BTCS Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. BTCS operated a digital-currency e-commerce marketplace and bitcoin transaction-verification (mining) and hosting businesses. It had stopped actively developing or marketing its marketplace.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $141,667 | $144,375 | $340,810 | $182,043 |
| Gross profit | $26,830 | $84,033 | $111,991 | $104,758 |
| Operating loss | $587,426 | $1,966,568 | $905,357 | $3,553,368 |
| Net loss | $28,143,576 | $1,249,846 | $30,182,917 | $4,599,392 |
| Net loss per share, basic and diluted | $0.16 | $0.01 | $0.17 | $0.03 |
Q2 gross margin was approximately 19%, down from 58% a year earlier; six-month gross margin was approximately 33%, versus 58%. Six-month revenue rose 87%, principally from transaction-verification services and new hosting revenue, while Q2 revenue was nearly flat. Mining and power expenses increased substantially. Transaction-verification services generated 84% of Q2 revenue and 91% of six-month revenue.
The large 2016 net losses primarily reflect non-cash and financing-related charges: Q2 included $9.7 million of warrant-liability fair-value expense, $14.5 million for the derivative liability related to a share shortfall, and $2.5 million on debt extinguishment. For the six months, the company also recorded a $2.25 million impairment of its Spondoolies investment and $241,000 of fixed-asset impairment.
Liquidity, debt and cash flow
At June 30, cash was $66,599 and current assets were $86,549, against current liabilities of $32.1 million, producing a $32.0 million working-capital deficit. The deficit included $27.5 million of derivative liabilities. Convertible notes at fair value were $3.84 million; total derivative liabilities were $27.5 million. Stockholders’ deficit was $32.0 million. Cash used in operating activities for the six months was $586,788; investing activities provided $337,087, mainly from a lease-deposit refund, and financing activities provided $191,765.
BTCS reported a June 2016 default on its Senior Notes, which also triggered a default on its Junior Notes. The June-issued Junior Notes provided $100,000 net proceeds, carried a 20% original issue discount, were secured by company and subsidiary assets, and matured December 5, 2016. The filing states the company lacked sufficient shares to meet note and warrant obligations and recorded a $14.5 million share-shortfall derivative liability.
Material changes, outlook and risks
- Management said existing liquidity was insufficient to fund operations and planned investments, and significant additional debt or equity financing was required. No further financing commitments were in place; availability and terms were uncertain. Recurring losses and operating cash deficits raised substantial doubt about the company’s ability to continue as a going concern.
- On July 20, 2016, the North Carolina mining facility was suspended after the bitcoin block reward halved and its cooling system failed. Management considered raising capital to restart it, selling it, or winding it down, and anticipated a substantial decline in revenue from Q3 2016 onward. The company gave notice to cancel the facility lease on September 1.
- The company reported that the facility was burglarized on August 8; equipment and approximately 165 leased mining servers were stolen. Company-owned equipment loss was not expected to be material; the matter was reported to authorities and the insurer.
- The Spondoolies investment was fully impaired after liquidation proceedings began, and BTCS was no longer pursuing the acquisition. All fixed assets were also impaired due to the company’s financial condition.
- Subsequent to quarter-end, BTCS issued 728.8 million shares through August 1 for note conversions and warrant exercises. The filing reports 952.8 million shares outstanding after those issuances and 965.8 million as of September 19. It also disclosed potential obligations for 6.52 billion additional shares and warrants for 10.26 billion shares under “favored nations” provisions, and said it lacked sufficient authorized and unreserved shares to fulfill obligations. The company intended to seek shareholder approval to adjust its capitalization; no assurance was given.
- Disclosure controls were deemed ineffective due to limited segregation of duties, reliance on outside consultants, and difficulty applying complex accounting rules. Management said remediation depended on having sufficient capital to hire additional staff.
Investor verification priorities
- Confirm current liquidity, financing availability, debt-default status, secured-creditor rights, and the company’s ability to continue as a going concern.
- Verify the latest share count, conversion and warrant terms, “favored nations” obligations, authorized-share capacity, and dilution implications.
- Check the status and economics of the suspended mining operation, lease cancellation, any restart or relocation plan, and effects on revenue and costs.
- Review the assumptions behind Level 3 derivative and convertible-note valuations, which drove major reported losses, and the recoverability of remaining assets.
- Assess remediation of ineffective disclosure controls and the outcome of the reported server theft and insurance claim.