Riot Blockchain (NASDAQ:RIOT) and one of its key backers, Barry Honig, have come under a tremendous amount of recent scrutiny over the past couple of months, capped off by a CNBC investigative piece on Friday that precipitated a drop of over 33% in the company’s share price.
Despite the fresh warning signs highlighted by CNBC, that same evening the company filed an 8-K during a market ‘dead zone’; Friday after the close heading into a long holiday weekend. The filing detailed a transaction that strikes us as intensely questionable, and raises brand new red flags.
We are first going to recap some of the recent reporting on Riot. For those interested in just the brand new items please skip to the following section.
After all, why buy cryptomining equipment directly from the manufacturer’s website or from a supplier when you can dramatically overpay for it by simply purchasing it through a 2-week-old entity that purchased it from a different related party entity that purchased it from (presumably) the manufacturer or a supplier?
“I still own every one of those [shares] at $22.50,” he said. “That should tell you what I think about Riot.”
Note that Mr. Honig is legally unable to freely trade the shares issued in the private placement given that they are as-of-yet unregistered and restricted. Later in the article the Denver Post asked the SEC for comment:
“The SEC also declined to comment about Riot but pointed to an investor alert from August: ‘Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams. These frauds include ‘pump-and-dump’ and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.’”
According to O’Rourke, the company is very careful with its reporting practices. In a meeting that O’Rourke demanded be off-camera he told CNBC that Riot “over-disclose[s]”. He also expressed that he was not worried about the SEC. Given the company’s self-described approach of over-disclosure, and in light of all of the scrutiny above, one might think that Riot’s executives would see fit to continue to exercise heightened caution with its disclosures.
It may be surprising then that on Friday February 16th at 4:54pm—the very day the CNBC investigative piece clobbered the stock by over 33%—a new Riot 8-K detailed yet another dubious acquisition of crypto-mining equipment that seemingly failed to disclose a related party transaction.
The 8-K included a detailed agreement relating to a press release issued the day before, Thursday February 15th. The press release had announced that Riot “entered into a definitive agreement to acquire additional cryptocurrency mining equipment consisting of 3,800 Antminer S9 Bitcoin miners manufactured by Bitmain.”
A quick browse over to the Bitmain website shows that you can purchase Antminer S9’s for $2,320 each. Thus, multiplication leads us to believe that purchasing 3,800 machines should cost a total of about $8,816,000, assuming no bulk discounts and excluding shipping costs.
But the new 8-K detailed how instead of purchasing the 3,800 machines in the manner above, Riot is instead purchasing the machines through its subsidiary Kairos Global Technologies (“Kairos”) that is in turn purchasing them through a recently formed entity called Prive Technologies LLC “Prive”).
The total consideration is $11 million in cash and 1 million shares of Riot stock, with 200,000 of the shares escrowed pending certain milestones. In all, the consideration suggests a total transaction value at the time of agreement of about $28 million. The detailed agreement also added that ancillary equipment would be purchased, consisting of an unspecified number of Racks, Power Supplies, Network Switches, LAN Cables, PDU’s, Power Cables, Desktop Control Servers, and Software licenses.
Factoring in all of the above: we estimate that Riot’s agreement suggests an over-payment of about $18.5 million for the equipment purchased through Prive.
Notably, the press release failed to mention Prive Technologies LLC at all, and the 8-K failed to disclose that Prive is seemingly a related party of Riot’s subsidiary Kairos:
We emailed Riot’s investor relations and asked about whether Prive is a related party of Kairos. We have not heard back as of this writing. Should we hear back from the company we will update this accordingly.
Avid readers may recall from our previous articles that we had identified red flags relating to Riot’s approach to purchasing crypto-mining equipment in an earlier deal. Our criticism focused on Riot’s decision not to purchase equipment directly from suppliers or from the manufacturer. Instead Riot chose to dramatically overpay for the equipment by acquiring the newly-formed Kairos entity which held the equipment.
Worse yet, Riot later disclosed that Kairos had purchased the equipment from “a company controlled by the president of [Kairos].” At the time we did not know the name of that unnamed entity. Given the latest information however, we believe Prive is likely the previously unknown entity controlled by Kairos’s President (Michael Ho).
When asked by CNBC about the earlier purchases O’Rourke said that the company paid a premium for the original equipment from Kairos due to a shortage of mining equipment and difficulties getting it directly from the manufacturer. Our research showed that Bitmain did not appear to have any major shortages or significant delays at the time of the purchase however.
Now in relation to this new deal, Bitmain similarly has an estimated shipping date of about 1 to 1.5 months on new Antminer S9s as of this writing.
Beyond our basic check of the Bitmain website however, we also have another comparable transaction we can use to determine a market price of Antminer S9 Machines. Namely, Riot entered into a separate transaction to purchase Antminer S9’s on the exact same day as the transaction with Prive.
Despite the press release only announcing the deal for 3,800 machines (through Prive), the 8-K described a second agreement entered on the same day (February 15th) involving the purchase of 3,000 Antminer S9’s and related equipment. In stark contrast to the deal with Prive above, the machines in the second transaction appear to have been purchased from a third-party supplier at prices that strike us as borderline commercially reasonable.
Riot purchased the machines in the second transaction from a Canadian distributor named Blockchain Mining Supply & Services Ltd. (“BMS&S”) for a total of $8,500,000 in cash. This compares to a total value of about $7,275,000 for 3,000 machines and 3,000 PSU’s based on prices from the Bitmain website. The President of BMS&S in the agreement is listed as Joe Alfa, who incidentally was the same would-be supplier for Long Blockchain’s Antminer machines (NASDAQ:OTCPK:LBCC). Consequently, evidence suggests that BMS&S/Joe Alfa is a supplier that has worked with multiple different companies.
Given that both transactions were entered into on the same day to purchase the same type of machine (Antminer S9s manufactured by Bitmain) we cannot help but notice the vast price differential:
The above strikes us as a rather brazen difference. We emailed Riot’s investor relations and asked why Riot paid so much more in the Prive transaction relative to the BMS&S transaction. We have not heard back as of this writing. Should we hear back from the company we will update this accordingly.
Stranger still, we found yet more entities set up by Michael Ho and Bryan Pascual that raise additional questions:
Our overall concern with these potentially related entities center around whether shareholder funds could be misused via investments that pass through them. The recent auditor switch also gives us heightened caution relating to the company’s financial controls.
We emailed Riot’s investor relations and asked whether the company or any of its affiliates or related parties (including recent or current key holders) engaged in any transactions with Prive Technologies LLC, BMH Mining LLC, Ingenium International LLC, or Ingenium Global Inc. We have not heard back as of this writing. Should we hear back from the company we will update this accordingly.
Moving right along, a review of corporate filings shows that Michael Ho has listed 3 different addresses on his corporate filings despite all three entities being formed around the same time:
The implication from the above seems to be that Mr. Ho maintained addresses in all 3 cities and took the time to form distinct corporate entities from each location. We find this to be odd. We emailed Riot’s investor relations and asked why Michael Ho has listed 3 different addresses for his recent corporate filings. We have not heard back as of this writing. Should we hear back from the company we will update this accordingly.
The company seems to be running through its cash balance at a rather hasty pace. Riot raised $37 million in cash through a December private placement. Since then the company has:
All said, the company has invested/committed/spent more than $24.7 million through the above actions in the span of less than a month. We will be watching closely to see how much cash the company is left with after all of the aforementioned endeavors.
Our overall view hasn’t changed since our last article. We still believe Riot is hurtling toward the abyss.
Disclosure: I am/we are short RIOT, MARA.
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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