BTCS Inc. (filed as Bitcoin Shop, Inc.) — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2014; filed August 14, 2014. The company operated an online marketplace for purchases using bitcoin, litecoin and dogecoin. It listed more than 140,000 products, fulfilled by third-party vendors, and recognized net processing fees and markups rather than the full merchandise value. The filing reports no comparable prior-year period because the February 2014 share exchange was accounted for as a reverse merger.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Revenue | $4,912 | $16,286 |
| Operating expenses | $2,668,489 | $4,240,607 |
| Operating loss | $2,663,577 | $4,224,321 |
| Net loss | $2,567,620 | $4,019,364 |
| Basic and diluted loss per share | $0.02 | $0.03 |
- Expenses and margins: General and administrative expense was $2,626,581 for the quarter and $4,173,402 for the six months. It included stock-based compensation of $2,223,369 and $3,567,163, respectively. The filing does not provide a conventional gross margin; revenue represents transaction fees and markups recorded net.
- Cash flow: Six-month operating cash use was $800,701; investing cash use was $307,136; financing provided $1,821,000. Cash rose from $9,052 at year-end to $722,215 at June 30.
- Liquidity and assets: Current assets were $1,096,934 and current liabilities $216,426, yielding reported working capital of $880,508. Total assets were $1,404,969. Assets included $200,000 of investments and $250,000 deposited for a bitcoin auction; the auction deposits were returned in July.
- Debt and equity: The balance sheet reports no borrowings; accounts payable and accrued expenses were $216,426. A February private placement raised $1.875 million gross and $1.813 million net. Stockholders’ equity was $1,188,543, with an accumulated deficit of $4,002,239.
Material changes and unusual items
- The February reverse merger and private placement substantially changed the company’s capital structure. Common shares outstanding were 145,669,504 at June 30; 152,987,235 were reported outstanding as of August 11.
- Management option awards drove substantial noncash compensation expense. The company reported $14,293,076 of unrecognized option compensation cost at June 30.
- The company recorded six-month warrant fair-value income of $204,957; the warrant liability was reduced to zero after fair-value changes and a waiver of the placement’s Most Favored Nations provision. These noncash gains reduced reported net loss.
- The company invested $150,000 in GoCoin and $50,000 in Bitvault. After quarter-end, it bought 500 bitcoins for $292,500 and invested $150,000 in a convertible note issued by Express Technologies.
- After quarter-end, all remaining Series B preferred shares were converted into 5,867,300 common shares; the Series B designation was withdrawn on August 8.
Outlook, risks and controls
- No quantified revenue or earnings guidance is provided. Management described the company as early-stage, with limited revenue and capital resources, and said its existing liquidity was insufficient to fund operations, anticipated capital expenditures and working-capital needs for the foreseeable future. Additional debt or equity financing may be required, with no assurance it will be available on favorable terms or at all.
- The filing states that recurring losses, operating cash deficits and the accumulated deficit raise substantial doubt about the company’s ability to continue as a going concern.
- Disclosure controls and internal control over financial reporting were deemed ineffective as of June 30. Identified material weaknesses included limited segregation of duties and reliance on outside consultants for financial reporting. Management intended to hire additional accounting and administrative staff.
- The company reported no litigation, no material changes to risk factors from its latest annual report, and no off-balance-sheet transactions. Its operating sublease commitments totaled $50,768 and were paid in advance.
Important facts for investors to verify
- Whether marketplace transaction volume and net fee revenue can grow enough to support the company’s substantial operating cost base.
- How long available cash can fund operations, and whether additional financing will be needed and on what terms.
- The timing and future income-statement effect of unrecognized stock-option compensation, and the potential dilution from options, warrants and convertible preferred shares.
- The valuation, liquidity and risks of bitcoin holdings and strategic investments, including the post-quarter purchase of 500 bitcoins and the Express Technologies note.
- Progress in remediating the disclosed control weaknesses and the company’s ability to meet its going-concern funding needs.