As
filed with the Securities and Exchange Commission on March [*], 2018
Registration
No. 333-219893
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment
No. 4
to
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
BTCS
I
nc
.
(Exact
name of registrant as specified in its charter)
Nevada
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7372
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90-1096644
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(State
or other jurisdiction of
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(Primary
Standard Industrial
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(I.R.S.
Employer
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incorporation
or organization)
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Classification
Code Number)
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Identification
Number)
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9466
Georgia Avenue #124
Silver
Spring, MD 20901
(202)
430-6576
(Address,
including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Charles
W. Allen
Chief
Executive Officer
BTCS
Inc.
9466
Georgia Avenue #124
Silver
Spring, MD 20901
(202)
430-6576
(Name,
address, including zip code, and telephone number, including area code, of agent for service)
With
a copy to:
Michael
D. Harris Esq.
Nason,
Yeager, Gerson, White & Lioce, P.A.
3001
PGA Blvd., Suite 305
Palm
Beach Gardens, FL 33410
(561)
471-3507
Approximate
date of commencement of proposed sale to the public:
As
soon as practicable after this Registration Statement is declared effective.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box: [X]
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering.
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [ ] (Do not check if a smaller reporting company)
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Smaller
reporting company [X]
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Emerging
growth company [ ]
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If
an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
[ ]
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities to be Registered
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Amount
to be Registered(1)
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Proposed
Maximum Offering Price per Share(2)
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Proposed
Maximum Aggregate Offering Price(2)
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Amount
of Registration
Fee(3)
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Common
Stock, par value $0.001 per share, issuable upon exercise of outstanding Series A warrants
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15,873,600
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$
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0.1111
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$
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1,763,557
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$
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0
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Common
Stock, par value $0.001 per share, issuable upon exercise of outstanding Additional warrants
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15,714,288
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$
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0.111
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$
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1,745,857
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$
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0
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Common
Stock, par value $0.001 per share, issuable upon exercise of outstanding Bonus warrants
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15,714,288
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$
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0.111
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$
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1,745,857
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$
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0
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Common
Stock, par value $0.001 per share, issuable upon exercise of outstanding Series B warrants
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12,942,000
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$
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0.11
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$
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1,423,620
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$
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0
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Common
Stock, par value $0.001 per share, issuable upon exercise of outstanding Series C-1 Convertible Preferred Stock and Common
Stock issued upon the conversion of Series C S-1 Convertible Preferred Stock
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12,942,000
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$
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0.11
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$
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1,423,620
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$
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0
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Common
Stock, par value $0.001 per share
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8,695,456
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$
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-
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$
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-
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$
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-
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Total
(3)
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81,881,632
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-
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$
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-
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$
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0
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(1)
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Pursuant
to Rule 416 under the Securities Act of 1933, as amended, the shares being registered hereunder include such indeterminate
number of shares of Common Stock, as may be issuable with respect to the shares being registered hereunder as a result of
stock splits, stock dividends or similar transactions.
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(2)
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The
proposed maximum offering price per share and the proposed maximum aggregate offering price have been estimated solely for
the purpose of calculating the amount of the registration fee in accordance with Rules 457(c) under the Securities Act of
1933 on the basis of the average of the bid and asked price of our Common Stock on the OTC Markets on August 8, 2017, a date
within five days prior to the date of the filing of this registration statement, for 47,302,176 shares of Common Stock, and
on November 24, 2017, a date within five days prior to the date of the filing of this amendment to the Company’s registration
statement, for 30,879,744 shares of Common Stock.
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(3)
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A
registration fee of $609.09, for 47,302,176 shares of Common Stock, was paid by the Company in connection with the initial
filing of the Company’s Form S-1 registration statement on August 10, 2017 and an additional $422.90 was paid in connection
with the S-1/A filed on November 29, 2017.
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The
registrant hereby amends this registration statement on such date or date(s) as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective
on such date as the Commission acting pursuant to said Section 8(a) may determine.
The
information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell and is not soliciting
an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS
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SUBJECT
TO COMPLETION
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DATED
March [*], 2018
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81,881,632
Shares of Common Stock
BTCS
I
nc
.
We
are registering an aggregate of 81,881,632 shares of Common Stock, $0.001 par value per share of BTCS Inc., for resale by certain
of our shareholders identified in this prospectus. The 81,881,632 shares of Common Stock or the Resale Shares consist of (i) 15,873,600
shares of Common Stock underlying outstanding Series A warrants exercisable at $0.085 per share, (ii) 15,714,288 shares of Common
Stock underlying outstanding Additional Warrants exercisable at $0.085 per share, (iii) 15,714,288 shares of Common Stock underlying
outstanding Bonus Warrants exercisable at $0.17 per share, (iv) 12,942,000 shares of Common Stock underlying outstanding Series
B Warrants exercisable at $0.135 per share, (v) 10,000,800 shares of Common Stock underlying outstanding Series C-1 Convertible
Preferred Stock and 2,941,200 shares of Common Stock issued upon the conversion of Series C-1 Preferred Stock, (vi) 4,295,456
shares of Common Stock owned by our executive officers, and (vii) 4,400,000 shares of Common Stock. Please see the section
entitled “Selling Shareholders” beginning at page 51 of this prospectus.
The
shareholders identified in the “Selling Shareholders” section may offer to sell the Resale Shares at fixed prices,
at prevailing market prices at the time of sale, at varying prices or at negotiated prices, and will pay all brokerage commissions
and discounts attributable to the sale of such shares. They will receive all of the net proceeds from the offering of their shares.
The
Resale Shares may be sold by the shareholders identified in the “Selling Shareholders” section to or through underwriters
or dealers, directly to purchasers or through agents designated from time to time. For additional information regarding the methods
of sale you should refer to the section entitled “Plan of Distribution” in this prospectus.
Our Common Stock is presently quoted on the
OTCQB under the symbol “BTCS”. On March 6, 2018, the last reported sale price for our Common Stock on the OTCQB was
$0.086
per share.
Our
business and an investment in our securities involve a high degree of risk. See “Risk Factors” beginning on page 3
of this prospectus for a discussion of information that you should consider before investing in our securities.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus is _______ __, 2018
TABLE
OF CONTENTS
You
should rely only on information contained in this prospectus. We have not authorized anyone to provide you with information that
is different from that contained in this prospectus. The selling shareholder is not offering to sell or seeking offers to buy
shares of common stock in jurisdictions where offers and sales are not permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our
common stock.
GLOSSARY
OF DEFINED TERMS AND INDUSTRY DATA
In
this prospectus, each of the following quoted terms has the meanings set forth after such term:
“bitcoin”
— A type of a Digital Asset based on an open source math-based protocol existing on the Bitcoin Network and utilizing cryptographic
security.
“Bitcoin
Exchange”— An electronic marketplace where exchange participants may trade, buy and sell bitcoins based on bid-ask
trading. The largest Bitcoin Exchanges are online and typically trade on a 24-hour basis, publishing transaction price and volume
data.
“Bitcoin
Exchange Market” — The global bitcoin exchange market for the trading of bitcoins, which consists of transactions
on electronic Bitcoin Exchanges.
“Bitcoin
Network” — The online, end-user-to-end-user network hosting the public transaction ledger, known as the Blockchain,
and the source code comprising the basis for the math-based protocols and cryptographic security governing the Bitcoin Network.
“Blockchain”
— The public transaction ledger of the Bitcoin Network on which miners or mining pools solve algorithmic equations allowing
them to add records of recent transactions (called “blocks”) to the chain of transactions in exchange for an award
of bitcoins from the Bitcoin Network and the payment of transaction fees, if any, from users whose transactions are recorded in
the block being added.
“CEA”
— Commodity Exchange Act of 1936, as amended.
“CFTC”
— The US Commodity Futures Trading Commission, an independent agency with the mandate to regulate commodity futures and
option markets in the United States.
“Code”
— The US Internal Revenue Code of 1986, as amended.
“Digital
Asset” — Collectively, all digital assets based upon a computer-generated math-based and/or cryptographic protocol
that may, among other things, be used to buy and sell goods or pay for services. Bitcoins represent one type of Digital Asset.
“Digital
Security” — A type of Digital Asset that is offered by a promoter as an investment contract, which is a type of security
defined by Section 2(a)(1) of the Securities Act.
“DDoS
Attack” — Distributed denial of service attacks are coordinated hacking attempts to disrupt websites, web servers
or computer networks in which an attacker bombards an online target with a large quantity of external requests, thus precluding
the target from processing requests from genuine users.
“Exchange
Act” — The Securities Exchange Act of 1934, as amended.
“FDIC”
— The Federal Deposit Insurance Corporation.
“FinCEN”
— The Financial Crimes Enforcement Network, a bureau of the US Department of the Treasury.
“FINRA”
— The Financial Industry Regulatory Authority, Inc., which is the primary regulator in the United States for broker-dealers.
“Fiat
Currency” — Currency that a government has declared to be legal tender, but is not backed by a physical commodity.
The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that
the money is made of.
“IRS”
— The US Internal Revenue Service, a bureau of the US Department of the Treasury.
“Mining”
— The process by which Bitcoins are created involving programmers solving complex math problems with the computers in the
Bitcoin Network.
“SEC”
— The US Securities and Exchange Commission.
“Securities
Act” — The Securities Act of 1933, as amended.
“SIPC”
— The Securities Investor Protection Corporation.
“Transaction
Verification Services” — Is equivalent to Mining.
“Warrants”
refers to the Series A Warrants, Additional Warrants, Bonus Warrants, and Series B Warrants.
“1940
Act” – The Investment Company Act of 1940, as amended.
Industry
Data
This
prospectus also includes estimates of market size and industry data that we obtained from industry publications and surveys and
internal company sources. The industry publications and surveys used by management to determine market size and industry data
contained in this prospectus have been obtained from sources believed to be reliable.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should
consider in making your investment decision. Before investing in our Common Stock, you should carefully read this entire prospectus,
including our financial statements and the related notes and the information set forth under the headings “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each case included
elsewhere in this prospectus.
Unless
the context otherwise requires, references to “we,” “our,” “us,” “BTCS,” or the
“Company” in this prospectus mean BTCS Inc., on a combined basis with its wholly-owned subsidiary, BTCS Digital Manufacturing,
as applicable.
Introduction
We
are 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.
Our
Business
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. The Company has not participated in any initial coin
offerings as it believes most of the offerings entail the offering of Digital Securities and require registration under the Securities
Act and under state securities laws. Since about July 2017, initial coin offerings using Digital Securities have been (or should
be) limited to accredited investors. Because we cannot qualify as an accredited investor, we do not intend to acquire coins in initial coin offerings or
from purchasers in such 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.
The Company will carefully review its purchases of Digital Securities to avoid violating the Investment Company Act of 1940 (the
“Investment Company”) and seek to reduce potential liabilities under the federal securities laws. See “Risk
Factors” at page 3 and “Business” at pages 31-44.
Digital
asset blockchains are typically maintained by a network of participants which run servers which secure their blockchain. The market
is rapidly evolving and there can be no assurances that we will be competitive with industry participants that have or may have
greater resources than us.
Blockchain
Technology and Digital Asset Initiatives
We
are also focused on Digital Assets and blockchain technologies. Subject to additional financing, we plan to continue to evaluate
other strategic opportunities in this rapidly evolving sector in an effort to enhance shareholder value.
Transaction
Verification Service Business (Digital Asset mining e.g. bitcoin, Suspended)
We
believe that with additional funding we may be able to resume our transaction verification services business (Digital Asset mining
e.g. bitcoin) and believe this may provide revenue growth. If we are successful in resuming our transaction verification services
business, we anticipate utilizing outsourced data centers and may diversify operations by securing other blockchains in addition
to bitcoins. If we resume our mining operations, we do not intend to actively trade the Digital Assets but rather hold them for
our own account and sell them for U.S. dollars or other currencies including virtual currencies.
Transaction
verification entails running ASIC (application-specific integrated circuit) servers or other specialized servers which solve a
set of prescribed complex mathematical calculations in order to add a block to a blockchain and thereby confirm Digital Asset
transactions. A party which is successful in adding a block to the blockchain, is awarded a fixed number of Digital Assets for
our effort.
Going
Concern
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, our independent auditors have indicated
in their report on our December 31, 2017 financial statements that there is substantial doubt about our ability to continue
as a going concern.
Summary
of The Offering
|
Resale
Shares:
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81,881,632
shares of Common Stock (the “Resale Shares”), consisting of: (i) 15,873,600
shares of Common Stock issuable upon exercise of outstanding Series A Warrants exercisable
at $0.085 per share; (ii) 15,714,288 shares of Common Stock issuable upon exercise of
outstanding Additional Warrants exercisable at $0.085 per share; (iii) 15,714,288 shares
of Common Stock issuable upon exercise of outstanding Bonus Warrants exercisable at $0.17
per share; and (iv) 12,942,000 shares of Common Stock issuable upon exercise of outstanding
Series B Warrants exercisable at $0.135 per share, (v) 10,000,800 shares of Common Stock
underlying outstanding Series C-1 Convertible Preferred Stock and 2,941,200 shares of
Common Stock issued upon the conversion of Series C-1 Preferred Stock, (vi) 4,295,456
shares of Common Stock owned by our executive officers, and (vii) 4,400,000 shares of
Common Stock. The Series A, Additional, and Bonus Warrants were issued in a private placement
that closed on May 25, 2017. The Series C-1 Convertible Preferred Stock and the Series
B Warrants were issued in a private placement that closed in October 2017
.
See
“Private Placements.” The Selling Shareholders include our executive officers.
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Common
Stock outstanding before and after this offering:
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Common
Stock outstanding prior to offering: 368,219,169 shares
Common
Stock offered by the Selling Shareholders: 81,881,632 shares
Common
Stock outstanding immediately following the offering: 438,464,145 shares. (1)
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Use
of proceeds:
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We
will not receive any proceeds from the sale of shares in this offering by the Selling Shareholders. However, if any of the
Warrants are exercised for cash, we will receive the proceeds, and we plan to use such proceeds for general corporate purposes
including compensation to our management.
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Risk
factors:
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See
“Risk Factors” beginning on page 3 of this prospectus and the other information included in this prospectus for
a discussion of factors you should carefully consider before investing in our securities.
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OTCQB
trading symbol
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BTCS
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(1)
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The
number of outstanding shares after the offering assumes: i) the 60,244,176 Resale Shares
issuable upon the exercise of outstanding warrants are exercised for cash, and ii) 10,000,800
Resale Shares issuable upon the conversion of Series C-1 Convertible Preferred Stock
is converted.
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Unless
we indicate otherwise, all information in this prospectus:
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●
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is
based on 368,219,169 shares of Common Stock issued and outstanding as of March 6 ,
2018;
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●
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excludes
60,244,176 shares of our Common Stock, being registered in this prospectus, issuable
upon exercise of outstanding warrants at a weighted average exercise price of $0.118
per share as of March 6 , 2018; and excludes i) 10,000,800 shares of our Common
Stock issuable upon the conversion of Series C-1 Convertible Preferred Stock, and ii)
1,820,458 shares of Common Stock underlying warrants not being registered in this Prospectus.
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RISK
FACTORS
Any
investment in our Common Stock involves a high degree of risk. Investors should carefully consider the risks described below and
all of the information contained in this prospectus before deciding whether to purchase our Common Stock. Our business, financial
condition and results of operations could be materially adversely affected by these risks if any of them actually occur. This
prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described
below and elsewhere in this prospectus.
Risks
Related to Our Company
We
need to secure additional financing.
We
anticipate that we will incur operating losses for the foreseeable future. Our cash burn rate is approximately $80,000 per month.
As of March 6 , 2018, we had $237,000 in available cash and approximately $336,000 of Digital Assets. The
price of the Digital Assets are subject to wide fluctuations.
Our
available cash and Digital Assets as of the date of this prospectus are expected to be only sufficient to last through October
2018. We require additional funds for our anticipated operations. If we are not successful in securing additional financing,
we may be required to delay significantly, reduce the scope of or eliminate our business activities, downsize our general and
administrative infrastructure, or seek alternative measures to avoid bankruptcy.
Our
auditors have issued a “going concern” audit opinion.
Our
independent auditors have indicated in their report on our December 31, 2017 financial statements that there is substantial doubt
about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements
have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if
we do not continue as a going concern. Therefore, you should not rely on our consolidated balance sheet as an indication of the
amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to shareholders,
in the event of liquidation.
We
have a limited operating history and a history of operating losses, and expect to incur significant additional operating losses.
We
have a limited operating history. Therefore, there is limited historical financial information upon which to base an evaluation
of our performance. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently
encountered by companies in their early stages of operations. We have generated net losses of $45.1 million and $ 44.3 million
for the years ended December 31, 2017 and 2016 , respectively. We expect to incur additional net losses over the
next several years as we seek to expand operations. The amount of future losses and when, if ever, we will achieve profitability
are uncertain. If we are unsuccessful at executing on our business plan, our business, prospects, and results of operations may
be materially adversely affected.
We
have an evolving business model.
As
Digital Assets and blockchain technologies become more widely available, we expect the services and products associated with them
to evolve. Very recently, the Securities and Exchange Commission (the “SEC”) issued a Report that promoters that use
initial coin offerings or token sales to raise capital may be engaged in the offer and sale of securities in violation of the
Securities Act and the Securities Exchange Act of 1934 (the “Exchange Act”). This may cause us to potentially change
our future business in order to comply fully with the federal securities laws as well as applicable state securities laws. As
a result, to stay current with the industry, our business model may need to evolve as well. From time to time we may modify aspects
of our business model relating to our product mix and service offerings. We cannot offer any assurance that these or any other
modifications will be successful or will not result in harm to the business. We may not be able to manage growth effectively,
which could damage our reputation, limit our growth and negatively affect our operating results.
The
loss of our executive officers Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan,
our Chief Operating Officer, could have a material adverse effect on us.
Our
continued success depends solely on the continued services of our executive officers, particularly Charles Allen, our Chairman,
Chief Executive Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, who have extensive market
knowledge and long-standing industry relationships. In particular, our reputation among and our relationships with key Digital
Asset industry leaders are the direct result of a significant investment of time and effort by these individuals to build our
credibility in a highly specialized industry. Occasionally, members of senior management or key employees may find it necessary
to take a leave of absence due to medical or other causes. The loss of services of either Charles Allen or Michal Handerhan, could
diminish our business and growth opportunities and our relationships with key leaders in the Digital Asset industry and could
have a material adverse effect on us.
The
loss of Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating
Officer, would have a material adverse effect on us.
After
October 2018 we will not have sufficient funds to make payroll and compensate either Charles Allen or Michal Handerhan,
if either are unwilling to continue working without pay and choose to leave it could have a material adverse effect on us.
The
simultaneous loss of services of both Charles Allen and Michal Handerhan, would result in the Company having no officers or employees
and would subsequently cease all operations which would have a material adverse effect on us. See the second risk factor below
on the loss of our executive officers and employees.
Michal Handerhan our Chief Operating
Officer has notified the Company that in the event of the departure of Charles Allen, our Chairman, Chief Executive Officer and
Chief Financial Officer from the Company he may terminate his employment and may resign as an officer and director of the Company,
which would have a material adverse effect on us.
We
have no other officers and only two other directors. The simultaneous loss of Charles Allen, our Chairman, Chief Executive Officer
and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, would have a material adverse effect on us. Their
Employment Agreements permit them to resign for Good Reason which includes non-payment of salaries. This would result in the Company
owing them $435,000 and would leave the Company without officers or employees which may have a material adverse effect upon us.
Charles
Allen, our Chairman, Chief Executive Officer and Chief Financial Officer and Michal Handerhan our Chief Operating Officer have
both notified the Company that in the event the Company is unable to consummate the proposed merger with an Australian entity
they intend to terminate their employment and resign as officers and directors of the Company. In January 2018 our officers indicated
that due to delays with the proposed merger they have agreed to stay on for a limited time to evaluate other strategic alternatives
for the Company; if they are to leave it would have a material adverse effect on us.
We
have no other officers and only two other directors. The simultaneous loss of Charles Allen, our Chairman, Chief Executive Officer
and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, would have a material adverse effect on us. See
the risk factor immediately below on the loss of our executive officers and employees.
If
Charles Allen and Michal Handerhan are not available as officers and employees, we may lack officers and employees who have experience
in the blockchain industry, which will adversely affect our future prospects.
Messrs.
Charles Allen and Michal Handerhan are our sole officers and employees. Each has experience in the blockchain industry including
mining. Each of them are also the officers and directors of Global Bit Ventures Inc. (“GBV”) which has entered into
a series of agreements to be acquired by Marathon Patent Group, Inc. (“Marathon”), subject to shareholder approval
and customary closing conditions. If this merger closes, Messrs. Allen and Handerhan have agreed to become the Chief Executive
Officer and President, respectively, of Marathon which will present a conflict of interest with the business of the Company. It
is likely that due to time constraints, they will resign as officers and employees after a transition period. Pending their resignations,
our independent directors would be required to assess corporate opportunities. For this reason, their duties with Marathon may
adversely affect the Company. It is possible that they may remain as directors of the Company. Presently, the Company’s
active business is the managing of our Digital Asset portfolio and seeking to acquire an operating company in the blockchain industry.
Our previously announced merger with an Australian company was terminated . However, our officers are spending time pursuing
another acquisition. We presently have no agreement to acquire any other business. Because of conflicts for their time, we may
be hampered in our acquisition efforts. Our informal plan is for Mr. David Garrity, an experienced financial executive and an
independent director of the Company is expected to become Chief Executive Officer and potentially Chief Financial Officer. We
have no agreement with Mr. Garrity and cannot assure you that he will accept full-time employment. Further, Mr. Garrity has limited
experience in the blockchain industry. For these reasons, if the Marathon merger closes, we may be adversely affected.
If
the Marathon GBV merger fails to close our Chairman, Chief Executive Officer and Chief Financial Officer, Charles Allen’s
involvement with GBV may create a continuing, conflict of interest. In the event such position and interest results in a conflict
of interest between us and GBV, Mr. Allen could potentially make decisions that are not in the best interest of the shareholders
of the Company.
Our
Chairman, Chief Executive Officer and Chief Financial Officer, Charles Allen, is involved in other companies including his position
and interest in GBV, a blockchain company. If the Marathon GBV merger fails to close, Mr. Allen may face continuing conflicts
of interest between the Company and GBV. The conflicts include time and the potentially competing interests of two companies in
the same industry. Our Board of Directors and Mr. Allen will attempt to minimize such conflicts. In determining whether or not
our interest conflict with those of Mr. Allen’s, our disinterested directors will primarily consider legal advice concerning
corporate opportunities, the potential benefits to us, the degree of risk to which we may be exposed and our financial position
at that time. We will rely upon the role of Mr. David Garrity and Jonathan Read, our two non-employee directors to evaluate corporate
opportunities and the time Mr. Allen spends on our interests. However, as discussed at page 46 under the heading “Conflicts
of Interest,” Mr. Read is Chief Executive Officer and Chairman of another company which has invested in and is seeking to
enter into the blockchain industry. While Mr. Garrity presently has no conflicts to our knowledge, he may acquire them in the
future and he may not want to continue as the only director without potential conflicts of interest. Other than as indicated,
the Company has no other procedures or mechanisms to deal with conflicts of interest. It is possible that the existence of the
potential conflict or decisions made in connection with such conflicts could adversely affect the price of our Common Stock and
could cause the price to be less than it might have been if the conflicts did not exist or were avoided. Mr. Allen currently devotes
no less than twenty-five hours per week to GBV, however as a result of the Company’s past inability to compensate Mr. Allen
at generally accepted market levels and its historic failure to either make payroll or make payroll on a timely basis, Mr. Allen
may choose to devote a substantial amount of his time to his involvement with other companies which may have a material adverse
effect on us.
From
July 1, 2017 to October 24, 2017 we did not have sufficient funds to make payroll and compensate Charles Allen, as a result Mr.
Allen elected to devote a substantial amount of his time to his involvement with other companies which may have a material adverse
effect on us.
With
our small size and lack of financial resources, we may not be able to recruit independent directors. Because our officers may
be subject to potential lawsuits brought by shareholders on behalf of the Company, they may be hesitant to take actions which
could benefit us and they may be more likely to resign. Ultimately, we may be adversely harmed as the result of such potential
conflicts.
If
the Marathon GBV merger fails to close our Chief Operating Officer, Michal Handerhan’s involvement with GBV may create a
continuing, conflict of interest. In the event such position and interest results in a conflict of interest between us and GBV,
Mr. Handerhan could potentially make decisions that are not in the best interest of the shareholders of the Company.
Our
Chief Operating Officer, Michal Handerhan, is involved in other companies including his position and interest in GBV, a blockchain
company. If the Marathon GBV merger fails to close, Mr. Handerhan may face continuing conflicts of interest between the Company
and GBV. The conflicts include time and the potentially competing interests of two companies in the same industry. Our Board of
Directors and Mr. Handerhan will attempt to minimize such conflicts. In determining whether or not our interest conflict with
those of Mr. Handerhan’s, our disinterested directors will primarily consider legal advice concerning corporate opportunities,
the potential benefits to us, the degree of risk to which we may be exposed and our financial position at that time. We will rely
upon the role of Mr. David Garrity and Jonathan Read, our two non-employee directors to evaluate corporate opportunities and the
time Mr. Handerhan spends on our interests. However, as discussed at page 46 under the heading “Conflicts of Interest,”
Mr. Read is Chief Executive Officer and Chairman of another company which has invested in and is seeking to enter into the blockchain
industry. While Mr. Garrity presently has no conflicts to our knowledge, he may acquire them in the future and he may not want
to continue as the only director without potential conflicts of interest. Other than as indicated, the Company has no other procedures
or mechanisms to deal with conflicts of interest. It is possible that the existence of the potential conflict or decisions made
in connection with such conflicts could adversely affect the price of our Common Stock and could cause the price to be less than
it might have been if the conflicts did not exist or were avoided. Mr. Handerhan currently devotes no less than twenty-five hours
per week to GBV, however as a result of the Company’s past inability to compensate Mr. Handerhan at generally accepted market
levels and its historic failure to either make payroll or make payroll on a timely basis, Mr. Handerhan may choose to devote a
substantial amount of his time to his involvement with other companies which may have a material adverse effect on us.
From
July 1, 2017 to October 24, 2017 we did not have sufficient funds to make payroll and compensate Michal Handerhan, as a result
Mr. Handerhan has chosen to devote a substantial amount of his time to his involvement with other companies which may have a material
adverse effect on us.
With
our small size and lack of financial resources, we may not be able to recruit independent directors. Because our officers may
be subject to potential lawsuits brought by shareholders on behalf of the Company, they may be hesitant to take actions which
could benefit us and they may be more likely to resign. Ultimately, we may be adversely harmed as the result of such potential
conflicts.
Any
inability to attract and retain additional personnel could affect our ability to successfully grow our business.
Our
future success depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial,
editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense. Our failure to
retain and attract the necessary technical, managerial, editorial, merchandising, marketing, and customer service personnel could
harm our business.
We
may need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization
and to satisfy new reporting requirements
.
We
are required to comply with a variety of reporting, accounting and other rules and regulations. Compliance with existing requirements
is expensive. We may need to implement additional finance and accounting systems, procedures and controls to satisfy our reporting
requirements and such further requirements may increase our costs and require additional management time and resources. Our internal
control over financial reporting is determined to be ineffective. Such failure could cause investors to lose confidence in our
reported financial information, negatively affect the market price of our Common Stock, subject us to regulatory investigations
and penalties, and adversely impact our business and financial condition.
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters
could significantly affect our financial results
.
Generally
accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard
to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, estimating valuation
allowances and accrued liabilities (including allowances for returns, credit card chargebacks, doubtful accounts and obsolete
and damaged inventory), internal use software and website development (acquired and developed internally), accounting for income
taxes, valuation of long-lived and intangible assets and goodwill, stock-based compensation and loss contingencies, are highly
complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation
or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected
financial performance.
If
we fail to accurately forecast our expenses and revenues, our business, prospects, financial condition and results of operations
may suffer and the price of our securities may decline.
The
rapidly evolving nature of our industry and the constantly evolving nature of our business, make forecasting operating results
difficult. We plan to upgrade and further expand the components of our infrastructure. We may experience difficulties with upgrades
of our infrastructure, and may incur increased expenses as a result of these difficulties. As a result of these potential expenditures
on our infrastructure, our ability to reduce spending may become limited. Therefore, any significant shortfall in the revenues
for which we have built and are continuing to build our infrastructure would likely harm our business.
Natural
disasters and geo-political events could adversely affect our business.
Natural
disasters, including hurricanes, cyclones, typhoons, tropical storms, floods, earthquakes and tsunamis, weather conditions, including
winter storms, droughts and tornados, whether as a result of climate change or otherwise, and geo-political events, including
civil unrest or terrorist attacks, that affect us or other service providers could adversely affect our business.
Since
there has been limited precedence set for financial accounting of Digital Assets other than Digital Securities, it is unclear
how we will be required to account for Digital Asset transactions in the future.
Since
there has been limited precedence set for the financial accounting of Digital Assets other than Digital Securities, it is unclear
how we will be required to account for Digital Asset transactions or assets. Furthermore, a change in regulatory or financial
accounting standards could result in the necessity to restate our financial statements. Such a restatement could negatively impact
our business, prospects, financial condition and results of operation.
We
are subject to the information and reporting requirements of the Exchange Act), and other federal securities laws, including compliance
with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).
The
costs of preparing and filing annual and quarterly reports and other information with the Securities and Exchange Commission and
furnishing audited reports to shareholders will cause our expenses to be higher than they would have been if we were privately
held. It may be time consuming, difficult and costly for us to develop, implement and maintain the internal controls and reporting
procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other
finance personnel in order to develop and implement appropriate internal controls and reporting procedures.
If
we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results
accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation
and adversely impact the trading price of our Common Stock. During our assessment of the effectiveness of internal control over
financial reporting as of December 31, 2017 , management identified a significant deficiency in our disclosure controls
and procedures which may lead to a failure to prevent or detect misstatements.
Effective
internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment
existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control
deficiencies may adversely affect our financial condition, results of operation and access to capital. During our assessment of
the effectiveness of internal control over financial reporting as of December 31, 2017 , management identified a significant
deficiency related to presence of weakness in our disclosure control and procedure resulting from limited internal audit functions.
Because of our inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with any policies and procedures may deteriorate.
Public
company compliance may make it more difficult to attract and retain officers and directors.
The
Sarbanes-Oxley Act and rules implemented by the Securities and Exchange Commission have required changes in corporate governance
practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs in
2018 and beyond and to make certain activities more time consuming and costly. The impact of the SEC’s July 25, 2017
report on Digital Securities (the “Report”) as well as recent enforcement actions and speeches made by the SEC’s
Chairman will increase our compliance and legal costs. More recently, the SEC’s Chairman commented that most initial
coin offerings (a type of Digital Asset) involve the offer of a Digital Security. As a public company, we also expect that these
rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance and we
may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors
or as executive officers, and to maintain insurance at reasonable rates, or at all.
Our
stock price may be volatile.
The
market price of our Common Stock is likely to be highly volatile and could fluctuate widely in price in response to various factors,
many of which are beyond our control, including the following:
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changes
in our industry including changes which adversely affect bitcoin and other Digital Assets;
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competitive
pricing pressures;
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continued
volatility in the stock prices of Digital Assets issuers;
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continued
volatility in the price of bitcoin and other Digital Assets;
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our
ability to obtain working capital financing;
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additions
or departures of key personnel including our executive officers;
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sales
of our Common Stock;
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conversion
of our Series C-1 Convertible Preferred Stock and the subsequent sale of the underlying Common Stock;
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exercise
of our warrants and the subsequent sale of the underlying Common Stock;
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our
ability to execute our business plan;
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operating
results that fall below expectations;
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loss
of any strategic relationship;
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regulatory
developments; and
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economic
and other external factors.
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In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our Common Stock. As a result, you may be unable to resell your shares at a desired price.
We
have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited
to the value of our Common Stock.
We
have never paid cash dividends on our Common Stock and do not anticipate doing so in the foreseeable future. The payment of dividends
on our Common Stock will depend on earnings, financial condition and other business and economic factors affecting us at such
time as our board of directors may consider relevant. If we do not pay dividends, our Common Stock may be less valuable because
a return on your investment will only occur if our stock price appreciates.
There
is currently a limited trading market for our Common Stock and we cannot ensure that one will be sustained.
Our
shares of Common Stock are not traded on a national securities exchange, and the price, may not reflect our actual or perceived
value. There can be no assurance that there will be an active market for our shares of Common Stock in the future. The market
liquidity will be dependent on the perception of our operating business, among other things. We may, in the future, take certain
steps, including utilizing investor awareness campaigns, press releases, road shows and conferences to increase awareness of our
business and any steps that we might take to bring us to the awareness of investors may require we compensate consultants with
cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result
in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment at a price that reflects
the value of the business and trading may be at an inflated price relative to the performance of our company due to, among other
things, availability of sellers of our shares. The price of our Common Stock has been highly volatile. Because there may be a
low price for our shares of Common Stock and because of our involvement in the Digital Asset business, many brokerage firms or
clearing firms may not be willing to effect transactions in the securities or accept our shares for deposit in an account. Even
if an investor finds a broker willing to effect a transaction in the shares of our Common Stock, the combination of brokerage
commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions
will not permit the use of low priced shares of Common Stock as collateral for any loans.
Because
our Common Stock does not trade on a national securities exchange, the prices of our Common Stock may be more volatile and lower
than if we were listed.
Our
Common Stock trades on the OTCQB operated by OTC Markets. This market is not a national securities exchange. While our Common
Stock trading has been relatively active, generally the OTCQB does not have the same level of activity as a national securities
exchange like Nasdaq. Most institutions will not purchase a security unless it is on a national securities exchange. In addition,
they do not purchase stocks that trade below $5 per share. We may, in the future, take certain steps, including utilizing investor
awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might
take to bring us to the awareness of investors may require we compensate consultants with cash and/or stock. There can be no assurance
that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently,
investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business and
trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers
of our shares.
Our
Common Stock is deemed a “penny stock,” which would make it more difficult for our investors to sell their shares.
Our
Common Stock is subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock
rules generally apply to companies whose Common Stock is not listed on the Nasdaq Stock Market or other national securities exchange
or trades at less than $5.00 per share. These rules require, among other things, that brokers who trade penny stock to persons
other than “established customers” complete certain documentation, make suitability inquiries of investors and provide
investors with certain information concerning trading in the security, including a risk disclosure document and quote information
under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock
rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain
subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities.
Because our Common Stock is subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
Sales
by our significant shareholders could have an adverse effect on the market price of our stock.
Several
of our shareholders own significant portions of our preferred stock convertible into Common Stock, and Warrants exercisable for
Common Stock. If one or more of our significant shareholders were to sell all or a material number of shares of Common Stock currently
available to be sold and the additional shares of Common Stock, upon effectiveness of a registration statement we are required
to file (or expiration of the six-month Rule 144 period), the market price of our Common Stock could be negatively impacted. These
shares plus the shares of Common Stock issuable upon conversion of preferred stock and on the exercise of warrants creates a circumstance
commonly referred to as an “overhang” and in anticipation of exercises the market price of our Common Stock could
fall. Investors should be aware that they could experience significant short-term volatility in our stock if such shareholders
decide to sell all or a portion of their holdings of our Common Stock at once or within a short period of time. The existence
of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional
financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or
appropriate.
Our
articles of incorporation allow for our board to create new series of preferred stock without further approval by our shareholders,
which could adversely affect the rights of the holders of our Common Stock.
Our
board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of
directors also has the authority to issue preferred stock without further shareholder approval. As a result, our board of directors
could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before dividends are distributed to the holders of Common Stock and the right
to the redemption of the shares, together with a premium, prior to the redemption of our Common Stock. In addition, our board
of directors could authorize the issuance of a series of preferred stock that has greater voting power than our Common Stock or
that is convertible into our Common Stock, which could decrease the relative voting power of our Common Stock or result in dilution
to our existing shareholders.
Substantial
future sales of our Common Stock by us or by our existing shareholders could cause our stock price to fall.
Additional
equity financings or other share issuances by us, including shares issued in connection with strategic alliances and corporate
partnering transactions, could adversely affect the market price of our Common Stock. Sales by existing shareholders of a large
number of shares of our Common Stock in the public market or the perception that additional sales could occur could cause the
market price of our Common Stock to drop.
If
the Selling Shareholders exercise their Warrants or we engage in future securities offerings, our shareholders will experience
future dilution.
If
the Selling Shareholders exercise their Warrants including those which the Resale Shares underlie, our existing shareholders will
incur substantial dilution. In order to raise capital, we plan to offer additional shares of our Common Stock or other securities
convertible into or exchangeable for our Common Stock. We have no plans as to the type of security or price or the potential number
of shares of Common Stock. Although no assurances can be given that we will issue any Common Stock or Common Stock equivalents
or consummate a financing, in the event we do, or in the event we sell shares of Common Stock or other securities convertible
into shares of our Common Stock in the future, additional and substantial dilution will occur.
We
may be accused of infringing intellectual property rights of third parties.
We
may be subject to legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability
of damages, royalties and the potential for injunctive relief has increased the defense litigation costs of patent infringement
claims, especially those asserted by third parties whose sole or primary business is to assert such claims. Such claims, even
if not meritorious, may result in significant expenditure of financial and managerial resources, and the payment of damages or
settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or business processes
we currently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may
not be available on financially feasible terms or terms acceptable to us or at all. In addition, we may not be able to obtain
on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing ecommerce
services to other businesses and individuals under commercial agreements.
Use
of social media may adversely impact our reputation.
There
has been a marked increase in use of social media platforms and similar devices, including weblogs (blogs), social media websites,
and other forms of Internet-based communications which allow individual access to a broad audience of consumers and other interested
persons. Consumers value readily available information concerning retailers, manufacturers, and their goods and services and often
act on such information without further investigation, authentication and without regard to its accuracy. The availability of
information on social media platforms and devices is virtually immediate as is its impact. Social media platforms and devices
immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content
posted. The opportunity for dissemination of information, including inaccurate information, is virtually limitless. Information
concerning or affecting us may be posted on such platforms and devices at any time. Information posted may be inaccurate and adverse
to us, and it may harm our business. The harm may be immediate without affording us an opportunity for redress or correction.
Such platforms also could be used for the dissemination of trade secret information or compromise of other valuable company assets,
any of which could harm our business.
Risks
Related to the Bitcoin Network and Bitcoins
The
following risks relate to our proposed business and the effects upon us assume we obtain financing in a sufficient amount to re-enter
this business.
The
further development and acceptance of the Bitcoin Network and other Digital Asset systems, which represent a new and rapidly changing
industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance
of the Bitcoin Network may adversely affect an investment in our Company.
Digital
Assets such as bitcoins that may be used, among other things, to buy and sell goods and services are a new and rapidly evolving
industry of which the Bitcoin Network is a prominent, but not unique, part. The growth of the Digital Assets industry in general,
and the Bitcoin Network in particular, is subject to a high degree of uncertainty. The factors affecting the further development
of the Digital Assets industry, as well as the Bitcoin Network, include:
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continued
worldwide growth in the adoption and use of bitcoins and other Digital Assets;
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government
and quasi-government regulation of bitcoins and other Digital Assets and their use, or restrictions on or regulation of access
to and operation of the Bitcoin Network or similar Digital Assets systems;
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the
maintenance and development of the open-source software protocol of the Bitcoin Network;
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changes
in consumer demographics and public tastes and preferences;
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the
availability and popularity of other forms or methods of buying and selling goods and services, including new means of using
fiat currencies;
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general
economic conditions and the regulatory environment relating to Digital Assets; and
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the
impact of regulators focusing on Digital Assets and Digital Securities and the costs associated with such regulatory oversight.
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A
decline in the popularity or acceptance of the Bitcoin Network could adversely affect an investment in us.
Because
the market for Digital Assets is extremely volatile, we may inadvertently violate the 1940 Act and incur large losses as a result
and potentially be required to register as an investment company or terminate operations.
Presently
our only material assets (other than cash
) are investments in bitcoin and ether. Recently the prices
of these Digital Assets have been extremely volatile. For example, bitcoin which currently accounts for over 60% of our Digital
Assets is subject to such wide price swings which could result in it being less than 60% of our Digital Assets. Because we will
be become an investment company as defined by the 1940 Act if our portfolio of Digital Securities exceeds 40% of our assets excluding
cash, we are subject to a number of risks due to volatility including:
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Contrary
to our legal advice, the SEC or a court may conclude that bitcoin or ether are securities;
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Based
on legal advice, we may acquire other Digital Assets which we have been advised are not securities but later are held to be
securities;
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We
may knowingly acquire Digital Assets that are securities and acquire minority investments in businesses which investments
are securities; and
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Regardless
of the internal procedures we take to avoid surpassing the 40% test, future volatility during the course of a day may cause
us to exceed the 40% limit.
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If
we exceed the test, we will have one-year to reduce our holdings of securities below the 40% test. However, that can only occur
once during a three-year period. Accordingly, if volatility causes us to exceed the 40% test, we may experience large losses when
we liquidate securities as a result of continued volatility. Further, if we elect to sell a private investment, not only may it
be difficult to find a buyer but we could incur a significant loss on the sale of a private investment due to not only the lack
of liquidity but also the entity’s poor performance. If we are able to come below the 40% threshold and again face the same
problem, it is likely we will be forced to terminate operations, sell all assets and distribute cash to our shareholders who will
likely suffer very large losses. Further, the cost of distributing cash to our shareholder may exceed the amount of cash on hand
in which case we would use our remaining funds to wind down the Company.
If
We Acquire Digital Securities, Even Unintentionally, We May Violate the Investment Company Act and Incur Potential Third Party
Liabilities
We
expect that if we obtain sufficient financing, we will increase our portfolio of Digital Assets including bitcoins and Digital
Securities. As this prospectus discloses, there is an increased regulatory examination of Digital Assets and Digital Securities.
This has led to regulatory and enforcement activities. In order to limit our acquisition of Digital Securities to stay within
the 40% threshold, we will examine the manner in which Digital Assets were initially marketed to determine if they may be deemed
Digital Securities and subject to federal and state securities laws. Even if we conclude that a particular Digital Asset is not
a security under the Securities Act, certain states including California take a stricter view of the term “investment contract”
which means the Digital Asset may have violated applicable state securities laws. This will result in increased compliance costs
and legal fees. If our examination of a Digital Asset is incorrect, we may incur regulatory penalties and private investor liabilities
since Section 5 of the Securities Act is a strict liability statute much like selling spoiled milk and state securities laws generally
impose liability for negligence for misrepresentations.
Currently,
there is relatively small use of bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators,
thus contributing to price volatility that could adversely affect an investment in us.
As
relatively new products and technologies, bitcoins and the Bitcoin Network have only recently become widely accepted as a means
of payment for goods and services by many major retail and commercial outlets, and use of bitcoins by consumers to pay such retail
and commercial outlets remains limited. Conversely, a significant portion of bitcoin demand is generated by speculators and investors
seeking to profit from the short- or long-term holding of bitcoins. A lack of expansion by bitcoins into retail and commercial
markets, or a contraction of such use, may result in increased volatility or a reduction in the price of bitcoin, either of which
could adversely impact an investment in us.
Significant
Bitcoin Network contributors could propose amendments to the Bitcoin Network’s protocols and software that, if accepted
and authorized by the Bitcoin Network, could adversely affect an investment in us.
A
small group of individuals contribute to the Bitcoin Core project on Github. This group of contributors is currently headed by
Wladimir J. van der Laan, the current lead maintainer. These individuals can propose refinements or improvements to the Bitcoin
Network’s source code through one or more software upgrades that alter the protocols and software that govern the Bitcoin
Network and the properties of bitcoin, including the irreversibility of transactions and limitations on the mining of new bitcoin.
Proposals for upgrades and discussions relating thereto take place on online forums. For example, there is an ongoing debate regarding
altering the Blockchain by increasing the size of blocks to accommodate a larger volume of transactions. Although some proponents
support an increase, other market participants oppose an increase to the block size as it may deter miners from confirming transactions
and concentrate power into a smaller group of miners. To the extent that a significant majority of the users and miners on the
Bitcoin Network install such software upgrade(s), the Bitcoin Network would be subject to new protocols and software that may
adversely affect an investment in the Shares. In the event a developer or group of developers proposes a modification to the Bitcoin
Network that is not accepted by a majority of miners and users, but that is nonetheless accepted by a substantial plurality of
miners and users, two or more competing and incompatible Blockchain implementations could result. This is known as a “hard
fork.” In such a case, the “hard fork” in the Blockchain could materially and adversely affect the perceived
value of bitcoin as reflected on one or both incompatible Blockchains, that may adversely affect an investment in us.
Bitcoin
has recently forked and additional forks may occur in the future which may affect the value of bitcoin held by the Company.
On
August 1, 2017 bitcoin’s blockchain was forked and Bitcoin Cash was created. The fork resulted in a new blockchain being
created with a shared history, and a new path forward. Bitcoin Cash has a block size of 8mb and other technical changes. On October
24, 2017, bitcoin’s blockchain was forked and Bitcoin Gold was created. The fork resulted in a new blockchain being created
with a shared history, and new path forward, Bitcoin Gold has a different proof of work algorithm and other technical changes.
The value of the newly created Bitcoin Cash and Bitcoin Gold may or may not have value in the long run and may affect the price
of bitcoin if interest is shifted away from bitcoin to the newly created Digital Assets. The value of bitcoin after the creation
of a fork is subject to many factors including the value of the fork product, market reaction to the creation of the fork product,
and the occurrence of forks in the future. As such, the value of bitcoin could be materially reduced if existing and future forks
have a negative effect on bitcoin’s value.
The
open-source structure of the Bitcoin Network protocol means that the contributors to the protocol are generally not directly compensated
for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could
damage the Bitcoin Network and an investment in us.
The
Bitcoin Network operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core project on GitHub.
As an open source project, Bitcoin is not represented by an official organization or authority. As the Bitcoin Network protocol
is not sold and its use does not generate revenues for contributors, contributors are generally not compensated for maintaining
and updating the Bitcoin Network protocol. Although the MIT Media Lab’s Digital Currency Initiative funds the current maintainer
Wladimir J. van der Laan, among others, this type of financial incentive is not typical. The lack of guaranteed financial incentive
for contributors to maintain or develop the Bitcoin Network and the lack of guaranteed resources to adequately address emerging
issues with the Bitcoin Network may reduce incentives to address the issues adequately or in a timely manner. This may adversely
affect an investment in us.
If
a malicious actor or botnet obtains control in excess of 50 percent of the processing power active on the Bitcoin Network, it
is possible that such actor or botnet could manipulate the Blockchain in a manner that adversely affects an investment in us.
If
a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions
of the computers) obtains a majority of the processing power dedicated to mining on the Bitcoin Network, it may be able to alter
the Blockchain on which the Bitcoin Network and all bitcoin transactions rely by constructing alternate blocks if it is able to
solve for such blocks faster than the remainder of the miners on the Bitcoin Network can add valid blocks. In such alternate blocks,
the malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new
bitcoins or transactions using such control. Using alternate blocks, the malicious actor could “double-spend” its
own bitcoins (i.e., spend the same bitcoins in more than one transaction) and prevent the confirmation of other users’ transactions
for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of
the processing power on the Bitcoin Network or the bitcoin community does not reject the fraudulent blocks as malicious, reversing
any changes made to the Blockchain may not be possible. Such changes could adversely affect an investment in us.
In
late May and early June 2014, a mining pool known as GHash.io approached and, during a 24- to 48-hour period in early June may
have exceeded, the threshold of 50 percent of the processing power on the Bitcoin Network. To the extent that GHash.io did exceed
50 percent of the processing power on the network, reports indicate that such threshold was surpassed for only a short period,
and there are no reports of any malicious activity or control of the Blockchain performed by GHash.io. Furthermore, the processing
power in the mining pool appears to have been redirected to other pools on a voluntary basis by participants in the GHash.io pool,
as had been done in prior instances when a mining pool exceeded 40 percent of the processing power on the Bitcoin Network. The
approach to and possible crossing of the 50 percent threshold indicate a greater risk that a single mining pool could exert authority
over the validation of bitcoin transactions. To the extent that the bitcoin ecosystem, including the Core Developers and the administrators
of mining pools, do not act to ensure greater decentralization of bitcoin mining processing power, the feasibility of a malicious
actor obtaining in excess of 50 percent of the processing power on the Bitcoin Network (e.g., through control of a large mining
pool or through hacking such a mining pool) will increase, which may adversely impact an investment in us.
If
the award of bitcoin for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize
miners, miners may cease expending hashrate to solve blocks and confirmations of transactions on the Blockchain could be slowed
temporarily. A reduction in the hashrate expended by miners on the Bitcoin Network could increase the likelihood of a malicious
actor obtaining control in excess of fifty percent (50%) of the aggregate hashrate active on the Bitcoin Network or the Blockchain,
potentially permitting such actor to manipulate the Blockchain in a manner that adversely affects an investment in us.
As
the award of new bitcoin for solving blocks declines, and if transaction fees are not sufficiently high, miners may not have an
adequate incentive to continue mining and may cease their mining operations. The current fixed reward for solving a new block
is twelve and a half (12.5) bitcoin per block; the reward decreased from twenty-five (25) bitcoin in July 2016. It is estimated
that it will halve again in about four (4) years. This reduction may result in a reduction in the aggregate hashrate of the Bitcoin
Network as the incentive for miners will decrease. Moreover, miners ceasing operations would reduce the aggregate hashrate on
the Bitcoin Network, which would adversely affect the confirmation process for transactions (i.e., temporarily decreasing the
speed at which blocks are added to the Blockchain until the next scheduled adjustment in difficulty for block solutions) and make
the Bitcoin Network more vulnerable to a malicious actor obtaining control in excess of fifty (50) percent of the aggregate hashrate
on the Bitcoin Network. Periodically, the Bitcoin Network has adjusted the difficulty for block solutions so that solution speeds
remain in the vicinity of the expected ten (10) minute confirmation time targeted by the Bitcoin Network protocol. The Company
believes that from time to time there will be further considerations and adjustments to the Bitcoin Network regarding the difficulty
for block solutions. More significant reductions in aggregate hashrate on the Bitcoin Network could result in material, though
temporary, delays in block solution confirmation time. Any reduction in confidence in the confirmation process or aggregate hashrate
of the Bitcoin Network may negatively impact the value of bitcoin, which will adversely impact an investment in us.
To
the extent that the profit margins of Bitcoin mining operations are not high, operators of Bitcoin mining operations are more
likely to immediately sell bitcoins earned by mining in the Bitcoin Exchange Market, resulting in a reduction in the price of
bitcoins that could adversely impact an investment in us.
Over
the past two years, Bitcoin Network mining operations have evolved from individual users mining with computer processors, graphics
processing units and first generation ASIC servers. Currently, new processing power brought onto the Bitcoin Network is predominantly
added by incorporated and unincorporated “professionalized” mining operations. Professionalized mining operations
may use proprietary hardware or sophisticated ASIC machines acquired from ASIC manufacturers. They require the investment of significant
capital for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing facilities),
incurring of electricity costs and the employment of technicians to operate the mining farms. As a result, professionalized mining
operations are of a greater scale than prior Bitcoin Network miners and have more defined, regular expenses and liabilities. These
regular expenses and liabilities require professionalized mining operations to more immediately sell bitcoins earned from mining
operations on the Bitcoin Exchange Market, whereas it is believed that individual miners in past years were more likely to hold
newly mined bitcoins for more extended periods. The immediate selling of newly mined bitcoins greatly increases the supply of
bitcoins on the Bitcoin Exchange Market, creating downward pressure on the price of bitcoins.
The
extent to which the value of bitcoin mined by a professionalized mining operation exceeds the allocable capital and operating
costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher
percentage of its newly mined bitcoin rapidly if it is operating at a low profit margin—and it may partially or completely
cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold into
the Bitcoin Exchange Market more rapidly, thereby potentially reducing bitcoin prices. Lower bitcoin prices could result in further
tightening of profit margins, particularly for professionalized mining operations with higher costs and more limited capital reserves,
creating a network effect that may further reduce the price of bitcoin until mining operations with higher operating costs become
unprofitable and remove mining power from the Bitcoin Network. The network effect of reduced profit margins resulting in greater
sales of newly mined bitcoin could result in a reduction in the price of bitcoin that could adversely impact an investment in
us.
To
the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transaction
fee will not be recorded on the Blockchain until a block is solved by a miner who does not require the payment of transaction
fees. Any widespread delays in the recording of transactions could result in a loss of confidence in the Bitcoin Network, which
could adversely impact an investment in us.
To
the extent that any miners cease to record transactions in solved blocks, such transactions will not be recorded on the
Blockchain. Currently, there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks;
however, to the extent that any such incentives arise (e.g., a collective movement among miners or one or more mining pools forcing
bitcoin users to pay transaction fees as a substitute for or in addition to the award of new bitcoins upon the solving of a block),
actions of miners solving a significant number of blocks could delay the recording and confirmation of transactions on the Blockchain.
Any systemic delays in the recording and confirmation of transactions on the Blockchain could result in greater exposure to double-spending
transactions and a loss of confidence in the Bitcoin Network, which could adversely impact an investment in us.
The
acceptance of Bitcoin Network software patches or upgrades by a significant, but not overwhelming, percentage of the users and
miners in the Bitcoin Network could result in a “fork” in the Blockchain, resulting in the operation of two separate
networks until such time as the forked Blockchains are merged. The temporary or permanent existence of forked Blockchains could
adversely impact an investment in us.
Bitcoin
is an open source project and, although there is an influential group of leaders in the Bitcoin Network community including the
Core Developers, there is no official developer or group of developers that formally controls the Bitcoin Network. Any individual
can download the Bitcoin Network software and make any desired modifications, which are proposed to users and miners on the Bitcoin
Network through software downloads and upgrades, typically posted to the bitcoin development forum on GitHub.com. A substantial
majority of miners and bitcoin users must consent to those software modifications by downloading the altered software or upgrade
that implements the changes; otherwise, the changes do not become a part of the Bitcoin Network. Since the Bitcoin Network’s
inception, changes to the Bitcoin Network have been accepted by the vast majority of users and miners, ensuring that the Bitcoin
Network remains a coherent economic system; however, a developer or group of developers could potentially propose a modification
to the Bitcoin Network that is not accepted by a vast majority of miners and users, but that is nonetheless accepted by a substantial
population of participants in the Bitcoin Network. In such a case, and if the modification is material and/or not backwards compatible
with the prior version of Bitcoin Network software, a fork in the Blockchain could develop and two separate Bitcoin Networks could
result, one running the pre-modification software program and the other running the modified version (i.e., a second “Bitcoin”
network). Such a fork in the Blockchain typically would be addressed by community-led efforts to merge the forked Blockchains,
and several prior forks have been so merged. This kind of split in the Bitcoin Network could materially and adversely impact an
investment in us and, in the worst case scenario, harm the sustainability of the Bitcoin Network’s economy.
Intellectual
property rights claims may adversely affect the operation of the Bitcoin Network.
Third
parties may assert intellectual property claims relating to the holding and transfer of Digital Assets and their source code.
Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in the
Bitcoin Network’s long-term viability or the ability of end-users to hold and transfer bitcoins may adversely affect an
investment in us. Additionally, a meritorious intellectual property claim could prevent us and other end-users from accessing
the Bitcoin Network or holding or transferring their bitcoins. As a result, an intellectual property claim against us or other
large Bitcoin Network participants could adversely affect an investment in us.
The
Bitcoin Exchanges on which bitcoins trade are relatively new and, in most cases, largely unregulated and may therefore be more
exposed to fraud and failure than established, regulated exchanges for other products. To the extent that the Bitcoin Exchanges
representing a substantial portion of the volume in bitcoin trading are involved in fraud or experience security failures or other
operational issues, such Bitcoin Exchanges’ failures may result in a reduction in the price of bitcoin and can adversely
affect an investment in us.
The
Bitcoin Exchanges on which the bitcoins trade are new and, in most cases, largely unregulated. Furthermore, many Bitcoin Exchanges
(including several of the most prominent US Dollar denominated Bitcoin Exchanges) do not provide the public with significant information
regarding their ownership structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace
may lose confidence in, or may experience problems relating to, Bitcoin Exchanges, including prominent exchanges handling a significant
portion of the volume of bitcoin trading.
Over
the past four (4) years, a number of Bitcoin Exchanges have been closed due to fraud, failure or security breaches. In many of
these instances, the customers of such Bitcoin Exchanges were not compensated or made whole for the partial or complete losses
of their account balances in such Bitcoin Exchanges. While smaller Bitcoin Exchanges are less likely to have the infrastructure
and capitalization that make larger Bitcoin Exchanges more stable, larger Bitcoin Exchanges are more likely to be appealing targets
for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive
information or gain access to private computer systems). Further, the collapse of the largest Bitcoin Exchange in 2014 suggests
that the failure of one component of the overall Bitcoin ecosystem can have consequences for both users of a Bitcoin Exchange
and the Bitcoin industry as a whole.
More
recently, the Wall Street Journal has reported that China will shut down Bitcoin Exchanges and other virtual currency trading
platforms. The article reported that China has accounted for the bulk of global bitcoin trading. Further, in late January 2018,
the Wall Street Journal reported that $530 million of cryptocurrency was missing from a Japanese exchange.
A
lack of stability in the Bitcoin Exchange Market and the closure or temporary shutdown of Bitcoin Exchanges due to fraud, business
failure, hackers or malware, or government-mandated regulation may reduce confidence in the Bitcoin Network and result in greater
volatility in bitcoin value. These potential consequences of a Bitcoin Exchange’s failure could adversely affect an investment
in us.
Political
or economic crises may motivate large-scale sales of Bitcoins, which could result in a reduction in Bitcoin value and adversely
affect an investment in us.
As
an alternative to fiat currencies that are backed by central governments, Digital Assets such as bitcoins, which are relatively
new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and
selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless,
political or economic crises may motivate large-scale acquisitions or sales of bitcoins either globally or locally. Large-scale
sales of bitcoins would result in a reduction in bitcoin value and could adversely affect an investment in us.
Demand
for bitcoin is driven, in part, by its status as the most prominent and secure Digital Asset. It is possible that a Digital Asset
other than bitcoins could have features that make it more desirable to a material portion of the Digital Asset user base, resulting
in a reduction in demand for bitcoins, which could have a negative impact on the price of bitcoins and adversely affect an investment
in us.
The
Bitcoin Network and bitcoins, as an asset, hold a “first-to-market” advantage over other Digital Assets. This first-to-market
advantage is driven in large part by having the largest user base and, more importantly, the largest combined mining power in
use to secure the Blockchain and transaction verification system. Having a large mining network results in greater user confidence
regarding the security and long-term stability of a Digital Asset’s network and its block chain; as a result, the advantage
of more users and miners makes a Digital Asset more secure, which makes it more attractive to new users and miners, resulting
in a network effect that strengthens the first-to-market advantage.
As
of March 6 , 2018, there were over one thousand five hundred ( 1,500 ) alternate Digital Assets (or altcoins)
tracked by CoinMarketCap, having a total market capitalization (including the market capitalization of bitcoin) of approximately
$442 billion, using market prices and total available supply of each Digital Asset. This included altcoins using a “proof
of work” mining structure similar to Bitcoin, and those using a “proof of stake” transaction verification system
that is different than Bitcoin’s mining system (e.g., Peercoin, Bitshares and NXT). As of March 6 , 2018, bitcoin’s
$184 billion market capitalization was over two (2) times the size of the $80 billion market cap of Ether, the second
largest proof-of-work Digital Asset. Despite the marked first-mover advantage of the Bitcoin Network over other Digital Assets,
it is possible that another Digital Asset could become materially popular due to either a perceived or exposed shortcoming of
the Bitcoin Network protocol that is not immediately addressed by the Bitcoin contributor community or a perceived advantage of
an altcoin that includes features not incorporated into Bitcoin. If a Digital Asset obtains significant market share (either in
market capitalization, mining power or use as a payment technology), this could reduce bitcoin’s market share as well as
other Digital Assets we may become involved in and have a negative impact on the demand for, and price of, such Digital Assets
and could adversely affect an investment in us.
Our
ability to adopt technology in response to changing security needs or trends poses a challenge to the safekeeping of our Digital
Assets.
The
history of the Bitcoin Exchange Market has shown that Bitcoin Exchanges and large holders of bitcoins must adapt to technological
change in order to secure and safeguard their bitcoins and other Digital Assets. We rely on Bitgo Inc.’s multi-signature
enterprise storage solution to safeguard our bitcoins from theft, loss, destruction or other issues relating to hackers and technological
attack. We believe that it may become a more appealing target of security threats as the size of our bitcoin holdings grow. To
the extent that either Bitgo Inc. or we are unable to identify and mitigate or stop new security threats, our bitcoins may be
subject to theft, loss, destruction or other attack, which could adversely affect an investment in us.
Security
threats to us could result in, a loss of Company’s Digital Assets, or damage to the reputation and our brand, each of which
could adversely affect an investment in us.
Security
breaches, computer malware and computer hacking attacks have been a prevalent concern in the Bitcoin Exchange Market since the
launch of the Bitcoin Network. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information
or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment,
and the inadvertent transmission of computer viruses, could harm our business operations or result in loss of our bitcoins and
other Digital Assets. Any breach of our infrastructure could result in damage to our reputation which could adversely affect an
investment in us. Furthermore, we believe that, as our assets grow, it may become a more appealing target for security threats
such as hackers and malware.
We
primarily rely on Bitgo Inc.’s multi-signature enterprise storage solution to safeguard our bitcoins from theft, loss, destruction
or other issues relating to hackers and technological attack. Nevertheless, Bitgo Inc.’s security system may not be impenetrable
and may not be free from defect or immune to acts of God, and any loss due to a security breach, software defect or act of God
will be borne by us. In January 2018, the Japanese cryptocurrency exchange Coincheck reported that hackers breached Coincheck’s
security and stole approximately $530 million worth of cryptocurrency. Our bitcoins and other Digital Assets are also stored
with exchanges such as Itbit, Kraken and Coinbase and others prior to selling them.
The
security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of
an employee of ours, or otherwise, and, as a result, an unauthorized party may obtain access to our, private keys, data or bitcoins.
Additionally, outside parties may attempt to fraudulently induce employees of ours to disclose sensitive information in order
to gain access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until
launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an
actual or perceived breach of our security system occurs, the market perception of the effectiveness of our security system could
be harmed, which could adversely affect an investment in us.
In
the event of a security breach, we may be forced to cease operations, or suffer a reduction in assets, the occurrence of each
of which could adversely affect an investment in us.
A
loss of confidence in our security system, or a breach of our security system, may adversely affect us and the value of an investment
in us.
We
will take measures to protect us and our bitcoins and other Digital Assets from unauthorized access, damage or theft; however,
it is possible that the security system may not prevent the improper access to, or damage or theft of our bitcoins. A security
breach could harm our reputation or result in the loss of some or all of our bitcoins. A resulting perception that our measures
do not adequately protect our Digital Assets could result in a loss of current or potential shareholders, reducing demand for
our Common Stock and causing our shares to decrease in value.
Bitcoin
transactions are irrevocable and stolen or incorrectly transferred bitcoins may be irretrievable. As a result, any incorrectly
executed Bitcoin transactions could adversely affect an investment in us.
Bitcoin
(and other Digital Asset) transactions are not, from an administrative perspective, reversible without the consent and active
participation of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on the
Bitcoin Network. Once a transaction has been verified and recorded in a block that is added to the Blockchain, an incorrect transfer
of Digital Assets or a theft of Digital Assets generally will not be reversible and we may not be capable of seeking compensation
for any such transfer or theft. Although our transfers of bitcoins will regularly be made to or from vendors, consultants, services
providers, etc. it is possible that, through computer or human error, or through theft or criminal action, our bitcoins could
be transferred from us in incorrect amounts or to unauthorized third parties. To the extent that we are unable to seek a corrective
transaction with such third party or is incapable of identifying the third party which has received our bitcoins through error
or theft, we will be unable to revert or otherwise recover incorrectly transferred Company Digital Assets. To the extent that
we are unable to seek redress for such error or theft, such loss could adversely affect an investment in us.
Our
bitcoins and other Digital Assets may be subject to loss, damage, theft or restriction on access.
There
is a risk that part or all of our bitcoins could be lost, stolen or destroyed. We believe that our bitcoins and other Digital
Assets will be an appealing target to hackers or malware distributors seeking to destroy, damage or steal our bitcoin and other
Digital Assets. Although we primarily utilize Bitgo Inc.’s enterprise multi-signature storage solution for our bitcoins,
to minimize the risk of loss, damage and theft, we cannot guarantee that it will prevent such loss, damage or theft, whether caused
intentionally, accidentally or by act of God. Access to our Digital Assets could also be restricted by natural events (such as
an earthquake or flood) or human actions (such as a terrorist attack). Any of these events may adversely affect our operations
and, consequently, an investment in us.
The
limited rights of legal recourse against us, and our lack of insurance protection expose us and our shareholders to the risk of
loss of our bitcoins and other Digital Assets for which no person is liable.
The
bitcoins and other Digital Assets held by us are not insured. Therefore, a loss may be suffered with respect to our bitcoins which
is not covered by insurance and for which no person is liable in damages which could adversely affect our operations and, consequently,
an investment in us.
Bitcoins
and other Digital Assets held by us are not subject to FDIC or SIPC protections.
We
do not hold our bitcoins and other Digital Assets with a banking institution or a member of the Federal Deposit Insurance Corporation
(“FDIC”) or the Securities Investor Protection Corporation (“SIPC”) and, therefore, our Digital Assets
are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions.
We
may not have adequate sources of recovery if our bitcoins and other Digital Assets are lost, stolen or destroyed.
If
our bitcoins or other Digital Assets are lost, stolen or destroyed under circumstances rendering a party liable to us, the responsible
party may not have the financial resources sufficient to satisfy our claim. For example, as to a particular event of loss, the
only source of recovery for us might be limited, to the extent identifiable, other responsible third parties (e.g., a thief or
terrorist), any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim
of ours.
The
sale of our bitcoins or other Digital Assets to pay expenses at a time of low prices could adversely affect an investment in us.
We
may sell bitcoins or other Digital Assets to pay expenses on an as-needed basis, irrespective of then-current prices. The extreme
volatility of bitcoin and other Digital Assets could mean that prices are low when we need to sell. Consequently, our Digital
Assets may be sold at a time when the prices are low, which could adversely affect an investment in us.
Intellectual
property rights claims may adversely affect an investment in us.
We
are not aware of any intellectual property claims that may prevent us from operating and holding bitcoins or other Digital Assets;
however, third parties may assert intellectual property claims relating to the operation of us and the mechanics instituted for
the investment in, holding of and transfer of bitcoins or other Digital Assets. Regardless of the merit of an intellectual property
or other legal action, any legal expenses to defend or payments to settle such claims would be extraordinary expenses and be borne
by us through the sale of our bitcoins and other Digital Assets. Additionally, a meritorious intellectual property claim could
prevent us from operating and force us to liquidate our bitcoins and other Digital Assets. As a result, an intellectual property
claim against us could adversely affect an investment in us.
Regulatory
changes or actions may restrict the use of Digital Assets or the operation of trading markets in a manner that adversely affects
an investment in us.
Until
recently, little or no regulatory attention has been directed toward bitcoin, other Digital Assets and the markets where they
trade by U.S. federal and state governments, foreign governments and self-regulatory agencies. As bitcoin has grown in popularity
and in market size and initial coin offerings which tend to be Digital Securities, the SEC, Federal Reserve Board, U.S. Congress
and certain other U.S. agencies (e.g., the CFTC, FinCEN and the Federal Bureau of Investigation) have begun to examine the operations
of the initial coin offerings, Bitcoin Network, bitcoin users and the Bitcoin Exchange Market.
On
July 25, 2017, the SEC issued its Report which concluded that Digital Assets or tokens issued for the purpose of raising funds
may be securities within the meaning of the federal securities laws. The Report focused on the activities of a virtual organization
which offered tokens in exchange for ether which as disclosed on page 15 of this prospectus is the second largest reported digital
currency. The Report emphasized that whether Digital Asset is a security is based on the facts and circumstances. Although the
Company’s activities are not focused on raising capital or assisting others that do so, the federal securities laws are
very broad, and there can be no assurances that the SEC will not take enforcement action against the Company in the future including
for the sale of unregistered securities in violation of the Securities Act or acting as an unregistered investment company in
violation of the Investment Company Act. The SEC has taken various actions against persons or entities misusing bitcoin in connection
with fraudulent schemes (i.e., Ponzi scheme), inaccurate and inadequate publicly disseminated information, and the offering of
unregistered securities. More recently, the SEC suspended trading in three Digital Asset public companies. Since issuing the
Report the SEC Chairman has stated that the SEC is carefully examining initial coin offerings and similar areas involving Digital
Assets for their compliance with the Securities Act.
Very
recently, it has been publicly reported that the SEC staff has been issuing subpoenas seeking information about initial coin offerings.
Although we have never invested in initial coin offering, lawsuits filed by the SEC claiming that initial coin offering issuers
and cryptocurrency public companies violate the Securities Act and the Exchange Act and the resulting publicity may have a material
adverse effect on the prices of Digital Assets we own and otherwise adversely affect opportunities in the Blockchain industry,
which in turn will have an adverse impact on our business and prospects.
The
CFTC has determined that bitcoin and other virtual currencies are commodities and the sale of derivatives based on digital currencies
must be done in accordance with the provisions of the CEA and CFTC regulations. Also of significance, is that the CFTC appears
to have taken the position that bitcoin is not encompassed by the definition of currency under the CEA and CFTC regulations. The
CFTC defined bitcoin and other “virtual currencies” as “a digital representation of value that functions as
a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin
and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United
States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of
exchange in the country of issuance.” To the extent that bitcoin itself is determined to be a security, commodity future
or other regulated asset, or to the extent that a US or foreign government or quasi-governmental agency exerts regulatory authority
over the Bitcoin Network or bitcoin trading and ownership, trading or ownership in bitcoin or an investment in us may be adversely
affected.
The
CFTC affirmed its approach to the regulation of bitcoin and bitcoin-related enterprises on June 2, 2016, when the CFTC settled
charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its Order, the CFTC found that Bitfinex engaged in “illegal,
off-exchange commodity transactions and failed to register as a futures commission merchant” when it facilitated borrowing
transactions among its users to permit the trading of bitcoin on a “leveraged, margined or financed basis” without
first registering with the CFTC. In 2017 the CFTC stated that it would consider bitcoin and other virtual currencies as commodities
or derivatives depending on the facts of the offering. In December 2017, bitcoin futures trading commenced on two CFTC regulated
futures markets.
Local
state regulators such as the NYSDFS have also initiated examinations of bitcoin, the Bitcoin Network and the regulation thereof.
In July 2014, the NYSDFS proposed the first US regulatory framework for licensing participants in “virtual currency business
activity.” The proposed regulations, known as the “BitLicense,” are intended to focus on consumer protection
and, after the closure of an initial comment period that yielded 3,746 formal public comments and a reproposal, the NYSDFS issued
its final “BitLicense” regulatory framework in June 2015. The “BitLicense” regulates the conduct of businesses
that are involved in “virtual currencies” in New York or with New York customers and prohibits any person or entity
involved in such activity to conduct activities without a license.
Additionally,
a U.S. federal magistrate judge in the U.S. District Court for the Eastern District of Texas has ruled that “Bitcoin is
a currency or form of money,” a Florida circuit court judge determined that bitcoin did not qualify as money or “tangible
wealth,” and an opinion from the U.S. District Court for the Northern District of Illinois identified bitcoin as “virtual
currency.” Additionally, two CFTC commissioners publicly expressed a belief that derivatives based on bitcoin are subject
to the same regulation as those based on commodities, and the IRS released guidance treating bitcoin as property that is not currency
for U.S. federal income tax purposes. Taxing authorities of a number of U.S. states have also issued their own guidance regarding
the tax treatment of bitcoin for state income or sales tax purposes. On June 28, 2014, the Governor of the State of California
signed into law a bill that removed state-level prohibitions on the use of alternative forms of currency or value (including bitcoin).
The bill indirectly authorizes bitcoin’s use as an alternative form of money in the state. In February 2015, a bill was
introduced in the California State Assembly to establish a licensing regime for businesses engaging in “virtual currencies.”
In September 2015, the bill was ordered to become an inactive file and as of the date of this registration statement there hasn’t
been further consideration by the California State Assembly. As of August 2016, the bill was withdrawn from consideration for
vote for the remainder of the year. There is a possibility of future regulatory change altering, perhaps to a material extent,
the nature of an investment in us or the ability of us to continue our operations.
Bitcoin
currently faces an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such as
the European Union, China and Russia. While certain governments such as Germany, where the Ministry of Finance has declared bitcoin
to be “
Rechnungseinheiten
” (a form of private money that is recognized as a unit of account, but not recognized
in the same manner as fiat currency), have issued guidance as to how to treat bitcoin, most regulatory bodies have not yet issued
official statements regarding intention to regulate or determinations on regulation of bitcoin, the Bitcoin Network and bitcoin
users.
Among
those for which preliminary guidance has been issued in some form, Canada and Taiwan have labeled bitcoin as a digital or virtual
currency, distinct from fiat currency, while Sweden and Norway are among those to categorize bitcoin as a form of virtual asset
or commodity. In Australia, a GST (similar to the European value added tax (“VAT”)) is currently applied to bitcoin,
forcing a ten (10) percent markup on top of market price, essentially preventing the operation of any Bitcoin Exchange. This may
be undergoing a change, however, since the Senate Economics References Committee and the Productivity Commission recommended that
digital currency be treated as money for GST purposes to remove the double taxation. The United Kingdom determined that the VAT
will not apply to bitcoin sales. Since December 2013, China, Iceland, Vietnam and Russia have taken a more restrictive stance
toward bitcoin and, thereby, have reduced the rate of expansion of bitcoin use in each country. In May 2014, the Central Bank
of Bolivia banned the use of bitcoin as a means of payment. In the summer and fall of 2014, Ecuador announced plans for its own
state-backed electronic money, while passing legislation that prohibits the use of decentralized Digital Assets such as bitcoin.
In July 2016, economists at the Bank of England advocated that central banks issue their own digital currency, and the House of
Lords and Bank of England started discussing the feasibility of creating a national virtual currency, the BritCoin. As of July
2016, Iceland was studying how to create a system in which all money is created by a central bank, and Canada was beginning to
experiment with a digital version of its currency called CAD-COIN, intended to be used exclusively for interbank payments. On
August 24, 2017, Canada issued guidance stating the sale of cryptocurrency may constitute an investment contract in accordance
with Canadian law for determining if an investment constitutes a security. In July 2016, the Russian Ministry of Finance indicated
it supports a proposed law that bans bitcoin domestically but allows for its use as a foreign currency. Russia recently issued
several releases indicating they may begin regulating bitcoin and licensing miners and entities engaging in initial coin offerings.
Conversely, regulatory bodies in some countries such as India and Switzerland have declined to exercise regulatory authority when
afforded the opportunity. In April 2015, the Japanese Cabinet approved proposed legal changes that would reportedly treat bitcoin
and other Digital Assets as included in the definition of currency. These regulations would, among other things, require market
participants, including exchanges, to meet certain compliance requirements and be subject to oversight by the Financial Services
Agency, a Japanese regulator. In September 2017 Japan began regulating Bitcoin Exchanges and registered several such exchanges
to operate within Japan. In July 2016, the European Commission released a draft directive that proposed applying counter-terrorism
and anti-money laundering regulations to virtual currencies, and, in September 2016, the European Banking authority advised the
European Commission to institute new regulation specific to virtual currencies, with amendments to existing regulation as a stopgap
measure. Various foreign jurisdictions may, in the near future, adopt laws, regulations or directives that affect the Bitcoin
Network and its users, particularly Bitcoin Exchanges and service providers that fall within such jurisdictions’ regulatory
scope. Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance
of bitcoin by users, merchants and service providers outside of the United States and may therefore impede the growth of the bitcoin
economy. On September 4, 2017, reports were published that China may begin prohibiting the practice of using cryptocurrency for
capital fundraising. Additional reports have surfaced that China is considering regulating Bitcoin Exchanges by enacting a licensing
regime wherein Bitcoin Exchanges may legally operate. In September 2017, the Financial Services Commission of South Korea released
a statement that initial coin offerings would be prohibited as a fundraising tool. In January 2018, the South Korean Justice Minister
issued remarks about banning bitcoin and other Digital Assets, although the President’s office clarified that no final decision
has been made. In June 2017, India’s government ruled in favor of regulating bitcoin and India’s ministry of Finance
is currently developing rules for such regulation. Australia has previously introduced legislation to regulate Bitcoin Exchanges
and increase anti-money laundering policies.
The
effect of any future regulatory change on us, bitcoins, or other Digital Assets is impossible to predict, but such change could
be substantial and adverse to us and could adversely affect an investment in us.
It
may be illegal now, or in the future, to acquire, own, hold, sell or use bitcoins or other Digital Assets in one or more countries,
and ownership of, holding or trading in our Company’s securities may also be considered illegal and subject to sanction.
Although
currently bitcoins and other Digital Assets are not regulated or are lightly regulated in most countries, including the United
States, one or more countries such as China and Russia may take regulatory actions in the future that severely restricts the right
to acquire, own, hold, sell or use bitcoins or other Digital Assets or to exchange Digital Assets for currency. Such an action
may also result in the restriction of ownership, holding or trading in our securities. Such restrictions may adversely affect
an investment in us.
If
regulatory changes or interpretations of our activities require our registration as a MSB under the regulations promulgated by
FinCEN under the authority of the U.S. Bank Secrecy Act, we may be required to register and comply with such regulations. If regulatory
changes or interpretations of our activities require the licensing or other registration of us as a money transmitter (or equivalent
designation) under state law in any state in which we operate, we may be required to seek licensure or otherwise register and
comply with such state law. In the event of any such requirement, to the extent the Company decides to continue, the required
registrations, licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also
decide to cease the Company’s operations. Any termination of certain Company operations in response to the changed regulatory
circumstances may be at a time that is disadvantageous to investors.
To
the extent that the activities of the Company cause it to be deemed a MSB under the regulations promulgated by FinCEN under the
authority of the U.S. Bank Secrecy Act, the Company may be required to comply with FinCEN regulations, including those that would
mandate the Company to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.
To
the extent that the activities of the Company cause it to be deemed a “money transmitter” (or equivalent designation)
under state law in any state in which the Company operates, the Company may be required to seek a license or otherwise register
with a state regulator and comply with state regulations that may including the implementation of anti-money laundering programs,
maintenance of certain records and other operational requirements. Currently, the NYSDFS has finalized its “BitLicense”
framework for businesses that conduct “virtual currency business activity,” the Conference of State Bank Supervisors
has proposed a model form of state level “virtual currency” regulation and additional state regulators including those
from California, Idaho, Virginia, Kansas, Texas, South Dakota and Washington have made public statements indicating that virtual
currency businesses may be required to seek licenses as money transmitters. In July 2016, North Carolina updated the law to define
“virtual currency” and the activities that trigger licensure in a business friendly approach that encourages companies
to use virtual currency and blockchain technology. Specifically, the North Carolina law does not require miners or software providers
to obtain a license for multi-signature software, smart contract platforms, smart property, colored coins and non-hosted, non-custodial
wallets. Starting January 1, 2016, New Hampshire requires anyone exchanges a digital currency for another currency must become
a licensed and bonded money transmitter. In numerous other states, including Connecticut and New Jersey, legislation is being
proposed or has been introduced regarding the treatment of bitcoin and other Digital Assets. The Company will continue to monitor
for developments in such legislation, guidance or regulations.
Such
additional federal or state regulatory obligations may cause the Company to incur extraordinary expenses, possibly affecting an
investment in the Resale Shares in a material and adverse manner. Furthermore, the Company and its service providers may not be
capable of complying with certain federal or state regulatory obligations applicable to MSBs and MTs. If the Company is deemed
to be subject to and determines not to comply with such additional regulatory and registration requirements, we may act to dissolve
and liquidate the Company. Any such action may adversely affect an investment in us.
Current
interpretations require the regulation of bitcoins and other Digital Assets under the CEA by the CFTC, we may be required to register
and comply with such regulations. To the extent that we decide to continue operations, the required registrations and regulatory
compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any
disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
Current
and future legislation, CFTC and other regulatory developments, including interpretations released by a regulatory authority,
may impact the manner in which bitcoins and other Digital Assets are treated for classification and clearing purposes. In particular,
derivatives on these assets are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain
as to how future regulatory developments will impact the treatment of bitcoins and other Digital Assets under the law.
Bitcoins
have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation
under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to
register as a commodity pool operator and to register us as a commodity pool with the CFTC through the National Futures Association.
Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting
an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek
to cease certain of our operations. Any such action may adversely affect an investment in us. No CFTC orders or rulings are applicable
to our business.
If
regulatory changes or interpretations require the regulation of bitcoins and other Digital Assets (in contrast to Digital Securities)
under the Securities Act and Investment Company Act by the SEC, we may be required to register and comply with such regulations.
To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result in
extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. This would likely have a material
adverse effect on us and investors may lose their investment.
Current
and future legislation and SEC rulemaking and other regulatory developments, including interpretations released by a regulatory
authority, may impact the manner in which bitcoins are treated for classification and clearing purposes. The SEC’s July
25, 2017 Report expressed its view that Digital Assets may be securities depending on the facts and circumstances. As of the date
of this prospectus, we are not aware of any rules that have been proposed to regulate the Digital Assets we hold as securities.
We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins and other Digital Assets under
the law. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting
an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek
to cease certain of our operations. Any such action may adversely affect an investment in us.
To
the extent that Digital Assets including bitcoins are deemed by the SEC to fall within the definition of a security, we may be
required to register and comply with additional regulation under the Investment Company Act, including additional periodic reporting
and disclosure standards and requirements and the registration of our Company as an investment company. Additionally, one or more
states may conclude bitcoins are a security under state securities laws which would require registration under state laws including
merit review laws which would adversely impact us since we would likely not comply. As stated earlier in this prospectus, some
states including California define the term “investment contract” more strictly than the SEC. Such additional registrations
may result in extraordinary, non-recurring expenses of our Company, thereby materially and adversely impacting an investment in
our Company. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease
all or certain parts of our operations. Any such action would likely adversely affect an investment in us and investors may suffer
a complete loss of their investment.
The
Company does not currently have any mining operations but may resume its mining operations through outsourced data centers if
it receives additional capital. To the extent that the Company resumes mining operations and acquires Digital Assets as a result
of mining, we do not intend to trade the Digital Assets until we determine, with the assistance of legal counsel, that the Digital
Assets are not securities, the Digital Assets would only be used for our own account.
As
discussed at page 41 we do not think that bitcoin and ether are securities. As such, we do not intend to acquire securities in
amounts that are equal to or greater than 40% of our assets. Should the total value of securities which we hold rise to more than
40% of our assets (exclusive of cash) we note that SEC Rule 3a-2 under the 1940 Act allows an issuer to prevent itself
from being deemed an investment company if it reduces its holdings of securities to less than 40% of its assets (exclusive of
cash) and does not go above the 40% threshold more than once every three years. In order to comply with the 1940 Act, we
anticipate having increased management time and legal expenses in order to analyze which Digital Assets are securities and periodically
analyze our total holdings to ensure that we do not maintain more than 40% of our total assets (exclusive of cash) as securities.
If our view that ether is not a security is challenged by the SEC and courts uphold the challenge, we may inadvertently violate
the 1940 Act and incur substantial legal fees in defending our position. In such case the legal fees may exceed our available
assets which could adversely affect an investment in us.
If
federal or state legislatures or agencies initiate or release tax determinations that change the classification of bitcoins or
other Digital Assets as property for tax purposes (in the context of when such Digital Assets are held as an investment), such
determination could have a negative tax consequence on our Company or our shareholders.
Current
IRS guidance indicates that Digital Assets such as bitcoins should be treated and taxed as property, and that transactions involving
the payment of bitcoins for goods and services should be treated as barter transactions. While this treatment creates a potential
tax reporting requirement for any circumstance where the ownership of a bitcoin passes from one person to another, usually by
means of bitcoin transactions (including off-Blockchain transactions), it preserves the right to apply capital gains treatment
to those transactions which may have adversely affect an investment in our Company.
On
December 5, 2014, the New York State Department of Taxation and Finance issued guidance regarding the application of state tax
law to Digital Assets such as bitcoins. The agency determined that New York State would follow IRS guidance with respect to the
treatment of Digital Assets such as bitcoins for state income tax purposes. Furthermore, they defined Digital Assets such as bitcoin
to be a form of “intangible property,” meaning the purchase and sale of bitcoins for fiat currency is not subject
to state income tax (although transactions of bitcoin for other goods and services maybe subject to sales tax under barter transaction
treatment). It is unclear if other states will follow the guidance of the IRS and the New York State Department of Taxation and
Finance with respect to the treatment of Digital Assets such as bitcoins for income tax and sales tax purposes. If a state adopts
a different treatment, such treatment may have negative consequences including the imposition of greater a greater tax burden
on investors in bitcoin or imposing a greater cost on the acquisition and disposition of bitcoins, generally; in either case potentially
having a negative effect on prices in the Bitcoin Exchange Market and may adversely affect an investment in our Company.
Foreign
jurisdictions may also elect to treat Digital Assets such as bitcoins differently for tax purposes than the IRS or the New York
State Department of Taxation and Finance. To the extent that a foreign jurisdiction with a significant share of the market of
bitcoin users imposes onerous tax burdens on bitcoin users, or imposes sales or value added tax on purchases and sales of bitcoins
for fiat currency, such actions could result in decreased demand for bitcoins in such jurisdiction, which could impact the price
of bitcoins and negatively impact an investment in our Company.
Risks
Related to Our Digital Assets Holdings
The
loss or destruction of a private key required to access a Digital Assets such as bitcoin may be irreversible. Our loss of access
to our private keys or our experience of a data loss relating to our Company’s Digital Assets could adversely affect an
investment in our Company.
Bitcoins
are controllable only by the possessor of both the unique public key and private key relating to the local or online digital wallet
in which the bitcoins are held. We are required by the operation of the Bitcoin Network to publish the public key relating to
a digital wallet in use by us when it first verifies a spending transaction from that digital wallet and disseminates such information
into the Bitcoin Network. We safeguard and keep private the private keys relating to our bitcoins by primarily utilizing Bitgo
Inc.’s enterprise multi-signature storage solution; to the extent a private key is lost, destroyed or otherwise compromised
and no backup of the private key is accessible, we will be unable to access the bitcoins held by it and the private key will not
be capable of being restored by the Bitcoin Network. Any loss of private keys relating to digital wallets used to store our bitcoins
could adversely affect an investment in us.
To
the extent that any
of our Digital Assets are
held by Exchanges, we face heightened risks from cybersecurity attacks and financial stability of the Exchanges
.
The
Company currently uses a digital asset exchange to hold all of the Company’s ether; the Company’s bitcoin
are held directly by the Company in a bitcoin wallet utilizing Bitgo Inc.’s enterprise multi-signature storage solution.
All Digital Assets not held in the Company’s bitcoin wallet are subject to the risks encountered by a Digital Asset exchange
including a DDoS Attack or other malicious hacking, a sale of the Digital Asset exchange, loss of the Digital Assets by the Digital
Asset exchange and other risks similar to those described on page 15 in a risk factor entitled “Security threats
to us could result in, a loss of Company’s Digital Assets, or damage to the reputation and our brand, each of which could
adversely affect an investment in us.” The Company does not maintain a custodian agreement with the Digital Asset exchange
that holds the Company’s ether. This Exchange does not provide insurance and may lack the resources to
protect against hacking and theft. In the future we may acquire other Digital Assets that are held by Exchanges. If a material
amount of our Digital Assets are held by Exchanges, we may be materially and adversely affected if the Exchanges suffer
cyberattacks or incur financial problems.
Risks
Related to Our Future Transaction Verification Business
If
the award of bitcoins for solving blocks and transaction fees for recording transactions are not sufficiently high to cover expenses
related to running data center operations it may have adverse affects on an investment in us.
If
the award of new bitcoins for solving blocks declines and transaction fees are not sufficiently high, we may not have an adequate
incentive to restart our mining operations, which may adversely impact an investment in us.
As
the number of bitcoins awarded for solving a block in the Blockchain decreases, the incentive for miners to continue to contribute
processing power to the Bitcoin Network will transition from a set reward to transaction fees. Either the requirement from miners
of higher transaction fees in exchange for recording transactions in the Blockchain or a software upgrade that automatically charges
fees for all transactions may decrease demand for bitcoins and prevent the expansion of the Bitcoin Network to retail merchants
and commercial businesses, resulting in a reduction in the price of bitcoins that could adversely impact an investment in us.
In
order to incentivize miners to continue to contribute processing power to the Bitcoin Network, the Bitcoin Network may either
formally or informally transition from a set reward to transaction fees earned upon solving for a block. This transition could
be accomplished either by miners independently electing to record in the blocks they solve only those transactions that include
payment of a transaction fee or by the Bitcoin Network adopting software upgrades that require the payment of a minimum transaction
fee for all transactions. If transaction fees paid for Bitcoin transactions become too high, the marketplace may be reluctant
to accept bitcoins as a means of payment and existing users may be motivated to switch from bitcoins to another Digital Asset
or back to fiat currency. Decreased use and demand for bitcoins may adversely affect their value and may adversely impact an investment
in us.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation,
intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking
statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties
known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such
statements.
In
some cases, you can identify forward-looking statements by terminology, such as “expects”, “anticipates”,
“intends”, “estimates”, “plans”, “potential”, “possible”, “probable”,
“believes”, “seeks”, “may”, “will”, “should”, “could”
or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties
that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified
in their entirety by reference to the factors discussed throughout this prospectus.
You
should read this prospectus and the documents that we reference herein and therein and have filed as exhibits to the registration
statement, of which this prospectus is part, completely and with the understanding that our actual future results may be materially
different from what we expect. You should assume that the information appearing in this prospectus is accurate as of the date
on the front cover of this prospectus only. Because the risk factors referred to above could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place
undue reliance on any forward-looking statements. These risks and uncertainties, along with others, are described above under
the heading “Risk Factors” beginning on page 3 of this prospectus. Further, any forward-looking statement speaks only
as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors
emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this
prospectus, and particularly our forward-looking statements, by these cautionary statements.
MARKET
FOR COMMON STOCK
Our
Common Stock is currently quoted on the OTCQB and has been quoted under the symbol “BTCS”. Because we are quoted on
the OTCQB, our securities may be less liquid, receive less coverage by security analysts and news media, and generate lower prices
than might otherwise be obtained if they were listed on a national securities exchange.
The
following table sets forth the high and low bid quotations for our Common Stock as reported by OTC Markets LLC, on a split-adjusted
basis accounting for our 1-for-60 reverse stock split effected on February 13, 2017, for the periods indicated.
|
|
High
|
|
|
Low
|
|
Fiscal
2018
|
|
|
|
|
|
|
|
|
First
Quarter (through March 6 , 2018)
|
|
$
|
0.21
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2017
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.32
|
|
|
$
|
0.04
|
|
Second
Quarter
|
|
|
0.15
|
|
|
|
0.03
|
|
Third
Quarter
|
|
|
0.58
|
|
|
|
0.05
|
|
Fourth
Quarter
|
|
|
0.26
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2016
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
7.92
|
|
|
$
|
5.04
|
|
Second
Quarter
|
|
|
6.90
|
|
|
|
0.56
|
|
Third
Quarter
|
|
|
0.58
|
|
|
|
0.04
|
|
Fourth
Quarter
|
|
|
0.37
|
|
|
|
0.04
|
|
As
of March 6 , 2018, there were 135 shareholders of record of our Common Stock, one of which is Cede & Co., a nominee
for Depository Trust Company, or DTC. Shares of Common Stock that are held by financial institutions as nominees for beneficial
owners are deposited into participant accounts at DTC, and are considered to be held of record by Cede & Co. as one shareholder.
Dividends
We
have not paid dividends on our Common Stock since inception and do not plan to pay dividends on our common stock in the foreseeable
future.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of operations should be read together with our financial
statements and accompanying notes appearing elsewhere in this prospectus. This Management’s Discussion and Analysis contains
forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” set forth
in the beginning of this prospectus, and see “Risk Factors” beginning on page 3 for a discussion of certain risk factors
applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative of
results that may occur in future periods.
Overview
During
the past year, we have worked with certain investors to remove portions of our debt and raise capital. While we need to raise
additional capital, our goal is to re-enter the Digital Assets business once we are able to raise the necessary capital. We cannot
assure you we will be successful in raising the capital or assuming we can, be able to develop a successful business. For further
information please see the “Summary.”
Results
of Operations for the Years Ended December 31 , 2017 and 2016
The
following table reflects our operating results for the years ended December 31 , 2017 and 2016:
|
|
For
the years ended
|
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
E-commerce
|
|
$
|
4,480
|
|
|
$
|
1,640
|
|
Transaction
verification services
|
|
|
-
|
|
|
|
325,627
|
|
Hosting
|
|
|
-
|
|
|
|
27,945
|
|
Total
revenues
|
|
|
4,480
|
|
|
|
355,212
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
Power
and mining expenses
|
|
|
(160
|
)
|
|
|
(263,869
|
)
|
Revaluation
of digital currencies
|
|
|
704,946
|
|
|
|
8,665
|
|
Gross
profit
|
|
|
709,266
|
|
|
|
100,008
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,564,851
|
|
|
|
1,309,014
|
|
Marketing
|
|
|
9,242
|
|
|
|
10,693
|
|
Impairment
loss on fixed assets
|
|
|
-
|
|
|
|
236,585
|
|
Total
operating expenses
|
|
|
1,574,093
|
|
|
|
1,556,292
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
|
(864,827
|
)
|
|
|
(1,456,284
|
)
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income:
|
|
|
|
|
|
|
|
|
Impairment
loss related to investment
|
|
|
-
|
|
|
|
(2,250,000
|
)
|
Fair
value adjustments for warrant liabilities
|
|
|
(39,222,099
|
)
|
|
|
(25,266,593
|
)
|
Fair
value adjustments for convertible notes
|
|
|
(16,849,071
|
)
|
|
|
2,096,700
|
|
Fair
value adjustments for derivative liability shortfall of shares
|
|
|
-
|
|
|
|
(14,915,419
|
)
|
Interest
expenses
|
|
|
-
|
|
|
|
(7,420
|
)
|
Loss
on issuance of Series C Convertible Preferred stock
|
|
|
(2,809,497
|
)
|
|
|
-
|
|
Loss
on issuance of Series C-1 Convertible Preferred stock
|
|
|
(478,035
|
)
|
|
|
-
|
|
Loss
on issuance of Units
|
|
|
-
|
|
|
|
(250,000
|
)
|
Gain
on extinguishment of debt
|
|
|
15,918,867
|
|
|
|
837,369
|
|
Loss
from lease termination
|
|
|
(100,696
|
)
|
|
|
-
|
|
Liquidated
damages
|
|
|
(693,000
|
)
|
|
|
(3,102,750
|
)
|
Other
income
|
|
|
33,022
|
|
|
|
49,121
|
|
Total
other expenses
|
|
|
(44,200,509
|
)
|
|
|
(42,808,992
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(45,065,336
|
)
|
|
$
|
(44,265,276
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.36
|
)
|
|
$
|
(4.89
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding, basic and diluted
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
123,548,858
|
|
|
|
9,058,785
|
|
Revenues
Revenues
for the year ended December 31 , 2017 and 2016 were approximately $4,000 and $355,000 , respectively. Revenues
represent net revenue earned: 1) from the processing of customer transactions through our ecommerce website, 2)
through fees earned from our transaction verification service business, and 3) from hosting. The decrease in our revenues
is mainly a result of the Company suspending its operations at its North Carolina transaction verification services facility in
July 2016.
Cost
of revenues
Cost
of revenues
for the year
ended December 31 , 2017 and 2016 were approximately $(705,000) and $(264,000) , respectively. The decrease
in the power and mining expenses is the result of the reduction in mining activities and related electric costs for our transaction
verification services business. Our electricity cost is a variable expense subject to certain demand charges which change based
upon on and off-peak usage and seasonal billing rates. Our power consumption and resulting electricity cost is determined by the
power settings of our transaction verification servers and other ancillary equipment used in the building. Such cost was offset
by an increase in gain from revaluation of digital currencies of $700,000.
Operating
expenses
Operating
expenses for the year ended December 31 , 2017 and 2016 were approximately $1.6 million and $1.5 million.
The increase in operating expenses over the prior year mostly relates to increase in general and administrative
expenses but is offset by decrease in impairment loss on fixed assets . We impaired all fixed assets and recorded an
approximately $241,000 impairment charge during the year ended 2016.
Other
Expenses
Other
expenses
for the years ended 2017 and 2016 was
approximately $44.2 million and $42.8 million, respectively. The increase in other expenses over the prior year
primarily relates to increases in fair value adjustments for warrant liabilities of $14.0 million, fair value adjustments
for convertible notes of $18.9 million and loss on issuance of Preferred C of $2.8 million, offset by increase in gain
on extinguishment of debt of $15.1 million, and decrease in fair value adjustments for derivative liability shortfall of
shares of $14.9 million, all of which are non-cash expenses.
Liquidity
and Capital Resources
On
December 31, 2017, we had current assets of approximately $987,000 and current liabilities of approximately $76,000, rendering
a working capital of approximately $911,000.
Our
working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. The Company
used approximately $1.5 million of cash in its operating activities for the year ended December 31, 2017. The Company incurred
a $45.1 million net loss for the year ended December 31, 2017. The Company had cash of approximately $303,000 and working capital
of approximately $0.9 million at December 31, 2017. The Company expects to incur losses into the foreseeable future as it undertakes
its efforts to execute its business plans.
We
will require significant additional capital to sustain short-term operations and make the investments needed to execute our longer-term
business plan. Our existing liquidity is not sufficient to fund operations and anticipated capital expenditures for the foreseeable
future, and we do not have sufficient cash resources to support our current operations for the next 12 months, and will need additional
funding to resume revenue generating activities. If we attempt to obtain additional debt or equity financing, we cannot provide
assurance that such financing will be available to us on favorable terms, if at all.
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about
our ability to continue as a going concern. The consolidated financial statements have been prepared assuming we will continue
as a going concern. We have not made adjustments to the accompanying consolidated financial statements to reflect the potential
effects on the recoverability and classification of assets or liabilities should we be unable to continue as a going concern.
We
continue to incur ongoing administrative and other expenses, including public company expenses, primarily accounting and legal
fees, in excess of corresponding (non-financing related) revenue. While we continue to implement its business strategy, it intends
to finance its activities through:
●
|
managing
current cash and cash equivalents on hand from the Company’s past equity offerings, and
|
|
|
●
|
seeking
additional funds raised through the sale of additional securities in the future.
|
Liquidit
y
As
of March 6 , 2018, the Company had $237,336 of available cash and approximately $336,000 in Digital Assets.
The Company’s Digital Assets are listed below:
Digital
Asset
|
|
Units
Held
|
|
|
Value
|
|
Bitcoin
(BTC)
|
|
|
21.83
|
|
|
$
|
237,240
|
|
Ethereum
(ETH)
|
|
|
120.68
|
|
|
$
|
98,760
|
|
Total
|
|
|
|
|
|
$
|
336,000
|
|
Bitcoin
(BTC) exceeds 60% of the Company’s assets excluding cash. The Company has not participated in any initial coin offering
due to the fact that many, if not all , initial coin offerings constitute a Digital Security and because of
the SEC’s intense focus on legal compliance in this area . Because of the rules under the Securities Act, we are ineligible
to participate in an initial coin offering if it is for Digital Securities. Accordingly , we recently elected
to not participate in initial coin offerings in the future.
We
do not have sufficient capital to meet our expenses over the 12 months from the date of this prospectus. We expect our current
available cash and Digital Assets are only sufficient to sustain operations through October 2018, which may change as a
result of the extreme volatility in the value of our Digital Assets. We will require significant additional capital to sustain
short-term operations and make the investments needed to execute our longer-term business plan. If we attempt to obtain additional
debt or equity financing, we cannot provide assurance that such financing will be available to us on favorable terms, if at all.
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about
our ability to continue as a going concern. The condensed consolidated financial statements have been prepared assuming we will
continue as a going concern. We have not made adjustments to the accompanying consolidated financial statements to reflect the
potential effects on the recoverability and classification of assets or liabilities should we be unable to continue as a going
concern.
We
continue to incur ongoing administrative and other expenses, including public company expenses, primarily accounting and legal
fees, in excess of corresponding (non-financing related) revenue. While we continue to implement its business strategy, it intends
to finance its activities through:
●
|
managing
current cash and cash equivalents on hand from the Company’s past equity offerings,
and
|
|
|
●
|
seeking
additional funds raised through the sale of additional securities in the future.
|
Accounting
Treatment of Digital Assets
There
is currently no authoritative literature under accounting principles generally accepted in the United States (U.S. GAAP), which
specifically addresses the accounting for Digital Assets, including digital currencies. Therefore, by analogy we are recording
Digital Assets similar to financial instruments under ASC 825, Financial Instruments, because the economic nature of these Digital
Assets is most closely related to a financial instrument such as an investment in a foreign currency. The accounting for
Digital Assets under ASC 825 would provide relevant information about the current value of Digital Assets.
Digital
Securities have the same rights, preferences and privileges as traditional securities of the same class, but settle differently
than traditional securities. Digital Securities are typically uncertificated securities, the ownership and transfer of which are
recorded on a proprietary or open source ledger that may be publicly distributed. Therefore, we believe that such securities would
be considered a financial instrument in accordance with ASC 825.
Because
Digital Assets and Digital Securities will be accounted for in accordance with ASC 825, such securities would be valued in accordance
with ASC 820, Fair Value Measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs such as quoted
prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity
to develop its own assumptions.
Off
Balance Sheet Transactions
We
are not a party to any off balance sheet transactions. We have no guarantees or obligations other than those which arise out of
normal business operations.
Going
Concern and Management Plans
The audited consolidated
financial statements for the year ended December 31, 2017, included in this prospectus , have been prepared on a going concern
basis, which implies that we will continue to realize our assets and discharge our liabilities and commitments in the normal course
of business. We have generated approximately $4,000 in revenues during the year ended December 31, 2017 and have never paid any
dividends and are unlikely to pay dividends or generate substantial earnings in the immediate or foreseeable future. Our continuation
as a going concern is dependent upon the continued financial support from our shareholders, the ability of our company to obtain
necessary financing to achieve our operating objectives, and the attainment of profitable operations. As of December 31, 2017,
we have accumulated deficit of $114.1 million since inception. As we do not have sufficient funds for our planned or new operations,
we will need to raise additional funds for operations. These factors, among others, raise substantial doubt about our ability
to continue as a going concern.
The
continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or convertible
debt securities by us could result in a significant dilution in the equity interests of our current shareholders. Obtaining commercial
loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Subject
to additional financing, the Company plans to create a portfolio of Digital Assets including bitcoin and ether 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. 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. As
discussed above the Company does not intend to acquire Digital Securities in quantities which would cause it to be deemed an investment
company in violation of the 1940 Act. There is a risk that we may inadvertently become an investment company. See “Risk
Factors” at page 3 of this prospectus.
Critical
Accounting Policies and Estimates
We
believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management
discussion and analysis:
Basis
of Presentation Financial Statements
We maintain our books
of account and prepare statutory financial statements in accordance with accounting principles in the United States of America.
The accompanying consolidated financial statements are based on the statutory records, with adjustments and reclassifications,
for the purpose of fair presentation in accordance with United States generally accepted accounting principles (“US GAAP”).
Accounting
Treatment of Digital Assets
There
is currently no authoritative literature under accounting principles generally accepted in the United States (U.S. GAAP), which
specifically addresses the accounting for Digital Assets, including digital currencies. Therefore, by analogy we are recording
Digital Assets similar to financial instruments under ASC 825, Financial Instruments, because the economic nature of these Digital
Assets is most closely related to a financial instrument such as an investment in a foreign currency. The accounting for
Digital Assets under ASC 825 would provide relevant information about the current value of Digital Assets.
Digital
Securities have the same rights, preferences and privileges as traditional securities of the same class, but settle differently
than traditional securities. Digital Securities are typically uncertificated securities, the ownership and transfer of which are
recorded on a proprietary or open source ledger that may be publicly distributed. Therefore, we believe that such securities would
be considered a financial instrument in accordance with ASC 825.
Because
Digital Assets and Digital Securities will be accounted for in accordance with ASC 825, such securities
would be valued in accordance with ASC 820, Fair Value Measurements. ASC 820 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
Revenue
Recognition
Revenue
is measured at the fair value of the consideration received or receivable. Revenue is reduced for customer returns, rebates, and
other similar allowances. Revenue for our transaction verification services business is recognized when the bitcoins are received
in our digital wallet and are booked at the prevailing market price on the day of receipt as reported by Coinbase.
Property,
plant and equipment
Property,
plant and equipment are carried at cost less accumulated depreciation and any accumulated impairment losses, if any. Depreciation
is charged so as to write off the cost of assets, other than land and construction in progress, over their estimated useful lives,
using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each year-end,
with the effect of any changes in estimate accounted for on a prospective basis.
Assets
held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter,
the term of the relevant lease. The gain or loss arising on the disposal or retirement of an item of property, plant and equipment
is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or
loss.
The
ranges of estimated useful lives are as follows:
|
●
|
Machinery
and equipment 2-6 years
|
|
|
|
|
●
|
Transaction
verification servers (i.e. bitcoin mining hardware) 2 years
|
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified
by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08,
“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net),” ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing,” and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients.” The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict
the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies may adopt
the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or
a cumulative effect upon adoption approach. The Company will adopt the new standard effective January 1, 2018, using the modified
retrospective approach. The adoption of ASU 2014-09 will not have a material impact on the Company’s consolidated financial
position, results of operations, equity or cash flows.
In
August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern, which defines management’s
responsibility to assess an entity’s ability to continue as a going concern, and requires related footnote disclosures if
there is substantial doubt about its ability to continue as a going concern. ASU No. 2014-15 is effective for the Company for
the fiscal year ending on June 30, 2017, with early adoption permitted. The Company will adopt the new standard on January
1, 2018. The adoption of ASU 2014-15 will not have an impact on its consolidated financial statements and related disclosures.
In
November 2015, FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 requires that deferred
tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU No. 2015-17 is effective
for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.
The Company will adopt the new standard on January 1, 2018. The adoption of ASU 2015-17 will not have an impact on its 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 (“ASU 2016-09”). Under ASU 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
2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU 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 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 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 will adopt the new standard on January 1, 2018. The adoption of ASU 2016-09 will not
have an impact on its consolidated financial statements and related disclosures.
In
April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customer (“ASU 2016-10”). The new guidance
is an update to ASC 606 and provides clarity on: identifying performance obligations and licensing implementation. For public
companies, ASU 2016-10 is effective for annual periods, including interim periods within those annual periods, beginning after
December 15, 2016. The Company will adopt the new standard on January 1, 2018. The adoption of ASU 2016-10 will not have an impact
on its consolidated financial statements and related disclosures.
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
adopted ASU No. 2017-09 as of January 1, 2018. The adoption of this update did not impact the Company’s 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.
Off
Balance Sheet Transactions
We
are not a party to any off balance sheet transactions. We have no guarantees or obligations other than those which arise out of
normal business operations.
PRIVATE
PLACEMENTS
In
2017, the Company engaged in two private placements with a limited number of investors in order to obtain working capital. The
shares of Common Stock underlying the Warrants sold below are all being offered for sale by this prospectus.
On
May 25, 2017, the Company sold Series C Convertible Preferred Stock in exchange for $1,111,111. The Series C Convertible Preferred
Stock is convertible into 15,873,600 shares of Common Stock at approximately $0.063 per share. The Company also issued the investors
the warrants included as part of the Resale Shares, except the Series B Warrants.
In
October 2017, the Company raised an additional $1.1 million from the sales of Series C-1 Convertible Preferred Stock convertible
into 12,942,000 shares of Common Stock at a conversion price of $0.085 per share. One investor invested $250,000 in bitcoin valued
as of the date of its investment. The value of bitcoin is subject to material fluctuations. See “Risk Factors” at
page 3. The Company also issued the four investors Series B Warrants.
For
more information concerning the securities issues in these private placements, see “Description of Securities” at
pages 53 and 55.
USE
OF PROCEEDS
The
Selling Shareholders will receive all of the proceeds from the sale of the Resale Shares offered by them under this prospectus.
We will not receive any proceeds from the sale of the shares by the Selling Shareholders covered by this prospectus. However,
we will receive the proceeds from any cash exercise of the Warrants by the Selling Shareholders, to the extent that occurs rather
than cashless exercises. If the registration statement which contains this prospectus is current, the warrant holders must exercise
the Warrants for cash. There can be no assurance that any of the Selling Shareholders will exercise all or any of their Warrants.
We intend to u
se any proceeds received from cash
exercises for general corporate purposes, including payment of salaries to our management. The Selling Shareholders include our
executive officers.
DILUTION
As
of March 6 , 2018, we had 368,219,169 shares of Common Stock outstanding. We are registering a total of 81,881,632 shares
of Common Stock for resale by certain of our shareholders identified in this prospectus. In this prospectus, we refer to these
shares as the Resale Shares. The Resale Shares consist of (i) 15,873,600 shares of Common Stock underlying outstanding Series
A Warrants exercisable at $0.085 per share, (ii) 15,714,288 shares of Common Stock underlying outstanding Additional Warrants
exercisable at $0.085 per share, (iii) 15,714,288 shares of Common Stock underlying outstanding Bonus Warrants exercisable at
$0.17 per share, (iv) 12,942,000 shares of Common Stock underlying outstanding Series B Warrants exercisable at $0.135 per share,
(v) 10,000,800 shares of Common Stock underlying outstanding Series C-1 Convertible Preferred Stock and 2,941,200 shares of Common
Stock issued upon the conversion of Series C-1 Preferred Stock, (vi) 4,295,456 shares of Common Stock owned by our executive officers,
and (vii) 4,400,000 shares of Common Stock. Assuming the Registration Statement containing this prospectus is effective, these
Resale Shares will be freely tradeable upon the exercise of warrants and our shareholders will be significantly diluted.
We
have negative shareholders equity and even if all Resale Shares are issued, the net tangible book value per share will be negative.
CAPITALIZATION
The
following table details the Company’s capitalization as of March 6 , 2018.
Class
of Security
|
|
Shares
of
Common
Stock as
Converted
|
|
Common
Stock Issued and Outstanding
|
|
|
368,219,169
|
|
Series
C-1 Preferred Stock (50,004 shares at a 1:200 conversion ratio)
|
|
|
10,000,800
|
|
Warrants
to Purchase Common Stock
|
|
|
62,064,634
|
|
Total
Shares Fully Diluted
|
|
|
440,284,603
|
|
The
62,064,634 Warrants include: (i) 47,302,176 Warrants issued in connection with the Series C financing completed on May 25, 2017,
(ii) 12,942,000 Warrants issued in connection with the Series C-1 financing completed in October 2017, (iii) 524,368 Warrants
with a strike price of $0.025 and an expiration date of January 21, 2020, (iv) 1,294,923 Warrants with a strike price of $0.032
and an expiration date of April 16, 2020, and (v) 1,167 Warrants with a strike price of $18.0 and an expiration date of December
16, 2018.
BUSINESS
Introduction
We
are 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.
Our
Business
Subject
to additional financing, the Company plans to create a portfolio of Digital Assets including bitcoin and ether 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. 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.
Digital
asset blockchains are typically maintained by a network of participants which run servers which secure their blockchain. The market
is rapidly evolving and there can be no assurances that we will remain competitive with industry participants that have or may
have greater resources than us.
Blockchain
Technology and Digital Asset Initiatives
We
are also focused on Digital Assets and Blockchain technologies. Subject to additional financing, we plan to continue to evaluate
other strategic opportunities in this rapidly evolving sector in an effort to enhance shareholder value.
Transaction
Verification Service Business (Digital Asset mining e.g. bitcoin, Suspended)
We
believe that with additional funding we may be able to resume our transaction verification services business (Digital Asset mining
e.g. bitcoin) and believe this may provide revenue growth. If we are successful in resuming our transaction verification services
business, we anticipate utilizing outsourced data centers and may diversify operations by securing other blockchains in addition
to bitcoins blockchain. If we resume our mining operations, we do not intend to actively trade the Digital Assets but rather hold
them for our own account and sell them for U.S. dollars or other currencies including virtual currencies.
Transaction
verification entails running ASIC (application-specific integrated circuit) servers or other specialized servers which solve a
set of prescribed complex mathematical calculations in order to add a block to a blockchain and thereby confirm Digital Asset
transactions. When we are successful in adding a block to the blockchain, we are awarded a fixed number of Digital Assets for
our effort.
Industry
and Market Overview (Bitcoin and Blockchain Technologies)
Introduction
to Bitcoins and the Bitcoin Network
A
bitcoin is one type of a Digital Asset that is issued by, and transmitted through, an open source, math-based protocol platform
using cryptographic security that is known as the “Bitcoin Network.” The Bitcoin Network is an online, peer-to-peer
user network that hosts the public transaction ledger, known as the “Blockchain,” and the source code that comprises
the basis for the cryptography and math-based protocols governing the Bitcoin Network. No single entity owns or operates the Bitcoin
Network, the infrastructure of which is collectively maintained by a decentralized user base. Bitcoins can be used to pay for
goods and services or can be converted to fiat currencies, such as the US Dollar, at rates determined on Bitcoin Exchanges or
in individual end-user-to-end-user transactions under a barter system.
Bitcoins
are “stored” or reflected on the digital transaction ledger known as the “Blockchain,” which is a digital
file stored in a decentralized manner on the computers of each Bitcoin Network user. The Blockchain records the transaction history
of all bitcoins in existence and, through the transparent reporting of transactions, allows the Bitcoin Network to verify the
association of each bitcoin with the digital wallet that owns them. The Bitcoin Network and Bitcoin software programs can interpret
the Blockchain to determine the exact bitcoin balance, if any, of any digital wallet listed in the Blockchain as having taken
part in a transaction on the Bitcoin Network.
The
Blockchain is comprised of a digital file, downloaded and stored, in whole or in part, on all bitcoin users’ software programs.
The file includes all blocks that have been solved by miners and is updated to include new blocks as they are solved. As each
newly solved block refers back to and “connects” with the immediately prior solved block, the addition of a new block
adds to the Blockchain in a manner similar to a new link being added to a chain. Each new block records outstanding bitcoin transactions,
and outstanding transactions are settled and validated through such recording, the Blockchain represents a complete, transparent
and unbroken history of all transactions on the Bitcoin Network.
The
Bitcoin Network is decentralized and does not rely on either governmental authorities or financial institutions to create, transmit
or determine the value of bitcoins. Rather, bitcoins are created and allocated by the Bitcoin Network protocol through a “mining”
process subject to a strict, well-known issuance schedule. The value of bitcoins is determined by the supply of and demand for
bitcoins in the Bitcoin Exchange Market (and in private end-user-to-end-user transactions), as well as the number of merchants
that accept them. As bitcoin transactions can be broadcast to the Bitcoin Network by any user’s bitcoin software and bitcoins
can be transferred without the involvement of intermediaries or third parties, there are little or no transaction costs in direct
peer-to-peer transactions on the Bitcoin Network. Third party service providers such as Bitcoin Exchanges and bitcoin third party
payment processing services may charge significant fees for processing transactions and for converting, or facilitating the conversion
of, bitcoins to or from fiat currency.
Overview
of the Bitcoin Network’s Operations
In
order to own, transfer or use bitcoins, a person generally must have Internet access to connect to the Bitcoin Network. Bitcoin
transactions between parties occur very rapidly (within several seconds) and may be made directly between end-users without the
need for a third-party intermediary, although there are entities that provide third-party intermediary services. To prevent the
possibility of double-spending a single bitcoin, a user must notify the Bitcoin Network of the transaction by broadcasting the
transaction data to its network peers. The Bitcoin Network provides confirmation against double-spending by memorializing every
transaction in the Blockchain, which is publicly accessible and transparent. This memorialization and verification against double-spending
is accomplished through the bitcoin mining process, which adds “blocks” of data, including recent transaction information,
to the Blockchain.
Brief
Description of Bitcoin Transfers
Prior
to engaging in bitcoin transactions, a user generally must first install on its computer or mobile device a bitcoin software program
that will allow the user to generate a digital “wallet” (analogous to a bitcoin account). Alternatively, a user may
retain a third party to create a digital wallet to be used for the same purpose. Each such wallet includes one or more unique
digital addresses and verification system consisting of a “public key” and a “private key,” which are
mathematically related.
In
a bitcoin transaction, the bitcoin recipient must provide its digital address, which serves as a routing number to the recipient’s
digital wallet on the Blockchain, to the party initiating the transfer. The recipient, however, does not make public or provide
to the sender its related private key. The payor, or “spending” party, does reveal its public key in signing and verifying
its spending transaction to the Blockchain.
Neither
the recipient nor the sender reveal their digital wallet’s private key in a transaction, because the private key authorizes
access to, and transfer of, the funds in that digital wallet to other users. In the data packets propagated from a user’s
bitcoin software program onto the Bitcoin Network to allow transaction confirmation, the sending party must “sign”
its transaction with a data code derived from entering the private key into a “hashing algorithm.” The hashing algorithm
converts the private key into a digital signature, which signature serves as validation that the transaction has been authorized
by the holder of the digital wallet’s private key.
Transaction
Verification (Digital Asset Mining) & Creation of New Digital Assets
Transaction
Verification Process (Mining Process)
The
process by which bitcoins are “mined” results in new blocks being added to the Blockchain and new bitcoins being issued
to the miners. Miners engage in a set of prescribed complex mathematical calculations in order to add a block to the Blockchain
and thereby confirm bitcoin transactions included in that block’s data. Miners that are successful in adding a block to
the Blockchain are automatically awarded a fixed number of bitcoins for their effort; we also refer to this process of receiving
the aforementioned award as transaction verification services. This reward system is the method by which new bitcoins enter into
circulation to the public and is accomplished in the added block through the notation of the new bitcoin creation and their allocation
to the successful miner’s digital wallet. To begin mining, a user can download and run Bitcoin Network mining software,
which, like regular Bitcoin Network software programs, turns the user’s computer into a “node” on the Bitcoin
Network that validates blocks.
All
bitcoin transactions are recorded in blocks added to the Blockchain. Each block contains the details of some or all of the most
recent transactions that are not memorialized in prior blocks, a reference to the most recent prior block, and a record of the
award of bitcoins to the miner who added the new block. In order to add blocks to the Blockchain, a miner must map an input data
set (i.e., a reference to the immediately preceding block in the Blockchain, plus a block of the most recent Bitcoin Network transactions
and an arbitrary number called a “nonce”) to a desired output data set of predetermined length (“hash value”)
using the SHA-256 cryptographic hash algorithm. To “solve” or “calculate” a block, a miner must repeat
this computation with a different nonce until the miner generates a SHA-256 hash of a block’s header that has a value less
than or equal to the current target set by the Bitcoin Network. Each unique block can only be solved and added to the Blockchain
by one miner; therefore, all individual miners and mining pools on the Bitcoin Network are engaged in a competitive process and
are incentivized to increase their computing power to improve their likelihood of solving for new blocks.
The
cryptographic hash function that a miner uses is one-way only and is, in effect, irreversible: hash values are easy to generate
from input data (i.e., valid recent network transactions, Blockchain and nonce), but neither a miner nor participant is able to
determine the original input data solely from the hash value. As a result, generating a new valid block with a header less than
the target prescribed by the Bitcoin Network is initially difficult for a miner, yet other nodes can easily confirm a proposed
block by running the hash function just once with the proposed nonce and other input data. A miner’s proposed block is added
to the Blockchain once a majority of the nodes on the Bitcoin Network confirms the miner’s work, and the miner that solved
such block receives the reward of a fixed number of bitcoins (plus any transaction fees paid by transferors whose transactions
are recorded in the block). Therefore, “hashing” is akin to a mathematical lottery, and miners that have devices with
greater processing power (i.e., the ability to make more hash calculations per second) are more likely to be successful miners
because they can generate more hashes or “entries” into that lottery.
As
more miners join the Bitcoin Network and its processing power increases, the Bitcoin Network automatically adjusts the complexity
of the block-solving equation in an effort to set distribution such that newly-created blocks will be added to the Blockchain,
on average, approximately every ten minutes. Processing power is added to the Bitcoin Network at irregular rates that have grown
rapidly from early 2013 through 2017.
Incentives
for Transaction Verification (Mining)
Miners
dedicate substantial resources to mining. Given the increasing difficulty of the target established by the Bitcoin Network, current
miners must invest in expensive mining devices with adequate processing power to hash at a competitive rate. The first mining
devices were standard home computers; however, mining computers are currently designed solely for mining purposes. Such devices
included ASIC machines built by specialized companies like BitFury, Bitmain Technologies, 21 Inc., Avalon, and BW. Miners also
incur substantial electricity costs in order to continuously power and cool their devices while solving for a new block.
The
Bitcoin Network is designed in such a way that the reward for adding new blocks to the Blockchain decreases over time and the
production (and reward) of bitcoins will eventually cease. Once such reward ceases, it is expected that miners will demand compensation
in the form of transaction fees to ensure that there is adequate incentive for them to continue mining. The amount of transaction
fees will be based upon the structural requirements necessary to provide sufficient revenue to incentivize miners, as counterbalanced
by the need to retain sufficient bitcoin users (and transactions) to make mining profitable.
Though
not free from doubt, bitcoin industry participants have expressed a belief that transaction fees would be enforced through (i)
mining operators collectively refusing to record transactions that do not include a payment of a transaction fee or (ii) the updating
of bitcoin software to require a minimum transaction fee payment. Under a regime whereby large miners require fees to record transactions,
a transaction where the spending party did not include a payment of transaction fees would not be recorded on the Blockchain until
a miner who does not require transaction fees solves for a new block (thereby recording all outstanding transaction records for
which it has received data). If popular bitcoin software for digital wallets were to require a minimum transaction fee, users
of such programs would be required to include such fees; however, because of the open-source nature of the Bitcoin Network, there
may be no way to require that all digital wallets include minimum transaction fees for spending transactions. Alternatively, a
future Bitcoin Network software update could simply build a small transaction fee payment into all spending transactions (e.g.,
by deducting a fractional number of bitcoins from all transactions on the Bitcoin Network as transaction fees).
The
Bitcoin Network protocol already includes transaction fee rules and the mechanics for awarding transaction fees to the miners
that solve for blocks in which the fees are recorded; however, users currently may opt not to pay transaction fees (depending
on the bitcoin software they use) and miners may choose not to enforce the transaction fee rules since, at present, the bitcoin
rewards are far more substantial than transaction fees. On March 6 , 2018, transaction fees accounted for approximately
2.06 percent of miners’ total revenue, though the percentage of revenue represented by transaction fees is not static
and fluctuates based on the number of transactions for which sending users include transaction fees, the levels of those transaction
fees and the number of transactions a miner includes in its solved blocks. Typically, transactions do not have difficulty being
recorded if transaction fees are not included. According to a recent Wall Street Journal article, much of the world’s bitcoin
mining occurs in China; it is unclear whether the Chinese crackdown on Digital Assets will impact mining activities or whether
if it does, what the adverse effects will be.
Mining
Pools
The
Bitcoin Network’s mining protocol was created in a manner to make it more difficult to solve for new blocks as the processing
power dedicated to mining increases (in order to maintain the 10 minute per block solution time average). Therefore, the difficulty
of finding a valid hash value has grown exponentially since the first blocks were mined. Currently, the likelihood that an individual
acting alone will be able to mine bitcoins is extremely low. As a result, mining “pools” have developed in which multiple
miners act cohesively and combine their processing power to solve blocks. When a pool solves a new block, the participating mining
pool members split the resulting reward based on the processing power they each contributed to solve for such block. Mining pools
provide participants with access to smaller, but steadier and more frequent, bitcoin payouts. The Company monitors the Blockchain
network and, based on the information we collected from our network access, as of March 6 , 2018, the largest three mining
pools were, BTC.com, AntPool, and ViaBTC, which, when aggregated, represented approximately 53 percent of the processing
power on the Bitcoin Network (as calculated by determining the percentage of blocks mined by each such pool over the prior month).
Mathematically
Controlled Supply
The
method for creating new bitcoins is mathematically controlled in a manner so that the supply of bitcoins grows at a limited rate
pursuant to a pre-set schedule. The number of bitcoins awarded for solving a new block is automatically halved every 210,000 blocks.
Thus, the current fixed reward for solving a new block is 12.5 bitcoins per block and the reward will decrease by half to become
6.25 bitcoins around June 2020 (based on estimates of the rate of block solution calculated by BitcoinClock.com). This deliberately
controlled rate of bitcoin creation means that the number of bitcoins in existence will never exceed 21 million and that bitcoins
cannot be devalued through excessive production unless the Bitcoin Network’s source code (and the underlying protocol for
bitcoin issuance) is altered. The Company monitors the Blockchain network and, as of March 6 , 2018, based on the information
we collected from our network access 16.90 million bitcoins have been mined.
Modifications
to the Bitcoin Protocol
Bitcoin
is an open source project (i.e., a product whose source code is freely available to the public and that utilizes crowdsourcing
to identify possible issues, problems and defects) and there is no official developer or group of developers that controls the
Bitcoin Network. The Bitcoin Network’s development is overseen by a core group of developers, which varies from time to
time (“Core Developers”). The Core Developers are able to access and can propose alterations to the Bitcoin Network
source code hosted on GitHub, an online service and forum used to share and develop open source code. Other programmers have access
to and can propose changes to the bitcoin source code on GitHub, but the Core Developers have an elevated level of influence over
the process. As a result, the Core Developers are responsible for quasi-official releases of updates and other changes to the
Bitcoin Network’s source code. Users and miners must accept any changes made to the Bitcoin Network (including those proposed
by the Core Developers) by downloading the proposed modification of the source code.
A
modification of the source code is only effective with respect to the bitcoin users and miners that download it. Consequently,
as a practical matter, a modification to the source code (e.g., a proposal to increase the 21 million total limit on bitcoins
or to reduce the average confirmation time target from 10 minutes per block) only becomes part of the Bitcoin Network if accepted
by participants collectively having a substantial majority of the processing power on the Bitcoin Network. If a modification is
accepted only by a percentage of users and miners, a division in the Bitcoin Network will occur such that one network will run
the pre-modification source code and the other network will run the modified source code; such a division is known as a “fork”
in the Bitcoin Network. It should be noted that, although their power to amend the source code is effectively subject to the approval
of users and miners, the Core Developers have substantial influence over the development of the Bitcoin Network and the direction
of the bitcoin community.
Other
Blockchain Technologies
Core
Development of the bitcoin source code has increasingly focused on modifications of the bitcoin protocol to allow non-financial
and next generation uses (sometimes referred to as Bitcoin 2.0 projects). These uses include smart contracts and distributed registers
built into, built atop or pegged alongside the Blockchain. For example, the white paper for Blockstream, a program of which Core
Developers Jeff Garzik and Gregory Maxwell are a part, calls for the use of “pegged sidechains” to develop programming
environments that are built within block chain ledgers that can interact with and rely on the security of the Bitcoin Network
and Blockchain, while remaining independent thereof. We are actively evaluating other Blockchain technologies that relate to Bitcoin
2.0 projects. At this time, Bitcoin 2.0 projects remain in early stages and have not been materially integrated into the Blockchain
or Bitcoin Network.
Bitcoin
Value
Bitcoins
are an example of a Digital Asset that is not a fiat currency (i.e., a currency that is backed by a central bank or a national,
supra-national or quasi-national organization) and are not backed by hard assets or other credit. As a result, the value of bitcoins
is determined by the value that various market participants place on bitcoins through their transactions.
Exchange
Valuation
Due
to the peer-to-peer framework of the Bitcoin Network and the protocols thereunder, transferors and recipients of bitcoins are
able to determine the value of the bitcoins transferred by mutual agreement or barter with respect to their transactions. As a
result, the most common means of determining the value of a bitcoin is by surveying one or more Bitcoin Exchanges where bitcoins
are publicly bought, sold and traded (i.e., the Bitcoin Exchange Market).
On
each Bitcoin Exchange, bitcoins are traded with publicly disclosed valuations for each transaction, measured by one or more fiat
currencies such as the US Dollar, the Euro or the Chinese Yuan. Bitcoin Exchanges typically report publicly on their site the
valuation of each transaction and bid and ask prices for the purchase or sale of bitcoins. Although each Bitcoin Exchange has
its own market price, it is expected that most Bitcoin Exchanges’ market prices should be relatively consistent with the
Bitcoin Exchange Market average since market participants can choose the Bitcoin Exchange on which to buy or sell bitcoins (i.e.,
exchange shopping). Arbitrage between the prices on various Bitcoin Exchanges is possible, but the imposition of fees and fiat
currency deposit/withdrawal policies appears to have, at times, prevented an active arbitrage mechanism among users on some Bitcoin
Exchanges. For example, delayed fiat currency withdrawals imposed by Mt. Gox resulted in Mt. Gox trading at a premium of up to
10 to 20 percent for several months through January 2014. In February 2014, Mt. Gox suspended trading, closed its website and
exchange service, and filed for a form of bankruptcy protection from creditors called minjisaisei, or civil rehabilitation, to
allow courts to seek a buyer. In April 2014, Mt. Gox began liquidation proceedings.
Even
in the absence of large trading fees and fiat currency deposit/withdrawal policies, price differentials across Bitcoin Exchanges
remain. For disclosure on the accounting of Digital Assets, see “ Management’s Discussion and Analysis of Financial
Condition and Results of Operations ”
at page 24.
Forms
of Attack Against the Bitcoin Network
Exploitation
of Flaws in the Bitcoin Network’s Source Code
As
with any other computer code, the Bitcoin Network source code may contain certain flaws. Several errors and defects have been
found and corrected, including those that disabled some functionality for users, exposed users’ information, or allowed
users to create multiple views of the Bitcoin Network. Such flaws have been discovered and quickly corrected by the Core Developers
or the bitcoin community, thus demonstrating one of the advantages of open source codes that are available to the public: open
source codes rely on transparency to promote community-sourced identification and solution of problems within the code.
Reports
of flaws in or exploitations of the source code that allow malicious actors to take or create money in contravention of known
Bitcoin Network rules have been exceedingly rare. For example, in 2010, a hacker or group of hackers exploited a flaw in the Bitcoin
Network source code that allowed them to generate 184 billion bitcoins in a transaction and send them to two digital wallet addresses.
However, the bitcoin community and developers identified and reversed the manipulated transactions within approximately five hours,
and the flaw was corrected with an updated version of the bitcoin protocol. Another addressed issue with the Bitcoin Network source
code, “transaction malleability” was addressed by the Core Developers in a March 2013 software update. The Core Developers,
in conjunction with other developers and miners, work continuously to ensure that flaws are quickly fixed or removed.
Greater
than Fifty Percent of Network Computational Power
Malicious
actors can structure an attack whereby such actor gains control of more than half of the Bitcoin Network’s processing power
or “hashrate.” Computer scientists and cryptographers believe that the immense collective processing power of the
Bitcoin Network makes it impracticable for an actor to gain control of computers representing a majority of the processing power
on the Bitcoin Network. During May and June 2014, mining pool GHash.io’s hashing power approached 50 percent of the processing
power on the Bitcoin Network. During a brief period in early June 2014, the mining pool may have controlled in excess of one-half
of the Bitcoin Network’s processing power. Although no malicious activity or abnormal transaction recording was observed,
the incident establishes that it is possible that a substantial mining pool may accumulate close to or more than a majority of
the processing power on the Bitcoin Network. As of March 6 , 2018, no single pool controlled more than twenty percent of
the total processing power.
If
a malicious actor acquired sufficient computational power necessary to control the Bitcoin Network (which amount would be well
in excess of fifty percent), it would be able to engage in double-spending, or prevent some or all transactions from being confirmed,
and prevent some or all other miners from mining any valid new blocks. The malicious actor or group of actors, however, would
not be able to reverse other people’s transactions, change the fixed number of bitcoins generated per new block, or transfer
previously existing bitcoins that belong to other users.
Cancer
Nodes
This
form of attack involves a malicious actor propagating “cancer nodes” to isolate certain users from the legitimate
Bitcoin Network. A target user functionally surrounded by cancer nodes would be put on a separate “network,” allowing
the malicious actor to relay only blocks created by the separate network and thus opening the target user to double-spending attacks.
By using cancer nodes, a malicious actor also can disconnect the target user from the bitcoin economy entirely by refusing to
relay any blocks or transactions. Bitcoin software programs make these attacks more difficult by limiting the number of outbound
connections through which users are connected to the Bitcoin Network.
Manipulating
Blockchain Formation
A
malicious actor may attempt to double-spend bitcoins by manipulating the formation of the Blockchain rather than through control
of the Bitcoin Network. In this type of attack, a miner creates a valid new block containing a double-spend transaction and schedules
the release of such attack block so that it is added to the Blockchain before a target user’s legitimate transaction can
be included in a block. Variations of this form of attack include the “Finney attack,” “race attack,”
and “vector76 attack.” All double-spend attacks require that the miner sequence and execute the steps of its attack
with sufficient speed and accuracy. Users and merchants can dramatically reduce the risk of a double-spend attack by waiting for
multiple confirmations from the Bitcoin Network before settling a transaction. The Bitcoin Network still may be used to execute
instantaneous, low-value transactions without confirmation to the extent the recipient of bitcoins determines that a malicious
miner would be unwilling to carry out a double-spend attack for low-value transactions because the reward from mining would be
higher than the small profit gained from double-spending. Users and merchants can take additional precautions by adjusting their
Bitcoin Network software programs to connect only to other well-connected nodes and to disable incoming connections. These precautions
reduce the risk of double-spend attacks involving manipulation of a target’s connectivity to the Bitcoin Network (as is
the case with vector76 and race attacks).
Historical
Chart of the Price of Bitcoins, 2017-2018
The
price of bitcoins is volatile and fluctuations are expected. Movements may be influenced by various factors, including, but not
limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties
around the world. Since our Transaction Verification Services business records revenue based on the price of earned bitcoins and
we may retain such bitcoins as an asset or as payment for future expenses, the relative value of such revenues may fluctuate,
as will the value of any bitcoins we retain. The following chart illustrates the fluctuating value of the US Dollar exchange rate
for bitcoins for the one-year period ending March 6 , 2018, as reported by coindesk.com:
Uses
of Bitcoins
Global
Bitcoin Market
Global
trade in bitcoins consists of individual end-user-to-end-user transactions, together with facilitated exchange-based bitcoin trading.
A limited market currently exists for bitcoin-based derivatives. There is currently no reliable data on the total number or demographic
composition of users or miners on the Bitcoin Network.
Goods
and Services
Bitcoins
also can be used to purchase goods and services, either online or at physical locations, although reliable data is not readily
available about the retail and commercial market penetration of the Bitcoin Network. In addition to our Company in January 2014,
US national online retailers Overstock.com and TigerDirect began accepting bitcoin payments. Over the course of 2014, computer
hardware and software company Microsoft began accepting bitcoins as online payment for certain digital content, online retailer
NewEgg began accepting bitcoins, and computer hardware company Dell began accepting bitcoins. There are thousands of additional
online merchants that accept bitcoins, and the variety of goods and services for which bitcoins can be exchanged is increasing.
Currently, local, regional and national businesses, including Time Inc., Wikimedia, WordPress, Expedia and Foodler, accept bitcoin.
Bitcoin service providers such as BitPay, Coinbase and GoCoin and online gift card retailer Gyft provide other means to spend
bitcoin for goods and services at additional retailers. There are also many real-world locations that accept bitcoin throughout
the world. In 2014, payments giant PayPal announced a partnership with BitPay, Coinbase and GoCoin to expand their bitcoin-related
services to PayPal’s merchant customers, thereby significantly expanding the reach of bitcoin-accepting merchants. To date,
the rate of consumer adoption and use of bitcoin in paying merchants has trailed the broad expansion of retail and commercial
acceptance of bitcoin. Nevertheless, there will likely be a strong correlation between continued expansion of the Bitcoin Network
and its retail and commercial market penetration.
Anonymity
and Illicit Use
The
Bitcoin Network was not designed to ensure the anonymity of users, despite a common misperception to the contrary. All bitcoin
transactions are logged on the Blockchain and any individual or government can trace the flow of bitcoins from one address to
another. Off-Blockchain transactions occurring off the Bitcoin Network are not recorded and do not represent actual bitcoin transactions
or the transfer of bitcoins from one digital wallet address to another, though information regarding participants in an Off-Blockchain
transaction may be recorded by the parties facilitating such Off-Blockchain transactions. Digital wallet addresses are randomized
sequences of 27-34 alphanumeric characters that, standing alone, do not provide sufficient information to identify users; however,
various methods may be used to connect an address to a particular user’s identity, including, among other things, simple
Internet searching, electronic surveillance and statistical network analysis and data mining. Anonymity is also reduced to the
extent that certain Bitcoin Exchanges and other service providers collect users’ personal information, because such Bitcoin
Exchanges and service providers may be required to produce users’ information in order to comply with legal requirements.
In many cases, a user’s own activity on the Bitcoin Network or on Internet forums may reveal information about the user’s
identity.
Users
may take certain precautions to enhance the likelihood that they and their transactions will remain anonymous. For instance, a
user may send its bitcoins to different addresses multiple times to make tracking the bitcoins through the Blockchain more difficult
or, more simply, engage a so-called “mixing” or “tumbling” service to switch its bitcoins with those of
other users. However, these precautions do not guarantee anonymity and are illegal to the extent that they constitute money laundering
or otherwise violate the law.
As
with any other asset or medium of exchange, bitcoins can be used to purchase illegal goods or fund illicit activities. For example,
Silk Road, an anonymous online marketplace that sold illegal substances prior to its seizure and the arrest of its founder and
operator in October 2013, accepted only bitcoins. The use of bitcoins for illicit purposes, however, is not promoted by the Bitcoin
Network or the user community as a whole. Furthermore, we do not believe our ecommerce platform, which we no longer support or
are developing, has exposure to such uses because the products sold in our marketplace were curated by our management and the
sellers of those products are big box retailers with credible products and retail operations.
Alternative
Digital Assets
Bitcoins
are not the only type of Digital Assets founded on math-based algorithms and cryptographic security, although it was considered
the most prominent as of March 6 , 2018. Over 1,500 other Digital Assets, (commonly referred to as “altcoins”,
“tokens”, “protocol tokens”, or “Digital Assets”), have been developed since the Bitcoin Network’s
inception, including Ethereum, Ripple, Litecoin, Dash, and Monero. The Bitcoin Network, however, possesses the “first-to-market”
advantage and thus far has captured the majority of the industry’s market share and is secured by a mining network with
significantly more processing power than that of any other Digital Asset. The Company is examining and will continue to examine
these other Digital Assets including Digital Securities and acquire them, subject to financing, existing market conditions and
regulatory compliance.
Government
Oversight
The
Bitcoin Network is a recent technological innovation and the regulatory schemes to which bitcoin and the Bitcoin Network may
be subject have not been fully explored or developed. Recent actions taken by the SEC in its Report that certain Digital
Assets may be securities and actions taken by the CFTC including its July 24, 2017 order approving the first derivative
clearing organization for digital currency swaps reflects that we may face increased government regulation and oversight. As
stated earlier in this prospectus, the SEC’s July 25, 2017 Report, its Chairman’s recent remarks and concerns
about the “Wild West” nature of the Digital Assets market and reports that its staff is issuing subpoenas
will adversely affect the Company’s future acquisition of Digital Assets by limiting the amount of Digital Securities
it may acquire and creating increased compliance and legal costs. In the future before we acquire Digital Assets, we may be
required to examine how they were originally offered to determine if they were offered as an investment contract or security.
Because of legal uncertainties, careful examination of the results of our compliance review will be required by experienced
securities counsel. Because we must stay under the Investment Company’s 40% provisions, we will limit the amount of
Digital Securities we acquire and establish procedures designed to protect us from rapid fluctuations in value of our
Digital Assets portfolio. If our compliance procedures and legal reviews prove to be incorrect, we may incur the
likelihood of prohibitive SEC penalties and/or private lawsuit defense costs and adverse rulings.
Following
the issuance of the Report, promoters sought to evade it by callings coins “utility tokens” even where the developer
retained material future services that affected the profitability and future value of the coins. The SEC quickly stopped one such
initial coin offering, which clearly was intended to send a message.
The
Company currently owns two specific types of virtual currencies: bitcoin and ether. In order to avoid being an inadvertent
investment company within the meaning of the Investment Company Act of 1940, we actively focus on insuring that our ownership
of assets that are not securities will always exceed 60% of our total assets excluding cash. See “Risk Factors” at
page 3 and “Business at page 31. Whether our ownership of the above Digital Assets includes securities turns on the definition
of a security under the Securities Act and applicable court decisions. The key definition is the term “investment contract”
and what is an investment contract. In 1946 the U.S. Supreme Court held that an investment in an orange grove operated and controlled
by a third party was an investment contract and therefore a security subject to various provisions of the federal securities laws.
We
analyze whether our ownership of the above virtual currencies are securities under the investment contract analysis from the leading
case and the lower court cases which have followed it. The test for determining if an asset is an investment contract based upon
whether there was: (i) an investment of money, (ii) in a common enterprise, (iii) with the expectation of profits, (iv) primarily
through the efforts of others.
Bitcoin
Regardless
of how one obtains bitcoin it requires an investment of money (whether it be U.S. dollars, other currency, or virtual currency)
or mining. When a holder acquires bitcoin, the holder pays for the bitcoin with some form of currency, thus bitcoin satisfies
this prong of the test.
Courts
have focused on three distinct types of common enterprise: (i) horizontal commonality; (ii) broad vertical commonality; and
(iii) strict vertical commonality. The horizontal commonality test requires a pooling of investors and profit sharing.
The
holders of bitcoin do not pool their assets in a common entity or make payments to one common enterprise. Bitcoin is, by its design,
decentralized and has no common entity controlling it. Mining, buying, and selling of bitcoin are all decentralized exchanges
which do not feature the holders sharing in risks. Similarly, sellers of bitcoin do not share profits or risks with the purchasers
and each purchaser keeps his or her own profits. Bitcoin holders who see their holdings as an investment are viewing bitcoin as
an appreciating asset not as a common enterprise. Thus, bitcoin does not satisfy the test for horizontal commonality.
With
broad vertical commonality, the key the investors’ dependence on the efforts and expertise of the promoter or in the case
of virtual currencies based on blockchain, the developer. There is no central promoter or common seller for bitcoin. Further,
an individual seller of bitcoin would not constitute a promoter. A court has concluded that when the seller is no longer involved
with the business there is no common enterprise. The lack of continuing management by the promoter or developer is similar to
the land development cases where the courts have concluded that initial development services do not lead to the conclusion that
the sale of a real estate parcel is a security. Thus, bitcoin does not satisfy the test for broad vertical commonality.
Strict
vertical commonality differs from broad vertical commonality by requiring that the fortunes of the investors be tied to the efforts
of the promoter or third parties; pooling is not an element. Because sellers of bitcoin do not provide further services or share
in future price increases, bitcoin does not satisfy the test for strict vertical commonality.
The
speculative fever surrounding bitcoin means that buyers of it often expect profits arising from value of the appreciation of bitcoin
just as has historically happened with gold and silver. While some holders may acquire bitcoin exclusively for the purpose of
transacting sales (similar to a currency), many holders acquire bitcoin in order to sell it at a later date when the value has
appreciated or depreciated.
The
Supreme Court’s use of “solely” has been interpreted by an appellate court to mean “the efforts made by
those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure
or success of the enterprise.” However, the effort to create profit need not come exclusively from the efforts of others
so long as the efforts of others are significant and primary. Bitcoin’s expectation of profits arise not from any efforts
of others but from mere hoped for appreciation of value. This is similar to commodities such as gold or diamonds. As such, bitcoin
does not satisfy this prong of the Supreme Court’s test.
As
a result of failing to meet the prongs of the test for common enterprise and the efforts of others, we believe that bitcoin does
not constitute an investment contract and is not a security.
Ether
As mentioned in the SEC’s
Report, ether is a virtual currency originally created by the Ethereum Foundation that permits the development by third parties
of digitalized contracts on a decentralized blockchain platform called the Ethereum Blockchain. The Report refers to ether
as a “virtual currency” which was used to purchase DAO tokens. The Report could have but did not concluded that
ether is or may be a security. In the Report the Commission concluded that the DAO tokens under discussion were securities.
As a virtual currency like bitcoin, the Company does not believe that ether is a security. Our counsel has advised us that while
it is clear that bitcoin is not a security and more likely than not that ether is not a security, there is a risk that the SEC
or a court may conclude otherwise. This is a factor that we must consider in evaluating whether we have become or may become an
investment company since it will never be practical for us to register under the 1940 Act. However, due to cost considerations
our counsel has not completed a full analysis as to whether or not ether is a security. Its view is that when ether was initially
developed it may have been an investment contract which is one part of the statutory definition of a security. Nonetheless, while
not settled, our counsel believes that while not free from doubt, it appears that ether presently is a virtual currency and not
an investment contract or security. Since bitcoin constitutes approximately 70% of our eligible assets and we monitor this valuation
on a daily basis, we do not believe it is in our shareholders’ interests or necessary for the protection of investors to
get a more definitive opinion on ether.
Until
February 2014, the only U.S. federal regulator to release official guidance on bitcoin and the Bitcoin Network was FinCEN, a bureau
of the U.S. Department of the Treasury responsible for the federal regulation of currency market participants. On March 18th,
2013, FinCEN issued interpretive guidance relating to the application of the Bank Secrecy Act to distributing, exchanging and
transmitting “virtual currencies.” More specifically, it determined that a Bitcoin user will not be considered a money
service business (“MSB”) or be required to register, report and perform recordkeeping; however, an administrator or
exchanger of bitcoin must be a registered money services business under FinCEN’s money transmitter regulations. As a result,
Bitcoin Exchanges that deal with U.S. residents or otherwise fall under U.S. jurisdiction are required to obtain licenses and
comply with FinCEN regulations. FinCEN released additional guidance on January 30, 2014, April 29, 2014, October 27, 2014 and
August 14, 2015, clarifying that most miners, software developers, hardware manufacturers, escrow service providers and investors
in bitcoin would not be required to register with FinCEN on the basis of such activity alone, but that Bitcoin Exchanges, payment
processors and convertible Digital Asset administrators would likely be required to register with FinCEN on the basis of the activities
described in the October 2014 and August 2015 letters.
Prior
to concluding that digital assets may be securities, the SEC has taken various actions against persons or entities misusing bitcoin
in connection with fraudulent schemes (i.e., Ponzi schemes), inaccurate and inadequate publicly disseminated information, and
the offering of unregistered securities. Clarity regarding the treatment of bitcoin was obtained on September 17, 2015, when the
CFTC instituted and settled the
Coinflip
case. The
Coinflip
order found that the respondents (i) conducted activity
related to commodity options transactions without complying with the provisions of the CEA and CFTC regulations, and (ii) operated
a facility for the trading of swaps without registering the facility as a SEF or DCM. The
Coinflip
order was significant
as it is the first time the CFTC determined that bitcoin and other virtual currencies are properly defined as commodities under
the CEA. Based on this determination, the CFTC applied CEA provisions and CFTC regulations that apply to transactions in commodity
options and swaps to the conduct of the bitcoin derivatives trading platform. Also of significance, is that the CFTC appears to
have taken the position that bitcoin is not encompassed by the definition of currency under the CEA and CFTC regulations. The
CFTC defined bitcoin and other “virtual currencies” as “a digital representation of value that functions as
a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin
and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United
States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of
exchange in the country of issuance.”
The
CFTC affirmed its approach to the regulation of bitcoin and bitcoin-related enterprises on June 2, 2016, when the CFTC settled
charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its Order, the CFTC found that Bitfinex engaged in “illegal,
off-exchange commodity transactions and failed to register as a futures commission merchant” when it facilitated borrowing
transactions among its users to permit the trading of bitcoin on a “leveraged, margined or financed basis” without
first registering with the CFTC. In 2017 the CFTC stated that it would consider bitcoin and other virtual currencies as commodities
or derivatives depending on the facts of the offering. The CME Group announced that it will permit trading of bitcoin futures
on its exchanges as early as December 2017.
On
March 25, 2014, the IRS released guidance on the treatment of virtual convertible currencies, such as bitcoin, for U.S. federal
income tax purposes. The guidance, the first issued by a U.S. government agency regarding the asset classification of bitcoin,
classified bitcoin as “property” that it is not currency for U.S. federal income tax purposes. The guidance clarified
that bitcoin could be held as capital assets and that holders of bitcoin were required to track gains and losses relating to their
cost basis at acquisition and their amount realized upon sale or other disposition of the bitcoin. The IRS also clarified that
bitcoin received as payment (e.g., as wages or, in the case of a miner, as a reward for solving a block) is included in the recipient’s
taxable income based on the fair market value of bitcoin when received. The IRS may revisit its treatment of Digital Assets, including
seeking enforcement of existing guidance or issuing new guidance, in response to recommendations in a September 2016 report by
the U.S. Treasury Inspector General for Tax Administration. The asset classification of bitcoin by the IRS is not controlling
on other government agencies for purposes other than those relating to U.S. federal income tax.
On
June 26, 2014, the U.S. Government Accountability Office publicly released a report to the Committee on Homeland Security and
Government Affairs that summarized regulatory, law enforcement and consumer protection assessments regarding the Bitcoin economy
and Bitcoin in general. The report recommended that the U.S. Consumer Financial Protection Bureau participate in inter-agency
working groups on Bitcoin to assess how the agency might address Bitcoin-related consumer protection issues. The report echoed,
in part, a May 7, 2014 investor alert published by the SEC that highlighted fraud and other concerns relating to certain investment
opportunities denominated in bitcoin and fraudulent and unregistered investment schemes targeted at participants in online Bitcoin
forums. In the fall of 2014, the SEC is reported to have initiated an inquiry into the sale of unregistered securities denominated
in bitcoin or altcoins, and into the sale of “crypto-equity” (i.e., tokens for use on altcoin programming platforms),
although the Company has not verified the scope or veracity of such reports due to the confidentiality of such inquiries.
As
of April 2016, the U.S. Congress, U.S. Senate Committee on Homeland Security and Government Affairs, U.S. Senate Committee on
Banking, Housing and Urban Affairs, the CFTC, the New York State Department of Financial Services (“NYSDFS”), and
the Conference of State Bank Supervisors had initiated formal inquiries into or held hearings on Digital Assets, including bitcoin,
and possible regulation thereof. Members of the private sector and representatives of the Department of Justice, Secret Service
and FinCEN (among other government agencies) had participated in such inquiries and hearings.
U.S.
state regulators, including the California Department of Financial Institutions, NYSDFS, Virginia Corporation Commission, Idaho
Department of Financial Services and Washington State Department of Financial Institutions, have similarly released interpretations
or mandates that Bitcoin Exchanges and similar Bitcoin service providers register on a state-level as MTs or MSB. In July 20-17,
Delaware amended its General Corporation Law to provide for the creation maintenance of certain required records by blockchain
technology and permit its use for electronic transmission of stockholder communications. In June 2014, the State of California
adopted legislation that would formally repeal laws that could be interpreted as making illegal the use of bitcoin or other Digital
Assets as a means of payment. In February 2015, a bill was introduced in the California State Assembly to establish a licensing
regime for businesses engaging in virtual currencies. In September 2015, the bill was ordered to become an inactive file and as
of the date of this registration statement there hasn’t been further consideration by the California State Assembly. As
of August 2016, the bill was withdrawn from consideration for vote for the remainder of the year.
In
July 2014, the NYSDFS proposed the first US regulatory framework for licensing participants in “virtual currency business
activity.” The proposed regulations, known as the “BitLicense,” are intended to focus on consumer protection
and, after the closure of an initial comment period that yielded 3,746 formal public comments and a reproposal, the NYSDFS issued
its final “BitLicense” regulatory framework in June 2015. The “BitLicense” regulates the conduct of businesses
that are involved in “virtual currencies” in New York or with New York customers and prohibits any person or entity
involved in such activity to conduct activities without a license. The “BitLicense” requires, among other things,
that licensees are adequately capitalized, maintain detailed books and records, adopt anti-money laundering policies, ensure they
have robust cyber security policies and incorporate a variety of other compliance policies. As of January 2017, the NYSDFS has
granted a “BitLicense” to three (3) market participants.
On
December 16, 2014, the Conference of State Bank Supervisors released for public comment a proposed model regulatory framework
for state regulation of participants in “virtual currency activities.” Although similar in some regards, the proposed
model framework does not track completely the BitLicense regulations in New York. The Conference of State Bank Supervisors proposed
framework is a non-binding model and would have to be independently adopted, in sum or in part, by state legislatures or regulators
on a case-by-case basis. In numerous other states, including Connecticut, North Carolina, New Hampshire and New Jersey, legislation
is being proposed or has been introduced regarding the treatment of bitcoin and other Digital Assets.
In
addition, various foreign jurisdictions may adopt laws, regulations or directives that affect Bitcoin. In October 2012, the European
Central Bank issued a report on “virtual currency” schemes indicating that Bitcoin may become the subject of regulatory
interest in the European Union. In August 2013, the German Ministry of Finance released an interpretation that labeled bitcoin
to be a form of private money or a unit of account that is not recognized as a full currency, but is subject to German tax laws.
A ruling by the Court of Justice of the European Union on October 22, 2015 found that a bitcoin exchange’s trading of bitcoin
for conventional currency (such as Euros or Swedish Krona) and vice versa was subject to value added tax (“VAT”) rules
because it constituted the supply of services for consideration. However, the court also found that bitcoin could qualify for
an exception reserved for transactions related to currency, bank notes, and other legal tender, and thus the bitcoin trading could
be exempted from VAT. The ruling shows that bitcoin tax treatment in the European Union has moved more closely in-line with that
of conventional currency. Foreign government bodies have also initiated public inquiries similar to those taken by US government
bodies, including public hearings on Digital Assets, including bitcoin, held by both the French and Canadian Senates. In October
2015, the European Court of Justice determined that exchanging transactions in Digital Assets are exempt from value-added taxes
in the same manner as traditional currencies. In July 2016, the European Commission released a draft directive that proposed applying
counter-terrorism and anti-money laundering regulations to virtual currencies, and in September 2016, the European Banking authority
advised the European Commission to institute new regulation specific to virtual currencies, with amendments to existing regulation
as a stopgap measure.
The
Wall Street Journal reported in September 2017 that China has decided to ban Digital Asset Exchanges which has had the immediate
effect of reducing the price of bitcoin. Earlier on December 5, 2013, the People’s Bank of China and five Chinese ministries
released a notice that restricted Bitcoin activity among its financial and payment institutions while classifying bitcoin as a
“virtual commodity” that was legal to own and speculate in. News reports from China indicated that many banking institutions
and third-party payment processors in China had received private guidance leading them to close Bitcoin Exchange bank accounts
that held Chinese Yuan on behalf of exchange customers. During the second half of 2014, Chinese Bitcoin Exchanges again began
to accept deposits of Chinese Yuan through the use of third-party payment providers, and trading activity returned to higher levels.
In January 2016, the People’s Bank of China, China’s central bank, disclosed that it has been studying a state-backed
electronic monetary system and potentially had plans for its own state-backed electronic money. In January 2017, the People’s
Bank of China announced that it had found several violations, including margin financing and a failure to impose anti-money laundering
controls, after on-site inspections of two China-based Bitcoin Exchanges. In response to the Chinese regulator’s oversight,
the three largest China-based Bitcoin Exchanges, OKCoin, Huobi, and BTC China, started charging trading commission fees to suppress
speculative trading and prevent price swings which resulted in a significant drop in volume on these exchanges. On September 4,
2017, reports were published that China may begin prohibiting the practice of using cryptocurrency for capital fundraising. Additional
reports have surfaced that China is considering regulating Bitcoin Exchanges by enacting a licensing regime wherein Bitcoin Exchanges
may legally operate.
In
Russia, state agencies and prosecutors have released guidance or statements that have hampered the growth of bitcoin. In January
2014, anonymous electronic transfers were restricted to de minimis sums; although bitcoin transactions are not truly anonymous,
this measure has been taken to apply to the Bitcoin Network. Additionally, a central bank statement warned of the association
of bitcoin and money laundering and terrorist activity. In early February, a prosecutor implied that the use of bitcoin and bitcoin
themselves were not legal tender and were illegal, although whether this amounted to a ban on bitcoin has been questioned. In
April 2016, it was reported that the Russian Finance Ministry was considering proposing regulations that would prohibit the issuance
of all Digital Assets or their use in exchange for goods or services in Russia. However, in July 2016, in a significant change
in tone, the Russian Ministry of Finance indicated it supports a proposed law that bans bitcoin domestically but allows for its
use as a foreign currency. In October 2017, Russia issued several releases indicating they may begin regulating bitcoin and licensing
miners and entities engaging in initial coin offerings.
After
the United States, China and Russia were among the next tier of large bitcoin-using jurisdictions as of late 2013. The impact
of the restrictions has been seen in a decline of Chinese investment activity in bitcoin and a reduction in the number of bitcoin
nodes operating in Russia had continued into late 2014, despite a pickup in trading volume on Chinese Bitcoin Exchanges. Less
active bitcoin jurisdictions in Iceland (conversion between bitcoin and krona prohibited), Vietnam (financial services firms prohibited
from interacting with Bitcoin) and Bolivia (use of bitcoin prohibited by the Central Bank of Bolivia) have more severely restricted
the use of bitcoin with little impact on the global growth of bitcoin. Similarly, the reported ban on decentralized Digital Assets
in Ecuador (made in advance of plans to introduce a government backed electronic cash system) have had no visible impact on the
Bitcoin Network due to limited use of bitcoin in Ecuador.
While
jurisdictions such as Germany and China have taken a preliminary regulatory stance on bitcoin, some countries have declined to
apply regulation to bitcoin when afforded the opportunity. In June 2014, the Swiss government elected not to regulate bitcoin
use and issued guidance on the further development and future application of laws to bitcoin-related activity in Switzerland.
In 2017 Switzerland gave a swiss bank approval to manage assets based on bitcoin and other digital currencies. Among others, Australia,
Finland and the Netherlands have joined Canada and Germany among the foreign countries releasing formal or informal tax guidance
regarding bitcoin income or operations. On August 24, 2017, Canada issued guidance stating the sale of cryptocurrency may constitute
the sale of investment contract in accordance with Canadian law for determining if an investment constitutes a security.
Due
in part to its international nature and the nascent stage of regulation, along with the limited experience with bitcoin of, and
language barriers between, international journalists, information regarding the regulation of bitcoin in various jurisdictions
may be incomplete, inaccurate or unreliable. For example, news of the People’s Bank of China notice release on December
5, 2013 was followed by days of confusion relating to difficulty in interpreting and analyzing the content of the release. In
another instance, on July 29, 2013, a bitcoin service business in Thailand announced that, in a meeting with the Bank of Thailand,
regulators from the Foreign Exchange Administration and Policy Department had functionally banned bitcoin activity in the country,
leading to widespread reporting of a blanket ban. Later reporting, however, questioned whether the Bank of Thailand regulators
had the authority, or ever expressed the intention, to ban all bitcoin use in Thailand. Additionally, in the first quarter of
2014, the Bank of Thailand issued a warning to its citizens regarding the risks of bitcoin and stated that it is not a currency.
Despite these announcements, bitcoin exchanges continue to operate in Thailand converting bitcoin to and from Thai baht.
In
April 2015, the Japanese Cabinet approved proposed legal changes that would reportedly treat bitcoin and other Digital Assets
as included in the definition of currency. These regulations would, among other things, require market participants, including
exchanges, to meet certain compliance requirements and be subject to oversight by the Financial Services Agency, a Japanese regulator.
These changes were approved by the Japanese Diet in May 2016 and became effective in April 2017. In September 2017, Japan began
regulating Bitcoin Exchanges and registered several such exchanges to operate within Japan.
In
September 2017, the Financial Services Commission in South Korea released a statement that initial coin offerings would be prohibited
as a fundraising tool. In January 2018, the South Korean Justice Minister issued remarks about banning bitcoin and other Digital
Assets, although the President’s office clarified that no final decision has been made.
In
June 2017, India’s government ruled in favor of regulating bitcoin and India’s ministry of Finance is currently developing
rules for such regulation.
Australia
has previously introduced legislation to regulate Bitcoin Exchanges and increase anti-money laundering policies.
In
February 2018, the Ontario Securities Commission recently approved a Blockchain exchange-traded fund for launch on the Toronto
Stock Exchange.
As
both the regulatory landscape develops and journalistic familiarity with bitcoin increases, mainstream media’s understanding
of Digital Assets and the regulation thereof may improve. Regulation of Digital Assets varies from country to country as well
as within countries. An increase in the regulation of Digital Assets may affect our proposed business by increasing compliance
costs or prohibiting certain or all of our proposed activities.
Competition
Blockchain
Technology and Digital Assets Initiatives
Subject
to raising additional capital, the Company’s Digital Asset initiatives will compete with other industry participants that
focus on investing in and securing the Blockchains of bitcoin and other Digital Assets. Market and financial conditions, and other
conditions beyond the Company’s control, may make it more attractive to invest in other entities, or to invest in bitcoin
or Digital Assets directly. Companies have raised substantial capital this year seeking to enter the Digital Assets business.
Our lack of capital is a competitive disadvantage.
Transaction
Verification Service Business (Digital Asset mining e.g. bitcoin, Suspended)
While
our current Transaction Verification Services business is suspended we anticipate that if we resume our operations, which
is subject to additional financing, our current and future competition is centered on the following areas:
●
|
Vertically
integrated companies such as Bitfury, Bitmain Technologies, Avalon, and BW which design
and build ASIC servers and are engaged in transaction verification services through the
use of their own ASIC servers; and
|
|
|
●
|
Companies
that are engaged in transaction verification services which may have lower operating costs than our future operations.
|
Our
potential competitors may have greater resources, longer histories, more intellectual property, greater hashing capacity, and
lower cost operations. They may secure better terms from ASIC server suppliers, deploy ASIC servers faster than us, and devote
more resources to technology infrastructure. Other companies also may enter into business combinations or alliances that strengthen
their competitive positions.
Assets
The
Company’s sole asset (other than its Digital Assets and cash balance) is its human capital specifically Mr. Allen and Mr.
Handerhan, who have extensive market knowledge and long-standing business relationships within the industry. Our success depends
solely on their continued service. See “Risk Factors” above.
Intellectual
Property and Trade Secrets
We
have no intellectual property assets or licenses and rely upon the experience of our two executive officers in the Digital Assets
business as it has evolved.
Growth
Strategy
Transaction
Verification Services Growth Strategy
We
believe that with additional funding we may be able to resume our transaction verification services business (Digital Asset mining
e.g. bitcoin) and believe this may provide revenue growth. If we are successful in resuming our transaction verification services
business, we anticipate utilizing outsourced data centers and may diversify operations by securing other blockchains in addition
to bitcoins blockchain.
Employees
We
currently have two employees.
Property
None
MANAGEMENT
Directors,
Executive Officers and Corporate Governance
The
following table presents information with respect to our officers and directors as of the date of this prospectus:
Name
and Address
|
|
Age
|
|
Date
First Elected or
Appointed
|
|
Position(s)
|
|
|
|
|
|
|
|
Charles
W. Allen
|
|
42
|
|
February
5, 2014
|
|
Chief
Executive Officer, Chief Financial Officer and Chairman
|
|
|
|
|
|
|
|
Michal
Handerhan
|
|
40
|
|
February
5, 2014
|
|
Chief
Operating Officer, Secretary and Director
|
|
|
|
|
|
|
|
Jonathan
Read
|
|
60
|
|
July
14, 2017
|
|
Independent
Director
|
|
|
|
|
|
|
|
David
Garrity
|
|
57
|
|
October
16, 2017
|
|
Independent
Director
|
Each
director serves until our next annual meeting of the shareholders or unless they resign earlier. The Board of Directors elects
officers and their terms of office are at the discretion of the Board of Directors.
Background
of Officers and Directors
The
following is a brief account of the education and business experience during at least the past five years of our officers and
directors, indicating the person’s principal occupation during that period, and the name and principal business of the organization
in which such occupation and employment were carried out.
Charles
W. Allen,
age 42, has served as our Chief Executive Officer and Chief Financial Officer since February 5, 2014 and as
our Chairman of the Board since September 11, 2014. Mr. Allen is responsible for our overall corporate strategy and direction
as well as managing our corporate finances. Since January 12, 2018 Mr. Allen has been the CEO of Global Bit Ventures Inc. a newly
formed private blockchain focused company. Since October 10, 2017 Mr. Allen has been a director of GBV. Mr. Allen is also on the
advisory board of GoCoin LLC, a leading Digital Asset payment processor. Mr. Allen has extensive experience in business strategy
and structuring and executing a variety of investment banking and capital markets transactions, including financings, IPO’s
and mergers and acquisitions. From February, 2012 through January, 2014 Mr. Allen was a Managing Director at RK Equity Capital
Markets LLC (“RK”) and focused on natural resources investment banking and added to RK’s capital markets efforts.
In August, 2012 Mr. Allen co-founded RK Equity Investment Corp. (“RKEIC”) and served as a member of its board from
inception through September 7, 2014. Mr. Allen has extensive experience in business strategy, investment banking and capital markets
transactions. Prior to his work in the blockchain industry he worked domestically and internationally on projects in technology,
media, natural resources, logistics, medical services and financial services. He has served as a Managing Director at numerous
boutique investment banks focused on advising and raising capital for small and mid-size companies. Mr. Allen received a B.S.
in Mechanical Engineering from Lehigh University and a M.B.A. from the Mason School of Business at the College of William &
Mary. The Board concludes that Mr. Allen’s background and leadership experiences in the industry qualify him to serve on
the Board.
Michal
Handerhan
,
age 40, has served as our Chief Operating Officer since February 5, 2014 and was appointed as our Secretary
on March 11, 2014. Mr. Handerhan served as our Chairman of the Board from February 5, 2014 to September 11, 2014 and was a co-founder
of BitcoinShop.us LLC. Mr. Handerhan supports both our business and development strategy across the management team. Since January
12, 2018 Mr. Handerhan has been the Secretary and a director of GBV. From February, 2011 through February, 2014 Mr. Handerhan
served as an independent IT and web services consultant to the National Aeronautics and Space Administration (“NASA”).
From October, 2005 until February, 2014 Mr. Handerhan was the President and Chief Executive Officer of Meesha Media Group, LLC
which provided high-definition video production services, Web 2.0 development, database management, and social media solutions.
From March, 2002 through October, 2006 Mr. Handerhan served as a team leader for NASA in their Peer Review Services group. Prior
to working at NASA’s Peer Review Services group Mr. Handerhan served as the web developer for Folio Investments. Mr. Handerhan
received a B.S. in Computer Science from Czech Technical University. The Board concludes that Mr. Handerhan’s extensive
experiences in IT qualify him to serve on the Board.
Jonathan
Read
, age 60, has served as our Independent Director since July 14, 2017. Mr. Read has held numerous executive positions
with United States and internationally based companies over a span in excess of 35 years. In October 2017, Mr. Read was appointed
Chief Executive Officer of TimefireVR, Inc. (OTCQB: TFVR) after joining the Board in August 2017. From November 1, 2015 to January
31, 2017, Mr. Read was Chief Executive Officer or President of TimefireVR, Inc., and during the course of his tenure repositioned,
re-financed, and merged the company into an entity focused on the virtual reality sector. From 2013 to present, he has served
as Managing Partner of Quadratam1 LLC, a Scottsdale, Arizona based firm specializing in providing financial and organizational
consulting services for growth-stage companies in the United States and China. Beginning in 2005 and continuing through 2012,
he founded and served as Chief Executive Officer and a director of ECOtality, Inc. (Nasdaq: ECTY), a San Francisco based entity
in the field of electric vehicle charging and battery technology. In 2013, ECOtality, Inc. filed for Chapter 11 bankruptcy protection.
In 2014, Mr. Read filed for bankruptcy personally. TimefireVR recently announced that it has sold its legacy business, acquired
Digital Assets and is seeking to acquire one or more businesses in the blockchain industry. Accordingly, in considering potential
corporate opportunities, Mr. Read will not be disinterested.
David
Garrity
, age 57, has served as our Independent Director since October 16, 2017. Mr. Garrity has over 25 years’ experience
in the financial services industry, he has held senior roles including CFO and board of director positions for both publicly-held
and private companies, and has extensive experience in several disciplines including operating, advisory and research, and is
CEO of New York City based consulting firm, GVA Research. During 2008 and 2009, David served as CFO and a director at Interclick,
Inc., a behavioral targeting internet advertising network. From June 9, 2011 to May 14, 2013, Mr. Garrity was Chief Financial
Officer of Aspen Group, Inc., an online for-profit university. From May 14, 2013 through October 31, 2013, he was Executive Vice
President Corporate Development for Aspen Group, Inc. Since February 1, 2017, Mr. Garrity has been acting CFO of Mutualink, Inc.,
a private company developing secure distributed networking technologies to support communications interoperability for public-
& private-sector clients. Mr. Garrity appears regularly on CNBC, BNN, Bloomberg, The Financial Times, Asia Times, Yahoo Finance,
and other media outlets.
Conflicts
of Interest
Messrs.
Allen and Handerhan are officers and directors of GBV and have agreed to become employees and the senior officers of Marathon
if the Marathon merger closes. While they will remain as our officers for an unspecified period of time to allow us to find replacements
we expect them to remain as directors thereafter. However they will be required to devote the bulk of their time to the business
of Marathon. This may adversely affect us as they will have limited time to spend on our business.
We
appointed Messrs. David Garrity and Jonathan Read as directors to have independent directors to evaluate corporate opportunities
due to future potential conflicts with Marathon since Messrs. Allen and Handerhan will be conflicted. Recently, Mr. Read’s
employer announced that it has entered the blockchain industry which creates a conflict for him in the same manner. While Mr.
Garrity remains presently free of conflicts, it is possible that conflicts can occur in the future. Further he may not want to
continue as a director where he alone is empowered to evaluate conflicts of interest and future corporate opportunities. Given
our small size and lack of financial resources, we may be hampered in recruiting independent directors.
Our
Chief Executive Officer and our Chief Operating Officer are officers and serve on the Board of Directors of a company which
engages in the mining of Digital Assets; when we had sufficient working capital, we engaged in the same business. With sufficient
capital, we intend to re-enter this business. To deal with conflicts of interest, we have added two independent directors who
will monitor possible conflicts of interest. The future activities of our officers and directors may be challenged by shareholders,
result in a diversion of time and cause us to incur legal and other expenses.
Board
Leadership Structure And Role In Risk Oversight
Our
Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and
reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding the Company’s
assessment of risks. The Board of Directors focuses on the most significant risks facing us and our general risk management strategy,
and also ensures that risks undertaken by us are consistent with the Board of Directors’ appetite for risk. While the Board
of Directors oversees the Company, our management is responsible for day-to-day risk management processes. We believe this division
of responsibilities is the most effective approach for addressing the risks facing the Company and that our board leadership structure
supports this approach.
Code
Of Ethics
We
have not yet adopted a code of ethics that applies to our principal executive officers, principal financial officer, principal
accounting officer or controller, or persons performing similar functions, since we have been focusing our efforts on growing
our business and obtaining financing for our Company. We expect to adopt a code as we further develop our business.
Family
Relationships
There
are no family relationships between any of our directors, executive officers or directors.
Committees
Of The Board Of Directors
Due
to our size, we have not formally designated a nominating committee, an audit committee, a compensation committee, or committees
performing similar functions.
The
Board currently acts as our audit committee. Since we are still a developing company, the Board of Directors is still in the process
of finding an “audit committee financial expert” as defined in Regulation S-K.
Compensation
Committee Interlocks And Insider Participation
None
of our executive officers serves as a member of the Board of Directors or compensation committee of any other entity that has
one or more of our executive officers serving as a member of our Board of Directors.
2014
Equity Incentive Plan
As
of March 6 , 2018, there were approximately 258,395 shares of Common Stock available for issuance under our 2014 Equity
Incentive Plan and no outstanding options under our 2014 Equity Incentive Plan.
EXECUTIVE
COMPENSATION
The
following summary compensation table sets forth information concerning compensation for services rendered in all capacities during
the fiscal years ended December 31, 2017 and 2016 awarded to, earned by or paid to our
executive
officers. The numbers in the summary compensation table represent the actual amount of compensation accrued under Generally Accepted
Accounting Principles
.
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Total
($)
|
|
Charles W. Allen, CEO
|
|
|
2017
|
|
|
|
235,389
|
|
|
|
75,000
|
|
|
|
310,389
|
|
|
|
|
2016
|
|
|
|
150,000
|
|
|
|
75,000
|
|
|
|
225,000
|
|
Michal Handerhan, COO
|
|
|
2017
|
|
|
|
182,792
|
|
|
|
35,000
|
|
|
|
217,792
|
|
|
|
|
2016
|
|
|
|
125,000
|
|
|
|
50,000
|
|
|
|
175,000
|
|
DIRECTOR
COMPENSATION
The
following summary compensation table sets forth information concerning compensation for services rendered in all capacities during
the fiscal years ended December 31, 2017 and 2016 awarded to, earned by or paid to our directors excluding executive officers.
The numbers in the summary compensation table represent the actual amount of compensation accrued under Generally Accepted Accounting
Principles.
Name
and Principal Position
|
|
Year
|
|
|
All
other
Compensation ($) (1)
|
|
|
Total
($)
|
|
Jonathan Read, Director
|
|
|
2017
|
|
|
|
33,716
|
|
|
|
33,716
|
|
David Garrity, Director
|
|
|
2017
|
|
|
|
15,582
|
|
|
|
15,582
|
|
|
(1)
|
Our
director’s compensation for 2017 was based on the assumption that the planned merger
with the Australian company was moving forward. As a result of the termination of the
planned merger the Company is reevaluating the level of compensation for it its directors
for 2018.
|
Employment
Agreements with Executive Officers
As
a condition to the May 2017 financing, the Company was unable to pay each of its two officers and sole employees, Mr. Allen and
Mr. Handerhan, cash compensation, whether in base salary or bonus, in excess of $50,000 per year, including accrued and unpaid
salaries, until such time as the Company filed its Form 10-k for the period ending December 31, 2016. That compensation was paid
later in 2017.
To
achieve our compensation objective of retaining and motivating qualified executives, we believe that we need to provide our executive
officers with severance and change of control protections that are competitive with the protections offered by other companies.
Offering our executive officers these payments and benefits facilitates the operation of our business, allows them to better focus
their time, attention and capabilities on our business, provides for a clear and consistent approach to managing involuntary departures
with mutually understood separation benefits, and aligns with market practice.
Charles
W. Allen
On
June 22, 2017, we entered into an employment agreement with Charles Allen (the “Allen Employment Agreement”), whereby
Mr. Allen agreed to serve as our Chief Executive Officer and Chief Financial Officer for a period of two (2) years, subject to
renewal, in consideration for an annual salary of $245,000. Additionally, under the terms of the Allen Employment Agreement, Mr.
Allen shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Allen shall
be entitled to participate in all benefits plans we provide to our senior executive. We shall reimburse Mr. Allen for all reasonable
expenses incurred in the course of his employment. The Company shall pay the Mr. Allen $500 per month to cover telephone and internet
expenses. If the Company does not provide office space to Mr. Allen the Company will pay him an additional $500 per month to cover
expenses in connection with their office space needs.
Michal
Handerhan
On
June 22, 2017, we entered into an employment agreement with Michal Handerhan (the “Handerhan Employment Agreement”),
whereby Mr. Handerhan agreed to serve as our Chief Operating Officer and Secretary for a period of two (2) years, subject to renewal,
in consideration for an annual salary of $190,000. Additionally, under the terms of the Handerhan Employment Agreement, Mr. Handerhan
shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Handerhan shall
be entitled to participate in all benefits plans we provide to our senior executive. We shall reimburse Mr. Handerhan for all
reasonable expenses incurred in the course of his employment. The Company shall pay Mr. Handerhan $500 per month to cover telephone
and internet expenses. If the Company does not provide office space to Mr. Handerhan the Company will pay him an additional $500
per month to cover expenses in connection with their office space needs.
The
terms of the Allen Employment Agreement and Handerhan Employment Agreement (collectively the “Employment Agreements”)
provide each of Messrs. Allen and Handerhan (the “Executives”) certain, severance and change of control benefits if
the Executive resigns from the Company for good reason or the Company terminates him other than for cause. In such circumstances,
the Executive would be entitled to a lump sum payment equal to (i) the Executive’s then-current base salary, and (ii) payment
on a pro-rated basis of any bonus or other payments earned in connection with any bonus plan to which the Executive was a participant.
In addition, the severance benefit for the Executives the employment agreements include the Company continuing to pay for medical
and life insurance coverage for up to one year following termination. If, within eighteen months following a change of control
(as defined below), the Executive’s employment is terminated by the Company without cause or he resigns from the Company
for good reason, the Executive will receive certain severance compensation. In such circumstances, the cash benefit to the Executive
will be a lump sum payment equal to two times (i) his then-current base salary and (ii) his prior year cash bonus and incentive
compensation. Upon the occurrence of a change of control, irrespective of whether his employment with the Company terminates,
each Executive’s stock options and equity-based awards will immediately vest.
A
“change of control” for purposes of the Employment Agreements means any of the following: (i) the sale or partial
sale of the Company to an un-affiliated person or entity or group of un-affiliated persons or entities pursuant to which such
party or parties acquire shares of capital stock of the Company representing at least twenty five (25%) of the fully diluted capital
stock (including warrants, convertible notes, and preferred stock on an as converted basis) of the Company; (ii) the sale of the
Company to an un-affiliated person or entity or group of such persons or entities pursuant to which such party or parties acquire
all or substantially all of the Company’s assets determined on a consolidated basis, or (iii) Incumbent Directors (Mr. Allen
and Mr. Handerhan) cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or
similar transaction, to constitute at least a majority of the board of directors of the Company.
Additionally,
pursuant to the terms of the Employment Agreements, we have entered into an indemnification agreement with each Executive Officer
and our Executive Officers’ have insurance with terms in the amount of $2,000,000.
On
December 14, 2017, the Company agreed to pay Charles Allen, its CEO, and Michal Handerhan, its COO, cash bonuses of $75,000 and
$35,000, respectively for 2017. The Company further agreed to pay Mr. Allen and Mr. Handerhan contingent cash bonuses of $175,000
and $75,000 respectively (the “Contingent Bonus”) which will be deemed earned on the earlier of i) the closing of
a merger approved by the Board, ii) the closing of one or many financings in 2018 totaling over $1.25 million in gross proceeds,
or iii) the Company having cash and digital assets valued over $1.5 million. Provided further that the Contingent Bonus if deemed
earned will only be payable if the Company has at least $1.25 million in cash and digital assets prior to paying the bonuses.
The Contingent Bonus are not conditioned upon the continued service of either Mr. Allen or Mr. Handerhan.
Outstanding
Equity Awards At Fiscal Year-End Table
There
are no outstanding equity awards issued to our Named Executive Officers as of December 31, 2017.
PRINCIPAL
SHAREHOLDERS
The
following table sets forth certain information regarding beneficial ownership of our Common Stock and Series B, and C-1 Convertible
Preferred Stock as of the date of this prospectus: (i) by each of our directors, (ii) by each of the Named Executive Officers,
(iii) by all of our executive officers and directors as a group, and (iv) by each person or entity known by us to beneficially
own more than five percent (5%) of any class of our outstanding voting shares.
Title
of class
|
|
Name
and address of beneficial owner
(2)
|
|
Amount
and nature of beneficial ownership
(1)
|
|
|
Percent
of
class
(1)
|
|
Common
Stock
|
|
Charles
W. Allen
|
|
|
1,857,829
|
|
|
|
*
|
|
Common
Stock
|
|
Michal
Handerhan
|
|
|
2,437,627
|
|
|
|
*
|
|
Common
Stock
|
|
David
Garrity
|
|
|
25,045
|
|
|
|
*
|
|
Common
Stock
|
|
Jonathan
Read
|
|
|
0
|
|
|
|
0
|
%
|
|
|
All
officers and directors as a group (four persons)
|
|
|
|
|
|
|
1.53
|
%
|
Series
C-1 Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Alpha
Capital Anstalt –
(3)
Lettstrasse 32, 9490 Vaduz
Principality of Liechtenstein
|
|
|
5,883
|
|
|
|
9.1
|
%
|
|
|
Cavalry
Fund I LP
(4)
61 Kinderkamack Road
Woodcliff Lake, NJ 07677
|
|
|
14,707
|
|
|
|
22.7
|
%
|
|
|
DiamondRock
LLC
(5)
425
East 63
rd
Street
New
York, NY 10065
|
|
|
14,707
|
|
|
|
22.7
|
%
|
|
|
L1Capital
Global
(6)
Opportunities Master Fund Ltd.
135 East 57
th
Street
, Level 23
New York, NY 10022
|
|
|
14,707
|
|
|
|
22.7
|
%
|
*
Less than 1%
(1)
|
Percentage
ownership of Common Stock only is determined based on shares owned together with securities exercisable or convertible into
shares of Common Stock within 60 days of the date of this prospectus, for each shareholder. Beneficial ownership is determined
in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares
of Common Stock subject to securities exercisable or convertible into shares of Common Stock that are currently exercisable
or exercisable within 60 days of the date of this prospectus, are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person. As of the date of this prospectus, there were 368,219,169
shares of our Common Stock issued and outstanding. The holders of the outstanding preferred stock are also Selling Shareholders
and have blockers which limit their voting and conversion privileges to 4.99% of outstanding Common Stock within the foregoing
60 day periods. The percentages reflect their ownership of each series of preferred stock, which is not subject to any blocker.
|
|
|
(2)
|
The
address of these persons, unless otherwise noted, is c/o BTCS Inc., 9466 Georgia Avenue #124, Silver Spring, MD 20901.
|
|
|
(3)
|
Konrad
Ackerman has voting and dispositive power over shares held by Alpha Capital Anstalt.
|
|
|
(4)
|
Cavalry
Fund I Management LLC, the investment manager of Cavalry Fund I LP, has voting and investment power over these securities.
Thomas Walsh is the managing member of Cavalry Fund I Management LLC, which is the general partner of Cavalry Fund I LP. Thomas
Walsh disclaims beneficial ownership over these securities.
|
|
|
(5)
|
Neil
Rock has voting and dispositive power over shares held by DiamondRock, LLC.
|
|
|
(6)
|
David
Feldman has voting and dispositive power over shares held by L1 Capital Global Opportunities
Masterfund
Ltd.
|
|
|
(7)
|
Neil
Rock has voting and dispositive power over shares held by DiamondRock G3 LLC.
|
SELLING
SHAREHOLDERS
The
shares of Common Stock being offered by the Selling Shareholders are the Resale Shares issuable upon exercise of the Series A
warrants, Additional warrants and Bonus Warrants. We are registering the shares of Common Stock in order to permit the Selling
Shareholders to offer the shares for resale from time to time. Except for the ownership of the shares of Common Stock, the Selling
Shareholders have not had any material relationship with us within the past three years.
Under
the terms of the Warrants, a Selling Shareholder may not exercise the warrants to the extent such conversion or exercise, as the
case may be, would cause such selling shareholder, together with its affiliates, to beneficially own a number of shares of Common
Stock which would exceed 4.99% of our then outstanding shares of Common Stock following such conversion or exercise, excluding
for purposes of such determination shares of Common Stock issuable upon exercise of the warrants which have not been exercised.
The number of shares in the second column does not reflect this limitation. The Selling Shareholders may sell all, some or none
of the Resale Shares in this offering. See “Plan of Distribution.”
All
expenses incurred with respect to the registration of the Common Stock will be paid by us, but we will not be obligated to pay
any underwriting fees, discounts, commissions or other expenses incurred by the Selling Shareholders in connection with the sale
of the Resale Shares.
The
Selling Shareholders named below may from time-to-time offer and sell pursuant to this prospectus up to 81,881,632 Resale Shares.
The
table below lists the Selling Shareholders and other information regarding the beneficial ownership of the shares of Common Stock
by each of the Selling Shareholders.
The
second column lists the number of shares of Common Stock beneficially owned by each selling shareholder, based on its ownership
of the shares of Common Stock, as of the date of this prospectus. This table is prepared solely based on information supplied
to us by the Selling Shareholders and any public documents filed with the SEC.
The
third column lists the shares of Common Stock being offered by this prospectus by the Selling Shareholders.
The
fourth column assumes the sale of all of the Resale Shares offered by the Selling Shareholders pursuant to this prospectus.
We
do not know how long the Selling Shareholders will hold the shares before selling them or how many shares they will sell, and
we currently have no agreements, arrangements or understandings with any of the Selling Shareholders regarding the sale of any
of the Resale Shares.
Except
as noted in the footnotes to the table below, to our knowledge, none of the Selling Shareholders has held any position or office
or had any other material relationship with us or any of our predecessors or affiliates within the past three years other than
as a result of the ownership of our securities. None of the Selling Shareholders is a broker-dealer of affiliate of a broker-dealer.
See “Plan of Distribution” for additional information about the Selling Shareholders and the manner in which the Selling
Shareholders may dispose of their shares. Beneficial ownership has been determined in accordance with the rules of the SEC, and
generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shares voting or investment
power of that security, and includes option that are currently exercisable or exercisable within 60 days. Our registration of
these securities does not necessarily mean that the Selling Shareholders will sell any or all of the securities covered by this
prospectus. The number of shares of Common Stock and Series C-1 Convertible Preferred Stock are taken from the stock transfer
records of March 6 , 2018.
Name
of Shareholder
|
|
Number
of Shares
of Common Stock
Owned Prior to
Offering
|
|
|
Maximum
Number of Shares
of Common Stock
to be Sold
Pursuant to this
Prospectus (1)
|
|
|
Number
of
Shares of
Common Stock
Owned After
Offering (2)
|
|
Percentage
of
Common Stock
Beneficially Owned
After Offering (2)
|
|
Alpha
Capital Anstalt (3)(8)
|
|
|
442,201
|
|
|
|
14,578,744
|
|
|
42,201
|
|
|
*
|
|
Cavalry
Fund I LP (4)(8)
|
|
|
1,000,000
|
|
|
|
18,708,344
|
|
|
0
|
|
|
0
|
%
|
DiamondRock,
LLC (5)(8)
|
|
|
5,238,900
|
|
|
|
18,708,344
|
|
|
4,238,900
|
|
|
*
|
|
L1
Capital Global Opportunities Masterfund Ltd. (6)(8)
|
|
|
1,100,010
|
|
|
|
18,708,344
|
|
|
100,010
|
|
|
*
|
|
Blockchain
Global Ltd. (7)
|
|
|
3,941,200
|
|
|
|
6,882,400
|
|
|
0
|
|
|
0
|
%
|
Charles
Allen
|
|
|
1,857,829
|
|
|
|
1,857,829
|
|
|
0
|
|
|
0
|
%
|
Michal
Handerhan
|
|
|
2,437,627
|
|
|
|
2,437,627
|
|
|
0
|
|
|
0
|
%
|
*
Less than 1%
(1)
|
Represents
81,881,632 Resale Shares, consisting of (i) 15,873,600 shares of Common Stock issuable upon exercise of outstanding Series
A warrants exercisable at $0.085 per share; (ii) 15,714,288 shares of Common Stock issuable upon exercise of outstanding Additional
warrants exercisable at $0.085 per share; (iii) 15,714,288 shares of Common Stock issuable upon exercise of outstanding Bonus
Warrants exercisable at $0.17 per share;
(iv) 12,942,000 shares of Common Stock underlying
outstanding Series B Warrants exercisable at $0.135 per share,
(v) 10,000,800 shares of Common Stock underlying outstanding
Series C-1 Convertible Preferred Stock and 2,941,200 shares of Common Stock issued upon the conversion of Series C-1 Preferred
Stock, (vi) 4,295,456 shares of Common Stock owned by our executive officers, and (vii) 4,400,000 shares of Common Stock.
The Series A, Additional, and Bonus Warrants were issued in a private placement that closed on May 25, 2017. The Series B
Warrants were issued in a private placement that closed in October 2017
.
|
|
|
(2)
|
This
number does not give effect to exercise of other warrants. It assumes all Resale Shares have been issued upon conversion of
Series C-1 and exercise of Warrants and then sold. See “Capitalization” on page 31 of this prospectus. Each Selling
Shareholder (other than the Company’s executive officers) owns shares of Series C-1 which contain a 4.99% beneficial
ownership limitation. See the Principal Shareholders tables for a breakdown of the ownership of each series of convertible
stock.
|
|
|
(3)
|
Konrad
Ackerman has voting and dispositive power over shares held by Alpha Capital Anstalt. The 14,578,744 represents: i) 400,000
shares of Common Stock, ii) 1,176,600 shares of Common Stock underlying Series C-1, iii) 3,968,400 shares of Common Stock
underlying the Series A Warrant, iv) 3,928,572 shares of Common Stock underlying the Additional Warrant, v) 3,928,572 shares
of Common Stock underlying the Bonus Warrant, and vi) 1,176,600 shares of Common Stock underlying the Series B Warrant.
|
|
|
(4)
|
Cavalry
Fund I Management LLC, the investment manager of Cavalry Fund I LP, has voting and investment power over these securities.
Thomas Walsh is the managing member of Cavalry Fund I Management LLC, which is the general partner of Cavalry Fund I LP. Thomas
Walsh disclaims beneficial ownership over these securities. The 18,708,344 represents: i) 1,000,000 shares of Common Stock,
ii) 2,941,400 shares of Common Stock underlying Series C-1, iii) 3,968,400 shares of Common Stock underlying the Series A
Warrant, iv) 3,928,572 shares of Common Stock underlying the Additional Warrant, v) 3,928,572 shares of Common Stock underlying
the Bonus Warrant, and vi) 2,941,400 shares of Common Stock underlying the Series B Warrant.
|
|
|
(5)
|
Neil
Rock has voting and dispositive power over shares held by DiamondRock, LLC. The 18,708,344 represents: i) 1,000,000
shares of Common Stock, ii) 2,941,400 shares of Common Stock underlying Series C-1, iii) 3,968,400 shares of Common Stock
underlying the Series A Warrant, iv) 3,928,572 shares of Common Stock underlying the Additional Warrant, v) 3,928,572 shares
of Common Stock underlying the Bonus Warrant, and vi) 2,941,400 shares of Common Stock underlying the Series B Warrant.
|
|
|
(6)
|
David
Feldman has voting and dispositive power over shares held by L1 Capital Global Opportunities Masterfund Ltd. The
18,708,344 represents: i) 1,000,000 shares of Common Stock, ii) 2,941,400 shares of Common Stock underlying Series C-1, iii)
3,968,400 shares of Common Stock underlying the Series A Warrant, iv) 3,928,572 shares of Common Stock underlying the Additional
Warrant, v) 3,928,572 shares of Common Stock underlying the Bonus Warrant, and vi) 2,941,400 shares of Common Stock underlying
the Series B Warrant.
|
|
|
(7)
|
Sam
Lee has voting and dispositive power over shares held by Blockchain Global Ltd. The 6,882,400 represents: i) 3,941,200
shares of Common Stock, and ii) 2,941,200 shares of Common Stock underlying the Series B Warrant.
|
|
|
(8)
|
Each
of these investors owns shares of preferred stock which are subject to 4.99% beneficial ownership limitations.
|
RELATED
PARTY TRANSACTIONS
On
March 31, 2017, the Company entered into salary settlement agreements (the “Settlement Agreements”) with each of Charles
Allen and Michal Handerhan pursuant to which each agreed to exchange $2,500 in accrued and unpaid salaries for 87,936 shares of
series seed preferred stock in BitVault, Inc. and 13,963 common shares in GCZ, Inc. (collectively the “Settlement Shares”).
In fiscal year 2014 the Company had written the Settlement Shares off as unrecoverable.
On
June 23, 2017, pursuant to the June 3, 2016 Amendment Agreement the Principal Stockholders each received $2,076 in connection
with their pro-rata portion of the Payment, which represents the final Payment pursuant to the Amendment Agreement.
DESCRIPTION
OF SECURITIES
Authorized
Capital Stock
Our
authorized capital stock consists of 975,000,000 shares of Common Stock, $0.001 par value, and 20,000,000 shares of preferred
stock, $0.001 par value. As of the date of this prospectus, there were 368,219,169 shares of Common Stock outstanding.
Common
Stock
The
holders of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders
and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of Common Stock and preferred stock
entitled to vote in any election of directors may elect all of the directors standing for election. Subject to preferences that
may be applicable to any outstanding shares of preferred stock, the holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally available therefor. Upon the liquidation, dissolution
or winding up of BTCS, holders of our Common Stock are entitled to share ratably together with the holders of our preferred stock
in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock.
Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There
are no redemption or sinking fund provisions applicable to our Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable.
Preferred
Stock
Pursuant
to our articles of incorporation, our board of directors has the authority, without further action by the shareholders, to issue
up to 20,000,000 shares of preferred stock, in one or more series. Our board shall determine the rights, preferences, privileges
and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series or the designation of any series. The issuance
of preferred stock could adversely affect the voting power, conversion or other rights of holders of Common Stock. Preferred stock
could be issued quickly with terms calculated to delay or prevent a change in control of BTCS or make removal of management more
difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of our Common Stock.
Series
A Preferred Stock
.
The
Company has 100 shares of outstanding Series A Preferred Stock (the “Series A”). On December 9, 2016, the Company
sold 100 shares of Series A Preferred Stock to Charles Allen, its Chief Executive Officer and a director, for $100. The Series
A Preferred Stock is not convertible, does not have any preferential dividend or liquidation rights. Holders of Series A Preferred
Stock shall only be entitled to vote on the approval of the Charter Amendment and shall be entitled to a voting power equal to
one vote more than the total combined voting power of the Company’s common stock. The Company shall have the obligation
to redeem all of the Series A Preferred Stock for a total of $100 upon the Company’s filing with the Nevada Secretary of
State of Articles of Amendment to the Company’s Articles of Incorporation effectuating the Charter Amendment.
Series
B Convertible Preferred Stock
.
The
Company has no shares of outstanding Series B Convertible Preferred Stock (the “Series B”). Each share of Series B
converts into 200 shares of common stock. The Certificate of Designation contains what is commonly referred to as a blocker which
limits the number of shares of common stock which the holder may “beneficially own” to 4.99% of the common stock issued
and outstanding. Under Rule 13d-3 of the Exchange Act, In determining beneficial ownership the holder must consider shares of
common stock that may be issued upon conversion or exercise of other securities within 60-days of the date of calculation and
which are not subject to any limitation on conversion or exercise. The Series B also contains a provision requiring the Company
to treat all holders equally.
Series
C-1 Convertible Preferred Stock
.
The
Company has 50,004 shares of outstanding Series C-1 Convertible Preferred Stock (the “Series C-1”) which are identical
to the Series B.
Anti-takeover
Effects of Nevada Law and of Our Charter and Bylaws
In
addition to the features of our charter related to the issuance of preferred stock, which are described above, the Nevada Revised
Statutes (“NRS”) contain several provisions which may make a hostile take-over or change of control of our Company
more difficult to accomplish. They include the following:
Nevada
law, any one or all of the directors of a corporation may be removed by the holders of not less than two-thirds of the voting
power of a corporation’s issued and outstanding stock. All vacancies on the board of directors of a Nevada corporation may
be filled by a majority of the remaining directors, though less than a quorum, unless the articles of incorporation provide otherwise.
In addition, unless otherwise provided in the articles of incorporation, the board may fill the vacancies for the entire remainder
of the term of office of the resigning director or directors. Our Articles of Incorporation do not provide otherwise.
In
addition, Nevada law provides that unless otherwise provided in a corporation’s articles of incorporation or bylaws, shareholders
do not have the right to call special meetings. Our Articles of Incorporation and our Bylaws do not give shareholders this right.
In accordance with Nevada law, we also require advance notice of any shareholder proposals.
Nevada
law provides that, unless otherwise prohibited by any bylaws adopted by the shareholders, the board of directors may amend any
bylaw, including any bylaw adopted by the shareholders. Pursuant to Nevada law, our Articles of Incorporation grant the authority
to adopt, amend or repeal bylaws exclusively to our directors.
Nevada’s
“combinations with interested stockholders” statutes prohibit certain business “combinations” between
certain Nevada corporations and any person deemed to be an “interested stockholder” for two years after the such person
first becomes an “interested stockholder” unless (i) the corporation’s board of directors approves the combination
(or the transaction by which such person becomes an “interested stockholder”) in advance, or (ii) the combination
is approved by the board of directors and sixty percent of the corporation’s voting power not beneficially owned by the
interested stockholder, its affiliates and associates. Furthermore, in the absence of prior approval, certain restrictions may
apply even after such two-year period. For purposes of these statutes, an “interested stockholder” is any person who
is (x) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares
of the corporation, or (y) an affiliate or associate of the corporation and at any time within the two previous years was the
beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation.
Subject to certain timing requirements set forth in the statutes, a corporation may elect not to be governed by these statutes.
However, we have not included any such provision in our Articles of Incorporation or Bylaws, which means these provisions apply
to us.
Nevada’s
“acquisition of controlling interest” statutes contain provisions governing the acquisition of a controlling interest
in certain Nevada corporations. These “control share” laws provide generally that any person who acquires a “controlling
interest” in certain Nevada corporations may be denied certain voting rights, unless a majority of the disinterested stockholders
of the corporation elects to restore such voting rights. These statutes provide that a person acquires a “controlling interest”
whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the NRS, would
enable that person to exercise (1) one-fifth or more, but less than one-third, (2) one-third or more, but less than a majority
or (3) a majority or more, of all of the voting power of the corporation in the election of directors. Once an acquirer crosses
one of these thresholds, shares which it acquired in the transaction taking it over the threshold and within the 90 days immediately
preceding the date when the acquiring person acquired or offered to acquire a controlling interest become “control shares”
to which the voting restrictions described above apply. Our Articles of Incorporation and Bylaws currently contain no provisions
relating to these statutes, and unless our Articles of Incorporation or Bylaws in effect on the tenth day after the acquisition
of a controlling interest were to provide otherwise, these laws would apply to us if we were to (i) have 200 or more stockholders
of record (at least 100 of which have addresses in the State of Nevada appearing on our stock ledger) and (ii) do business in
the State of Nevada directly or through an affiliated corporation. As of the date of this prospectus, we have less than 100 record
stockholders with Nevada addresses. However, if these laws were to apply to us, they might discourage companies or persons interested
in acquiring a significant interest in or control of the company, regardless of whether such acquisition may be in the interest
of our shareholders.
PLAN
OF DISTRIBUTION
We
are registering the Resale Shares to permit the resale of these shares of Common Stock by the Selling Shareholders from time-to-time
after the date of this prospectus. We will not receive any of the proceeds from the sale by the Selling Shareholders of the shares
of Common Stock. We will bear all fees and expenses incident to our obligation to register the shares of Common Stock.
The
Selling Shareholders may sell all or a portion of the shares of Common Stock beneficially owned by them and offered hereby from
time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of Common Stock are sold through
underwriters or broker-dealers, the Selling Shareholders will be responsible for underwriting discounts or commissions or agent’s
commissions. The shares of Common Stock may be sold in one or more transactions at fixed prices, at prevailing market prices at
the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve crosses or block transactions,
|
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on
any quotation service on which the securities may be listed or quoted at the time of sale;
|
|
|
|
|
●
|
in
transactions otherwise than on these systems;
|
|
|
|
|
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through
the writing of options;
|
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|
|
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●
|
ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
|
|
|
●
|
block
trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
|
|
|
|
|
●
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
|
|
|
|
|
●
|
privately
negotiated transactions;
|
|
|
|
|
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|
short
sales;
|
|
|
|
|
●
|
sales
pursuant to Rule 144;
|
|
|
|
|
●
|
broker-dealers
may agree with the selling security holders to sell a specified number of
|
|
●
|
such
shares at a stipulated price per share;
|
|
|
|
|
●
|
a
combination of any such methods of sale; and
|
|
|
|
|
●
|
any
other method permitted pursuant to applicable law.
|
If
the Selling Shareholders effect such transactions by selling shares of Common Stock to or through underwriters, broker-dealers
or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions
from the Selling Shareholders or commissions from purchasers of the shares of Common Stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or
agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of Common
Stock or otherwise, the Selling Shareholders may enter into hedging transactions with broker-dealers, which may in turn engage
in short sales of the shares of Common Stock in the course of hedging in positions they assume. The Selling Shareholders may also
sell shares of Common Stock short and deliver shares of Common Stock covered by this prospectus to close out short positions and
to return borrowed shares in connection with such short sales. The Selling Shareholders may also loan or pledge shares of Common
Stock to broker-dealers that in turn may sell such shares.
The
Selling Shareholders may pledge or grant a security interest in some or all of the shares of Common Stock owned by them and, if
they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of
Common Stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act of 1933, as amended, amending, if necessary, the list of Selling Shareholders to include the pledgee,
transferee or other successors in interest as Selling Shareholders under this prospectus. The Selling Shareholders also may transfer
and donate the shares of Common Stock in other circumstances in which case the transferees, donees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this prospectus.
The
Selling Shareholders and any broker-dealer participating in the distribution of the shares of Common Stock may be deemed to be
“underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the
time a particular offering of the shares of Common Stock is made, a prospectus supplement, if required, will be distributed which
will set forth the aggregate amount of shares of Common Stock being offered and the terms of the offering, including the name
or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the Selling
Shareholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
Under
the securities laws of some states, the shares of Common Stock may be sold in such states only through registered or licensed
brokers or dealers. In addition, in most states the shares of Common Stock may not be sold unless such shares have been registered
or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
The
Selling Shareholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange
Act, and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit
the timing of purchases and sales of any of the shares of Common Stock by the Selling Shareholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in the distribution of the shares of Common Stock to
engage in market-making activities with respect to the shares of Common Stock. All of the foregoing may affect the marketability
of the shares of Common Stock and the ability of any person or entity to engage in market-making activities with respect to the
shares of Common Stock.
We
paid all expenses of the registration of the shares of Common Stock pursuant to the Registration Rights Agreement, including,
without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or “blue
sky” laws; provided, however, that a Selling Shareholder will pay all underwriting discounts and selling commissions, if
any. We will indemnify the Selling Shareholders against liabilities, including some liabilities under the Securities Act, in accordance
with the Registration Rights Agreements, or the Selling Shareholders will be entitled to contribution. We may be indemnified by
the Selling Shareholders against civil liabilities, including liabilities under the Securities Act that may arise from any written
information furnished to us by the Selling Shareholder specifically for use in this prospectus, in accordance with the related
Registration Rights Agreement, or we may be entitled to contribution.
Once
sold pursuant to this prospectus, the Resale Shares will be freely tradable in the hands of persons other than our affiliates.
Transfer
Agent
The
transfer agent for our Common Stock is Equity Stock Transfer. Its address is 237 W 37th Street, Suite 602, New York, NY 10018
and its telephone number is (917) 746-4597.
LEGAL
MATTERS
The
validity of the securities being offered by this prospectus been passed upon for us by Nason, Yeager, Gerson, White & Lioce,
P.A., Palm Beach Gardens, Florida.
EXPERTS
The
financial statements of BTCS Inc. and subsidiaries as of December 31, 2017 and 2016 , and the related consolidated
statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2017 , which included
an explanatory paragraph about BTCS Inc.’s ability to continue as a going concern included in this registration statement
have been so included in reliance on the reports of RBSM LLP an independent registered public accounting firm, given on the authority
of said firm as experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We
are a reporting company and file annual, quarterly and special reports, and other information with the SEC. Copies of the reports
and other information may be read and copied at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549.
You can request copies of such documents by writing to the SEC and paying a fee for the copying cost. You may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at www.sec.gov
that contains reports, proxy and information statements and other information regarding registrants that file electronically with
the SEC.
This
prospectus is part of a registration statement on Form S-1 that we filed with the SEC. Certain information in the registration
statement has been omitted from this prospectus in accordance with the rules and regulations of the SEC. We have also filed exhibits
and schedules with the registration statement that are excluded from this prospectus. For further information you may:
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read
a copy of the registration statement, including the exhibits and schedules, without charge at the SEC’s Public Reference
Room; or
|
|
|
|
|
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|
obtain
a copy from the SEC upon payment of the fees prescribed by the SEC.
|
INDEX
TO FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of BTCS Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of BTCS Inc. and subsidiary (The “Company”) as of December 31, 2017 and 2016, and the related consolidated
statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two year period ended
December 31, 2017 and the related notes (collectively referred to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and
the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2017, in conformity
with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as
a Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company has an accumulated deficit, recurring losses, and expects continuing future losses, and has stated that
substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events
and conditions and management’s plans regarding these matters are also described in Note 3. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/S/ RBSM LLP
We have served as the Company’s auditor
since 2016.
Henderson, Nevada
March 14 , 2018
BTCS
Inc. and Subsidiaries
Consolidated
Balance Sheets
|
|
December
31, 2017
|
|
|
December
31,2016
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
303,334
|
|
|
$
|
95,068
|
|
Digital
currencies
|
|
|
616,352
|
|
|
|
199
|
|
Prepaid
expense
|
|
|
67,736
|
|
|
|
-
|
|
Total
current assets
|
|
|
987,422
|
|
|
|
95,267
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,235
|
|
|
|
-
|
|
Websites
|
|
|
-
|
|
|
|
919
|
|
Deposits
|
|
|
-
|
|
|
|
1,885
|
|
Total
other assets
|
|
|
1,235
|
|
|
|
2,804
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
988,657
|
|
|
$
|
98,071
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity (Deficit):
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expense
|
|
$
|
75,997
|
|
|
$
|
770,497
|
|
Short
term loan
|
|
|
-
|
|
|
|
45,000
|
|
Convertible
notes
|
|
|
-
|
|
|
|
3,283,034
|
|
Derivative
liabilities
|
|
|
-
|
|
|
|
23,231,938
|
|
Derivative
liabilities for shortfall of shares
|
|
|
-
|
|
|
|
14,915,419
|
|
Liquidated
Damages Liabilities
|
|
|
-
|
|
|
|
3,102,750
|
|
Total
current liabilities
|
|
|
75,997
|
|
|
|
45,348,638
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred
stock; 20,000,000 shares authorized at 0.001 par value:
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred stock: 25,877 and 0 shares issued and outstanding at December 31, 2017 and 2016, respectively Liquidation
preference 0.001 per share
|
|
|
25
|
|
|
|
-
|
|
Series
C-1 Convertible Preferred stock: 50,004 and 0 shares issued and outstanding at December 31, 2017 and 2016, respectively Liquidation
preference 0.001 per share
|
|
|
50
|
|
|
|
-
|
|
Common
stock, 975,000,000 shares authorized at 0.001 par value, 363,043,769 and 16,095,929 shares issued and outstanding at December
31, 2017 and 2016, respectively
|
|
|
363,044
|
|
|
|
16,097
|
|
Treasury
stock, at cost, 0 and 216,667 shares at December 31, 2017 and 2016, respectively
|
|
|
-
|
|
|
|
(217
|
)
|
Additional
paid in capital
|
|
|
114,667,080
|
|
|
|
23,785,756
|
|
Accumulated
deficit
|
|
|
(114,117,539
|
)
|
|
|
(69,052,203
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
912,660
|
|
|
|
(45,250,567
|
)
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and stockholders’ equity (deficit)
|
|
$
|
988,657
|
|
|
$
|
98,071
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BTCS
Inc. and Subsidiaries
Consolidated
Statement of Operations
|
|
For
the years ended
|
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
E-commerce
|
|
$
|
4,480
|
|
|
$
|
1,640
|
|
Transaction
verification services
|
|
|
-
|
|
|
|
325,627
|
|
Hosting
|
|
|
-
|
|
|
|
27,945
|
|
Total
revenues
|
|
|
4,480
|
|
|
|
355,212
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
|
|
|
|
|
|
|
Power
and mining expenses
|
|
|
(160
|
)
|
|
|
(263,869
|
)
|
Revaluation
of digital currencies
|
|
|
704,946
|
|
|
|
8,665
|
|
Gross
profit
|
|
|
709,266
|
|
|
|
100,008
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,564,851
|
|
|
|
1,309,014
|
|
Marketing
|
|
|
9,242
|
|
|
|
10,693
|
|
Impairment
loss on fixed assets
|
|
|
-
|
|
|
|
236,585
|
|
Total
operating expenses
|
|
|
1,574,093
|
|
|
|
1,556,292
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
|
(864,827
|
)
|
|
|
(1,456,284
|
)
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income:
|
|
|
|
|
|
|
|
|
Impairment
loss related to investment
|
|
|
-
|
|
|
|
(2,250,000
|
)
|
Fair
value adjustments for warrant liabilities
|
|
|
(39,222,099
|
)
|
|
|
(25,266,593
|
)
|
Fair
value adjustments for convertible notes
|
|
|
(16,849,071
|
)
|
|
|
2,096,700
|
|
Fair
value adjustments for derivative liability shortfall of shares
|
|
|
-
|
|
|
|
(14,915,419
|
)
|
Interest
expenses
|
|
|
-
|
|
|
|
(7,420
|
)
|
Loss
on issuance of Series C Convertible Preferred stock
|
|
|
(2,809,497
|
)
|
|
|
-
|
|
Loss
on issuance of Series C-1 Convertible Preferred stock
|
|
|
(478,035
|
)
|
|
|
-
|
|
Loss
on issuance of Units
|
|
|
-
|
|
|
|
(250,000
|
)
|
Gain
on extinguishment of debt
|
|
|
15,918,867
|
|
|
|
837,369
|
|
Loss
from lease termination
|
|
|
(100,696
|
)
|
|
|
-
|
|
Liquidated
damages
|
|
|
(693,000
|
)
|
|
|
(3,102,750
|
)
|
Other
income
|
|
|
33,022
|
|
|
|
49,121
|
|
Total
other expenses
|
|
|
(44,200,509
|
)
|
|
|
(42,808,992
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(45,065,336
|
)
|
|
$
|
(44,265,276
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.36
|
)
|
|
$
|
(4.89
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic and diluted
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
123,548,858
|
|
|
|
9,058,785
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BTCS
Inc. and Subsidiaries
Consolidated
Statement of Stockholders’ Equity (Deficit)
For
the years ended December 31, 2016 and 2015
|
|
Series
B Convertible
|
|
|
Series
C Convertible
|
|
|
Series
C-1 Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance
January 1, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2,841,342
|
|
|
$
|
2,842
|
|
|
|
(216,667
|
)
|
|
$
|
(217
|
)
|
|
$
|
21,994,382
|
|
|
$
|
(24,786,927
|
)
|
|
$
|
(2,789,920
|
)
|
Conversion
of Senior convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,648,662
|
|
|
|
9,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,703,215
|
|
|
|
-
|
|
|
|
1,712,864
|
|
Warrant
exercise for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68,750
|
|
|
|
69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,696
|
|
|
|
-
|
|
|
|
91,765
|
|
Cashless
warrant exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,537,175
|
|
|
|
3,537
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,537
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(44,265,276
|
)
|
|
|
(44,265,276
|
)
|
Balance
December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,095,929
|
|
|
|
16,097
|
|
|
|
(216,667
|
)
|
|
|
(217
|
)
|
|
|
23,785,756
|
|
|
|
(69,052,203
|
)
|
|
|
(45,250,567
|
)
|
Issuance
of Series C Convertible Preferred Stock and warrants for cash in an offering (net of 3.7 million warrant liability, offset
by 2.8 million of loss on issuance of Series C Convertible Preferred Stock)
|
|
|
-
|
|
|
|
-
|
|
|
|
79,368
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance
of Series C-1 Convertible Preferred Stock and warrants for cash and digital currency in an offering (net of 1.5 million warrant
liability,offset by 478,000 of loss on issuance of Series C-1 Convertible Preferred Stock)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,710
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
-
|
|
Issuance
of common stock for settlement of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
833,333
|
|
|
|
833
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,834
|
|
|
|
-
|
|
|
|
61,667
|
|
Issuance
of Series B Convertible Preferred Stock in exchange for convertible notes payable
|
|
|
1,160,941
|
|
|
|
1,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74,299,064
|
|
|
|
-
|
|
|
|
74,300,224
|
|
Conversion
of Series B Convertible Preferred stock to common stock
|
|
|
(1,135,064
|
)
|
|
|
(1,135
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
227,012,800
|
|
|
|
227,013
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(225,878
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion
of Series C Convertible Preferred Stock to common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(79,368
|
)
|
|
|
(79
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
15,873,600
|
|
|
|
15,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,795
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion
of Series C-1 Convertible Preferred Stock to common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,706
|
)
|
|
|
(15
|
)
|
|
|
2,941,200
|
|
|
|
2,941
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,926
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock due to Anti-Dilution provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,517,352
|
|
|
|
14,517
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,517
|
)
|
|
|
-
|
|
|
|
-
|
|
Cashless
warrant exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,856,798
|
|
|
|
81,857
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,196,111
|
|
|
|
-
|
|
|
|
12,277,968
|
|
Management
redemption from escrow account
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(400,000
|
)
|
|
|
(400
|
)
|
|
|
400
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125,000
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
9,875
|
|
|
|
|
|
|
|
10,000
|
|
Issuance
of common stock as consideration for warrant Amendment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,400,000
|
|
|
|
4,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
435,600
|
|
|
|
|
|
|
|
440,000
|
|
Reclassification
from derivative liability to stockholders’ equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,138,704
|
|
|
|
-
|
|
|
|
4,138,704
|
|
Fractional
shares adjusted for reverse split
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,424
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
Cancellation
of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(616,667
|
)
|
|
|
(617
|
)
|
|
|
616,667
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,065,336
|
)
|
|
|
(45,065,336
|
)
|
Balance
December 31, 2017
|
|
|
25,877
|
|
|
$
|
25
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
50,004
|
|
|
$
|
50
|
|
|
|
363,043,769
|
|
|
$
|
363,044
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
114,667,080
|
|
|
$
|
(114,117,539
|
)
|
|
$
|
912,660
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BTCS
Inc. and Subsidiaries
Consolidated
Statement of Cash Flows
|
|
For the
years ended
|
|
|
|
2017
|
|
|
2016
|
|
Net Cash flows used from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(45,065,336
|
)
|
|
$
|
(44,265,276
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses
|
|
|
1,169
|
|
|
|
182,037
|
|
Issuance of common stock for services
|
|
|
10,000
|
|
|
|
-
|
|
Issuance of common stock as consideration for warrant
Amendment
|
|
|
440,000
|
|
|
|
-
|
|
Change in fair value of digital currencies
|
|
|
(704,946
|
)
|
|
|
(8,665
|
)
|
Loss on issuance of Units
|
|
|
-
|
|
|
|
250,000
|
|
Fair value adjustments for warrant liabilities
|
|
|
39,222,099
|
|
|
|
25,266,593
|
|
Fair value adjustments for convertible notes
|
|
|
16,849,071
|
|
|
|
(2,096,700
|
)
|
Fair value adjustments for derivative liability shortfall
of shares
|
|
|
-
|
|
|
|
14,915,419
|
|
Gain on extinguishment of debt
|
|
|
(15,918,867
|
)
|
|
|
(837,369
|
)
|
Loss from lease termination
|
|
|
100,696
|
|
|
|
-
|
|
Impairment loss related to investment
|
|
|
-
|
|
|
|
2,250,000
|
|
Impairment loss on fixed assets
|
|
|
-
|
|
|
|
236,585
|
|
Loss on sale of fixed assets
|
|
|
-
|
|
|
|
1,530
|
|
Loss on issuance of Series C Convertible Preferred stock
|
|
|
2,809,497
|
|
|
|
-
|
|
Loss on issuance of Series C-1 Convertible Preferred
stock
|
|
|
478,035
|
|
|
|
-
|
|
Liquidated damages
|
|
|
693,000
|
|
|
|
3,102,750
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Digital currencies
|
|
|
338,793
|
|
|
|
25,502
|
|
Prepaid expenses and other current assets
|
|
|
(67,736
|
)
|
|
|
8,902
|
|
Accounts payable
|
|
|
(673,729
|
)
|
|
|
140,233
|
|
Net cash used in operating activities
|
|
|
(1,488,254
|
)
|
|
|
(828,459
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,485
|
)
|
|
|
(14,582
|
)
|
Sale of property and equipment, net
|
|
|
-
|
|
|
|
66,807
|
|
Refund of lease deposit
|
|
|
1,885
|
|
|
|
335,000
|
|
Net cash (used in) provided by investing activities
|
|
|
400
|
|
|
|
387,225
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from exercise of warrant
|
|
|
-
|
|
|
|
91,765
|
|
Net proceeds from issuance of Series C Convertible Preferred
Stock and warrants for cash in an offering
|
|
|
925,115
|
|
|
|
-
|
|
Net proceeds from issuance of Series C-1 Convertible
Preferred Stock and warrants for cash and digital currency in an offering
|
|
|
825,000
|
|
|
|
-
|
|
Net proceeds from issuance of convertible notes
|
|
|
-
|
|
|
|
320,002
|
|
Payment to settle an investor
loan
|
|
|
(54,000
|
)
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,696,120
|
|
|
|
411,767
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
208,266
|
|
|
|
(29,467
|
)
|
Cash, beginning of period
|
|
|
95,068
|
|
|
|
124,535
|
|
Cash, end of period
|
|
$
|
303,334
|
|
|
$
|
95,068
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing and investing
activities:
|
|
|
|
|
|
|
|
|
Conversion of convertible notes to common stock
|
|
$
|
-
|
|
|
$
|
(4,208,546
|
)
|
Conversion of Series B Convertible Preferred Stock to
common stock
|
|
$
|
227,013
|
|
|
$
|
-
|
|
Conversion of Series C Convertible Preferred Stock to
common stock
|
|
$
|
15,874
|
|
|
$
|
-
|
|
Conversion of Series C-1 Convertible Preferred Stock
to common stock
|
|
$
|
2,941
|
|
|
$
|
-
|
|
Issuance of common stock due to Anti-Dilution provision
|
|
$
|
14,517
|
|
|
$
|
-
|
|
Cashless warrant exercise
|
|
$
|
12,277,968
|
|
|
$
|
3,537
|
|
Management redemption from escrow account
|
|
$
|
400
|
|
|
$
|
-
|
|
Preferred issued for conversion of notes
|
|
$
|
1,160
|
|
|
$
|
-
|
|
Debt settlement from sale of fixed assets
|
|
$
|
-
|
|
|
$
|
22,200
|
|
Reclassification between convertible notes and derivative
liabilities
|
|
$
|
4,138,704
|
|
|
$
|
92,601
|
|
Fractional shares adjusted for reverse split
|
|
$
|
4
|
|
|
$
|
-
|
|
Issuance of Series C-1 Convertible Preferred Stock and
warrants in exchange of digital currencies
|
|
$
|
250,000
|
|
|
$
|
-
|
|
Issuance of Series B Convertible Preferred Stock to settle
convertible notes payable
|
|
$
|
74,300,224
|
|
|
$
|
-
|
|
Issuance of common stock for settlement of debt
|
|
$
|
61,667
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Organization and Description of Business and Recent Developments
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. 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.
On
February 15, 2017, the Company’s Common Stock began trading on the OTCQB under the symbol “BTCSD.” On approximately
March 15, 2017, the Common Stock resumed trading under the symbol “BTCS.”
The
Reverse Stock Split reduced the number of outstanding shares of Common Stock from 952,756,004 shares to 15,879,262 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 consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, DM. The
Company maintains its books of account and prepares consolidated financial statements in accordance with Generally Accepted Accounting
Principles in the United States of America (“U.S. GAAP”). The Company’s fiscal year ends on December 31. All
significant intercompany balances and transactions have been eliminated in consolidation.
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. 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 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. On October 24, 2017, upon filing its Form
10-Q for the six months ended June 30, 2017, 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. The total gross proceeds raised were $1.1 million,
with net proceeds of $825,005, after deducting the offering expenses.
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.
Our
working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. The Company
used approximately $
1.5
million of cash in its operating
activities for the year ended December 31, 2017 . The Company incurred $45.1 million net loss for the year ended
December 31, 2017 . The Company had cash of approximately $303,000 and a working capital of approximately $0.9 million
at December 31, 2017 . 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.
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
A
summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements
is as follows:
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 December 31, 2017 and 2016 , the Company had $303,000 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.
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December
31, 2017 and 2016, the Company had $53,000 and $0 in excess of the FDIC insured limit, respectively.
Digital
Currencies Translations and Remeasurements
The
Company accounts for digital currencies, which it considers to be an operating asset, at their initial cost and subsequently remeasures
the carrying amounts of digital currencies it owns at each reporting date based on their current fair value. The changes in the
fair value of digital currencies are included as a component of income or loss from operations. The Company currently classifies
digital currencies as a current asset. Digital currencies are considered a crypto-currency and the Company receives deposits in
various kinds of digital currencies including but not limited to bitcoins, litecoins and dogecoins from customer trade transactions.
The
Company obtains the equivalency rate of bitcoins to USD from various exchanges including, Bitstamp and Coinbase. The equivalency
rate obtained from these sources represents a generally well recognized quoted price in an active market for bitcoins, which market
and related database are accessible to the Company on an ongoing basis.
Property
and Equipment
Property
and equipment consists of leasehold improvements, computer, equipment and office furniture and fixtures, all of which are recorded
at cost. Depreciation and amortization is recorded using the straight-line method over the respective useful lives of the assets
ranging from three to five years. Long-lived assets are reviewed for impairment whenever events or circumstances indicate that
the carrying amount of these assets may not be recoverable. Due to the financial nature of the Company, the Company impaired all
fixed assets and recorded an approximately $237,000 impairment charge in June 2016.
Intangible
Asset
The
Company has applied the provision of ASC topic 350-50-50 Intangible - Goodwill and Other/Website Development Costs, in accounting
for its costs incurred to purchase its website. Capitalized website costs are being amortized by the straight
-line
method over an estimated useful life of three (3) years. Amortization cost was approximately $900 and $ 5,000 for the years
ended December 31, 2017 and 2016, respectively .
Investments
Shares
in Group undertakings are stated at cost less any provision for impairment.
The
Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an
investment may not be recoverable. If any such indication of impairment exists, the Company makes an estimate of the recoverable
amount. If the recoverable amount of the cash-generating unit is less than the value of the investment, the investment is considered
to be impaired and is written down to its recoverable amount. An impairment loss is recognized immediately in the profit and loss
account. During the year ended 2016, the Company recorded impairment loss of approximately $2.3 million.
Derivative
Instruments
We
account 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.
Reclassifications
Certain
reclassifications have been made in prior years’ consolidated financial statements to conform to the current year’s
presentation.
Use
of Estimates
In
preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making
estimates, actual results reported in future periods may be affected by changes in these estimates. On an ongoing basis, the Company
evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payment
arrangements, estimating the provision for income taxes, estimating the fair value of equity instruments recorded as derivative
liabilities, useful lives of depreciable assets and whether impairment charges may apply.
Revenue
Recognition
The
Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104
for revenue recognition and Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition.”
Accordingly, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product
delivery has occurred, the selling price to the customer is fixed or determinable and collectability of the revenue is reasonably
assured.
Transaction
Verification Servers
Our
material revenue stream is related to the mining of digital currencies. The Company derives its revenue by providing transaction
verification services within the digital currency networks of crypto-currencies, such as Bitcoin and Ethereum, commonly termed
“crypto- currency mining.” In consideration for these services, the Company receives digital currency (“Coins”).
The Coins are recorded as revenue, using the average spot price of digital currencies on the date of receipt. The coins are recorded
on the balance sheet at their fair value and re–measured at each reporting date. Revaluation gains or losses, as well gains
or losses on sale of Coins are recorded as a component of cost of revenues in the statement of operations. Expenses associated
with running the crypto-currency mining business, such as equipment deprecation, rent and electricity cost are also recorded as
cost of revenues.
There
is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting for the production
and mining of digital currencies and management has exercised significant judgement in determining appropriate accounting treatment
for the recognition of revenue for mining of digital currencies. Management has examined various factors surrounding the substance
of the Company’s operations and the guidance in ASC 605,
Revenue Recognition
, including the stage of completion being
the completion and addition of a block to a blockchain and the reliability of the measurement of the digital currency received.
In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies which could result
in a change in the Company’s financial statements.
Income
Taxes
The
Company recognizes income taxes on an accrual basis based on tax positions taken or expected to be taken in its tax returns. A
tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing
that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it
is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained
upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted
approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes
are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.
A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely
not be realized. Should they occur, the Company’s policy is to classify interest and penalties related to tax positions
as income tax expense. Since the Company’s inception, no such interest or penalties have been incurred.
Fair
Value of Financial Instruments
Financial
instruments, including cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are
carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company
measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes
the use of unobservable inputs when measuring fair value.
The
Company uses three levels of inputs that may be used to measure fair value:
Level
1 - quoted prices in active markets for identical assets or liabilities
Level
2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
Employee
Stock-Based Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718 Compensation - Stock Compensation (“ASC 718”).
ASC 718 addresses all forms of share-based payment (“SBP”) awards including shares issued under employee stock purchase
plans and stock incentive shares. Under ASC 718 awards result in a cost that is measured at fair value on the awards’ grant
date, based on the estimated number of awards that are expected to vest and will result in a charge to operations.
Advertising
Expense
Advertisement
costs are expensed as incurred and included in marketing expenses. Advertising expenses amounted to approximately $
9,000
and $
11,000 for the years ended December 31, 2017 and 2016 , respectively.
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. Net income (loss) attributable to common stockholders includes the effect of the deemed
capital contribution on extinguishment of preferred stock and the deemed dividend related to the immediate accretion of beneficial
conversion feature of convertible preferred stock. 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 December 31, 2017 and
2016 because their effect was anti-dilutive:
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants
to purchase common stock
|
|
|
62,064,634
|
|
|
|
268,788,732
|
|
Convertible
notes
|
|
|
-
|
|
|
|
50,198,041
|
|
Favored
Nations
|
|
|
-
|
|
|
|
108,747,774
|
|
Series
B Convertible Preferred stock
|
|
|
5,175,400
|
|
|
|
-
|
|
Series
C-1 Convertible Preferred stock
|
|
|
10,000,800
|
|
|
|
-
|
|
Total
|
|
|
77,240,834
|
|
|
|
427,734,547
|
|
Preferred
Stock
The
Company applies the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification
and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments
and are measured at fair value. The Company classifies conditionally redeemable preferred shares (if any), which includes preferred
shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence
of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies
its preferred shares in stockholders’ equity. The Company’s preferred shares do not feature any redemption rights
within the holders’ control or conditional redemption features not within the Company’s control as of December 31,
2017. Accordingly, all issuances of preferred stock are presented as a component of consolidated stockholders’ equity.
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.
The
Company has evaluated
its convertible preferred stock conversion component of the Private Placement
and determined it should be considered an “equity host” and not a “debt host” as defined by ASC 815, Derivatives
and Hedging. This evaluation is necessary in order to determine if any embedded features require bifurcation and, therefore, separate
accounting as a derivative liability. The Company’s analysis followed the “whole instrument approach,” which
compares an individual feature against the entire preferred stock instrument which includes that feature.
The
Company’s analysis was based on a consideration of its convertible preferred stock’s economic characteristics and
risks and more specifically evaluated all the stated and implied substantive terms and features including (i) whether the Preferred
Stock included redemption features, (ii) whether the preferred stockholders were entitled to dividends, (iii) the voting rights
of the Preferred Stock and (iv) the existence and nature of any conversion rights. As a result of the Company’s determination
that its convertible preferred stock is an “equity host,” the embedded conversion feature is not considered a derivative
liability.
Fair
Value Option
As
permitted under FASB ASC 825, Financial Instruments, (“ASC 825”), the Company has elected the fair value option to
account for its convertible notes that were issued during the year ended December 31, 2016. ASC 825 requires that the entity record
the financial asset or financial liability, including those instruments when the fair value options is elected at fair value rather
than historical cost at a discounted carrying amount with changes in fair value recorded in the statement of operations. In addition,
it requires that upfront costs and fees related to items for which the fair value option is elected be recognized in earnings
as incurred and not deferred.
Adoption
of Recent Accounting Pronouncements
In
August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-15, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit Arrangements, which clarifies the treatment of debt issuance costs from line-of-credit arrangements after the adoption
of ASU No. 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. In particular, ASU
No. 2015-15 clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to
a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of
such arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted
ASU No. 2015-15 during the first quarter of fiscal 2016, and its adoption did not have a material impact on its consolidated financial
statements.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified
by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08,
“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net),” ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing,” and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients.” The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict
the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies may adopt
the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or
a cumulative effect upon adoption approach. The Company will adopt the new standard effective January 1, 2018, using the modified
retrospective approach. The adoption of ASU 2014-09 will not have a material impact on the Company’s consolidated financial
position, results of operations, equity or cash flows.
In
August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern, which defines management’s
responsibility to assess an entity’s ability to continue as a going concern, and requires related footnote disclosures if
there is substantial doubt about its ability to continue as a going concern. ASU No. 2014-15 is effective for the Company for
the fiscal year ending on June 30, 2017. The Company will adopt the new standard on January 1, 2018. The adoption of ASU 2014-15
will not have an impact on its consolidated financial statements and related disclosures.
In
November 2015, FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 requires that deferred
tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU No. 2015-17 is effective
for financial statements issued for fiscal years beginning after December 15, 2016. The Company will adopt the new standard on
January 1, 2018. The adoption of ASU 2015-17 will not have an impact on its 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 (“ASU 2016-09”). Under ASU 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
2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU 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 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 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. The Company will adopt the new standard on January 1, 2018.
The adoption of ASU 2016-09 will not have an impact on its consolidated financial statements and related disclosures.
In
April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customer (“ASU 2016-10”). The new guidance
is an update to ASC 606 and provides clarity on: identifying performance obligations and licensing implementation. For public
companies, ASU 2016-10 is effective for annual periods, including interim periods within those annual periods, beginning after
December 15, 2016. The Company will adopt the new standard on January 1, 2018. The adoption of ASU 2016-10 will not have an impact
on its consolidated financial statements and related disclosures.
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
adopted ASU No. 2017-09 as of January 1, 2018. The adoption of this update did not impact the Company’s 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 – 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.
On
February 15, 2017, the Company’s Common Stock began trading on the OTCQB under the symbol “BTCSD.” On approximately
March 15, 2017, the Common Stock resumed trading under the symbol “BTCS.”
The
Reverse Stock Split reduced the number of outstanding shares of Common Stock from 952,756,004 shares to 15,879,262 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 were not affected by the Reverse Stock Split; however, the conversion ratios have been adjusted
to reflect the Reverse Stock Split.
2016
Activities
On
June 3, 2016, the Company and investors from a private placement as of April 20, 2015 (the “Subscription Agreement”)
entered into 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 38,750 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 8,333 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.
Over
the course of June 8, 2016 through June 28, 2016, the Company issued 68,750 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.
Over
the course of June 8, 2016 and June 28, 2016, the Company issued a total of 1,039,013 shares of the Company’s Common Stock
for: i) the conversion of $890,179 of principal and accrued interest on the Senior Notes, and ii) the cashless exercise of the
2016 Warrants.
Over
the course of July 1, 2016 through August 1, 2016, the Company issued a total of 12,146,820 shares of the Company’s Common
Stock for: i) the conversion of $822,685 of principal and accrued interest on the Senior Notes, and ii) the cashless 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.
None
of the securities were sold through a broker-dealer and accordingly, there were no placement agent commissions involved. No registration
rights were granted to any of the purchasers. Following these issuances, there were 16,095,929 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) 108,747,774 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; (ii)
warrants to purchase 171,349,405 shares of Common Stock pursuant to “favored nations” provisions in certain common
stockholder subscription agreements which includes those anti-dilution warrants previously disclosed, and (iii) warrants to purchase
97,423,579 shares of Common Stock 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 Senior Notes and
Junior Notes to $0.0252.
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, 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) $220,000 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 has any
Senior Notes, Junior Notes or Convertible Notes outstanding. The Note Offer also provided the Note Holders with a three month
right of first refusal to participate in the Company’s next financing and a one year participation right with respect to
the Company next fully underwritten offering.
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. As a result of
the Note Offer, the January Offer and April Offer the Company issues a total of 1,160,941 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.
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.
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. The Company subsequently received another
$100,000 from an institutional investor which was held in escrow until the filing of the 10-Q.
Between
March 15, 2017 and December 19, 2017, the Company issued 81,856,798 shares of Common Stock for the cashless exercise of 111,244,318
warrants.
Between March 28,
2017 and December 31, 2017, the Company issued 227,012,800 shares of Common Stock upon the conversion of 1,135,064 shares of
Series B Convertible Preferred stock.
Between
November 27, 2017 and November 29, 2017, the Company issued 15,873,600 shares of Common Stock upon the conversion of 79,368 shares
of Series C Convertible Preferred stock.
On
November 27, 2017, the Company issued 2,941,200 shares of Common Stock upon the conversion of 14,706 shares of Series C-1 Convertible
Preferred stock.
On
December 7, 2017, the Company entered into an Amendment to Securities Agreement with the holders of a majority of the Company’s
outstanding Convertible Preferred Stock Series C-1 amending the terms of the Company’s May 2017 Securities Purchase Agreement,
the Company’s October 2017 Securities Purchase Agreement (the “October SPA”), the Certificate of Designations,
Preferences, and Rights of the Series C-1 Convertible Preferred Stock, and the terms of the Series A Warrants, Additional Warrants,
Bonus Warrants, and Series B Warrants. The Company issued, on a pro-rata basis to the subscribers of the October SPA a total of
4,400,000 shares of common stock of the Company.
The sales of unregistered
securities of our Company subsequent to the year ended December 31, 2017 are summarized below:
On January 1, 2018,
the Company issued 5,175,400 shares of Common Stock upon the conversion of 25,877 shares of Series B Convertible Preferred stock.
Stock
Purchase Warrants
The
following is a summary of warrant activity for the year ended December 31, 2017 and 2016:
|
|
Number
of Warrants
|
|
Outstanding
as of December 31, 2015
|
|
|
486,723
|
|
Ratchet
warrants issued due to price reset
|
|
|
271,641,648
|
|
Cashless
warrant exercise
|
|
|
(3,270,888
|
)
|
Warrants
exercise for cash
|
|
|
(68,750
|
)
|
Outstanding
as of December 31, 2016
|
|
|
268,788,733
|
|
Issuance
of Series C Convertible Preferred Stock and warrants for cash in an offering
|
|
|
47,302,176
|
|
Issuance
of Series C-1 Convertible Preferred Stock and warrants for cash and digital currency in an offering
|
|
|
12,942,000
|
|
Issuance
of Series B Convertible Preferred Stock in exchange for convertible notes payable and warrants
|
|
|
(163,178,007
|
)
|
Ratchet
warrants issued due to price reset
|
|
|
7,454,050
|
|
Cashless
warrant exercise
|
|
|
(111,244,318
|
)
|
Outstanding
as of December 31, 2017
|
|
|
62,064,634
|
|
Note
6 - 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 bear 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 $18.00 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, each Purchaser will not have the right to convert any portion of the
Junior Note if such 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.
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.
As
a result of the Senior Note conversions, the Company became obligated to issue, subject to certain limitations, the following
additional securities: (i) 108,747,774 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 268,788,732 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 $0.0252. As of December 31, 2016, the Company does not 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.
As
of the December 31, 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 $14,915,419 to account for the shortfall.
As
of December 31, 2016, the Company was in default on its Senior Notes and Junior Notes. 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 has any Senior Notes, Junior
Notes or Convertible Notes outstanding.
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
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 December 31,
2017
and 2016 :
|
|
Fair
value measured at December 31, 2017
|
|
|
|
Total
carrying value at
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
December
31, 2017
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
616,352
|
|
|
$
|
616,352
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
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 years ended December 31, 2017 and 2016 .
Level
1 Valuation Techniques
The
fair values of Level 1 digital currencies are determined using the equivalency rate of bitcoins to USD from various exchanges
including, Bitstamp, Kraken and Coinbase. The equivalency rate obtained from these sources represents a generally well recognized
quoted price in an active market for bitcoins, which market and related database are accessible to the Company on an ongoing basis.
The
following table sets forth a summary of the changes in the fair value of the Company’s Level 1 financial assets that are
measured at fair value on a recurring basis:
Digital Currency at fair value - January 1, 2017
|
|
$
|
199
|
|
Issuance of Series C-1 Convertible Preferred Stock and warrants in exchange of digital currencies
|
|
|
250,000
|
|
Change in fair value of digital currencies
|
|
|
704,946
|
|
Purchase and sale of digital currencies
|
|
|
(338,793
|
)
|
Digital Currency at fair value - December 31, 2017
|
|
$
|
616,352
|
|
Level
3 Valuation Techniques
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 years ended December 31, 2017 and 2016 :
Derivative
liabilities balance - January 1, 2016
|
|
$
|
3,794,153
|
|
Change
in fair value of derivative liability
|
|
|
(5,921,409
|
)
|
Reclassification
from derivative
|
|
|
92,601
|
|
Fair
value adjustments for warrant liabilities
|
|
|
25,266,593
|
|
Derivative
liabilities balance - December 31, 2016
|
|
$
|
23,231,938
|
|
Conversion
of warrant liabilities
|
|
|
(51,325,017
|
)
|
Fair
value adjustments for warrant liabilities
|
|
|
39,222,099
|
|
Cashless
warrant exercise
|
|
|
(12,277,968
|
)
|
Loss
on issuance of Series C Convertible Preferred stock
|
|
|
2,809,497
|
|
Net
proceeds from issuance of Series C Convertible Preferred Stock and warrants for cash in an offering
|
|
|
925,115
|
|
Loss
on issuance of Series C-1 Convertible Preferred stock
|
|
|
478,035
|
|
Net
cash proceeds from issuance of Series C-1 Convertible Preferred Stock and warrants for cash and digital currency in an offering
|
|
|
825,005
|
|
Net
digital currency proceeds from issuance of Series C-1 Convertible Preferred Stock and warrants for cash and digital currency
in an offering
|
|
|
250,000
|
|
Reclassification
between convertible notes and derivative liabilities
|
|
|
(4,138,704
|
)
|
Derivative
liabilities balance - December 31, 2017
|
|
|
-
|
|
Derivative
liabilities for shortfall of shares balance - January 1, 2016
|
|
$
|
-
|
|
Change
in fair value of derivative liability shortfall of shares
|
|
|
14,915,419
|
|
Derivative
liabilities for shortfall of shares balance - December 31, 2016
|
|
$
|
14,915,419
|
|
Conversion
of shortfall shares liabilities
|
|
|
(14,915,419
|
)
|
Derivative
liabilities for shortfall of shares balance - December 31, 2017
|
|
$
|
-
|
|
Convertible
notes at fair value - January 1, 2016
|
|
$
|
1,781,156
|
|
Addition
of convertible notes
|
|
|
320,002
|
|
Conversion
of notes into common stock
|
|
|
4,208,546
|
|
Gain
on extinguishment of debt
|
|
|
(837,369
|
)
|
Change
in fair value of convertible notes (including OID discount)
|
|
|
(2,096,700
|
)
|
Reclassification
to derivative liability
|
|
|
(92,601
|
)
|
Convertible
notes at fair value - December 31, 2016
|
|
$
|
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 - December 31, 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 year ended December 31, 2017
is as follows:
Warrant
Liabilities
Date
of valuation
|
|
March
2, 2017
|
|
|
May
24, 2017
|
|
|
December
7, 2017
|
|
|
December
31, 2016
|
|
Strike
Price
|
|
|
0.025
- 18.000
|
|
|
|
0.085
|
|
|
|
0.025
- 0.085
|
|
|
|
0.03
- 60.0
|
|
Volatility
|
|
|
186.7%
- 208.3
|
%
|
|
|
210.10%
- 254.70
|
%
|
|
|
255.89%
- 465.94
|
%
|
|
|
118%
- 230
|
%
|
Risk-free
interest rate
|
|
|
1.25%
- 1.83
|
%
|
|
|
1.24%
- 1.79
|
%
|
|
|
1.67%
- 2.14
|
%
|
|
|
0.35%
- 2.23
|
%
|
Contractual
life (in years)
|
|
|
1.79
to 3.79
|
|
|
|
1.52
to 5.00
|
|
|
|
0.98
to 4.88
|
|
|
|
0.10
to 3.96
|
|
Dividend
yield (per share)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Senior
Convertible Notes at Fair Value
Date
of valuation
|
|
March
2, 2017
|
|
|
December
31, 2016
|
|
Strike
Price
|
|
|
0.32
|
|
|
|
0.0252
|
|
Volatility
|
|
|
267.8
|
%
|
|
|
300.42%
- 328.04
|
%
|
Risk-free
interest rate
|
|
|
0.68
|
%
|
|
|
0.51%
- 0.63
|
%
|
Dividend
yield (per share)
|
|
|
0
|
|
|
|
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 - Employment Agreements
Charles
W. Allen
On
June 22, 2017, we entered into an employment agreement with Charles Allen (the “Allen Employment Agreement”), whereby
Mr. Allen agreed to serve as our Chief Executive Officer and Chief Financial Officer for a period of two (2) years, subject to
renewal, in consideration for an annual salary of $245,000. Additionally, under the terms of the Allen Employment Agreement, Mr.
Allen shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Allen shall
be entitled to participate in all benefits plans we provide to our senior executive. We shall reimburse Mr. Allen for all reasonable
expenses incurred in the course of his employment. The Company shall pay the Executive $500 per month to cover telephone and internet
expenses. If the Company does not provide office space to the Executive the Company will pay the Executive an additional $500
per month to cover expenses in connection with their office space needs.
Michal
Handerhan
On
June 22, 2017, we entered into an employment agreement with Michal Handerhan (the “Handerhan Employment Agreement”),
whereby Mr. Handerhan agreed to serve as our Chief Operating Officer and Secretary for a period of two (2) years, subject to renewal,
in consideration for an annual salary of $190,000. Additionally, under the terms of the Handerhan Employment Agreement, Mr. Handerhan
shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Handerhan shall
be entitled to participate in all benefits plans we provide to our senior executive. We shall reimburse Mr. Handerhan for all
reasonable expenses incurred in the course of his employment. The Company shall pay the Executive $500 per month to cover telephone
and internet expenses. If the Company does not provide office space to the Executive the Company will pay the Executive an additional
$500 per month to cover expenses in connection with their office space needs.
The
terms of the Allen Employment Agreement and Handerhan Employment Agreement (collectively the “Employment Agreements”)
provide each of Messrs. Allen and Handerhan (the “Executives”) certain, severance and change of control benefits if
the Executive resigns from the Company for good reason or the Company terminates him other than for cause. In such circumstances,
the Executive would be entitled to a lump sum payment equal to (i) the Executive’s then-current base salary, and (ii) payment
on a pro-rated basis of any bonus or other payments earned in connection with any bonus plan to which the Executive was a participant.
In addition, the severance benefit for the Executives the employment agreements include the Company continuing to pay for medical
and life insurance coverage for up to one year following termination. If, within eighteen months following a change of control
(as defined below), the Executive’s employment is terminated by the Company without cause or he resigns from the Company
for good reason, the Executive will receive certain severance compensation. In such circumstances, the cash benefit to the Executive
will be a lump sum payment equal to two times (i) his then-current base salary and (ii) his prior year cash bonus and incentive
compensation. Upon the occurrence of a change of control, irrespective of whether his employment with the Company terminates,
each Executive’s stock options and equity-based awards will immediately vest.
A
“change of control” for purposes of the Employment Agreements means any of the following: (i) the sale or partial
sale of the Corporation to an un-affiliated person or entity or group of un-affiliated persons or entities pursuant to
which such party or parties acquire shares of capital stock of the Corporation representing at least twenty five (25%)
of the fully diluted capital stock (including warrants, convertible notes, and preferred stock on an as converted basis) of the
Corporation ; (ii) the sale of the Corporation to an un-affiliated person or entity or group of such persons or entities
pursuant to which such party or parties acquire all or substantially all of the Corporation’s assets determined on
a consolidated basis, or (iii) Incumbent Directors (Mr. Allen and Mr. Handerhan) cease for any reason, including, without limitation,
as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the board of
directors of the Company.
Additionally,
pursuant to the terms of the Employment Agreements, we have agreed to execute and deliver in favor of the Executives an indemnification
agreement and to maintain directors’ and officers’ insurance with terms and in the amounts commensurate with our senior
executive.
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 400,000 shares of Common Stock (the “Escrow Shares”) into escrow.
The
return of 200,000 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 200,000 escrowed shares (the “Merger Escrow Shares”)
to the Principal Stockholders shall be based upon the successful consummation of the merger with 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 5 ) the Principal Stockholders each received $86 in connection
with their pro-rata portion of the Payment (as defined in Note 5 ). In April 2015, the Principal Stockholders each subscribed
for $20,000 in the Subscription Agreement (as defined in Note 5 ) for an aggregate of $40,000.
On
January 30, 2017, the Company received 24,000,000 shares 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 a securities escrow agreement dated February 19, 2016 (the “Securities Escrow Agreement”).
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 the Escrow Shares into escrow. The Company failed to list the Company’s
Common Stock on a national securities exchange on or before December 31, 2016 and failed to consummated the merger with
Spondoolies-Tech Ltd. on or before December 31, 2016. The escrow agent returned the shares to the Company for cancelation for
no consideration.
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
10 – Commitments and Contingencies
On
May 28, 2015 the Company entered an operating sub-lease agreement ending on May 31, 2016 for its headquarters in Arlington, Virginia.
Prepaid expenses include $12,000 of fixed minimum lease payment that was prepaid through May 31, 2016. The sub-lease was subsequently
extended on a month-to-month basis for $500 per month from June 1, 2016 through December 31, 2016. After December 31, 2016 the
Company was not party to any lease agreements for corporate office space and its employees have been working virtually. The Company
is paying each of Mr. Allen and Mr. Handerhan $1,000 per month to cover out of pocket expenses associated with phone, internet
and office space.
Note
11 - North Carolina Facility
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 subsequently ceased operations
at DM.
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 were stolen. The value of the stolen equipment owned by the Company
did not appear to be material. The Company reported the theft to local authorities as well its insurance company regarding
next steps. The Company received payment from the insurance company in the amount of approximately $85,000 and has assigned the
payment to the benefit of CSC as part of the settlement agreement with CSC the Company’s equipment finance provider which
owned the stolen serves.
On
September 1, 2016, DM gave cancelation notice to the landlord with respect to the Lease of its North Carolina facility.
Note
12 – Income Taxes
The
Company had no income tax expense due to operating loss incurred for the years ended December 31, 2017 and 2016.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the
Tax Cuts and Jobs Act (the “Tax Act”), which makes broad and complex changes to the U.S. tax code. Certain of these
changes may be applicable to the Company, including but not limited to, reducing the U.S. federal corporate tax rate from 35 percent
to 21 percent, creating a new limitation on deductible interest expense, eliminating the corporate alternative minimum tax (“AMT”),
modifying the rules related to uses and limitations of net operating loss carryforwards generated in tax years ending after December
31, 2017, and changing the rules pertaining to the taxation of profits earned abroad. Changes in tax rates and tax laws are accounted
for in the period of enactment. The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently,
we have recorded a decrease related to deferred tax assets of approximately $1 million dollars exclusive of the corresponding change
in the valuation allowance, for the year ended December 31, 2017. Due to the full valuation allowance on the deferred tax assets,
there is no net adjustment to deferred tax expense or benefit due to the reduction of the corporate tax rate.
The
tax effects of temporary differences and tax loss and credit carry forwards that give rise to significant portions of deferred
tax assets and liabilities at December 31,
2017
and
2016 are comprised of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net-operating loss carryforward
|
|
$
|
1,385,309
|
|
|
$
|
2,430,727
|
|
Other
|
|
|
-
|
|
|
|
1,478
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets
|
|
|
1,385,309
|
|
|
|
2,432,215
|
|
Valuation allowance
|
|
|
(1,385,309
|
)
|
|
|
(2,432,215
|
)
|
Deferred Tax Asset, Net of Allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2017,
the Company had net operating loss carry forwards for federal and state tax purposes of approximately $5 million which
expires in 2037. Prior to the merger, the Company had generated net operating losses, which the Company’s preliminary analysis
indicates would be subject to significant limitations pursuant to Internal Revenue Code Section 382. The Company has not completed
its IRC Section 382 Valuation, as required and the NOL’s because of potential Change of Ownerships might be completely worthless.
Therefore, Management of the Company has recorded a Full Valuation Reserve, since it is more likely than not that no benefit will
be realized for the Deferred Tax Assets.
In assessing the realization
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during
the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and taxing strategies in making this assessment. In case the deferred tax assets
will not be realized in future periods, the Company has provided a valuation allowance for the full amount of the deferred tax
assets at December 31, 2017. The valuation allowance decreased by approximately $1.0 million as of December 31, 2017. The valuation
allowance decreased by approximately $1.0 million as of December 31, 2017, generally do to a decrease in the tax rate applied
based upon the “Tax Act”.
The
expected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as follows:
|
|
For
the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Statutory
Federal Income Tax Rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State
Taxes, Net of Federal Tax Benefit
|
|
|
(5.4
|
)%
|
|
|
(5.4
|
)%
|
Federal
tax rate change
|
|
|
11.9
|
%
|
|
|
-
|
|
Other
|
|
|
39.7
|
%
|
|
|
-
|
|
Change
in Valuation Allowance
|
|
|
(12.2
|
)%
|
|
|
39.4
|
%
|
|
|
|
|
|
|
|
|
|
Income
Taxes Provision (Benefit)
|
|
|
-
|
%
|
|
|
-
|
%
|
The
Company has not identified any uncertain tax positions requiring a reserve as of December 31, 2017 .
Note
13 - Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the consolidated financial statements are
issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would
have required adjustment or disclosure in the consolidated financial.
On
January 1, 2018, the Company issued 5,175,400 shares of Common Stock upon the conversion of 25,877 shares of Series B Convertible
Preferred stock.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13.
Other Expenses of Issuance and Distribution
The
following table sets forth all expenses to be paid by the Registrant, other than estimated underwriting discounts and commissions.
All amounts shown are estimates except for the SEC registration fee:
SEC
registration fee
|
|
$
|
1,031.99
|
|
Legal
fees and expenses
|
|
|
25,650.00
|
|
Accounting
fees and expenses
|
|
|
15,000.00
|
|
Transfer
agent and registrar fees
|
|
|
5,000.00
|
|
Printing
and engraving expenses
|
|
|
0.00
|
|
Miscellaneous
fees and expenses
|
|
|
2,000.00
|
|
Total
|
|
|
48,681.99
|
|
^
To be added by amendment.
Item
14. Indemnification of Directors and Officers
Neither
our Articles of Incorporation nor Bylaws prevent us from indemnifying our officers, directors and agents to the extent permitted
under the Nevada Revised Statute (“NRS”). NRS Section 78.7502 provides that a corporation shall indemnify any director,
officer, employee or agent of a corporation against expenses, including attorneys’ fees, actually and reasonably incurred
by him in connection with any the defense to the extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or proceeding referred to NRS Section 78.7502(1) or 78.7502(2),
or in defense of any claim, issue or matter therein.
NRS
Section 78.7502(1) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or
proceeding if he: (a) is not liable pursuant to NRS Section 78.138; or (b) acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
NRS
Section 78.7502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred
by him in connection with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS Section 78.138;
or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to
the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent
jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
NRS
Section 78.747 provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually
liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The
court as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification
by us is against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of
such issue.
Item
15. Recent Sales of Unregistered Securities
The
sales of unregistered securities of our Company during the year ended December 31, 2016 are summarized below:
On
June 6, 2016, the Company, entered into a Securities Purchase Agreement with certain institutional investors pursuant to which
the purchasers subscribed for up to $375,000 of a 20% Original Issue Discount Junior Secured Convertible Notes. The aggregate
principal amount of the notes issued at the initial close was $125,000 and the Company received $100,000 after giving effect to
the 20% original issue discount. The notes bear no interest except in the event of default which interest rate is 24% per annum
upon the occurrence of an event of default, have a maturity date of December 5, 2016, and are convertible (principal, and interest)
at any time after the issuance date of the notes into shares of the Company’s Common Stock at a conversion price equal to
$18.00 per share, subject to adjustment upon an event of default and other events.
Between
June 8, 2016 and June 28, 2016, the Company issued 68,750 shares of Common Stock for the cash exercise of warrants resulting in
aggregate proceeds of $91,765.
Between
June 8, 2016 and June 28, 2016, the Company issued a total of 1,039,013 shares of the Company’s Common Stock for: i) the
conversion of $890,179 of principal and accrued interest on the Senior Notes, and ii) the cashless exercise of the 2016 Warrants.
Between
July 1, 2016 and August 1, 2016, the Company issued a total of 12,146,824 shares of the Company’s Common Stock for: i) the
conversion of $822,685 of principal and accrued interest on the Senior Notes, and ii) the cashless exercise of the 2016 Warrants.
On
December 6, 2016, the Company issued a total of $220,002 Convertible Promissory Notes (the “December 2016 Notes”)
to three accredited investors. The December 2016 Notes were issued in connection with a loan of $200,002 and the cancellation
of two $10,000 promissory notes previously issued by the Company to two of the investors. The December 2016 Notes are due on June
6, 2017 and bear interest at 8% per annum payable on the maturity date. Further, the December 2016 Notes required the Company
to designate a series of preferred stock with super voting power and issue it to an executive officer of the Company. In furtherance
of that provision, the Company issued 100 shares of Series A Preferred Stock to Charles Allen, its Chief Executive Officer and
a director, which provided Mr. Allen with a majority of the Company’s outstanding voting power with respect to increasing
the Company’s authorized shares and effectuating a reverse split. See Item 5.03 below. Until such time as the Company effects
a Charter Amendment, the December 2016 Notes are convertible into a preferred stock. After the Charter Amendment is effected,
the December 2016 Notes will be convertible into Common Stock. The conversion price of the December 2016 Notes is $0.12 per share.
The
sales of unregistered securities of our Company during the year ended December 31, 2017 are summarized below:
On
February 28, 2017, the Company issued 4,370 shares of Common Stock in connection with the 60:1 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, 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 has any Senior Notes, Junior Notes or Convertible Notes outstanding. The Note Offer also provided the Note
Holders with a three month right of first refusal to participate in the Company’s next financing and a one year participation
right with respect to the Company next fully underwritten offering.
On
March 9, 2017, as a result of the Note Offer 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 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 52,311 shares of Preferred.
The
April Investors also agreed to: i) waive their right to their pro-rata portion of the remaining $240,216 payment under the May
27, 2016 amendment to the April Agreement (the “Payment”), ii) release the Company from its $50,000 management salary
restriction as it relates to their pro-rata portion of the Payment, and iii) cancel their rights in the April Agreement to the
favored nations provision. After giving effect to the April Investors release from the Payment, the Company is still obligated
to pay those investors who participate in the April 2015 financing but did not accept the April Offer $187,330 prior to either
Charles Allen, its Chief Executive Officer, Chief Financial Officer and Chairman and Michal Handerhan, its Chief Operating Officer
and corporate secretary (collectively, the Company’s sole officers, directors and employees, the “Officers”)
receiving disbursements towards their annual salaries or bonuses in excess of $50,000.
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 1,108,861 shares of Preferred, par value $0.001.
Each holder of Preferred may, from time to time, convert any or all of such holder’s shares of Preferred into fully paid
and non-assessable shares of Common Stock in an amount equal to two hundred (200) shares of Common Stock for each one (1) share
of Preferred surrendered. However, at no time may all or a portion of shares of Preferred stock be converted if the number of
shares of Common Stock to be issued pursuant to such conversion which would exceed, when aggregated with all other shares of Common
Stock owned by such holder at such time, the number of shares of Common Stock which would result in such holder beneficially owning
more than 4.99% of all of the Common Stock outstanding at such time.
Each
of the three Note Holders agreed to a leak-out agreement (the “Note Leak
-
Out”) with respect to the sale of
Common Stock underlying the Preferred. The Note Leak-Out agreement restricts the number of shares of Common Stock that can be
sold to 30% of the previous trading day’s volume until May 18, 2017 and thereafter to 20% of the previous day’s trading
volume until February 6, 2018.
Each
of the five January Investors agreed to a leak-out agreement (the “January Leak-Out”) with respect to the sale of
Common Stock underlying the Preferred. The January Leak-Out agreement restricts the number of shares of Common Stock that can
be sold to 7.8% of the previous trading day’s volume until February 6, 2018.
Each
of the seven April Investors agreed to a leak-out agreement (the “April Leak
-
Out”) with respect to the sale
of Common Stock underlying the Preferred. The April Leak-Out agreement restricts the number of shares of Common Stock that can
be sold to 12.2% of the previous trading day’s volume until February 6, 2018.
Each
of the five January Investors agreed to a lockup agreement with respect to the sale of the Common Stock underlying the Preferred,
whereby they agreed not to sell the Common Stock underlying the Preferred until May 19, 2017.
Each
of the seven April Investors agreed to a lockup agreement with respect to the sale of the Common Stock underlying the Preferred,
whereby they agreed not to sell the Common Stock underlying the Preferred until May 19, 2017.
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”).
The Company leased Bitmain S7 servers and power supplies (the “Servers”) from CSC starting on February 2, 2016 for
$12,053 per month for a term of 36 months. Prior to the CSC Agreement the Company owed CSC $91,823 in accrued and unpaid monthly
lease payments and interest, and had a continuing monthly payment obligation totaling $277,225 over the remaining term of the
CSC Lease for an aggregate liability of $369,048.
Pursuant
to the CSC Agreement the Company has agreed to: i) issue CSC 833,333 shares of the Company’s Common Stock (the “Shares”),
and ii) pay CSC $200,000 (the “Cash Payment”). The Shares and Cash Payment constitute the total payment to CSC with
respect to the termination and release from the CSC Lease. The Company agreed to endorse and deliver to CSC the insurance check
it received from Erie Insurance in the amount of $84,278 which will be credited against the Cash Payment. The remaining $115,722
Cash Payment is due in full by March 31, 2018 and is subject to certain payment terms including 10% annual interest, subject
to periodic increase, as set forth in the CSC Agreement.
As
a result of the Company’s default on the CSC Lease and prior to the CSC Agreement, the Company forfeited its $25,000 security
deposit with CSC and returned to CSC the remaining leased Servers in the Company’s possession.
On
March 27, 2017, the Company discovered a calculation error (the “Error”) with respect to the number of shares of Series
B Convertible Preferred Stock (the “Preferred”) issued to certain investors who both participate in the Company’s
April 19, 2015 financing (the “April Investors”) and accepted the securities exchange offer (the “April Offer”).
The Error is a result of the Company inadvertently applying the sixty for one reverse split twice in its calculation of the number
of Preferred to be both authorized and issued. The Company issued six investors an aggregate of 52,080 Preferred shares in order
to fulfill its obligation with respect to the April Offer and correct the Error.
On
March 28, 2017, the Company filed a Certificate of Correction to amended the Certificate of Designation of the Preferred originally
filed with the Secretary of State of the State of Nevada on March 15, 2017 to increase the number of shares of Preferred by 52,080
to 1,160,941.
On
April 26, 2017, the Company entered into a Settlement Agreement with RK Equity Advisors, LLC, and Pickwick Capital Partners, LLC
(collectively “RKPCP”) pursuant to which the Company terminated the engagement letter with RKPCP including all provisions
and any obligations to pay future fees. As consideration for the termination the Company issued Pickwick Capital Partners, LLC
125,000 shares of Common Stock.
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 a new class of Series C Convertible Preferred Stock 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 $111,111, subject to reduction in the event of future sales of equity securities
and Common Stock equivalents (with customary exemptions) at a lower price. 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 has agreed to file a registration
statement covering the Common Stock issuable upon exercise of the registrable securities described below. The registration statement
will cover 47,302,176 shares of common underlying the Series A Warrants, Additional Warrants, and Bonus Warrants, which warrants
are described below:
15,873,600
Series A Warrants exercisable at $0.085 per share, subject to adjustment, over a five-year period;
15,714,288
Additional Warrants exercisable at $0.085 per share, subject to adjustment, 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
Series A Warrants and Additional Warrants have price protection in the event of future lower priced issuances.
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 was terminated. 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.
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.
Between
March 15, 2017 and December 19, 2017, the Company issued 81,856,798 shares of Common Stock for the cashless exercise of 111,244,318
warrants.
Between March 28, 2017
and December 31, 2017 , the Company issued 227,012,800 shares of Common Stock upon the conversion of 1,135,064
shares of Series B Convertible Preferred stock.
Between
November 27, 2017 and November 29, 2017, the Company issued 15,873,600 shares of Common Stock upon the conversion of 79,368 shares
of Series C Convertible Preferred stock.
On
November 27, 2017, the Company issued 2,941,200 shares of Common Stock upon the conversion of 14,706 shares of Series C-1 Convertible
Preferred stock.
On
December 7, 2017, the Company entered into an Amendment to Securities Agreement with the holders of a majority of the Company’s
outstanding Convertible Preferred Stock Series C-1 amending the terms of the Company’s May 2017 Securities Purchase Agreement,
the Company’s October 2017 Securities Purchase Agreement (the “October SPA”), the Certificate of Designations,
Preferences, and Rights of the Series C-1 Convertible Preferred Stock, and the terms of the Series A Warrants, Additional Warrants,
Bonus Warrants, and Series B Warrants. The Company issued, on a pro-rata basis to the subscribers of the October SPA a total of
4,400,000 shares of common stock of the Company.
The
sales of unregistered securities of our Company subsequent to the year ended December 31, 2017 are summarized below:
On
January 1, 2018, the Company issued 5,175,400 shares of Common Stock upon the conversion of 25,877 shares of Series B Convertible
Preferred stock.
All
of the above offerings and sales were deemed to be exempt under Section 4(a)(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number
of accredited investors, and transfer was restricted by us in accordance with the requirements of the Securities Act of 1933.
Each investor agreed that it was purchasing for investment and not with a view to distribution.
Item
16. Exhibits and Financial Statement Schedules
(1)
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Filed
herein
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(2)
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Management
contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
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(3)
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Contained
in Exhibit 5.1
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Item
17. Undertakings
(a)
The undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i)
To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii)
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the Calculation of Registration Fee table in the effective registration statement.
(iii)
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
(2)
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4)
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant
to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule
430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement
or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document immediately prior to such date of first use.
(b)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Burlington, State of Massachusetts on March 14 , 2018.
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BTCS
INC.
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By:
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/s/
Charles Allen
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Charles
W. Allen
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Chief
Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)
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Pursuant
to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature
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Title
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Date
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/s/ Charles Allen
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Chief Executive Officer and Chief Financial Officer
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March 14 , 2018
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Charles W. Allen
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(Principal Executive Officer and Principal Financial and Accounting Officer) and Chairman of the Board of Directors
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/s/ Michal Handerhan
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Director
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March 14 , 2018
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Michal Handerhan
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/s/ David Garrity
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Director
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March 14 , 2018
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David Garrity
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/s/ Jonathan Read
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Director
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March 14 , 2018
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Jonathan Read
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