BTCS Inc. (formerly Bitcoin Shop, Inc./TouchIT Technologies, Inc.) — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; this is an annual report, not a standalone Q4 report. The 2013 financial statements primarily report the legacy touch-screen products business. The Bitcoin e-commerce business was acquired in February 2014, after year-end, so its results are not included in these annual figures.
Business context and material changes
During 2013, the company designed, produced through third parties, and marketed touch-based visual communication products. Revenue growth was driven largely by interactive LCD/LED products. On February 5, 2014, the company completed a share exchange to acquire BitcoinShop, LLC, becoming focused on an online marketplace where customers could buy third-party merchandise using virtual currencies. It also sold the legacy technology assets and arranged for the buyer to assume associated operating debts and liabilities. The company changed its name to Bitcoin Shop, Inc. and later its trading symbol to BTCS.
The 2014 BitcoinShop business model held no merchandise inventory, earned processing fees and transaction margins, and paid vendors in U.S. dollars. Management said it targeted retaining about 20% of gross profit in Bitcoin, exposing the company to cryptocurrency price changes. The filing describes a short operating history and integration with one major vendor.
Financial results and position
| Metric | FY2013 | FY2012 | Change or context |
|---|---|---|---|
| Net sales | $1,610,704 | $1,287,709 | Up about 25%; LCD/LED sales increased to $1,216,323 from $689,648. |
| Gross profit | $499,394 | $402,688 | Gross margin approximately 31% in both years; cost of sales was 69% of revenue. |
| Operating income/(loss) | $88,671 | $(29,442) | Improved by $118,113, which management attributed to product mix and spending controls. |
| Net income/(loss) | $87,186 in the income statement | $(25,141) | The filing gives inconsistent FY2013 net-income figures elsewhere, including $98,359; see verification items. |
| Net cash from/(used in) operations | $252,930 | $(532,024) | FY2013 cash flow benefited from working-capital movements, including other current liabilities. |
| Cash at year-end | $20,778 | $6,412 | Management characterized the cash position as poor. |
| Total assets | $601,123 | $588,119 | Included $400,000 of other non-current assets. |
| Current liabilities | $462,123 | $547,161 | Included trade payables of $265,648 and related-party amounts of $96,699. |
| Convertible notes | $629,856 | $583,200 | Reported as non-current liabilities; two notes carried 8% interest and were due May 17, 2015. |
| Shareholders’ equity | $(490,856) | $(542,241) | Negative equity at both year-ends. |
Investing cash outflow was $23,721 in 2013, and financing cash outflow was $214,843. No cash taxes or dividends were reported. Current assets were $173,943 versus current liabilities of $462,123, indicating limited short-term liquidity. The filing reports no off-balance-sheet arrangements.
Outlook, risks, contingencies, and unusual items
- Going concern: The auditor included an explanatory paragraph raising substantial doubt about the company’s ability to continue as a going concern. Management said additional financing or higher revenues were needed and that no further financing commitments existed at the reporting date.
- Subsequent financing and capitalization: In February 2014, the company raised $1,875,000 in a private placement of Series C preferred units with warrants. The BitcoinShop members received 100,773,923 common shares in the acquisition. The filing also describes post-year-end exchanges of the legacy convertible notes into common and Series B preferred shares.
- Legacy liabilities and releases: The asset sale transferred legacy operating assets and liabilities to the buyer, while the subsequent-events note says the company was left with convertible notes. Former officers/directors waived certain unpaid fees and loans. The exact scope and completion of assumed, exchanged, or released obligations should be verified.
- Accounting and controls: Management concluded disclosure controls and internal control over financial reporting were ineffective because of limited internal audit resources. The auditor had advised that previously filed financial statements from September 2011 through September 2013 could not be relied upon because two 8% convertible notes and accrued interest had been omitted. The company reported hiring a part-time comptroller in February 2014.
- Key operating risks: Risks include early-stage execution and competition, reliance on vendors, fulfillment and payment processors, website availability and cybersecurity, Bitcoin price volatility and exchange failures, changing regulation and tax requirements, customer adoption, and the need to raise capital. The company disclosed no material active or pending legal proceedings.
- Management outlook: Management expected the legacy business’s positive trend to continue in 2014, but also warned that the startup nature of the new business could produce losses. The filing does not provide quantified financial guidance for the BitcoinShop business.
Important facts for investors to verify
- Reconcile FY2013 earnings: the income statement reports net income of $87,186 and comprehensive income of $98,358, while balance-sheet and MD&A passages cite net income of $98,359. The filing also has inconsistent descriptions of other income and expenses.
- Confirm the final audited financial statements and any amendments or restatements addressing the omitted convertible notes and accrued interest in earlier filings.
- Trace the $629,856 reported convertible-note liability through the February 2014 note exchanges, including remaining principal, accrued interest, and any liabilities retained after the asset sale.
- Confirm the amount of cash available to the post-transaction BitcoinShop business, and how the $1.875 million private placement proceeds were used; the year-end cash figure predates those transactions.
- Assess dilution and resale overhang from acquisition shares, preferred-stock conversions, warrants, the equity incentive plan covering up to 15,503,680 shares, and applicable lockups.
- Evaluate early marketplace traction, vendor concentration, transaction margins, customer acquisition costs, and Bitcoin exposure; the filing does not provide post-acquisition operating results.