Riot Blockchain - Are You Freaking Kidding Me?

1. Hindenburg Research February, 20, 2018
Riot Blockchain: Are You Freaking Kidding Me?
• Despite a Friday CNBC investigative piece highlighting red flags with Riot that precipitated a
33%+ share decline, the company filed an 8-K later that afternoon raising bright new red flags.
• The filing was released during a market “dead zone”; Friday after the close heading into the
long holiday weekend. It detailed a dubious acquisition.
• We estimate that Riot's acquisition agreement implied an over-payment of about $18.5
million for bitcoin mining equipment purchased from a seemingly undisclosed related
party entity.
• We found other entities related to a Riot subsidiary that raise additional questions.
• Riot’s latest questionable transaction strikes us as particularly brazen in light of the intense
public scrutiny the company has seen recently.
Introduction
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 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.

2. • 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 that showed 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:

3. "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 a different 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 in
the meeting 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

4. 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 performance 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.
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 at the time showed that Bitmain did not appear to
have any major shortages or significant delays at the time of the purchase however.

5. Now in relation to this new deal, Bitmain 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, the
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.
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:
1. 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.
2. 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

6. with a senior executive named Sorin Tanasescu who 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.
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
formed distinct corporate entities from each location. We find this to be odd.
Cash Drain
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.
Conclusion
We contacted Riot seeking comment on several of our various questions raised above. We have not
heard back as of this writing but should we hear back we will update this article with their responses
accordingly. 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 and MARA. Please see full disclaimer on the following page.
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.

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