified as a current liability and $0.8 million has been classified as a long-term liability.
The current liability represents the next twelve months' portion of the license fees revenue. For each of the years ended
December 31, 2019 and 2018, approximately $0.1 million, was recorded as the amortized license fee revenue.
Washington University License Agreement
During 2004 WU and Riot Blockchain entered
into an exclusive license agreement which grants Riot Blockchain exclusive license and right to sublicense WU's technology (as
defined under the WU License Agreement) for veterinary products worldwide, except where prohibited. The term of the WU License
Agreement continues until the expiration of the last of WU's patents (as defined in the WU License Agreement). Riot
Blockchain has agreed to pay minimum annual royalties, creditable against future royalties and royalties payable to WU for covered
product sales by Riot Blockchain carrying a mid-single digit royalty rate and for sublicense fees received by Riot Blockchain carrying
a low double-digit royalty rate. No royalty payments were made during the years ended December 31, 2019 and 2018.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Note 14. Income taxes
The components of the loss from continuing operations before income
taxes for the years ended December 31, 2019 and 2018 are as follows (in thousands):
|
|
For the years ended December 31,
|
|
|
2019
|
|
2018
|
Domestic
|
|
$
|
(20,446
|
)
|
|
$
|
(56,453
|
)
|
Foreign
|
|
|
—
|
|
|
|
(4,555
|
)
|
Loss from Continuing Operations before Income Taxes
|
|
$
|
(20,446
|
)
|
|
$
|
(61,008
|
)
|
The components of income tax benefit
are as follows (in thousands):
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
US Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
US State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
Total current benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
US Federal
|
|
$
|
117
|
|
|
$
|
495
|
|
US State
|
|
|
26
|
|
|
|
112
|
|
Foreign
|
|
|
—
|
|
|
|
92
|
|
Total deferred benefit
|
|
|
143
|
|
|
|
699
|
|
Total benefit for income taxes
|
|
$
|
143
|
|
|
$
|
699
|
|
The tax effects of temporary differences and tax loss and credit
carry forwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 2019 and 2018 are
comprised of the following (in thousands):
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
43,436
|
|
|
$
|
30,745
|
|
Research and development credit carryforwards
|
|
|
989
|
|
|
|
989
|
|
Stock option expense
|
|
|
1,095
|
|
|
|
1,384
|
|
Impairment of mining related assets and other
|
|
|
(146
|
)
|
|
|
8,779
|
|
Total deferred tax assets
|
|
|
45,374
|
|
|
|
41,897
|
|
Valuation allowance
|
|
|
(45,374
|
)
|
|
|
(41,897
|
)
|
Net deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Indefinite life intangible assets
|
|
|
—
|
|
|
|
(143
|
)
|
Net deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
(143
|
)
|
The Company has approximately $168.8 million
of federal and state tax Net Operating Losses (“NOL”s) that may be available to offset future taxable income, if any.
The federal net operating loss carryforwards of $100.3 million, if not utilized, will expire in 2037. The federal and state net
operating loss carryforwards of $20.1 million and $19.1 million generated in 2019 and 2018, respectively are subject to an 80%
limitation on taxable income, do not expire and will carry forward indefinitely.
Furthermore, as a result of changes in the
ownership of our common stock and changes in our business operations, our ability to use our federal NOLs may be limited under
Internal Revenue Code Section 382 and 383. State NOLs are subject to similar limitations in many cases. As a result,
our substantial NOLs may not have any value to us.
The statute of limitations for assessment
by the IRS and state tax authorities is open for tax years ending December 31, 2016 through 2019, although carryforward
attributes that were generated prior to tax year 2016 may still be adjusted upon examination by the IRS or state tax
authorities if they either have been or will be used in a future period. Currently, no federal or state income tax returns
are under examination by the respective taxing authorities. The foreign tax returns for the years ended December 31, 2017
through 2019 are open for examination.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
In assessing the realization of deferred tax
assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and taxing strategies in making this assessment. In case the deferred tax assets will not be realized in
future periods, the Company has provided a valuation allowance for the full amount of the deferred tax assets at December 31, 2019
and 2018. The valuation allowance increased by approximately $3.5 million during the year ended December 31, 2019.
The expected tax expense (benefit) based on
the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as follows (in thousands):
|
|
For the years ended December 31,
|
|
|
2019
|
|
2018
|
Statutory federal income tax expense (benefit)
|
|
$
|
(4,293
|
)
|
|
$
|
(12,791
|
)
|
State taxes, net of federal tax expense (benefit)
|
|
|
(664
|
)
|
|
|
(2,887
|
)
|
Stock compensation
|
|
|
1,142
|
|
|
|
174
|
|
Other
|
|
|
195
|
|
|
|
–
|
|
Change in valuation allowance
|
|
|
3,477
|
|
|
|
14,805
|
|
Income taxes benefit
|
|
$
|
(143
|
)
|
|
$
|
(699
|
)
|
The Company has not identified any uncertain
tax positions requiring a reserve as of December 31, 2019 and 2018. The Company’s policy is to recognize interest and penalties
that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense. The
Company did not accrue either interest or penalties for the years ended December 31, 2019 and 2018.
The Company is subject to U.S. federal
income tax and primarily Oklahoma and Colorado state income tax. The Company has not been under tax examination in any
jurisdiction for the years ended December 31, 2019 and 2018.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Note 15. Commitments and Contingencies
Commitments:
Oklahoma Lease Agreement
On February 27, 2018, Kairos entered into a
lease agreement (the “OKC Lease”) with 7725 Reno #1, LLC (“7725 Reno”), pursuant to which Kairos leases
approximately 107,600 square foot warehouse located in Oklahoma City, Oklahoma. Pursuant to the terms of the OKC Lease, the
initial term of one year terminates on February 15, 2019, unless terminated earlier pursuant to the terms of the OKC Lease. Kairos
has the right to operate from the premises on a 24 hour/seven day a week basis. Base rent for the premises during the initial term
of the OKC Lease was equal to $55.95/kW per month for a total of 4 Megawatts (MW) of available electrical power, or $223,800 per
month.
On March 26, 2018, Kairos entered into a first
amendment to the above OKC Lease, whereby 7725 Reno agreed to increase the electrical power available for Kairos’s use from
6MW to 12MW, and the base rent under the lease was increased to approximately $664,760 per month, effective as of the date when
such additional power is available.
Effective November 29, 2018, Kairos entered
into the second amendment to the OKC Lease which provided the following:
|
•
|
extended the initial term of the lease through August 19, 2019;
|
|
•
|
monthly base rent of $235,000 for December 2018, $230,000 for January and $190,000 per month thereafter for the duration of the OKC Lease, including any renewals thereof;
|
|
•
|
changes the monthly electricity usage charges; and
|
|
•
|
granting Kairos the option to renew the OKC Lease for up to two, three-month periods after expiration of the initial term of the second amendment to the OKC Lease.
|
On May 15, 2019, Kairos renewed the OKC Lease
for the first renewal term of three months, extending the OKC Lease through November 15, 2019.
On August 15, 2019, Kairos renewed the OKC
Lease for the second renewal term of three months, extending the lease through February 15, 2020.
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.
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 leases 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 is for thirty-nine (39) months expiring on August
9, 2021, with one, five-year option to renew. The initial base rent is $4,658.50 per month (or $2.75 per sq. ft.) for the first
year and shall escalate at the rate of 3.0% per annum thereafter. Additionally, common operating expenses are prorated and charged
monthly as additional rent.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Operating Leases
At December 31, 2019, the Company had operating
lease liabilities of approximately $0.4 million and right of use assets of approximately $0.4 million, which are included in the
consolidated balance sheet.
The following summarizes quantitative information
about the Company’s operating leases (dollars in thousands):
Lease cost
|
|
Year Ended December 31, 2019
|
Operating lease cost
|
|
$
|
2,378
|
|
Variable lease cost
|
|
|
3,200
|
|
Operating lease expense
|
|
|
5,578
|
|
Short-term lease rent expense
|
|
|
17
|
|
Total rent expense
|
|
$
|
5,595
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
2,377
|
|
Right of use assets exchanged for new operating lease liabilities
|
|
$
|
2,664
|
|
Weighted-average remaining lease term – operating leases
|
|
|
0.5 years
|
|
Weighted-average discount rate – operating leases
|
|
|
10.00
|
%
|
Maturities of the Company’s operating lease liabilities,
are as follows (in thousands):
For the year ended December 31, 2020
|
|
$
|
344
|
|
For the year ended December 31, 2021
|
|
|
35
|
|
Total
|
|
$
|
379
|
|
Less present value discount
|
|
|
(11
|
)
|
Operating lease liabilities
|
|
$
|
368
|
|
Rent expense, recorded on a straight-line
basis, was approximately $5.6 million and $5.5 million for the years ended December 31, 2019 and 2018, respectively.
Ingenium International LLC Consulting
Agreement
On February 21, 2018, the Company entered into
a Consulting Agreement with Ingenium International LLC (the “Consultant”) to provide consulting services related to
the Company’s business for a twelve-month period. Pursuant to the Consulting Agreement, Consultant’s services
are defined as follows: complete the installation and deployment of 8,000+ ASIC cryptocurrency miners, which included the Prive
Equipment and the BMSS Equipment; assist in managing and monitoring the operation of the 8,000+ cryptocurrency miners on an ongoing
basis; promptly responding to and troubleshooting any issues as they arise in the management and monitoring of the operations;
continuing the buildout of up to 40 Megawatts of energy capacity, with the ultimate goal to secure the power and build the location
for up to 80 Megawatts of energy capacity; and to make strategic introductions to other cryptocurrency business opportunities and
contacts in the sector. In connection with the Consulting Agreement the Company made a lump sum payment of $4.0 million to
the Consultant. The Company recorded the $4.0 million as a prepaid expense on February 21, 2018 and was amortizing the total cost
over the one-year life of the agreement. However, the Company determined that as of December 31, 2018, the Consultants had
provided substantially all the agreed upon services under the Consulting Agreement and therefore, recorded any remaining prepaid
balance to selling, general and administrative expense on the accompanying statement of operations.
The controlling principals of Ingenium International
LLC. are shareholders in the Company by virtue of the previous acquisitions of Kairos and Prive.
Synapse Financial Technologies, Inc.
Agreement
On October 23, 2018, the Company, through its
wholly-owned subsidiary, Logical Brokerage entered into an agreement (the “SynapseFi Agreement”) with Synapse Financial
Technologies, Inc. (“SynapseFi”) to secure Synapse’s services. SynapseFi is an industry leader in the provision of Application
Program Interfaces (“API”) to the financial services industry.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
The SynapseFi
Agreement was terminated by mutual agreement of the parties, in September 2019.
For the years ended December 31, 2019 and 2018,
there were no material expenses incurred related to the SynapseFi Agreement.
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.
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 the motions to dismiss has been completed. Subject
to the outcome of the pending motions, defendants intend to continue to vigorously contest Lead Plaintiff’s 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.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
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 March 9, 2020 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.
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, a fifth 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.
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.
SEC Subpoena and Other Matters
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
has as of the date of the letter, it does 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.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
On September 7, 2018, a complaint was filed
by the SEC (Case 1:18-cv-08175) and as subsequently amended, (the “Complaint”) against, among others, a number of individuals
and entities some of whom the Company has previously disclosed as its beneficial owners, as well as, Mr. John O’Rourke III,
the Company’s former chairman of the board of directors and chief executive officer who resigned from the Company on September
8, 2018, as disclosed in the Current Periodic Report on Form 8-K filed September 10, 2018. Other persons named in the Complaint
have previously reported that they were beneficial owners of the Company’s common stock, however, the Company has no basis
to determine whether any such persons may have operated as a control group, collectively beneficially owning more than 5% of the
Company’s common stock.
Note 16. Related Party Transactions
Tess
Tess related parties
include: Powercases Inc., and 2227470 Ontario Inc., (companies that are wholly-owned by Jeffrey Mason, President and Chief Executive
Officer of Tess), 1038088 Ontario Limited (a company that is wholly-owned by Fraser Mason, Chairman and Chief Financial Officer
of Tess), and JLM Strategic Marketing (a proprietorship owned by Jennifer Mason, Manager Corporate Communications of Tess).
The following table
provides the total amount of transactions that have been entered into with Tess related parties and outstanding balances with Tess
related parties as of and for the periods identified (in thousands):
|
|
Year Ended
|
Services to Tess provided by (1):
|
|
December 31, 2019
|
|
December 31, 2018
|
Powercases Inc.
|
|
$
|
213
|
|
|
$
|
655
|
|
JLM Strategic Marketing
|
|
$
|
—
|
|
|
$
|
228
|
|
1038088 Ontario Limited
|
|
$
|
45
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
Payable to:
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
Powercases Inc.
|
|
$
|
—
|
|
|
$
|
37
|
|
JLM Strategic Marketing
|
|
$
|
—
|
|
|
$
|
9
|
|
1038088 Ontario Limited
|
|
$
|
—
|
|
|
$
|
52
|
|
|
(1)
|
- 2019 amounts provided by related parties are up to the date of de-consolidation.
|
During the 2019 period
ended (up to the point of de-consolidation) and the year ended December 31, 2018, included in Tess's recorded services from related
parties was approximately $0.3 million and $0.7 million, respectively for Tess's key management personnel salaries.
Note 17. Subsequent Events:
Financing
Subsequent to December 31, 2019, in connection with the Company’s
Sales Agreement with H.C. Wainwright, the Company received gross proceeds of approximately $9.5 million from the sale of 5,995,559
shares of common stock.
Common Stock
On February 7, 2020, the Company issued 122,377
restricted stock units, and 5,000 vested restricted stock units to an officer of the Company.
On February 27, 2020, for 2020 services the
Company awarded 1,212,192 restricted shares of common stock vesting over a one-year period to Directors and certain employees of
the Company.
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share
amounts)
Prive share escrow status
As of February 2020, the conditions for the release of
the 200,000 shares of Riot’s stock held in escrow in connection with the Prive acquisition were not achieved by the date
specified in the Prive Purchase Agreement. The Escrow Agent has been notified that the conditions set forth in the Prive Purchase
Agreement were not met and the 200,000 shares of Riot’s stock that have been held in escrow by the Escrow Agent are to be
returned to the Company. See Note 4, Acquisitions, for additional discussion regarding the Prive acquisition.
Corporate Matters
On February 7, 2020, the Company amended and
restated its employment agreement (the “Agreement”) with its Chief Executive Officer and Interim Chief Financial Officer
(the “Executive”). Under the terms of the Agreement, the Executive will receive a prorated annual salary of $0.3 million
and 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. The termination date of the Agreement is February 7, 2021.