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Riot Blockchain flagged by auditor for 'material weaknesses' in financial reports

Jennifer Schlesinger
  • Riot Blockchain “has not maintained effective internal control over financial reporting as of December 31, 2018,” according to its auditor.
  • The company currently has just over $225,000 in cash compared to more than $41.6 million at year end 2017, according to the annual report.
  • Riot also says that a Securities and Exchange Commission subpoena received in April 2018 is an ongoing issue, according to its latest press release. Riot is cooperating with the SEC.

Riot Blockchain , the cryptocurrency company whose stock skyrocketed after changing its name from Bioptix, announced what it called "material weaknesses" in internal control over financial reporting and an adverse auditor report in its latest annual report, filed Tuesday.

The annual report filed with the Securities and Exchange Commission shows a company in the red. The company says it currently has just over $225,000 in cash compared to more than $41.6 million at year end 2017.

Riot "generated approximately $7.7 million in revenue on the production of 1,081 Bitcoins … and 3,023 Litecoins for the year," according to a news release issued Tuesday on the company's 2018 financial performance.

The auditor report, contained in the 10K filing, said Riot "has not maintained effective internal control over financial reporting as of December 31, 2018."

The weaknesses could have had a material adverse impact on the company's operations and could result in material misstatements to the financial reports, according to the annual report. However, the issues did not affect the financial statements in the just filed annual report, according to Marcum, Riot's auditor, in their audit report.

The company had problems with its information technology relating to risk mitigation, user access, and securing digital currency mining equipment and wallets, according to Marcum's audit report.

Riot plans to fix the issues by end of fiscal year 2019, according to its filing.

'A concern they could get hacked'

Marcum has been Riot's auditor since late 2018. The firm replaced MNP, which was the company's auditor for slightly over a year, according to SEC filings.

The financial control issue was not mentioned in the news release.

Riot's CFO Robby Chang did not immediately respond to CNBC's request for comment.

The SEC declined to comment.

"I think it is a concern they could get hacked. That would be disastrous for a company if there is theft." Peter Henning, a professor of law at Wayne State University in Detroit, said in a phone interview. Henning was a senior attorney in the division of enforcement at the SEC.

Jake Zamansky, of the securities law firm Zamansky LLC, called the issue very significant. "The internal control problems they cite go to the heart of the business," he said in a phone interview.

Riot also says that an SEC subpoena received in April 2018 is an ongoing issue, according to its latest news release.

"The Company has been cooperating with the SEC in that investigation," the news release said.

The material weakness "may well draw even more attention from the SEC," Henning said. "When there is a subpoena, that means there is a formal investigation and the SEC can expand its investigation."

Zamansky said the SEC will "absolutely" pay attention to the issue. He said the subpoena is a "major cloud hanging over [Riot's] head"

Riot's annual report was delayed. The company on March 18 submitted a notification of late filing.

Capital issues

The internal control was not the only issue the auditor found.

"[T]he Company has a significant working capital deficiency, has incurred significant losses, and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern," Marcum said in an auditor's report included in the 10k.

Riot's cash on hand, around $225,000 could impair the company. The company leases a mining facility in Oklahoma City for $190,000 per month and an office in Florida for appoximately $7,000, according to the filing.

The company said that to continue normal operations for the next 12 months it will need to raise capital either from equity or debt.

"Without additional capital, the Company's ability to continue to operate will be limited," Riot said in its filing.

The annual report also raised potential concerns about Riot's management.

"Our chief executive officer is new; loss of key members of management, or our inability to attract and retain qualified personnel could adversely affect our business," the report said. "Our chief executive officer and our management team has limited experience."

Riot has announced three CEOs and one interim CEO since changing its name and business plan in October 2017. The current CEO is Jeff McGonegal, who took on the role in February.

One former CEO, John O'Rourke, resigned September in the wake of unrelated allegations over what an SEC news release called "lucrative market manipulation schemes."

A CNBC investigation in February 2018 found a number of red flags at Riot Blockchain, including annual meetings that were postponed at the last minute, sales of stock by company insiders soon after the company's name change, dilutive share issuances on favorable terms to large investors, confusing SEC filings and evidence that a major shareholder was selling shares while everyone else was buying.

"We have made significant inroads in building a diversified portfolio of investments and to begin securing digital assets," O'Rourke said in a letter to shareholders the day the CNBC investigation aired.

As bitcoin's price hit record highs in late December 2017, Riot was making news on a daily basis. The company's stock shot from $8 a share to more than $40 as investors chased the craze of all things crypto.

"[W]e may never become profitable," Riot warned in its latest filing, as well as the prior annual report. "Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods."



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