BTCS Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 6, 2019. This is an annual report, not a standalone fourth-quarter report. Comparative 2017 figures are marked restated.
Business context
BTCS described itself as an early-stage digital-asset and blockchain company. Its e-commerce business generated no revenue in 2018, and its transaction-verification (mining) operations remained suspended. Management’s proposed strategy—conditional on raising capital—included acquiring digital assets and blockchain businesses, and potentially resuming mining using outsourced data centers. The Company reported no digital currencies on its December 31, 2018 balance sheet.
Financial results and liquidity
| Metric | 2018 | 2017, restated |
|---|---|---|
| Revenue | $0 | $4,480 |
| Gross profit | $0 | $4,320 |
| Operating expenses | $990,169 | $1,574,093 |
| Net loss | $826,420 | $45,464,569 |
| Net cash used in operating activities | $505,619 | $1,488,254 |
| Cash at year-end | $52,117 | $303,334 |
- 2018 operating expenses fell about $584,000, mainly from lower general and administrative costs, including reduced stock compensation and bonuses. The company remained loss-making despite the lower expenses.
- The much smaller 2018 net loss primarily reflects the absence of large 2017 non-cash charges, including warrant-liability and convertible-note fair-value adjustments and preferred-stock issuance losses. 2018 included a $163,749 realized gain on sales of digital currencies.
- At December 31, 2018, total assets were $63,153, current liabilities were $319,146, and stockholders’ deficit was $255,993. Current liabilities included a $200,000 short-term note; accounts payable and accrued expenses were $119,146. The filing reports negative working capital of approximately $300,000.
- The December 18, 2018 note bears 12% interest, is due September 18, 2019, and bears 20% interest upon default. Cash was approximately $91,850 on January 31, 2019; management also disclosed an approximately $80,000 monthly cash burn and stated available cash might cover public-company costs only through May 1, 2019, depending on expenses and excluding employee pay.
- Cash from financing activities was $257,000 in 2018, including $200,000 from the note and $57,000 from warrant exercises. Subsequent warrant exercises raised $148,843 through January 31, 2019.
Material changes, unusual items and reporting matters
- The 2017 financial statements were restated after the Company corrected its accounting for digital assets. The restatement reduced reported 2017 digital currencies and total assets by $399,233, and increased the reported 2017 net loss by the same amount. Digital assets are now accounted for as indefinite-lived intangible assets at cost less impairment; impairment losses are not reversed.
- The auditor expressed an unmodified opinion on the financial statements but highlighted substantial doubt about the Company’s ability to continue as a going concern. The filing says additional financing is necessary and that financing is not assured.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end 2018. Identified weaknesses included inadequate segregation of duties and oversight, insufficient controls to capture material transactions, and difficulty applying complex accounting rules. The weaknesses had not been remediated.
- Common shares outstanding rose from 363,043,769 at December 31, 2017 to 375,455,986 at December 31, 2018; the filing reports 387,281,530 outstanding on January 31, 2019. It also reports 29,414 Series C-1 preferred shares convertible into 5,882,800 common shares and 46,832,367 warrants at January 31, 2019.
- The Company reported approximately $115.3 million of accumulated deficit at year-end. It has two employees, disclosed unpaid executive salaries, and warned that additional equity or convertible-debt financing could materially dilute existing shareholders. The filing also describes possible severance obligations and contingent executive bonuses.
Outlook and principal risks
Management expects losses to continue and says existing liquidity is inadequate for the next 12 months or to restart revenue-generating activities. Planned acquisitions and any return to mining depend on financing; management said current mining economics did not offer a positive return on investment. Principal risks include inability to secure financing, potential cessation of operations, digital-asset price volatility, regulatory uncertainty, cybersecurity and custody risks, possible classification of digital assets as securities, and the risk of becoming subject to the Investment Company Act.
The filing also identifies dependence on two executives, potential conflicts involving their roles at Global Bit Ventures, limited OTCQB trading liquidity, potential dilution, and the possibility that additional legal or accounting costs could strain cash. No material active or pending legal proceedings were reported.
Important facts for investors to verify
- Current cash, monthly cash requirements, employee compensation arrears, and the Company’s ability to meet obligations as they fall due; specifically, the status and repayment terms of the $200,000 note.
- Whether financing has been secured and whether the stated business strategy or mining plans have advanced.
- The status of internal-control remediation and the Company’s procedures for accounting for and safeguarding any digital assets.
- Reconcile the filing’s share and warrant disclosures: year-end common shares, January 31 common shares and warrants, and the fully diluted total.
- Reconcile the statement that no digital assets were held at year-end with risk-factor language describing ether held at an exchange, which may be outdated or inconsistent.
- Assess potential dilution from preferred shares, warrants, future financings, and contingent compensation or severance obligations.