Notes
to Unaudited Condensed 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
Assets, 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.
Subject
to additional financing, the Company plans to acquire additional Digital Assets to provide investors with indirect ownership of
Digital Assets that are not securities, such as bitcoin and ether. 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. We are not limiting
our assets to a single type of Digital Asset and may purchase a variety of Digital Assets that appear to benefit our investors,
subject to the certain limitations regarding Digital Securities. The Company is also seeking to acquire controlling interests
in businesses in the blockchain industry.
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 or can only be sold to accredited
investors in the United States. 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. Further, the Company does not intend to participate in registered or unregistered
initial coin offerings. The Company will carefully review its purchases of Digital Securities to avoid violating 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.
Amendment
to Articles of Incorporation
On April 5, 2019, the
Company filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Nevada Secretary
of State to effect a one-for 30 reverse split of the Company’s class of common stock. The Amendment took effect on April
9, 2019. No fractional shares were or will be issued or distributed as a result of the Amendment. 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. The financial statements have been retroactively restated to reflect the reverse stock split.
Note
2 - Basis of Presentation
The
accompanying unaudited condensed 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 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 unaudited condensed financial statements and notes should be read in conjunction with the financial
statements and notes for the year ended December 31, 2018.
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.
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Financial Statements
Our
working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. The Company
used approximately $0.4 million of cash in its operating activities for the six months ended June 30, 2019. The Company incurred
$0.6 million net loss for the six months ended June 30, 2019. The Company had cash of approximately $0.6 million and a working
capital of approximately $91,000 at June 30, 2019. 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 equity financing, primarily through the Purchase
Agreement with Cavalry, however there are currently no other commitments of debt or equity 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 financial
statements have been prepared assuming the Company will continue as a going concern. The Company has not made adjustments to the
accompanying 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:
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managing
current cash and cash equivalents on hand from the Company’s past debt and equity offerings by controlling costs,
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seeking additional financing
through sales of additional securities whether through Cavalry or other investors.
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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 2018
Annual Report.
Use
of Estimates
The
accompanying unaudited condensed 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, if any, 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.
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 June 30, 2019 and 2018 because
their effect was anti-dilutive:
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As of June 30,
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2019
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2018
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Warrants to purchase common stock
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1,229,710
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2,068,821
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Series C-1 Convertible Preferred stock
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196,093
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196,093
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Total
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1,425,803
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2,264,914
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BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Financial Statements
Recent
Accounting Pronouncements
In August 2018, the SEC
adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements
that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements
on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in
each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The
analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of
comprehensive income is required to be filed. This final rule was effective November 5, 2018. The implementation of this
rule did not have a material impact on the Company’s condensed financial position, results of operations, equity or cash
flows.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future financial statements.
Note
5 - Note Payable
On
December 18, 2018, the Company issued a $200,000 promissory note to one institutional investor (the “Promissory Note”).
The Promissory Note is due on September 18, 2019 and bears interest at a rate of 12%. In the event of default, the Promissory
Note bears interest at a rate of 20%.
During
the six months ended June 30, 2019, the Company made no payment in connection with this Promissory Note and accrued interest expense
of approximately $12,000. As of June 30, 2019, the principal balance of the Promissory Note was $200,000 and accrued interest
on the note payable amounted to approximately $13,000.
Note
6 - Stockholders’ Equity
During
the six months ended June 30, 2019, the Company issued 725,564 shares of Common Stock for the cash exercise of Series A Warrants,
Additional Warrants, and Bonus Warrants resulting in aggregate proceeds of $200,000 to the Company.
On
April 18, 2019, the Company issued 16,860 shares of Common Stock in connection with the one-for 30 reverse split resulting from
the rounding up of fractional shares of Common Stock to the whole shares of Common Stock.
Purchase
Agreement
On May 13, 2019, the
Company entered into an equity line purchase agreement with Cavalry Fund I LP (“Cavalry”) (the “Purchase Agreement”)
pursuant to which Cavalry agreed to purchase from the Company, at Company’s sole discretion, up to $10,000,000 of
common stock (subject to certain limitations) from time to time over a 36-month period. In consideration for entering into the
$10 million Purchase Agreement, the Company issued to Cavalry 333,334 shares of common stock as a commitment fee and will issue
up to 583,334 shares of common stock pro rata as Cavalry purchases additional shares.
Concurrently with the
execution of the Purchase Agreement on May 13, 2019, the Company and Cavalry also entered into a registration rights agreement
(the “Registration Rights Agreement”), pursuant to which the Company agreed, among other things, to file a registration
statement (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”), no later
than May 23, 2019 to register for resale by Cavalry under the Securities Act of 1933 (the “Act”), the shares of common
stock that the Company may elect to issue and sell to Cavalry from time to time under the Purchase Agreement. The Registration
Rights Agreement provides that in the event the Company is unable to register sufficient shares under the Registration Statement,
the Company will be required to file additional registration statements such that sufficient registered shares are available for
issuance and sale to Cavalry under the Purchase Agreement.
The Company filed
a Registration Statement on Form S-1 seeking to register 4,374,741 shares. The Registration Statement was declared effective
by the SEC on May 28, 2019. Provided the Registration Statement remains current and effective and the conditions set
forth in the Purchase Agreement are satisfied, the Company may, from time to time and at its sole discretion, direct Cavalry to
purchase shares of the Company’s common stock during trading hours (“Intraday Puts”) and after trading hours
until 7 p.m. New York time (“Aftermarket Puts”) (either an Intraday Put or an Aftermarket Put may be referred to as
a “Put”). The Company may make multiple Puts each day subject to delivery of the shares associated with prior Puts.
The
number of shares that may be sold under an Intraday Put shall be equal to the total daily trading dollar volume (“Daily
Trading Dollar Volume”) for the trading day prior to the applicable Put date, divided by the Intraday Purchase Price (such
shares being the “Intraday Put Share Limit”). The “Intraday Purchase Price” means the lower of: (i) 94%
of the lowest sale price on the trading day prior to the applicable Put date, and (ii) 94% of the arithmetic average of the three
lowest closing prices for the Company’s common stock during the 12 consecutive trading days ending on the Trading Day immediately
preceding such Put date.
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Financial Statements
The
number of shares that may be sold under an Aftermarket Put shall be equal to the Daily Trading Dollar Volume, divided by the Aftermarket
Put Price (such shares being the “Aftermarket Put Share Limit”). The “Aftermarket Put Price” means: the
lower of: (i) the lowest Sale Price on the applicable Put date, and (ii) the arithmetic average of the three lowest closing prices
for the Company’s common stock during the 12 consecutive trading days ending on the trading day immediately preceding such
Put date.
Upon
mutual agreement of Cavalry and the Company and subject to written confirmation by Cavalry that such agreement will not result
in violation of the 4.99% beneficial ownership limitation, the Company may increase the Intraday Put Share Limit or the Aftermarket
Put Share Limit, as applicable, for any Put to include an amount equal to $2,000,000 in Put shares at the applicable Purchase
Price, in each case in addition to the applicable Intraday Put Share Limit or Aftermarket Put Share Limit. In all instances, the
Company may not sell shares of its common stock to Cavalry under the Purchase Agreement if it would result in Cavalry beneficially
owning more than 4.99% of the Company’s common stock or if the closing price the trading day immediately preceding the Put
date is below $0.005.
As
of June 30, 2019, the Company sold a total of 2,131,461 shares of common stock under the Purchase Agreement for total proceeds
of $685,006, net of cost of $10,000.
Note
7 - Subsequent Events
From
June 30, 2019 through July 10, 2019, the Company sold a total of 1,092,308 shares of common stock under the Purchase Agreement
for total proceeds of $318,105.