Overnight, a Castle Rock biotech company’s makeover into Riot Blockchain rocketed it out of oblivion and into the realm of opportunistic investors. But sales of thousands of shares by the CEO and a key investor have raised red flags among skeptics.
By ditching its bland name, Bioptix, for the hottest term du jour, Riot Blockchain dazzled the stock market at its October debut and became Colorado’s top-performing stock in 2017, rising more than 600 percent since the name change. Riot plunged into its new game plan, investing in blockchain companies, purchasing coin mining equipment (souped-up computers) and buying bitcoins at auction. Stock watchers wondered whether to trust a company doing such a serious 180 — a road also taken by an iced tea maker, a sports bra developer and even Kodak, the old photography company.
Shareholders who had stuck with the waning biotech firm were rewarded. Many cashed in — including new CEO John O’Rourke.
Ten days after Riot’s stock hit a high of $46.80 on Dec. 19, O’Rourke unloaded 30,383 shares for about $869,000. When insiders sell, take a hint that you should too, said many critics, including Motley Fool.
O’Rourke said he had his reasons: taxes.
“Basically, I sold less than 10 percent of my overall position. And I was doing it for tax obligations,” O’Rourke, previously a managing member of investment fund ATG Capital, said in an interview Thursday. He received more than 300,000 shares of Riot stock when he became CEO, but they only vest and become his gradually over 24 months. He had to pay taxes as they vested.
“I could have sold more stock, but at the time, I sold what I needed,” said O’Rourke, who lives in Fort Lauderdale, Fla., with his wife and 3-week-old baby. “I’m a big believer in the company and in what we’re working on. We’re the best situated in the space. We’re well capitalized.”
Riot is among a growing number of firms adding “blockchain” or other cryptocurrency label to their corporate focus. It’s reminiscent of the dot-com era when adding “.com” to a corporate name upped a company’s profile and stock price. Some Riot investors are praising the new direction, while others are fleeing in fear that Riot could end up with the same fate of at least one cohort, Crypto Co., the former sports bra maker that pivoted so fast, its trading was suspended by government regulators in December.
There are other things that have skeptics suspicious. The company dismissed its auditor in January. It postponed its annual meeting for a second time about a week ago. And a recent Wall Street Journal article on Riot said government regulators are looking more closely at companies that “shift their business models to ‘capitalize on the perceived promise’ of the blockchain business.”
“In this day and age, there are a lot of skeptics and naysayers. People are looking to short and distort,” O’Rourke said. “But ultimately, there is an explanation for everything. Hopefully that’s the story here.”
Michael O’Rourke, chief market strategist with Jones Trading — and no relation to Riot’s CEO — calls the rise of such blockchain pivots “mania.” In a recent report titled “The Bubbles Have Bubbles,” he mentioned Riot and others but focused on microlender LongFin, which acquired “blockchain microlender” Ziddu.com. Its stock zoomed to $142.82 from $26.
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“The changes have done wonders for the company’s share prices. The blind greed in the market is throwing capital at any(thing) and everything associated with blockchain and cryptocurrencies, creating exit strategies for crafty operators,” he said.
Investors need to look closely at a company’s financial reports, warned Chris Hughen, an associate professor of finance at the University of Denver’s Daniels College of Business.
“While I don’t intimately know the business model (of Riot), which may be sound, I’m certainly skeptical because this company has every red flag that I can think of off the top of my head — with auditor changes, the warrants, the insiders selling, the name change and the switch from biotech to cryptocurrency,” Hughen said. “It gets even more interesting because there’s almost no revenue on their financial statements.”
Before the name change, Bioptix posted quarterly revenues of $24,175, thanks to licensing fees from its years as a biotech firm. At the same time, it lost $5.3 million. A year earlier, revenue was the same but it lost less, posting a net loss of $1.7 million. Similar results show up for the first nine months of 2017, with Bioptix posting a loss of $11 million on sales of $72,524.
Riot’s past is steeped in financial woes. Under different names, management and business models, it has never been profitable. There were multiple reverse stock splits to keep share prices above the $1 minimum.
What a year to jump into blockchain. While bitcoin, the most well-known cryptocurrency, has been around since 2008, the value of the virtual coin rose from less than a penny in 2010 to a peak of more than $19,000 for one bitcoin in December.
Riot invests in other bitcoin or blockchain companies, giving investors a way to get into the volatile market and skipping the tedious process of mining for digital currency. And according to the company’s stream of news releases, it’s already paying off. Its 10 percent stake in GoNumerical’s Coinsquare, a Toronto digital currency exchange, is now worth 10 times more, or about $34 million U.S., based on Coinsquare’s $341.2 million valuation, according to the company. On Thursday, Riot upped its stake to 12.5 percent.
O’Rourke said he plans to lean on Riot’s expertise to build a U.S.-based exchange that will make it easier for people to buy, sell and trade digital currencies, like bitcoin.
“There are only a handful of digital currency exchanges open to U.S. residents right now and we don’t feel that some operate with best practices,” he said. “We plan to operate in a more transparent manner with our customers. The big gorilla in the U.S. (Coinbase), when you buy bitcoin on their exchange, it takes seven to 10 days to settle on your account. We believe in practices that should have been adopted but haven’t been by competitors. This is a market opportunity.”
Many of Riot’s current investors are newer to the company but Barry Honig, the investor who could be credited with the company’s new destiny, was there in 2016 when it was called Venaxis. He said that he got involved only after a friend told him about the money-losing stock. He saw that the biotech firm never quite recovered from a U.S. Food and Drug Administration rejection, still had cash and overpaid its executives.
“In two years, the stock is up five times,” said Honig, who earlier had joined O’Rourke in suing another small startup run by anti-virus icon John McAfee for breach of contract. “Myself, being involved as an early shareholder, people who followed me, they’ve benefited.”
Honig, the type of investor whose stock purchases attract attention, told the Wall Street Journal that he has since sold most of his shares, or about 500,000, since the name change. But he didn’t divulge his profit. He won’t say what his ownership is today other than it’s “more than 1 percent.” When Riot raised $37 million more from investors in December, Honig bought 22,000 shares.
“I still own every one of those at $22.50,” he said. “That should tell you what I think about Riot.”
But those who didn’t benefit? Former shareholders, laid-off employees and others who had once believed in AspenBio Pharma, Venaxis or Bioptix — Riot’s past identities.
One former board member, former Colorado Lt. Gov. Gail Schoettler, resigned in protest from the board early last year. She told the Journal that Honig “trolls for small companies with cash and cheap shares,” and Venaxis was forced to pivot even as it pursued a “promising medical development.” Schoettler declined to comment to The Denver Post.
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.”
Bitcoin is the face of this new digital world. But bitcoin’s more like an app for the bigger disruptor, blockchain. The hype is in the software and distributed computer network’s potential to change multiple industries — it’s not limited to bitcoins and buying stuff. Blockchain could change the way we bank, vote, trade stocks, store health records and anything that today requires trusting a third party, like a bank.
And in an era in which malicious hackers are on the prowl and our online activities can be tracked by the government, advertisers or companies like Facebook and Google, blockchain’s appeal is to keep a person’s digital life secure and anonymous — and that’s just one of its attractions. While phishing and other malicious attacks will still target the weakest point — humans — blockchain is not a central data repository. There is no single owner, like Google and its cloud, so a successful hacker doesn’t have access to data from a large number of people all at once.
Public acceptance will take time, just as it did for people to trust a website with their credit card number (something some folks still don’t do). But there’s no doubt that adding cryptocurrencies or blockchain to a business has raised corporate profiles.
“There are similarities with what’s happening with bitcoin and the dot-com era,” said David Gold, a managing director of Westminster-based Access Venture Partners, which invests in tech companies, including Shapeshift.io, a digital asset exchange. “There were a lot of companies that put dot-com in their name because it made it easier to raise money. There’s no question that is what’s happening with blockchain. Like the dot-com era, there will be scammers with blockchain, but the potential of the technology disruption here is also just as real.”
The company’s origins date to August 2000, when AspenBio Inc. was founded as a bio-pharmaceutical company. By 2009, the Castle Rock company, which employed 24 people at the time, was pursuing commercialization of a blood test called AppyScore to help diagnose human appendicitis. Three years later, it changed its name to Venaxis and renamed its test APPY1.
In 2015, the FDA didn’t approve Venaxis’ test and called it “not substantially equivalent.” Investors sued, saying the company misled them (the case was later dismissed). Then-CEO Steve Lundy called the FDA decision “very disappointing” and said the company would explore other options, including a next-generation product.
But whatever new options were considered, business did not improve. Venaxis, which employed 35 people in early 2016, went on to buy but then terminate a deal to acquire Strand Life Sciences, an India-based cancer genomics company.
In Sept. 2016, Venaxis snapped up Bioptix Diagnostics, a Boulder firm previously known as AlphaSniffer that developed medical instruments to help with drug discovery. Venaxis changed its name to Bioptix in November 2016.
Honig, the company’s largest shareholder in Sept. 2016, was fuming at the purchase and criticized the board for burning through cash. He told the board that if they didn’t do something, he would force change. The FDA rejection was bad luck but continued pursuit would have cost too much, he said. He nominated new directors, which included O’Rourke, and got the company to return some cash to shareholders.
Bioptix exited the biotech business completely in January, laid off a “significant” portion of its workforce and accepted the resignations of three board members, including Schoettler, who had served since 2001. Michael Beeghley, president of financial advisory firm Applied Economics, took over as interim CEO and handed the job off to board director O’Rourke in November.
“At the end of the day, the CEO of the company changed the name and direction,” Honig said. “Not me.”