BTCS Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2016. BTCS focused on digital currencies and blockchain technologies. It suspended its North Carolina transaction-verification (mining) facility in July and subsequently ceased operations there; its e-commerce site remained online but was no longer being developed, marketed, or supported.
Financial results and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2016: $15,649; 2015: $169,069 | 2016: $356,459; 2015: $351,112 |
| Gross profit (loss) | 2016: $(19,401); 2015: $67,245 | 2016: $92,590; 2015: $172,003 |
| Operating loss | 2016: $(213,834); 2015: $(4,101,563) | 2016: $(1,119,191); 2015: $(7,654,931) |
| Net income (loss) | 2016: $3,236,941; 2015: $(3,819,439) | 2016: $(26,945,976); 2015: $(8,418,831) |
| Cash used in operations | Not separately presented | 2016: $674,545; 2015: $514,612 |
At September 30, 2016, total assets were $37,700, including no cash and $200 in digital currencies. Current liabilities were $24,272,260, versus current assets of $9,496; the resulting working-capital deficit was approximately $24.3 million. Stockholders’ deficit was $24,234,560. Convertible notes at fair value were $2,576,819; derivative liabilities were $11,977,349, with a further $7,401,321 liability for a share shortfall. The filing identifies $45,000 of short-term loans.
Material changes, outlook, and risks
- Q3 revenue fell about 91% year over year, chiefly because transaction-verification revenue declined after the facility suspension. Nine-month revenue was nearly flat, but gross profit fell as power and mining expenses increased.
- Q3 net income was driven by net non-cash fair-value and related adjustments, including a $7.1 million gain from the share-shortfall derivative adjustment, partly offset by a $2.9 million loss on convertible-note fair value and $1.4 million in liquidated damages. It does not reflect an improvement in underlying operating performance: the company reported an operating loss and negative gross profit.
- Nine-month net loss rose to $26.9 million, principally reflecting non-cash fair-value losses on warrants, convertible notes and share-shortfall derivatives, a $2.3 million Spondoolies investment impairment, and a $2.9 million debt-extinguishment loss. The Spondoolies investment was fully impaired.
- BTCS said it needed significant additional capital, had no financing commitments, and expected losses to continue. Management disclosed substantial doubt about the company’s ability to continue as a going concern. Plans to build a digital-asset portfolio or resume mining through outsourced data centers were conditional on obtaining financing.
- The company defaulted on Senior Notes on June 16, 2016, triggering a Junior Notes default. At quarter-end, the filing reports defaults on $966,036 of Senior Notes and $188,533 of Junior Notes. The June Junior Notes carried a 20% original issue discount, were secured by company assets, and had a stated December 5, 2016 maturity.
- Approximately 165 leased mining servers were stolen after the facility was shut down; the insurer’s claims process was ongoing, and any proceeds for those servers would be payable to the equipment lessor, CSC.
- After quarter-end, BTCS issued $220,002 of convertible promissory notes on December 6, 2016, due June 6, 2017, at 8% interest. The proceeds were restricted to specified expenses. The filing also describes efforts to obtain shareholder approval for a reverse split or increase in authorized capital to address conversion and issuance obligations.
- Disclosure controls were reported ineffective at September 30 due to limited segregation of duties, reliance on outside consultants, and difficulty applying complex accounting rules. Management said remediation depended on having sufficient capital.
Most important facts for investors to verify
- Whether BTCS obtained sufficient financing and completed the proposed capital restructuring, and whether it could meet near-term obligations given zero cash at quarter-end.
- The status and terms of note defaults, collateral rights, conversion obligations, and the very large potential share and warrant issuances under anti-dilution provisions.
- The accounting and cash implications of the fair-value liabilities and liquidated-damages charges. The filing contains inconsistent statements about whether the company had enough authorized shares to meet security-holder obligations.
- Whether mining operations resumed, what insurance recovery, if any, resulted from the server theft, and how revenue changed after the North Carolina shutdown.
- The filing’s reported weighted-average diluted shares for Q3 (16.5 billion) differs markedly from basic weighted-average shares (857.3 million); investors should review the EPS and dilution disclosures in the underlying filing.