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. 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
Company is also internally developing a digital asset data analytics platform to provide information to users, such as tracking
of multiple exchanges and wallets to aggregate portfolio holdings into a single platform to view and analyze performance, risk
metrics, and potential tax implications.
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.
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 unaudited 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, 2019.
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.
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 $1,115,000 of cash in its operating activities for the six months ended June 30, 2020. The Company incurred
approximately $790,000 net loss for the six months ended June 30, 2020. The Company had cash of approximately $84,000 and working
capital of approximately $62,000 at June 30, 2020. 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 Equity Line Purchase Agreement with Cavalry and seeking to obtain additional equity linked debt financing, 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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●
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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 2019
Annual Report.
Digital
Assets Translations and Remeasurements
Digital
Assets are included in current assets in the balance sheets. Digital Assets 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. Subsequent reversal of impairment losses is not permitted.
Realized
gain (loss) on sale of Digital Assets are included in other income (expense) in the statements of operations.
The
Company assesses impairment of Digital Assets quarterly if the fair value of digital assets is less than its cost basis. The Company
recognizes impairment losses on Digital Assets caused by decreases in fair value using the average U.S. dollar spot price of the
related Digital Asset as of each impairment date. Such impairment in the value of Digital Assets are recorded as a component of
costs and expenses in our statements of operations.
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.
BTCS Inc.
Notes to Unaudited Condensed Financial Statements
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, convertible notes and warrants. Diluted loss per share excludes the shares issuable upon the conversion
of preferred stock, notes 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, 2020 and 2019 because
their effect was anti-dilutive:
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As
of June 30,
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|
|
|
2020
|
|
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2019
|
|
Warrants to purchase common stock
|
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502,915
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1,229,710
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Series C-1 Convertible Preferred stock
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196,093
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|
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196,093
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Convertible notes
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4,048,583
|
|
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-
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Total
|
|
|
4,747,591
|
|
|
|
1,425,803
|
|
Recent
Accounting Pronouncements
In
December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting standards Update (“ASU”)
No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is
intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general
principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.
The Company is currently evaluating the impact of this standard on its financial statements and related disclosures.
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
2019
Promissory Note
On
November 7, 2019, the Company issued a $200,000 promissory note (the “2019 Promissory Note”). The 2019 Promissory
Note is due on August 7, 2020 and is: (i) convertible at a 20% discount to the closing price of the Company’s common stock
on the date before exercise with a floor price of $0.02 per share, (ii) shall bear interest at 12% per annum (payable at maturity)
and in the event of default bears interest at a rate of 20%, (iii) convertible at the Company’s option subject to certain
limitations as set forth in the 2019 Promissory Note, and (iv) may be prepaid by the Company. In addition, the Convertible Note
does not contain any embedded features that require bifurcation pursuant to ASC 815-15. At the issuance date, the Convertible
Note was convertible into 2,173,913 shares of common stock at $0.09 per share, but the Company’s fair value of underlying
common stock was $0.12 per share. As such, the Company recognized a beneficial conversion feature, resulting in a discount to
the Notes of approximately $50,000 with a corresponding credit to additional paid-in capital.
On
April 6, 2020, the Company issued a total of 735,294 shares of the Company’s common stock for the conversion of $50,000
of principal on the 2019 Promissory Note.
On
May 7, 2020, the Company issued a total of 632,736 shares of the Company’s common stock for the conversion of the
remaining $150,000 of principal and $2,000 of interest on the 2019 Promissory Note.
BTCS Inc.
Notes to Unaudited Condensed Financial Statements
On
May 11, 2020, the Company issued a total of 35,824 shares of the Company’s common stock for the conversion of the
remaining accrued interest of $9,458 on the 2019 Promissory Note.
During
the six months ended June 30, 2020, the Company recorded approximately $40,000 in interest expense related to amortization on
debt discount related to the 2019 Promissory Note.
During
the six months ended June 30, 2020, the Company recorded interest expense of approximately $7,900. As of June 30, 2020, the principal
balance of the 2019 Promissory Note was $0.
2020
Promissory Note
On
April 17, 2020, the Company issued Cavalry Fund I LP (the “Fund”) a $500,000 promissory note (the “2020 Promissory
Note”) in consideration for $500,000. The Promissory Note is (i) due on February 17, 2021, (ii) convertible at a 35% discount
to the closing price of the Company’s common stock on the date before exercise with a floor price of $0.01 per share and
(iii) shall bear interest at 12% per annum (payable at maturity). Subject to certain limitations, the Company may force conversion
of the 2020 Promissory Note. In addition, the Convertible Note does not contain any embedded features that require bifurcation
pursuant to ASC 815-15. At the issuance date, the Convertible Note was convertible into 7,770,008 shares of common stock
at $0.064 per share, but the Company’s fair value of underlying common stock was $0.099 per share. As such,
the Company recognized a beneficial conversion feature, resulting in a discount to the Notes of approximately $269,000
with a corresponding credit to additional paid-in capital.
During
the six months ended June 30, 2020, the Company recorded approximately $65,000 in interest expense related to amortization on
debt discount related to the 2020 Promissory Note. As of June 30, 2020, the remaining unamortized debt discount related to
the 2020 Promissory Note was approximately $204,000.
During
the six months ended June 30, 2020, the Company recorded interest expense of approximately $12,000. As of June 30, 2020, the principal
balance of the 2020 Promissory Note was $500,000.
Note
6 - Stockholders’ Equity
Issuance
of Shares Pursuant to Equity Line of Credit Purchase Agreement
On
September 5, 2019, the Company filed a second Registration Statement on Form S-1 seeking to register 6,454,000 shares. The second
Registration Statement was declared effective by the SEC on December 20, 2019.
During the six months
ended June 30, 2020, the Company issued 6,186,633 shares of common stock (including 24,219 pro-rata
commitment shares) under the second Registration Statement pursuant to the Purchase Agreement with Cavalry resulting in aggregate
proceeds of approximately $415,000.
On June 22, 2020, the Company
filed a third Registration Statement on Form S-1 seeking to register 9,045,000 shares. The third Registration Statement was declared
effective by the SEC on June 26, 2020.
During the six months
ended June 30, 2020, Company issued 769,369 shares of common stock (including 8,369 pro-rata commitment shares)
under the third Registration Statement pursuant to the Purchase Agreement with Cavalry resulting in aggregate proceeds
of approximately $143,000.
Issuance
of Shares Due to Conversion of 2019 Promissory Note
On
April 6, 2020, the Company issued a total of 735,294 shares of the Company’s common stock for the conversion of $50,000
of principal on the 2019 Promissory Note.
On
May 7, 2020, the Company issued a total of 632,736 shares of the Company’s common stock for the conversion of the
remaining $150,000 of principal and $2,000 of interest on the 2019 Promissory Note.
On
May 11, 2020, the Company issued a total of 35,824 shares of the Company’s common stock for the conversion of the
remaining accrued interest of $9,458 on the 2019 Promissory Note.
Note
7 - Subsequent Events
From
July 15, 2020 to July 21, 2020, the Company issued 1,945,158 shares of common stock (including 17,658 pro-rata commitment
shares) under the third Registration Statement pursuant to the Purchase Agreement with Cavalry resulting in aggregate proceeds
of approximately $302,000.