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 - Restatement of the Consolidated Financial Statements
The
purpose of restatement is to correct errors in the Company’s previously issued financial statements for the period ended
March 31, 2018 in connection with the accounting for digital currencies as intangible assets with indefinite lives and record
such digital currencies at cost less impairment, if any. Management determined that the Company’s digital currencies for
the three months ended March 31, 2018 were accounted for in error and were overstated by approximately $63,000.
The
originally filed accounting policy regarding digital currencies transactions and remeasurement stated that:
“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.”
The
updated accounting policy regarding digital currencies transactions and remeasurement state that:
“Digital
currencies are included in current assets in the consolidated balance sheets. Digital currencies are recorded at cost less impairment.
An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when
events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.
Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first
perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company
concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized,
the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent
reversal of impairment losses is not permitted.
Realized
gain (loss) on sale of digital currencies is included in other income (expense) in the consolidated statements of operations.”
The
effect of the restatement on the Company’s consolidated balance sheet as of March 31, 2018 are as follows:
|
|
March 31, 2018
|
|
|
|
As Previously Reported
|
|
|
Restatement Adjustment
|
|
|
As Restated
|
|
Digital currencies
|
|
$
|
199,920
|
|
|
$
|
(63,027
|
)
|
|
$
|
136,893
|
|
Total current assets
|
|
|
440,801
|
|
|
|
(63,027
|
)
|
|
|
377,774
|
|
Total Assets
|
|
|
441,914
|
|
|
|
(63,027
|
)
|
|
|
378,887
|
|
Accumulated deficit
|
|
|
(114,618,680
|
)
|
|
|
(63,027
|
)
|
|
|
(114,681,707
|
)
|
Total stockholders’ equity
|
|
|
411,519
|
|
|
|
(63,027
|
)
|
|
|
348,492
|
|
Total Liabilities and stockholders’ equity
|
|
|
441,914
|
|
|
|
(63,027
|
)
|
|
|
378,887
|
|
The
effect of the restatement on the Company’s consolidated statement of operations for the three months ended March 31, 2018
are as follows:
|
|
For the three months ended
March 31, 2018
|
|
|
|
As Previously Reported
|
|
|
Restatement Adjustment
|
|
|
As Restated
|
|
Total operating expenses
|
|
|
257,146
|
|
|
|
2
|
|
|
|
257,148
|
|
Net loss from operations
|
|
|
(257,146
|
)
|
|
|
(2
|
)
|
|
|
(257,148
|
)
|
Revaluation of digital currencies
|
|
|
(180,816
|
)
|
|
|
180,816
|
|
|
|
-
|
|
Realized gain (loss) on sale of digital currencies
|
|
|
(63,179
|
)
|
|
|
155,392
|
|
|
|
92,213
|
|
Total other expenses (income)
|
|
|
(243,995
|
)
|
|
|
336,207
|
|
|
|
92,213
|
|
Net loss
|
|
|
(501,141
|
)
|
|
|
336,206
|
|
|
|
(164,935
|
)
|
Basic and Diluted Loss per Share
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
Basic and Diluted Shares
|
|
|
368,219,169
|
|
|
|
-
|
|
|
|
368,219,169
|
|
The
effect of the restatement on the Company’s consolidated statement of cash flows for the three months ended March 31, 2018
are as follows:
|
|
For the three months ended March 31, 2018
|
|
|
|
As Previously Reported
|
|
|
Restatement Adjustment
|
|
|
As Restated
|
|
Net loss
|
|
$
|
(501,141
|
)
|
|
$
|
336,206
|
|
|
$
|
(164,935
|
)
|
Change in fair value of digital currencies
|
|
|
180,816
|
|
|
|
(180,816
|
)
|
|
|
-
|
|
Realized loss (gain) on sale of digital currencies
|
|
|
63,179
|
|
|
|
(155,392
|
)
|
|
|
(92,213
|
)
|
Net cash used in operating activities
|
|
|
(308,734
|
)
|
|
|
172,437
|
|
|
|
(136,297
|
)
|
Net cash provided by investing activities
|
|
|
172,437
|
|
|
|
(172,437
|
)
|
|
|
-
|
|
The
impact of the restatement has been reflected throughout these financial statements, including the applicable footnotes, as appropriate
Note
3 - 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
4 - 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 $0.1 million of cash in its operating activities for the three months ended March 31, 2018. The Company incurred
$0.2 million net loss for the three months ended March 31, 2018. The Company had cash of approximately $0.17 million, digital
currencies of approximately $0.1 million and a working capital of approximately $0.3 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
5 - 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
Digital
currencies are included in current assets in the consolidated balance sheets. Digital currencies are recorded at cost less impairment.
An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when
events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.
Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first
perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company
concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized,
the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent
reversal of impairment losses is not permitted.
Realized
gain (loss) on sale of digital currencies is included in other income (expense) in the consolidated statements of operations.
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.
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
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.