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.
Public Scrutiny of Riot Blockchain
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.
- 10/6/2017: Following the company’s sudden business and name change from Bioptix Inc. to Riot Blockchain, the Heisenberg Report identified a multitude of early red flags including how the company’s official corporate address corresponded to a mail drop adjacent to a Blimpie’s in a Colorado strip mall.
- 12/11/2017: We published our first detailed report on Riot entitled “Sudden Business Pivot, Suspicious Acquisitions, Questionable Special Dividend.” In the report, we described the company’s bizarre approach to buying crypto-mining equipment. Rather than purchasing the equipment directly from the manufacturer or from suppliers, Riot instead significantly overpaid for the equipment by purchasing it through a newly formed shell entity. We also highlighted the ownership of key backer Barry Honig and a questionable special cash dividend that seemed to disproportionately benefit insiders such as Honig.
- 12/12/2017: The following day, CNBC’s Brian Kelly led a segment that reinforced and corroborated much of our research, concluding the piece stating “I’m not sure that this is actually a blockchain company, so you need to be careful is the bottom line.”
- 12/13/2017: We published a follow-up article describing how both Riot and a company called Marathon Patent Group (NASDAQ:MARA) showed alarming parallels, including shared key executives, shared key backers, and similarly dubious methods of purchasing crypto-mining equipment through newly-formed shell entities.
- 12/19/2017: Andrew Left of Citron stated on twitter “$RIOT is THE most traded retail stock in market today yet Citron believes they are making fraudulent claims to investors.” He then challenged Riot CEO John O’Rourke to a debate on CNBC. O’Rourke declined the invitation, but Left went on the network and shared his short thesis anyway. He described the Riot business by saying “there is nothing there.” He later clarified that he didn’t believe there was fraud because “in order for there to be fraud you have to have operat[ions].”
- 1/9/2018: We wrote a follow-up piece entitled “Riot Blockchain: This Crypto Clown Car Continues Hurtling Toward The Abyss” which described new red flags, including that (1) Riot had switched auditors; engaging its 3rd auditor within the span of a year (2) Riot had a propensity for reporting its negative developments on Friday’s after the market close; and (3) new documents showed that Riot’s crypto-mining assets had actually been purchased through an entity that purchased them from yet another entity that was a related-party. From our article:
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?
- 1/31/2018: The Wall Street Journal published a piece entitled “Investor Who Rode Pivot From Biotech to Bitcoin Sells Big Stake” and described how Riot’s key backer Barry Honig had exited much of his stake in the company. When asked about a recent SEC investigation in a different company that subpoenaed records relating to Mr. Honig and other investors, Honig stated that he hadn’t been contacted by the SEC and didn’t believe he was a target. “I am 120% not worried”, he said.
- 2/11/2018: The Denver Post published a detailed piece on Riot that described new warning signs including the company’s postponement of its annual meeting for the 2nd time in a row. The article also detailed Barry Honig’s ownership history in the company. When asked about Honig’s purchases in Riot’s recent private placement, Honig responded:
“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.’”
- 2/16/2018: The CNBC exposé highlighted additional signs of trouble including that (1) Riot had apparently not even booked a room for its twice-postponed annual meeting; (2) upon visiting Barry Honig’s office the reporters actually encountered Riot’s CEO John O’Rourke who then claimed that he did not work there; and (3) other eyebrow raising footage such as a rather awkward shot of O’Rourke attempting to close the door in the face of CNBC correspondent Michelle Caruso-Cabrera. O’Rourke later promised an on-camera interview to Caruso-Cabrera, but then hastily backed out the night before. Later, O’Rourke complained that the CNBC report was “a negative one-sided piece”, which is definitely something that can happen when a company CEO is asked to present the other side then repeatedly no-shows to the interview opportunities.
- 2/16/2018: Investigative reporter Teri Buhl followed up after the CNBC piece with additional details about Honig and O’Rourke’s history of prior deals and other connections between key individuals involved in Riot. It should be noted that Buhl has done a tremendous amount of work focused on Barry Honig and his various stock deals. Ms. Buhl was even sued by Honig after reporting on an SEC subpoena that named Honig in relation to another company. She nonetheless continued to advance her research. The lawsuit was eventually dropped.
An Apparent Undisclosed Related-Party Transaction Raises Brand New Red Flags
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:
- Nevada corporate records show that Kairos was established October 19th 2017 with its President and Director currently listed as Michael Ho and Bryan Pascual, respectively.
- Florida corporate records show that Prive was set up less than 2 weeks later, on October 31st 2017, and similarly lists Michael Ho and Bryan Pascual as its managers.
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.
A Second, Starkly Different Transaction
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: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:
- In the believed non related-party transaction with BMS&S, Riot paid $2,833 per Antminer S9/PSU.
- In the believed related-party transaction with Prive, Riot paid $7,368 per Antminer S9/related equipment.
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.
A Variety of Other Entities Raise Additional Questions
Stranger still, we found yet more entities set up by Michael Ho and Bryan Pascual that raise additional questions:
- BMH Mining LLC was established in Florida on December 11th 2017 according to Florida records. Given the name of the entity, we wonder if this is another entity that is in the business of purchasing or selling crypto-mining equipment.
- Ingenium International LLC was also established in Florida the same day, December 11th 2017, according to Florida records. Readers of our original piece may recall that we had identified a suspicious and similarly named Nevada entity called Ingenium Global Inc. that was set up by Michael Ho and Bryan Pascual on October 19th 2017. We found it odd because subsequent to its formation Riot announced an investment the next day, October 20th, in TessPay, a company with a senior executive named Sorin Tanasescu that controlled a similarly named “Ingenium” entity.
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:
- In the Nevada records from 10/19/2017 Michael Ho states that his address is in Dubai.
- In the Florida records from 10/31/2017 Michael Ho states that his address is in Los Angeles.
- In the Florida records from 12/11/2017 Michael Ho states that his address is in Tampa, where he is neighbors with Pascual.
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:
- Entered into the above agreements to purchase crypto-mining equipment which include $19.5 million in cash outlays.
- Bought 500 bitcoin through a U.S. Marshall’s auction for an estimated $5.2 million.
- Entered a Letter of Intent (LOI) to purchase Logical Brokerage Corp for an undisclosed sum.
- Spent an unknown amount on general corporate operations.
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.
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.
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.