BTCS Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 18, 2016. BTCS was an early-stage digital-currency company whose activities included bitcoin mining, a beta e-commerce marketplace, and development of a digital wallet and broader platform. During 2015, it shifted greater focus toward mining and expanded its North Carolina facility.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $506,190 | $38,214 |
| Mining revenue | $499,890 | $17,809 |
| E-commerce revenue | $6,300 | $20,405 |
| Gross profit | $216,091 | $31,468 |
| Net loss | $(10,047,036) | $(14,757,016) |
| Net loss per share, basic and diluted | $(0.06) | $(0.11) |
| Adjusted EBITDA (non-GAAP) | $(1,212,982) | $(721,215) |
- Revenue increased 1,225%, primarily from mining; mining contributed 99% of 2015 revenue. E-commerce revenue declined.
- Gross margin was approximately 42.7% in 2015 versus 82.4% in 2014. Mining power and expenses rose to $290,099 from $6,746.
- Operating expenses were $8.41 million, including $6.38 million of stock-based compensation. Net loss improved year over year, but adjusted EBITDA worsened.
- Operating cash outflow was $796,533; investing cash outflow was $3.23 million; financing provided $4.14 million. Cash at year-end was $124,535.
- At December 31, total assets were $3.23 million, current liabilities $6.02 million, and stockholders’ deficit $2.79 million. Working-capital deficit was approximately $5.9 million, including $3.79 million of derivative liabilities.
- The balance sheet reported $1.78 million of senior convertible notes at fair value and a $45,000 short-term loan. The notes’ stated principal was $1.45 million.
Material changes and financing
- BTCS completed the build-out of an 83,000-square-foot North Carolina mining facility, with capacity of 3 MW; it was using approximately 0.95 MW. The lease runs to January 2017 and includes a purchase option.
- BTCS raised $433,000 in a January private placement and $2.31 million in an April private placement. In December it issued secured convertible notes with $1.45 million principal for $1.3775 million after the original issue discount; the filing reports net proceeds of $1.3625 million after certain offering costs in its liquidity discussion.
- The December notes bear 10% interest, rising to 24% upon default, mature September 16, 2016, and are convertible at $0.30 per share subject to adjustments. They provide for two amortization payments; cash payments are 120% of the applicable amount. Company and subsidiary assets secure the notes, and covenants restrict specified financing and corporate actions.
- BTCS invested an additional $750,000 in Spondoolies in December, bringing its reported ownership to approximately 9.6% and total investment to $2.25 million. The contemplated acquisition of Spondoolies remained subject to conditions; the filing says completion was not assured.
- Shares issued and outstanding at December 31 were 170.48 million, with 13 million treasury shares; the filing reports 157.48 million shares outstanding as of February 17, 2016. Year-end warrants totaled approximately 29.2 million; potential dilution also includes convertible notes.
Outlook, risks, and unusual items
- Management expected continuing losses and stated that significant additional capital was needed. It described financing plans as cost control, additional securities issuance, and increased mining revenue. The filing cited an estimated cash runway through July 2016, excluding further facility build-out, but the auditor and management both reported substantial doubt about the company’s ability to continue as a going concern.
- Bitcoin price volatility, network difficulty, mining rewards, electricity costs, hardware obsolescence, operational interruptions, and competition could materially affect mining economics. The company’s mining servers were depreciated over an estimated two-year useful life.
- Digital currencies were not insured and were not covered by FDIC or SIPC protections. The filing also described material cybersecurity, private-key, exchange, regulatory, tax, and blockchain-fork risks.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, identifying material weaknesses related to limited staffing and segregation of duties, transaction controls, and complex accounting. The auditor did not attest to internal control effectiveness.
- Reported unusual/noncash items included $6.38 million in stock-based compensation, $1.05 million loss on issuance of units, $952,060 loss on issuance of convertible notes and warrants, and a $482,666 gain from fair-value changes in warrant liabilities. Coin Outlet-related investments were impaired; the filing reports a $254,433 investment impairment in 2015.
- As a subsequent event, CSC returned $300,890 of equipment funding advanced by BTCS in February 2016, net of a two-month security deposit; the equipment was to be leased for approximately $11,000 monthly over 36 months.
Important facts for investors to verify
- How much additional capital is required, whether financing is available, and how the secured notes’ September 2016 maturity and amortization obligations will be met.
- Whether management’s stated cash-runway estimate reconciles with year-end cash, subsequent financing and spending, and expected operating cash burn.
- Mining output, realized bitcoin prices, network difficulty, power costs, and utilization of the facility—and whether mining can generate positive operating cash flow.
- The terms, fair-value assumptions, conversion and dilution effects of the notes, warrants, and derivative liabilities; also reconcile the filing’s differing descriptions of net proceeds from the December financing.
- Status and financial implications of the proposed Spondoolies transaction, the carrying value of the investment, and any further impairment exposure.
- Progress in remediating the disclosed material weaknesses and the company’s ability to maintain timely, reliable financial reporting.