BTCS Inc. — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2021. BTCS is an early-stage blockchain and digital-asset company that resumed proof-of-stake blockchain infrastructure operations in Q1 2021. It also is developing a staking-as-a-service platform and a digital-asset analytics platform, and holds digital assets as treasury assets.
Financial performance and position
- Revenue and gross profit: Q2 staking revenue was $380,499, versus none in Q2 2020; six-month revenue was $453,023, versus none in the prior-year period. Gross profit was $321,250 for Q2 and $378,778 for six months, equivalent to gross margins of approximately 84% and 84%, respectively.
- Operating costs and earnings: Q2 operating expenses were $2.26 million, up from $257,301; six-month operating expenses were $10.24 million, up from $530,519. Net loss was $4.84 million for Q2 and $11.62 million for six months, compared with $420,302 and $790,573, respectively. Six-month loss attributable to common stockholders was $16.68 million, including $5.05 million of preferred-stock deemed dividends; loss per share was $0.32 versus $0.03.
- Key expense items: Six-month stock-based compensation was $9.23 million. Digital-asset impairment was $2.27 million in Q2 and $3.57 million for six months. Six-month realized gains on digital-asset transactions were $3.05 million. Debt-discount amortization was $1.13 million for six months.
- Cash flow: Six-month operating cash use was $3.29 million; investing cash use was $8.50 million, primarily for productive digital assets for staking; financing cash inflow was $14.18 million. Cash increased by $2.39 million to $2.92 million at June 30. The company reported approximately $2.7 million of cash at August 5.
- Assets and liquidity: At June 30, total assets were $14.43 million, including $2.92 million cash, $2.65 million current digital assets and $8.26 million staked digital assets. Current liabilities were $1.43 million and working capital was $4.8 million. Management stated available cash was adequate for at least the next 12 months.
- Debt and capital: Current liabilities included $1.27 million of convertible notes, net. The notes had $2.0 million aggregate principal outstanding, each bearing 12% interest and due October 2021 and November 2021; accrued interest was approximately $119,000. The company raised approximately $14.2 million net through financing activities during the six months. Common shares outstanding rose to 57.1 million from 42.0 million at year-end.
- Other measure: Management reported six-month Adjusted EBITDA of $2.20 million, a non-GAAP measure that excludes, among other items, stock compensation and digital-asset impairment. It cautioned that the measure has limitations and should not replace GAAP results.
Material changes versus prior comparable periods
- Staking operations generated the company’s first reported staking revenue in the periods shown; the company operated 240 Ethereum Beacon Chain nodes and deployed a Cardano pool.
- Operating expenses increased substantially, primarily due to stock-option compensation. Q2 compensation and related expenses were $1.70 million; for six months they were $9.04 million.
- Q2 losses increased alongside digital-asset impairment and debt-discount amortization. For the six-month comparison, the $3.05 million realized gain on digital assets partially offset impairments and other expenses.
- The company invested $8.5 million in productive digital assets for staking and ended the quarter with a reported $21.50 million fair market value of digital assets in its MD&A table. This differs from balance-sheet carrying values because digital assets are recorded at cost less impairment.
- Funding included a $9.5 million registered direct offering of common shares and warrants, equity-line proceeds, convertible notes, warrant exercise proceeds and Series C-2 preferred stock. Series C-2 had anti-dilution provisions; at quarter-end it was convertible into approximately 40.1 million common shares.
Outlook, commentary and risks
- No quantified revenue, earnings or operating guidance was provided. Management said proof-of-stake infrastructure is expected to be a core focus and plans to expand to other blockchain protocols. It is developing staking and analytics platforms; analytics development had been delayed by the pandemic, and an IT service provider was engaged in April to accelerate it.
- Management cited the fast-evolving digital-asset market and competition from better-resourced participants. Relevant exposures include digital-asset price volatility and impairment, staking and protocol risks including potential slashing, regulatory uncertainty, and the need for continued financing. The filing states digital assets are carried at cost less impairment and impairment losses cannot be reversed.
- Management reported no off-balance-sheet transactions, legal proceedings or subsequent events. It stated that no dividends are planned in the foreseeable future.
- Disclosure controls were assessed as not effective at the reasonable-assurance level as of June 30, due to limited segregation of duties and insufficient independent review. A full-time CFO was hired June 28; management said remediation was underway and believed the weakness had been removed and controls were then effective.
Important facts for investors to verify
- Reconcile the $21.50 million period-end digital-asset fair value in MD&A with the lower balance-sheet carrying amounts, and review subsequent asset values; the filing reported $26.5 million fair value as of August 5.
- Assess the timing and terms of the two convertible notes due in October and November 2021, including conversion discounts, floors, accrued interest and potential dilution.
- Review the Series C-2 conversion and anti-dilution terms, including the disclosed potential conversion into 40.1 million shares, alongside warrants, options and other equity awards.
- Evaluate whether staking revenue can grow enough to support operating costs, and monitor platform development, market conditions, impairment exposure and the effectiveness of control remediation.
- Consider the recurring and potentially dilutive compensation structure: six-month stock-based compensation was $9.23 million, and the filing disclosed substantial outstanding options and restricted stock units.