Amid stock declines, BTCS Inc. (OTCQB:BTCS) operates an innovative business model consisting of acquiring Bitcoin USD (BTC-USD), Ethereum USD (ETH-USD), and stakes in blockchain companies. The operations do not seem to be the reason behind the value erosion, but the detrimental management of the equity structure. BTCS has recently increased the share count as the shareholders resale stock from the exercise of warrants and convertible stock. In a recent S-1/A filing, BTCS noted approximately 18% further increase in the share count amounting to approximately 432 million shares. The number of shares outstanding seems to be the most important feature to study on this name.
Source: S-1/A filing
Founded in 2013, BTCS Inc. casts itself as one of the first U.S. publicly traded companies to be involved in Digital Assets and blockchain technologies. The business plan of BTCS is explained with the following words in the prospectus:
“Subject to additional financing, the Company plans to acquire additional Digital Assets to provide investors with indirect ownership of Digital Assets that are not securities, such as bitcoin and ether. The Company intends to acquire Digital Assets through open market purchases. Additionally, the Company may acquire Digital Assets by resuming its transaction verification services business through outsourced data centers and earning rewards in Digital Assets by securing their respective blockchains.” Source: Prospectus
BTCS may not acquire any coin from initial coin offerings (“ICOs”). The fact that the SEC forces ICO promoters to register under the Securities Act and under state securities laws is critical to understand this behavior. BTCS provides the following words in this regard:
“The Company has not participated in any initial coin offerings as it believes most of the offerings entail the offering of Digital Securities and require registration under the Securities Act and under state securities laws or can only be sold to accredited investors in the United States. The Company will carefully review its purchases of Digital Securities to avoid violating the 1940 Act and seek to reduce potential liabilities under the federal securities laws”. Source: Prospectus
BTCS is currently looking for acquisition targets in the blockchain and digital asset sector with the following features. First, the target needs to be fully involved in the acquisition of blockchain technology-related business ventures. In addition, potential target companies need to have enough financing to provide working capital and cover public company expenses.
With this business model in mind, the company’s most important asset should be the financial advisors selecting the deals. The man in charge of this task is Charles Allen, Chief Executive Officer, Chief Financial Officer and Chairman of BTCS. He seems to have, first of all, great academic credentials in finance. The image below was obtained from his Linkedin:
With that, his professional expertise includes posts executing financial valuation, due diligence, and deal management. This is exactly the professional profile that investors should be looking for on this name. The image below shows one of the posts held by Charles Allen:
Many Liquid Assets And Recent Conversion of Convertible Notes
With that, the balance sheet seems beneficial. BTCS holds $0.3 million in cash, $0.6 million in digital currencies and a total of $0.98 million in total assets. Taking into account this amount of cash and liquid investments, BTCS seems ready to acquire other companies. Bear in mind that digital currencies could be rapidly converted into dollars if BTCS selects a target acquisition.
Source: S-1/A filing
The company did not provide specific information on the amount and the type of digital currencies owned. However, it did say in the last annual report that BTCS owns only two types of securities; bitcoin and ether.
“The Company currently owns two specific types of virtual currencies: bitcoin and ether.” Source: 10-K
With that, BTCS also holds a maximum of 40% stake in securities to respect the Investment Company Act of 1940. The company explains this feature with the following words:
“In order to avoid being an inadvertent investment company within the meaning of the Investment Company Act of 1940, we actively focus on ensuring that our ownership of assets that are not securities will always exceed 60% of our total assets excluding cash.” Source: 10-K
The liability side showed improvements in 2017. Large amount of convertible notes and derivative liabilities were converted. The total amount of liabilities decreased from $45 million to $0.07 million as shown in the image below. It is beneficial since current shareholders should not fear stock dilution from these convertible securities. In addition, the balance sheet looks much more clear now.
Source: S-1/A filing
The 2017 income statement shows massive reduction in the amount of total revenues. From revenues of $0.35 million in 2016, BTCS reported revenues of $4,480 in 2017. The reason for this detrimental result is the suspension of the company’s transaction verification services facility in North Carolina. As the company explained, the profits of mining bitcoin were not that significant anymore. Read the following words in this regard:
“On July 20, 2016, BTCS Digital Manufacturing (“DM”), a wholly owned subsidiary the Company suspended its North Carolina transaction verification services facility operations. The recent reduction in the block reward from 25 bitcoins to 12.5 bitcoins, often referred to as the halving, coupled with the facilities cooling system failing, has resulted in DM being unable to meet certain of its financial commitments. The Company has subsequently ceased operations at DM.” Source: 10-Q
With that, the digital manufacturing facility in North Carolina not only ceased operations in July. Only a few weeks after suspending the company’s transaction verification services, BTCS suffered a robbery losing 165 Bitmain transaction verification servers:
With these dramatic operating circumstances, the net losses were equal to -$45 million in 2017, approximately the same reported in 2016. Take a look at the P&L account below:
Source: S-1/A filing
Why were the net income results so similar in 2016 and 2017? The fact is that the revenues and the operating expenses are not that significant. The largest expenses shown on the P&L are adjustments for changes in warrants, convertible notes, and other convertible securities. With this in mind, the most important part of the financial statements of BTCS is the equity structure. Both the net losses and the stock value erosion were originated by the changes in the company’s equity.
Increase In The Amount of Shares and Recent Resale of Shares
The recent decrease in the share price has been created by the issuance of stock. The chart below shows how the share count has increased more than three times in the last three years:
Warrants and convertible notes are the reason behind the increase in the amount of shares. In a recent filing, the company announced the resale by stockholders of 67 million shares upon exercise of warrants. As a result, the number of shares outstanding is expected to increase by 18% amounting to 432 million. The image below provides further details on this new offering:
Source: S-1/A filing
Valuation: 73x 2016 Sales and 27x Its Book Value Per Share
With 432 million shares at $0.06 per share, the market capitalization equals $26 million. With $0.3 million in cash and almost no debt, the enterprise value equals $25.7 million. Using the 2017 company’s revenues, the EV/Sales seems too high, so let’s use the revenues of 2016, $0.35 million. With that figure, taken when things were going great for BTCS, the multiple is 73x, which is also very expensive.
Furthermore, with assets of $0.98 million and 432 million shares, the assets per share equals $0.0022. Taking into account that the shares trade at $0.06, or 27x its book value per share, the company seems quite expensive right now.
Finally, BTCS Inc. does seem to have acquired any stake in other blockchain company for the moment. This feature makes judging the work of the management and the future of BTCS a bit difficult. The CEO seems vastly prepared, but if he does not bring any deal, the market cannot assess his skills. Let’s hope that the company is able to finish a transaction soon.
BTCS is run by a brilliant CEO and has an interesting business model. With that said, the management of the equity structure and the resale of stock by stockholders are destroying a lot of value. 432 million shares at $0.06 seems too much money for a company that only made $0.3 million in revenues in 2016 and $4,480 in 2017. Currently trading at 27x its book value per share, BTCS does not seem interesting from the value-investing point of view. Smart investors will look for other securities in order to get exposure to the cryptocurrency industry. Finally, long-term shareholders may opt to liquidate their stake before the 18% share count increase leads to stock declines.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.