BTCS Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. BTCS described itself as focused on digital assets and blockchain, but had ceased its North Carolina transaction-verification (mining) operations in July 2016. Its e-commerce marketplace remained online but was no longer being developed, marketed, or supported.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $3,181 | $199,143, down about 98% |
| Gross profit | $3,181 | $85,161 |
| Operating expenses | $179,446 | $403,092 |
| Operating loss | $176,265 | $317,931 |
| Net loss | $35,195,544 | $2,039,341 |
| Basic and diluted loss per share | $1.78 | $0.72 |
| Cash used in operations | $90,727 | $354,308 |
| Cash at period end | $4,341 | $95,068 at December 31, 2016 |
Q1 2017 gross profit equaled revenue because no power or mining expense was recorded; the resulting 100% gross margin reflects very small e-commerce revenue and is not indicative of a scaled operating business. Investing and financing cash flows were each reported as zero for Q1 2017.
At March 31, 2017, total assets were $6,425, current liabilities were $6,090,644, and stockholders’ deficit was $6,084,219. Current assets were $4,540, including $199 of digital currencies. Current liabilities included $965,837 of accounts payable and accrued expenses, a $45,000 short-term loan, and $5,079,807 of derivative liabilities. The resulting working-capital deficit was approximately $6.1 million. Accumulated deficit was $104.2 million.
Material changes and unusual items
- Revenue fell primarily because mining operations had been suspended; mining and power expenses also fell to zero. General and administrative expense declined to $179,386 from $399,802, which management attributed partly to lower depreciation and reduced use of services.
- The $35.2 million net loss was driven mainly by non-cash fair-value losses of $33.2 million on warrant liabilities and $16.8 million on convertible notes, partly offset by a $15.9 million gain on extinguishment of debt. The quarter also included a $177,389 lease-termination loss and $693,000 of liquidated damages.
- On March 9, BTCS exchanged senior and junior notes, December 2016 convertible notes, and warrants for Series B preferred stock. The filing states that the notes were no longer outstanding at March 31 and records the settlement of approximately $90.2 million of related liabilities. Derivative liabilities were $5.1 million at quarter-end, down from $23.2 million at December 31; the filing reports significant non-cash fair-value and conversion activity.
- A one-for-60 reverse stock split took effect in February 2017. Common shares outstanding were 41,924,720 at March 31, versus 16,095,929 at December 31, 2016. The filing reports 93,794,671 common shares outstanding as of August 9, 2017, after subsequent warrant exercises and preferred conversions.
Outlook, liquidity, and risks
Management said existing liquidity was insufficient to fund operations and anticipated capital needs for the foreseeable future, and that additional financing was necessary to sustain operations and resume revenue-generating activity. The company reported no financing commitments and no assurance that additional financing would be available on favorable terms, or at all. The filing states that recurring losses, operating cash-flow deficits, and accumulated deficit raise substantial doubt about BTCS’s ability to continue as a going concern for one year from issuance of the financial statements.
Subject to obtaining financing, BTCS planned to build a portfolio of bitcoin and other protocol tokens, potentially through open-market purchases, initial digital asset offerings, or a return to transaction verification using outsourced data centers. No quantitative operating or financial guidance was provided. The company cautioned that further equity or convertible-debt financing could significantly dilute existing stockholders.
Subsequent events disclosed included a May 2017 financing that raised $1 million in cash through Series C preferred stock and warrants, and repayment of the $45,000 promissory note for $54,000. These events occurred after the reporting date and do not change the March 31 cash balance. Disclosure controls were reported ineffective due to limited segregation of duties, reliance on outside consultants, and difficulty applying complex accounting principles; management planned remediation when capital permitted. The filing reported no legal proceedings and no material changes to the risk factors in the latest Form 10-K.
Important facts for investors to verify
- Whether BTCS obtained sufficient additional financing to meet near-term obligations and continue as a going concern, including the terms and dilution from the May Series C financing.
- The status and potential share impact of outstanding warrants, preferred-stock conversions, and anti-dilution or “favored nations” provisions; the filing lists substantial potential common-share issuance.
- The assumptions and valuation inputs behind Level 3 derivative liabilities and the large, non-cash fair-value charges and debt-extinguishment gain.
- Whether the company generated meaningful revenue or restarted digital-asset operations after the quarter; its stated business plans were conditional on financing.
- Progress in remediating the disclosed material weaknesses in disclosure and financial-reporting controls.