BTCS Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017; filed October 24, 2017. Financial statements are unaudited. Amounts are in U.S. dollars unless noted.
Business context
BTCS described itself as focused on blockchain and digital-asset opportunities. Its North Carolina transaction-verification (mining) operation had ceased in mid-2016, and its e-commerce site remained online but was no longer being developed or marketed. Management planned, subject to financing, to acquire digital assets and potentially resume verification services through outsourced data centers.
Key financial results
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $358 | $141,667 | $3,539 | $340,810 |
| Gross profit | $358 | $26,830 | $3,539 | $111,991 |
| Operating expenses | $215,102 | $614,256 | $394,548 | $1,017,348 |
| Net income (loss) | $591,673 | $(28,143,576) | $(34,603,871) | $(30,182,917) |
| Operating cash flow | Not presented by quarter | $(947,421) | $(586,788) |
Quarterly 2017 income was driven by non-operating, largely noncash items—not meaningful operating growth. For the six-month period, fair-value losses on warrant liabilities ($31.7 million) and convertible notes ($16.8 million), and a $2.8 million loss on issuing Series C preferred stock, contributed to the net loss. These were partly offset by a $15.9 million gain on extinguishment of debt and a $2.1 million gain on settlement of a derivative liability. The six-month net loss increased from 2016 despite lower operating expenses.
Revenue fell sharply year over year because mining and hosting activity had stopped. Mining expenses were zero in 2017 versus $114,837 for Q2 2016 and $228,819 for the first half of 2016. With negligible revenue, operating margins are not informative.
Balance sheet, debt and liquidity
- At June 30, 2017: cash $17,277; current assets $45,495; total assets $48,863.
- Current liabilities were $5,531,410, including $5,191,634 of derivative liabilities; working capital was deficient by approximately $5.5 million. Stockholders’ deficit was $5,482,547.
- No convertible notes or short-term loan remained outstanding at June 30. The March exchange offer extinguished note and related liabilities; the filing recorded a $15.9 million gain. Accounts payable and accrued expenses were $339,776.
- Six-month investing cash use was $1,484; financing provided $871,114, including $925,114 net proceeds from the May financing and a $54,000 loan settlement payment. Cash declined by $77,791 to $17,277.
- BTCS raised $1 million gross in May by issuing Series C preferred stock and warrants. The preferred shares were initially convertible into 15,873,600 common shares. The filing describes substantial warrant and price-protection terms.
Material developments, outlook and risks
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, operating cash deficits, and limited liquidity. It expected continued losses and said existing liquidity was insufficient for foreseeable operations and planned investment.
- October financing and merger: Subsequent-event disclosures describe an October financing involving cash and bitcoin, with funds subject to escrow and filing-related conditions, plus an offering that could continue up to $1.5 million. The filing also describes a proposed merger with an Australian digital-asset company as pending and contingent; management gave no assurance it would close. The financing amounts and release conditions are not fully clear from the filing text. Management said failure to complete the financing’s second closing or the merger could prompt both senior officers to resign.
- Funding and dilution: Management said additional capital was necessary and might not be available on favorable terms, or at all. New equity or convertible securities could substantially dilute existing holders. Potentially issuable shares included securities under the May and October financings and outstanding warrants. Common shares outstanding increased from 16,095,929 at December 31, 2016 to 88,606,774 at June 30, 2017; the filing reported 200,710,953 as of October 19, 2017. A one-for-60 reverse split took effect in February; historical share and per-share data were retroactively adjusted.
- Controls: Disclosure controls were deemed ineffective at June 30 due to limited segregation of duties, reliance on outside consultants, and difficulty applying complex accounting rules. Management said it intended to hire additional staff when resources permitted.
- The filing reported no legal proceedings and no off-balance-sheet transactions. It cautioned that forward-looking statements are subject to risks and may differ materially from actual results.
Important facts for investors to verify
- Whether October escrowed cash and bitcoin were actually released, the amount ultimately received, and the resulting cash runway.
- The status and closing conditions of the proposed Australian merger, including whether it closed and whether management remained in place.
- The full conversion, warrant, anti-dilution, and price-protection terms, and their potential effect on share count and ownership dilution.
- The assumptions used to value Level 3 derivative liabilities and how future valuation changes could affect reported earnings.
- Progress on remediating ineffective disclosure and financial-reporting controls, and the company’s ability to fund operations beyond the near term.