Riot BlockChain:  Potential Red Flags

Summary:  Riot Blockchain is a former Biotech company that recently pivoted into BlockChain.  The stock price has soared since this pivot, but there appears to be many red flags.

Riot BlockChain appears to be a Pump and Dump. The more research I do on Riot, the more red flags I find. The most obvious case of potential fraud for me to prove appears to be Riot overpaying and hyping their mining equipment.

On November 1st, Riot Blockchain spent over $12 Million in stock and also $1 Million in future royalties for crypto mining equipment that was worth around $2 Million from a company called Kairos Global Technology Inc. Also, notice that this company was formed on October 19th 2017, under 2 weeks before the purchase.
( Entity Details - Secretary of State, Nevada shows when Kairos was formed )

Here is the PR that Riot put out on November 2nd:
Riot Blockchain Enters Agreement for Acquisition of 1,200 Bitcoin Mining Machines Manufactured by Bitmain

It is very clear what mining equipment they were buying.

Riot’s stock price was $6.95 on November 1st. Riot purchased the mining equipment for 1,750,001 shares of Riot stock and also $1,000,000 in future royalties to “Certain of the shareholders of Kairos” So, they paid $12,162,500 worth of Riot stock and $1,000,000 in cash for equipment worth around $2 million. The equipment purchased is below:

700 AntMiner S9s and 500 AntMiner L3s, all manufactured by Bitmain.
( https://ir.riotblockchain.com/sec-filings-email/content/0001079973-18-000010/riot_s3.htm )

Anybody or any company was easily able to purchase this EXACT equipment online from Bitmain (the company who made the mining equipment)

Here is screen shot of the equipment prices on October 16th from Archive.org

$1,265 for the S9 and $2,040 for the L3
700 * $1,265 + 500 * $2,040 = $1,905,500

Here is screen shot of the equipment prices on November 14th from Archive.org

$1,415 for the S9 and $1,586 for the L3
700 * $1,415 + 500 * $1,586 = $1,783,500

If you look at the financials of Kairos Global Technology Inc. that Riot provided on 1/5/18, you can clearly see that Kairos paid exactly $2,089,679 for the mining equipment. Here is a link to Kairos’s financial info that shows what they paid for the mining equipment. It’s under “Purchase of equipment”
https://ir.riotblockchain.com/sec-filings-email/content/0001079973-18-000009/ex99x1.htm

The current pricing of their equipment can be found on the link below.
( Buy ASIC Bitcoin Miners & Bitcoin Mining Equipment - Bitmain ) They recently increased the price of the S9 due to high demand from all the bitcoin hype.

The S9 is currently selling for $2,320 (they purchased 700 as per the SEC filings above)

The L3 is selling for $1,536 (they purchased 500 as per the SEC filings above)

700 * $2,320 + 500 * $1,536 = $2,392,000 (Someone can buy this equipment at full price for $2.4 Million.)

The 1,750,001 shares Riot issued for the $2 million worth of equipment is now worth $42.75 million as of 1/5/18. Plus, Riot also promised $1,000,000 in future royalty payments.

It does not make sense for a company to buy mining equipment from another company that was just formed 2 weeks before and pay over 6x the value of the equipment. They could have bought the same exact equipment directly from the manufacturer. Or, they could have bought similar equipment directly from another company. Yes, they might have needed to wait for the equipment. But, it will NEVER make financial sense to purchase computers at over 6x the market rate and expect to ever get a return on that equipment. The price of computers is always going down long term, and the performance is always getting better over time. Crypto mining is a very competitive market now, and there is no guarantee they would earn a return on their equipment if they paid the $2 Million retail price. If there was a guarantee, the equipment maker would just use the mining equipment themselves and not sell it .

This purchase looks to be done so Riot's stock can benefit from the bitcoin hype and the other crypto hype. There is no reason to overpay by over 6x for crypto mining equipment. Let's say a mining machine costs $2,400 retail and produces an estimated $100 a month in revenue. It would never make sense to pay 6x the $2,400 cost just so you can earn an extra $200 from starting the mining a couple months early.

Here is some information I found on Kairos:

They registered a domain name of KairosBlockChain.com on 10/16/17

Registrant Name: Michael Ho
Registrant Organization: MKH International Ltd
Registrant Street: 5709 Cayan Tower
Registrant City: Dubai
Registrant State/Province: AE
Registrant Postal Code: 643651
Registrant Country: AE
Registrant Phone: +1.6046492060
email: Mikeho.mkh@gmail.com

The registered agent is LAXAGUE LAW INC
The president is Michael Ho (from Dubai)

The 2 directors are Bryan Pascual and Moses D Silverman (both from Florida)

Entity Details - Secretary of State, Nevada

Here is a complaint on Laxague Law INC:

Ripoff Report | Joe Laxague Law Firm Complaint Review Reno, Nevada

Here is one potential smoking gun:
https://www.sec.gov/Archives/edgar/data/1167419/000165495417000149/defrancesco13da_jan52017.htm

The lawyer used for Riot in the past was Joe Laxague, Esq. Laxague Law, Inc. This is the same lawyer who set up Kairos company, who owned the mining equipment.

Riot has changed their company name 3 times. The past 3 names are: Bioptix, Inc. Venaxis, Inc. AspenBio Pharma, Inc.
https://ir.riotblockchain.com/all-sec-filings/content/0001079973-17-000761/0001079973-17-000761.pdf

On October 17th, Riot announced that they acquired a majority stake in another Bitcoin company named Tess, Inc.
Riot Blockchain to Acquire Majority Interest in TESS, a Blockchain Development Company

Tess happens to have some direct connections back to the Kairos company:

Tess's Chief Software Architect is Sorin Tanasescu

I give credit to the following article for this paragraph below: ( Riot Blockchain: Sudden Business Pivot, Suspicious Acquisitions, Questionable Special Dividend )

On the same day that Laxague Law set up Kairos (October 19, 2017), the same law firm also set up an entity called Ingenium Global, Inc., which has a unique name that is similar to an entity in which Tanasescu manages (Ingenium IT Compusoft). Even more interestingly, Ingenium Global, Inc. listed the exact same officers/directors as Kairos (an individual in Dubai and two from Florida) and registered the exact same par value and share count. Given that Riot announced the acquisition of Tess the very next day (October 20, 2017), we cannot help but wonder whether the selling parties in the Kairos transactions were in any way related to the shareholders of Ingenium, and ultimately to the selling parties in the Tess transaction.

Here is some more information on the Tess transaction:

Tess Inc. Acquisition: On October 20, 2017, the Company acquired approximately 52% of TESS which is developing blockchain solutions for telecommunications companies. Under the terms of the Purchase Agreement (the “Purchase Agreement”) the Company invested cash of $320,000 and issued 75,000 shares of restricted Common Stock in exchange for 2,708,333 shares of common stock of TESS. Accordingly, TESS became a majority-owned subsidiary of the Company. In connection with the transaction, the Company and TESS entered into a registration rights agreement pursuant to which the Company agreed to file a registration statement within three months to register the resale of 25,000 shares (of 75,000 shares) of Common Stock issued to TESS. As of October 20, 2017 TESS has net tangible assets of approximately $10,000 and the Company expects that the purchase price will be allocated to intangible assets including inprocess research and development and goodwil. ( https://ir.riotblockchain.com/all-sec-filings/content/0001079973-17-000667/0001079973-17-000667.pdf )

Both Michael Ho and Laxague Law appears to be a key connection between Kairos and Tess.

They also both appear to be connected directly to Riot in the past.

https://www.sec.gov/Archives/edgar/data/1167419/000165495417000149/defrancesco13da_jan52017.htm
(Shows a connection between Laxague Law and Riot)

I managed to find a connection between Michael Ho, Jason Les (a Riot director), and also Jason Mo (a Riot board advisor)
All 3 are professional poker players, and all 3 played at the 2016 WSOP event:
https://www.wsop.com/pdfs/reports/14968/Ev68-Flight-C-Counts-by-Seat.pdf

I’m assuming their paths also would have crossed at other events, but I don’t have the resources to research that easily.

Also:
Riot happened to buy Kairos on November 1st.
Jason Les was added to board on November 3rd. (Riot Blockchain Inc Board of Directors )

Here are some other Red Flags.

1. Riot (formerly Bioptix) announced a special dividend of $1 a share that only applied to certain shareholders on Oct 3rd.
Bioptix Announces Special Cash Dividend

The next day, Riot announces that they are changing their focus to “Strategic Investor and Operator in Blockchain Technologies”. It does not make much sense for a company to issue almost all of their cash out to special shareholders, and announce the next day that they are going to focus on a new business. This new focus would require more cash. They also announced an investment in Coinsquare, which shows as a $3 million investment on their SEC filings.

2. Riot previously announced a shareholder meeting for December 28th. I live about 30 minutes from the "country club type hotel" that the meeting was supposed to be at. I tried to call Riot for more information on the meeting around a week before the meeting, but they never answered the phone or responded to voicemail or email. Their IR email that they put on every PR ( IR@RiotBlockchain.com ) has been bouncing back as an invalid email for over 2 weeks. I tried calling the hotel earlier in the week of the December 28th meeting. 3 different people at the hotel told me that they never heard of any meeting for Riot. They ended up cancelling this meeting the day before the meeting and rescheduling it for February. (Riot Blockchain Announces Adjournment of Annual Meeting of Stockholders )

3. Riot also wants to increase its Equity incentive plan to 1,645,000 shares from 895,000 shares. Riot’s stock price was $29.80 as of 12/27/17. This has a value of around $49 Million as of 12/27/17. Riot appears to be trying to dilute the common shareholders as much as possible and finding ways to siphon the company’s cash to its insiders. This $49 million is more than the entire company was worth for all of 2017 until they decided to do a name change and add “BlockChain” to their name. The board did not do anything to deserve such a huge pay raise. All they did was create HYPE around their company and cause the stock price to increase due to the hype. They only have made small investments in other companies. And, one of those investments has them paying around $13 million for $2 million worth of computer mining equipment. (explained in detail earlier)
Riot Blockchain Announces Adjournment of Annual Meeting of Stockholders(shows their request to increase incentive plan)

4. Riot’s CEO sold most of his shares on the last trading day of 2017
https://ir.riotblockchain.com/all-sec-filings/content/0001140361-17-047827/0001140361-17-047827.pdf

5. Riot has put out PR with no actual news relating to their company. This PR is only to draw attention to new investors that are looking for ways to jump into the BlockChain / Crypto space. Here are 2 examples:

5a. Riot Blockchain Director Featured in ABC7 News Interview on Cryptocurrency

5b. Riot Blockchain Featured in 5-Part Series on CBS Interactive This Week

Here are the 5 videos of the CEO from the article :
Video: Blockchain 101
The Key Differences Between The Blockchain and Bitcoin
Video: How blockchain encryption works
Video: Why the blockchain will disrupt the enterprise
How to Get Started With Blockchain Technology (The CEO tries to pitch his company to new investors)

6. Possible insider trading:
Closing stock prices by date:

Sept 26: $4.30
Sept 27: $4.4999
Sept 28: $4.98
Sept 29: $5.16
Oct 2: $6.45
Oct 3: $8.09

For ALL of 2017, Riot was trading around the $3 to $4 range. It jumped to $6.45, the day before their announcement that they were going to Pivot into the Crypto area.

7. On December 19th, Riot announced a Pipe offering for the purchase of 1,644,444 restricted units of the Company at a purchase price of $22.50 per unit (the "Investment"). Each unit consists of one share of restricted common stock and one warrant to purchase one share of restricted common stock at an exercise price of $40.00 per share for a period of three years.

Riot Blockchain Announces $37 Million Private Placement

Riot’s stock price was:

12/15 $28.50
12/18 $36.57
12/19 $38.60
12/20 $36.12

8. Riot fired their accounting firm on 1/5/18

https://ir.riotblockchain.com/sec-filings-email/content/0001079973-18-000008/riot_8k-010518.htm

This accounting firm happened to be involved in at least 2 other fraud cases:

EisnerAmper Dodges Suit Over $93M Oak Rock Fraud Scheme - Law360
EisnerAmper Wants To Keep $100M Fraud Claims Nixed - Law360

9. Barry Honig is a large shareholder. He has a history with penny stocks. He was the one who called the meeting to force out the Bioptix people .

Shareholder forces out Bioptix board members - BizWest
Bioptix Reports Board of Director Changes
Pershing Gold: We Believe Shares Are Virtually Worthless
California DOJ investigating Honig and The Frost Group

10. Here is some more information on Riot’s special dividend copied from Riot Blockchain: Sudden Business Pivot, Suspicious Acquisitions, Questionable Special Dividend

Riot Depleted An Estimated 63% of the Company's Cash Through a Special Dividend That Appears To Have Disproportionately Advantaged Company Insiders

Bioptix/Riot recently engineered a "special cash dividend" that stripped the fledgling company of approximately 63% of its cash, seemingly handing a significant portion of those funds to company insiders. That kind of cash giveaway - announced one day ahead of a shift to a new, speculative business model - gives us significant concerns. The sequence of events was as follows:

In March 2017, Bioptix announced the completion of private placements that included a convertible note financing and also included warrants to purchase 1,900,000 shares of common stock.

On September 25, 2017, Bioptix made the following disclosures:

Bioptix filed a Form 8-K stating, in part, that notes from the March 2017 Offerings had been exchanged for shares of Series A Convertible Preferred Stock.
Bioptix filed an amended Registration Statement Form S-3 which described how holders of Series A Convertible Preferred Stock "are entitled to receive dividends if and when declared by the Company's board of directors. The Series A Preferred Stock will participate on an 'as converted' basis, with all dividends declared on the Company's Common Stock." Then on October 4, 2017, the newly-named Riot filed a Form 8-K stating that the company had approved a cash dividend:

Pursuant to which, the holders of the Company's common stock, no par value per share (the 'Common Stock'), and Series A Convertible Preferred Stock, no par value per share (the 'Series A Preferred Stock'), as of the close of business on October 13, 2017, shall receive $1.00 for each share of Common Stock, including each share of Common Stock that would be issuable upon conversion of the Series A Preferred Stock, on an as converted basis.

The magnitude of the dividend is significant. The payout "totaled approximately $9,562,000" whereas Riot's financial statements reflected that at the close of Q3 2017 - two days before the October 2017 dividend was approved - the company had only $13,139,722 in cash and cash equivalents. When factoring in an added $1.86 million in cash proceeds from warrant conversion, the October 2017 dividend depleted an estimated 63% of the company's cash and cash equivalents balance. Consequently, we find its size relative to Riot's available cash to be troubling.

The timing of related warrant conversions is similarly concerning. Riot's quarterly filing prior to the October 2017 dividend indicates that 2,060,000 warrants from the March offering were converted into 1,228,690 common shares on a cashless basis. In addition, 620,000 warrants were exercised for cash during a period where Riot's board of directors authorized on October 10th a "temporary reduction in exercise price" of convertible securities from the March 2017 private offerings. Given that the record date of the October 2017 dividend was October 13, 2017 (with a payment date of October 18, 2017), both the cashless warrant conversion and the conversion from the reduction in exercise price of the March 2017 securities appear to have conspicuously occurred just prior to the payment of the October 2017 dividend.

Who Benefited From the Special Dividend?

In the press release announcing the special dividend, the company's CEO stated: "This special dividend is a positive step to return value to all Bioptix shareholders." Despite this pronouncement, we believe Riot insiders and participants in the March 2017 private placements benefited disproportionately.

The amended Form S-3 detailing the convertible and warrant offerings prominently mentioned one individual in particular. Per the filing, "The Lead Investor is Barry Honig who is also a selling stockholder." Moreover, Honig-related entities, as well as Honig's family members including brother Jonathan and father Alan, also participated in the transactions.

Later, in two Schedule 13G filings filed as of an event date of October 10th - just days prior to the dividend ex-date - Jonathan Honig and an individual named Mark Groussman reported common stock ownership stakes of 9.51% and 5.93% respectively. Jonathan Honig's filing also mentioned that the 9.51% figure "does not include 808,198 shares of common stock issuable upon conversion of Series A Preferred Stock." it is unclear from the filings where Barry Honig's ownership on a common stock and on a convertible/exercised basis stands currently.

Note that the same filing mentioned that there were only 5,436,503 shares of common stock outstanding as of September 20th. By November 13th, the number of common shares had spiked up to 8,321,137, a roughly 53% increase in common shares in less than two months. Such a jump indicates that a significant amount of dilution has affected common stockholders in a short amount of time.

11. Michael Ho, owner of Kairos, already started a new mining company: mysite
This shows how easy it is to start a mining company from scratch. It's also a little weird to sell a business for $13 million, and then just start the same exact business up all over again right away.

12. Riot's CFO has already been accused of pumping this same exact company before they changed their name:
Here is some information about Riot's CFO:

CFO/Sec'y of RIOT Blockchain previously sued twice over pump-and-dump biotech company * r/investing

13.  Riot put out another PR today (1/10/18) about them forming a new subsidiary that is "identifying environmentally friendly projects with large energy capacity and a cost-efficient rate for cryptocurrency mining and data center operations."
Riot Blockchain Establishes Digital Green Energy Corp as New Subsidiary

Riot recently overpaid to buy mining equipment.  It looks like Riot bought the mining equipment first, and now they are exploring a good place to put this equipment and maybe future equipment.  

Also, Riot said "Daniel Stefan Robertsen has been appointed President of Digital Green Energy Corp and will begin his duties in the role on January 24, 2018".

They also said he was "most recently Chairman and CEO of Bitfury Norway AS".

There is very well known blockchain company called Bitfury that was founded in 2011.  However, Mr. Robertsen was never the CEO of this well known Bitfury.  Bitfury Norway AS was recently formed on October 11th 2017:
https://opencorporates.com/companies/no/919779543

Here are some other well written articles on Riot:

https://seekingalpha.com/article/4136235-riot-blockchain-crypto-clown-car-continues-hurtling-toward-abyss

https://seekingalpha.com/article/4131031-riot-blockchain-sudden-business-pivot-suspicious-acquisitions-questionable-special-dividend

Disclosure: I am/we are short RIOT.

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