Notes
to Unaudited Condensed Consolidated Financial Statements
Note
1 - Business Organization and Nature of Operations
BTCS
Inc. (formerly Bitcoin Shop, Inc.), a Nevada Corporation (the “Company”) in February 2014 entered the business of
hosting an online ecommerce marketplace where consumers can purchase merchandise using digital currencies, including bitcoin and
is building a diversified company with operations in the blockchain and digital currency ecosystems. In January 2015, the Company
began a rebranding campaign using its BTCS.COM domain (shorthand for Blockchain Technology Consumer Solutions) to better reflect
its broadened strategy. The Company released its new website which included broader information on its strategy, and access to
its ecommerce site. In late 2014 we shifted our focus towards our transaction verification service business, also known as bitcoin
mining. Although we continue to support our ecommerce marketplace we are no longer developing or actively marketing it and our
support of the ecommerce marketplace is limited.
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 is pursuing the following options: i) seeking additional capital to potentially
bring DM back online; ii) a possible sale of DM; iii) and permanently winding down DM’s operations. If the Company ceases
operations at DM, it may relocate its transaction verification services business to others data centers which may be more appropriate
for the Company’s current scale of operations.
On
August 8, 2016, DM discovered that its facility in North Carolina was broken into and certain of its equipment and approximately
165 Bitmain transaction verification servers leased from CSC Leasing Company were stolen. The value of the stolen equipment owned
by the Company does not appear to be material. The Company has reported the theft to local authorities as well its insurance company
regarding next steps.
The
Company was incorporated in the State of Nevada in 2008 under the name “Hotel Management Systems, Inc.”. On February
5, 2014, the Company entered into an Exchange Agreement with BitcoinShop.us, LLC, a Maryland limited liability company (“BCSLLC”),
and the holders of the membership interests in BCSLLC. Upon closing of the Share Exchange, BCSLLC Members transferred all the
outstanding membership interests of BCSLLC to the Company in exchange for an aggregate of 100,773,923 shares of the Company’s
common stock (the “Reverse Merger”). As a result, BCSLLC became a wholly-owned subsidiary of the Company. Immediately
following the Share Exchange with BCSLLC, the Company discontinued its business as manufacturer of touch screen and touch board
products, interactive whiteboard displays and large touch-screens.
The
Company is an early entrant in the digital currency market and one of the first U.S. publicly traded companies to be involved
with digital currencies. The Company currently operates a beta ecommerce marketplace which already accepts a variety of digital
currencies, and has been operating its transaction verification services business, which generate bitcoins (i.e. bitcoin mining).
Note
2 - Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q
and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying condensed consolidated
financial statements do not include all of the information and notes required by GAAP for annual financial statements, but reflect
all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented. In the opinion of the Company’s management, all
adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position
and the results of operations for the periods presented have been included. Interim results are not necessarily indicative of
results for a full year. The condensed consolidated financial statements and notes should be read in conjunction with the financial
statements and notes for the year ended December 31, 2015.
Note
3 - Liquidity, Financial Condition and Management’s Plans
For
the six months ended June 30, 2016 and 2015, the Company recognized a net loss of approximately $30.2 million and a net
loss of approximately $4.6 million, respectively. The Company had cash and cash equivalents of approximately $67,000 and
a working capital deficiency of approximately $32.0 million at June 30, 2016, which includes $27.5 million for the fair
value of derivative liabilities. The Company expects to incur losses into the foreseeable future as it undertakes its efforts
to execute its business plans.
The
Company will require significant additional capital to sustain its short-term operations and make the investments it needs to
execute its longer term business plan. The Company’s existing liquidity is not sufficient to fund its operations and anticipated
capital expenditures for the foreseeable future. The Company is currently seeking to obtain additional debt or equity financing,
however there are currently no commitments in place for further financing nor is there any assurance that such financing will
be available to the Company on favorable terms, if at all.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about
the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has not made adjustments to the accompanying consolidated financial
statements to reflect the potential effects on the recoverability and classification of assets or liabilities should the Company
be unable to continue as a going concern.
The
Company continues to incur ongoing administrative and other operating expenses, including public company expenses, in excess of
revenues. While the Company continues to implement its business strategy, it intends to finance its activities by:
●
|
managing
current cash and cash equivalents on hand from the Company’s past debt and equity offerings, by controlling costs, and
|
|
|
●
|
seeking
additional financing through sales of additional securities.
|
Note
4 - Summary of Significant Accounting Policies
A
summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial
statements is as follows:
Transaction
Verification Services
Revenue
earned from bitcoin processing activities (“Transaction Verification Services”), commonly termed ‘mining’
activities, is recognized at the fair value of the bitcoins received as consideration on the date of actual receipt.
The
Company generates revenue by performing computer processing activities for bitcoin generation. In the digital-currency industry
such activity is generally referred to as Transaction Verification Services or bitcoin mining. The Company receives consideration
for performing such transaction verification activities in the form of bitcoins. Revenue is recorded upon the actual receipt of
bitcoins.
Expenses
consist of utilities paid to cover our electric costs, rent for our facility and personnel to run our facility. The expenses related
to our Transaction Verification Services activities are affected by the level of activities and not the ultimate generation of
bitcoins. The Company expenses these costs as they are incurred.
Net
Loss per Share
Basic
loss per share is computed by dividing net loss applicable to common stock by the weighted-average number of common shares outstanding
during the period.
For
purposes of calculating basic and diluted earnings per share, vested restricted stock awards are considered outstanding. Under
the treasury stock method, diluted loss per share reflects the potential dilution that could occur if securities or other instruments
that are convertible into common stock were exercised or could result in the issuance of common stock. The following financial
instruments were not included in the diluted loss per share calculation as of June 30, 2016 and 2015 because their effect was
anti-dilutive:
|
|
June 30,
2016
|
|
|
June 30, 2015
|
|
Stock options
|
|
|
-
|
|
|
|
12,450,000
|
|
Warrants
|
|
|
1,184,186,577
|
|
|
|
22,991,679
|
|
Convertible notes
|
|
|
274,376,241
|
|
|
|
-
|
|
Favored Nations
|
|
|
474,752,455
|
|
|
|
-
|
|
Excluded potentially dilutive securities
|
|
|
1,933,315,273
|
|
|
|
35,441,679
|
|
Recent
Accounting Pronouncements
In
January 2016, FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU
No. 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies
the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment
to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance
sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in
the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure
the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation
of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the
accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance
on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The Company is currently evaluating the impact that ASU No. 2016-01 will have on its condensed consolidated
financial statements and related disclosures.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
In
February 2016, FASB issued ASU No. 2016-02,
Leases
(Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840)
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.
The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on
the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine
whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease,
respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater
than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to
existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15,
2018, with early adoption permitted upon issuance. When adopted, the Company does not expect this guidance to have a material
impact on its condensed consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-08, Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations
.
The purpose of ASU No. 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. For public
entities, the amendments in ASU No. 2016-08 are effective for interim and annual reporting periods beginning after December 15,
2017. The Company is currently assessing the impact of ASU No. 2016-08 on its condensed consolidated financial statements and
related disclosures.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based
Payment Accounting
. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies
in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as
income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates
the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies
to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore,
ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception
to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer
with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of
taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a
company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding
obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash
flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments
by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting
the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods
beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The
Company is currently assessing the impact that ASU No. 2016-09 will have on its condensed consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customer
. The new guidance is an update to ASC
606 and provides clarity on: identifying performance obligations and licensing implementation. For public companies, ASU No. 2016-10
is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. The
Company is currently evaluating the impact that ASU No. 2016-10 will have on its condensed consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
,
which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. The Company is currently evaluating the impact of this new pronouncement on its condensed consolidated
statements of cash flows.
Subsequent
events
Subsequent
events have been evaluated through the date of this filing.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
5 - Property and Equipment
Property
and equipment consist of the following at June 30, 2016 and December 31, 2015:
|
|
June
30, 2016
|
|
|
December
31, 2015
|
|
Equipment
|
|
$
|
-
|
|
|
$
|
109,493
|
|
Computer
|
|
|
-
|
|
|
|
3,086
|
|
Leasehold improvement
|
|
|
-
|
|
|
|
242,091
|
|
Transaction verification
servers
|
|
|
-
|
|
|
|
451,281
|
|
|
|
|
-
|
|
|
|
805,951
|
|
Accumulated depreciation
|
|
|
-
|
|
|
|
(316,531
|
)
|
Property and
equipment, net
|
|
$
|
-
|
|
|
$
|
489,420
|
|
Depreciation
expense was approximately $84,000 and $68,000 for the three months ended June 30, 2016 and 2015, respectively, and $177,000 and
$114,000 for the six months ended June 30, 2016 and 2015, respectively.
During
the six months ended June 30, 2016, the Company purchased fixed assets of approximately $19,000, sold fixed assets amounting to
approximately $55,000, resulting in loss on sale of fixed assets of $35,000.
Due
to the financial nature of the Company as of June 30, 2016, the Company impaired all fixed assets and recorded an approximately
$241,000 impairment charge during the three months ended June 30, 2016.
Note
6 - Investment at Cost
Spondoolies
The
Company had total investment of approximately $2.3 million to Spondoolies Tech Ltd. (“Spondoolies”) as of December
31, 2015.
On
May 5, 2016, the Company was informed that, on May 4, 2016, a hearing was held in the district court in Beersheva, Israel during
which certain parties sought appointment of a temporary liquidator for Spondoolies. As a result of the liquidation the Company
is no longer pursuing the acquisition of Spondoolies. The Company assessed impairment for the Spondoolies investment and determined
that this investment is not recoverable and as such fully impaired.
During
the six months ended June 30, 2016, the Company recorded impairment loss of approximately $2.3 million.
Note
7 - Fair Value Measurements
The
Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy.
The
following table presents information about the Company’s liabilities measured at fair value on a recurring basis and the
Company’s estimated level within the fair value hierarchy of those assets and liabilities as of June 30, 2016 and December
31, 2015:
|
|
Fair
value measured at June 30, 2016
|
|
|
|
Total
carrying value
at June 30,
|
|
|
Quoted
prices in active
markets
|
|
|
Significant
other
observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2016
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Currencies
|
|
$
|
17,872
|
|
|
$
|
17,872
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
13,015,937
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,015,937
|
|
Derivative liabilities for shortfall
of shares
|
|
|
14,479,363
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,479,363
|
|
Convertible notes at fair value
|
|
|
3,840,110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,840,110
|
|
|
|
Fair
value measured at December 31, 2015
|
|
|
|
Total
carrying value
at
December 31,
|
|
|
Quoted
prices in active
markets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
2015
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Currencies
|
|
$
|
17,036
|
|
|
$
|
17,036
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
3,794,153
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,794,153
|
|
Convertible notes at fair value
|
|
|
1,781,156
|
|
|
|
|
|
|
|
|
|
|
|
1,781,156
|
|
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
There
were no transfers between Level 1, 2 or 3 during the six months ended June 30, 2016.
The
following table presents additional information about Level 3 assets and liabilities measured at fair value. Both observable and
unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category.
As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in fair
value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable
long-dated volatilities) inputs.
Changes
in Level 3 liabilities measured at fair value for the six months ended June 30, 2016:
Derivative liabilities Balance - January 1,
2016
|
|
$
|
3,794,153
|
|
Change in fair
value of derivative liability
|
|
|
9,221,784
|
|
Derivative liabilities Balance
- June 30, 2016
|
|
$
|
13,015,937
|
|
Derivative liabilities for shortfall of shares Balance - January
1, 2016
|
|
$
|
-
|
|
Change
in fair value of derivative liability shortfall of shares
|
|
|
14,479,363
|
|
Derivative liabilities for shortfall
of shares Balance - June 30, 2016
|
|
$
|
14,479,363
|
|
Convertible notes at fair
value Balance - January 1, 2016
|
|
$
|
1,781,156
|
|
Addition of convertible notes
|
|
|
100,000
|
|
Conversion of notes into common stock
|
|
|
(890,179
|
)
|
Loss on extinguishment of debt
|
|
|
2,512,473
|
|
Change in fair
value of convertible notes (including OID discount)
|
|
|
336,660
|
|
Convertible notes
at fair value Balance - June 30, 2016
|
|
$
|
3,840,110
|
|
The
Company’s derivative liabilities are measured at fair value using the Monte Carlo simulation valuation methodology. A summary
of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
derivative liabilities that are categorized within Level 3 of the fair value hierarchy for the six months ended June 30, 2016
is as follows:
Warrant
Liabilities
Date of valuation
|
|
June
30, 2016
|
|
Strike price
|
|
$
|
0.01
|
|
Volatility (annual)
|
|
|
146% to 155
|
%
|
Risk-free rate
|
|
|
0.64% to 0.93
|
%
|
Contractual term (years)
|
|
|
0.60 to 4.5
|
|
Dividend yield (per share)
|
|
|
0
|
%
|
Derivative
Liabilities for shortfall of shares
Date
of valuation
|
|
June
30, 2016
|
|
Strike price
|
|
$
|
0.01
|
|
Volatility (annual)
|
|
|
155.0
|
%
|
Risk-free rate
|
|
|
0.9
|
%
|
Contractual term (years)
|
|
|
4.0
|
|
Dividend yield (per share)
|
|
|
0
|
%
|
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Convertible
Notes at Fair Value
Date of valuation
|
|
June
30, 2016
|
|
Strike price
|
|
$
|
0.01
|
|
Volatility (annual)
|
|
|
90.6% to 193.2
|
%
|
Risk-free rate
|
|
|
0.02% to 0.4
|
%
|
Dividend yield (per share)
|
|
|
0
|
%
|
The
development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the
responsibility of the Company’s Management.
Note
8 - Stock Based Compensation
Compensation
expense for all stock-based awards is measured on the grant date based on the fair value of the award and is recognized as an
expense, on a straight-line basis, over the employee’s requisite service period (generally the vesting period of the equity
award). The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model. Stock-based
compensation expense is recognized only for those awards that are expected to vest using an estimated forfeiture rate. The Company
estimates pre-vesting option forfeitures at the time of grant and reflects the impact of estimated pre-vesting option forfeitures
in compensation expense recognized. For options and warrants issued to non-employees, the Company recognizes stock compensation
costs utilizing the fair value methodology over the related period of benefit.
Stock-based
compensation expense was $0 and $1.4 million for the three months ended June 30, 2016 and 2015, respectively. Stock-based compensation
expense was $0 and $2.8 million for the six months ended June 30, 2016 and 2015, respectively.
Stock
Options
There
are no stock options outstanding as of June 30, 2016 and December 31, 2015.
Note
9 - Related Party Transactions
On
February 19, 2016, the Company entered into a securities escrow agreement (the “Securities Escrow Agreement”) with
Charles Allen its Chief Executive Officer, Chief Financial Officer and Chairman, and Michal Handerhan, its Chief Operating Officer
and corporate secretary (collectively, the “Principal Stockholders”). Pursuant to the Securities Escrow Agreement
and for the benefit of the Company’s public shareholders the Principal Stockholders voluntarily agreed to place stock certificates
representing 24,000,000 shares of Common Stock (the “Escrow Shares”) into escrow.
The
return of 12,000,000 escrowed shares (the “Listing Escrow Shares”) to the Principal Stockholders shall be based upon
the successful listing of the Company’s Common Stock on a National Stock Exchange on or before December 31, 2016 (the “Listing
Condition”). The Listing Escrow Shares will be returned to the Company for cancelation for no consideration if the Company
fails to achieve the Listing Condition. The return of 12,000,000 escrowed shares (the “Merger Escrow Shares”) to the
Principal Stockholders shall be based upon the successful consummation of the merger with Spondoolies-Tech Ltd. (“Spondoolies”)
on or before December 31, 2016 (the “Merger Condition”). The Merger Escrow Shares will be returned to the Company
for cancelation for no consideration if the Company fails to achieve the Merger Condition.
Pursuant
to the June 3, 2016 Amendment Agreement (as defined in Note 11 below) the Principal Stockholders each received $86 in connection
with their pro-rata portion of the Payment (as defined in Note 11 below). In April 2015, the Principal Stockholders each subscribed
for $20,000 in the Subscription Agreement (as defined in Note 11 below) for an aggregate of $40,000.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
10 - Notes Payable
On
June 6, 2016, the Company, entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
certain institutional investors (the “Purchasers”), pursuant to which the Purchaser subscribed for up to $375,000
of a 20% Original Issue Discount Junior Secured Convertible Notes (the “Junior Notes”). The aggregate principal amount
of the Junior Notes issued at the initial close is $125,000 and the Company received $100,000 after giving effect to the 20% original
issue discount. The lead investor was granted the option to require the Company to sell the Purchasers up to two additional Junior
Notes in the principal amount of $125,000 during each of the periods that begin with the Initial Closing Date and end (i) on or
before 45 days from the Initial Closing Date, and (ii) on or before 90 days from the Initial Closing Date.
The
Junior Notes bears no interest except in the event of default which interest rate is 24% per annum upon the occurrence
of an Event of Default (as defined in the Junior Notes), have a maturity date of December 5, 2016 and are convertible (principal,
and interest) at any time after the issuance date of the Junior Notes into shares of the Company’s Common Stock at a conversion
price equal to $0.30 per share. If an Event of Default has occurred, the Junior Note shall be convertible at 60% of the lowest
closing price during the prior twenty (20) trading days of the Company’s Common Stock.
The
Junior Notes contains certain covenants, such as restrictions on the incurrence of indebtedness, creation of liens, payment of
restricted payments, redemptions, payment of cash dividends and the transfer of assets. The Junior Notes also contains certain
adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar
transactions. In addition, subject to limited exceptions, the Purchaser will not have the right to convert any portion of the
Junior Note if the Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares
of the Company’s Common Stock outstanding immediately after giving effect to its conversion. The Purchaser may not convert
into or otherwise beneficially own in excess of 9.99% of the number of shares of the Company’s Common Stock outstanding
immediately after giving effect to its conversion.
In
connection with the Company’s obligations under the Junior Notes, the Company and its subsidiaries (the “Subsidiaries”)
entered into a Security Agreement, Pledge Agreement and Subsidiary Agreement with the lead investor, as agent, pursuant to which
the Company and the Subsidiaries granted a lien on all assets of the Company (the “Collateral”) excluding permitted
indebtedness, for the benefit of the Purchasers, to secure the Company’s obligations under the Junior Notes. Upon an Event
of Default (as defined in the Junior Notes), the Purchaser may, among other things, collect or take possession of the Collateral,
proceed with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
The
use of proceeds from this financing are intended for general corporate purposes. The Company also reimbursed the Purchaser $5,000
for legal fees and expenses from the private placement.
The
issuance of the Common Stock is exempt from the registration requirements from the Securities Act of 1933, as amended, pursuant
to Section 4(a)(2) and Rule 506(b) of Regulation D thereof. The Company has not engaged in general solicitation or advertising
with regard to the issuance and sale of the Common Stock and has not offered securities to the public in connection with such
issuance and sale.
Over
the course of June 16, 2016 through June 30, 2016, the Company issued a total of 66,466,033 shares of the Company’s
Common Stock for: i) the conversion of $581,000 of principal and accrued interest on the Senior Secured Convertible Notes issued
December 16, 2015 (the “Senior Notes”), and ii) the exercise of warrants. The issuances were exempt from registration
pursuant to Rule 506 under Regulation D, the investors are sophisticated and familiar with our operations, and there was no solicitation
in connection with the issuances. The dates of the issuances and the numbers of shares issued are as follows:
|
|
|
|
|
Issued
|
|
|
|
|
Date
|
|
Note
Conversions
|
|
|
Warrant
Exercises
|
|
|
Total
|
|
June
8, 2016
|
|
|
0
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
June 10, 2016
|
|
|
0
|
|
|
|
300,000
|
|
|
|
300,000
|
|
June 16, 2016
|
|
|
5,900,000
|
|
|
|
0
|
|
|
|
5,900,000
|
|
June 17, 2016
|
|
|
3,250,417
|
|
|
|
0
|
|
|
|
3,250,417
|
|
June 20, 2016
|
|
|
9,238,446
|
|
|
|
0
|
|
|
|
9,238,446
|
|
June 21, 2016
|
|
|
31,452,170
|
|
|
|
0
|
|
|
|
31,452,170
|
|
June 22, 2016
|
|
|
0
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
June 28, 2016
|
|
|
0
|
|
|
|
1,825,000
|
|
|
|
1,825,000
|
|
June
30, 2016
|
|
|
0
|
|
|
|
12,500,000
|
|
|
|
12,500,000
|
|
Total
Issued Shares
|
|
|
49,841,033
|
|
|
|
16,625,000
|
|
|
|
66,466,033
|
|
None
of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.
No registration rights were granted to any of the purchasers. Following these issuances, there were 236,946,578 shares of our
Common Stock issued and outstanding as of June 30, 2016.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
On
June 22, 2016 the Company entered into a Standstill and Leak-out Agreement with all of the Senior Note holders. The Senior Note
holders have agreed not to convert any Senior Notes until July 1, 2016. Thereafter, and until September 19, 2016, each Senior
Note holder’s daily conversions will be limited to the greater of: (1) $7,500, and (2) five percent of the aggregate dollar
value of Common Stock traded during the trading day immediately prior to the conversion date.
As
of the June 30, 2016 the Company did not have sufficient shares of Common Stock to fulfill its obligations with respect to its
Notes and warrants and has booked a derivative liability of $14,479,363 to account for the shortfall.
Note
11 - Stockholders’ Equity
On
June 3, 2016, the Company received the last signature from investors, which investors hold 75% of the units (“Units”)
sold to subscribers (“Subscribers”) in the Company private placement offering (the “Offering”) pursuant
to that certain subscription agreement by and between the Company and the Subscribers dated on or around April 20, 2015 (the “Subscription
Agreement”), to an amendment agreement (the “Amendment Agreement”).
Pursuant
to the Amendment Agreement, the Company agreed to pay, on a pro-rata basis to all subscribers that purchased Units in the Offering,
and in proportion to the respective Units purchased by each subscriber, pursuant to the Subscription Agreement, an aggregate $250,000
(“Payment”) upon the occurrence of the following events and in the amounts and on payment dates set forth in connection
with such events: (i) in the event of a closing of any one or more equity or debt financing resulting in aggregate gross proceeds
from the date of this Amendment of $350,000 or less, a payment towards the then-remaining Payment equal to ten-percent (10%) of
such gross proceeds shall be made within three (3) business days of the closing of any such equity or debt financing; (ii) in
the event of a closing of any one or more equity or debt financing resulting in aggregate gross proceeds from the date of this
Amendment of $350,000 or more but less than $1,000,000, a payment towards the then-remaining Payment equal to twenty-percent (20%)
of such gross proceeds shall be made within three (3) business days of the closing of any such equity or debt financing; (iii)
at any of the Company’s fiscal-year-ends payment will be made in the amount of available cash prior to any payments of bonuses
payable to Mr. Allen, the Company’s CEO, CFO and Chairman, and Mr. Handerhan, the Company’s COO, Secretary and Director;
and (iv) upon closing of any one or more equity or debt financing resulting in aggregate gross proceeds from the date of this
Amendment of $1,000,000 or more, a payment of all then-remaining Payment within three (3) business days of the closing of any
such equity or debt financing.
In
consideration for the Payment, the Subscribers agreed to limit any remedies currently due, if any, or to which they may be entitled
in the future, under the “Favored Nations Provision” of the Subscription Agreement, to the additional issuance of
Common Stock of the Company and warrants (“Warrants”) to purchase Common Stock up to the Common Stock and Warrants
that would not result in each respective Subscriber beneficially owning over 4.99% of the Company’s issued and outstanding
Common Stock.
On
June 8, 2016, the Company and an investor (the “Investor”) holding a warrant dated January 19, 2015 (the “Warrant”)
to purchase 2,325,000 shares (the “Warrant Shares”) of the Company’s Common Stock entered into a warrant
exercise agreement (the “Exercise Agreement”).
Pursuant
to the Exercise Agreement, the Company agreed to accept as full payment for 500,000 of the Warrant Shares, an aggregate exercise
price equal to $27,500 (the “Exercise Price”) and the Investor irrevocably agreed to exercise the Warrant and deliver
the Exercise Price within 2 days of the Exercise Agreement.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Over
the course of June 8, 2016 through June 28, 2016, the Company issued 4,125,000 shares of Common Stock for the cash exercise of
warrants resulting in aggregate proceeds of $91,765 to the Company this includes the $27,500 received in connection with the Exercise
Agreement mentioned above.
Note
12 - Subsequent Events
Over
the course of July 1, 2016 through August 1, 2016, the Company issued a total of 728,809,426 shares of the Company’s Common
Stock for: i) the conversion of $460,344 of principal and accrued interest on the Senior Notes, and ii) the exercise of warrants.
The issuances were exempt from registration pursuant to Rule 506 under Regulation D, the investors are sophisticated and familiar
with our operations, and there was no solicitation in connection with the issuances. The dates of the issuances and the numbers
of shares issued are as follows:
|
|
|
|
|
|
Issued
|
|
|
|
|
Date
|
|
|
Note
Conversions
|
|
|
Warrant
Exercises
|
|
|
Total
|
|
|
July
1, 2016
|
|
|
|
1,409,427
|
|
|
|
4,000,000
|
|
|
|
5,409,427
|
|
|
July
5, 2016
|
|
|
|
7,137,095
|
|
|
|
12,000,000
|
|
|
|
19,137,095
|
|
|
July
6, 2016
|
|
|
|
13,107,365
|
|
|
|
7,500,000
|
|
|
|
20,607,365
|
|
|
July
7, 2016
|
|
|
|
32,997,387
|
|
|
|
40,935,845
|
|
|
|
73,933,232
|
|
|
July
8, 2016
|
|
|
|
28,313,307
|
|
|
|
35,380,676
|
|
|
|
63,693,983
|
|
|
July
11, 2016
|
|
|
|
43,015,180
|
|
|
|
36,502,280
|
|
|
|
79,517,460
|
|
|
July
12, 2016
|
|
|
|
8,214,526
|
|
|
|
16,000,000
|
|
|
|
24,214,526
|
|
|
July
13, 2016
|
|
|
|
41,857,162
|
|
|
|
11,153,844
|
|
|
|
53,011,006
|
|
|
July
14, 2016
|
|
|
|
73,745,678
|
|
|
|
36,257,966
|
|
|
|
110,003,644
|
|
|
July
15, 2016
|
|
|
|
51,569,878
|
|
|
|
0
|
|
|
|
51,569,878
|
|
|
July
18, 2016
|
|
|
|
53,571,427
|
|
|
|
0
|
|
|
|
53,571,427
|
|
|
July
19, 2016
|
|
|
|
44,240,476
|
|
|
|
0
|
|
|
|
44,240,476
|
|
|
July
20, 2016
|
|
|
|
23,591,267
|
|
|
|
0
|
|
|
|
23,591,267
|
|
|
July
25, 2016
|
|
|
|
7,500,000
|
|
|
|
0
|
|
|
|
7,500,000
|
|
|
July
27, 2016
|
|
|
|
60,590,572
|
|
|
|
0
|
|
|
|
60,590,572
|
|
|
July
29, 2016
|
|
|
|
11,448,412
|
|
|
|
0
|
|
|
|
11,448,412
|
|
|
August
1, 2016
|
|
|
|
26,769,656
|
|
|
|
0
|
|
|
|
26,769,656
|
|
|
Total
Issued Shares
|
|
|
|
529,078,815
|
|
|
|
199,730,611
|
|
|
|
728,809,426
|
|
None
of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.
No registration rights were granted to any of the purchasers. Following these issuances, there were 952,756,004 shares of our
Common Stock issued and outstanding.
As
a result of the Senior Note conversions, the Company became obligated to issue, subject to certain limitations, the following
additional securities: (i) 6,524,866,433 shares of Common Stock pursuant to “favored nations” provisions in certain
common stockholder subscription agreements which includes those anti-dilution shares of Common Stock previously disclosed; and
(ii) warrants to purchase 10,264,097,638 shares of Common Stock pursuant to “favored nations” provisions in
certain common stockholder subscription agreements which includes those anti-dilution warrants previously disclosed. These figures
do not reflect additional warrants to purchase Common Stock issuable to certain investors pursuant to the terms of the warrants
issued on December 16, 2016 which includes those anti-dilution warrants previously disclosed. The Company also lowered the conversion
price of the Company’s outstanding Junior Notes and Senior Notes to $0.00042. The Company does not currently have sufficient
authorized and unreserved shares to fulfill its obligations with respect to the issuance of new shares of Common Stock. While
no assurances can be made, the Company intends to seek shareholder approval to adjust the Company’s capitalization.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
On
July 20, 2016, DM 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 is pursuing the following options:
i) seeking additional capital to potentially bring DM back online; ii) a possible sale of DM; iii) and permanently winding down
DM’s operations. If the Company ceases operations at DM, it may relocate its transaction verification services business
to others data centers which may be more appropriate for the Company’s current scale of operations.
On
August 8, 2016, DM, a wholly owned subsidiary of the Company discovered that its facility in North Carolina was broken into and
certain of its equipment and approximately 165 Bitmain transaction verification servers leased from CSC Leasing Company were stolen.
The value of the stolen equipment owned by the Company does not appear to be material. The Company has reported the theft to local
authorities as well its insurance company regarding next steps.
On
September 1, 2016, DM gave cancelation notice to the landlord with respect to the lease of its North Carolina
facility.