BTCS Inc. — Form 10-Q Summary
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2017. BTCS had ceased operating its North Carolina transaction-verification facility in 2016 and reported only minimal e-commerce revenue. Its stated strategy was to pursue digital assets and blockchain-related activities, subject to obtaining financing. Unless stated otherwise, amounts below are U.S. dollars.
Financial performance and condition
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Revenue | $941 | $15,649 | $4,480 | $356,459 |
| Gross profit (loss) | $941 | $(19,401) | $4,480 | $92,590 |
| Operating loss | $(211,469) | $(213,834) | $(602,478) | $(1,119,191) |
| Net income (loss) | $(10,959,746) | $3,236,941 | $(45,563,617) | $(26,945,976) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(958,755) | $(674,545) |
- At September 30, cash was $5,943; current assets were $26,323 and total assets were $29,567. Current liabilities were $4,833,294, including $4,341,334 of derivative liabilities. The resulting working-capital deficit was approximately $4.8 million.
- Net cash used in investing activities was $1,484 and net cash provided by financing activities was $871,114 for the first nine months of 2017. Financing included $925,114 net proceeds from the May financing, partly offset by a $54,000 loan settlement.
- The balance sheet showed no short-term loan or convertible notes outstanding at September 30. The company exchanged notes and related securities for Series B preferred stock; it recorded a $15.9 million gain on extinguishment of associated liabilities.
- Common shares issued and outstanding were 187,025,438 at September 30. As of November 6, the company reported 245,714,073 common shares outstanding and 435,986,321 shares on a fully diluted basis, including preferred-stock conversions and warrants.
Material changes and unusual items
- Nine-month revenue fell to $4,480 from $356,459, mainly because transaction-verification and hosting activity had ceased. Mining and power expenses also fell to zero from $263,869.
- Nine-month operating expenses declined to $606,958 from $1,211,781, mainly reflecting lower fixed-asset impairment and depreciation-related costs. Despite the lower operating loss, the net loss widened, largely because of non-cash fair-value charges.
- Nine-month results included a $40.3 million loss from warrant-liability fair-value adjustments, a $16.8 million loss from convertible-note fair-value adjustments, a $2.8 million loss on issuance of Series C preferred stock, and the $15.9 million debt-extinguishment gain. These items materially affected reported earnings and are not equivalent to operating cash flows.
- For the third quarter, the $10.96 million net loss included an $8.65 million warrant-liability fair-value loss and a $2.14 million loss on settlement of a derivative liability. The prior-year quarter reported net income of $3.24 million.
Outlook, risks and contingencies
- Management stated that recurring losses, operating cash deficits and the accumulated deficit raise substantial doubt about the company’s ability to continue as a going concern. It expected further losses and said existing liquidity was insufficient to fund operations and planned investments for the foreseeable future.
- Management said BTCS needed significant additional capital and was seeking debt or equity financing, with no assurance financing would be available on favorable terms, or at all. It also warned that failure to close the proposed merger before year-end would leave it without sufficient capital for expenses over the following 12 months.
- The proposed merger with an Australian digital-asset company remained pending and subject to contingencies; BTCS gave no assurance it would close. The October 2017 financing raised approximately $1.1 million, including 59.38 bitcoin valued at $250,000 at investment. The filing reports that escrow cash was released following the October 24 filing of the prior-quarter report. Financing terms include preferred shares, warrants, and investor protections that create potential dilution.
- BTCS reported ineffective disclosure controls as of September 30, citing limited segregation of duties, reliance on outside consultants, and difficulty applying complex accounting rules. Management said it planned remediation when resources allowed.
- The company reported no legal proceedings, no defaults upon senior securities, and no off-balance-sheet transactions. It cautioned that actual results could differ materially from forward-looking statements.
Important facts for investors to verify
- Whether the proposed merger closes, on what terms, and whether BTCS can secure sufficient ongoing financing.
- Available cash and digital-asset holdings after the October financing, subsequent spending, and any further fundraising.
- Current and potential dilution from preferred-stock conversions, warrants, anti-dilution protections, and subsequent share issuances.
- The assumptions and valuation sensitivity behind the large Level 3 derivative and warrant liabilities and associated non-cash earnings effects.
- Progress addressing the disclosed control weaknesses and the company’s ability to meet reporting and other financing obligations.