Riot Blockchain: This Crypto Clown Car Continues Hurtling Toward The Abyss

Published on


Summary: Riot Blockchain, Inc. (RIOT)

  • Riot filed a registration for ~3.3M shares of common stock & common stock issuable upon warrant exercise, representing potential selling pressure for a stock with only ~11.6M common shares outstanding.
  • The registration statement was reported Friday after the close.
  • Riot dismissed and replaced its auditor, reporting the event Friday after the close. The company has had 3 different auditors within the span of a year.
  • A new audit reported Friday after the close sheds light on Riot’s bizarre approach to purchasing (and overpaying for) cryptomining assets.
  • The CEO recently sold about $869,256 worth of his shares, reporting the event Friday after the close heading into the long New Year’s weekend.


This is a brief update on new red flags we have identified since our original December 11th piece on Riot (NASDAQ:RIOT), which had detailed a broad array of red flags relating to the company’s sudden name change and business pivot from a medical device company, its 3rd metamorphosis within the span of a year.

Since that original piece, a slew of new information has come out, much of it having been released on Fridays after the market close. Given that these releases have occurred during periods of relative market inactivity, we believe the timing may have mitigated the impact of negative developments.

Share Registration Could Create Near-Term Selling Pressure

Per an S-3 filed on Friday after the close, the company is registering 3,292,226 shares of common stock and common stock issuable upon warrant exercise. The implication of this filing is that investors who had purchased shares in the recent private placement offering will be free to trade them once the statement is declared effective. We believe this could create near to mid-term selling pressure, especially if the investors take a cue from the company’s own CEO who recently sold off a significant portion of his shares.

The number of shares being registered is meaningful. Per the filing, as of January 4th, the company had 11,622,112 shares of common stock outstanding. The 1,646,113 common shares being registered represent over 14% of the outstanding common shares. The registration of 1,646,113 warrants issuable into shares of common stock at a $40 strike price also could create additional selling pressure. Note that the company has 1,458,001 preferred shares convertible into common issued and outstanding as well.

The Company Dismissed its Auditor

According to an 8-K filed Friday after the close, EisnerAmper LLP was dismissed as auditor and MNP LLP (headquartered in Calgary Canada) was engaged on January 5th. Based on the S-3 filed Friday after the close, we see that the company had used a different audit firm, GHP Horwath, P.C., until January 13, 2017. The S-3 notes that the partners and employees of GHP joined another independent registered public accounting firm, likely in relation to its acquisition by Crowe Horwath LLP.

We find the frequent shuffling of auditors to be a red flag that warrants investor caution. Given that Riot has had 3 auditors within the span of a year, we have little faith in their financial controls.

New Audit Sheds More Light on the Company’s Bizarre Approach to Purchasing (And Overpaying for) Cryptomining Assets

Readers of our earlier piece may recall that we had uncovered oddities in relation to the company’s transaction to acquire cryptomining equipment. For example, rather than purchasing the equipment directly from the manufacturer’s website or from a supplier, Riot chose instead to acquire a 2-week-old corporate entity called Kairos Global Technology (“Kairos”) that held the cryptomining equipment. Our belief was and continues to be that Riot significantly overpaid for these assets, and new information not only corroborates those initial conclusions but also raises additional questions.

An audit of Kairos was filed as an amended 8-K and was also released Friday after the close. It confirmed that Kairos had purchased its equipment for $2,089,679, which was close to our earlier estimate of $1.9 million. The “excess purchase price over acquired assets” of Kairos was recorded as $8,637,545, confirming that net of cash the company paid more than 4x for equipment from the entity that existed for only about 2 weeks.

While the above corroborated much of our initial analysis, one item turned up in the audit that we did not expect. We had mistakenly assumed that Kairos (i) purchased the cryptomining equipment directly from the manufacturer; then (ii) Riot dramatically overpaid for the equipment by purchasing Kairos at a premium. Instead, in the “Related Party Transactions” section of the Kairos audit, we found this:

During the period, the Company [Kairos] purchased equipment of $2,089,679 from a company controlled by the president of the Company.

In other words, Kairos actually purchased the mining equipment from a yet another entity (a related party one) before ultimately being acquired by Riot.

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?


We believe Riot is on a collision course with the annals of history. Despite this, given the company’s recent $37 million private placement, we fully expect there to be more forthcoming announcements of purchases of varying amounts of cryptomining equipment or token investments in blockchain-related assets. Investors recently have responded feverishly to such press releases, so we expect the stock will have continued future volatility. We therefore are hedged and are positioned for a bumpy ride along the way. Best of luck 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.

Additional disclosure: Use of Hindenburg Research’s research is at your own risk. In no event should Hindenburg Research or any affiliated party be liable for any direct or indirect trading losses caused by any information in this report. You further agree to do your own research and due diligence, consult your own financial, legal, and tax advisors before making any investment decision with respect to transacting in any securities covered herein. You should assume that as of the publication date of any short-biased report or letter, Hindenburg Research (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients and/or investors has a short position in all stocks (and/or options of the stock) covered herein, and therefore stands to realize significant gains in the event that the price of any stock covered herein declines. Following publication of any report or letter, we intend to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation, conclusions, or opinions. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Hindenburg Research is not registered as an investment advisor in the United States or have similar registration in any other jurisdiction. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented “as is,” without warranty of any kind – whether express or implied. Hindenburg Research makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and Hindenburg Research does not undertake to update or supplement this report or any of the information contained herein. Hindenburg Research and the terms, logos and marks included on this report are proprietary materials. Copyright in the pages and in the screens of this report, and in the information and material therein, is proprietary material owned by Hindenburg Research unless otherwise indicated. Unless otherwise noted, all information provided in this report is subject to copyright and trademark laws. Logos and marks contained in links to third party sites belong to their respective owners. All users may not reproduce, modify, copy, alter in any way, distribute, sell, resell, transmit, transfer, license, assign or publish such information.

One thought on “Riot Blockchain: This Crypto Clown Car Continues Hurtling Toward The Abyss Riot Blockchain, Inc. (RIOT)

Comments are closed.