Executive Summary
Riot Blockchain has deployed around 8,000 application-specific integrated circuits (ASIC) miners at its Oklahoma facility. Using its subsidiary TESS Inc., the organization aims to develop a blockchain-based escrow service for telecom carriers working on a wholesale basis. It currently holds 13% interest in Coinsquare Ltd., which is a digital Canadian currency exchange. It additionally holds investments in Verady, LLC, which is dedicated to providing crypto currency accounting and audit technology services. Transparency as a key to the recommended strategy is imperative because the cryptocurrency is quickly evolving. When it comes to the tax consequences of using Bitcoin, it is necessary to guarantee the high levels of connectivity with investors so that they are aware of their financial undertakings. Considering the riskiness of purchasing cryptocurrencies as a class of assets, it is imperative to ensure that they do not spend more money than they can afford, thus becoming disappointed in their investment. However, there are limitations associated with using KPIs in such an organization. Specifically, a disadvantage of the measurement is that it does not offer actionable information quickly and time has to pass in order to get the results for measuring performance.
Overview
Riot Blockchain, Inc. (formerly Bioptix, Inc.) is a Bitcoin mining company that supports the Bitcoin blockchain through the quick expansion of large-scale mining in the US. The organization focuses on the expansion of its operations by means of increasing the hash rate of the mining as well as an infrastructure capacity. It also gains exposure through internally developed businesses, joint ventures, and targeted investments in the sector. Riot Blockchain is dedicated to establishing a future where Bitcoin mining will significantly benefit from US operations and endeavors that drive such a future. The company’s mining operations include the US Whinstone facility in Rockdale and the hosted miners at New York’s Coinmint LLC’s Massena. At this time, Riot has a deployed hash rate capacity of 3.0 EH/s using around 91 megawatts (MW) of energy (Riot, 2021). The Whinstone facility is a wholly-owned subsidiary of the organization and consists of the second-largest Bitcoin mining and hosting facility in the Northern part of the US and is measured by 300 WM in its developed capacity.
Strategic Posture and Corporate Governance
Company Performance
In terms of its financial performance, Riot Blockchain continues attaining significant milestones to position itself for future opportunities through its focus on Bitcoin mining. Based on the latest available financial report for the third quarter of 2021, the company increased its total revenue by 2,53% to reach the record number of $64.8 million for the three-month period ending in September 2021 in contrast to the $2.5 million for the same three-month period in 2020. It was possible to increase mining revenue by 2,099% to a record $53.6 million for the same period in 2021 compared to $2.4 million for the same three-month period (Ishak, 2017). In addition, the company increased its mining revenue margin, computed as cryptocurrency mining net of the cost of revenues of cryptocurrency mining, not including depreciation and amortization, to 76% for the three-month period in 2021 as compared to the same period in 2020. Operationally, Riot Blockchain has increased the deployed hash rate capacity by 63%, which allowed to make significant progress in the speed of Bitcoin mining.
By the fourth quarter of 2022, Riot Blockchain expects to reach the total self-mining hash rate capacity of 8.6 EH/s, excluding any expected incremental productivity gains from the utilization of 200 MW of immersion-cooling infrastructure, assuming full deployment of around 90,150 Antminer ASICs. Around 95% of the self-mining fleet consists of the latest generation S19 series miner model (Riot, 2021). Upon the full deployment, the Company’s complete self-mining fleet is expected to consume around 284 MW of energy.
As stated previously by the company, Riot Blockchain filed a prospectus supplement with the US Securities and Exchange Commission to offer and sell more than $600 of the common stock from time to time through the ATM Offering. Subsequent to September 30, 2021, the organization completed the ATM Offering and received a total of $600 in gross proceeds, with fewer commissions and offering expenses from the sale of around 19.9 million shares of common stock (). Therefore, net sales will be used for accelerating the growth of the organization as well as the general corporate purposes and further strengthening the balance sheet.
Mission and Vision Statements
The mission of Riot Blockchain is the dedication to supporting the Bitcoin ecosystem through proof-of-work mining. The organization believes in the future of Bitcoin and its efforts aimed at growing the mining operations through demonstrating the commitment to the network. It is notable that while a mission statement is clearly stated on the website, the vision is not. A good vision statement should express the medium and long-term goals and aspirations of an organization, looking into the future and how the company can help change the world. In order to help the company meet its strategic growth opportunities, the organization has engaged XMS Capital Partners. With the help of strategic partnerships, Riot Blockchain will be able to navigate the dynamic bitcoin landscape and its strategic transactions and operations. The organization does not have a defined timeline for any transaction and is incapable of providing any assurance of whether or when a transaction can be announced or consummated.
Board of Directors
Riot Blockchain is currently led by Benjamin Yi, Executive Chairman of the Board, Hybert Marleau, Director, Jason Les, Chief Executive Officer, Megan Brooks, Chief Operating Officer, and Jeffrey McGonegal, Chief Financial Officer (Riot, 2022). The Executive Chairman of the Board is responsible for defining the corporate strategy of the organization, engaging in corporate development, and governance to the Company. The Director of the organization has a broad area of expertise, such as macroeconomic policy and analysis, corporate governance, financial analysis, and investment banking.
External Environment
Natural and Physical Environments
The physical conditions in the environment have a great influence on how businesses can and will conduct themselves. Importantly, environmental factors such as climate change, natural disasters, and pollution levels can influence supply change and possibly increase the costs of raw materials. When it comes to Bitcoin mining, the most important factor is concerned with the availability and consumption of energy. Specifically, each Bitcoin transaction consumes 1,173 kilowatt hours of electricity, which is equal to the power that a standard American home consumes in six weeks (Tully, 2021). Because of this, it is necessary to approach the issue of adequate energy consumption seriously. On a global scale, there are estimations of Bitcoin’s use of renewable energy ranging between 40% to 75% (Huang et al., 2021). In general, there is an issue with using renewable energy for powering a Bitcoin mining plant, which means that it will not be available for powering a home, a factory, or even an electric car.
Economic, Technological, Political-legal, and Sociocultural Forces
When it comes to other forces, it is necessary to consider the economic, technological, political-legal, and sociocultural influences. From the economic standpoint, such factors as consumer confidence, employment, interest rates, and inflation. Consumer confidence represents an economic indicator measuring general consumer optimism about the condition of the economy. Importantly, confident consumers are more likely to spend their money compared to consumers with low confidence, meaning that organizations are more likely to prosper in the context of higher consumer confidence (McWhinney, 2021). Employment is another important factor, which is defined by a business cycle of economic booms and periods of decline and stagnation. Interest rates are defined as the amount lenders charge individuals or businesses to borrow money. The higher the business rate, the higher are the total business expenses for companies in debt. Finally, inflation represents the rate at which prices in the economy are increasing. Inflation causes a boost in expenses such as rent, utilities, and costs of materials used in production.
Technological factors play a crucial role for organizations such as Riot Blockchain, including production techniques, information and communication resources, production, logistics, marketing, and technologies of e-commerce. These factors include the existence of 3D technologies, engine efficiency, Internet connectivity, wireless charging, automation, and others. Therefore, the availability of the latest and updated technologies is imperative for facilitating the smooth operations of a Bitcoin mining organization. Political-legal factors represent to what a business can and cannot do in terms of established legislation and the political situation. Political and legal factors intersect in instances when government agencies introduce policies and legislatures that impact how businesses can operate in their industries. Finally, sociocultural factors represent large-scale forces within societies and cultures that influence thoughts, behaviors, and opinions. The openness of the sociocultural environment allows increasing entrepreneurship and business adventurism of organizations.
External Factor Analysis Summary
EFAS table can be accessed in Table 1 below.
Table 1
Internal Environment
Culture and Marketing
The company’s culture is rooted in innovation as a driver for change and ongoing development. In the context of the pandemic, the desire of organizations for change is imperative, with more and more organizations learning how to quickly get mobilized and address unexpected changes. Innovation defines the culture at Riot Blockchain, enabling the company to challenge its teams to think bigger, work faster, and “break through walls” instead of going around them, trying anything that can improve the experiences of customers. Such a culture of innovation enables the growth and expansion of opportunities for exchanging ideas and cross-fertilizing innovative impulses across the boundaries of an organization.
The organization enables a culture that encourages and embraces new technologies, maintains the passion for knowledge, as well as erases limitations to creativity. Importantly, Riot Blockchain does not have a strict hierarchy, which enables open opportunities for innovation. The expertise of workers must be a fit for the processes being carried out at the organization. Breaking the rules is commonplace in such instances, however ‘painful’ and unpleasant it may seem at first. The main purpose of a culture of innovation at the organization is to make sure that there are enough resources available to do the work effectively and efficiently.
IFAS
Internal Factor Analysis Summary (IFAS) represents an analysis of different internal factors that influence the sustainability of an organization. The identification of IFAS is carried out through looking at the internal conditions of the insurance and into consideration when management formulates and implements the strategy of an organization. Therefore, the table presented below will allow for the understanding of the internal capabilities and resources of an organization. Every shortcoming and positive point have their weight, with the weighted score allowing to differentiate between more and less important factors. IFAS can be accessed in Table 2 below.
Table 2
Financial Data Table/10K Report
Based on the 10-K report submitted by Riot Blockchain, there are several factors that adversely influence the operating results and the financial condition of the business. Specifically, in order to be competitive in the cryptocurrency mining industry at scale, it is imperative to get new miners to expand the hash rate capacity and invest in new technologies. It may not be possible to achieve this in sufficient quantities for meeting business needs. The increased demand for new miners at scale can influence the capacity of miner manufacturers to keep up-to-date with new miners, prices, and delivery schedules. Besides, the mining of cryptocurrency is a capital-intensive industry, with the expectation of having to use significant capital for acquiring new miners for expanding the hash rate capacity to compete with large-scale miners in the future (United States Securities and Exchange Commission, 2021). The company has subcontracted the main cryptocurrency mining operations with the help of a co-location mining services agreement. Riot Blockchain is also subject to different third-party risks and uncertainties associated with the arrangement.
Operations and Logistics
The operations and logistics of Riot Blockchain are concerned with mining and hosting. The organization continuously makes updates in the status of miner shipments and deployment, updates on the 400 megawatt infrastructure expansion at its Whinstone facility in Rockdale, Texas, with relevant updates being made to the remaining flexible facilities for power grid stabilization. In general, Riot Blockchain is positioned well and will continue its growth and production in the year 2022. The company’s management reports that its miner deployments in one of its immersion-cooled buildings are fully underway. This means that the company has the capacity to refine its processes for driving immersion-based miner installations and can initiate various tests on operational enhancement through the support of cooling technologies. It is expected to witness an increase in the hash rate capacity as Riot Blockchain continues executing its deployments in the newly-completed Building F and the soon to be completed Building G.
In addition, the organization has been closely monitoring the weather conditions at its locations in order to leverage the supply and demand of energy. Being the largest Bitcoin miner by developed capacity in Texas, Riot continues curtaining its Bitcoin mining operations at the Whinstone Facility. It is notable that Riot is preparing for future potential expansion opportunities by securing 100 MW high-voltage transformers and 40 MW medium-voltage transformers that are currently in the inventory. The organization has been evaluating its operational efficiencies and development expertise to further expand its mining capacity for Bitcoin.
Human Resource Management
The Department of Human Resources at Riot Blockchain is led by Emma Norris. The responsibility of the HR manager is to enable excellent team leadership and program management abilities. There is a goal to bridge the gap between the labor forces and the management to achieve the maximum possible levels of innovation. At this time, the organization employs around 200 full-time team members at that facility, besides the additional 400 contractors in Rockdale. The company pays its workers a base salary, defined by a set annual amount. An annual incentive bonus is also being paid, with the potential to reach an amount of 100% of the employee’s base salary (“Riot Blockchain, Inc. Executive employment agreement,” 2021). Workers may also be eligible to receive an initial equity award and additional equity awards. During the term of employment, Riot Blockchain workers are entitled to participate in employee benefit programs and plans, including medical, dental, disability insurance plans, 401k, Medicare/Social Security plans, and others.
The paid time off covers twenty-five days per fiscal year. The workers are non-union while the working conditions are good, with the facilities being equipped with the most updated technologies and accommodations. There have been no reports regarding protests by human rights groups for employment practices. The overall mission and goals of HRM at the organization are to improve workplace environments in contexts of increased business risks and uncertainties. This means that the strategy is changing continuously to ensure that the HR of the company is up-to-date with relevant challenges.
Information Technology
Information technologies (IT) are at the core of the business model of Riot Blockchain. Within the company, IT is used for safeguarding data and information, building communication networks, creating and administering databases, allowing workers to troubleshoot any arising issues. IT also allows implementing a range of different procedures for ensuring the security and efficiency of relevant information. Most of the services, both administrative and customer, are highly automated.
The logistics systems are also automated as Riot Blockchain invests in the steady flow of procedures. With the help of blockchain technologies, the organization has the capacity of accessing an end-to-end solution for learner performance, more organized, and more efficient operation. A centralized public ledger system can document the changes that are recorded in real time. Armed with a lot of data, the organization has the capacity to eliminate unnecessary steps in the process of delivery. With the help of distributed and decentralized measures, it is possible to reduce clerical errors and bottlenecks. Using smart contracts, there is no longer a need for brokerages, lawyers, and other third parties to complete tasks. Thanks to the enterprise resource planning systems, the company can make simple transactions involving retailers that source products from their suppliers. Then, a bank provides the working capital that suppliers need to fill the necessary order. There is no need for manual audits as Blockchain technologies allow for the reliable connection of different glows of information. Consequently, it is easier for the management to eliminate execution errors, improve the decision-making process, and resolve any conflicts within the supply chain.
The IT trend of Bitcoin mining is expected to continue its rise in terms of high profit margins. The industry has now taken the form of a traditional business with low risks, and Riot has experienced a lot of investors being ready to ‘throw money’ at them. However, it is also notable that in the recent year, it is expected to witness a squeeze in margins, which can possibly lead to increased mergers and acquisitions.
Analyze and Recommend Strategies
SFAS Worksheet
SFAS worksheet can be accessed in Table 3 below.
Table 3
TOWS Analysis
With the help of TOWS analysis, it is possible to emphasize the external environment, such as the threats and opportunities, to better understand the strategic choice that an organization faces. It includes internal strengths and internal weaknesses as well as external opportunities and external threats. The combination of internal strengths (S) and external opportunities (O) represents strategies. The internal strengths (S) combined with external threats (T) represent strategies that use strengths for minimizing threats. Internal weaknesses (W) combined with external opportunities (O) represent strategies that can help minimize weaknesses by taking advantage of opportunities. Finally, internal weaknesses (W) combined with external threats (T) are strategies to minimize weaknesses and avoid threats. The TOWS matrix applicable to Riot Blockchain is presented in Table 4 below.
Table 4
Recommended Strategy
Better customer relationships represent a crucial strategy for strengthening the position of Riot Blockchain in its respective industry. The organization believes that it can continue enjoying differentiated access to the miner spot market and expect to continue the ongoing spot purchases. Therefore, the focus is on facilitating the growing numbers of purchases and enabling the increased efficiency of new mining processes on attractive terms. For Riot Blockchain, new customers will take the form of new investors that will spend their money on cryptocurrencies.
Customers who consider investing in cryptocurrencies may be concerned with the risks associated with such investments. Specifically, cryptocurrency prices are much more volatile compared to the prices of such assets as stocks. In the future, the prices of Bitcoin can be influenced by regulatory changes, with the risks that cryptocurrencies become illegal and possibly worthless. Therefore, it is the job of the customer relationship management of Riot Blockchain to work on attracting investors by advertising the potential upsides of investing in cryptocurrencies. The customers should be given comprehensive information on what they will gain after investing. The customer relationship management will also have to communicate any transaction fees associated with their purchases. Therefore, the key to customer management relationships is establishing high levels of transparency when communicating with their customers due to the high levels of volatility.
Transparency as a key to the recommended strategy is imperative because cryptocurrency is quickly evolving. When it comes to the tax consequences of using Bitcoin, it is necessary to guarantee high levels of connectivity with investors so that they are aware of their financial undertakings. Considering the riskiness of purchasing cryptocurrencies as a class of assets, it is imperative to ensure that they do not spend more money than they can afford, thus becoming disappointed in their investment. One of the main goals of the formation of financial statements is timely and reliable informing of all interested parties about the economic situation of the entity. Thus, one of the oldest key principles of management is being implemented, which is the principle of accountability. It is based on the idea of regularly providing information within the management hierarchy to control processes and make decisions.
Over time, the principle of accountability has taken on a broader meaning. It has been transformed into a requirement for informational openness and transparency of any management and business structures. The term transparency has spread to all types of management activities, including in the public sector of the economy. This requirement has acquired a general character and has received a broad interpretation, penetrating almost all spheres of public life, from government bodies to private corporate structures (Demirag, 2017). The disclosure requirement is actively supported by international and state authorities. Fixed by regulation, it provides for the formation of reports that include not only traditional financial information but also a significant amount of non-financial data. At the same time, the methods and forms of informing have recently also undergone a significant transformation.
In this regard, Riot is actively following the global trend. Information openness is gaining universal importance and no longer applies only to accounting information. Recently, a number of steps have been taken to increase transparency, and the requirements for transparency of the economy as a whole and individual sectors are increasing (Demirag, 2017). The requirement for information transparency is also complemented by the need to build more open management and control structures. At Riot, the problem of the quality of information disclosure is especially acute in corporate governance. This has happened historically. Due to political and economic reasons, the scope of business responsibility has been institutionally limited until recently. It was created and existed for a long time on a limited liability basis (Demirag, 2017). Many companies, open joint stock companies, still have a closed, non-transparent business structure. Another reason for the information closeness and lack of transparency of management is the orientation towards insider sources of investment.
Formally, the information needs of users of corporate reporting should be satisfied within the framework of the current system of accounting and financial reporting. It remains the backbone of the disclosure system and the main channel connecting the company and its stakeholders. However, financial statements have not been considered as the only and complete source of the necessary information for a long time, and primarily because of their inherent information limitations (Demirag, 2017). The main problem of accounting data is their averageness and focus on cost indicators. At the same time, despite the proclaimed neutrality, the formal, impersonal nature of reporting forms in practice often masks the predominance of the information interests of those stakeholders who have the opportunity to directly or indirectly determine the company’s strategic goals.
The stated informational limitations of financial reporting are overcome in a broader concept of corporate reporting, designed to provide full disclosure of information not contained in accounting registers. Such corporate reporting is designed to ensure greater transparency of the business and the completeness of informing stakeholders (Demirag, 2017). The complex nature of the concept of corporate reporting is reflected in the principles of corporate governance of the organization for economic cooperation and development. Consistent with these principles, the corporate governance structure should provide timely and accurate disclosure of information on all material matters relating to the corporation, including the financial position, performance, ownership, and management of the company.
The first method, based on a variety of reporting forms and levels of analytics, can be observed in management accounting, which is implemented on the basis of modern information technology software solutions. A high-quality management accounting system is able to sufficiently fully provide the necessary diversity and depth of information presentation. The main disadvantages of this approach are information redundancy and the locality of the solutions used, reflecting the unique features of the business. In addition, it requires increased confidentiality since not all management accounting information may be of a public nature and subject to disclosure due to trade secrets or corporate ethics. Existing approaches to understanding the transparency of corporate reporting are united by the declaration of commitment to certain general principles of doing business and following the best practices of corporate transparency (Demirag, 2017). In addition, there is a general tendency to increase the information content of reporting data due to a wider provision of non-financial information. Finally, the expansion of the range of information provided is due to the inclusion of strategic data in the reporting.
In turn, information of a strategic nature is a logical consequence of the expansion of the scope of the principle of accountability, which led to the need to revise the current paradigm for assessing the quality of corporate governance, which began to be assessed not only from the standpoint of performance, determined on the basis of financial ratios and business performance in general. At the same time, in the new paradigm, the performance criteria still retain their significance, remaining the basis for assessing successful work for the current period. At the same time, increasing attention has been paid to indicators of the quality of management processes, which are considered indicators of the future value of a business (Demirag, 2017). Thus, corporate reporting becomes a source of information not only current but also strategic.
Information of a strategic nature should include information of a long-term nature, reflecting future-oriented decisions but capable of affecting the current state of the business in the present. This may be data on investment programs, marketing policies, mergers, and acquisitions. Strategic information can also include information about the current market and competitive position that characterizes business prospects in the future. Thus, the principles of completeness and relevance of reporting data are further developed due to the fact that, along with information of a current or general nature, data about the mission and strategic goals of the company, its capabilities, and resources appear in it (Demirag, 2017). The idea of a strategically significant addition to standard corporate reporting has been implemented in the sustainability report concept. This concept suggests that corporate reporting should reflect not only current activities but also its projection into the outside world. This includes internal state and plans, partnerships, supply and distribution chains, environmental impact, and public relations.
Evaluation and Control
Measuring Performance
The performance of the organization depends significantly on the mining efficiency. The general rule of measurement for cryptocurrencies is the number of hashes per second, which is represented by the number of tries per second in order to find a block. At this time, there are different methods of measuring the hashes. For example, mining pools have become widely used as major computing resources of the Bitcoin network, attracting miners for different reasons. Riot uses a mining pool, which entails miners working together to mine a new block, which means that all of them receive relatively stable rewards from mining.
On a wider scale, which goes beyond the measurement of mining effectiveness, the organization considers the financial measures of performance associated with organizational profits and effectiveness. Such indicators as return on assets, return on equity, and return on investment is measured. Profits and stock prices are also financial performance indicators that Riot Blockchain considers, measures, and reports regularly. Besides, one of the clearest definitions of organizational performance is described in terms of growth and survival. Within the definition, an organization considers its performance effective as if it can meet the prescribed goals and continue improving. The downside of this approach is that it does not consider the internal and external environment of the company.
Both individual and team level performance is measured in order to identify relevant gaps and challenges for the purpose of improving performance in the future. At the individual level, the company measures adaptive performance, which is represented by the responsiveness of the employees at work. The performance is linked to such indicators as workers’ capacity to be initiative, perform extra tasks, be resourceful and enthusiastic, motivated, creative, committed, and have good interpersonal relationships in the workplace. At the team level, the organization measures organizational performance in the context of input-process-output measures, which take a system view of relevant team processes to look at team tasks as separate events. Finally, at the organizational level, the company adopts cohort measures to monitor and evaluate all measures comprehensively.
Outputs, Behavior, and Input Controls
Behavior, input, and output control all represent the means of controlling relevant job requirements, expectations, and results associated with company objectives and targets of performance. Riot Blockchain uses key performance indicators (KPI) for measurements, which have both advantages and disadvantages. On the one hand, the company uses SMART indicators, which means that they are specific, measurable, achievable, and timely. KPI-based measurement helps encourage employees to be highly initiative and take action because they will get highly rewarded for positive accomplishments. The company has set tangible KPI goals that workers have to accomplish in order to get rewarded. Another benefit of using KPIs on a regular basis is associated with the possibility to measure outcomes and results. Specifically, the measurements will allow determining whether a goal was too high, whether there were gaps in employee knowledge, as well as whether there were any other difficulties preventing the achievement of the goals.
However, there are limitations associated with using KPIs in such an organization. Specifically, a disadvantage of the measurement is that it does not offer actionable information quickly, and time has to pass in order to get the results for measuring performance. This is a problem for organizations such as Riot Blockchain that need to process information rather quickly in order to make decisions in real time. Since KPIs can vary from one business to another, Riot Blockchain can adapt them according to their needs and requirements. Because there is no single approach that will fit all organizations, the KPIs at Riot can include the return on assets, current ratio, debt to equity ratio, working capital, the number of new investors, and others. Regardless of the measurement used, the organization’s goal is to ensure that projects are delivered on time and budget while ensuring a high-quality outcome.
References
Demirag, I. (2017). Corporate social responsibility, accountability and governance: Global perspectives. Routledge.
Huang, J., O’Neill, C., & Tabuchi, H. (2021). Bitcoin uses more electricity than many countries. How is that possible? The New York Times.
Ishak, W. (2017). Creating an innovation culture. McKinsey&Company.
McWhinney, J. (2021). Understanding the consumer confidence index. Investopedia.
Riot. (2021). Riot Blockchain reports record third quarter 2021 financial results, current operational and financial highlights [PDF document].
Riot. (2022). Riot Blockchain announces January production and operations updates. RIOT.
Tully, S. (2021). Every single Bitcoin transaction—even buying a latte—consumes over $100 in electricity, says a new report. Fortune.
United States Securities and Exchange Commission. (2021). Riot Blockchain, Inc.