Yesterday, just one day before its annual shareholders' meeting, Riot Blockchain (NASDAQ:RIOT) filed an 8-K with the SEC announcing that it was adjourning its annual meeting until Feb. 1, 2018, to allow shareholders additional time to vote on four proposals it put forth.
Three of the four proposals are fairly standard affairs, but one proposal really stands out: Riot Blockchain asked shareholders to allow it to add another 750,000 shares of stock to its 2017 compensation plan. With a current market price of $27.40 per share, this would add nearly $21 million of value to the compensation piggy bank.
Riot Blockchain already has authorization to reward insiders handsomely. The company wrote in a proxy statement, filed on Dec. 12, that "229,000 shares were available" under its existing 2017 plan. Adding another 750,000 shares to the compensation cookie jar would give Riot Blockchain the ability to issue as many as 979,000 shares to insiders, currently worth $26.8 million.
That's a considerable amount of stock, since in the same filing Riot discloses that there were approximately 9.7 million shares of stock issued and outstanding as of Dec. 11. Since then, the company closed on an equity raise in which it issued 1.6 million additional shares, bringing the count up to 11.3 million shares.
Based on an estimated 11.3 million shares currently outstanding, Riot's upsized 2017 plan would allow it to hand over 8% of the company to insiders as compensation for their efforts.
Cashing in with free stock
Riot's insiders are already making piles of money from restricted stock and options, at least on paper. On Nov. 3, John O'Rourke was hired as the company's CEO; he scored a salary worth $25,000 per month, plus 344,000 shares of restricted stock, and an option to purchase 100,000 additional shares for just $10 each, according to Riot's proxy filing. He also received other compensation for his role as chairman of the company.
O'Rourke's 344,000 shares of restricted stock vest over a period of 24 months. Thus, with each passing month, he earns the ability to sell 14,333 shares, currently worth about $392,700. Notably, his profits from Riot's rising share price are on paper only, since he hasn't been selling his shares as they vest.
On one hand, stock-based compensation can be a very good thing. It aligns the interests of shareholders and management, as insiders have a personal interest in keeping a company's share price high. O'Rourke certainly has much more to gain from Riot's stock price than he does from collecting a salary.
Furthermore, Riot can easily issue stock, but getting its hands on cash has been anything but easy. Riot Blockchain recently raised approximately $37 million by selling stock and warrants at a deep discount to their then-current market prices. Selling stock at a discount to pay salaries to its employees is a silly thing to do, if it can simply skip a step and pay insiders in stock rather than cash.
That said, the size of Riot's request is alarming. It's hard to rationalize a larger incentive compensation program that could put 8% of the company's ownership in insiders' hands, given how few details exist about how the grants would be doled out.
What are shareholders paying for?
Publicly traded companies typically set performance thresholds that determine how much incentive compensation insiders will receive, often tied to metrics like a company's return on equity, net income, or the sale of a business unit at a profit.
GAIN Capital Holdings, an online currency broker that recently hopped on the bitcoin train, benchmarks its incentive compensation to specific levels of annual revenue and EBITDA, among other factors. In 2016, the company set a revenue target of $455.2 million and an EBITDA target of $113.8 million. Shareholders have a pretty good idea of what they're paying for.
For its part, Riot Blockchain said in an earlier proxy filing that it would pay out incentive compensation based on 18 different performance criteria, ranging from earnings per share to debt reduction and the successful completion of financings. But it lacks any ties to any specific objective, like selling its stake in bitcoin exchange Coinsquare at a certain gain, or generating a specific return from its bitcoin-mining operations.
If anything, Riot Blockchain's desire for bigger insider paydays and its willingness to adjourn annual meetings to do it highlight the risks of investing in a biotech company turned cryptocurrency holding company. Even if Riot Blockchain ultimately succeeds as a cryptocurrency investor -- as low as the odds may be -- insiders may siphon off most of the gains, thanks to lucrative stock awards. Buyer beware.