BTCS Inc. (BTCS) has been unable execute on any of their business plans in the past and has left investors behind but now this management seems to have huge incentive to produce and the ship is moving forward. There have been many starts and stops with this company but now it feels like the engine finally turned over. On August 21, 2017 BTCS and Blockchain Global Limited (BCG) signed a non-binding LOI to merge based on certain conditions. The most important requirements was cleaning up the balance sheet. In order to do this management had to find a way to get rid of the last round of toxic debt and did so by diluting the company severely and giving them some warrants. They also had to raise funds to pay off note holders and get the company in a position for acquisition. The downside of the deal is that BTCS shareholders will only get 25% of BCG but that includes 13% going to management. The premium in BTSC price is dependent on these 2 executives performing. If you look at the latest quarter investors will realize that there are no significant revenues or operations. They have ceased and the sole value lies in consummating the BCG acquisition.
BCG will get 75% of the company. Which will leave investors with 13% while the 2 executive officers will get 12%. BTCS management was required to retire the preferred stock in order to comply with the anti-dilution provision. The Equity Incentive plan of 20% of the diluted shares happens after the acquisition but in fairness it goes to insiders who are restricted from selling but this does represent more dilution nonetheless. If you do the math the 13% of shareholders have management getting another 20% which is over 100% dilution to existing shareholders.
Baby Steps of Performance
The company was required to remove the anti-dilution protection from the last round of financing. Their answer to this was filed in an 8-K that gave investors warrants at an effective .085 strike price until 2022. The closing was done in two parts with the first part of $100,000 released early in October to complete the audits and then the balance of $900,000 was due when the company filed a 10-Q. This revealed that “as of the date of this Report, we have approximately $5,200 in available cash, and 58.36 bitcoins (assuming timely filing and elimination of the obligation to return the bitcoin). We then will have sufficient resources to pay the costs associated with the proposed merger and pay our management accrued and future compensation through the anticipated closing date of late 2017.” It’s clear this was another step forward in closing an LOI.
Motivation for Inking Deal
The thing about a non-binding LOI is that there is wiggle room for both parties to get out of the deal. BCG has a lot of bitcoin assets and over the past couple of months bitcoin has gone up a huge amount so have the underlying assets. Will the deal get inked with a market of $26 million. It really depends on if exchanges are in demand and the recent Coinbase transaction suggests exchanges are going for a premium. Coinbase was seeking funding at $1.0 billion valuation according to the Wall Street Journal.
The Acquisition
Bitcoin Exchange – BCG wholly owns and operates ACX.io, an Australian Bitcoin Exchange and liquidity provider. Leveraging BCG’s asset security, exchange IP, and a proprietary liquidity engine, ACX provides a process to buy and sell bitcoin. Further, through ACX, BCG operates a proprietary arbitrage engine which captures a spread across multiple liquidity pools.
Bitcoin Mining – BCG currently owns approximately 6 petahash (“PH”) of mining capacity in a purpose-built outsourced facility in China. BCG’s China operation has access to electricity at approximately US$0.04/kwh.
Blockchain start-up accelerator -BCG complements its core business operations with a novel start-up accelerator program targeted at companies that are developing innovative blockchain technologies and applications. Through BCG’s Melbourne Blockchain Center, a 6,000 square-foot leased facility launched in late 2014 and located in the heart of Melbourne, BCG has played a role in accelerating the development of a number of companies. BCG typically retains an equity stake in the companies it incubates and/or receives a licensing agreement or other economic incentive.
Blockchain Consultancy -BCG also provides blockchain technology advisory services including the preparation and support of crowd-sourced Blockchain token sales and Initial Coin Offerings.
Not much is known about BCG except what was provided in the LOI announcement. The financial metrics given were $4.4 mil 2016 Revenue and $3.5 mil in assets – Bitcoin and Cash as of July 1, 2017. The revenues from an exchange are fees that they make which are transaction based. They charge nothing to post a bid or offer but they do charge 1% fee to move the money to a bank. This is a very simple transaction based model. Growth in revenue is based on deposits and transactions. In the future you have to think they will expand and offer margin which will allow them to make money off of borrowing and leverage of the asset.
Post Acquisition
The primary risk is the closing of the transaction. Can management clean this company up in time. They narrowly met the last deadline to provide financials. Their incentive to get this deal don’t is very high given the valuation of the stock. They narrowly met their October 24th deadline with their lenders but they did in finally perform for shareholders. The question is do investors still have an appetite for an exchange because exchanges are quick get rich business plans. They pay off over time as users transact business. Looking post acquisition if management doesn’t pursue an aggressive strategy the stock could be at high risk of falling as investors don’t see the profits falling to the bottom line.
Investment Summary
Anything related to cryptocurrency seems to be in play but investors need to look and analyze the underlying business. The exchange is not a very sexy business model requiring a long payback. The dilution to shareholders doesn’t stop after the acquisition. There is another round of 20% to management built into the deal. It’s unclear what new management intends to after closing. Will they grow the business and earn their 20% or just take it and do nothing? Time will tell but a lot of investors are looking at this transaction because it appears to be the first cryptocurrency exchange to be publically held. A lot of investors are hoping to see this succeed.
This article was submitted by Mike Sheikh. Mike is a contributor for Seeking Alpha. Mike (or PSinvestor) have NOT been compensated for this article and does not currently hold a position in the company, but may trade it in the near future. You can follow Michael on TWITTER @breckskifan
