BTCS Inc. 10-Q Summary: Quarter Ended September 30, 2015
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2015, for BTCS Inc. (formerly Bitcoin Shop, Inc.), a Nevada corporation. The company operates in the blockchain and digital currency ecosystem, focusing on transaction verification services (Bitcoin mining) and an e-commerce marketplace. In July 2015, the company rebranded to BTCS Inc. to reflect a broader strategy. As of November 11, 2015, there were 157,400,545 shares of common stock outstanding.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2015 | 9 Months Ended Sep 30, 2014 |
|---|---|---|
| Total Revenues | $351,112 | $17,806 |
| Gross Profit | $172,003 | $17,806 |
| Net Loss | $(8,418,831) | $(6,608,862) |
| Net Loss Per Share (Basic/Diluted) | $(0.05) | $(0.05) |
| Cash and Equivalents (Sep 30, 2015) | $91,623 | $5,403 (Dec 31, 2014) |
| Working Capital Deficit | $(3,359,928) | $(198,023) (Dec 31, 2014) |
| Total Assets | $2,303,825 | $273,802 (Dec 31, 2014) |
| Total Liabilities | $3,535,484 | $266,120 (Dec 31, 2014) |
| Derivative Liability | $3,186,372 | $0 (Dec 31, 2014) |
Cash Flow (9 Months 2015): Operating activities used $514,612; Investing activities used $2,179,178 (primarily for mining equipment and investments); Financing activities provided $2,780,010 (primarily from private placements).
Material Changes vs. Prior Period
- Revenue Shift: Revenue increased 1,872% year-over-year, driven almost entirely by the new transaction verification (mining) business, which generated $344,822. E-commerce revenue declined to $6,290.
- Expense Surge: Operating expenses increased to $8.08 million, largely due to non-cash stock-based compensation ($6.38 million) and depreciation ($205k) related to new mining infrastructure.
- Derivative Liability: A significant new liability of $3.19 million was recorded for warrants issued in private placements containing "Most Favored Nations" provisions. This liability fluctuates with the company's stock price.
- Asset Growth: Total assets increased significantly due to a $1.5 million investment in Spondoolies-Tech Ltd. and the acquisition of mining servers.
- Impairment: The company recorded a $254,433 impairment loss on its investment in Coin Outlet due to declining Bitcoin prices.
Outlook, Risks, and Management Commentary
- Going Concern: Management states there is substantial doubt about the company's ability to continue as a going concern due to recurring losses, negative cash flows, and a working capital deficiency. The financial statements do not include adjustments for potential asset/liability reclassification if the company cannot continue.
- Capital Needs: The company requires significant additional capital to sustain operations and fund the expansion of its mining facility (currently utilizing 0.65 MW of a 3 MW capacity). Future financing is not guaranteed.
- Strategic Acquisition: On September 21, 2015, BTCS entered a Share Purchase Agreement to acquire Spondoolies-Tech Ltd. (a Bitcoin hardware manufacturer). The deal is contingent on Israeli tax rulings and regulatory approvals. Upon closing, existing BTCS shareholders would own approximately 54.4% to 55.4% of the combined entity.
- Internal Controls: The company identified material weaknesses in internal controls, citing limited segregation of duties and reliance on outside consultants for financial reporting.
Investor Verification Checklist
- Liquidity Runway: Verify the sufficiency of the $91,623 cash balance against the $3.36 million working capital deficit and ongoing burn rate.
- Derivative Liability Volatility: Monitor the $3.19 million warrant liability, which is re-measured quarterly and can significantly impact net income based on stock price fluctuations.
- Spondoolies Acquisition Status: Confirm the status of the Israeli tax authority rulings and regulatory approvals required to close the Spondoolies merger.
- Stock-Based Compensation: Assess the sustainability of operations given that a large portion of operating expenses ($6.38M for the 9-month period) is non-cash stock compensation.
- Minig Economics: Evaluate the profitability of the mining operation given the variable electricity costs and the volatility of Bitcoin prices.