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Item 5. Market for Registrant’s Common Equity

2022-03-16 compared with 2021-03-31 · 40 added, 310 removed, 3 unchanged (99% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

MARKET FOR REGISTRANT’S

COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock trades on the Nasdaq Capital Market under the symbol “RIOT”.

As of March 26, 2021, we had approximately 9550 holders of record of our common stock.

The closing price of our common stock on March 30, 2021 was $51.51 per share.

Securities Authorized under Equity Compensation Plans Information

The Company currently has one equity compensation plan, The Riot Blockchain, Inc.

2019 Equity Incentive Plan, as amended (the “2019 Plan”).

The Company currently provides stock-based compensation to employees, directors and consultants, under the 2019 Plan, as approved by the Company’s shareholders on October 23, 2019, and on November 12, 2020 with respect to the first amendment to the 2019 Plan.

The Company’s previous 2017 Stock Incentive Plan, as amended (the “2017 Plan”), was replaced by the 2019 Plan, with the 2017 Plan continuing to govern the then outstanding grants and awards for 12,000 options and 114,103 shares of restricted common stock.

No additional grants can be made under the 2017 Plan.

The Company has reserved 4,061,809 common shares for issuance under the 2019 Plan.

The following table provides information as of December 31, 2020, about the shares of common stock that may be issued upon the exercise of options or the vesting of restricted common stock under the 2019 Plan:

Plan Category

Number of securities to be issued

upon exercise of outstanding

options and restricted common

Weighted average exercise price of

outstanding options

Number of securities remaining

available for future issuance

Equity compensation plans approved by security holders (1)

Equity compensation plans not approved by security holders

Consists of 12,000 stock options with a weighted average exercise price of $4.09 and 813,306 shares of restricted stock.

Our common stock trades on the Nasdaq Capital Market under the

symbol “RIOT”.

Holders of our Common Stock

As of March 8, 2022, there were approximately 841 holders of

record of our common stock.

The actual number of stockholders is greater than this number of record holders and includes stockholders

who are beneficial owners but whose shares are held in street name by brokers and other nominees.

Dividend Policy

We have historically not declared or paid cash dividends on our

capital stock.

Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board

of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions,

capital requirements, business prospects, and other factors our board of directors may deem relevant.

Stock Performance Graph

This performance graph shall not be deemed

“filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of Riot Blockchain, Inc.

under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

The following graph shows a comparison, from

January 1, 2017 through December 31, 2021, of the cumulative total return on our common stock, the Nasdaq Composite Index and the Russell

Due to the infancy of our industry, we have not compared our performance against a self-constructed peer group or used a Published

Industry Index.

Such returns are based on historical results and are not intended to suggest future performance.

Data for the Nasdaq Composite

Index and the Russell 2000 Index assumes an investment of $100 on December 31, 2016 and reinvestment of dividends.

We have historically

not declared or paid cash dividends on our common stock .

Recent Sales of Unregistered Securities

SELECTED FINANCIAL DATA.

On December 1, 2021, we issued 715,413 shares of our

common stock, subject to a holdback of 70,165 shares to the sellers in connection with the ESS Metron Acquisition.

The shares of common

stock in connection with the ESS Metron Acquisition were issued in reliance upon an exemption from registration provided by Section 4(a)(2)

of the Securities Act.

Subsequently, we registered for resale the 645,248 shares issued to the sellers at the closing of the ESS Metron

On May 26, 2021, at the closing of the Whinstone Acquisition,

we issued 11.8 million shares of our common stock to Northern Data in exchange for all of the issued and outstanding equity interests

of Whinstone.

These shares were issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act.

Subsequently, we registered the shares issued to Northern Data for resale pursuant to registration rights granted under the shareholders’

agreement we entered into with Northern Data in connection with closing of the Whinstone Acquisition.

Not applicable.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in the section entitled “Risk Factors”

and elsewhere in this Annual Report on Form 10-K, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and the periods that follow to differ materially from those expressed in, or implied by, those forward-looking statements.

See also “Cautionary Note Regarding Forward-Looking Statements”

on page 4 of this report.

RESULTS OF OPERATIONS

The Company has experienced recurring losses and negative cash flows from operations.

At December 31, 2020, the Company had approximate balances of cash and cash equivalents of $223.4 million, working capital of $233.9 million, total stockholders’

equity of $277.1 million and an accumulated deficit of $229.9 million.

To date, the Company has in large part relied on debt and equity financing to fund its operations.

The Company’s current focus is on growing its cryptocurrency mining operation, primarily with the goal of mining bitcoin.

As discussed under Part I, Item 1 of this Annual Report on Form 10-K, the Company utilizes specialized ASIC miners manufactured by Bitmain, known as Antminers.

As disclosed, during the year ended December 31, 2020, the Company continued an ongoing process begun in late 2019 of upgrading its existing miner fleet and evaluating every level of its mining operations, with the objective to increase the Company’s operational efficiency and performance.

Miner Network Upgrade

The initial stage of this upgrading process began in December 2019, with the acquisition of 4,000 model S17-Pro Antminers from Bitmain, which were fully deployed at Riot’s former Oklahoma City, Oklahoma mining facility (the “OKC Facility”), increasing Riot’s overall hash rate capacity to approximately 0.25 EH/s in the first quarter of 2020.

Throughout the year ended December 31, 2020, Riot continued its ongoing project of updating its miner fleet, making the following Antminer purchases pursuant to purchase agreements with their manufacturer, Bitmain, as disclosed by the Company on its current reports on Form 8-K filed with the SEC and included as exhibits hereto:

1,040 model S19 miners at an aggregate purchase price of approximately $1.94 million, all of which were delivered and installed at the Coinmint Facility by August 2020;

20,606 model S19-Pro miners at an aggregate purchase price of approximately $48.4 million, 2,003 of which were delivered and installed at the Coinmint Facility by November 2020, with the remaining 18,603 scheduled to be delivered in stages through October 31, 2021;

12,000 model S19j-Pro miners at an aggregate purchase price of approximately $26.3 million, which are scheduled to be delivered in stages starting August 2021 through October 2021.

As of December 31, 2020, with all 4,000 model S17-Pro Antminers and 3,043 of the new model S19 and model S19-Pro Antminers received and deployed at the Coinmint Facility, the Company’s miner fleet was capable of producing an estimated aggregate hash rate capacity of approximately 0.57 EH/s, representing an increase of approximately 461% over the Company’s estimated maximum hash rate capacity as of December 31, 2019.

In March 2021, the Company executed an additional purchase agreement with Bitmain to acquire 1,500 Bitmain model S19j Antminers at an aggregate purchase price of $7.2 million, which are scheduled to be delivered in October 2021.

With the full deployment of these new model S17-Pro, S19, S19-Pro, S19j, and S19j Pro Antminers, Riot’s total fleet will comprise 39,146 total Antminers.

These 39,146 advanced miners have substantially greater hash rate capacities and use electric power more efficiently than the Bitmain model S9 Antminers Riot previously operated.

Once all 39,146 of these newer generation Antminers have been received and deployed, the Company expects to be able to achieve a total hash rate capacity of approximately 4.0 Eh/s by November 2021, representing an increase of approximately 699% over the Company’s estimated maximum aggregate hash rate capacity as of December 31, 2020, and an increase of approximately 3,824% over the maximum hash rate capacity the Company’s former fleet of legacy model S9 miners were capable of producing.

Relocation of Mining Operations

During the first quarter of the fiscal year ended December 31, 2020, the Company made the strategic decision to explore alternatives to the OKC Facility after observing elevated energy costs in operating its miners combined with atmospheric heat in Oklahoma City.

After engaging in an extensive search and vetting process involving the Company’s independent strategic advisory firm, XMS Capital Partners (“XMS”), the Company entered into a co-location mining services agreement, dated as of April 28, 2020, (the “Coinmint Agreement”) with Coinmint, LLC (“Coinmint”) to allow the Company to relocate its miners to Coinmint’s cryptocurrency mining facility in Massena, New York (the “Coinmint Facility”).

During the second quarter of the fiscal year ended December 31, 2020, and after an initial testing period, Riot completed the relocation of its cryptocurrency mining operations from the OKC Facility to the Coinmint Facility, where Coinmint provides access to electrical power and internet, as well as basic maintenance, for Riot’s miners, including all 4,000 of its S17-Pro Antminers.

In connection with this relocation, Riot also began selling off or otherwise salvaging for spare parts its legacy model S9 miners, which the Company’s management team had made the strategic decision to take offline to accommodate its growing newer generation Antminer fleet.

Riot relocated its mining operations to the Coinmint Facility for a number of benefits, the largest of which was to reduce overhead and take advantage of the more competitive electricity costs in the New York ISO market.

Following the relocation to the Coinmint Facility, the Company’s lease of the OKC Facility was allowed to terminate by its terms as of June 21, 2020.

Strategic Opportunities

The Company engaged XMS to assist with evaluating strategic growth opportunities.

XMS is an independent global financial services firm with expertise in M&A and strategic advisory.

The Company engaged XMS to help with navigating the dynamic Bitcoin landscape and advise the Company on potential strategic transactions in bitcoin mining related operations.

The Company does not have a defined timeline for any transaction and cannot provide any assurance whether or when a transaction may be announced or consummated.

The COVID-19 global pandemic has been unpredictable and unprecedented and is likely to continue to result in significant national and global economic disruption, which may adversely affect our business.

Based on the Company’s current assessment, however, the Company does not expect any material impact on its long-term development, its operations, or its liquidity due to the worldwide spread of the COVID-19 virus.

However, the Company is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and industry.

Summary of Mining Results

The following table presents additional information about our cryptocurrency mining activities in coins and amounts during the years ended December 31, 2020 and 2019 ($ in thousands):

Quantities (in coins)

Cryptocurrencies

Balance at January 1, 2019

Revenue recognized from cryptocurrencies mined

Mining pool operating fees

Proceeds from sale of cryptocurrencies

Purchase of miner equipment with cryptocurrencies

Realized gain on sale/exchange of cryptocurrencies

Impairment of cryptocurrencies

Balance at December 31, 2019

Revenue recognized from cryptocurrencies mined

Mining pool operating fees

Proceeds from sale of cryptocurrencies

Realized gain on sale/exchange of cryptocurrencies

Impairment of cryptocurrencies

Cryptocurrencies received from sale of equipment

Balance at December 31, 2020

2020 Compared to 2019

Cryptocurrency mining revenues for the years ended December 31, 2020 and 2019, totaled approximately $12.0 million and $6.7 million, respectively.

Other revenue consisted of license payments of approximately $0.1 million in each period.

Revenues from cryptocurrency mining are impacted significantly by volatility in bitcoin prices, as well as increases in the Bitcoin blockchain’s Network Hash Rate resulting from the growth in the overall quantity and quality of miners working to solve blocks on the Bitcoin blockchain and the difficulty index associated with the secure hashing algorithm employed in solving the blocks.

From early 2019 to the end of 2020 the Bitcoin blockchain’s Network Hash Rate increased by approximately 249% as a result of, among other factors, the increased number of miners working to solve blocks on the Bitcoin blockchain during that period, many of which make use of newer, more efficient ASIC chips that are specially designed to solve blocks using the SHA-256 set of cryptographic hash functions employed on the Bitcoin blockchain.

For years ended December 31, 2020 and 2019, the average Network Hash Rate working on the Bitcoin blockchain was 142.74 EH/s and 98.67 EH/s, respectively.

Further, the difficulty index increased over 231% in the past two fiscal years.

The cumulative difficulty index increase over each of years ended December 31, 2020 and 2019 was 43.79% and 97.67%, respectively.

Cost of Revenues

Cost of revenue for the year ended December 31, 2020 of approximately $6.3 million consisted primarily of direct production costs of the mining operations, including rent and utilities and fees paid to Coinmint pursuant to the Coinmint Agreement, but excluding depreciation and amortization, which are separately stated.

The cost of revenue for the year ended December 31, 2019 was approximately $6.1 million.

The cost of revenue for the years ended December 31, 2020 and 2019 as a percentage of mining revenue totaled 52.2% and 90.4%, respectively.

The improvement in 2020 resulted from higher average bitcoin values for mined bitcoin and lower fixed and variable costs incurred for costs of revenue for the second half of 2020 following the relocation to the Coinmint Facility.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2020 totaled approximately $10.3 million, which is an approximately $1.1 million, or a 11.9% increase, as compared to $9.2 million in the 2019 period.

Compensation related expense decreased by approximately $0.6 million due primarily to staff reductions during 2019, net of severance costs and the compensation expense of $0.3 for Tess in the 2019 period, which in 2020 is no longer reported in our consolidated financial statements.

Stock-based compensation increased by approximately $2.7 million for the year ended December 31, 2020 as compared with the 2019 period due to the 2020 issuance of 1,544,359 restricted stock units and the accelerated vesting of 471,544 restricted stock units due to the resignation of a member of the Company’s board.

Legal fees decreased by approximately $0.6 million due to legal matters associated primarily with the fees for the class action and derivative suits and special SEC related matters being higher in the 2019 period.

Audit fees decreased approximately $0.3 million due to the higher level of financial activities and the audit of internal controls over financial reporting incurred for the year ended December 31, 2019.

Depreciation and Amortization

Depreciation and amortization expenses in the year ended December 31, 2020 totaled approximately $4.5 million, which is an increase of approximately $4.4 million, compared to $0.1 million during the year ended December 31, 2019.

The increase is primarily due to higher average depreciable equipment levels in the year ended December 31, 2020 resulting from the Company’s acquisition of 7,043 new miners, which the Company depreciates over their two-year estimated usable lives using the straight-line method.

Asset Impairment Charges

Impairment of long-term investments of $9.4 million recognized during the year ended December 31, 2020 was recorded in connection with the impairment of our investment in Coinsquare.

The Company recorded this 100% impairment as a result of the OSC Order and Settlement Agreement in which Coinsquare and certain of its executives and directors admitted to violations of Ontario securities laws and conduct contrary to the public interest in connection with their operation of the Coinsquare Market.

Impairment charges for cryptocurrencies was $1.0 million for the year ended December 31, 2020, which was recorded to recognize an impairment of our cryptocurrencies during the three months ended March 31, 2020.

Asset impairment charges of $1.5 million were recognized during the year ended December 31, 2019 and were related to $0.8 million for the impairment of our cryptocurrencies accounted for as intangible assets and $0.7 million related to our intangible assets acquired in connection with our RiotX / Logical Brokerage business.

Other Income and Expense

During the year ended December 31, 2020, we recognized income of approximately $1.4 million in connection with the reversal of our registration rights penalty.

During the year ended December 31, 2019, we recognized losses related to the issuance of convertible notes of approximately $6.2 million and expenses totaling $6.8 million to revalue the notes and the related warrant liability to fair value.

During the year ended December 31, 2019, we recorded a gain of approximately $1.1 million on the deconsolidation of Tess, due to our reduced ownership interest from 50.2% to 8.8%.

No such expense was recognized during the year ended December 31, 2020.

During the years ended December 31, 2020 and 2019, interest income and interest expense was nominal.

Other expense for the year ended December 31, 2020 was nominal.

Other income was approximately $0.9 million for the year ended December 31, 2019, due to a $0.4 million gain on forgiveness of our payable and interest in connection with our agreement with BMSS, and a $0.5 million gain on forgiveness of various accounts payable balances.

During the years ended December 31, 2020 we recorded a gain on the sale / exchange of cryptocurrencies of approximately $5.2 million.

During the year ended December 31, 2019 the gain on sale of cryptocurrencies was $0.7 million.

For the years ended December 31, 2020 and 2019, the Company recorded income tax benefits of zero and $0.1 million, respectively.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2020, we had working capital of approximately $233.9 million, which included cash and cash equivalents of $223.4 million.

We reported a net loss of $12.7 million during the year ended December 31, 2020.

The net loss included $12.0 million in non-cash items consisting of the impairment of our investment in Coinsquare of $9.4 million, depreciation and amortization totaling $4.5 million, stock-based compensation totaling $3.4 million, impairment to our cryptocurrencies of $1.0 million, and amortization of our right of use assets of $0.4 million, offset by a $5.2 million realized gain on the sale / exchange of cryptocurrencies, $1.4 million for the reversal of our accrual for the registration rights penalty, and amortization of our license revenue of $0.1 million.

Subsequent to December 31, 2020, the Company received gross proceeds of approximately $84.8 million from the sale of approximately 4.4 million shares of common stock via the 2020 ATM Offering.

Coinmint Co-location Mining Services Agreement

On April 8, 2020, the Company entered into an agreement with Coinmint, (the “Coinmint Agreement”), pursuant to which Coinmint agreed to provide up to approximately 9.5 MW of electrical power and to perform all maintenance necessary to operate Riot’s miners deployed at the Coinmint Facility.

In exchange, Coinmint is reimbursed for direct production expenses and receives a performance fee based on the net cryptocurrencies generated by Riot’s miners deployed at the Coinmint Facility.

The amount of electrical power supplied to Riot’s miners at the Coinmint Facility has subsequently been increased to accommodate Riot’s expanding miner fleet.

However, no formal written amendment to the Coinmint Agreement solidifying Riot’s continuing access to sufficient power to operate its expanding fleet of miners has been entered into with Coinmint.

The initial term of the Coinmint Agreement was six (6) months, with automatic renewals for subsequent three (3) month terms until terminated as provided in the agreement.

Prior Lease Agreements

Effective November 29, 2018, Kairos entered into the second amendment to the lease agreement for the approximately 107,600 square foot warehouse located in Oklahoma City, Oklahoma, including improvements thereon.

Subsequent amendments extended the lease term to June 30, 2020 at a monthly base rent of $190,000 per month plus electrical and utility costs based upon actual usage.

During the three months ended June 30, 2020, the Company relocated its miners to the Coinmint Facility and vacated the OKC Facility.

The Company’s refundable lease deposit of approximately $0.7 million related to its OKC lease was fully refunded, less applicable electricity charges on July 2, 2020.

On April 9, 2018, the Company entered into a commercial lease agreement (the “Florida Lease”) with W-Crocker Fin Place Owner VII, LLC, a Delaware limited liability company, pursuant to which the Company leased approximately 1,700 rentable square feet of office and common area space in Fort Lauderdale, Florida.

Pursuant to the terms of the Florida Lease, the initial term was for thirty-nine (39) months.

During May 2020, an agreement was reached to terminate the Florida Lease, and the Company expensed the termination payments for the Florida Lease.

During the year ended December 31, 2020, the Company entered into purchase agreements with Bitmain for the acquisition of a total of 33,646 of their model S19, S19-Pro, and S19j-Pro Antminer series of miners, to be shipped and delivered during 2020 and 2021.

During the year ended December 31, 2020, the Company received 3,043 model S19 Antminers of these 33,646 new miners, all of which have been deployed at the Coinmint Facility.

The remaining 30,603 of these new miners are scheduled for monthly deliveries in 2021.

The purchase commitment for these new miners totals $76.1 million, including $6.6 million paid for the 3,043 miners delivered during the year ended December 31, 2020, $31.9 million paid as deposits during the same period, and the remaining $37.6 million due to be paid during the year ending December 31, 2021 according to the previously disclosed payment schedules set forth in the applicable purchase agreements.

During December 2019, the Company purchased 4,000 next generation Bitmain model S17-Pro Antminers for a total purchase price of approximately $6.3 million directly from Bitmain.

During the year ended December 31, 2020, the Company relocated all 4,000 of these miners from its former OKC Facility to the Coinmint Facility in Massena, New York.

Revenue from Mining Operations

Funding our operations on a go-forward basis will rely significantly on our ability to continue to mine cryptocurrency and the spot or market price of the cryptocurrency we mine.

We expect to generate ongoing revenues from the production of cryptocurrencies, primarily bitcoin currency rewards, for example, in our mining facilities and our ability to liquidate bitcoin currency rewards at future values will be evaluated from time to time to generate cash for operations.

Generating bitcoin currency rewards, for example, which exceed our production and overhead costs will determine our ability to report profit margins related to such mining operations, although accounting for our reported profitability is significantly complex.

Furthermore, regardless of our ability to generate revenue from the sale of our cryptocurrency assets, we will need to raise additional capital in the form of equity or debt to fund our operations and pursue our business strategy.

The ability to raise funds as equity, debt or conversion of cryptocurrency to maintain our operations is subject to many risks and uncertainties and, even if we were successful, future equity issuances would result in dilution to our existing stockholders and any future debt or debt securities may contain covenants that limit our operations or ability to enter into certain transactions.

Our ability to realize revenue through bitcoin production and successfully convert bitcoin into cash or fund overhead with bitcoin is subject to a number of risks, including regulatory, financial and business risks, many of which are beyond our control.

Additionally, the value of bitcoin currency rewards has been extremely volatile recently and such volatility has recently been lower and future prices cannot be predicted.

If we are unable to generate sufficient revenue from our bitcoin production when needed or secure additional sources of funding, it may be necessary to significantly reduce our current rate of spending or explore other strategic alternatives.

At-the-Market Equity Offerings

During the year ended December 31, 2020, the Company received net proceeds of approximately $257.5 million (after deducting $7.3 million in commissions and expenses) from sales of 49,932,051 shares of its common stock, no par value, at a weighted average gross sales price of $5.30 per share pursuant to an At-The-Market Sales Agreement, dated effective as of May 24, 2019, as amended (the “2019 ATM Sales Agreement”), with its sales agent, H.C.

Wainwright & Co., LLC (“Wainwright”).

For a more detailed discussion of Company’s At-the-Market Equity Offerings, see Note 11, Stockholders’

Equity, to the Company’s Consolidated Financial Statements for the fiscal years ended December 31, 2019 and December 31, 2020, beginning on page F-24 of this Annual Report on Form 10-K.

Legal Proceedings

The Company has been named a defendant in several class action and other investor related lawsuits as more fully described in Part I, Item 3., “Legal Proceedings”, of this Annual Report on Form 10-K.

While the Company maintains policies of insurance, such policies may not cover all of the costs or expenses associated with responding to such matters or any liability or settlement associated with any lawsuits and are subject to significant deductible or retention amounts.

Operating Activities

Net cash used in operating activities was $11.1 million during the year ended December 31, 2020.

Cash was consumed from continuing operations by the net loss of $12.7 million, less non-cash items of $12.0 million, consisting of the impairment of our investment in Coinsquare of $9.4 million, depreciation and amortization totaling $4.5 million, stock-based compensation totaling $3.4 million, impairment to our cryptocurrencies of $1.0 million, and amortization of our right of use assets of $0.4 million, offset by a $5.2 million realized gain on the sale / exchange of cryptocurrencies, $1.4 million for the reversal of our accrual for the registration rights penalty, and amortization of our license revenue of $0.1 million.

Cryptocurrencies increased by $11.8 million and prepaid expenses and other current assets decreased by $0.8 million, offset by, an increase in accounts payable and accrued expenses of $0.9 million and a decrease in our lease liability of $0.4 million.

Net cash used in operating activities was $15.4 million during the year ended December 31, 2019.

Cash was consumed from the net loss of $20.3 million, less non-cash items of $14.7 million, including a loss on the issuance of our convertible notes, common stock and warrants of $6.2 million, the change in fair value of our convertible notes and the related warrant liability of $6.8 million, amortization of our right of use assets of $2.3 million, stock-based compensation totaling $0.7 million, impairment to our cryptocurrencies of $0.8 million, an impairment of intangible assets acquired of $0.7 million related to our decision not to pursue our Logical Brokerage business, net of deferred income tax benefit of $0.1 million, and depreciation and amortization totaling $0.1 million, offset by a $1.1 million gain recognized on the deconsolidation of Tess, a $0.9 million gain on the extinguishment of notes, interest and accounts payable, other income of approximately $0.1 million, primarily related to the amortization of our deferred revenue related to our legacy animal health business and a $0.7 million related to the gain from the sale of cryptocurrencies.

Cryptocurrencies increased by $6.6 million, offset by, a decrease in our lease liability of $2.3 million and a decrease in accounts payable and accrued expenses of $0.8 million.

Investing Activities

Net cash used in investing activities during the year ended December 31, 2020 was $32.8 million, consisting of proceeds received from the sale of cryptocurrencies of $8.3 million and proceeds received from the sale of property and equipment of $0.1 million, offset by deposits on equipment of $33.1 million, and purchases of property and equipment of $8.1 million.

Net cash used in investing activities during the year ended December 31, 2019 was $3.2 million, consisting of proceeds from the sale of cryptocurrencies of $3.2 million, offset by $5.0 million for the purchase of our next generation Bitmain S17-Pro Antminers, deposits on equipment of $1.4 million.

Financing Activities

Net cash provided by financing activities were $259.9 million during the year ended December 31, 2020, which primarily consisted of net proceeds from the issuance of our common stock in connection with our 2019 ATM Offering of $48.0 million and $209.5 million in connection with our 2020 ATM Offering, and proceeds received from the exercise of common stock warrants of $2.9 million, offset by the repurchase of common stock to pay director and employee withholding taxes of $0.4 million.

Net cash provided by financing activities were $25.9 million during the year ended December 31, 2019, which consisted of net proceeds from the issuance of our common stock pursuant to General Instruction I.B.1 of Form S-3 in connection with our ATM Offering of $23.8 million, the proceeds received from the issuance of Notes and Warrants of $3.0 million in the 2019 Private Financing, offset by the repayment of the principal balance related to our agreement with BMSS of $0.9 million, net of the $0.4 million gain recorded on extinguishment of the BMSS balance.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes.

Future events and their effects cannot be determined with absolute certainty.

Therefore, the determination of estimates requires the exercise of judgment.

Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, investments, intangible assets, stock-based compensation and business combinations.

The Company’s financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted.

In order to get a full understanding of the Company’s financial statements, one must have a clear understanding of the accounting policies employed.

A summary of the Company’s critical accounting policies follows:

Fair value of financial instruments

The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements.

This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.

To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 —

quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 —

observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable;

Level 3 —

assets and liabilities whose significant value drivers are unobservable.

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions.

Unobservable inputs require significant management judgment or estimation.

In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy.

In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement.

Such determination requires significant management judgment.

As of December 31, 2020, there were no financial assets or liabilities measured at fair value.

The carrying amounts of the Company’s financial assets and liabilities, such as cash and cash equivalents, and accounts payable, approximate fair value due to the short-term nature of these instruments.

During the year ended December 31, 2019, the Company issued convertible notes and warrants in connection with the notes.

The notes and warrants were classified as liabilities and measured at fair value on the issuance date, with changes in fair value recognized as other expense on the consolidated statements of operations and disclosed in the consolidated financial statements.

Cryptocurrencies

Cryptocurrencies, (including bitcoin and litecoin) are included in current assets in the accompanying consolidated balance sheets.

The classification of cryptocurrencies as a current asset has been made after the Company’s consideration of the significant consistent daily trading volume on readily available cryptocurrency exchanges, there are no limitations or restrictions on Company’s ability to sell bitcoin and the pattern of actual sales of bitcoin by the Company.

Cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed below.

Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives.

An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.

Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured.

In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists.

If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary.

If the Company concludes otherwise, it is required to perform a quantitative impairment test.

To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset.

Subsequent reversal of impairment losses is not permitted.

Purchases of cryptocurrencies by the Company are included within investing activities in the accompanying consolidated statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying consolidated statements of cash flows.

The sales of cryptocurrencies are included within investing activities in the accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the consolidated statements of operations.

The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.

Impairment of long-lived assets

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

The Company made the decision, effective as of December 31, 2019 not to pursue its RiotX / Logical Brokerage business development plan, and recorded an impairment of intangible assets acquired of approximately $0.7 million.

Notes Payable Fair Value Option

In January 2019, the Company issued Senior Secured Promissory Notes (the “Notes”) to Oasis Capital, LLC, Harbor Gates Capital, LLC and SG3 Capital, LLC (each an “Investor”

and collectively, the “Investors”) in the aggregate principal amount of $3.4 million.

The Company has elected the fair value option to account for these Notes due to the complexity and number of embedded features.

The fair value of the Notes is classified within Level 3 of the fair value hierarchy because the fair values were estimated utilizing a Monte Carlo simulation model.

Accordingly, the Company recorded these Notes at fair value with changes in fair value recorded in the statement of operations.

As a result of applying the fair value option, direct costs and fees related to the Notes were recognized in earnings as incurred and were not deferred.

The change in fair value of the Notes has been presented as change in value of convertible notes payable on the consolidated statements of operations.

As of December 31, 2019, all of the Notes were converted into 1,813,500 shares of the Company’s common stock valued at their estimated fair value at the time of conversion totaling approximately $10.2 million.

Warrant Liability

The Company issued Warrants to purchase 1,908,144 shares of its common stock in connection with the Notes issued to the Investors in January 2019, and recorded these outstanding Warrants as a liability at fair value utilizing a Monte Carlo simulation model.

This liability is subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company’s statements of operations.

As of June 25, 2019, the Company’s Notes had been converted in their entirety and the warrant liability was revalued and reclassified to equity, because the contingency was eliminated.

Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases (“ASC 842”).

Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate.

Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term.

For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.

As of December 31, 2020, the Company’s only active office lease was its lease of its office space for its Castle Rock, Colorado headquarters (the “Castle Rock Lease”).

The leased terms are not material and the lease is cancelable upon short notice.

The Company also terminated two former operating leases during the year ended December 31, 2020:

(i) the lease of the OKC Facility and (ii) the Florida Lease, both of which are discussed under “Prior Leases”

In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components as permitted under ASC 842.

The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

Revenue Recognition

The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers.

The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

The following five steps are applied to achieve that core principle:

Identify the contract with the customer;

Identify the performance obligations in the contract;

Determine the transaction price;

Allocate the transaction price to the performance obligations in the contract;

Recognize revenue when the Company satisfies a performance obligation.

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct.

A performance obligation meets ASC 606’s definition of a “distinct”

good or service (or bundle of goods or services) if both of the following criteria are met:

The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.

The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.

When determining the transaction price, an entity must consider the effects of all of the following:

Variable consideration

Constraining estimates of variable consideration

The existence of a significant financing component in the contract

Noncash consideration

Consideration payable to a customer

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

The transaction price is allocated to each performance obligation on a relative standalone selling price basis.

The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

The Company has entered into digital asset mining pools by executing contracts with the mining pool operators to provide computing power to the mining pool.

The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator.

In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain.

The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.

Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities.

The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators.

The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools.

The consideration is all variable.

Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized.

There is no significant financing component in these transactions.

Fair value of the cryptocurrency award received is determined using the market rate of the related cryptocurrency at the time of receipt.

There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment.

In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.

Stock Based Compensation

The Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award.

Stock options issued under the Company’s equity incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant.

These options generally vest on the grant date or over a one- year period.

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

Expected Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.

Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.

Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U.

Treasury zero-coupon issues with an equivalent remaining term.

Expected Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.

Effective January 1, 2017, the Company elected to account for forfeited awards as they occur, as permitted by Accounting Standards Update (“ASU”) 2016-09.

Ultimately, the actual expenses recognized over the vesting period will be for those shares that vested.

Prior to making this election, the Company estimated a forfeiture rate for awards at 0%, as the Company did not have a significant history of forfeitures.

Earnings (loss) per share

Basic net earnings (loss) per share (“EPS”) of common stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of common stock outstanding during the period.

Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

The Company excludes the unvested restricted share units (RSUs) awarded to its employees, officers, directors, and contractors under the 2019 Equity Plan from this net loss per share calculation because including them would be antidilutive.

Recently issued and adopted accounting pronouncements

The Company continually assesses any new accounting pronouncements to determine their applicability.

When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a review to determine the consequences of the change to its financial statements and believes that there are proper controls in place to ascertain that the Company’s financial statements properly reflect the change.

We have considered recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.

See Note 3 to our financial statements beginning on page F-10 of this Form 10-K for a description of recent accounting pronouncements applicable to our financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for smaller reporting companies.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity