BTCS Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; filed May 14, 2018. Financial statements are unaudited and consolidated with the wholly owned subsidiary BTCS Digital Manufacturing.
Business context and strategy
BTCS describes itself as focused on blockchain and digital-asset ecosystems. Its e-commerce revenue activity was negligible, and its transaction-verification (mining) operation had been suspended since 2016. Subject to obtaining financing, the company planned to build a portfolio of digital assets and potentially resume mining through outsourced data centers. It reported no revenue in the quarter.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $0 | $3,181 |
| Operating expenses | $257,146 | $179,446 |
| Operating loss | $257,146 | $176,265 |
| Net loss | $501,141 | $35,195,544 |
| Operating cash flow | $(308,734) | $(90,727) |
| Investing cash flow | $172,437 | $0 |
| Financing cash flow | $0 | $0 |
| Cash at period end | $167,037 | $303,334 at Dec. 31, 2017 |
| Digital currencies at period end | $199,920 | $616,352 at Dec. 31, 2017 |
| Current assets / current liabilities | $440,801 / $30,395 | $987,422 / $75,997 at Dec. 31, 2017 |
Gross margin is not meaningful because there was no revenue. The quarter’s $243,995 in other expense included a $180,816 digital-currency revaluation loss and a $63,179 realized loss on sales. The company sold digital currencies for $172,437 of cash proceeds. No debt balance is reported on the March 31 balance sheet; reported liabilities were current accounts payable and accrued expenses of $30,395.
Changes versus comparable periods
- Revenue fell from $3,181 to zero, while operating expenses rose by about $78,000, primarily from higher general and administrative costs.
- Net loss narrowed substantially from $35.2 million to $0.5 million. The prior-year loss included large non-cash fair-value charges for warrant liabilities ($33.2 million) and convertible notes ($16.8 million), partly offset by a $15.9 million gain on debt extinguishment. These unusual prior-year items largely explain the year-over-year improvement; they do not indicate a comparable improvement in operating performance.
- Cash declined by $136,297 from year-end. Digital-currency assets also declined, reflecting sales and fair-value changes.
- Common shares outstanding increased from 363,043,769 at December 31, 2017 to 368,219,169 at March 31, 2018. The filing reports 372,337,169 shares outstanding as of May 8, 2018.
Liquidity, outlook, risks and other notable items
- Management said existing liquidity was insufficient to fund operations and anticipated capital expenditures for the foreseeable future, and that the company lacked sufficient cash for the next 12 months. It expected continuing losses and required additional capital to sustain operations and pursue its plans.
- The filing states there is substantial doubt about the company’s ability to continue as a going concern for one year from issuance. Management was seeking debt or equity financing, but reported no financing commitments and gave no assurance funding would be available on favorable terms, or at all. Equity or convertible-debt financing could significantly dilute shareholders.
- Management’s plans included controlling costs, selling additional securities, acquiring digital assets through open-market purchases, and potentially restarting mining. No quantified financial guidance was provided.
- Digital-asset prices and the rapidly evolving blockchain market create valuation and execution risks. The filing also discusses securities-law and Investment Company Act considerations regarding digital securities and token acquisitions.
- Disclosure controls and procedures were deemed ineffective at the reasonable-assurance level. Cited material weaknesses included limited segregation of duties, reliance on outside consultants for financial reporting, and difficulty applying complex accounting principles. Management said remediation depended on having sufficient capital to hire additional staff.
- Subsequent events: on April 4, 2018, CEO Charles Allen sold and transferred all 100 super-voting Series A preferred shares to director David Garrity. During April, 20,590 Series C-1 preferred shares converted into 4,118,000 common shares. The filing also refers to a “Proposed Merger” in its forward-looking-statement discussion but provides no clear details in the supplied text.
- The filing reports no legal proceedings, unregistered securities sales, defaults upon senior securities, or off-balance-sheet transactions.
Important facts for investors to verify
- Financing runway, status of capital-raising efforts, and the going-concern assessment.
- The operating-cash-flow discrepancy: the cash-flow statement reports $308,734 used in Q1 2018, while one MD&A passage says approximately $0.1 million; other passages say approximately $0.3 million.
- Details and status of the referenced Proposed Merger, which are not clear in the filing text provided.
- Effects of the Series A super-voting share transfer on voting control, and the potential dilution from outstanding warrants and preferred-stock conversion rights. At March 31, the filing lists 62,064,634 warrants and 10,000,800 Series C-1 conversion shares excluded from diluted loss per share as anti-dilutive.
- Plans, funding requirements, and feasibility for restarting mining or expanding digital-asset holdings, as well as exposure to digital-asset price volatility.