Being a crypto company isn’t as easy as it looks. Just ask Riot Blockchain, a Nasdaq-listed company that was previously known as Bioptix. Riot is the subject of an audit in which “material weakness” was discovered in their financial reporting, according to a U.S. SEC filing.

As of year-end 2018, Riot had a cash war chest of $225,000 versus nearly $42 million when the bitcoin price was at its peak. Meanwhile, the company’s crypto mining operation:

“generated approximately $7.7 million in revenue on the production of 1,081 bitcoins (including Bitcoin Cash as converted) and 3,023 Litecoins for the year.”

Marcum, the blockchain company’s auditor, warned that Riot had failed to maintain proper financial reporting protocols since last December:

“[Riot] has not maintained effective internal control over financial reporting as of December 31, 2018.”

Biotech-to-Bitcoin Pivot Roils Riot as Crypto Market Cools

Before changing its name, Riot was a biotech play. In 2017, the company reinvented itself with a focus on bitcoin and blockchain including a crypto mining operation in Oklahoma City. This led Riot shares to initially skyrocket.

The negative audit report is a blow to Riot, which has been under investigation by regulators since months after the name change. The company maintains that it is cooperating with the SEC probe. Riot’s stock has shed one-third of its value over the past year.

Auditor, Law Prof. Warn of ‘Disastrous’ Outcome

The auditor fears that a deficiency in Riot Blockchain’s internal controls for financial reporting could lead to bigger problems. They cite a possible “material misstatement of the company’s annual or interim financial statements” that wouldn’t be uncovered until it’s too late. The weaknesses cut to the core of crypto investing and include:

“User access controls”

“Program change management controls for certain financially relevant systems”

“Physical security controls” surrounding the safeguarding of cryptocurrency hardware wallets, seed phrases, pin codes, and mining equipment.

The financial reports comprising Riot’s 2018 annual report, which incidentally was filed late, are clear of any mistakes. To keep it that way, Riot Blockchain’s management team expects “the remediation of this material weakness will be completed prior to the end of fiscal 2019.”

Wayne State University Professor of Law Peter Henning laid out a worst-case scenario, telling CNBC:

“I think it is a concern they could get hacked. That would be disastrous for a company if there is theft.”

He added that the adverse audit could exacerbate the SEC’s ongoing investigation into the company.

Riot Blockchain’s CEO Shuffle

If Riot’s financial statements are a reflection of the company’s management history, it’s no wonder they’re in disarray. Since the name change, Riot has had three different CEOs, most recently naming Jeff McGonegal to the helm.

In September 2018, the company’s chairman and CEO, John O’Rourke, resigned amid market manipulation charges by the SEC, according to reports. Those charges against O’Rourke were reportedly unrelated to Riot Blockchain. The company then appointed Chris Ensey as interim CEO as part of a broader restructuring, since which time he has left Riot.

Riot plans to launch RiotX, a U.S. based crypto exchange, by the end of Q2 2019. They might want to be sure and get a handle on their crypto hard wallets, private keys, and seed phrases before having custody over anyone else’s funds.