ITEM
1 Financial Statements
BTCS
Inc. and Subsidiary
Condensed
Consolidated Balance Sheets
|
|
March
31, 2018
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|
|
December
31, 2017
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
167,037
|
|
|
$
|
303,334
|
|
Digital
currencies
|
|
|
199,920
|
|
|
|
616,352
|
|
Prepaid
expense
|
|
|
73,844
|
|
|
|
67,736
|
|
Total
current assets
|
|
|
440,801
|
|
|
|
987,422
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,113
|
|
|
|
1,235
|
|
Total
other assets
|
|
|
1,113
|
|
|
|
1,235
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
441,914
|
|
|
$
|
988,657
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expense
|
|
$
|
30,395
|
|
|
$
|
75,997
|
|
Total
current liabilities
|
|
|
30,395
|
|
|
|
75,997
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock; 20,000,000 shares authorized at 0.001 par value:
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred stock: 0 and 25,877 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively;
Liquidation preference 0.001 per share
|
|
|
-
|
|
|
|
25
|
|
Series
C-1 Convertible Preferred stock: 50,004 shares issued and outstanding at at March 31, 2018 and December 31, 2017; Liquidation
preference 0.001 per share
|
|
|
50
|
|
|
|
50
|
|
Common
stock, 975,000,000 shares authorized at 0.001 par value, 368,219,169 and 363,043,769 shares issued and outstanding at March
31, 2018 and December 31, 2017, respectively
|
|
|
368,219
|
|
|
|
363,044
|
|
Additional
paid in capital
|
|
|
114,661,930
|
|
|
|
114,667,080
|
|
Accumulated
deficit
|
|
|
(114,618,680
|
)
|
|
|
(114,117,539
|
)
|
Total
stockholders’ equity
|
|
|
411,519
|
|
|
|
912,660
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and stockholders’ equity
|
|
$
|
441,914
|
|
|
$
|
988,657
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BTCS
Inc. and Subsidiary
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
For
the three months ended
|
|
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
E-commerce
|
|
$
|
-
|
|
|
$
|
3,181
|
|
Total
revenues
|
|
|
-
|
|
|
|
3,181
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
255,661
|
|
|
|
179,386
|
|
Marketing
|
|
|
1,485
|
|
|
|
60
|
|
Total
operating expenses
|
|
|
257,146
|
|
|
|
179,446
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
|
(257,146
|
)
|
|
|
(176,265
|
)
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income:
|
|
|
|
|
|
|
|
|
Fair
value adjustments for warrant liabilities
|
|
|
-
|
|
|
|
(33,172,886
|
)
|
Fair
value adjustments for convertible notes
|
|
|
-
|
|
|
|
(16,849,071
|
)
|
Gain
on extinguishment of debt
|
|
|
-
|
|
|
|
15,873,067
|
|
Loss
from lease termination
|
|
|
-
|
|
|
|
(177,389
|
)
|
Liquidated
damages
|
|
|
-
|
|
|
|
(693,000
|
)
|
Revaluation
of digital currencies
|
|
|
(180,816
|
)
|
|
|
-
|
|
Realized
loss on sale of digital currencies
|
|
|
(63,179
|
)
|
|
|
-
|
|
Total
other expenses
|
|
|
(243,995
|
)
|
|
|
(35,019,279
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(501,141
|
)
|
|
$
|
(35,195,544
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(1.78
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic and diluted
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
368,219,169
|
|
|
|
19,730,929
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BTCS
Inc. and Subsidiary
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
For
the three months ended
|
|
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Net
Cash flows used from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(501,141
|
)
|
|
$
|
(35,195,544
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expenses
|
|
|
122
|
|
|
|
919
|
|
Change
in fair value of digital currencies
|
|
|
180,816
|
|
|
|
-
|
|
Fair
value adjustments for warrant liabilities
|
|
|
-
|
|
|
|
33,172,886
|
|
Fair
value adjustments for convertible notes
|
|
|
-
|
|
|
|
16,849,071
|
|
Realized
loss on sale of digital currencies
|
|
|
63,179
|
|
|
|
-
|
|
Gain
on extinguishment of debt
|
|
|
-
|
|
|
|
(15,873,067
|
)
|
Loss
from lease termination
|
|
|
-
|
|
|
|
177,389
|
|
Liquidated
damages
|
|
|
-
|
|
|
|
693,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
(6,108
|
)
|
|
|
-
|
|
Accounts
payable
|
|
|
(45,602
|
)
|
|
|
84,619
|
|
Net
cash used in operating activities
|
|
|
(308,734
|
)
|
|
|
(90,727
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of digital currencies
|
|
|
172,437
|
|
|
|
-
|
|
Net
cash (used in) provided by investing activities
|
|
|
172,437
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(136,297
|
)
|
|
|
(90,727
|
)
|
Cash,
beginning of period
|
|
|
303,334
|
|
|
|
95,068
|
|
Cash,
end of period
|
|
$
|
167,037
|
|
|
$
|
4,341
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
Conversion
of Series B Convertible Preferred Stock to common stock
|
|
$
|
5,175
|
|
|
$
|
6,340
|
|
Issuance
of common stock due to Anti-Dilution provision
|
|
$
|
-
|
|
|
$
|
14,517
|
|
Cashless
warrant exercise
|
|
$
|
-
|
|
|
$
|
4,534
|
|
Management
redemption from escrow account
|
|
$
|
-
|
|
|
$
|
400
|
|
Preferred
issued for conversion of notes
|
|
$
|
-
|
|
|
$
|
1,160
|
|
Fractional
shares adjusted for reverse split
|
|
$
|
-
|
|
|
$
|
4
|
|
Issuance
of common stock for settlement of debt
|
|
$
|
-
|
|
|
$
|
90,168,290
|
|
Preferred
converted to Common Stock
|
|
$
|
-
|
|
|
$
|
(32
|
)
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
1 - Business Organization and Nature of Operations
BTCS
Inc. (formerly Bitcoin Shop, Inc.), a Nevada corporation (the “Company”) was incorporated in 2008. In February 2014,
the Company entered the business of hosting an online ecommerce marketplace where consumers can purchase merchandise using digital
currencies, including bitcoin and is currently focused on blockchain and digital currency ecosystems. In January 2015, the Company
began a rebranding campaign using its BTCS.COM domain (shorthand for Blockchain Technology Consumer Solutions) to better reflect
its broadened strategy. The Company released its new website which included broader information on its strategy. In late 2014
we shifted our focus towards our transaction verification service business, also known as bitcoin mining, though in mid-2016 we
ceased our transaction verification services operation at our North Carolina facility due to capital constraints.
The
Company is an early entrant in the Digital Asset market and one of the first U.S. publicly traded companies to be involved with
Digital Assets and blockchain technologies. Subject to additional financing, the Company plans to create a portfolio of Digital
Assets including bitcoin and other “protocol tokens” to provide investors a diversified pure-play exposure to the
bitcoin and blockchain industries. The Company intends to acquire Digital Assets through open market purchases. 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 “1940 Act”) and seek to reduce
potential liabilities under the federal securities laws.
Note
2 - Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q
and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying condensed consolidated
financial statements do not include all of the information and notes required by GAAP for annual financial statements, but in
the opinion of the Company’s management, reflect all adjustments consisting of normal, recurring adjustments, that are necessary
for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim
results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and notes should
be read in conjunction with the financial statements and notes for the year ended December 31, 2017.
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.
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 $0.3 million of cash in its operating activities for the three months ended March 31, 2018. The Company incurred
$0.5 million net loss for the three months ended March 31, 2018. The Company had cash of approximately $0.17 million, digital
currencies of approximately $0.2 million and a working capital of approximately $0.4 million at March 31, 2018. 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 condensed
consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not
made adjustments to the accompanying condensed 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.
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
The
Company continues to incur ongoing administrative and other operating expenses, including public company expenses, in excess of
revenues. While the Company continues to implement its business strategy, it intends to finance its activities by:
|
●
|
managing
current cash and cash equivalents on hand from the Company’s past debt and equity offerings by controlling costs,
|
|
|
|
|
●
|
seeking
additional financing through sales of additional securities
|
Note
4 - Summary of Significant Accounting Policies
There
have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2017
Annual Report.
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary BTCS Digital
Manufacturing. All significant intercompany balances and transactions have been eliminated in consolidation.
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 March 31, 2018, and December 31, 2017, the Company had approximately $167,000 and $303,000 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.
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.
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.
Use
of Estimates
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“US GAAP”). This requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses during the period. The Company’s significant
estimates and assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, the valuation
of derivative liabilities, and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s
estimates, including the carrying amount of the intangible assets, could be affected by external conditions, including those unique
to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on
the Company’s estimates and could cause actual results to differ from those estimates and assumptions.
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.
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
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)
Net
Loss per Share
Basic
loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares
and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the Company’s
convertible preferred stock and warrants. Diluted loss per share excludes the shares issuable upon the conversion of preferred
stock 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 March 31, 2018 and 2017 because
their effect was anti-dilutive:
|
|
As
of March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
to purchase common stock
|
|
|
62,064,634
|
|
|
|
105,610,725
|
|
Series
B Convertible Preferred stock
|
|
|
-
|
|
|
|
225,848,200
|
|
Series
C-1 Convertible Preferred stock
|
|
|
10,000,800
|
|
|
|
-
|
|
Total
|
|
|
72,065,434
|
|
|
|
331,458,925
|
|
Adoption
of 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 adopted ASU 2014-09 on January 1, 2018, using the modified retrospective
approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s condensed consolidated financial position,
results of operations, equity or cash flows.
Note
5 - Fair Value Measurements
The
Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy.
The
following table presents information about the Company’s liabilities measured at fair value on a recurring basis and the
Company’s estimated level within the fair value hierarchy of those assets and liabilities as of March 31, 2018 and December
31, 2017:
|
|
Fair
value measured at March 31, 2018
|
|
|
|
Total
carrying value at March 31,
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2018
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
199,920
|
|
|
$
|
199,920
|
|
|
|
-
|
|
|
|
-
|
|
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
Fair
value measured at December 31, 2017
|
|
|
|
Total
carrying value at December 31,
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2017
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
616,352
|
|
|
$
|
616,352
|
|
|
|
-
|
|
|
|
-
|
|
There
were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2018.
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
currenciess at fair value - January 1, 2018
|
|
$
|
616,352
|
|
Realized
loss on sale of digital currencies
|
|
|
(63,179
|
)
|
Change
in fair value of digital currencies
|
|
|
(180,816
|
)
|
Proceeds
from sale of digital currencies
|
|
|
(172,437
|
)
|
Digital
Currency at fair value - March 31, 2018
|
|
$
|
199,920
|
|
Note
6 - Stockholders’ Equity
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.
Note
7 - Subsequent Events
On
April 4, 2018, the Company approved the sale and transfer of all 100 issued and outstanding shares of the Company’s super
voting Series A Preferred Stock (the “Series A”). Charles Allen, the Company’s Chief Executive Officer, sold
all 100 shares of the Series A to David Garrity, one of the Company’s directors.
During
April 2018 the Company issued 4,118,000 shares of Common Stock upon the conversion of 20,590 shares of Series C-1 Convertible
Preferred stock.
ITEM
2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain
statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking
statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans,
believes, seeks, estimates and similar expressions identify such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume
no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting
forward-looking statements. Factors that could cause or contribute to these differences include those discussed in the Risk Factors
contained in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 14, 2018.
Overview
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 “1940 Act”) and seek to reduce potential liabilities under the federal securities laws.
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.
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 stockholders. 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 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, participating in initial coin offerings. Additionally, the Company may
acquire digital assets by resuming its transaction verification services business through outsourced data centers and earning
rewards in digital assets by securing their respective blockchains.
We
continue to incur ongoing administrative and other expenses, including public company expenses, in excess of revenue and capital
raises. While we continue to implement our business strategy, we intend to finance our activities through:
●
|
managing
current cash and cash equivalents on hand from the Company’s recent equity offerings, and
|
|
|
●
|
seeking
additional funds raised through the sale of additional securities in the future.
|
Results
of Operations for the Three Months Ended March 31, 2018 and 2017
The
following table reflects our operating results for the three months ended March 31, 2018 and 2017:
|
|
For
the three months ended
|
|
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
E-commerce
|
|
$
|
-
|
|
|
$
|
3,181
|
|
Total
revenues
|
|
|
-
|
|
|
|
3,181
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
255,661
|
|
|
|
179,386
|
|
Marketing
|
|
|
1,485
|
|
|
|
60
|
|
Total
operating expenses
|
|
|
257,146
|
|
|
|
179,446
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
|
(257,146
|
)
|
|
|
(176,265
|
)
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income:
|
|
|
|
|
|
|
|
|
Fair
value adjustments for warrant liabilities
|
|
|
-
|
|
|
|
(33,172,886
|
)
|
Fair
value adjustments for convertible notes
|
|
|
-
|
|
|
|
(16,849,071
|
)
|
Gain
on extinguishment of debt
|
|
|
-
|
|
|
|
15,873,067
|
|
Loss
from lease termination
|
|
|
-
|
|
|
|
(177,389
|
)
|
Liquidated
damages
|
|
|
-
|
|
|
|
(693,000
|
)
|
Revaluation
of digital currencies
|
|
|
(180,816
|
)
|
|
|
-
|
|
Realized
loss on sale of digital currencies
|
|
|
(63,179
|
)
|
|
|
-
|
|
Total
other expenses
|
|
|
(243,995
|
)
|
|
|
(35,019,279
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(501,141
|
)
|
|
$
|
(35,195,544
|
)
|
Revenues
Revenues
for the three months ended March 31, 2018 and 2017 were approximately $0 and $3,000, respectively. Revenues represent net revenue
earned from the processing of customer transactions through our ecommerce website, through fees earned from our transaction verification
service business, and fees charged for hosting services.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2018 and 2017 were approximately $257,000 and $179,000, respectively. The increase
in operating expenses over the prior year mostly relates to increases in general and administrative expenses.
Other
Expenses
Other
expense for the three months ended March 31, 2018 and 2017 was approximately $0.2 million and $35.0 million, respectively. The
decrease in other expenses over the prior year primarily relates to increases in fair value adjustments for warrant liabilities
of $33.2 million, fair value adjustments for convertible notes of $16.8 million and is partially offset by gain on extinguishment
of debt of $15.9 million, all of which are non-cash expenses.
Net
Loss
Net
loss for the three months ended March 31, 2018 was approximately $0.5 million, net loss for the three months ended March 31, 2017
was approximately $35.2 million, respectively. The decrease in net loss for the three months ended March 31, 2018 resulted primarily
from fair value adjustments for warrant liabilities of $33.2 million, fair value adjustments for convertible notes of $16.8 million,
partially offset by gain on extinguishment of debt of $15.9 million.
Liquidity
and Capital Resources
Net
Cash from Operating Activities
Net
cash used in operating activities was approximately $0.3 million for the three months ended March 31, 2018. Net cash used in operating
activities for the three months ended March 31, 2018 was primarily driven by a $0.5 million net loss, partially offset by $0.2
million of change in fair value of digital currencies.
Net
cash used in operating activities was approximately $91,000 for the three months ended March 31, 2017. Net cash used in operating
activities for the three months ended March 31, 2017 was primarily driven by a $35.2 million net loss and gain on extinguishment
of debt of $15.9 million, offset by $33.2 million of fair value adjustment for warrant liabilities and $16.8 million of fair value
adjustment for convertible notes.
Net
Cash from Investing Activities
Net
cash provided by investing activities was $0.2 million for the three months ended March 31, 2018. The cash provided by investing
activities for the three months ended March 31, 2018, primarily resulted from approximately $0.2 million net proceeds from sale
of digital currencies.
Net
cash provided by investing activities was $0 for the three months ended March 31, 2017.
Net
Cash from Financing Activities
Net
cash provided by financing activities was $0 for the three months ended March 31, 2018 and 2017.
Liquidit
y
On
March 31, 2018, we had current assets of approximately $0.4 million and current liabilities of approximately $30,000, rendering
a working capital of approximately $0.4 million.
Our
working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. The Company
used approximately $0.1 million of cash in its operating activities for the three months ended March 31, 2018. The Company incurred
a $0.5 million net loss for the three months ended March 31, 2018. The Company had cash of approximately $0.2 million and working
capital of approximately $0.4 million at March 31, 2018. 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 condensed consolidated financial statements have been prepared assuming we will
continue as a going concern. We have not made adjustments to the accompanying condensed 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 the business strategy, we intend
to finance our 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.
|
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.
Principal
Accounting Estimates
In
response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, the Company has selected its most subjective accounting estimation processes for purposes of explaining the methodology
used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects
on the Company’s financial condition. These estimates involve certain assumptions that if incorrect could create a material
adverse impact on the Company’s results of operations and financial condition.
There
were no material changes to our principal accounting estimates during the period covered by this report.
RECENT
ACCOUNTING PRONOUNCEMENTS
For
information on recent accounting pronouncements, see Note 4 to the Unaudited Condensed Consolidated Financial Statements.
Cautionary
Note Regarding Forward-Looking Statements
This
report contains forward-looking statements including our liquidity and the Proposed Merger. Forward-looking statements can be
identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,”
“estimates,” “expects” and similar references to future periods.
Forward-looking
statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions.
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances
that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements.
We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical
fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially
from those in the forward-looking statements include our ability to raise capital on favorable terms and unanticipated issues
with respect to consummating our Proposed Merger.
Further
information on our risk factors is contained in our filings with the SEC, including our Form 10-K filed on March 14, 2018, as
it may be amended. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events
that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them.
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments
or otherwise, except as may be required by law.