Riot Blockchain, Inc.
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(Exact name of registrant as specified in its charter)
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Nevada
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84-1553387
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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202 6th Street, Suite 401 Castle Rock, CO 80104
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(Address of principal executive offices) (Zip Code)
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(303) 794-2000
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(Registrant's telephone number, including area code)
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Large Accelerated Filer
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☐
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Accelerated Filer
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☑
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Non-accelerated Filer
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☐
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Smaller Reporting Company
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☑
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Emerging growth company
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☐
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Title of each class:
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Trading Symbol
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Name of each exchange on which registered:
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Common Stock, no par value
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RIOT
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Nasdaq Capital Market
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Page
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PART I - FINANCIAL INFORMATION
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||||||
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Item 1.
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Condensed Interim Consolidated Financial Statements
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Condensed Consolidated Balance Sheets as of March 31, 2019 (Interim and Unaudited) and December 31, 2018
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2
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Condensed Interim Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited)
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3
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Condensed Interim Consolidated Statement of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2019 and 2018 (Unaudited)
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4
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||||
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Condensed Interim Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)
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6
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Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
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7
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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22
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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25
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Item 4.
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Controls and Procedures
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26
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PART II - OTHER INFORMATION
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||||||
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Item 1.
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Legal Proceedings
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27
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Item 1A.
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Risk Factors
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27
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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27
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Item 3.
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Defaults Upon Senior Securities
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27
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Item 4.
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Mine Safety Disclosures
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27
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Item 5.
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Other Information
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27
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Item 6.
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Exhibits
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27
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Signatures
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28
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·
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our history of operating losses and our ability to achieve or sustain profitability;
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·
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our recent shift to an entirely new business and our ability to succeed in this new business;
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·
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intense competition;
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·
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our ability to raise additional capital needed to finance our business;
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·
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general economic conditions in the U.S. and globally;
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·
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our ability to maintain the value and reputation of our brand;
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·
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our ability to attract and retain senior management and other qualified personnel;
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·
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cryptocurrency-related risks, including regulatory changes or actions and uncertainty regarding acceptance and/or widespread use of virtual currency;
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·
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risks relating to our virtual currency mining operations, including among others risks associated with the need for significant electrical power and cybersecurity risks;
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·
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our dependence in large part upon the value of virtual currencies, especially Bitcoin, which have historically been subject to significant volatility in their market prices;
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·
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risks relating to our planned establishment of a virtual currency exchange, including, among others, regulatory requirements and challenges and security threats;
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·
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our ability to protect our intellectual property rights;
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·
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volatility in the trading price of our common stock;
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·
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our ability to maintain the Nasdaq listing of our common stock;
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·
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our investments in other virtual currency and blockchain focused companies may not be realizable;
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·
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legal proceedings to which we are subject, or associated with, including actions by private plaintiffs and the SEC; and
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·
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the risks, uncertainties discussed in “Part I. Item 1A. Risk Factors” included in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2018, as amended, and any other reports filed or which will be filed by the Company.
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March 31, 2019
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December 31, 2018
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|||||||
ASSETS
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(Unaudited)
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|||||||
Current assets
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||||||||
Cash and cash equivalents
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$
|
1,016,019
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$
|
225,390
|
||||
Prepaid expenses and other current assets
|
793,690
|
1,378,534
|
||||||
Digital currencies
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1,085,018
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706,625
|
||||||
Total current assets
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2,894,727
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2,310,549
|
||||||
Property and equipment, net
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27,507
|
26,269
|
||||||
Right of use assets
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980,368
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-
|
||||||
Intangible rights acquired
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700,167
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700,167
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||||||
Long-term investments
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9,412,726
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9,412,726
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||||||
Security deposits
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703,275
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703,275
|
||||||
Other long-term assets, net:
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||||||||
Patents, net
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511,248
|
507,342
|
||||||
Convertible note and accrued interest
|
216,578
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200,000
|
||||||
Total assets
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$
|
15,446,596
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$
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13,860,328
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||||
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
|
||||||||
Current liabilities | ||||||||
Accounts payable
|
3,455,171
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$
|
3,829,315
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|||||
Accrued expenses
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2,506,769
|
1,516,252
|
||||||
Convertible notes payable, at fair value
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7,975,308
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-
|
||||||
Warrant liability
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5,322,162 | - | ||||||
Deferred purchase price - BMSS
|
1,200,000
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1,200,000
|
||||||
Operating lease liability, current
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882,991
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-
|
||||||
Deferred revenue, current portion
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96,698
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96,698
|
||||||
Current liabilities of discontinued operations
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16,340
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16,340
|
||||||
Total current liabilities
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21,455,439
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6,658,605
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||||||
Notes payable
|
1,696,083
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1,696,083
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||||||
Operating lease liability, less current portion
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73,994
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-
|
||||||
Deferred revenue, less current portion
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847,744
|
871,919
|
||||||
Deferred income tax liability
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142,709
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142,709
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||||||
Total liabilities
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24,215,969
|
9,369,316
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||||||
Commitments and contingencies - Note 12
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||||||||
Stockholders' (deficit) equity
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||||||||
Preferred stock, no par value, 15,000,000 share authorized:
|
||||||||
2% Series A Convertible stock, 2,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
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-
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-
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||||||
0% Series B Convertible stock, 1,750,001 shares authorized; 13,000 shares issued and outstanding as of March 31, 2019 and December 31, 2018, liquidation preference over common stock, equal to carrying value
|
69,059
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69,059
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||||||
Common stock, no par value; 170,000,000 shares authorized; 14,762,809 and 14,519,058 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
|
203,407,485
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202,917,443
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||||||
Accumulated deficit
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(210,728,202
|
)
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(197,199,197
|
)
|
||||
Total Riot Blockchain stockholders' (deficit) equity
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(7,251,658
|
)
|
5,787,305
|
|||||
Non-controlling interest
|
(1,517,715
|
)
|
(1,296,293
|
)
|
||||
Total stockholders' (deficit) equity
|
(8,769,373
|
)
|
4,491,012
|
|||||
Total liabilities and stockholders' (deficit) equity
|
$
|
15,446,596
|
$
|
13,860,328
|
Three Months Ended March 31,
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||||||||
2019
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2018
|
|||||||
Revenue:
|
||||||||
Revenue - digital currency mining
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$
|
1,406,085
|
$
|
901,380
|
||||
License fees
|
24,175
|
24,174
|
||||||
Total Revenue
|
1,430,260
|
925,554
|
||||||
Costs and expenses:
|
||||||||
Cost of revenues (exclusive of depreciation and
amortization shown below)
|
1,471,338
|
349,011
|
||||||
Selling, general and administrative
|
3,152,138
|
3,910,729
|
||||||
Depreciation and amortization
|
23,839
|
2,156,427
|
||||||
Impairment of property and equipment
|
-
|
11,480,491
|
||||||
Impairment of digital currencies
|
-
|
2,467,875
|
||||||
Total costs and expenses
|
4,647,315
|
20,364,533
|
||||||
Operating loss from continuing operations
|
(3,217,055
|
)
|
(19,438,979
|
)
|
||||
Other income (expense)
|
||||||||
Loss on issuance of convertible notes, common stock and warrants
|
(6,154,660
|
)
|
-
|
|||||
Change in fair value of warrant liability
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(2,753,228
|
)
|
-
|
|||||
Change in fair value of convertible notes
|
(1,644,582
|
)
|
-
|
|||||
Non-compliance penalty for SEC registration requirement
|
-
|
(333,338
|
)
|
|||||
Interest expense
|
(68,363
|
)
|
(1,069
|
)
|
||||
Other income
|
78,872
|
-
|
||||||
Investment income
|
16,842
|
62,586
|
||||||
Realized gain on sale of digital currencies
|
4,788
|
-
|
||||||
Other expense
|
(13,041
|
)
|
(3,682
|
)
|
||||
Total other expense
|
(10,533,372
|
)
|
(275,503
|
)
|
||||
Loss from continuing operations before income taxes
|
(13,750,427
|
)
|
(19,714,482
|
)
|
||||
Deferred income tax benefit
|
-
|
3,053,000
|
||||||
Loss from continuing operations
|
(13,750,427
|
)
|
(16,661,482
|
)
|
||||
Discontinued operations
|
||||||||
Income from operations
|
-
|
96,132
|
||||||
Income from discontinued operations
|
-
|
96,132
|
||||||
Net loss
|
(13,750,427
|
)
|
(16,565,350
|
)
|
||||
Net loss attributable to non-controlling interest
|
221,422
|
215,258
|
||||||
Net loss attributable to Riot Blockchain
|
$
|
(13,529,005
|
)
|
$
|
(16,350,092
|
)
|
||
Basic and diluted net loss per share:
|
||||||||
Continuing operations attributable to Riot Blockchain
|
$
|
(0.94
|
)
|
$
|
(1.36
|
)
|
||
Discontinued operations attributable to Riot Blockchain
|
-
|
0.01
|
||||||
Net loss per share
|
$
|
(0.94
|
)
|
$
|
(1.35
|
)
|
||
Basic and diluted weighted average number of shares outstanding
|
14,449,628
|
12,289,785
|
Total
|
||||||||||||||||||||||||||||||||
Riot Blockchain
|
Non- |
Total
|
||||||||||||||||||||||||||||||
Preferred Stock
|
Common Stock
|
Accumulated
|
stockholders'
|
controlling
|
stockholders'
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
deficit
|
equity (deficit)
|
interest
|
equity (deficit)
|
|||||||||||||||||||||||||
Balance as of January 1, 2019
|
13,000
|
$
|
69,059
|
14,519,058
|
202,917,443
|
$
|
(197,199,197
|
)
|
$
|
5,787,305
|
$
|
(1,296,293
|
)
|
$
|
4,491,012
|
|||||||||||||||||
Delivery of common stock underlying restricted stock units
|
-
|
-
|
93,751
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Commons stock issued with convertible notes
|
-
|
-
|
150,000
|
255,000
|
-
|
255,000
|
-
|
255,000
|
||||||||||||||||||||||||
Stock-based compensation
|
-
|
-
|
-
|
235,042
|
-
|
235,042
|
-
|
235,042
|
||||||||||||||||||||||||
Net loss attributable to non-controlling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
(221,422
|
)
|
(221,422
|
)
|
||||||||||||||||||||||
Net loss
|
-
|
-
|
-
|
-
|
(13,529,005
|
)
|
(13,529,005
|
)
|
-
|
(13,529,005
|
)
|
|||||||||||||||||||||
Balance as of March 31, 2019
|
13,000
|
$
|
69,059
|
14,762,809
|
$
|
203,407,485
|
$
|
(210,728,202
|
)
|
$
|
(7,251,658
|
)
|
$
|
(1,517,715
|
)
|
$
|
(8,769,373
|
)
|
Total
|
|
|||||||||||||||||||||||||||||||
Preferred Stock
|
Common Stock
|
Accumulated
|
Riot Blockchain
stockholders'
|
Non-controlling
|
Total
stockholders' |
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
deficit
|
equity
|
interest
|
equity
|
|||||||||||||||||||||||||
Balance as of January 1, 2018
|
1,458,001
|
$
|
7,745,266
|
11,622,112
|
180,387,518
|
$
|
(139,263,480
|
)
|
$
|
48,869,304
|
$
|
758,095
|
$
|
49,627,399
|
||||||||||||||||||
Common stock issued for asset purchase - Prive
|
-
|
-
|
800,000
|
8,480,000
|
-
|
8,480,000
|
-
|
8,480,000
|
||||||||||||||||||||||||
Common stock escrow shares issued for asset purchase - Prive
|
-
|
-
|
200,000
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Preferred stock converted to Common stock
|
(530,001
|
)
|
(2,815,498
|
)
|
530,001
|
2,815,498
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||
Exercise of warrants
|
-
|
-
|
100,000
|
350,000
|
-
|
350,000
|
-
|
350,000
|
||||||||||||||||||||||||
Stock-based compensation
|
-
|
-
|
-
|
883,943
|
-
|
883,943
|
-
|
883,943
|
||||||||||||||||||||||||
Exercise of stock options
|
-
|
-
|
19,533
|
78,522
|
-
|
78,522
|
-
|
78,522
|
||||||||||||||||||||||||
Common stock issued for services
|
-
|
-
|
2,754
|
20,000
|
-
|
20,000
|
-
|
20,000
|
||||||||||||||||||||||||
Sale of Riot shares held by Tess
|
-
|
-
|
-
|
320,000
|
-
|
320,000
|
-
|
320,000
|
||||||||||||||||||||||||
Cashless exercise of stock purchase warrants
|
-
|
-
|
3,215
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Delivery of common stock underlying restricted stock units
|
-
|
-
|
50,000
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Non-controlling interest - Logical Brokerage
|
-
|
-
|
-
|
-
|
-
|
-
|
40,541
|
40,541
|
||||||||||||||||||||||||
Net loss attributable to non-controlling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
(215,258
|
)
|
(215,258
|
)
|
||||||||||||||||||||||
Net loss
|
-
|
-
|
-
|
-
|
(16,350,092
|
)
|
(16,350,092
|
)
|
-
|
(16,350,092
|
)
|
|||||||||||||||||||||
Balance as of March 31, 2018
|
928,000
|
$
|
4,929,768
|
13,327,615
|
$
|
193,335,481
|
$
|
(155,613,572
|
)
|
$
|
42,651,677
|
$
|
583,378
|
$
|
43,235,055
|
Three Months Ended March 31,
|
||||||||
2019
|
2018
|
|||||||
Cash flows from operating activities
|
||||||||
Net loss
|
$
|
(13,750,427
|
)
|
$
|
(16,565,350
|
)
|
||
Income from discontinued operations
|
-
|
96,132
|
||||||
Loss from continuing operations
|
(13,750,427
|
)
|
(16,661,482
|
)
|
||||
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities of continuing operations:
|
||||||||
Stock-based compensation
|
235,042
|
883,943
|
||||||
Depreciation and amortization
|
23,839
|
2,156,427
|
||||||
Deferred income tax benefit
|
-
|
(3,053,000
|
)
|
|||||
Amortization of license fee revenue
|
(24,175
|
)
|
(24,174
|
)
|
||||
Amortization of right of use assets
|
567,131
|
-
|
||||||
Common stock issued for services
|
-
|
20,000
|
||||||
Loss on issuance of convertible notes, common stock and warrants
|
6,154,660
|
-
|
||||||
Change in fair value of convertible notes
|
1,644,582
|
-
|
||||||
Change in fair value of warrant liability
|
2,753,228
|
-
|
||||||
Impairment of property and equipment
|
-
|
11,480,491
|
||||||
Impairment of digital currencies
|
-
|
2,467,875
|
||||||
Realized gain on sale of digital currencies
|
(4,788
|
)
|
-
|
|||||
Changes in assets and liabilities:
|
||||||||
Prepaid contracts
|
-
|
(3,584,699
|
)
|
|||||
Prepaid expenses and other current assets
|
584,844
|
27,438
|
||||||
Digital currencies - mining, net of mining pool operating fees
|
(1,377,869
|
)
|
(901,380
|
)
|
||||
Accrued interest
|
(16,578
|
)
|
-
|
|||||
Accounts payable
|
(374,144
|
)
|
1,101,198
|
|||||
Accrued expenses
|
990,517
|
526,590
|
||||||
Lease liability
|
(590,514
|
)
|
-
|
|||||
Net cash used in operating activities of continuing operations
|
(3,184,652
|
)
|
(5,560,773
|
)
|
||||
Net cash provided by (used in) operating activities of discontinued operations
|
-
|
(68,824
|
)
|
|||||
Net cash used in operating activities
|
(3,184,652
|
)
|
(5,629,597
|
)
|
||||
Cash flows from investing activities - continuing operations:
|
||||||||
Proceeds from sale of digital currencies
|
1,004,264
|
-
|
||||||
Purchase of digital currencies
|
-
|
(5,625,000
|
)
|
|||||
Purchases of property and equipment
|
(3,024
|
)
|
(18,922,569
|
)
|
||||
Purchases of other investments
|
-
|
(6,412,726
|
)
|
|||||
Security deposits
|
-
|
(673,463
|
)
|
|||||
Purchases of patent and trademark application costs
|
(25,959
|
)
|
(24,074
|
)
|
||||
Investment in Logical Brokerage, net of cash acquired
|
-
|
(516,918
|
)
|
|||||
Purchase of developed technology by 1172767 B.C. Ltd.
|
-
|
(32,640
|
)
|
|||||
Net cash provided by (used in) investing activities
|
975,281
|
(32,207,390
|
)
|
|||||
Cash flows from financing activities - continuing operations:
|
||||||||
Proceeds from issuance of convertible notes
|
3,000,000
|
775,074
|
||||||
Repayment of notes payable and other obligations
|
-
|
(81,040
|
)
|
|||||
Proceeds from exercise of warrants
|
-
|
350,000
|
||||||
Proceeds from exercise of stock options
|
-
|
78,522
|
||||||
Proceeds from sale of Riot shares held by 1172767 B.C. Ltd.
|
-
|
320,000
|
||||||
Net cash provided by financing activities of continuing operations
|
3,000,000
|
1,442,556
|
||||||
Net increase (decrease) in cash and cash equivalents
|
790,629
|
(36,394,431
|
)
|
|||||
Cash and cash equivalents at beginning of period
|
225,390
|
41,651,965
|
||||||
Cash and cash equivalents at end of period
|
$
|
1,016,019
|
$
|
5,257,534
|
||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid for interest
|
$
|
-
|
$
|
1,219
|
||||
Cash paid for taxes
|
$
|
-
|
$
|
-
|
||||
Supplemental disclosure of noncash investing and financing activities:
|
||||||||
Value of shares issued for Prive asset acquisition
|
$
|
-
|
$
|
8,480,000
|
||||
Conversion of preferred stock to common stock
|
$
|
-
|
$
|
2,815,498
|
||||
Deferred purchase price for BMSS
|
$
|
-
|
$
|
1,500,000
|
|
March 31,
|
|||||||
|
2019
|
2018
|
||||||
Warrants to purchase common stock
|
3,579,257
|
1,831,886
|
||||||
Options to purchase common stock
|
62,000
|
150,000
|
||||||
Unvested restricted stock awards
|
33,542
|
681,176
|
||||||
Escrow shares of common stock
|
200,000
|
200,000
|
||||||
Convertible Series B preferred shares
|
13,000
|
928,000
|
||||||
Convertible notes
|
1,813,500
|
-
|
||||||
Total
|
5,701,299
|
3,791,062
|
March 31, 2019
|
||||
(Unaudited)
|
||||
Beginning balance, January 1, 2019
|
$
|
706,625
|
||
Revenue recognized from digital currencies mined
|
1,406,085
|
|||
Mining pool operating fees
|
(28,216
|
)
|
||
Sale of digital currencies
|
(1,004,264
|
)
|
||
Realized gain on sale of digital currencies
|
4,788
|
|||
Ending balance
|
$
|
1,085,018
|
January 28, 2019
|
March 31, 2019
|
||
(Unaudited)
|
(Unaudited)
|
||
Dividend yield
|
0%
|
0%
|
|
Expected price volatility
|
119.5%
|
118.0%
|
|
Risk free interest rate
|
2.60%
|
2.41%
|
|
Expected term
|
1 year
|
10 months
|
January 28, 2019
|
March 31, 2019
|
||
(Unaudited)
|
(Unaudited)
|
||
Dividend yield
|
0%
|
0%
|
|
Expected price volatility
|
111.6%
|
113.7%
|
|
Risk free interest rate
|
2.58%
|
2.23%
|
|
Expected term
|
5 years
|
4 years, 10 months
|
Fair value measured at March 31, 2019 (Unaudited)
|
||||||||||||||||
Total carrying value at March 31, 2019
|
Quoted prices in
active markets
(Level 1)
|
Significant other
observable inputs
(Level 2)
|
Significant
unobservable inputs
(Level 3)
|
|||||||||||||
Liabilities:
|
||||||||||||||||
Senior secured convertible notes
|
$
|
7,975,308
|
$
|
-
|
$
|
-
|
$
|
7,975,308
|
||||||||
Warrant liability
|
$
|
5,322,162
|
$
|
-
|
$
|
-
|
$
|
5,322,162
|
Convertible Notes
|
Warrant Liability
|
|||||||
Issuance of senior secured convertible notes
|
$
|
6,330,726
|
$
|
-
|
||||
Issuance of warrants in connection with convertible notes
|
-
|
2,568,934
|
||||||
Balance at January 28, 2019
|
6,330,726
|
2,568,934
|
||||||
Change in fair value
|
1,644,582
|
2,753,228
|
||||||
Balance at March 31, 2019
|
$
|
7,975,308
|
$
|
5,322,162
|
Three Months Ended March 31,
|
||||||||
2019
|
2018
|
|||||||
Restricted stock awards under the Plan
|
$
|
176,544
|
$
|
766,949
|
||||
Stock option awards under the Plan
|
58,498
|
116,994
|
||||||
Total stock-based compensation
|
$
|
235,042
|
$
|
883,943
|
Number of Shares
|
Weighted Average Grant-Date
Fair Value
|
|||||||
Unvested at January 1, 2018
|
95,939
|
$
|
12.49
|
|||||
Vested
|
(22,397
|
)
|
$
|
9.37
|
||||
Forfeited
|
(40,000
|
)
|
$
|
16.82
|
||||
Unvested at March 31, 2019
|
33,542
|
$
|
9.39
|
Shares Underlying Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual
Term (Years)
|
Aggregate Intrinsic Value
|
|||||||||||||
Outstanding at January 1, 2019
|
62,000
|
$
|
15.71
|
9.2
|
$
|
-
|
||||||||||
Outstanding at March 31, 2019
|
62,000
|
$
|
15.71
|
9.0
|
$
|
-
|
||||||||||
Exercisable at March 31, 2019
|
62,000
|
$
|
15.71
|
9.0
|
$
|
-
|
Shares Underlying Options/Warrants
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual
Term (Years)
|
Aggregate Intrinsic Value
|
|||||||||||||
Outstanding at January 1, 2019
|
1,671,113
|
$
|
39.47
|
2.0
|
$
|
-
|
||||||||||
Granted
|
1,908,144
|
$
|
1.94
|
5.2
|
$
|
2,537,832
|
||||||||||
Outstanding at March 31, 2019
|
3,579,257
|
$
|
19.46
|
3.6
|
$
|
2,537,832
|
||||||||||
Exercisable at March 31, 2019
|
3,579,257
|
$
|
19.46
|
5.2
|
$
|
2,537,832
|
March 31, 2018
|
||||
Revenue
|
$
|
137,000
|
||
Cost of revenue
|
41,000
|
|||
Gross margin
|
96,000
|
|||
Operating expenses
|
-
|
|||
Operating income
|
96,000
|
|||
Income from discontinued operations, net of tax
|
$
|
96,000
|
|
·
|
extends 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 lease, including any renewals;
|
|
·
|
changes the monthly electricity usage charges; and
|
|
·
|
Kairos shall have the option to renew the lease for up to two, three-month periods after expiration of the initial term.
|
Lease cost
|
Three Months Ended
March 31,
|
|||
Operating lease cost
|
$
|
600,593
|
||
Variable lease cost
|
776,053
|
|||
Operating lease expense
|
1,376,646
|
|||
Short-term lease rent expense
|
4,620
|
|||
Total rent expense
|
$
|
1,381,266
|
||
Other information
|
||||
Operating cash flows from operating leases
|
$
|
623,976
|
||
Right of use assets exchanged for new operating lease liabilities
|
$
|
1,547,499
|
||
Weighted-average remaining lease term – operating leases
|
0.9 years
|
|||
Weighted-average discount rate – operating leases
|
10.00
|
%
|
For the nine months ended December 31, 2019
|
$
|
898,045
|
||
For the year ended December 31, 2020
|
58,731
|
|||
For the year ended December 31, 2021
|
35,040
|
|||
Total
|
$
|
991,816
|
||
Less imputed interest
|
(34,831
|
)
|
||
Operating lease liabilities
|
$
|
956,985
|
Three Months Ended
|
||||||||
Services to Tess provided by:
|
March 31, 2019
|
March 31, 2018
|
||||||
Powercases Inc.
|
$
|
160,826
|
$
|
163,582
|
||||
JLM Strategic Marketing
|
$
|
-
|
$
|
36,198
|
||||
1038088 Ontario Limited
|
$
|
45,062
|
$
|
47,817
|
Payable to:
|
March 31, 2019
|
December 31, 2018
|
||||||
Powercases Inc.
|
$
|
145,047
|
$
|
37,250
|
||||
JLM Strategic Marketing
|
$
|
101,405
|
$
|
9,483
|
||||
1038088 Ontario Limited
|
$
|
9,292
|
$
|
52,053
|
|
•
|
continuing expansion of digital currency mining operations relative to the price of digital currencies;
|
|
•
|
continuing to evaluate opportunities for acquisitions in the blockchain and digital currency sector;
|
|
•
|
establishing a virtual currency exchange;
|
|
•
|
exploring other possible strategic options and financing opportunities available to the Company;
|
|
•
|
evaluating options to monetize, partner or license the Company's assets; and
|
|
•
|
continuing to implement cost control initiatives to conserve cash.
|
|
•
|
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
|
|
•
|
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
|
|
•
|
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
|
|
1)
|
We did not implement or properly maintain control activities at either the entity or activity level that were designed or were operating effectively to identify and address (i) all significant risks that could have a material adverse impact on the Company’s ongoing operations and (ii) all likely sources that could result in a material misstatement to the financial statements.
|
|
2)
|
We did not design or maintain effective general IT controls over certain information systems that are relevant to the mitigation of the risk pertaining to the misappropriation of assets and to the preparation of the consolidated financial statements. Specifically, we did not design and implement:
|
|
a.
|
User access controls to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to the appropriate Company personnel;
|
|
b.
|
Program change management controls for certain financially relevant systems to ensure that IT program and data changes affecting the Company’s (i) financial IT applications, (ii) digital currency mining equipment, (iii) digital currency hardware wallets, and (iv) underlying accounting records, are identified, tested, authorized and implemented appropriately; and
|
|
c.
|
Physical security controls to ensure that the (i) digital currency hardware wallets, (ii) digital currency hardware wallet master seed phrases, (iii) digital currency hardware wallet pin codes, and (iv) the digital currency mining equipment were safeguarded, monitored, validated, and restorable, both physically and electronically.
|
EXHIBIT
|
|
DESCRIPTION
|
4.
|
Instruments Defining the Rights of Security Holders, Including Indentures.
|
|
4.1
|
||
4.2
|
||
10.
|
Material Contracts.
|
|
10.01
|
||
10.02
|
||
10.03
|
||
10.04
|
||
31.
|
Certifications.
|
|
31.1
|
|
|
31.2
|
|
|
32
|
|
|
101
|
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows and (iv) the Notes to Condensed Interim Consolidated Financial Statements. *
|
|
Riot Blockchain, Inc.
(Registrant)
|
|
|
Dated: May 9, 2019
|
/s/ Jeffrey G. McGonegal
|
|
Jeffrey G. McGonegal
Chief Executive Officer (Principal Executive Officer)
|
Dated: May 9, 2019
|
/s/ Robby Chang
|
|
Robby Chang
Chief Financial Officer (Principal Financial and Accounting Officer)
|
|
|
|
May 9, 2019
|
|
|
|
/s/ Jeffrey G. McGonegal
|
|
|
Jeffrey G. McGonegal
Chief Executive Officer (Principal Executive Officer)
|
|
|
|
|
May 9, 2019
|
|
|
|
/s/ Robby Chang
|
|
|
Robby Chang
Chief Financial Officer (Principal Financial and Accounting Officer)
|
|
|
(1)
|
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
|
|
(2)
|
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
|
|
|
|
May 9, 2019
|
|
|
|
/s/ Jeffrey G. McGonegal
|
|
|
Jeffrey G. McGonegal, Chief Executive Officer (Principal Executive Officer)
|
|
May 9, 2019
|
|
|
|
/s/ Robby Chang
|
|
|
Robby Chang, Chief Financial Officer (Principal Financial and Accounting Officer)
|
Document and Entity Information - shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2019 |
May 09, 2019 |
|
Document and Entity Information [Abstract] | ||
Entity Registrant Name | Riot Blockchain, Inc. | |
Entity Central Index Key | 0001167419 | |
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Mar. 31, 2019 | |
Current Fiscal Year End Date | --12-31 | |
Document Fiscal Period Focus | Q1 | |
Document Fiscal Year Focus | 2019 | |
Entity Filer Category | Accelerated Filer | |
Entity Small Business | true | |
Entity Emerging Growth Company | false | |
Entity Common Stock, Shares Outstanding | 15,957,059 |
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares |
Mar. 31, 2019 |
Dec. 31, 2018 |
---|---|---|
Preferred stock, par value | ||
Preferred stock, shares authorized | 15,000,000 | 15,000,000 |
Common stock, par value | ||
Common stock, shares authorized | 170,000,000 | 170,000,000 |
Common stock, shares issued | 14,762,809 | 14,519,058 |
Common stock, shares outstanding | 14,762,809 | 14,519,058 |
2% Convertible Preferred Stock Series A [Member] | ||
Preferred stock, shares authorized | 2,000,000 | 2,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
0% Convertible Preferred Stock Series B [Member] | ||
Preferred stock, shares authorized | 1,750,001 | 1,750,001 |
Preferred stock, shares issued | 13,000 | 13,000 |
Preferred stock, shares outstanding | 13,000 | 13,000 |
Organization |
3 Months Ended |
---|---|
Mar. 31, 2019 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Organization | Note 1. Organization:
Nature of operations:
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., and changed its state of incorporation to Nevada from Colorado.
The Company operates a digital currency mining operation, which utilizes specialized computers (also known as “miners”) that generate digital currency (primarily bitcoin) from the blockchain. The Company acquired approximately 8,000 miners through its acquisitions of Kairos Global Technology, Inc. (“Kairos”) in November 2017, and from Prive Technologies, Inc. (“Prive”), and separately from Blockchain Mining Supply & Services Ltd. (“BMSS”) in February 2018. |
Liquidity, Financial Condition, and Going Concern |
3 Months Ended |
---|---|
Mar. 31, 2019 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Liquidity, Financial Condition, and Going Concern | Note 2. Liquidity, Financial Condition, and Going Concern:
The Company has experienced recurring losses and negative cash flows from operations. At March 31, 2019, the Company had approximate balances of cash and cash equivalents of $1,000,000, digital currencies of $1,085,000, a working capital deficit of $18,561,000, total stockholders' deficit of $8,769,000 and an accumulated deficit of $210,728,000. To date, the Company has, in large part, relied on equity and debt financing to fund its operations.
The Company’s primary focus is on its digital currency mining operation located in Oklahoma City, Oklahoma, along with its investigation of the launch of RiotX as a digital currency exchange in the United States. That operational focus and the Company’s acquisitions of Kairos and 1172767 B.C. Ltd. (“1172767” or “Tess”), formerly known as Tess Inc., and its investment in goNumerical Ltd. (d/b/a “Coinsquare”), as well as the Company’s name change, reflects a strategic decision by the Company to operate in the blockchain and digital currency related business sector. The Company's current strategy will continue to expose the Company to the numerous risks and volatility associated within this sector.
The Company expects to continue to incur losses from operations for the near-term and these losses could be significant as the Company incurs costs and expenses associated with recent and potential future acquisitions, and development of the RiotX exchange platform, as well as public company, legal and administrative related expenses being incurred. As disclosed in Note 7, during the three months ended March 31, 2019, for a total investment of $3,000,000, the Company issued a series of Senior Secured Convertible Promissory Notes, to investors for an aggregate principal amount of $3,358,333 and an equal value of warrants for the purchase of shares of the Company’s common stock. The Company is closely monitoring its cash balances, cash needs and expense levels.
The Company believes that in order for the Company to meet its obligations arising from normal business operations for the next twelve months, the Company requires additional capital either in the form of equity or debt. Without additional capital, the Company’s ability to continue to operate will be limited. If the Company is unable to obtain adequate capital, it could be forced to cease or reduce its operations. The Company is currently pursuing capital transactions in the form of debt and equity, however, the Company cannot provide any assurance that it will be successful in its plans. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded assets amounts and classification of liabilities that might be necessary should the Company not be able to continue as a going concern. In the opinion of management, these factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. |
Basis of presentation, summary of significant accounting policies and recent accounting pronouncements |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of presentation, summary of significant accounting policies and recent accounting pronouncements | Note 3. Basis of presentation, summary of significant accounting policies and recent accounting pronouncements:
Basis of presentation and principles of consolidation
The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results.
The results for the unaudited condensed interim consolidated statement of operations are not necessarily indicative of results to be expected for the year ending December 31, 2019 or for any future interim period. The unaudited condensed interim consolidated balance sheet at March 31, 2019 has been derived from unaudited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 2, 2019.
Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company's 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, assumptions used in estimating the fair value of convertible notes and warrants, and the valuation allowance associated with the Company’s deferred tax assets.
Significant Accounting Policies:
For a detailed discussion about the Company’s significant accounting policies, see Form 10-K filed with the SEC on April 2, 2019.
Sequencing:
On January 28, 2019, the Company adopted a sequencing policy under Accounting Standards Codification (“ASC”) 815-40-35 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 with 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, issuance 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 7 - 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 (collectively the “Investors”) in the aggregate principal amount of $3,358,333. The Company has elected the fair value option to account for these Notes due to the complexity and number of embedded features. The fair value of the Notes are 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 condensed interim consolidated statements of operations.
Warrant Liability:
The Company issued warrants to purchase 1,908,144 shares of its common stock in connection with its Senior Secured Promissory Notes issued in January 2019, and recorded the stock warrants outstanding as a liability at fair value utilizing a Monte Carlo simulation model. This liability is subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company's condensed interim consolidated statements of operations.
Leases:
Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases. 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. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term.
The Company continues to account for leases in the prior period financial statements under ASC Topic 840.
Loss per share:
Basic net loss per share (“EPS”) of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company excludes its unvested restricted shares and escrow shares from the net loss per share calculation. The escrow shares are excluded 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 March 31, 2019 and 2018 because their inclusion would be anti-dilutive are as follows:
Reclassifications:
Certain prior period amounts reported in the condensed interim consolidated statements of operations have been reclassified to conform to the presentations currently used. The reclassifications did not have a material impact on the Company's condensed interim consolidated financial statements and related disclosures.
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 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, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Based on the analysis, on January 1, 2019, the Company recorded right of use assets and lease liabilities of approximately $1.5 million.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year 2020 and is required to be applied prospectively. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
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 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework, Changes to the Disclosure Requirements for Fair Value Measurement, 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 us on December 1, 2020. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is A Service Contract” (“ASU 2018-15”). This update clarifies the accounting treatment for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is still evaluating the prospective impact of this guidance on its future consolidated financial statements and related disclosures.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer for a promised good or service that is distinct within the collaborative arrangement. The guidance also precludes entities from presenting amounts related to transactions with a collaborative arrangement participant that is not a customer as revenue, unless those transactions are directly related to third-party sales. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.
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Digital Currencies |
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Indefinite-lived Intangible Assets (Excluding Goodwill) [Abstract] | |||||||||||||||||||||||||||||||||||||||||
Digital Currencies | Note 4. Digital Currencies:
The following table presents additional information about digital currencies:
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Fair value measurements |
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Fair value measurements | Note 5. Fair value measurements:
During the three months ended March 31, 2019 the Company issued senior secured promissory notes and warrants in connection with these notes. The convertible 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 condensed interim consolidated financial statements.
A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s senior secured promissory notes and warrants at the issuance date of January 28, 2019 and at March 31, 2019 is as follows:
Senior Secured Promissory Notes:
Warrants:
The following tables classify the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of March 31, 2019:
There were no assets or liabilities measured at fair value during the three months ended March 31, 2018.
The following table presents changes in Level 3 liabilities measured at fair value for the three months ended March 31, 2019. Unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category.
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Investment in Coinsquare |
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Mar. 31, 2019 | |
Investments, All Other Investments [Abstract] | |
Investment in Coinsquare | Note 6. Investment in Coinsquare:
In September 2017, the Company acquired a minority interest for $3.0 million in Coinsquare, which operates a digital crypto currency exchange platform in Canada. During February 2018, the Company invested an additional $6.4 million to acquire additional common stock of Coinsquare. The investment included an additional equity investment of $2.8 million that was part of an approximate $24 million financing by Coinsquare. Additionally, warrants acquired in the original investment were exercised in exchange of a cash payment of $3.6 million. These additional investments resulted in a current ownership in Coinsquare by the Company of approximately 12% based upon Coinsquare’s issued and outstanding shares. The Company has evaluated the guidance in ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, and elected to account for the investment using the measurement alternative as the equity securities are without a readily determinable fair value and do not give the Company significant influence over Coinsquare. The measurement alternative at cost, less any impairment, plus or minus changes resulting from observable price changes. As of March 31, 2019 and December 31, 2018, the Company considered the cost of the investment to not exceed the fair value of the investment and did not observe price changes. |
Notes Payable |
3 Months Ended |
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Mar. 31, 2019 | |
Debt Disclosure [Abstract] | |
Notes Payable | Note 7. Notes Payable:
Senior Secured Convertible Promissory Notes and Warrants
On January 28, 2019, in connection with a private financing (the “Private Financing”) first reported by the Company in its current report on Form 8-K filed on February 1, 2019, the Company issued a series of Senior Secured Convertible Promissory Notes (the “Notes”), to investors (the “Investors” and each an “Investor”) for an aggregate principal amount of $3,358,333 and an equal value of warrants for the purchase of shares of the Company’s common stock (the “Warrants”). The Notes are convertible into shares of the Company’s common stock at any time after the issuance date, provided that at no time will the Company will be required to issue shares in excess of the aggregate number of shares of its commons stock outstanding. The Notes 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 are subject to prepayment penalties, default conditions and other terms and conditions, as further defined in the agreements. As additional consideration for the investment, the Company issued a total of 150,000 restricted common shares to the three investors.
The Notes are 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 agreements. Provided, however, that according to the Notes, the cumulative shares of our 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 a security agreements between the Company and the Investors, the Company has granted to the Investors a security interest in its assets to secure repayment of the Notes. Further to the Private Financing, the Company has 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.
The Company 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, that, without first providing sixty days’ notice to the Company, 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 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.
The foregoing description of the Notes and the Warrants is qualified in its entirety by the agreements between the Company and the Investors as first disclosed by the Company in its current report on Form 8-K filed on February 1, 2019.
Due to the complexity and number of embedded features within the Notes and as permitted under accounting guidance, the Company elected to account for the Notes and all the embedded features under the fair value option, which records the Notes at fair value rather than at historical cost, with changes in fair value recorded in the condensed interim consolidated statements of operations. Direct costs and fees incurred to issue the Notes were recognized in earnings as incurred and were not deferred. On the initial measurement date of January 28, 2019, the fair value of the Notes was estimated at $6,330,726. Upfront costs and fees related to items for which the fair value option was elected were approximately $358,333 and were recorded as a component of other expenses for the three months ended March 31, 2019. As of March 31, 2019, the fair value of the Notes was $7,795,308, an increase in fair value of $1,644,582 which is reflected on the condensed interim consolidated statements of operations for the three months ended March 31, 2019, as change in fair value of notes payable. (See Note 5).
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.
As of March 28, 2018, Tess, a subsidiary of the Company, entered into a note purchase agreement with a private investor under which a convertible promissory note issued by Tess in the principal amount CAD $2.2 million (the “Convertible Note”) and cash proceeds of CAD $2.2 million were placed into a third-party controlled escrow account. Upon the successful achievement of conditions defined under the escrow agreement relating to closing of a transaction between Tess and Cresval Capital Corp, (“Cresval”) whereby Tess and Cresval would merge as provided in the merger agreements and Tess would become publicly traded on the TSXV Venture Exchange, the then remaining cash and the Convertible Note would be issued to Tess and the investor, respectively. The Convertible Note is convertible at $0.10 per share of the merged entity, as defined, subject to certain adjustments. On February 15, 2019, Cresval terminated its definitive agreement with Tess due to Tess’s inability to complete one of the specified closing conditions in the agreement.
The interim release consisted of CAD $1.0 million (USD $775,555) of cash released to Tess and an unsecured promissory note issued by Tess (“Promissory Note”) released to the investor. The Promissory Note bears interest at 5%, is unsecured and due in 2021. On August 23, 2018, the final release from escrow occurred. Tess received approximately USD $921,000, bringing the total Promissory Note balance to approximately $1,696,000. |
Stockholders' equity |
3 Months Ended |
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Mar. 31, 2019 | |
Equity [Abstract] | |
Stockholders' equity | Note 8. Stockholders’ equity:
Restricted Stock:
During the three months ended March 31, 2019, 93,751 shares of restricted common stock related to fully vested shares of restricted stock issued under the Company’s 2017 Equity Incentive Plan, were issued to two former officers who separated from the Company in February 2019 and a former director who resigned in October of 2018. |
Stock based compensation, options and warrants |
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Share-based Payment Arrangement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation, options and warrants | Note 9. Stock based compensation, options and warrants:
Stock based compensation:
The Company’s stock-based compensation expenses recognized during the three months ended March 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 three months ended March 31, 2019 and 2018, from the following categories:
Restricted stock units:
A summary of the Company’s unvested
restricted stock activity in the three months ended March 31, 2019 is presented here:
During the three months ended March 31, 2019, the Company did not grant restricted stock units.
During the three months ended March 31, 2019, forfeitures of restricted common stock totaled 40,000, which consisted of shares forfeited due to the termination of two of the Company’s officers.
The fair value of restricted stock unit grants is measured based on their fair value on the date of grant and amortized over the vesting period of twenty-four months. As of March 31, 2019, there was approximately $0.3 million of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a remaining weighted-average vesting period of approximately 4 months.
Stock incentive plan options:
A summary of activity under the Plan for the three months ended March 31, 2019 is presented below:
Aggregate intrinsic value represents the total intrinsic value (the difference between the Company’s closing stock price on March 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 March 31, 2019.
As of March 31, 2019, there was no unrecognized stock-based compensation expense related to unvested options.
Other common stock purchase options and warrants:
Following is a summary of outstanding options and warrants that were issued outside of the Plan for the three months ended March 31, 2019:
The Company granted warrants to purchase 1,908,144
shares of its common stock with an exercise price of $1.94, in
connection with its Senior Secured Promissory Notes issued on January 28, 2019. (See Note 7).
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on March 31, 2019 and the exercise price, multiplied by the number of in-the-money options and warrants) that would have been received by the option and warrant holders, had all option and warrant holders been able to, and in fact had, exercised their options and warrants on March 31, 2019.
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Discontinued Operations |
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Discontinued Operations | Note 10. Discontinued Operations:
During the quarter ended March 31, 2017, the Company made the decision to discontinue the operations of its wholly-owned subsidiary BDI. BDI had developed a proprietary Enhanced Surface Plasmon Resonance technology platform for the detection of molecular interactions. The decision to adopt this plan was made following an evaluation by the Company's Board of Directors in January 2017 of the estimated results of operations projected during the near to mid-term period for BDI, including consideration of product development required and updated sales forecasts, and estimated additional cash resources required. The Company substantially disposed of the assets and operations during 2017 by selling the assets and licensing the intellectual property rights. The Company has recognized the exit of BDI in accordance with ASC 205-20, Discontinued Operations. As such, the historical results of BDI, following its 2016 acquisition, have been classified as discontinued operations.
The Company's historical financial statements have been revised to present the operating results of the BDI business as a discontinued operation. Liabilities related to the discontinued operations of BDI totaled approximately $16,000 in accounts payable as of March 31, 2019 and December 31, 2018, respectively.
There were no results of discontinued operations for the three months ended March 31, 2019. Summarized results of the discontinued operation are as follows for the three months ended March 31, 2018:
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Leases |
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Leases | Note 11. Leases:
Oklahoma Lease Agreement.
On February 27, 2018, Kairos entered into a lease agreement (the “Lease”) with 7725 Reno #1, LLC (the “Landlord”), pursuant to which Kairos leases an approximately 107,600 square foot warehouse located in Oklahoma City, Oklahoma, including improvements thereon. Pursuant to the terms of the Lease, the initial term was scheduled to terminate on February 15, 2019, unless terminated earlier pursuant to the terms of the Lease, subject to Kairos’ options to renew the Lease, however the term of the Lease was extended by agreement of the parties as discussed below. Under the Lease, Kairos has the right to operate from the premises on a 24 hour/seven day a week basis. The Lease provides that, at least three months, but no more than six months, prior to its expiration Kairos shall give Landlord written notice of its intent to either exercise its option to renew the Lease or to allow the Lease to terminate at the end of its term.
Prior to the first amendment of the Lease discussed below, the base rent for the facility was equal to $55.95/kW per month for a total of 4 Megawatts (MW) of available electrical power, or $223,800 per month.
On March 26, 2018, Kairos entered into a first amendment to the Lease, whereby the Landlord agreed to increase the electrical power available for Kairos’s use from 6MW to 12MW, and, effective as of the date when such additional power became available for use, the base rent under the lease was increased to approximately $664,760 per month.
Effective November 29, 2018, Kairos entered into the second amendment to the Lease which provides the following:
Corporate Lease Agreement
On April 9, 2018, the Company entered into a commercial lease covering 1,694 rentable square feet of office space in Fort Lauderdale, Florida, with a third-party. The lease is for an initial term of thirty-nine months, with one five-year option to renew. The lease requires initial monthly rent of approximately $7,000, including base rent and associated operating expenses.
At March 31, 2019, the Company had operating lease liabilities of approximately $1.0 million and right of use assets of approximately $1.0 million, which are included in the condensed interim consolidated balance sheet.
The following summarizes quantitative information about the Company’s operating leases:
Maturities of the Company’s operating lease liabilities, are as follows (unaudited):
Rent expense, which is recorded on a straight-line basis, was approximately $350,000 for the three months ended March 31, 2018.
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Commitments and contingencies |
3 Months Ended |
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Mar. 31, 2019 | |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and contingencies | Note 12. Commitments and contingencies:
Contingencies:
The Company, and its subsidiaries, are subject at times to various claims, lawsuits and governmental proceedings relating to the Company’s business and transactions arising in the ordinary course of business. The Company cannot predict the final outcome of such proceedings. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including, consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Certain of the claims, lawsuits and proceedings arising in ordinary course of business are covered by the Company’s insurance program. The Company maintains property, and various types of liability insurance in an effort to protect the Company from such claims. In terms of any matters where there is no insurance coverage available to the Company, or where coverage is available and the Company maintains a retention or deductible associated with such insurance, the Company may establish an accrual for such loss, retention or deductible based on current available information. In accordance with accounting guidance, if it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial statements, and the amount of loss is reasonably estimable, then an accrual for the cost to resolve or settle these claims is recorded by the Company in the accompanying consolidated balance sheets. If it is reasonably possible that an asset may be impaired as of the date of the financial statement, then the Company discloses the range of possible loss. Paid expenses related to the defense of such claims are recorded by the Company as incurred and paid and included in the accompanying consolidated statements of operations. Management, with the assistance of outside counsel, may from time to time adjust such accruals according to new developments in the matter, court rulings, or changes in the strategy affecting the Company’s defense of such matters. On the basis of current information, the Company does not believe there is a reasonable possibility that, other than with regard to the Class Action described below, any material loss, if any, will result from any claims, lawsuits and proceedings to which the Company is subject to either individually, or in the aggregate.
On February 17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company's shareholders 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 shareholders 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. Lead Plaintiff was subsequently granted leave to file another amended complaint on May 8, 2019. Defendants intend to file a motion to dismiss in response, with briefing expected to be completed on the motion to dismiss in late June 2019. 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.
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 preliminary conference, the court adjourned the conference until September 9, 2019 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 SEC has continued to request information from the Company and the Company has been fully cooperating with the SEC in that investigation.
During 2018 the Company received several comment letters (the “Comment Letters”) from the Division of Corporation Finance and the Division of Investment Management of the SEC. The Comment Letters had been issued on the Company’s periodic reports on Form 10-Q for the quarter ended March 31, 2018, Annual Report on Form 10-K for the fiscal year ended December 31, 2017, amendment to Annual Report on Form 10-K/A for the fiscal year ended December 31, 2017 and current report on Form 8-K filed October 4, 2017. The Comment Letters raised matters related to, among other things, the unsettled nature of accounting treatment for the Company’s digital currency mining and the fair value method selected by the Company (as opposed to intangible accounting methods proposed by some experts) and applicability to the Company of the Investment Company Act of 1940, particularly as it relates to the Company’s minority interest in Coinsquare. On April 5, 2019, the Company received a letter from the SEC informing the Company that the SEC had completed their review of the above filings.
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.
On September 7, 2018, a complaint was filed by the SEC (Case 1:18-cv-08175) and amended as of March 8, 2019, (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.
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Tess Related Party Transactions |
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Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tess Related Party Transactions | Note 13. Tess Related Party Transactions:
Tess related parties include: Powercases Inc., and 2227470 Ontario Inc., (companies that are wholly-owned by Jeffrey Mason, President and Chief Executive Officer of Tess), 1038088 Ontario Limited (a company that is wholly-owned by Fraser Mason, Chairman and Chief Financial Officer of Tess), and JLM Strategic Marketing (a proprietorship owned by Jennifer Mason, Manager Corporate Communications of Tess).
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:
During the three-month periods ended March 31, 2019 and 2018, included in Tess's recorded services from related parties was approximately $150,000 and $213,400, respectively for Tess's key management personnel salaries. |
Subsequent Events |
3 Months Ended |
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Mar. 31, 2019 | |
Subsequent Events [Abstract] | |
Subsequent Events | Note 14. Subsequent Events:
Sale of Digital Currencies
Subsequent to March 31, 2019, the Company sold 250 bitcoin and 498 bitcoin cash generating total cash proceeds of approximately $1,372,000.
1172767
B.C. Ltd. Investment (formerly Tess Inc.)
On or about April 10, 2019, Tess closed on a funding agreement under which approximately 23.8 million shares of Tess were issued for CAD $1.2 million. As a result of this funding, the Company’s ownership in Tess was reduced to approximately 9%, such that Tess will thereafter no longer be consolidated within the Company’s financial statements.
Issuance of Restricted Shares
Effective as of May 1, 2019, 12,500 restricted shares under the Company’s 2017 Equity Incentive Plan were awarded, vesting equally over a period of twelve months in connection with the renewal of a consulting agreement.
Convertible Note Conversions
Subsequent to March 31, 2019, holders of the Senior Secured Convertible Promissory Notes issued on January 28, 2019, as first reported by the Company in its current report on Form 8-K filed on February 1, 2019, converted $2,363,500, of such notes into 1,181,750 shares of the Company’s common stock. |
Basis of presentation, summary of significant accounting policies and recent accounting pronouncements (Policies) |
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Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of presentation and principles of consolidation | Basis of presentation and principles of consolidation
The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results.
The results
for the unaudited condensed interim consolidated statement of operations are not necessarily indicative of results to be
expected for the year ending December 31, 2019 or for any future interim period. The unaudited condensed interim consolidated
balance sheet at March 31, 2019 has been derived from unaudited financial statements; however, it does not include all of the
information and notes required by U.S. GAAP for complete financial statements. The accompanying condensed interim
consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended
December 31, 2018 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 2,
2019. |
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Use of estimates | Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company's 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, assumptions used in estimating the fair value of convertible notes and warrants, and the valuation allowance associated with the Company’s deferred tax assets. |
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Sequencing | Sequencing:
On January 28, 2019, the Company adopted a sequencing policy under Accounting Standards Codification (“ASC”) 815-40-35 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 with 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, issuance of securities to the Company’s employees or directors are not subject to the sequencing policy. |
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Notes Payable Fair Value Option | Notes Payable Fair Value Option:
As described further in Note 7 - 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 (collectively the “Investors”) in the aggregate principal amount of $3,358,333. The Company has elected the fair value option to account for these Notes due to the complexity and number of embedded features. The fair value of the Notes are 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 condensed interim consolidated statements of operations. |
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Warrant Liability | Warrant Liability:
The Company issued warrants to purchase 1,908,144 shares of its common stock in connection with its Senior Secured Promissory
Notes issued in January 2019, and recorded the stock warrants outstanding as a liability at fair value utilizing a Monte Carlo
simulation model. This liability is subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company's condensed interim consolidated statements of operations. |
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Leases | Leases:
Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases. 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. 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. |
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Loss per share | 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 March 31, 2019 and 2018 because their inclusion would be anti-dilutive are as follows:
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Reclassifications | Reclassifications:
Certain prior period amounts reported in the condensed interim consolidated statements of operations have been reclassified to conform to the presentations currently used. The reclassifications did not have a material impact on the Company's condensed interim consolidated financial statements and related disclosures. |
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Recently issued and adopted accounting pronouncements | 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 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, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Based on the analysis, on January 1, 2019, the Company recorded right of use assets and lease liabilities of approximately $1.5 million.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year 2020 and is required to be applied prospectively. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
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 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework, Changes to the Disclosure Requirements for Fair Value Measurement, 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 us on December 1, 2020. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is A Service Contract” (“ASU 2018-15”). This update clarifies the accounting treatment for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is still evaluating the prospective impact of this guidance on its future consolidated financial statements and related disclosures.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer for a promised good or service that is distinct within the collaborative arrangement. The guidance also precludes entities from presenting amounts related to transactions with a collaborative arrangement participant that is not a customer as revenue, unless those transactions are directly related to third-party sales. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.
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Basis of presentation, summary of significant accounting policies and recent accounting pronouncements (Tables) |
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Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Antidilutive Securities | Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at March 31, 2019 and 2018 because their inclusion would be anti-dilutive are as follows:
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Digital Currencies (Tables) |
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Indefinite-lived Intangible Assets (Excluding Goodwill) [Abstract] | ||||||||||||||||||||||||||||||||||||||||
Summary of Additional Information About Digital Currencies | The following table presents additional information about digital currencies:
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Fair value measurements (Tables) |
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Schedule of Weighted Average Unobservable Inputs | A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s senior secured promissory notes and warrants at the issuance date of January 28, 2019 and at March 31, 2019 is as follows:
Senior Secured Promissory Notes:
Warrants:
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Schedule of Liabilities Measured at Fair Value Recurring Basis | The following tables classify the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of March 31, 2019:
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Schedule of Changes in Level 3 Liabilities Measured at Fair Value | The following table presents changes in Level 3 liabilities measured at fair value for the three months ended March 31, 2019. Unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category.
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Stock based compensation, options and warrants (Tables) |
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Schedule of Recognized Stock-based Compensation | The Company recognized total stock-based compensation expense during the three months ended March 31, 2019 and 2018, from the following categories:
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Summary of Restricted Plan Activity | A summary of the Company’s unvested
restricted stock activity in the three months ended March 31, 2019 is presented here:
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Summary of Stock Incentive Plan Activity | A summary of activity under the Plan for the three months ended March 31, 2019 is presented below:
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Schedule of Changes in Outstanding Warrants | Following is a summary of outstanding options and warrants that were issued outside of the Plan for the three months ended March 31, 2019:
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Discontinued Operations (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | ||||||||||||||||||||||||||||||||||||
Discontinued Operations and Disposal Groups [Abstract] | ||||||||||||||||||||||||||||||||||||
Schedule of Operation and Assets and Liabilities Related to Discontinued Operations | There were no results of discontinued operations for the three months ended March 31, 2019. Summarized results of the discontinued operation are as follows for the three months ended March 31, 2018:
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Leases (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Operating Leases | The following summarizes quantitative information about the Company’s operating leases:
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Schedule of Maturities of Operating Lease Liabilities | Maturities of the Company’s operating lease liabilities, are as follows (unaudited):
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Tess Related Party Transactions (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Tess Related Party Transactions | 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:
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Organization (Details) |
Mar. 31, 2019 |
---|---|
Kairos Global Technology, Inc [Member] | |
Number of computers acquired | 8,000 |
Liquidity, Financial Condition, and Going Concern (Details) - USD ($) |
Mar. 31, 2019 |
Jan. 28, 2019 |
Dec. 31, 2018 |
Mar. 31, 2018 |
Dec. 31, 2017 |
---|---|---|---|---|---|
Cash and cash equivalents | $ 1,016,019 | $ 225,390 | $ 5,257,534 | $ 41,651,965 | |
Working capital | 18,561,000 | ||||
Stockholders' equity | 8,769,373 | (4,491,012) | $ (43,235,055) | $ (49,627,399) | |
Accumulated deficit | 210,728,202 | $ 197,199,197 | |||
Total investment | 3,000,000 | ||||
Senior Secured Convertible Promissory Notes [Member] | Investors [Member] | |||||
Debt instrument face amount | $ 3,358,333 | $ 3,358,333 |
Basis of presentation, summary of significant accounting policies (Narrative) (Details) - USD ($) |
Mar. 31, 2019 |
Jan. 28, 2019 |
Dec. 31, 2018 |
---|---|---|---|
Expected operating liabilities to be recorded from adoption of FASB ASU 2016-02 | $ 1,500,000 | ||
Senior Secured Promissory Notes [Member] | |||
Warrant issued | 1,908,144 | ||
Senior Secured Convertible Promissory Notes [Member] | Investors [Member] | |||
Debt instrument face amount | $ 3,358,333 | $ 3,358,333 | |
Warrant issued | 1,908,144 |
Digital Currencies (Summary of Additional Information About Digital Currencies) (Details) |
3 Months Ended |
---|---|
Mar. 31, 2019
USD ($)
| |
Indefinite-lived Intangible Assets (Excluding Goodwill) [Abstract] | |
Digital currencies, beginning balance | $ 706,625 |
Revenue recognized from digital currencies mined | 1,406,085 |
Mining pool operating fees | (28,216) |
Sale of digital currencies | (1,004,264) |
Realized gain on sale of digital currencies | 4,788 |
Digital currencies, ending balance | $ 1,085,018 |
Fair value measurements (Schedule of Liabilities Measured at Fair Value Recurring Basis) (Details) |
Mar. 31, 2019
USD ($)
|
---|---|
Liablities: | |
Senior secured convertible notes | $ 7,975,308 |
Warrant liability | 5,322,162 |
Fair Value, Inputs, Level 1 [Member] | |
Liablities: | |
Senior secured convertible notes | |
Warrant liability | |
Fair Value, Inputs, Level 2 [Member] | |
Liablities: | |
Senior secured convertible notes | |
Warrant liability | |
Fair Value, Inputs, Level 3 [Member] | |
Liablities: | |
Senior secured convertible notes | 7,975,308 |
Warrant liability | $ 5,322,162 |
Fair value measurements (Schedule of Changes in Level 3 Liabilities Measured at Fair Value) (Details) - Fair Value, Inputs, Level 3 [Member] |
3 Months Ended |
---|---|
Mar. 31, 2019
USD ($)
| |
Convertible Notes [Member] | |
Issuance of senior secured convertible notes | $ 6,330,726 |
Issuance of warrants in connection with convertible notes | |
Balance at January 28, 2019 | 6,330,726 |
Change in fair value | 1,644,582 |
Balance at March 31, 2019 | 7,975,308 |
Warrant Liability [Member] | |
Issuance of senior secured convertible notes | |
Issuance of warrants in connection with convertible notes | 2,568,934 |
Balance at January 28, 2019 | 2,568,934 |
Change in fair value | 2,753,228 |
Balance at March 31, 2019 | $ 5,322,162 |
Investment in Coinsquare (Details) - Coinsquare [Member] - USD ($) |
1 Months Ended | |
---|---|---|
Sep. 30, 2017 |
Feb. 28, 2018 |
|
Minority interest | $ 3,000,000 | |
Amount of Investment | $ 6,400,000 | |
Equity investment | 2,800,000 | |
Financing amount | 24,000,000 | |
Warrant acquired cash payment | $ 3,600,000 | |
Percentage of owned | 12.00% |
Stockholders' equity (Details) |
3 Months Ended |
---|---|
Mar. 31, 2019
shares
| |
Restricted Stock [Member] | |
Class of Stock [Line Items] | |
Issuance of common stock | 93,751 |
Stock based compensation, options and warrants (Narrative) (Details) |
3 Months Ended |
---|---|
Mar. 31, 2019
USD ($)
| |
Share-based Payment Arrangement [Abstract] | |
Unrecognized compensation cost | $ 300,000 |
Unrecognized compensation cost, period | 4 months |
Stock based compensation, options and warrants (Schedule of Recognized Stock-based Compensation) (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2019 |
Mar. 31, 2018 |
|
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items] | ||
Total stock-based compensation | $ 235,042 | $ 883,943 |
Restricted Stock [Member] | ||
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items] | ||
Total stock-based compensation | 176,544 | 766,949 |
Stock options awards under the Plan Member [Member] | ||
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items] | ||
Total stock-based compensation | $ 58,498 | $ 116,994 |
Stock based compensation, options and warrants (Schedule of Restricted Stock Activity) (Details) - Restricted Stock [Member] |
3 Months Ended |
---|---|
Mar. 31, 2019
$ / shares
shares
| |
Number of shares | |
Unvested beginning balance | shares | 95,939 |
Vested | shares | (22,397) |
Forfeited | shares | (40,000) |
Unvested ending balance | shares | 33,542 |
Weighted Average Grant Date Fair value | |
Unvested beginning balance | $ / shares | $ 12.49 |
Vested | $ / shares | 9.37 |
Forfeited | $ / shares | 16.82 |
Unvested ending balance | $ / shares | $ 9.39 |
Discontinued Operations (Details) - USD ($) |
Mar. 31, 2019 |
Dec. 31, 2018 |
---|---|---|
BDI Member | ||
Current liabilities: | ||
Accounts payable | $ 16,000 | $ 16,000 |
Discontinued Operations (Schedule of Operation and Assets and Liabilities Related to Discontinued Operations) (Details) - BDI [Member] |
3 Months Ended |
---|---|
Mar. 31, 2018
USD ($)
| |
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] | |
Revenue | $ 137,000 |
Cost of revenue | 41,000 |
Gross margin | 96,000 |
Operating expenses | |
Operating income | 96,000 |
Income from discontinued operations, net of tax | $ 96,000 |
Leases (Narrative) (Details) |
3 Months Ended | ||||
---|---|---|---|---|---|
Mar. 31, 2018
USD ($)
|
Mar. 31, 2019
USD ($)
|
Apr. 09, 2018
USD ($)
ft²
|
Mar. 26, 2018
USD ($)
|
Feb. 27, 2018
USD ($)
ft²
|
|
Lessee, Lease, Description [Line Items] | |||||
Operating lease liabilities | $ 1,000,000 | ||||
Right of use assets | 1,000,000 | ||||
Rent expense | $ 350,000 | ||||
Office Space - Fort Lauderdale, Florida [Member] | |||||
Lessee, Lease, Description [Line Items] | |||||
Area of lease | ft² | 1,694 | ||||
Base rent per month | $ 7,000 | ||||
Lease term | 39 months | ||||
Lease renewal term | 5 years | ||||
Kairos Global Technology, Inc [Member] | |||||
Lessee, Lease, Description [Line Items] | |||||
Area of lease | ft² | 107,600 | ||||
Base rent per month | 235,000 | $ 664,760 | $ 223,800 | ||
Monthly base rent owed for January 2019 | 230,000 | ||||
Monthly base rent owed for all remaining periods thereafter for the duration of the lease, including any renewals | $ 190,000 |
Leases (Schedule of Operating Leases) (Details) |
3 Months Ended |
---|---|
Mar. 31, 2019
USD ($)
| |
Lease cost | |
Operating lease cost | $ 600,593 |
Variable lease cost | 776,053 |
Operating lease expense | 1,376,646 |
Short-term lease rent expense | 4,620 |
Total rent expense | 1,381,266 |
Other information | |
Operating cash flows from operating leases | 623,976 |
Right of use assets exchanged for new operating lease liabilities | $ 1,547,499 |
Weighted-average remaining lease term - operating leases | 10 months 25 days |
Weighted-average discount rate - operating leases | 10.00% |
Leases (Schedule of Maturities of Operating Lease Liabilities) (Details) |
Mar. 31, 2019
USD ($)
|
---|---|
Leases [Abstract] | |
For the nine months ended December 31,2019 | $ 898,045 |
For the year ended December 31, 2020 | 58,731 |
For the year ended December 31, 2021 | 35,040 |
Total operating lease obligation | 991,816 |
Less imputed interest | (34,831) |
TOTAL | $ 956,985 |
Tess Related Party Transactions (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2019 |
Mar. 31, 2018 |
|
Tess [Member] | ||
Related Party Transaction [Line Items] | ||
Key management personnel salaries | $ 150,000 | $ 213,400 |
Tess Related Party Transactions (Schedule of Tess Related Party Transactions) (Details) - USD ($) |
3 Months Ended | 12 Months Ended | |
---|---|---|---|
Mar. 31, 2019 |
Mar. 31, 2018 |
Dec. 31, 2018 |
|
Powercases Inc [Member] | |||
Related Party Transaction [Line Items] | |||
Services to Tess provided by | $ 160,826 | $ 163,582 | |
Payable to | 145,047 | $ 37,250 | |
JLM Strategic Marketing [Member] | |||
Related Party Transaction [Line Items] | |||
Services to Tess provided by | 36,198 | ||
Payable to | 101,405 | 9,483 | |
1038088 Ontario Limited [Member] | |||
Related Party Transaction [Line Items] | |||
Services to Tess provided by | 45,062 | $ 47,817 | |
Payable to | $ 9,292 | $ 52,053 |