BTCS Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The unaudited statements are prepared under U.S. GAAP. BTCS describes itself as focused on blockchain and digital-asset opportunities; it reported no revenue for the periods presented.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating expenses | $260,773 | $271,904 | $813,004 | $764,666 |
| Net loss | $347,547 | $224,849 | $911,778 | $606,472 |
| Net loss attributable to common stockholders | $347,547 | $224,849 | $1,007,486 | $606,472 |
| Loss per share, basic and diluted | $0.02 | $0.02 | $0.07 | $0.05 |
- For the nine months, operating cash used was $880,400, investing cash used was $249,923 (digital-asset purchases), and financing cash provided was $1,374,759. Cash increased by $244,436 to $296,553.
- At September 30, current assets were $541,479, current liabilities were $131,684, and working capital was approximately $410,000. Total assets were $543,165; stockholders’ equity was $411,481.
- Reported digital currencies were carried at $208,702 on the balance sheet. Management separately reported a fair market value of $228,908: 14.91863 BTC valued at $123,733 and 584.72693 ETH valued at $105,175. The company recorded a $40,698 impairment loss on digital currencies during the nine months.
- Current liabilities included $53,221 of convertible notes payable, net of discount. A $217,973 note was issued in September after exchanging a matured $200,000 promissory note and accrued interest; $150,000 principal was converted into shares by September 30.
Changes versus the prior comparable periods
- Q3 net loss increased by about 55% year over year despite operating expenses decreasing about 4%, principally because prior-year digital-currency transaction gains were replaced by interest expense and impairment losses.
- Nine-month net loss increased by about 50%. Operating expenses rose about 6%; management attributed the increase mainly to executive salary increases. Other income of $158,194 in 2018 became other expense of $98,774 in 2019, reflecting lower realized digital-currency gains, interest expense, and impairment.
- Nine-month operating cash use rose from $298,662 to $880,400. The company funded 2019 activity with $1,146,389 of net common-stock proceeds under its Cavalry equity purchase agreement and $228,370 from warrant exercises; it reported no financing cash proceeds in the 2018 period.
- A $95,708 deemed dividend from a warrant strike-price reduction increased the nine-month loss attributable to common stockholders; it did not increase reported net loss.
Outlook, risks, and notable items
- Management expects losses to continue and states that existing liquidity is insufficient to fund operations and anticipated capital expenditures for the foreseeable future, including the next 12 months. The filing identifies substantial doubt about the company’s ability to continue as a going concern and says significant additional capital is required.
- BTCS intends to seek additional equity and equity-linked financing, including under its agreement with Cavalry, but gives no assurance that funding will be available on favorable terms, or at all. The agreement allows purchases of up to $10 million over 36 months, subject to conditions and limitations. By September 30, all 4,374,741 shares registered for sale under the agreement had been sold for $1,146,389 net proceeds; further issuance depends on available registration and agreement conditions.
- Strategy remains conditional on financing: acquire digital assets such as bitcoin and ether, consider blockchain-sector acquisitions, and potentially resume mining through outsourced data centers. Management said mining did not appear to offer a positive return at then-current network difficulty and prices.
- On October 16, 2019, BTCS issued 679,730 shares to convert the remaining $67,973 principal on the September convertible note and subsequently paid $905 accrued interest. On November 7, it issued a new $200,000 promissory note, due August 7, 2020, bearing 12% interest and convertible at a 20% discount subject to a $0.02 floor.
- Common shares outstanding were 18,884,424 at September 30 and 19,564,154 on November 11, 2019. The filing reflects the April 2019 1-for-30 reverse split.
- Disclosure controls were deemed ineffective due to limited segregation of duties, reliance on outside consultants, and difficulty applying complex accounting rules. The filing also notes a prior restatement related to accounting for digital assets. Management said it intends to address weaknesses when resources permit.
- Management identifies digital-asset price volatility, regulatory uncertainty, competition, and the need for financing as risks. The filing reports no legal proceedings and no off-balance-sheet transactions.
Important facts for investors to verify
- How much additional financing is available in practice, given the company’s stated 12-month funding shortfall and the registration and other limits on the Cavalry facility.
- The current status and terms of convertible debt, including the November 2019 note, subsequent conversions, accrued interest, and potential share dilution.
- The basis for the difference between digital assets’ $208,702 balance-sheet carrying value and management’s $228,908 fair-market-value disclosure, and sensitivity to further price declines.
- Whether operations generate revenue or cash flow, and whether planned acquisitions or a return to mining can proceed without worsening liquidity.
- Progress in remediating ineffective disclosure controls and the digital-asset accounting weaknesses noted in the filing.