BTCS Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance sheet compared with December 31, 2015. The company focuses primarily on digital-currency transaction verification (bitcoin mining), with hosting and a beta e-commerce marketplace. Financial statements are unaudited.
Financial results and position
- Revenue: $199,143, up from $39,076 in Q1 2015. Transaction verification contributed $191,403 (about 96%); hosting contributed $7,740; e-commerce revenue was zero. The MD&A describes the increase as 4,103%, but the reported figures imply an increase of about 410%.
- Gross profit and margin: $85,161, compared with $22,133. Gross margin was about 42.8%, versus 56.6% in Q1 2015. Power and mining costs rose to $113,982 from $16,943.
- Operating expenses and loss: Operating expenses were $403,092, down from $1.61 million, largely because stock-based compensation fell from about $1.4 million to zero. Operating loss was $317,931, versus $1.59 million. Net loss was $2.04 million, versus $3.35 million; Q1 2016 included a $2.25 million investment impairment. Basic and diluted loss per share was $0.01, versus $0.02.
- Cash flow: Operating cash use was $354,308, compared with $101,353 in Q1 2015. Investing activities provided $292,333, principally from a $300,889 lease-deposit refund; financing provided no cash. Cash declined by $61,975 to $62,560.
- Liquidity and liabilities: Current assets were $126,555 and current liabilities $5.40 million, for a working-capital deficit of approximately $5.3 million. Current liabilities included $1.75 million of senior convertible notes at fair value and $3.30 million of derivative liabilities; a $45,000 short-term loan was also reported. Total assets were $571,757 and stockholders’ deficit was $4.83 million.
- Other balance-sheet items: Digital currencies were valued at $45,517. The $2.25 million Spondoolies investment reported at year-end was fully impaired during the quarter.
Changes, outlook, and risks
- Mining-related revenue expanded substantially from the prior-year quarter, while general and administrative costs declined. Mining expenses also increased, and gross margin was lower.
- Management expects losses to continue and says existing liquidity is insufficient to fund operations and anticipated capital expenditures. Significant additional debt or equity financing is required; no financing commitments were in place, and availability on acceptable terms is uncertain. The filing states there is substantial doubt about the company’s ability to continue as a going concern.
- BTCS reported using about 0.95 megawatts of its facility’s 3-megawatt capacity and said it may expand utilization with additional funding. Management also discussed hosted mining and evaluating data-center services; no quantitative financial guidance was provided.
- Mining competitiveness may be affected by rapidly changing technology, more efficient or lower-cost competitors, and changes in bitcoin rewards and transaction fees. The company also described competition affecting its e-commerce marketplace.
- On May 4, 2016, an Israeli court appointed a temporary liquidator for Spondoolies. BTCS said its pending acquisition might not be completed and that it was examining potential claims. The impairment was recorded in Q1; the liquidation hearing occurred afterward.
- Disclosure controls were assessed as ineffective due to limited segregation of duties, reliance on outside consultants, and difficulty applying complex accounting rules. Management said remediation depends on having sufficient capital.
- After quarter-end, BTCS dismissed Marcum LLP and engaged RBSM LLP as its independent auditor. The company reported no legal proceedings and no material changes to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Whether BTCS obtained financing after filing, and whether available funds could sustain operations.
- The status and recoverability of any claims or investments related to Spondoolies and the feasibility of the proposed acquisition.
- Mining revenue, operating costs, capacity utilization, and the company’s ability to compete as mining economics change.
- The reported revenue-growth percentage: the filing’s stated 4,103% does not reconcile with the disclosed revenue figures, which indicate growth of about 410%.
- Share-count reconciliation: the balance sheet reports 170,480,545 common shares issued and outstanding while also listing 13 million treasury shares; the cover reports 157,480,545 shares outstanding as of May 16, 2016.
- Progress addressing ineffective disclosure controls and internal-control weaknesses, and any effects of the auditor change.