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”) was incorporated in 2008. In February
2014, the Company entered the business of hosting an online ecommerce marketplace where consumers can purchase merchandise using
digital currencies, including bitcoin and is currently focused on 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.
In late 2014 we shifted our focus towards our transaction verification service business, also known as bitcoin mining, though
in mid-2016 we ceased our transaction verification services operation at our North Carolina facility due to capital constraints.
Although our ecommerce marketplace is still online, we are no longer developing, marketing or supporting it.
The
Company is an early entrant in the Digital Asset market and one of the first U.S. publicly traded companies to be involved with
Digital Assets and blockchain technologies. Subject to additional financing, the Company plans to create a portfolio of digital
assets including bitcoin and other “protocol tokens” to provide investors a diversified pure-play exposure to the
bitcoin and blockchain industries. The Company intends to acquire digital assets through: open market purchases and participating
in initial digital asset offerings (often referred to as initial coin offerings). 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.
Reverse
Stock Split and Amendment to Certificate of Incorporation
On
February 13, 2017, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of
Nevada to implement a reverse stock split at a ratio of one-for-60. The reverse stock split became effective immediately.
The
Reverse Stock Split reduced the number of outstanding shares of Common Stock from 952,756,004 shares to 15,879,267 shares as of
December 31, 2016. All per share amounts and outstanding shares of Common Stock including stock options, restricted stock and
warrants, have been retroactively adjusted in these consolidated financial statements for all periods presented to reflect the
1-for-60 Reverse Stock Split. Further, exercise prices of stock options and warrants have been retroactively adjusted in these
consolidated financial statements for all periods presented to reflect the 1-for-60 Reverse Stock Split. Numbers of shares of
the Company’s preferred stock and convertible securities were not affected by the Reverse Stock Split; however, the conversion
ratios have been adjusted to reflect the Reverse Stock Split.
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, 2016.
Note
3 - Liquidity, Financial Condition and Management’s Plans
The Company has commenced
its planned operations but has limited operating activities to date. The Company has financed its operations since inception using
proceeds received from capital contributions made by its officers and proceeds in financing transactions. On May 25, 2017,
the Company raised $1 million in cash from four institutional investors in exchange for the issuance of 79,368 of a new class
of Series C Convertible Preferred Stock (“Series C”) and three types of warrants as described below. The 79,368 Series
C shares are initially convertible into 15,873,600 shares of common stock. The Series C is convertible at $0.07 per share or approximately
$0.063 per share after giving effect to the additional $1,111,111. The Company is subject to a number of customary covenants
and a restriction on the incurrence of indebtedness for one year. Within 120 days, the Company agreed to file a registration statement,
now pending, which covers the common stock issuable upon exercise of the registrable securities described below.
The registration statement covers 47,302,176 shares of common underlying the Series A Warrants, Additional Warrants, and
Bonus Warrants. 15,873,600 Series A Warrants exercisable at $0.085 per share over a five-year period; 15,714,288 Additional Warrants
exercisable at $0.085 per share over a period which is the earlier of (i) one-year after the effective date of a registration
statement covering the warrant shares, or (ii) three years from the date of issuance. The Additional Warrants are callable by
the Company for nominal consideration if the common stock trades above $0.17 per share and the daily volume is more than $50,000
for at least 20 trading days; 15,714,288 Bonus Warrants exercisable at $0.17 per share, over a three-year period. The Bonus Warrants
are also callable for nominal consideration but the threshold price is more than $0.30 per share. The total gross proceeds raised
were $1 million, with net proceeds of $925,114, after deducting the offering expenses. All of these securities are subject
to price protection. For further information on these securities, see Note 9 – Subsequent Events.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Notwithstanding,
the Company has limited revenues, limited capital resources and is subject to all of the risks and uncertainties that are typical
of an early stage enterprise. Significant uncertainties include, among others, whether the Company will be able to raise the capital
it needs to finance its longer term operations and whether such operations, if launched, will enable the Company to sustain operations
as a profitable enterprise.
The Company
used approximately $0.9 million of cash in its operating activities for the six months ended June 30, 2017. The Company incurred
$34.6 million net loss for the six months ended June 30, 2017. The Company had cash of approximately $17,000 and a working capital
deficiency of approximately $5.5 million at June 30, 2017, which includes $5.2 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. See Note 9 – Subsequent Events.
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 for one year from the issuance of the financial statements. 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,
|
|
|
●
|
seeking
additional financing through sales of additional securities
|
Note
4 - Summary of Significant Accounting Policies
There
have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2016
Annual Report.
Concentration
of Cash
The
Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company considers
all highly liquid investments with original maturities of three months or less when purchased to be cash and cash equivalents.
As of June 30, 2017 and December 31, 2016, the Company had $17,000 and $95,000 in cash and cash equivalents. The Company has not
experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Derivative
Instruments
The
Company accounts for free-standing derivative instruments and hybrid instruments that contain embedded derivative features
in accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities, or ASC 815, as well as
related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments are
recognized as either
assets
or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives
that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in
fair value recognized as either a gain or loss in earnings. We determine the fair value of derivative instruments and hybrid instruments
based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of
each instrument. The Company used a Monte Carlo model to separately value the Warrants issued in connection with the convertible
notes in order to take into account the possibility of an adjustment to the exercise price associated with new rounds of financing
in the future.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Use
of Estimates
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“US GAAP”). This requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses during the period. The Company’s significant
estimates and assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, the valuation
of derivative liabilities, and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s
estimates, including the carrying amount of the intangible assets, could be affected by external conditions, including those unique
to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on
the Company’s estimates and could cause actual results to differ from those estimates and assumptions.
Convertible
Preferred Stock
The
Company has evaluated its convertible preferred stock and warrants in accordance with the provisions of ASC 815, Derivatives and
Hedging, including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred stock
could generate a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with
an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has
an effective strike price that is less than the market price of the underlying stock at the commitment date.
Net
Loss per Share
Basic
loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares
and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common
shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s
convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable
upon the conversion of preferred stock and the exercise of stock options and warrants from the calculation of net loss per share
if their effect would be anti-dilutive.
The
following financial instruments were not included in the diluted loss per share calculation as of June 30, 2017 and 2016 because
their effect was anti-dilutive:
|
|
As of June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants to purchase common stock
|
|
|
122,418,645
|
|
|
|
19,736,443
|
|
Convertible notes
|
|
|
-
|
|
|
|
4,572,937
|
|
Favored Nations
|
|
|
-
|
|
|
|
7,912,541
|
|
Series B preferred stock
|
|
|
199,785,600
|
|
|
|
-
|
|
Series C preferred stock
|
|
|
15,873,600
|
|
|
|
-
|
|
Total
|
|
|
338,077,845
|
|
|
|
32,221,921
|
|
Recent
Accounting Pronouncements
In
January 2016, the Financial Accounting Standards Board (the 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 consolidated financial statements and related disclosures.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
In
February 2016, the 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. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(“ASU 2016-08”). The purpose of ASU 2016-08 is to clarify the implementation of guidance on principal versus agent
considerations. The amendments in ASU 2016-08 are effective for interim and annual reporting periods beginning after December
15, 2017. The Company is currently assessing the impact of ASU 2016-08 on the consolidated financial statements and related disclosures.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized
cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount
of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value
and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective
on January 1, 2020. Early adoption will be available on January 1, 2019. The Company is currently evaluating the effect that the
updated standard will have on its consolidated financial statements and related disclosures.
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 consolidated statements
of cash flows.
In
January 2017, FASB issued ASU No. 2017-01, “Business Combinations – Clarifying the Definition of a Business”
(Topic 805) (“ASU No. 2017-01”). ASU 2017-01 provides a framework to use in determining when a set of assets and activities
is a business. ASU 2017-01 provides more consistency in applying the business combination guidance, reduces the costs of application,
and makes the definition of a business more operable. ASU 2017-01 is effective for interim and annual periods within those annual
periods beginning after December 15, 2017. The Company is currently evaluating the impact ASU 2017-01 will have on the Company’s
results of operations, financial position and disclosures, but it is not expected to have a material impact.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill
Impairment. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation.
A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed
the carrying amount of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year
2021 is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed
on testing dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on its consolidated
financial statements.
In
May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
,
which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under
the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of
the award (as equity or liability) changes as a result of the change in terms or conditions. It is effective prospectively for
the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. The Company
is currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but does
not expect it to have a significant impact.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic
815).
The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features. When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified
instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be
accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity
classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic
260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction
of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down
round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20,
Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of
this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content
in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the
amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for
all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments
should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating
the impact of adopting this standard on the consolidated financial statements and disclosures.
Note
5 - 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, 2017 and December
31, 2016:
|
|
Fair value measured at June 30, 2017
|
|
|
|
Total carrying
value at
|
|
|
Quoted prices in
active markets
|
|
|
Significant other
observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
June 30, 2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Currencies
|
|
$
|
199
|
|
|
$
|
199
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
5,191,634
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
5,191,634
|
|
|
|
Fair value measured at December 31, 2016
|
|
|
Total carrying
value at
|
|
|
Quoted prices in active markets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
December 31, 2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Currencies
|
|
$
|
199
|
|
|
$
|
199
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
23,231,938
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
23,231,938
|
|
Derivative liabilities for shortfall of shares
|
|
|
14,915,419
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,915,419
|
|
Convertible notes inclusive of derivative liabilities
|
|
|
3,283,034
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,283,034
|
|
There
were no transfers between Level 1, 2 or 3 during the three months ended June 30, 2017.
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, 2017:
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Derivative liabilities balance - January 1, 2017
|
|
$
|
23,231,938
|
|
Conversion of warrant liabilities
|
|
|
(51,325,017
|
)
|
Fair value adjustments for warrant liabilities
|
|
|
31,687,073
|
|
Gain on settlement of derivative liability
|
|
|
(2,136,971
|
)
|
Loss on issuance of Preferred C
|
|
|
2,809,497
|
|
Net proceeds from May fund raising
|
|
|
925,114
|
|
Derivative liabilities balance - June 30, 2017
|
|
$
|
5,191,634
|
|
|
|
|
|
|
Derivative liabilities for shortfall of shares balance - January 1, 2017
|
|
$
|
14,915,419
|
|
Conversion of shortfall shares liabilities
|
|
|
(14,915,419
|
)
|
Derivative liabilities for shortfall of shares balance - June 30, 2017
|
|
$
|
-
|
|
|
|
|
|
|
Convertible notes at fair value - January 1, 2017
|
|
$
|
3,283,034
|
|
Conversion of convertible notes
|
|
|
(20,132,105
|
)
|
Change in fair value of convertible notes (including OID discount)
|
|
|
16,849,071
|
|
Convertible notes at fair value - June 30, 2017
|
|
$
|
-
|
|
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, 2017
is as follows:
Warrant
Liabilities
Date
of valuation
|
|
March
2, 2017
|
|
|
May
24, 2017
|
|
|
June
30, 2017
|
|
Strike Price
|
|
|
0.025
- 18.000
|
|
|
|
0.085
|
|
|
|
0.025
- 18.000
|
|
Volatility
|
|
|
186.7%
- 208.3
|
%
|
|
|
210.10%
- 254.70
|
%
|
|
|
207.68%
- 267.65
|
%
|
Risk-free
interest rate
|
|
|
1.25%
- 1.83
|
%
|
|
|
1.24%
- 1.79
|
%
|
|
|
1.30%
- 1.87
|
%
|
Contractual
life (in years)
|
|
|
1.79
to 3.79
|
|
|
|
1.52
to 5.00
|
|
|
|
1.42
to 4.90
|
|
Dividend yield (per share)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Convertible
Notes at Fair Value
Date of valuation
|
|
March 2, 2017
|
|
Strike Price
|
|
|
0.32
|
|
Volatility
|
|
|
267.8
|
%
|
Risk-free interest rate
|
|
|
0.68
|
%
|
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
6 - Related Party Transactions
On
January 30, 2017, the Company received 24,000,000 pre-split shares (400,000 shares post-split) of Common Stock for cancelation
for no consideration (the “Escrow Shares”). The Escrow Shares were placed in escrow by Charles Allen our Chief Executive
Officer, Chief Financial Officer and Chairman, and Michal Handerhan, our Chief Operating Officer and corporate secretary (collectively,
the “Principal Stockholders”) pursuant to a securities escrow agreement dated February 19, 2016 (the “Securities
Escrow Agreement”). The Company recorded an adjustment to additional paid-in capital for $400 related to this transaction.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
7 - Notes Payable
On
March 9, 2017, the Company completed a securities exchange offer (the “Note Offer”) with its three convertible note
holders (the “Note Holders”). Pursuant to the Note Offer the Note Holders agreed to exchange i) $868,897 of 5% Original
Issue Discount 10% Senior Convertible Note Due September 16, 2016, originally issued in December 2015 and all accrued interest
and liquidated damages owed (collectively the “Senior Notes”), ii) $175,000 of 20% Original Issue Discount Junior
Convertible Notes Due December 5, 2016, originally issued in June 2016 and all accrued interest and liquidated damages owed (collectively
the “Junior Notes”), iii) $220,002 of 8% Convertible Notes Due June 6, 2017, originally issued in December 2016 and
all accrued interest owed (collectively the “Convertible Notes”), and iv) 97,423,579 warrants (the “Senior Warrants”)
for 845,631 shares of Series B Convertible Preferred Stock (the “Preferred”). After giving effect to the Note Offer
the Company no longer had any Senior Notes, Junior Notes or Convertible Notes outstanding. A gain of $15.9 million was booked
for the extinguishment of $90.2 million liabilities associated with convertible notes, warrant liabilities, shortfall shares liabilities
and liquidated damages.
Note
8 - Stockholders’ Equity
Reverse
Stock Split and Amendment to Certificate of Incorporation
On February 13, 2017,
the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada to implement
a reverse stock split at a ratio of one-for-60. The reverse stock split became effective immediately. See note 1 – Business
Organization and Nature of Operations.
2017
Activities
On February 28, 2017,
the Company issued 4,370 shares of Common Stock in connection with the one-for-60 reverse stock split resulting from the
rounding up of fractional shares of Common Stock to the whole shares of Common Stock.
On
March 9, 2017, as a result of the Note Offer (described in Note 7) becoming effective, a securities exchange offer made to the
Company’s January 19, 2015 investors (the “January Offer”) was accepted by certain of those investors (the “January
Investors”). Pursuant to the January Offer the January Investors agreed to exchange i) 12,052,344 shares of common stock
owed pursuant to the favored nations provision of the January 19, 2015 subscription agreement (the “January Agreement”),
and ii) 30,130,861 warrants owed pursuant to the favored nations provision of the January Agreement for 210,919 shares of Preferred.
On
March 9, 2017, as a result of the Note Offer (described in Note 7) becoming effective, a securities exchange offer made to the
Company’s April 19, 2015 investors (the “April Offer”) was accepted by certain of those investors (the “April
Investors”). Pursuant to the April Offer, the April Investors agreed to exchange i) 20,110,699 shares of Common Stock owed
pursuant to the favored nations provision of the April 19, 2015 subscription agreement (the “April Agreement”), and
ii) 28,154,980 warrants owed pursuant to the favored nations provision of the April Agreement for 104,391 shares of Preferred.
On
March 15, 2017, the Company issued investors who participated in its: i) January 19, 2015 financing and rejected the January Offer,
and ii) April 19, 2015 financing and rejected the April Offer an aggregate of 14,517,352 share of Common Stock and 112,782,487
warrants. The Common Stock and warrant issuances were made pursuant to the favored nations provision of the January Agreement
and April Agreement.
On
March 15, 2017, the Company filed a Certificate of Designation for the Preferred with the Secretary of State of the State of Nevada.
The Preferred Certificate of Designation provides authorization for the issuance of 1,160,941 shares of Preferred, par value $0.001.
On
March 22, 2017, the Company entered into a Settlement Agreement and Note (the “CSC Agreement”) with CSC Leasing Company
(“CSC”) with respect to the equipment lease schedule entered into between CSC and the Company (the “CSC Lease”).
Pursuant to the CSC Agreement the Company has agreed to: i) issue CSC 833,333 shares valued at $61,667 of the Company’s
common stock (the “Shares”), and ii) pay CSC $200,000 (the “Cash Payment”).
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
On
April 4, 2017, the Company entered into a Settlement Agreement with RK Equity Advisors, LLC and Pickwick Capital Partners, LLC
with respect to the tail provision of the Engagement Letter dated August 19, 2015. Pursuant to the Settlement Agreement the Company
has agreed to: i) terminate the Engagement Letter including all provisions thereof and including any obligations to future fees,
and ii) convert the Estimated Liability into 125,000 shares of common stock of the Company, par value $0.001 per share at a price
of $0.10 per share. The total value of this transaction is $10,000.
On May 25, 2017, the
Company raised $1 million in cash from four institutional investors in exchange for the issuance of $1,111,111 of of Series C.
See Note 3- Liquidity, Financial Condition and Management’s Plans.
Between
March 15, 2017 and June 30, 2017, the Company issued 24,628,136 shares of Common Stock for the cashless exercise of 37,948,307
warrants.
Between
March 28, 2017 and June 30, 2017, the Company issued 32,402,600 shares of Common Stock upon the conversion of 162,013 shares of
Series B Convertible Preferred stock.
Note
9 - Subsequent Events
Between
July 1, 2017 and October 13, 2017, the Company issued 56,572,046 shares of Common Stock for the cashless exercise
of 72,527,119 warrants.
Between
July 1, 2017 and October 18, 2017, the Company issued 56,148,800 shares of Common Stock upon the conversion of 280,744 shares
of Series B Convertible Preferred stock.
On
October 10, 2017, BTCS Inc. (the “Company”) entered into a Securities Purchase Agreement with four investors who committed
$750,000 in cash and $250,000 in bitcoin in exchange for a new class of Series C-1 Convertible Preferred Stock (the “Series
C-1”) and Series B Warrants exercisable at $0.135 per share (the “October Financing”). The Series C-1 is initially
convertible into shares of the Company’s common stock at an effective price $0.085 per share. Both the Series C-1 and Series
B Warrants are subject to adjustment in the event of future sales of the Company’s equity securities or common stock equivalents
at a lower price, subject to elimination of the price protection on the Exchange Date (which is defined and described below).
The investors are three
institutional investors who were also investors in the Company’s May 2017 Series C financing (the “May Financing”)
and the Australian entity which the Company previously announced that it had entered into a non-binding letter of intent to merge
with (the “Proposed Merger”); this investor made its $250,000 investment in bitcoin (59.381 BTC). The Proposed Merger
is still pending and subject to the same contingencies previously announced. Further, the Company can provide no assurances or
guarantees it will be able to consummate the Proposed Merger. The terms of the Series C-1 and the Series B Warrants are essentially
identical to the May Financing, except that the May Financing had three types of warrants rather than one. The offering is continuing
up to a maximum of $1,500,000 in cash, bitcoin and/or ethereum.
At the closing of the
October Financing, the institutional investors agreed to release $100,000 from escrow in order to permit the Company to pay its
auditors and other expenses (the “First Closing”). Charles Allen, our Chairman, Chief Executive Officer and Chief
Financial Officer and Michal Handerhan our Chief Operating Officer (collectively the “Officers”) did not receive
any proceeds from the First Closing towards owed out of pocket expenses of approximately $13,000 and accrued and unpaid salaries
of approximately $110,000 associated with the Company’s failure to make payroll since July 1, 2017. If the Company does
not file this Report (the “10Q”) by October 24
th
, the remaining $650,000 of cash (which is
being held in escrow) and $250,000 of bitcoin (held by the Company) (collectively the “Remaining Funds”) will be returned
to the investors; however, one institutional investor has the power to extend this two week period if it determines the Company
is making progress with regard to the 10-Q filing. If the Company files the 10Q prior to October 24
th
(as extended)
then the escrow agent will release the Remaining Funds to the Company and the Company will have no obligation to return any funds
(the “Second Closing”). The Company subsequently received another $100,000 from an institutional investor
which is presently being held in escrow pending the filing of the 10-Q. The following table details the total number of shares
of the Company’s common stock potentially issuable as a result of the October Financing.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Common Stock Underlying:
|
|
First Closing of
$100,000
|
|
|
Second Closing of
$900,000
|
|
|
Additional
investment of up to
$500,000
|
|
Series C-1
|
|
|
1,176,600
|
|
|
|
10,588,800
|
|
|
|
5,882,400
|
|
Series B Warrants
|
|
|
1,176,600
|
|
|
|
10,588,800
|
|
|
|
5,882,400
|
|
Total
|
|
|
2,353,200
|
|
|
|
21,177,600
|
|
|
|
11,764,800
|
|
The
Company and the investors also entered into a letter agreement (the “Side Letter”) which provided for various waivers
of certain investor protection provisions within the May Financing and the October Financing in order to permit the Proposed Merger
to occur. The following are the key elements of the Side Letter:
|
●
|
The
investors agreed to eliminate various investor protective provisions from the May Financing. However, the representations
and warranties and indemnification provisions in the May Financing Securities Purchase Agreement (the “May SPA”),
limitations on the issuance of preferred stock (except in connection with the Proposed Merger) and variable rate financings
remain, and the investors’ right of first refusal will expire nine months following the closing of the Proposed Merger.
|
|
|
|
|
●
|
91
Days following the closing of the Proposed Merger (the “Exchange Date”), the Series C and Series C-1 shall each
be exchanged for Series B Convertible Preferred Stock (the “Newly Issued Series B”) identical to that issued in
March 2017. The Series B is similar to the outstanding common stock, except for its containing a standard 4.99% beneficial
ownership blocker.
|
|
|
|
|
●
|
On
the Exchange Date, the provision of the May SPA blocking the issuance of preferred stock and precluding the Company from engaging
in variable rate transactions expires.
|
|
|
|
|
●
|
All
of the provisions of the October Financing Securities Purchase Agreement expire except for the representations and warranties
and indemnification provisions.
|
|
|
|
|
●
|
On
the Exchange Date, all anti-dilution and price protections for the investors in the May and October Financings expire.
|
|
|
|
|
●
|
Until
the Exchange Date, the Company must maintain a 300% share reserve for the common stock issuable under all outstanding Newly
Issued Series B, Series C and Series C-1 Preferred Stock or if it fails to do so it must on the Exchange Date issue the affected
investors a one-time grant of 20% of the Newly Issued Series B.
|
|
|
|
|
●
|
Beginning
on the Exchange Date, for a nine month period, if the Company fails to meet any of 11 targets, it must issue any affected
investors a one-time grant of 20% of the newly issued Series B. These targets include the failure to timely file a Form 10-Q
within 15 days after its due date, failure to post XBRL on its website, suspension of trading, delays in delivering common
stock upon conversion of Series B or exercise of warrants and any delay in removing restrictive legends.
|
The
issuance of the Series C-1 shares and the Series B Warrants is exempt from the registration requirements of the Securities Act
of 1933 pursuant to Section 4(a)(2) and Rule 506(b) of Regulation D thereof. The institutional investors previously invested in
securities of the Company, the Australian investor has entered into a non-binding term sheet with respect to the Proposed Merger,
the Company did not engage in general solicitation or advertising with regard to the issuance and sale of the securities and has
not offered securities to the public in connection with such issuance and sale. Each investor represented that it is an accredited
investor and purchased the securities for investment and not with a view to distribution.
In
connection with the October Financing, the Officers have both notified the Company that in the event the Company is: i)
unable to effectuate the Second Closing of this financing, or ii) unable to consummate the Proposed Merger, they intend
to terminate their employment and resign as officers and directors of the Company.
On
October 4, 2017, the Company filed the Certificate of Designation with the Nevada Secretary of State. The Certificate of Designation
authorized the Company to issue the shares of Series C-1.