Riot Blockchain: Sudden Business Pivot, Suspicious Acquisitions, Questionable Special Dividend (SA Editors' Picks)

Riot Blockchain: Sudden Business Pivot, Suspicious Acquisitions, Questionable Special Dividend

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With “blockchain mania” in full swing, a new self-described leader has emerged. Riot Blockchain purports to be “a Leading Blockchain Company & Only Nasdaq Listed Pure Play Blockchain Company.” With share prices nearly quadrupling in the past 3 months we decided to examine the name more closely.

The company’s blockchain focus has come about through a series of rapid moves. Mere months ago, Riot was known as Bioptix, Inc. (NASDAQ: BIOP) and operated “a life science tools company that provides an affordable solution for drug discovery scientists who require label-free, real-time detection of bio-molecular interactions.”

On October 4th of this year Bioptix announced that it was changing its name and ticker from Bioptix Inc. (Nasdaq: BIOP) to Riot Blockchain (Nasdaq: RIOT), and indicated that it would be pursuing a completely different business model focused on strategic investment and operations in the blockchain ecosystem.

We find such a dramatic pivot in business operations to be concerning in its own right, but we believe it is even more questionable given that the seismic shift has come about in conjunction with a series of dubious transactions.

Riot Paid Approximately $12 million To Acquire Kairos Global Technology – A Two-Week Old Crypo-Mining Company That Owned Only About $1.9 Million in Crypto Mining Assets

On November 2, 2017 the company announced via press release that it had “entered into a definitive agreement to acquire cryptocurrency mining equipment consisting of 700 AntMiner S9s and 500 AntMiner L3s, all manufactured by industry leader Bitmain.” Upon closing of the purchase the company issued another press release on November 6, 2017 stating that “it has closed on its acquisition of cryptocurrency mining equipment”. A basic reading of the press releases might lead a reader to believe that the company had purchased the equipment directly.

However, a reading of the November 1, 2017 form 8-K that described the transaction leaves us with a different impression. The 8-K clarified that Riot had actually acquired a corporate entity called Kairos Global Technology (“Kairos”) that held the cryptocurrency mining equipment described above.

The form 8-K described a share exchange agreement with Kairos whereby the Company exchanged Convertible Preferred Stock (convertible into 1,750,001 common shares of Riot) for all outstanding shares of Kairos’s common stock. Given that Riot’s stock closed at $6.95 per share on November 1, 2017, we estimate the share transaction value at approximately $12.1 million. (As of this writing those same shares would be worth an estimated $27 million.) In addition, Riot included a potential $1 million royalty sweetener for Kairos’s shareholders:

The shareholders of Kairos also will receive a royalty to be paid from cash flow generated from operations, which shall entitle such shareholders to receive 40% of the gross profits generated on a monthly basis until they have received a total of $1,000,000, at which point the royalty is extinguished.

All told, we estimate the transaction provided anywhere from $12-$13 million in value to Kairos’s shareholders on the day of closing. Our belief is that Riot grossly overpaid. As above, Riot’s stated motive for the transaction was to acquire 700 AntMiner S9s and 500 AntMiner L3s used to mine cryptocurrency.

However, if Riot had simply purchased the above servers directly from Bitmain, we estimate that the price would have been $1,905,000. In order to arrive at this number we checked a historical capture of the Bitmain website as of October 16th, 2017 and found that Antminer S9 servers were selling for $1,265 and that AntMiner L3s were selling for $2,040.

We contacted Bitmain to see if they were experiencing massive backlogs or any other scenario that could justify an overpayment of roughly $10 million for $1.9 million of machines. We have not heard back from Bitmain as of this writing. The historical capture of the Bitmain website from October 16th shows that machines would have been expected to ship in just over one month from that date (November 21st – November 30th).

Adding to our skepticism of the Kairos deal is the fact that Kairos appears to have had no operations and/or website (despite registering a domain name) and that the entity was formed on October 19, 2017 – less than two weeks prior to its announced acquisition by Riot. We believe the fact pattern indicates that Riot’s acquisition of Kairos’s assets is highly irregular.

Furthermore, it is unclear to us who ultimately benefited from the apparent generous payment terms for Kairos. The entity was registered to the address of a believed one-man law firm called Laxague Law Inc. (“Laxague Law”). Its officers consisted of a Dubai resident and its directors consisted of two Floridians, though the underlying shareholder structure was not publicly disclosed.

Riot’s Acquisition of a Majority Stake in Another Blockchain Technology Company Raises Additional Questions

Riot’s acquisition of newly-established Tess Inc. raises additional red flags. On October 20, 2017, Riot announced that it had acquired a majority (52%) stake in Tess, which Riot described as a company that was “developing blockchain solutions for telecommunications companies.” A “whois” search of the Tesspay.io website shows that it was initially registered on July 18, 2017. Tess then released a seven-page whitepaper in August 2017 describing (i) its plans for an initial coin offering (“ICO”); and (ii) the role its coins intend to play in telecommunications transactions. Those representations aside, the resumes of Tess’s principals leaves us skeptical Tess’s odds of success:

  • Tess’s CEO, Jeff Mason, concurrently holds the same CEO position at two other companies, according to his LinkedIn profile: PowerCases and Witzel;
  • Tess’s CFO, Fraser Mason, concurrently hold the position of Senior Vice President of PowerCases, according to his Linkedin profile;
  • Tess’s Chief Software Architect, Sorin Tananescu, concurrently holds various senior roles at other companies, including: (A) Managing Director of Voiceway; (B) Director of Middleware Integration for Rogers Communications; and (C) Director of an entity called Ingenium IT Compusoft (“Ingenium”).

Tananescu’s other companies give us additional cause for concern. Namely, Voiceway appears to have been associated with a Bitcoin phishing website.

On a Bitcoin forum called BitcoinTalk, one user conveyed that Google was displaying advertisements for “mt-qox.com,” a clever misspelling of the then-popular Mount Gox bitcoin trading website. That same user noted that the “mt-qox.com” website completely duplicated the real Mount Gox website.

The apparent imposter site was registered to Cristian Talle at the address 196 Judith Ave., Toronto, Canada, which appears to be a residence, based on a Google Maps search. That same address houses Tananescu’s other businesses including Voiceway and Ingenium. In addition, Talle used a Voiceway email address to register the mt-qox.com site. Reddit users also noticed the site and started a thread entitled “[SCAM] watch out for mt-qox.com”. The users reported the site to Mount Gox and Google. Google subsequently took action and blocked it as a phishing website, according to the thread. (Note that the Voiceway website itself was also registered by an individual named Cristian Talle – under a Rogers Communications email address.)

Furthermore on the subject of Tess: On the same day that Laxague Law set up Kairos (October 19, 2017), the same law firm also set up an entity called Ingenium Global Inc., which has a unique name that is similar to an entity in which Tananescu manages (Ingenium IT Compusoft). Even more interestingly, Ingenium Global Inc. listed the exact same officers/directors as Kairos (an individual in Dubai and two from Florida) and registered the exact same par value and share count. Given that Riot announced the acquisition of Tess the very next day (October 20, 2017), we cannot help but wonder whether the selling parties in the Kairos transactions were in any way related to the shareholders of Ingenium, and ultimately to the selling parties in the Tess transaction.

Riot Depleted An Estimated 63% of the Company’s Cash Through a Special Dividend That Appears To Have Disproportionately Advantaged Company Insiders

Bioptix/Riot recently engineered a “special cash dividend” that stripped the fledgling company of approximately 63% of its cash, seemingly handing a significant portion of those funds to company insiders. That kind of cash giveaway – announced 1 day ahead of a shift to a new, speculative business model – gives us significant concerns. The sequence of events was as follows:

In March 2017, Bioptix announced the completion of private placements that included a convertible note financing and also included warrants to purchase 1,900,000 shares of common stock;

On September 25, 2017, Bioptix made the following disclosures:

  1. Bioptix filed a form 8-K stating, in part, that notes from the March 2017 Offerings had been exchanged for shares of Series A Convertible Preferred Stock; and
  2. Bioptix filed an amended Registration Statement Form S-3 which described how holders of Series A Convertible Preferred Stock “are entitled to receive dividends if and when declared by the Company’s board of directors. The Series A Preferred Stock will participate on an ‘as converted’ basis, with all dividends declared on the Company’s Common Stock.”

Then on October 4, 2017, the newly-named Riot filed a Form 8-K stating that the Company had approved a cash dividend:

pursuant to which, the holders of the Company’s common stock, no par value per share (the ‘Common Stock’), and Series A Convertible Preferred Stock, no par value per share (the ‘Series A Preferred Stock’), as of the close of business on October 13, 2017, shall receive $1.00 for each share of Common Stock, including each share of Common Stock that would be issuable upon conversion of the Series A Preferred Stock, on an as converted basis.

The magnitude of the dividend is significant. The payout “totaled approximately $9,562,000” whereas Riot’s financial statements reflected that at the close of Q3 2017 – two days before the October 2017 Dividend was approved – the Company had only $13,139,722 in cash and cash equivalents. When factoring in an added $1.86 million in cash proceeds from warrant conversion, the October 2017 Dividend depleted an estimated 63% of the company’s cash and cash equivalents balance. Consequently, we find its size relative to Riot’s available cash to be troubling.

The timing of related warrant conversions is similarly concerning. Riot’s quarterly filing prior to the October 2017 Dividend indicates that 2,060,000 warrants from the March offering were converted into 1,228,690 common shares on a cashless basis. In addition, 620,000 warrants were exercised for cash during a period where Riot’s board of directors authorized on October 10th a “temporary reduction in exercise price” of convertible securities from the March 2017 private offerings. Given that the record date of the October 2017 Dividend was October 13, 2017 (with a payment date of October 18, 2017), both the cashless warrant conversion and the conversion from the reduction in exercise price of the March 2017 securities appear to have conspicuously occurred just prior to the payment of the October 2017 dividend.

Who Benefited From the Special Dividend?

In the press release announcing the special dividend, the company’s CEO stated “This special dividend is a positive step to return value to all Bioptix shareholders.” Despite this pronouncement, we believe Riot insiders and participants in the March 2017 private placements benefited disproportionately.

The amended Form S-3 detailing the convertible and warrant offerings prominently mentioned one individual in particular. Per the filing, “The Lead Investor is Barry Honig who is also a selling stockholder.” Moreover, Honig-related entities, as well as Honig’s family members including brother Jonathan and father Alan, also participated in the transactions.


Later, in two Schedule 13G filings filed as of an event date of October 10th—just days prior to the dividend ex-date—Jonathan Honig and an individual named Mark Groussman reported common stock ownership stakes of 9.51% and 5.93% respectively. Jonathan Honig’s filing also mentioned that the 9.51% figure “Does not include 808,198 shares of common stock issuable upon conversion of Series A Preferred Stock”. Is is unclear from the filings where Barry Honig’s ownership on a common stock and on a convertible/exercised basis stands currently.

Note that the same filing mentioned that there were only 5,436,503 shares of Common Stock outstanding as of September 20th. By November 13th the number of common shares had spiked up to 8,321,137, a roughly 53% increase in common shares in less than 2 months. Such a jump indicates that a significant amount of dilution has affected common stock holders in a short amount of time.

Conclusion

We have no strong bearish or bullish view on the future of blockchain. We genuinely hope the technology is implemented broadly and that currency and information can be effectively decentralized through its use. Regardless of one’s views on blockchain technology however, we think Riot is a name that investors should avoid. We urge cautious investing to all.

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. I have no business relationship with any company whose stock is mentioned in this article.

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December 11, 2017 at 06:42AM

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