BTCS Inc. (formerly Bitcoin Shop, Inc.) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated financial statements. Unless noted otherwise, financial amounts are in dollars.
Business context
The company was developing a digital-currency platform spanning a beta e-commerce marketplace, an invitation-only digital wallet, and transaction verification services (bitcoin mining). Management identified mining as a potential near-term revenue source and described plans to expand mining capacity at a leased 83,000-square-foot facility. The company began rebranding under the BTCS name in January 2015.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $37,668 | $3,974 |
| Gross profit / margin | $20,725 / approximately 55% | $3,974 / 100% |
| Operating expenses | $1,861,958 | $1,564,718 |
| Operating loss | $(1,841,233) | $(1,560,744) |
| Net loss | $(3,349,546) | $(1,451,744) |
| Basic and diluted loss per share | $(0.02) | $(0.01) |
| Cash from operating activities | $(101,367) | $(258,631) |
| Cash from investing activities | $(389,839) | $(162,290) |
| Cash from financing activities | $489,500 | $1,821,000 |
At March 31, cash was $3,697, digital currencies were carried at $19,944, and current assets totaled $62,057. Current liabilities were $2,137,721, including a $1,879,220 derivative liability; the working-capital deficit was $2,075,664. Total assets were $558,720 and stockholders’ deficit was $1,579,001. Short-term loans totaled $66,990, including $21,990 owed to related parties. The filing states substantial doubt about the company’s ability to continue as a going concern.
Changes, unusual items and financing
- Revenue increased, primarily from $36,630 of mining-related transaction verification revenue; e-commerce revenue fell to $1,038 from $3,974. Mining expenses were $16,943.
- Net loss increased by about $1.90 million year over year. Major items included $1,369,376 in stock-based compensation, a $926,620 loss from remeasuring warrant-related liabilities, a $519,600 loss on issuance of January units, and $254,433 in impairment expense. The company also recorded $58,380 of inducement expense related to converting vendor payables into stock.
- The January private placement raised $433,000 through 4.33 million units, each including one common share and warrants for 2.5 shares. The warrants include price-protection and other provisions; their accounting produced a substantial derivative liability. The company also raised $45,000 through a third-party short-term loan and borrowed $20,000 from its COO during the quarter.
- Investing cash outflows included $234,565 for property and equipment, $56,700 in deposits, and $100,000 for an investment. The company issued stock to acquire additional Coin Outlet shares and converted $143,694 of accounts payable into common stock.
- After quarter-end, the company reported a $2,312,500 April private placement. In May, it invested $1.5 million in Spondoolies for an approximately 6.6% fully diluted interest and disclosed merger-related exclusivity and potential break-up fees. These events were subsequent to the reporting date.
Outlook, risks and controls
Management expected losses to continue into the foreseeable future and said existing liquidity was insufficient to fund operations and anticipated capital expenditures. It planned to manage available cash, seek additional securities financing, and grow mining revenue, but gave no numerical guidance and could not assure that further financing would be available on favorable terms, or at all. Bitcoin price declines and uncertainty in digital-currency markets contributed to investment impairment and remain relevant risks.
Disclosure controls and procedures were deemed ineffective as of March 31, 2015. Reported weaknesses included limited segregation of duties, reliance on outside consultants for financial reporting, and difficulty applying complex accounting rules. Management said it intended to add accounting and administrative staff when capital permitted. No legal proceedings were reported; the filing said there were no material changes to risk factors from the latest Form 10-K.
Important facts for investors to verify
- Reconcile the filing’s stated revenue growth rate of 243.6% with reported revenue of $37,668 versus $3,974; those figures imply a substantially different growth rate.
- Review the $1.879 million Level 3 derivative liability, its valuation assumptions, and the potential dilution from warrants and other securities.
- Clarify the impairment disclosures: the filing reports $254,433 total impairment, while related discussion gives differing Coin Outlet investment amounts.
- Assess near-term cash needs, the going-concern uncertainty, and the terms and dilution effects of the April financing and other post-quarter transactions.
- Track mining economics, facility ramp-up and spending, and remediation of the disclosed internal-control weaknesses.