Bull & Bear Trading wants to acknowledge the significant contributions of Mr. Keith Taub for the origination and development of this article. Mr. Taub's market experience and analytical abilities combine for a strong skill set. These skills have proven valuable in identifying winning trades. Mr. Taub's short sale of Sears (OTCPK:SHLDQ) over the past year or so is just one example of his vision in seeing the probable outcomes for corporations. Mr. Taub has acquired the ability to read into the financial statements of corporations in depth. This vision helps him to accurately identify distressed corporations, oftentimes ahead of many other market participants. Bull & Bear is grateful for Mr. Taub's valuable contributions to this article. All opinions expressed belong to Bull & Bear Trading and are not reflective of Mr. Taub's thoughts. This article does not provide any investment advice. Bull & Bear Trading discusses trading ideas that we may be involved in for our own account, either long or short.
As the chart above illustrates, sometimes what goes up must come down as has been the case for nano-cap stock Riot Blockchain (RIOT). The Securities Exchange Commission, SEC, has taken an investigative interest into RIOT and the cast of characters who have been behind this company as disclosed on page 23 of the companies March 31, 2018 10-Q.
Riot Blockchain is headquartered in Castle Rock, CO, which is an affluent suburb of Denver. For decades the Denver area has been a hotbed of penny stock activity where the creativity and mental gymnastics of the local penny stock purveyors knows no boundaries. As a newly licensed stockbroker in 1986 I would hear disconcerting tales from clients who had negative experiences with brokerage firms based out of the Denver area as described in this 1982 article. While there were dozens of nefarious penny stock firms bilking investors out of the Denver area in the '80s and '90s, one of the largest was Blinder, Robinson & Co. This firm notoriously became known by the pejorative of Blind'em, Rob'em & Co. The SEC finally shut that firm down and sentenced former penny stock king Meyer Blinder to prison.
That was then, this is now. And perhaps there is zero connection between the outside-the-box thinking and creativity of yesteryear's penny stock dealers and today's creative thinkers in the Denver area's public markets. Through August of 2017 a Castle Rock, CO based penny stock named Bioptix was down 2.2% until it changed its name to, you guessed it, Riot Blockchain in October of 2017. RIOT soared over 600% to finish the year as Colorado's biggest percentage gaining stock. It seems that the individuals behind the name change to Riot Blockchain finally hit the jackpot with their new business strategy since the previous name of Bioptix did not fair well for the publicly traded shell corporation. Interestingly, the former name of Bioptix was Venaxis. And the former name of Venaxis was AspenBio Pharma, Inc. Get the picture? This entity has had four different names including the current name of Riot Blockchain, which finally caught the market's attention.
Unfortunately for the individuals involved in this public market activity, RIOT has also garnered the attention of the SEC in two separate investigations. One of these two investigations has been terminated by the SEC, while the other investigation associated with the subpoena from April 9, 2018 is currently active. An active SEC investigation can greatly complicate and even curtail a publicly traded company's ability to raise capital. Indeed, RIOT's June 30, 2018 10-Q disclosed the withdrawal of their S-3 shelf registration for additional stock sales. This would imply the ongoing SEC investigation would negatively impact their ability to raise equity. Without the SEC issuing an Effectiveness Order, there would be no registration of securities. While the April 9, 2018 subpoena is currently open amidst an active investigation there would be no issuance of any approvals by the SEC for the company to raise capital. More ominously, as cited in the 10Q, RIOT is in communication with the SEC's Division of Enforcement on various accounting questions pertaining to a bevy of potential irregularities.
It is common practice that when the SEC expends significant amounts of resources into an investigation the commission would prefer to conclude expensive projects with results to show for their efforts. The higher the profile of the investigation, the more urgent the need becomes for the SEC to appear productive. When CNBC is covering the investigation for the entire international business community to see in plain view, then the SEC's higher level of motivation to scrutinize their subject aggressively is acknowledged. The following is one of the CNBC investigations that has appeared on the business channel:
Several key comments in the June 30, 2018 10Q raise concerns. To paraphrase, the company acknowledges in one comment that it cannot determine the impact that an unfavorable SEC ruling could have upon the ongoing operations of RIOT. Because RIOT's financial position may be just weeks from insolvency in its current condition, the SEC may not have to take any action against this company. Due to unpaid bills it could be possible that RIOT would simply cease operations as the electric utility company cuts off service to the energy-intensive cryptocurrency mining servers. Another possibility could be the issuance of an SEC financial penalty against RIOT. Any fine of almost any size could also force RIOT into insolvency and a sharp decline in the price of the publicly traded stock.
'Trader's Idea Flow' believes that either way, whether the SEC elects to simply "run out the clock" on RIOT or finds just cause to impose a financial penalty, it's basically game over and literally lights out for RIOT.
The checkered history of the key players behind the questionable activities of this publicly traded company have lead them to their current Waterloo. Perhaps the high profile nature of the latest gambit posed by these individuals in their risky RIOT venture was one questionable operation too many. Fraud charges alleged by the SEC for O'Rourke that are unrelated to his activities at RIOT have lead to his departure from the company and his stepping down as CEO. This SEC complaint naming Honig, O'Rourke, Frost, Stetson, and others has not only caused the departure of the CEO of RIOT; but it has also called into question the activities of RIOTs larger shareholders. The recently exiting independent board member, Andrew Kaplan, has significant ties to Barry Honig and it’s yet to be determined how independent Andrew Kaplan actually was from the insiders at RIOT. The federal government always prefers to have insider witnesses to give independent testimony to corroborate the commission's own findings. Plea bargains are often based upon providing the government with cooperation and assistance in their investigations. It has been said that those who step forward promptly to enter into an agreement with the authorities the earliest are the most valuable and therefore can negotiate the best plea deal. Perhaps in the future we may learn of the cooperation given to the SEC by some number of the former allies who constructed RIOT and other creative market schemes involving penny stock companies.
To this point we have sought to communicate the severity of RIOT's situation as it pertains to the SEC's existing presence in dismantling the company's key players and making the company toxic for any serious, new executives to join the company. A significant number of the individuals behind the scheme that became RIOT are now the subjects of an SEC complaint and have been dis-associated from the company. Also, the company's S-3 shelf registration statement has been withdrawn indicating an acknowledgement that there will be no capital raise. So without the prior management that guided this venture, little chance of a capital raise, and with the SEC having their foot solidly upon the throat of this expiring company what is left to determine? On 9/9/18 RIOT announced that the company's COO would now be acting CEO. It appears that the new CEOs responsibilities may include final closure of operations for RIOT.
This is where the speculation on the company's financial condition comes into play. It is possible that some type of an announcement from RIOT regarding their newly defunct status could be forthcoming. But when might the market expect such news, if it were to occur? This excellent article published 9/11/18 on Seeking Alpha by The Stock Stooge speculated that RIOT could run out of cash in the "next month or so." RIOT's Q318 financial results are expected to be announced sometime around 11/12/18 and could provide the company with an appropriate opportunity to make an announcement of insolvency or defunct status. Or perhaps the company will extend their survival for a few additional months if they can forestall payments on their financial obligations.
The Q218 results point to RIOT revenues of only $2.77 million on the mining production of primarily Bitcoin but also Litecoin mining. However, Bitcoin traded as high as $9,800 in the Q218 period and averaged an estimated price of about $8,000 per coin during the period. Today's price of Bitcoin on 11/4/18 is about 20% lower. Thereby reducing the value of those Q2 revenues by a similar percentage amount.
The real issue for RIOT's failing business model is that the company continues to spend more on mining Bitcoin than it makes in revenue. The result, based on extrapolating out RIOTs revenue and expenses through Q318 show RIOT will run out of cash to fund operations in mid to late November. Based on this analysis RIOT would need the price of Bitcoin to be roughly $14,000 per coin just to break even. Accounts payable and accrued expenses continue to rise which infers RIOT is aging out its debts in an attempt to draw out its cash flow losses. This allows RIOT to stay in business by not paying its current expenses. This may ultimately cause an abrupt shut down in the business as creditors, namely their landlord and utilities shut off supply to the AntMiners that generate the revenues for RIOT.
Consolidated Statements Of Operations for RIOT found on page five of the 10Q are not a pretty picture: Summary
News of Riot Blockchain CEO and Chairman John O'Rourke resigning as a result of SEC fraud charges was another nail in the coffin for this company. While the company, RIOT, was not charged in this particular SEC case against O'Rourke, the company remains the target of another ongoing SEC investigation that could result in separate charges. The previously largest RIOT shareholder, Barry Honig, has also been charged by the SEC with fraud. Honig and O'Rourke were the main controlling parties of RIOT. In addition, Harvey Kesner who was the attorney for RIOT and Honig recently left his firm and was also removed as a named partner of his firm. As a company, RIOT is now more toxic than ever and not likely to attract the kind of new talent and necessary capital required to remain solvent. The type of individuals that dance on this shady, penny-stock stage are not fond of having the spotlight shown upon them for the benefit of the SEC and national media.
The current $6,400 price of Bitcoin is far below its 2017 peak above $19,000. Trading volume is way down at this time and does not indicate any imminent move higher in this cryptocurrency. The business of mining Bitcoin has gotten progressively more difficult and definitely more expensive. The breakeven cost for RIOT would require Bitcoin to trade at about $14,000. This price move higher in Bitcoin does not appear to be likely at this time. It is questionable how long RIOT can sustain money-losing operations of mining Bitcoin at a cost that is greater than the benefit.
Due to the ongoing SEC investigation RIOT will not be able to raise capital via the public markets. The current investigation could result in an unfavorable ruling by the SEC that results in negative consequences for the company. The range of punitive actions that could be taken by the SEC range from criminal charges down to the imposition of a financial penalty. It is questionable that RIOT can even afford the kind of ongoing expenses that any legal defense would require. And the weight of a SEC financial penalty or fine could also force the company into insolvency.
And then there are the class action lawsuits, which are bolstered by the SEC fraud charges against several of RIOT's previous management and financiers, and the SEC's ongoing investigation of irregular accounting at RIOT. These class action lawsuits could be deemed to have merit and they could advance to court. If that were to happen, then RIOT simply does not have the financial ability to defend itself in court as the company cannot afford the legal expenses or any type of settlement payments.
It certainly appears to be a matter of when and not if RIOT will announce news of their impending insolvency.
According to analysis of the Q218 10-Q RIOT could be out of cash by the middle to end of November. Management at RIOT may have strung out their payables just about as far as they can during that time frame. The company may experience an abrupt shut down of the cryptocurrency miners as the power goes off.
If RIOT is able to renegotiate the final payment date of the $1.5M for the AntMiners it does not change the inevitable but only kicks the can down the road a month or two before their accounts payable and accrued expenses catch up to them. They have 90 days to pay these expenses and that clock started its countdown about 30 days ago. Could RIOT survive to see the new year? Possibly.
A news announcement of the company's demise could cause the stock to drop below $1 per share fairly quickly. Further declines in price could follow the initial selloff as news disseminates that mining operations have ceased and RIOT is now defunct. And if there is no plan to recapitalize the company or bring on competent management with a legitimate business plan, then the long journey for this entity that has been known as AspenBio Pharma, Venaxis, Bioptix, and finally Riot Blockchain since October 2017 may finally be at an impasse. Soon the market may be saying, "Rest in peace Riot Blockchain, we hardly knew ya."
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Disclosure: I am/we are short RIOT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.