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.
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 in the opinion of the Company’s
management, 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. 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, excluding the Bonus Warrants,
are subject to price protection.
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 $1.0 million of cash in its operating activities for the nine months ended September 30, 2017. The
Company incurred $45.6 million net loss for the nine months ended September 30, 2017. The Company had cash of approximately $6,000
and a working capital deficiency of approximately $4.8 million at September 30, 2017, which includes $4.3 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 September 30,
2017, and December 31, 2016, the Company had approximately $6,000 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.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
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 and preferred
shares in order to take into account the possibility of an adjustment to the exercise price associated with new rounds of
financing in the future.
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.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
The
following financial instruments were not included in the diluted loss per share calculation as of September 30, 2017 and 2016
because their effect was anti-dilutive:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants to purchase common stock
|
|
|
52,669,694
|
|
|
|
268,788,732
|
|
Convertible notes
|
|
|
-
|
|
|
|
45,817,156
|
|
Favored Nations
|
|
|
-
|
|
|
|
108,747,774
|
|
Series B preferred stock
|
|
|
155,663,400
|
|
|
|
-
|
|
Series C preferred stock
|
|
|
15,873,600
|
|
|
|
-
|
|
Total
|
|
|
224,206,694
|
|
|
|
423,353,662
|
|
Recent
Accounting Pronouncements
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.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed 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.
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.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
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 September 30, 2017 and December
31, 2016:
|
|
Fair value measured at September 30, 2017
|
|
|
|
Total carrying value
at September 30, 2017
|
|
|
Quoted prices in
active markets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Currencies
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
4,341,334
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
4,341,334
|
|
|
|
Fair value measured at December 31, 2016
|
|
|
|
Total carrying value
at December 31,
2016
|
|
|
Quoted prices in
active markets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(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 September 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 nine months ended September 30, 2017:
Derivative liabilities balance - January 1, 2017
|
|
$
|
23,231,938
|
|
Conversion of warrant liabilities
|
|
|
(51,325,017
|
)
|
Fair value adjustments for warrant liabilities
|
|
|
40,338,368
|
|
Cashless warrant exercise
|
|
|
(11,638,566
|
)
|
Loss on issuance of Preferred C
|
|
|
2,809,497
|
|
Net proceeds from May fund raising
|
|
|
925,114
|
|
Derivative liabilities balance - September 30, 2017
|
|
$
|
4,341,334
|
|
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
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 - September 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 - September 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 nine months ended September 30,
2017 is as follows:
Warrant
Liabilities
Date of valuation
|
|
March 2, 2017
|
|
|
May 24, 2017
|
|
|
September 30, 2017
|
|
Strike Price
|
|
|
0.025 - 18.000
|
|
|
|
0.085
|
|
|
|
0.025 - 18.000
|
|
Volatility
|
|
|
186.7% - 208.3%
|
|
|
|
210.10% - 254.70%
|
|
|
|
207.65% - 295.61%
|
|
Risk-free interest rate
|
|
|
1.25% - 1.83%
|
|
|
|
1.24% - 1.79%
|
|
|
|
1.34% - 1.87%
|
|
Contractual life (in years)
|
|
|
1.79 to 3.79
|
|
|
|
1.52 to 5.00
|
|
|
|
1.17 to 4.65
|
|
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.
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.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
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”).
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.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
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 Series C. See Note 3- Liquidity, Financial Condition and Management’s Plans.
Between
March 15, 2017 and September 30, 2017, the Company issued 78,924,600 shares of Common Stock for the cashless exercise of 107,697,258
warrants.
Between March 28, 2017
and September 30, 2017, the Company issued 76,524,800 shares of Common Stock upon the conversion of 382,624 shares of Series B
Convertible Preferred stock.
Note
9 - Subsequent Events
Between October 1, 2017
and November 2, 2017, the Company issued 2,331,302 shares of Common Stock for the cashless exercise of 2,844,446
warrants.
Between October 1, 2017
and November 6, 2017, the Company issued 56,974,000 shares of Common Stock upon the conversion of 284,870 shares
of Series B Convertible Preferred stock.
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.
On
October 10, 2017, 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 did not
file its quarterly report for the period ending June 30, 2017 (the “10-Q”) 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
10-Q prior to October 24th (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 was held in escrow until the filing of the 10-Q.
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 unable to
consummate the Proposed Merger, they intend to terminate their employment and resign as officers and directors of the Company.
On
October 24, 2017, upon filing its Form 10-Q for the six months ended June 30, 2017, the $650,000 in cash held in escrow was released
to the Company and the Escrow Agent delivered the balance of the Series C-1 shares and Series B Warrants to the four investors
who initially invested in the October Financing. In connection with the escrow release, the Company’s obligation to return
$250,000 in bitcoin was extinguished. The Company received an additional investment of $100,000 in the October Financing from
a new investor who acquired shares of Series C-1 and Series B Warrants, such that a total of $750,000 in cash held in escrow was
released to the Company.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Pursuant
to a letter agreement entered into by Company and the investors (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 Series C and Series C-1 shall each be exchanged for Series B Convertible Preferred Stock 91 Days following the closing
of the Proposed Merger (the “Exchange Date”). The Series B is similar to the outstanding common stock, except for
its containing a standard 4.99% beneficial ownership blocker. All of the provisions of the October Financing Securities Purchase
Agreement expire except for the representations and warranties and indemnification provisions.
The
following table details the total number of shares of the Company’s common stock potentially issuable as a result of the
October Financing.
Common Stock Underlying:
|
|
First Closing of
$100,000
|
|
|
Second Closing of
$1,000,000
|
|
|
Additional investment
of up to $400,000
|
|
Series C-1
|
|
|
1,176,600
|
|
|
|
11,765,280
|
|
|
|
4,705,920
|
|
Series B Warrants
|
|
|
1,176,600
|
|
|
|
11,765,820
|
|
|
|
4,705,920
|
|
Total
|
|
|
2,353,200
|
|
|
|
23,530,560
|
|
|
|
9,411,840
|
|