UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

Amendment No. 1

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

or

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ______________

 

Commissions file number 000-55141

 

BTCS Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   90-1096644

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

9466 Georgia Avenue #124, Silver Spring, MD   20910
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (202) 430-6576

 

Securities registered under Section 12(b) of the Exchange Act: None.

 

Securities registered under Section 12(g) of the Exchange Act:

 

Common Stock, $0.001 par value

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
Emerging growth company [  ]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

As of June 28, 2019 the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $5,895,908, based on the closing sales price of Common Stock of $0.375 on June 28, 2019.

 

As of March 9, 2020, the registrant had 24,213,051 shares of Common Stock outstanding.

 

 

 

   

 

 

EXPLANATORY NOTE

 

This is Amendment No. 1 on Form 10-K/A (“Amendment”) to the Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as originally filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2020 (the “Original Form 10-K”) by BTCS Inc. (the “Company”, “we”, “us”, or “our”). The purpose of this Amendment is to correct an error in the Company’s previously issued financial statements for the period ended December 31, 2019 (as well as related disclosure within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations) in connection with the classification of the $374,979 purchase of digital currencies in the statement of cash flows. The $374,979 purchase of digital currencies has now been re-classified from an investing activity to an operating activity in the statement of cash flows. See pages F-5 and F-6 of this Amendment.

 

In addition, the Exhibit Index in Item 15 of Part IV of the Original Form 10-K is hereby amended and restated in its entirety and currently dated certifications required under the Sarbanes-Oxley Act of 2002 are filed (or furnished) as exhibits to this Amendment.

 

Except as described above, no other changes have been made to the Original Form 10-K. The Original Form 10-K continues to speak as of the filing date of the Original Form 10-K, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Form 10-K other than as expressly indicated in this Amendment. Accordingly, this Amendment should be read in conjunction with the Original Form 10-K and the Company’s filings with the SEC after the filing of the Original Form 10-K.

 

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BTCS INC.

TABLE OF CONTENTS

 

    Page
     
PART II    
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
     
PART IV    
     
Item 15. Exhibits and Financial Statement Schedules 25

 

  2  
 

 

PART II

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

INTRODUCTION

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our historical financial statements and the notes to those statements that appear elsewhere in this report. Certain statements in the discussion contain forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Risk Factors” and elsewhere in this report.

 

OVERVIEW

 

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 limitations contained within this report regarding Digital Securities. 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.

 

We are also focused on Digital Assets and blockchain technologies. We are currently internally developing a digital asset data analytics platform aimed at aggregating users’ information, 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 platform utilizes digital asset exchange APIs to read user data and does not allow for the trading of assets.

 

The Company is also seeking to acquire controlling interests in businesses in the blockchain industry as further described in this report. We plan to continue to evaluate other strategic opportunities including acquiring controlling interests in business in this rapidly evolving sector in an effort to enhance shareholder value. Even though the prices of Digital Assets have been subject to substantial volatility and there remains some regulatory uncertainty, we believe that businesses using blockchain technology and those involved with Digital Assets such as bitcoin and ether, offer upside opportunity and are the types of opportunities that we may pursue.

 

We cannot assure you we will be successful in raising sufficient capital to implement our full business plan or assuming we can, that we will be able to develop a successful business. For further information please see Part 1, Item 1 “Business.”

 

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 

    For the years ended  
    December 31,  
    2019     2018  
             
Operating expenses:                
General and administrative   $ 1,422,394     $ 986,525  
Marketing     9,989       3,644  
Total operating expenses     1,432,383       990,169  
                 
Other (expense) income:                
Interest expense     (86,142 )     -  
Impairment loss on digital currencies     (121,117 )     -  
Realized (loss) gain on digital currencies transactions     (959 )     163,749  
Total other (expenses) income     (208,218 )     163,749  
                 
Net loss   $ (1,640,601 )   $ (826,420 )
Deemed dividend related to reduction of warrant strike price     (95,708 )     (5,600 )
Net loss attributable to common stockholders   $ (1,736,309 )   $ (832,020 )

 

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Operating expenses

 

Operating expenses for the years ended December 31, 2019 and 2018 were approximately $1.4 million and $1.0 million. The slight increase in operating expenses over the prior year mostly relates to increases in general and administrative expenses as a result of salary increases to our executive management team.

 

Other Expenses

 

Other expenses for the year ended 2019 was approximately $208.2 thousand and other income for the year ended 2018 was approximately $163.7 thousand. The decrease in other income over the prior year primarily relates to decrease in realized gain on sale of digital currencies, an increase in interest expense related to debt discount amortization and an increase in impairment loss on digital currencies.

 

Net loss attributable to common stockholders

 

We incurred $95,708 and $5,600 of deemed dividend related to reduction of warrant strike price during the year ended December 31, 2019 and 2018, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

As of December 31, 2019, the Company had approximately $143 thousand of cash and $253 thousand in Digital Assets.

 

We will require significant additional capital to sustain short-term operations and make the investments needed to execute our longer-term business plan and repay our existing debt of $200,000 which becomes due on August 7, 2020. Our existing liquidity is not sufficient to fund operations and anticipated capital expenditures for the foreseeable future, and we will not have sufficient cash resources to support our current operations for the next 12 months.

 

We do not have sufficient capital to meet our expenses over the 12 months from the date of this report. Our current cash is not sufficient to sustain operations. We will require significant additional capital to sustain short-term operations and make the investments needed to execute our longer-term business plan. If we attempt to obtain additional debt or equity financing, we cannot provide assurance that such financing will be available to us on favorable terms, if at all.

 

During 2019 through the date of this report, the Company received $1,479,410 in exchange for 8,603,986 shares of common stock (excluding 419,652 commitment and pro-rata commitment shares) in connection with the $10 million Purchase Agreement with Cavalry Fund I LP.

 

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, whether through our $10 million Purchase Agreement or other sources. If we attempt to obtain additional debt or equity financing or are unable to rely on the $10 million Purchase Agreement for any reason, 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 audited financial statements have been prepared assuming we will continue as a going concern. We have not made adjustments to the accompanying audited financial statements to reflect the potential effects on the recoverability and classification of assets or liabilities should we be unable to continue as a going concern.

 

We continue to incur ongoing administrative and other expenses, including public company expenses, primarily accounting and legal fees, in excess of corresponding (non-financing related) revenue. While we continue to implement its business strategy, it intends to finance its activities through:

 

managing current cash and cash equivalents on hand from the Company’s past equity offerings, and
seeking additional funds raised through the sale of additional securities in the future.

 

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GOING CONCERN AND MANAGEMENT PLANS

 

The audited financial statements for the year ended December 31, 2019, have been prepared on a going concern basis, which implies that we will continue to realize our assets and discharge our liabilities and commitments in the normal course of business. We have not generated revenues during the years ended December 31, 2019 and 2018 and have never paid any dividends and are unlikely to pay dividends or generate substantial earnings in the immediate or foreseeable future. Our continuation as a going concern is dependent upon the continued financial support from our shareholders, the ability of our company to obtain necessary financing to achieve our operating objectives, and the attainment of profitable operations. As of December 31, 2019, we have an accumulated deficit of $117.0 million since inception. As we do not have sufficient funds for our planned or new operations, we will need to raise additional funds for operations. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

 

The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or convertible debt securities by us could result in a significant dilution in the equity interests of our current 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 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. See “Risk Factors” at page 6.

 

Off Balance Sheet Arrangements

 

As of December 31, 2019, there were no off-balance sheet arrangements.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:

 

Accounting Treatment of Digital Assets

 

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 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 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 was less than its cost basis on any day during the quarter. 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. There were no impairment losses related to Digital Assets during the year ended December 31, 2018. The Company recorded an impairment loss of approximately $121 thousand related to Digital Assets during the year ended December 31, 2019.

 

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Recent Accounting Pronouncements

 

See Note 4 to the financial statements for a discussion of recent accounting standards and pronouncements.

 

RISK FACTORS

 

There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment.

 

Risks Related to Our Company

 

We need to secure additional financing.

 

We require additional funds since we have very limited operating capital and negative working capital. As of March 9, 2020, we had approximately $247,500 in cash and the fair market value of our Digital Assets was approximately $349,346. Our cash as of the date of this report is expected, to only be sufficient to cover our public company costs through August 2020 depending on expenses which excludes: i) the repayment of the $200,000 convertible promissory note (the “2019 Promissory Note”), and ii) the payment of accrued and unpaid compensation to our executives.

 

We anticipate that we will incur operating losses for the foreseeable future.

 

Our cash burn rate is approximately $80,000 per month, may increase as we continue to spend additional cash on legal and accounting expenses in connection with our public reporting requirements. If we are not successful in securing additional financing including toxic funding, we will likely be required to cease operations.

 

If we do not raise additional debt or equity capital, we may not be able to pay all of our indebtedness.

 

In May 2019, we signed a Purchase Agreement with Cavalry. We may direct Cavalry to purchase shares of our common stock up to $10,000,000 under the Purchase Agreement over a 36-month period assuming there is an effective registration statement covering the shares.

 

The extent we rely on Cavalry as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and volume of trading and the extent to which we are able to secure working capital from other sources. If obtaining sufficient funding from Cavalry does not occur for any reason including Cavalry suffering liquidity issues or failure of the Company to keep the registration statement current, we will need to secure another source of funding in order to satisfy our working capital needs. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.

 

If we do not raise the necessary working capital, we will not be able to remain operational.

 

Our auditors have issued a “going concern” audit opinion.

 

Our independent auditors have indicated in their report on our December 31, 2019 and 2018 financial statements that there is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. Therefore, you should not rely on our balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to shareholders, in the event of liquidation.

 

We have a limited operating history and a history of operating losses, and expect to incur significant additional operating losses.

 

We have a limited operating history. Therefore, there is limited historical financial information upon which to base an evaluation of our performance. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages of operations. We have generated net losses of $1.7 million and $0.8 million for the years ended December 31, 2019 and 2018, respectively. We expect to incur additional net losses over the next several years as we seek to expand operations. The amount of future losses and when, if ever, we will achieve profitability are uncertain. If we are unsuccessful at executing on our business plan, our business, prospects, and results of operations may be materially adversely affected.

 

We have an evolving business model.

 

As Digital Assets and blockchain technologies become more widely available, we expect the services and products associated with them to evolve. In 2017, the SEC issued a DAO Report that promoters that use initial coin offerings or token sales to raise capital may be engaged in the offer and sale of securities in violation of the Securities Act and the Securities Exchange Act of 1934 (the “Exchange Act”). This may cause us to potentially change our future business in order to comply fully with the federal securities laws as well as applicable state securities laws. As a result, to stay current with the industry, our business model may need to evolve as well. From time to time we may modify aspects of our business model relating to our product mix and service offerings. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to the business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results.

 

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The loss of our executive officers Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, could have a material adverse effect on us.

 

Our success depends solely on the continued services of our executive officers, particularly Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, who have extensive market knowledge and long-standing industry relationships. In particular, our reputation among and our relationships with key Digital Asset industry leaders are the direct result of a significant investment of time and effort by these individuals to build our credibility in a highly specialized industry. The loss of services of either Charles Allen or Michal Handerhan, could diminish our business and growth opportunities and our relationships with key leaders in the Digital Asset industry and could have a material adverse effect on us.

 

In the past as we suffered liquidity concerns, we were unable to pay these officers. Neither exercised their right to terminate their employment agreement.

 

As a result of the Company’s past inability to compensate its officers at generally accepted market levels and its historic failure to either make payroll or make payroll on a timely basis, its officers choose to devote a substantial amount of their time to involvement with other companies or on other projects. Although our officers are now receiving compensation for their services, we can provide no assurances that we will not suffer liquidity issues in the near future as we implement our business plan. If the Company is unable to pay our officers their compensation, they may again devote time to other projects which may have a material adverse effect on us.

 

The loss of Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, would have a material adverse effect on us.

 

The simultaneous loss of services of both Charles Allen and Michal Handerhan, would result in the Company having no officers or employees and would subsequently cease all operations which would have a material adverse effect on us. See the second risk factor below on the loss of our executive officers and employees.

 

Michal Handerhan our Chief Operating Officer has notified the Company that in the event of the departure of Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer from the Company he may terminate his employment and may resign as an officer and director of the Company, which would have a material adverse effect on us.

 

We have no other officers and only one other director. The simultaneous loss of Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, would have a material adverse effect on us. Their Employment Agreements permit them to resign for Good Reason which includes non-payment of salaries. In the event both of officers terminate their Employment Agreements for Good Reason, this would result in the Company owing them $585,200 and would leave the Company without officers or employees which may have a material adverse effect upon us, your investment and the ability of the Company to continue operations.

 

Any inability to attract and retain additional personnel could affect our ability to successfully grow our business.

 

Our future success depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense. Our failure to retain and attract the necessary technical, managerial, editorial, merchandising, marketing, and customer service personnel could harm our business.

 

We may need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization and to satisfy new reporting requirements.

 

We are required to comply with a variety of reporting, accounting and other rules and regulations. Compliance with existing requirements is expensive. We may need to implement additional finance and accounting systems, procedures and controls to satisfy our reporting requirements and such further requirements may increase our costs and require additional management time and resources. Our internal control over financial reporting is determined to be ineffective. Such failure could cause investors to lose confidence in our reported financial information, negatively affect the market price of our common stock, subject us to regulatory investigations and penalties, and adversely impact our business and financial condition.

 

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

 

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, estimating valuation allowances and accrued liabilities (including allowances for returns, credit card chargebacks, doubtful accounts and obsolete and damaged inventory), internal use software and website development (acquired and developed internally), accounting for income taxes, valuation of long-lived and intangible assets and goodwill, stock-based compensation and loss contingencies, are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance.

 

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Natural disasters and geo-political events could adversely affect our business.

 

Natural disasters, including hurricanes, cyclones, typhoons, tropical storms, floods, earthquakes and tsunamis, weather conditions, including winter storms, droughts and tornados, whether as a result of climate change or otherwise, and geo-political events, including civil unrest or terrorist attacks, that affect us or other service providers could adversely affect our business.

 

Since there has been limited precedence set for financial accounting of Digital Assets other than Digital Securities, it is unclear how we will be required to account for Digital Asset transactions in the future.

 

Since there has been limited precedence set for the financial accounting of Digital Assets other than Digital Securities, it is unclear how we will be required to account for Digital Asset transactions or assets. Furthermore, a change in regulatory or financial accounting standards could result in the necessity to restate our financial statements. Such a restatement could negatively impact our business, prospects, financial condition and results of operation.

 

We are subject to the information and reporting requirements of the Exchange Act), and other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).

 

The costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited reports to shareholders will cause our expenses to be higher than they would have been if we were privately held. It may be time consuming, difficult and costly for us to develop, implement and maintain the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures.

 

If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our Common Stock. During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2018, management identified a significant deficiency in our disclosure controls and procedures which may lead to a failure to prevent or detect misstatements.

 

Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2018, management identified a significant deficiency related to presence of weakness in our disclosure control and procedure resulting from limited internal audit functions. Because of our inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with any policies and procedures may deteriorate.

 

Because we lack effective internal controls and disclosure controls we erroneously accounted for Digital Assets using a fair value methodology which was not consistent with United States generally accepted accounting principles (“US GAAP”) and required us to restate our financial statements for the year ended December 31, 2017 and the three and six months ended March 31, 2018 and June 30, 2018, our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations which could have a material adverse effect on our financial condition.

 

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. As discussed in this report, our internal controls and disclosure controls were not effective as of December 31, 2018. Because of our ineffective controls and material weaknesses, we did not account for our Digital Assets correctly in our financial statements and restated our audited financial statements for the year ended December 31, 2017 and the unaudited financial statements for the quarters ended March 31, 2018 and June 30, 2018.

 

A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

While the Company is now following US GAAP in accounting for its Digital Assets, it has not remediated its material weaknesses. There can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise in the future. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, could result in material misstatements in our financial statements and cause us to fail to meet our reporting and financial obligations, which in turn could have a material adverse effect on our financial condition and the trading price of our Common Stock.

 

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Public company compliance may make it more difficult to attract and retain officers and directors.

 

The Sarbanes-Oxley Act and rules implemented by the Securities and Exchange Commission have required changes in corporate governance practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs in 2019 and beyond and to make certain activities more time consuming and costly. The impact of the SEC’s July 25, 2017 report on Digital Securities (the “DAO Report”) as well as recent enforcement actions and speeches made by the SEC’s Chairman will increase our compliance and legal costs. More recently, the SEC’s Chairman commented that most initial coin offerings (a type of Digital Asset) involve the offer of a Digital Security. As a public company, we also expect that these rules and regulations will make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, and to maintain insurance at reasonable rates, or at all.

 

Our stock price may be volatile.

 

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

changes in our industry including changes which adversely affect bitcoin and other Digital Assets;
sales by Cavalry;
competitive pricing pressures;
continued volatility in the stock prices of Digital Assets issuers;
continued volatility in the price of bitcoin and other Digital Assets;
our ability to obtain working capital financing;
additions or departures of key personnel including our executive officers;
sales of our common stock;
conversion of our Series C-1 Convertible Preferred Stock and the subsequent sale of the underlying common stock;
conversion of our convertible notes and the subsequent sale of the underlying common stock;
exercise of our warrants and the subsequent sale of the underlying common stock;
our ability to execute our business plan;
operating results that fall below expectations;
loss of any strategic relationship;
regulatory developments; and
economic and other external factors.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. As a result, you may be unable to resell your shares at a desired price.

 

We have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our Common Stock.

 

We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.

 

There is currently a limited trading market for our Common Stock and we cannot ensure that one will be sustained.

 

Our shares of common stock are not traded on a national securities exchange, and the price, may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common stock in the future. The market liquidity will be dependent on the perception of our operating business, among other things. We may, in the future, take certain steps, including utilizing investor awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might take to bring us to the awareness of investors may require we compensate consultants with cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment at a price that reflects the value of the business and trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers of our shares. The price of our common stock has been highly volatile. Because there may be a low price for our shares of common stock and because of our involvement in the Digital Asset business, many brokerage firms or clearing firms may not be willing to effect transactions in the securities or accept our shares for deposit in an account. Even if an investor finds a broker willing to effect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of low priced shares of common stock as collateral for any loans.

 

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Because our Common Stock does not trade on a national securities exchange, the prices of our Common Stock may be more volatile and lower than if we were listed.

 

Our common stock trades on the OTCQB operated by OTC Markets Group Inc. This market is not a national securities exchange. While our common stock trading has been relatively active, generally the OTCQB does not have the same level of activity as a national securities exchange like Nasdaq. Most institutions will not purchase a security unless it is on a national securities exchange. In addition, they do not purchase stocks that trade below $5 per share. We may, in the future, take certain steps, including utilizing investor awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might take to bring us to the awareness of investors may require we compensate consultants with cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business and trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers of our shares.

 

Our Common Stock is deemed a “penny stock,” which would make it more difficult for our investors to sell their shares.

 

Our common stock is subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules generally apply to companies whose common stock is not listed on the Nasdaq Stock Market or other national securities exchange or trades at less than $5.00 per share. These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. Because our common stock is subject to the penny stock rules, investors will find it more difficult to dispose of our securities.

 

Our articles of incorporation allow for our board to create new series of preferred stock without further approval by our shareholders, which could adversely affect the rights of the holders of our Common Stock.

 

Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further shareholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing shareholders.

 

Substantial future sales of our Common Stock by us or by our existing shareholders could cause our stock price to fall.

 

Additional equity financings (in addition to the shares issued under the Purchase Agreement) or other share issuances by us, including shares issued in connection with strategic alliances and corporate partnering transactions, and shares issued on the conversion of outstanding notes, could adversely affect the market price of our Common Stock. Sales by existing shareholders of a large number of shares of our Common Stock in the public market or the perception that additional sales could occur could cause the market price of our Common Stock to drop.

 

We may be accused of infringing intellectual property rights of third parties.

 

We may be subject to legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability of damages, royalties and the potential for injunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted by third parties whose sole or primary business is to assert such claims. Such claims, even if not meritorious, may result in significant expenditure of financial and managerial resources, and the payment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or business processes we currently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may not be available on financially feasible terms or terms acceptable to us or at all. In addition, we may not be able to obtain on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing ecommerce services to other businesses and individuals under commercial agreements.

 

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Any current or future outbreak of a health epidemic or other adverse public health developments, such as the pneumonia caused by the COVID-19 coronavirus, could disrupt our operations and may affect the price of digital assets and adversely affect our business.

 

Our business could be adversely affected by the effects of health epidemics. For example, we rely on our limited staff for our continued operations and have no contingency plans and limited resources if anyone was to be affected by the coronavirus. Further consequences of the COVID-19 outbreak may have a material affect on the digital asset market. Our business could be adversely affected to the extent that the COVID-19 outbreak evolves into a worldwide health crises.

 

Risks Related to the Bitcoin Network and Bitcoins

 

The following risks relate to our proposed business and the effects upon us assume we obtain financing in a sufficient amount to re-enter this business.

 

The further development and acceptance of the Bitcoin Network and other Digital Asset systems, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of the Bitcoin Network may adversely affect an investment in our Company.

 

Digital Assets such as bitcoins that may be used, among other things, to buy and sell goods and services are a new and rapidly evolving industry of which the Bitcoin Network is a prominent, but not unique, part. The growth of the Digital Assets industry in general, and the Bitcoin Network in particular, is subject to a high degree of uncertainty. The factors affecting the further development of the Digital Assets industry, as well as the Bitcoin Network, include:

 

continued worldwide growth in the adoption and use of bitcoins and other Digital Assets;
   
government and quasi-government regulation of bitcoins and other Digital Assets and their use, or restrictions on or regulation of access to and operation of the Bitcoin Network or similar Digital Assets systems;
   
the maintenance and development of the open-source software protocol of the Bitcoin Network;
   
changes in consumer demographics and public tastes and preferences;
   
the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;
   
general economic conditions and the regulatory environment relating to Digital Assets; and
   
the impact of regulators focusing on Digital Assets and Digital Securities and the costs associated with such regulatory oversight.
   
  A decline in the popularity or acceptance of the Bitcoin Network could adversely affect an investment in us.

 

Because Digital Assets may be determined to be Digital Securities, we may inadvertently violate the 1940 Act and incur large losses as a result and potentially be required to register as an investment company or terminate operations.

 

Digital Assets we may own in the future may be determined to be Digital Securities by the SEC or a court. If a Digital Asset we were to hold was later determined to be a Digital Security, we could inadvertently become an investment company, as defined by the 1940 Act, if the value of the Digital Securities we owned exceeded 40% of our assets excluding cash. We are subject to the following risks:

 

Contrary to legal advice, the SEC or a court may conclude that bitcoin, ether, or other Digital Assets we later acquire to be securities;

   
based on legal advice, we may acquire other Digital Assets which we have been advised are not securities but later are held to be securities;
   
we may knowingly acquire Digital Assets that are securities and acquire minority investments in businesses which investments are securities; and
   
regardless of the internal procedures we take to avoid surpassing the 40% threshold, future volatility during the course of a day may cause use to exceed the 40% threshold.

 

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If we exceed the test, we will have one-year to reduce our holdings of securities below the 40% threshold. However, that can only occur once during a three-year period. Accordingly, if changes in the classification of Digital Assets causes us to exceed the 40% threshold, we may experience large losses when we liquidate securities as a result of continued volatility. Further, if we elect to sell a private investment, not only may it be difficult to find a buyer but we could incur a significant loss on the sale of a private investment due to not only the lack of liquidity but also the entity’s poor performance. If we are able to come below the 40% threshold and again face the same problem, it is likely we will be forced to terminate operations, sell all assets and distribute cash to our shareholders who will likely suffer very large losses. Further, the cost of distributing cash to our shareholders may exceed the amount of cash on hand in which case we would use our remaining funds to wind down the Company.

 

If We Acquire Digital Securities, Even Unintentionally, We May Violate the Investment Company Act and Incur Potential Third-Party Liabilities

 

We expect that if we obtain sufficient financing, we will acquire a portfolio of Digital Assets including bitcoins, ether and Digital Securities. There is an increased regulatory examination of Digital Assets and Digital Securities. This has led to regulatory and enforcement activities. In order to limit our acquisition of Digital Securities to stay within the 40% threshold, we will examine the manner in which Digital Assets were initially marketed to determine if they may be deemed Digital Securities and subject to federal and state securities laws. Even if we conclude that a particular Digital Asset is not a security under the Securities Act, certain states including California take a stricter view of the term “investment contract” which means the Digital Asset may have violated applicable state securities laws. This will result in increased compliance costs and legal fees. If our examination of a Digital Asset is incorrect, we may incur regulatory penalties and private investor liabilities since Section 5 of the Securities Act is a strict liability statute much like selling spoiled milk and state securities laws generally impose liability for negligence for misrepresentations.

 

Currently, there is relatively small use of bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect an investment in us.

 

As relatively new products and technologies, bitcoins and the Bitcoin Network have only recently become widely accepted as a means of payment for goods and services by many major retail and commercial outlets, and use of bitcoins by consumers to pay such retail and commercial outlets remains limited. Conversely, a significant portion of bitcoin demand is generated by speculators and investors seeking to profit from the short- or long-term holding of bitcoins. A lack of expansion by bitcoins into retail and commercial markets, or a contraction of such use, may result in increased volatility or a reduction in the price of bitcoin, either of which could adversely impact an investment in us.

 

Because Facebook is seeking to develop a cryptocurrency, it may adversely affect the value of bitcoins and Digital Assets.

 

In May 2019, Facebook announced its plans for a cryptocurrency called Libra. The massive social network and 27 other partners are touting the Libra digital coin and Facebook’s corresponding digital wallet, Calibra, as a way to make sending payments around the world as easy as it is to send a photo. Because Facebook is a leader in social media, when and if it launches its coins, it could adversely affect the value of bitcoins and Digital Assets. In July 2019, Facebook announced that Libra will not launch until all regulatory concerns have been met. In October 2019, many partners left the Libra Association including Paypal, eBay, Mastercard, Stripe, and Visa.

 

Significant Bitcoin Network contributors could propose amendments to the Bitcoin Network’s protocols and software that, if accepted and authorized by the Bitcoin Network, could adversely affect an investment in us.

 

A small group of individuals contribute to the Bitcoin Core project on Github. This group of contributors is currently headed by Wladimir J. van der Laan, the current lead maintainer. These individuals can propose refinements or improvements to the Bitcoin Network’s source code through one or more software upgrades that alter the protocols and software that govern the Bitcoin Network and the properties of bitcoin, including the irreversibility of transactions and limitations on the mining of new bitcoin. Proposals for upgrades and discussions relating thereto take place on online forums. For example, there is an ongoing debate regarding altering the Blockchain by increasing the size of blocks to accommodate a larger volume of transactions. Although some proponents support an increase, other market participants oppose an increase to the block size as it may deter miners from confirming transactions and concentrate power into a smaller group of miners. To the extent that a significant majority of the users and miners on the Bitcoin Network install such software upgrade(s), the Bitcoin Network would be subject to new protocols and software that may adversely affect an investment in the Shares. In the event a developer or group of developers proposes a modification to the Bitcoin Network that is not accepted by a majority of miners and users, but that is nonetheless accepted by a substantial plurality of miners and users, two or more competing and incompatible Blockchain implementations could result. This is known as a “hard fork.” In such a case, the “hard fork” in the Blockchain could materially and adversely affect the perceived value of bitcoin as reflected on one or both incompatible Blockchains, which may adversely affect an investment in us.

 

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Bitcoin has recently forked and additional forks may occur in the future which may affect the value of bitcoin held by the Company.

 

Since August 1, 2017, bitcoin’s blockchain was forked three times creating Bitcoin Cash, Bitcoin Gold and Bitcoin SV. The forks resulted in a new blockchain being created with a shared history, and a new path forward. The value of the newly created Bitcoin Cash, Bitcoin Gold and Bitcoin SV may or may not have value in the long run and may affect the price of bitcoin if interest is shifted away from bitcoin to the newly created Digital Assets. The value of bitcoin after the creation of a fork is subject to many factors including the value of the fork product, market reaction to the creation of the fork product, and the occurrence of forks in the future. As such, the value of bitcoin could be materially reduced if existing and future forks have a negative effect on bitcoin’s value.

 

The open-source structure of the Bitcoin Network protocol means that the contributors to the protocol are generally not directly compensated for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could damage the Bitcoin Network and an investment in us.

 

The Bitcoin Network operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core project on GitHub. As an open source project, Bitcoin is not represented by an official organization or authority. As the Bitcoin Network protocol is not sold and its use does not generate revenues for contributors, contributors are generally not compensated for maintaining and updating the Bitcoin Network protocol. Although the MIT Media Lab’s Digital Currency Initiative funds the current maintainer Wladimir J. van der Laan, among others, this type of financial incentive is not typical. The lack of guaranteed financial incentive for contributors to maintain or develop the Bitcoin Network and the lack of guaranteed resources to adequately address emerging issues with the Bitcoin Network may reduce incentives to address the issues adequately or in a timely manner. This may adversely affect an investment in us.

 

If a malicious actor or botnet obtains control in excess of 50 percent of the processing power active on the Bitcoin Network, it is possible that such actor or botnet could manipulate the Blockchain in a manner that adversely affects an investment in us.

 

If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power dedicated to mining on the Bitcoin Network, it may be able to alter the Blockchain on which the Bitcoin Network and all bitcoin transactions rely by constructing alternate blocks if it is able to solve for such blocks faster than the remainder of the miners on the Bitcoin Network can add valid blocks. In such alternate blocks, the malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new bitcoins or transactions using such control. Using alternate blocks, the malicious actor could “double-spend” its own bitcoins (i.e., spend the same bitcoins in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of the processing power on the Bitcoin Network or the bitcoin community does not reject the fraudulent blocks as malicious, reversing any changes made to the Blockchain may not be possible. Such changes could adversely affect an investment in us.

 

In late May and early June 2014, a mining pool known as GHash.io approached and, during a 24- to 48-hour period in early June may have exceeded, the threshold of 50% of the processing power on the Bitcoin Network. To the extent that GHash.io did exceed 50% of the processing power on the network, reports indicate that such threshold was surpassed for only a short period, and there are no reports of any malicious activity or control of the Blockchain performed by GHash.io. Furthermore, the processing power in the mining pool appears to have been redirected to other pools on a voluntary basis by participants in the GHash.io pool, as had been done in prior instances when a mining pool exceeded 40% of the processing power on the Bitcoin Network. The approach to and possible crossing of the 50% threshold indicate a greater risk that a single mining pool could exert authority over the validation of bitcoin transactions. To the extent that the bitcoin ecosystem, including the Core Developers and the administrators of mining pools, do not act to ensure greater decentralization of bitcoin mining processing power, the feasibility of a malicious actor obtaining in excess of 50% of the processing power on the Bitcoin Network (e.g., through control of a large mining pool or through hacking such a mining pool) will increase, which may adversely impact an investment in us.

 

If the award of bitcoin for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize miners, miners may cease expending hashrate to solve blocks and confirmations of transactions on the Blockchain could be slowed temporarily. A reduction in the hashrate expended by miners on the Bitcoin Network could increase the likelihood of a malicious actor obtaining control in excess of 50%) of the aggregate hashrate active on the Bitcoin Network or the Blockchain, potentially permitting such actor to manipulate the Blockchain in a manner that adversely affects an investment in us.

 

As the award of new bitcoin for solving blocks declines, and if transaction fees are not sufficiently high, miners may not have an adequate incentive to continue mining and may cease their mining operations. The current fixed reward for solving a new block is 12.5 bitcoin per block; the reward decreased from 25 bitcoin in July 2016. It is estimated that it will halve again in about four years. This reduction may result in a reduction in the aggregate hashrate of the Bitcoin Network as the incentive for miners will decrease. Moreover, miners ceasing operations would reduce the aggregate hashrate on the Bitcoin Network, which would adversely affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to the Blockchain until the next scheduled adjustment in difficulty for block solutions) and make the Bitcoin Network more vulnerable to a malicious actor obtaining control in excess of 50% of the aggregate hashrate on the Bitcoin Network. Periodically, the Bitcoin Network has adjusted the difficulty for block solutions so that solution speeds remain in the vicinity of the expected ten minute confirmation time targeted by the Bitcoin Network protocol. The Company believes that from time to time there will be further considerations and adjustments to the Bitcoin Network regarding the difficulty for block solutions. More significant reductions in aggregate hashrate on the Bitcoin Network could result in material, though temporary, delays in block solution confirmation time. Any reduction in confidence in the confirmation process or aggregate hashrate of the Bitcoin Network may negatively impact the value of bitcoin, which will adversely impact an investment in us.

 

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To the extent that the profit margins of Bitcoin mining operations are not high, operators of Bitcoin mining operations are more likely to immediately sell bitcoins earned by mining in the Bitcoin Exchange Market, resulting in a reduction in the price of bitcoins that could adversely impact an investment in us.

 

Over the past three years, Bitcoin Network mining operations have evolved from individual users mining with computer processors, graphics processing units and first-generation ASIC servers. Currently, new processing power brought onto the Bitcoin Network is predominantly added by incorporated and unincorporated “professionalized” mining operations. Professionalized mining operations may use proprietary hardware or sophisticated ASIC machines acquired from ASIC manufacturers. They require the investment of significant capital for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs and the employment of technicians to operate the mining farms. As a result, professionalized mining operations are of a greater scale than prior Bitcoin Network miners and have more defined, regular expenses and liabilities. These regular expenses and liabilities require professionalized mining operations to more immediately sell bitcoins earned from mining operations on the Bitcoin Exchange Market, whereas it is believed that individual miners in past years were more likely to hold newly mined bitcoins for more extended periods. The immediate selling of newly mined bitcoins greatly increases the supply of bitcoins on the Bitcoin Exchange Market, creating downward pressure on the price of bitcoins.

 

The extent to which the value of bitcoin mined by a professionalized mining operation exceeds the allocable capital and operating costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher percentage of its newly mined bitcoin rapidly if it is operating at a low profit margin-and it may partially or completely cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold into the Bitcoin Exchange Market more rapidly, thereby potentially reducing bitcoin prices. Lower bitcoin prices could result in further tightening of profit margins, particularly for professionalized mining operations with higher costs and more limited capital reserves, creating a network effect that may further reduce the price of bitcoin until mining operations with higher operating costs become unprofitable and remove mining power from the Bitcoin Network. The network effect of reduced profit margins resulting in greater sales of newly mined bitcoin could result in a reduction in the price of bitcoin that could adversely impact an investment in us.

 

To the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transaction fee will not be recorded on the Blockchain until a block is solved by a miner who does not require the payment of transaction fees. Any widespread delays in the recording of transactions could result in a loss of confidence in the Bitcoin Network, which could adversely impact an investment in us.

 

To the extent that any miners cease to record transactions in solved blocks, such transactions will not be recorded on the Blockchain. Currently, there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks; however, to the extent that any such incentives arise (e.g., a collective movement among miners or one or more mining pools forcing bitcoin users to pay transaction fees as a substitute for or in addition to the award of new bitcoins upon the solving of a block), actions of miners solving a significant number of blocks could delay the recording and confirmation of transactions on the Blockchain. Any systemic delays in the recording and confirmation of transactions on the Blockchain could result in greater exposure to double-spending transactions and a loss of confidence in the Bitcoin Network, which could adversely impact an investment in us.

 

The acceptance of Bitcoin Network software patches or upgrades by a significant, but not overwhelming, percentage of the users and miners in the Bitcoin Network could result in a “fork” in the Blockchain, resulting in the operation of two separate networks until such time as the forked Blockchains are merged. The temporary or permanent existence of forked Blockchains could adversely impact an investment in us.

 

Bitcoin is an open source project and, although there is an influential group of leaders in the Bitcoin Network community including the Core Developers, there is no official developer or group of developers that formally controls the Bitcoin Network. Any individual can download the Bitcoin Network software and make any desired modifications, which are proposed to users and miners on the Bitcoin Network through software downloads and upgrades, typically posted to the bitcoin development forum on GitHub.com. A substantial majority of miners and bitcoin users must consent to those software modifications by downloading the altered software or upgrade that implements the changes; otherwise, the changes do not become a part of the Bitcoin Network. Since the Bitcoin Network’s inception, changes to the Bitcoin Network have been accepted by the vast majority of users and miners, ensuring that the Bitcoin Network remains a coherent economic system; however, a developer or group of developers could potentially propose a modification to the Bitcoin Network that is not accepted by a vast majority of miners and users, but that is nonetheless accepted by a substantial population of participants in the Bitcoin Network. In such a case, and if the modification is material and/or not backwards compatible with the prior version of Bitcoin Network software, a fork in the Blockchain could develop and two separate Bitcoin Networks could result, one running the pre-modification software program and the other running the modified version (i.e., a second “Bitcoin” network). Such a fork in the Blockchain typically would be addressed by community-led efforts to merge the forked Blockchains, and several prior forks have been so merged. This kind of split in the Bitcoin Network could materially and adversely impact an investment in us and, in the worst case scenario, harm the sustainability of the Bitcoin Network’s economy.

 

Intellectual property rights claims may adversely affect the operation of the Bitcoin Network.

 

Third parties may assert intellectual property claims relating to the holding and transfer of Digital Assets and their source code. Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in the Bitcoin Network’s long-term viability or the ability of end-users to hold and transfer bitcoins may adversely affect an investment in us. Additionally, a meritorious intellectual property claim could prevent us and other end-users from accessing the Bitcoin Network or holding or transferring their bitcoins. As a result, an intellectual property claim against us or other large Bitcoin Network participants could adversely affect an investment in us.

 

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The Bitcoin Exchanges on which bitcoins trade are relatively new and, in most cases, largely unregulated and may therefore be more exposed to fraud and failure than established, regulated exchanges for other products. To the extent that the Bitcoin Exchanges representing a substantial portion of the volume in bitcoin trading are involved in fraud or experience security failures or other operational issues, such Bitcoin Exchanges’ failures may result in a reduction in the price of bitcoin and can adversely affect an investment in us.

 

The Bitcoin Exchanges on which the bitcoins trade are new and, in most cases, largely unregulated. Furthermore, many Bitcoin Exchanges (including several of the most prominent US Dollar denominated Bitcoin Exchanges) do not provide the public with significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to, Bitcoin Exchanges, including prominent exchanges handling a significant portion of the volume of bitcoin trading.

 

Over the past four years, a number of Bitcoin Exchanges have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such Bitcoin Exchanges were not compensated or made whole for the partial or complete losses of their account balances in such Bitcoin Exchanges. While smaller Bitcoin Exchanges are less likely to have the infrastructure and capitalization that make larger Bitcoin Exchanges more stable, larger Bitcoin Exchanges are more likely to be appealing targets for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information or gain access to private computer systems). Further, the collapse of the largest Bitcoin Exchange in 2014 suggests that the failure of one component of the overall Bitcoin ecosystem can have consequences for both users of a Bitcoin Exchange and the Bitcoin industry as a whole.

 

In 2018, China shut down Bitcoin Exchanges and other virtual currency trading platforms. A Wall Street Journal article reported that China accounted for the bulk of global bitcoin trading as of early 2018. Further, in late January 2018, the Wall Street Journal reported that $530 million of cryptocurrency was missing from a Japanese exchange. On May 7, 2019, Coindesk reported that approximately $41 million in Bitcoin was stolen from crypto exchange Binance.

 

It has been reported that Bithumb, a South Korea exchange was hacked, resulting in a $180 million loss. This followed its reported loss of $350 million in 2018. In 2019, the Chief Executive Officer of Quadriga, the largest exchange in Canada, died without providing for an alternative way to access its systems causing a reported $200 million loss.

 

A lack of stability in the Bitcoin Exchange Market and the closure or temporary shutdown of Bitcoin Exchanges due to fraud, business failure, hackers or malware, or government-mandated regulation may reduce confidence in the Bitcoin Network and result in greater volatility in bitcoin value. These potential consequences of a Bitcoin Exchange’s failure could adversely affect an investment in us.

 

Political or economic crises may motivate large-scale sales of Bitcoins, which could result in a reduction in Bitcoin value and adversely affect an investment in us.

 

As an alternative to fiat currencies that are backed by central governments, Digital Assets such as bitcoins, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of bitcoins either globally or locally. Large-scale sales of bitcoins would result in a reduction in bitcoin value and could adversely affect an investment in us.

 

Demand for bitcoin is driven, in part, by its status as the most prominent and secure Digital Asset. It is possible that a Digital Asset other than bitcoins could have features that make it more desirable to a material portion of the Digital Asset user base, resulting in a reduction in demand for bitcoins, which could have a negative impact on the price of bitcoins and adversely affect an investment in us.

 

The Bitcoin Network and bitcoins, as an asset, hold a “first-to-market” advantage over other Digital Assets. This first-to-market advantage is driven in large part by having the largest user base and, more importantly, the largest combined mining power in use to secure the Blockchain and transaction verification system. Having a large mining network results in greater user confidence regarding the security and long-term stability of a Digital Asset’s network and its block chain; as a result, the advantage of more users and miners makes a Digital Asset more secure, which makes it more attractive to new users and miners, resulting in a network effect that strengthens the first-to-market advantage.

 

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As of March 9, 2020, there were over 2,400 alternate Digital Assets (or altcoins) tracked by CoinMarketCap, having a total market capitalization (including the market capitalization of bitcoin) of approximately $223 billion, using market prices and total outstanding supply of each Digital Asset. This included altcoins using a “proof of work” mining structure similar to Bitcoin, and those using a “proof of stake” transaction verification system that is different than Bitcoin’s mining system (e.g., Peercoin, Bitshares and NXT). As of March 9, 2020, bitcoin’s $142 billion market capitalization was approximately 6.5 times the size of the $22 billion market cap of ETH, the second largest Digital Asset. Despite the marked first-mover advantage of the Bitcoin Network over other Digital Assets, it is possible that another Digital Asset could become materially popular due to either a perceived or exposed shortcoming of the Bitcoin Network protocol that is not immediately addressed by the Bitcoin contributor community or a perceived advantage of an altcoin that includes features not incorporated into Bitcoin. If a Digital Asset obtains significant market share (either in market capitalization, mining power or use as a payment technology), this could reduce bitcoin’s market share as well as other Digital Assets we may become involved in and have a negative impact on the demand for, and price of, such Digital Assets and could adversely affect an investment in us.

 

Our ability to adopt technology in response to changing security needs or trends poses a challenge to the safekeeping of our Digital Assets.

 

The history of the Bitcoin Exchange Market has shown that Bitcoin Exchanges and large holders of bitcoins must adapt to technological change in order to secure and safeguard their bitcoins and other Digital Assets. We rely on Bitgo Inc.’s multi-signature enterprise storage solution to safeguard our bitcoins from theft, loss, destruction or other issues relating to hackers and technological attack. We believe that it may become a more appealing target of security threats as the size of our bitcoin holdings grow. To the extent that either Bitgo Inc. or we are unable to identify and mitigate or stop new security threats, our bitcoins may be subject to theft, loss, destruction or other attack, which could adversely affect an investment in us.

 

Security threats to us could result in, a loss of Company’s Digital Assets, or damage to the reputation and our brand, each of which could adversely affect an investment in us.

 

Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the Bitcoin Exchange Market since the launch of the Bitcoin Network. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses, could harm our business operations or result in loss of our bitcoins and other Digital Assets. Any breach of our infrastructure could result in damage to our reputation which could adversely affect an investment in us. Furthermore, we believe that, as our assets grow, it may become a more appealing target for security threats such as hackers and malware.

 

We will primarily rely on the exchanges we hold our digital assets at and Bitgo Inc.’s multi-signature enterprise storage solution to safeguard our bitcoins and other digital assets from theft, loss, destruction or other issues relating to hackers and technological attack. Nevertheless, the exchanges we utilize or Bitgo Inc.’s security system may not be impenetrable and may not be free from defect or immune to acts of God, and any loss due to a security breach, software defect or act of God will be borne by us. In January 2018, the Japanese cryptocurrency exchange Coincheck reported that hackers breached Coincheck’s security and stole approximately $530 million worth of cryptocurrency. Our bitcoins and other Digital Assets are also stored with exchanges such as Itbit, Kraken and Coinbase and others prior to selling them.

 

On February 1, 2019, a 20 year old hacker pled guilty to stealing more than $5,000,000 worth of crypto currency from 40 victims through SIM swapping. The hacker is the first individual convicted of a crime for SIM swapping, which is growing increasingly popular with criminals as a way to steal crypto currency. In SIM swapping, hackers call a telecoms company posing as their target and claim that their SIM card has been lost, and that they would like their number to be ported to a new card. The criminals can convince phone companies that they are who they claim to be by providing social security numbers or addresses. Once the telecoms company transfers the number to a new SIM, hackers can bypass two-step authentication measures for accounts by using the phone as a recovery method. By using this method and acquiring someone’s phone number, a hacker can get into every account the person owns within minutes and that person cannot do anything about it.

 

The security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of an employee of ours, or otherwise, and, as a result, an unauthorized party may obtain access to our, private keys, data or bitcoins. Additionally, outside parties may attempt to fraudulently induce employees of ours to disclose sensitive information in order to gain access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security system occurs, the market perception of the effectiveness of our security system could be harmed, which could adversely affect an investment in us.

 

In the event of a security breach, we may be forced to cease operations, or suffer a reduction in assets, the occurrence of each of which could adversely affect an investment in us.

 

A loss of confidence in our security system, or a breach of our security system, may adversely affect us and the value of an investment in us.

 

We will take measures to protect us and our bitcoins and other Digital Assets from unauthorized access, damage or theft; however, it is possible that the security system may not prevent the improper access to, or damage or theft of our bitcoins. A security breach could harm our reputation or result in the loss of some or all of our bitcoins. A resulting perception that our measures do not adequately protect our Digital Assets could result in a loss of current or potential shareholders, reducing demand for our common stock and causing our shares to decrease in value.

 

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Bitcoin transactions are irrevocable and stolen or incorrectly transferred bitcoins may be irretrievable. As a result, any incorrectly executed Bitcoin transactions could adversely affect an investment in us.

 

Bitcoin (and other Digital Asset) transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on the Bitcoin Network. Once a transaction has been verified and recorded in a block that is added to the Blockchain, an incorrect transfer of Digital Assets or a theft of Digital Assets generally will not be reversible and we may not be capable of seeking compensation for any such transfer or theft. Although our transfers of bitcoins will regularly be made to or from vendors, consultants, services providers, etc. it is possible that, through computer or human error, or through theft or criminal action, our bitcoins could be transferred from us in incorrect amounts or to unauthorized third parties. To the extent that we are unable to seek a corrective transaction with such third party or is incapable of identifying the third party which has received our bitcoins through error or theft, we will be unable to revert or otherwise recover incorrectly transferred Company Digital Assets. To the extent that we are unable to seek redress for such error or theft, such loss could adversely affect an investment in us.

 

Our Digital Assets may be subject to loss, damage, theft or restriction on access.

 

There is a risk that part or all of our digital assets could be lost, stolen or destroyed. We believe that our Digital Assets will be an appealing target to hackers or malware distributors seeking to destroy, damage or steal our Digital Assets. Although we utilize the exchanges we hold our Digital Assets at and Bitgo Inc.’s enterprise multi-signature storage solution for our bitcoins, to minimize the risk of loss, damage and theft, we cannot guarantee that it will prevent such loss, damage or theft, whether caused intentionally, accidentally or by act of God. Access to our Digital Assets could also be restricted by natural events (such as an earthquake or flood) or human actions (such as a terrorist attack). Any of these events may adversely affect our operations and, consequently, an investment in us.

 

The limited rights of legal recourse against us, and our lack of insurance protection expose us and our shareholders to the risk of loss of our bitcoins and other Digital Assets for which no person is liable.

 

The bitcoins and other Digital Assets held by us are not insured. Therefore, a loss may be suffered with respect to our bitcoins which is not covered by insurance and for which no person is liable in damages which could adversely affect our operations and, consequently, an investment in us.

 

Bitcoins and other Digital Assets held by us are not subject to FDIC or SIPC protections.

 

We will not hold our bitcoins and other Digital Assets with a banking institution or a member of the Federal Deposit Insurance Corporation (“FDIC”) or the Securities Investor Protection Corporation (“SIPC”) and, therefore, our Digital Assets are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions.

 

We may not have adequate sources of recovery if our bitcoins and other Digital Assets are lost, stolen or destroyed.

 

If our bitcoins or other Digital Assets are lost, stolen or destroyed under circumstances rendering a party liable to us, the responsible party may not have the financial resources sufficient to satisfy our claim. For example, as to a particular event of loss, the only source of recovery for us might be limited, to the extent identifiable, other responsible third parties (e.g., a thief or terrorist), any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim of ours.

 

The sale of our bitcoins or other Digital Assets to pay expenses at a time of low prices could adversely affect an investment in us.

 

We may sell bitcoins or other Digital Assets to pay expenses on an as-needed basis, irrespective of then-current prices. The extreme volatility of bitcoin and other Digital Assets could mean that prices are low when we need to sell. Consequently, our Digital Assets may be sold at a time when the prices are low, which could adversely affect an investment in us.

 

Intellectual property rights claims may adversely affect an investment in us.

 

We are not aware of any intellectual property claims that may prevent us from operating and holding bitcoins or other Digital Assets; however, third parties may assert intellectual property claims relating to the operation of us and the mechanics instituted for the investment in, holding of and transfer of bitcoins or other Digital Assets. Regardless of the merit of an intellectual property or other legal action, any legal expenses to defend or payments to settle such claims would be extraordinary expenses and be borne by us through the sale of our bitcoins and other Digital Assets. Additionally, a meritorious intellectual property claim could prevent us from operating and force us to liquidate our bitcoins and other Digital Assets. As a result, an intellectual property claim against us could adversely affect an investment in us.

 

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Regulatory changes or actions may restrict the use of Digital Assets or the operation of trading markets in a manner that adversely affects an investment in us.

 

Until a few years ago, little or no regulatory attention has been directed toward bitcoin, other Digital Assets and the markets where they trade by U.S. federal and state governments, foreign governments and self-regulatory agencies. As bitcoin has grown in popularity and in market size and initial coin offerings which tend to be Digital Securities, the SEC, Federal Reserve Board, U.S. Congress and certain other U.S. agencies (e.g., the CFTC, FinCEN and the Federal Bureau of Investigation) have begun to examine the operations of the initial coin offerings, Bitcoin Network, bitcoin users and the Bitcoin Exchange Market.

 

On July 25, 2017, the SEC issued its DAO Report which concluded that Digital Assets or tokens issued for the purpose of raising funds may be securities within the meaning of the federal securities laws. The DAO Report focused on the activities of a virtual organization which offered tokens in exchange for ether which is the second largest reported digital currency. The DAO Report emphasized that whether Digital Asset is a security is based on the facts and circumstances. Although the Company’s activities are not focused on raising capital or assisting others that do so, the federal securities laws are very broad, and there can be no assurances that the SEC will not take enforcement action against the Company in the future including for the sale of unregistered securities in violation of the Securities Act or acting as an unregistered investment company in violation of the Investment Company Act. The SEC has taken various actions against persons or entities misusing bitcoin in connection with fraudulent schemes (i.e., Ponzi scheme), inaccurate and inadequate publicly disseminated information, and the offering of unregistered securities. More recently, the SEC suspended trading in three Digital Asset public companies. Since issuing the DAO Report the SEC Chairman has stated that the SEC is carefully examining initial coin offerings and similar areas involving Digital Assets for their compliance with the Securities Act. On November 16, 2018, the SEC announced its first civil penalties solely targeting ICO securities registration violators in reference to settled charges against ICO issuers CarrierEQ, Inc., (“Airfox”) and Paragon Coin, Inc. (“Paragon”). Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, stated that “we have made it clear that companies who issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities.” Unlike Slock.It, which faced no penalty, Airfox and Paragon were each ordered to: 1) pay $250,000 in penalties, 2) register their tokens pursuant to the Exchange Act, and 2) to file periodic reports with the SEC for at least a year.

 

Very recently, it has been publicly reported that the SEC staff has been issuing subpoenas seeking information about initial coin offerings. Although we have never invested in initial coin offering, lawsuits filed by the SEC claiming that initial coin offering issuers and cryptocurrency public companies violate the Securities Act and the Exchange Act and the resulting publicity may have a material adverse effect on the prices of Digital Assets we own and otherwise adversely affect opportunities in the Blockchain industry, which in turn will have an adverse impact on our business and prospects.

 

The CFTC has determined that bitcoin and other virtual currencies are commodities and the sale of derivatives based on digital currencies must be done in accordance with the provisions of the CEA and CFTC regulations. Also of significance, is that the CFTC appears to have taken the position that bitcoin is not encompassed by the definition of currency under the CEA and CFTC regulations. The CFTC defined bitcoin and other “virtual currencies” as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of exchange in the country of issuance.” To the extent that bitcoin itself is determined to be a security, commodity future or other regulated asset, or to the extent that a US or foreign government or quasi-governmental agency exerts regulatory authority over the Bitcoin Network or bitcoin trading and ownership, trading or ownership in bitcoin or an investment in us may be adversely affected.

 

The CFTC affirmed its approach to the regulation of bitcoin and bitcoin-related enterprises on June 2, 2016, when the CFTC settled charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its Order, the CFTC found that Bitfinex engaged in “illegal, off-exchange commodity transactions and failed to register as a futures commission merchant” when it facilitated borrowing transactions among its users to permit the trading of bitcoin on a “leveraged, margined or financed basis” without first registering with the CFTC. In 2017 the CFTC stated that it would consider bitcoin and other virtual currencies as commodities or derivatives depending on the facts of the offering. In December 2017, bitcoin futures trading commenced on two CFTC regulated futures markets. In 2018 two federal district courts determined that Digital Assets were commodities and can be regulated by the CFTC as such.

 

Local state regulators such as the NYSDFS have also initiated examinations of bitcoin, the Bitcoin Network and the regulation thereof. The NYSDFS began requiring New York based companies to have a “BitLicense” in June 2015. The “BitLicense” regulates the conduct of businesses that are involved in “virtual currencies” in New York or with New York customers, and prohibits any person or entity involved in such activity to conduct activities without a license. Out of concern of over regulating cryptocurrency, New York has formed a task force to further study the scope of its regulation.

 

Additionally, a U.S. federal magistrate judge in the U.S. District Court for the Eastern District of Texas has ruled that “Bitcoin is a currency or form of money,” a Florida circuit court judge determined that bitcoin did not qualify as money or “tangible wealth,” and an opinion from the U.S. District Court for the Northern District of Illinois identified bitcoin as “virtual currency.” Additionally, two CFTC commissioners publicly expressed a belief that derivatives based on bitcoin are subject to the same regulation as those based on commodities, and the IRS released guidance treating bitcoin as property that is not currency for U.S. federal income tax purposes. Taxing authorities of a number of U.S. states have also issued their own guidance regarding the tax treatment of bitcoin for state income or sales tax purposes. On June 28, 2014, the Governor of the State of California signed into law a bill that removed state-level prohibitions on the use of alternative forms of currency or value (including bitcoin). The bill indirectly authorizes bitcoin’s use as an alternative form of money in the state. In February 2015, a bill was introduced in the California State Assembly to establish a licensing regime for businesses engaging in “virtual currencies.” In September 2015, the bill was ordered to become an inactive file and as of the date of this report there hasn’t been further consideration by the California State Assembly. As of August 2016, the bill was withdrawn from consideration for vote for the remainder of the year. In March of 2019, California Assembly Majority Leader Ian Calderon introduced Assembly Bill 1489, which would govern virtual currency business activity that takes place with or on behalf of California residents. The bill proposes to require companies to go through a regulatory approval process to conduct crypto-related activities in the state by requiring licensure with stipulations on net worth, security, and reserves. Entities would be subject to examination, consolidations and data sharing to maintain compliance. As presently drafted, Bill 1489 does not consider virtual currencies (also known as cryptocurrencies and digital assets) to be legal tender, whether or not it is denominated in legal tender. It states that virtual currency is a representation of value for exchange, storage of value, or unit of account.

 

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Bitcoin currently faces an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such as the European Union, China and Russia. While certain governments such as Germany, where the Ministry of Finance has declared bitcoin to be “Rechnungseinheiten” (a form of private money that is recognized as a unit of account, but not recognized in the same manner as fiat currency), have issued guidance as to how to treat bitcoin, most regulatory bodies have not yet issued official statements regarding intention to regulate or determinations on regulation of bitcoin, the Bitcoin Network and bitcoin users.

 

Among those for which preliminary guidance has been issued in some form, Canada and Taiwan have labeled bitcoin as a digital or virtual currency, distinct from fiat currency, while Sweden and Norway are among those to categorize bitcoin as a form of virtual asset or commodity. In Australia, a GST (similar to the European value added tax (“VAT”)) is currently applied to bitcoin, forcing a ten (10) percent markup on top of market price, essentially preventing the operation of any Bitcoin Exchange. This may be undergoing a change, however, since the Senate Economics References Committee and the Productivity Commission recommended that digital currency be treated as money for GST purposes to remove the double taxation. The United Kingdom determined that the VAT will not apply to bitcoin sales. Since December 2013, China, Iceland, Vietnam and Russia have taken a more restrictive stance toward bitcoin and, thereby, have reduced the rate of expansion of bitcoin use in each country. In May 2014, the Central Bank of Bolivia banned the use of bitcoin as a means of payment. In the summer and fall of 2014, Ecuador announced plans for its own state-backed electronic money, while passing legislation that prohibits the use of decentralized Digital Assets such as bitcoin. In July 2016, economists at the Bank of England advocated that central banks issue their own digital currency, and the House of Lords and Bank of England started discussing the feasibility of creating a national virtual currency, the BritCoin. As of July 2016, Iceland was studying how to create a system in which all money is created by a central bank, and Canada was beginning to experiment with a digital version of its currency called CAD-COIN, intended to be used exclusively for interbank payments. On August 24, 2017, Canada issued guidance stating the sale of cryptocurrency may constitute an investment contract in accordance with Canadian law for determining if an investment constitutes a security. In July 2016, the Russian Ministry of Finance indicated it supports a proposed law that bans bitcoin domestically but allows for its use as a foreign currency. Russia recently issued several releases indicating they may begin regulating bitcoin and licensing miners and entities engaging in initial coin offerings. Conversely, regulatory bodies in some countries such as India and Switzerland have declined to exercise regulatory authority when afforded the opportunity. In April 2015, the Japanese Cabinet approved proposed legal changes that would reportedly treat bitcoin and other Digital Assets as included in the definition of currency. These regulations would, among other things, require market participants, including exchanges, to meet certain compliance requirements and be subject to oversight by the Financial Services Agency, a Japanese regulator. In September 2017 Japan began regulating Bitcoin Exchanges and registered several such exchanges to operate within Japan. In July 2016, the European Commission released a draft directive that proposed applying counter-terrorism and anti-money laundering regulations to virtual currencies, and, in September 2016, the European Banking authority advised the European Commission to institute new regulation specific to virtual currencies, with amendments to existing regulation as a stopgap measure. Various foreign jurisdictions may, in the near future, adopt laws, regulations or directives that affect the Bitcoin Network and its users, particularly Bitcoin Exchanges and service providers that fall within such jurisdictions’ regulatory scope. Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance of bitcoin by users, merchants and service providers outside of the United States and may therefore impede the growth of the bitcoin economy. On September 4, 2017, reports were published that China may begin prohibiting the practice of using cryptocurrency for capital fundraising. Additional reports have surfaced that China is considering regulating Bitcoin Exchanges by enacting a licensing regime wherein Bitcoin Exchanges may legally operate. In April 2019, China’s National Development Reform Commission listed crypto-mining among a variety of industries it intends to eliminate. In October 2018, The Shenzhen Court of International Arbitration of China published a case analysis on contract disputes between parties to a share transfer agreement involving cryptocurrencies and held that cryptocurrency was protected as property in China. In September 2017, the Financial Services Commission of South Korea released a statement that initial coin offerings would be prohibited as a fundraising tool. In December of 2018, the South Korea’s Financial Services Commission, the country’s top financial regulator, stated that six bills related to the regulation of cryptocurrencies had been submitted to the National Assembly. One of the bills would require all persons in charge of a cryptocurrency transfer business - including trading, brokerage and management – to register with the Financial Services Commission. In June 2017, India’s government ruled in favor of regulating bitcoin. In December 2017, India’s finance minister told the media that the government does not consider bitcoin a legal tender. In April 2018, the Reserve Bank of India issued a statement to all entities regulated by the Reserve Bank, stating that they must cease all activities related to cryptocurrency. The Internet and Mobile Association of India challenged the ban via petition to the Supreme Court of India, which ordered the Reserve Bank of India to devise a clear regulation regarding cryptocurrency. The Supreme Court of India will resume hearing the case in July 2019. In 2018, Australia passed legislation which requires digital currency exchange providers to register with AUSTRAC (the Australian Transaction Reports and Analysis Centre). In its budget summary for 2017-2018, the Australian government stated that, as part of its plan to make it easier for digital currency businesses to operate in the country, purchases of digital currency will no longer be subject to the general sales tax.

 

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The effect of any future regulatory change on us, bitcoins, or other Digital Assets is impossible to predict, but such change could be substantial and adverse to us and could adversely affect an investment in us.

 

It may be illegal now, or in the future, to acquire, own, hold, sell or use bitcoins or other Digital Assets in one or more countries, and ownership of, holding or trading in our Company’s securities may also be considered illegal and subject to sanction.

 

Although currently bitcoins and other Digital Assets are not regulated or are lightly regulated in most countries, including the United States, one or more countries such as China and Russia may take regulatory actions in the future that severely restricts the right to acquire, own, hold, sell or use bitcoins or other Digital Assets or to exchange Digital Assets for currency. Such an action may also result in the restriction of ownership, holding or trading in our securities. Such restrictions may adversely affect an investment in us.

 

If we become an inadvertent investment company in violation of the 1940 Act, our failure to register under the 1940 Act will adversely affect us and you will likely lose your entire investment.

 

Under the 1940 Act, a company may be deemed an investment company under if the value of its investment securities is more than 40% of its total assets (exclusive of government securities and cash items) on a consolidated basis.

 

In the event that the Digital Assets held by us exceed 40% of our total assets, exclusive of cash, we may inadvertently become an investment company. While we are putting in place policies that we expect will work to keep the investment securities held by us at less than 40% of our total assets, which may include actively monitoring the value of our investment securities, acquiring assets bitcoin with our cash, or liquidating our investment securities.

 

The Rules under the 1940 Act permit a company to breach the 40% threshold once every three years assuming it reduces its investment securities below 40% within one year. Otherwise registration under the 1940 Act would be required.

 

The 40% requirement may limit our ability to make certain investments or enter into joint ventures that could otherwise have a positive impact on our earnings. In any event, we do not intend to become an investment company engaged in the business of investing and trading securities. The failure to register when required would likely make our common stock worthless.

 

If we become an investment company and fail to register, we would have to stop doing almost all business. Registration is time consuming and restrictive and would require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a registered investment company. Further, we would become subject to substantial regulation concerning management, operations, transactions with affiliated persons and portfolio composition, and would need to file reports under the 1940 Act regime. The cost of such compliance would result in the Company incurring substantial additional expenses, and the failure to register if required would have a materially adverse impact to conduct our operations.

 

If regulatory changes or interpretations of our activities require our registration as a MSB under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, we may be required to register and comply with such regulations. If regulatory changes or interpretations of our activities require the licensing or other registration of us as a money transmitter (or equivalent designation) under state law in any state in which we operate, we may be required to seek licensure or otherwise register and comply with such state law. In the event of any such requirement, to the extent the Company decides to continue, the required registrations, licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease the Company’s operations. Any termination of certain Company operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.

 

To the extent that the activities of the Company cause it to be deemed a MSB under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, the Company may be required to comply with FinCEN regulations, including those that would mandate the Company to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.

 

To the extent that the activities of the Company cause it to be deemed a “money transmitter” (or equivalent designation) under state law in any state in which the Company operates, the Company may be required to seek a license or otherwise register with a state regulator and comply with state regulations that may including the implementation of anti-money laundering programs, maintenance of certain records and other operational requirements. Currently, the NYSDFS has finalized its “BitLicense” framework for businesses that conduct “virtual currency business activity,” the Conference of State Bank Supervisors has proposed a model form of state level “virtual currency” regulation and additional state regulators including those from California, Idaho, Virginia, Kansas, Texas, South Dakota and Washington have made public statements indicating that virtual currency businesses may be required to seek licenses as money transmitters. In July 2016, North Carolina updated the law to define “virtual currency” and the activities that trigger licensure in a business friendly approach that encourages companies to use virtual currency and blockchain technology. Specifically, the North Carolina law does not require miners or software providers to obtain a license for multi-signature software, smart contract platforms, smart property, colored coins and non-hosted, non-custodial wallets. Starting January 1, 2016, New Hampshire requires anyone exchanges a digital currency for another currency must become a licensed and bonded money transmitter. In numerous other states, including Connecticut and New Jersey, legislation is being proposed or has been introduced regarding the treatment of bitcoin and other Digital Assets. The Company will continue to monitor for developments in such legislation, guidance or regulations.

 

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Such additional federal or state regulatory obligations may cause the Company to incur extraordinary expenses, possibly affecting an investment in the Resale Shares in a material and adverse manner. Furthermore, the Company and its service providers may not be capable of complying with certain federal or state regulatory obligations applicable to MSBs and MTs. If the Company is deemed to be subject to and determines not to comply with such additional regulatory and registration requirements, we may act to dissolve and liquidate the Company. Any such action may adversely affect an investment in us.

 

Current interpretations require the regulation of bitcoins and other Digital Assets under the CEA by the CFTC, we may be required to register and comply with such regulations. To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.

 

Current and future legislation, CFTC and other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which bitcoins and other Digital Assets are treated for classification and clearing purposes. In particular, derivatives on these assets are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins and other Digital Assets under the law.

 

Bitcoins have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register as a commodity pool operator and to register us as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect an investment in us. No CFTC orders or rulings are applicable to our business.

 

If regulatory changes or interpretations require the regulation of bitcoins and other Digital Assets (in contrast to Digital Securities) under the Securities Act and Investment Company Act by the SEC, we may be required to register and comply with such regulations. To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. This would likely have a material adverse effect on us and investors may lose their investment.

 

Current and future legislation and SEC rulemaking and other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which bitcoins are treated for classification and clearing purposes. The SEC’s July 25, 2017 DAO Report expressed its view that Digital Assets may be securities depending on the facts and circumstances. As of the date of this report, we are not aware of any rules that have been proposed to regulate the Digital Assets we hold as securities. We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins and other Digital Assets under the law. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect an investment in us.

 

To the extent that Digital Assets including bitcoins are deemed by the SEC to fall within the definition of a security, we may be required to register and comply with additional regulation under the Investment Company Act, including additional periodic reporting and disclosure standards and requirements and the registration of our Company as an investment company. Additionally, one or more states may conclude bitcoins are a security under state securities laws which would require registration under state laws including merit review laws which would adversely impact us since we would likely not comply. As stated earlier in this report, some states including California define the term “investment contract” more strictly than the SEC. Such additional registrations may result in extraordinary, non-recurring expenses of our Company, thereby materially and adversely impacting an investment in our Company. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease all or certain parts of our operations. Any such action would likely adversely affect an investment in us and investors may suffer a complete loss of their investment.

 

The Company does not currently have any mining operations but may resume its mining operations through outsourced data centers if it receives additional capital. To the extent that the Company resumes mining operations and acquires Digital Assets as a result of mining, we do not intend to trade the Digital Assets until we determine, with the assistance of legal counsel, that the Digital Assets are not securities, the Digital Assets would only be used for our own account.

 

We do not believe that bitcoin and ether are securities. As such, we do not intend to acquire securities in amounts that are equal to or greater than 40% of our assets. Should the total value of securities which we hold rise to more than 40% of our assets (exclusive of cash) we note that SEC Rule 3a-2 under the 1940 Act allows an issuer to prevent itself from being deemed an investment company if it reduces its holdings of securities to less than 40% of its assets (exclusive of cash) and does not go above the 40% threshold more than once every three years. In order to comply with the 1940 Act, we anticipate having increased management time and legal expenses in order to analyze which Digital Assets are securities and periodically analyze our total holdings to ensure that we do not maintain more than 40% of our total assets (exclusive of cash) as securities. If our view that ether is not a security is challenged by the SEC and courts uphold the challenge, we may inadvertently violate the 1940 Act and incur substantial legal fees in defending our position. In such case the legal fees may exceed our available assets which could adversely affect an investment in us.

 

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If federal or state legislatures or agencies initiate or release tax determinations that change the classification of bitcoins or other Digital Assets as property for tax purposes (in the context of when such Digital Assets are held as an investment), such determination could have a negative tax consequence on our Company or our shareholders.

 

Current IRS guidance indicates that Digital Assets such as bitcoins should be treated and taxed as property, and that transactions involving the payment of bitcoins for goods and services should be treated as barter transactions. While this treatment creates a potential tax reporting requirement for any circumstance where the ownership of a bitcoin passes from one person to another, usually by means of bitcoin transactions (including off-Blockchain transactions), it preserves the right to apply capital gains treatment to those transactions which may have adversely affect an investment in our Company.

 

On December 5, 2014, the New York State Department of Taxation and Finance issued guidance regarding the application of state tax law to Digital Assets such as bitcoins. The agency determined that New York State would follow IRS guidance with respect to the treatment of Digital Assets such as bitcoins for state income tax purposes. Furthermore, they defined Digital Assets such as bitcoin to be a form of “intangible property,” meaning the purchase and sale of bitcoins for fiat currency is not subject to state income tax (although transactions of bitcoin for other goods and services maybe subject to sales tax under barter transaction treatment). It is unclear if other states will follow the guidance of the IRS and the New York State Department of Taxation and Finance with respect to the treatment of Digital Assets such as bitcoins for income tax and sales tax purposes. If a state adopts a different treatment, such treatment may have negative consequences including the imposition of greater a greater tax burden on investors in bitcoin or imposing a greater cost on the acquisition and disposition of bitcoins, generally; in either case potentially having a negative effect on prices in the Bitcoin Exchange Market and may adversely affect an investment in our Company.

 

Foreign jurisdictions may also elect to treat Digital Assets such as bitcoins differently for tax purposes than the IRS or the New York State Department of Taxation and Finance. To the extent that a foreign jurisdiction with a significant share of the market of bitcoin users imposes onerous tax burdens on bitcoin users, or imposes sales or value added tax on purchases and sales of bitcoins for fiat currency, such actions could result in decreased demand for bitcoins in such jurisdiction, which could impact the price of bitcoins and negatively impact an investment in our Company.

 

Risks Related to Our Digital Assets Holdings

 

The loss or destruction of a private key required to access a Digital Assets such as bitcoin may be irreversible. Our loss of access to our private keys or our experience of a data loss relating to our Company’s Digital Assets could adversely affect an investment in our Company.

 

Bitcoins are controllable only by the possessor of both the unique public key and private key relating to the local or online digital wallet in which the bitcoins are held. We are required by the operation of the Bitcoin Network to publish the public key relating to a digital wallet in use by us when it first verifies a spending transaction from that digital wallet and disseminates such information into the Bitcoin Network. We safeguard and keep private the private keys relating to our bitcoins not held at exchanges by utilizing Bitgo Inc.’s enterprise multi-signature storage solution; to the extent a private key is lost, destroyed or otherwise compromised and no backup of the private key is accessible, we will be unable to access the bitcoins held by it and the private key will not be capable of being restored by the Bitcoin Network. Any loss of private keys relating to digital wallets used to store our bitcoins could adversely affect an investment in us.

 

To the extent that any of our Digital Assets are held by Exchanges, we may face heightened risks from cybersecurity attacks and financial stability of the Exchanges.

 

The Company will use Digital Asset exchanges to hold certain of the its Digital Assets; the Company’s bitcoin will either be held directly by the Company in a bitcoin wallet utilizing Bitgo Inc.’s enterprise multi-signature storage solution or at Digital Asset exchanges. All Digital Assets not held in the Company’s Bitgo wallets will be subject to the risks encountered by a Digital Asset exchange including a DDoS Attack or other malicious hacking, a sale of the Digital Asset exchange, loss of the Digital Assets by the Digital Asset exchange and other risks similar to those described on page 16 in a risk factor entitled “Security threats to us could result in, a loss of Company’s Digital Assets, or damage to the reputation and our brand, each of which could adversely affect an investment in us.” The Company may not maintain a custodian agreement with the Digital Asset exchange that holds the Company’s Digital Assets. Exchange typically do not provide insurance and may lack the resources to protect against hacking and theft. In the future we may acquire other Digital Assets that are held by Exchanges. If a material amount of our Digital Assets are held by Exchanges, we may be materially and adversely affected if the Exchanges suffer cyberattacks or incur financial problems.

 

Risks Related to Our Digital Asset Data Analytics Platform Development

 

There is substantial doubt that we will be able to develop or commercialize our Digital Asset Data Analytics Platform.

 

We are currently developing a digital asset data analytics platform with the ultimate goal of consolidating users’ information so that it can be more easily accessed and reviewed by users. We may not successfully develop this platform in a cost-efficient manner or at all. If we fail to develop a digital asset data analytics platform as intended, it could have a material adverse effect on our business, especially to the extent that we allocate significant capital, labor and other resources to this endeavor rather than focusing on other business opportunities which may prove to have been more lucrative in hindsight.

 

  22  
 

 

Even if we do successfully develop our platform and bring it to the marketplace, there is no guarantee that we will attract a sufficient number of users to generate revenue or become profitable. Our competitors, most of whom have greater capital and human resources than we do, may develop technologies that are superior to our platform or commercialize comparable technologies before us, in which case our ability to attract users and generate revenue therefrom could be rendered unlikely or even impossible. If we fail to obtain users for our platform or find an alternative means of commercializing our platform to recoup our investment therein, it will have a material adverse effect on our financial condition.

 

Even if we develop and commercialize our Digital Asset Data Analytics Platform, we may not be able to generate material revenues.

 

The digital asset data analytics platform that we are currently developing will require significant time and capital. Even if we do develop this platform and acquire a sufficient number of users to generate revenue, we cannot guarantee the revenue would be material or sufficient to justify the costs we anticipate incurring to develop the platform. Our ability to capitalize on any platform we do develop will depend on a variety of factors and uncertainties beyond our control, including the competition we face and similar or superior services that may already exist by the time we begin marketing our platform, the volatile nature of the blockchain industry generally and the unknown demand for the services we plan to offer through our platform as it is currently envisioned, and the advancement of new technologies which could arise in the future and render our platform partially or completely obsolete. If any of these or other risks come to fruition to prevent our platform from generating material revenue to justify its costs of production, it would have a material adverse effect on our business.

 

The development of our Digital Asset Data Analytics Platform will depend on the successful efforts of our employees.

 

Our platform development effort is completely dependent on our infrastructure. We use internally developed systems for the platform. Any future difficulties developing aspects of our platform may cause delays in bringing our platform to market. If the location where all of our computer and communications hardware is located is compromised, our platform, prospects, could be harmed. We do not currently have a disaster recovery plan which could result in a loss of the platform software. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, the occurrence of any of which could lead to interruptions, delays, loss of critical data or the inability launch our platform. The occurrence of any of the foregoing risks could harm our business.

 

We are subject to cyber security risks and may incur delays in platform development in an effort to minimize those risks and to respond to cyber incidents.

 

Our digital asset data analytics platform will be entirely dependent on the secure operation of our website and systems as well as the operation of the Internet generally. The platform involves reading user data, and storage of user data, and security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. A number of large Internet companies have suffered security breaches, some of which have involved intentional attacks. From time to time we and many other Internet businesses also may be subject to a denial of service attacks wherein attackers attempt to block customers’ access to our Website. If we are unable to avert a denial of service attack for any significant period, we could sustain delays in the development of the platform and when launched risk losing future users and have user dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber attacks may target us, our users, or exchanges we read data from in general or the communication infrastructure on which we depend. If an actual or perceived attack or breach of our security occurs, user perception of the effectiveness of our security measures could be harmed and we could lose our future user. Actual or anticipated attacks and risks may cause us to incur increasing costs, and delay development. A person who is able to circumvent our security measures might be able to misappropriate our or our users’ proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and platform. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

 

Risks Related to the Purchase Agreement with Cavalry

 

The sale or issuance of our common stock to Cavalry may cause dilution and the sale of the shares of common stock acquired by Cavalry, or the perception that such sales may occur, could cause the price of our common stock to fall.

 

On May 13, 2019, we entered into the Purchase Agreement with Cavalry, pursuant to which Cavalry has committed to purchase up to $10,000,000 of our common stock. As of March 9, 2020, Cavalry has purchased 8,603,986 shares (excluding 419,652 commitment and pro-rata commitment shares) for $1,479,410 under the Purchase Agreement. The purchase shares that may be sold pursuant to the Purchase Agreement may be sold by us to Cavalry at our discretion from time to time over a 36-month period commencing after the SEC has declared effective a registration statement covering the respective shares. The purchase price for the shares that we may sell to Cavalry under the Purchase Agreement will fluctuate based on the price of our common stock. Depending on market liquidity at the time, sales of such shares may cause the trading price of our common stock to fall. Additionally, the amount that we may sell to Cavalry will be limited to the Daily Trading Dollar Volume on the day of, or day before, the Put. If the trading volume and/or price of our common stock is low, our ability to raise capital under the Purchase Agreement will be limited and/or take an extensive time to raise capital.

 

  23  
 

 

We generally have the right to control the timing and amount of any sales of our shares to Cavalry, except that, pursuant to the terms of our agreements with Cavalry, we would be unable to sell shares to Cavalry on any day when the closing sale price of our common stock is below $0.005 per share, subject to adjustment as set forth in the Purchase Agreement. Cavalry may ultimately purchase all, some or none of the shares of our common stock that may be sold pursuant to the Purchase Agreement in connection with our rights to direct Cavalry’s purchases at our discretion and, after it has acquired shares, Cavalry may sell all, some or none of those shares. Therefore, sales to Cavalry by us could result in substantial dilution to the interests of other holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock to Cavalry, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

 

We may not be able to access sufficient funds under the Purchase Agreement with Cavalry when needed.

 

Our ability to sell shares to Cavalry and obtain funds under the Purchase Agreement is limited by the terms and conditions in the Purchase Agreement, including restrictions on when we may sell shares to Cavalry, restrictions on the amounts we may sell to Cavalry at any one time, and a limitation on our ability to sell shares to Cavalry to the extent that it would cause Cavalry to beneficially own more than 4.99% of our outstanding common stock. In addition, any amounts we sell under the Purchase Agreement may not satisfy all of our funding needs, even if we are able and choose to sell all $10,000,000 under the Purchase Agreement. If we elect to issue and sell more than the shares offered under any one prospectus to Cavalry, which we have the right, but not the obligation, to do, we must first register for resale under the Securities Act any such additional shares on a subsequent prospectus.

 

We elected to enter into the Purchase Agreement with Cavalry as we expect that amount of capital over the next 12 months will be required for us to fully implement our business, operating and development plans. The extent we rely on Cavalry as a source of funding will depend on a number of factors including, the prevailing market price and trading volume of our common stock and the extent to which we are able to secure working capital from other sources. If obtaining sufficient funding from Cavalry were to prove unavailable or prohibitively dilutive, we will need to secure another source of funding in order to satisfy our working capital needs. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.

 

The sale of our common stock to Cavalry will cause dilution and the sale of the shares by Cavalry could cause the price of our common stock to decline.

 

The number of shares ultimately offered for sale by Cavalry is dependent upon the number of shares sold to Cavalry under the Purchase Agreement. The purchase price for the common stock to be sold to Cavalry pursuant to the Purchase Agreement will fluctuate based on the price of our common stock. Depending upon market liquidity at the time, a sale of shares by Cavalry at any given time could cause the trading price of our common stock to decline. After it has acquired such shares, Cavalry may sell all, some or none of such shares. Therefore, sales to Cavalry by us under the Purchase Agreement will result in substantial dilution to the interests of other holders of our common stock. The sale of a substantial number of shares of our common stock, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. However, we have the right to control the timing and amount of any sales of our shares to Cavalry.

 

  24  
 

 

PART IV

 

ITEM 15. EXHIBITS

 

            Incorporated by Reference

Exhibit

No.

  Description  

Filed/Furnished

Herewith

  Form  

Exhibit

No.

 

Filing

Date

                     
3.1   Articles of Incorporation       10-K   3.1   3/31/11
                     
3.1(a)   Amendment No. 1 To Articles of Incorporation       8-K   3.1   3/25/13
                     
3.1(b)   Amendment No. 2 To Articles of Incorporation       8-K   3.1   2/5/14
                     
3.1(c)   Amendment No. 3 To Articles of Incorporation       8-K   3.1   4/9/19
                     
3.1(d)   Certificate of Designation for Series A Preferred Stock       8-K   3.1   12/9/16
                     
3.1(e)   Certificate of Designation for Series B Convertible Preferred Stock       8-K   3.1   3/15/17
                     
3.1(f)   Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock       8-K   3.1   3/30/17
                     
3.1(g)   Certificate of Designation for Series C Convertible Preferred Stock       8-K   10.1   5/26/17
                     
3.1(h)   Certificate of Designation for Series C-1 Convertible Preferred Stock       8-K   3.1   10/10/17
                     
3.1(i)   Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series C-1 Convertible Preferred Stock       8-K   3.2   12/7/17
                     
3.1(j)   Certificate of Withdrawal of Certificate of Designation for Series C Convertible Preferred Stock       8-K   3.3   12/7/17
                     
3.2   Certificate of Amendment filed February 13, 2017       8-K   3.1   2/16/17
                     
3.3   Bylaws of TouchIT Technologies, Inc.       S-1   3.2   5/29/08
                     
3.4   Articles of Merger       8-K/A   3.1   7/31/15
                     
3.5   Agreement and Plan of Merger       8-K/A   3.2   7/31/15
                     
4.1   Convertible Note dated as of September 18, 2019       8-K   4.1   9/19/19
                     
4.2   Convertible Note dated as of November 7, 2019       8-K   4.1   11/7/19
                     
4.3   Certificate of Amendment to the Series C-1 COD       8-K   4.1   12/3/19
                     
10.1   Amended Series A Common Stock Purchase Warrant       8-K   10.3   12/7/17
                     
10.2   Amended Additional Common Stock Purchase Warrant       8-K   10.4   12/7/17
                     
10.3   Amended Bonus Common Stock Purchase Warrant       8-K   10.5   12/7/17
                     
10.4   Amended Series B Common Stock Purchase Warrant       8-K   10.6   12/7/17
                     
10.5   Amended Amendment to Securities Agreement       8-K   10.7   12/7/17
                     
10.6   Form of Series B Common Stock Purchase Warrant       8-K   10.1   10/10/17
                     
10.7   Form of Series C-1 Securities Purchase Agreement       8-K   10.2   10/10/17

 

  25  
 

 

10.8   Form of Side Letter       8-K   10.3   10/10/17
                     
10.9   Form of Warrant Exercise Agreement dated as of June 8, 2016       8-K   10.1   6/10/16
                     
10.10   Form of Series A Warrant       8-K   10.2   5/26/17
                     
10.11   Form of Additional Warrant       8-K   10.3   5/26/17
                     
10.12   Form of Bonus Warrant       8-K   10.4   5/26/17
                     
10.13   Form of Registration Right Agreement dated as of May 24, 2017       8-K   10.5   5/26/17
                     
10.14   Form of Securities Purchase Agreement dated as of May 24, 2017       8-K   10.6   5/26/17
                     
10.15   Employment Agreement - Charles Allen   (2)   10-K   10.8   6/23/17
                     
10.15(a)   Amendment to Employment Agreement - Charles Allen   (1) (2)            
                     
10.16   Employment Agreement - Michael Handerhan   (2)   10-K   10.9   6/23/17
                     

10.16(a)

  Amendment to Employment Agreement – Michal Handerhan   (1) (2)            
                     
10.17   Settlement Agreement and Note       8-K   10.1   3/23/17
                     
10.18   Form of Note Leak-Out Agreement       8-K   99.1   3/15/17
                     
10.19   Form of January Leak-Out Agreement       8-K   99.2   3/15/17
                     
10.20   Form of April Leak-Out Agreement       8-K   99.3   3/15/17
                     
10.21   Form of January Lock-Up Agreement       8-K   99.4   3/15/17
                     
10.22   Form of April Lock-Up Agreement       8-K   99.5   3/15/17
                     
10.23   Convertible Promissory Note       8-K   10.1   12/9/16
                     
10.24   Securities Purchase Agreement       8-K   10.1   6/7/16
                     
10.25   20% Original Issue Discount Junior Convertible note due December 5, 2016       8-K   10.2   6/7/16
                     
10.26   Security Agreement       8-K   10.3   6/7/16
                     
10.27   Pledge Agreement       8-K   10.4   6/7/16
                     
10.28   Subsidiary Guaranty       8-K   10.5   6/7/16
                     
10.29   Amendment to Subscription Agreement       8-K   10.6   6/7/16
                     
10.30   Securities Escrow Agreement       8-K   10.1   2/22/16
                     
10.31   Form of Series C Warrant       10-K/A   10.31   10/12/18
                     
10.32   Equity Line Purchase Agreement dated as of May 13, 2019       8-K   10.1   5/16/19
                     
10.33   Registration Rights Agreement dated as of May 13, 2019       8-K   10.2   5/16/19
                     
10.34   Note Exchange Agreement dated as of September 18, 2019       8-K   10.1   9/19/19
                     
10.35   Side Letter dated as of November 7, 2019       8-K   10.1   11/7/19
                     
21.1   List of Subsidiaries   (1)            
                     
31   Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   (3)            
                     
32   Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   (4)            

 

  26  
 

 

101.INS   XBRL Instance Document   (1)            
                     
101.SCH   XBRL Taxonomy Extension Schema   (1)            
                     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase   (1)            
                     
101.DEF   XBRL Taxonomy Extension Definition Linkbase   (1)            
                     
101.LAB   XBRL Taxonomy Extension Label Linkbase   (1)            
                     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase   (1)            

 

(1)

Previously filed with the Original Form 10-K on March 23, 2020.

   
(2) Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
   
(3) Filed herein
   
(4) Furnished herein

 

  27  
 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on June 22, 2020.

 

  BTCS INC.
     
Date: June 22, 2020 By: /s/ Charles Allen
    Charles W. Allen
    Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)

 

  28  
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

BTCS Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of BTCS Inc. (The “Company”) as of December 31, 2019 and 2018 and the related statements of operations, stockholders’ (deficit), and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the accompanying financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, and has an accumulated deficit that raises substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plan in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ RBSM LLP  
   
We have served as the Company’s auditor since 2016.  
   
Henderson, Nevada  
March 23, 2020  
   

Except for Note 2, as to which the date is June 22, 2020

 

 

  F- 1  

 

 

BTCS Inc.

Balance Sheets

 

    December 31,     December 31,  
    2019     2018  
             
Assets:                
Current assets:                
Cash   $ 143,098     $ 52,117  
Digital currencies     252,903       -  
Prepaid expense     24,008       8,333  
Total current assets     420,009       60,450  
                 
Other assets:                
Property and equipment, net     1,344       2,703  
Total other assets     1,344       2,703  
                 
Total Assets   $ 421,353     $ 63,153  
                 
Liabilities and Stockholders’ Deficit:                
Accounts payable and accrued expense   $ 28,324     $ 14,244  
Accrued compensation     416,935       104,902  
Convertible notes payable, net     159,854       -  
Short term loan     -       200,000  
Total current liabilities     605,113       319,146  
                 
Stockholders’ deficit:                
Preferred stock; 20,000,000 shares authorized at $0.001 par value:                
Series B Convertible Preferred stock: 0 shares issued and outstanding at December 31, 2019 and 2018; Liquidation preference $0.001 per share     -       -  
Series C-1 Convertible Preferred stock: 29,414 shares issued and outstanding at December 31, 2019 and 2018; Liquidation preference $0.001 per share     29       29  
Common stock, 975,000,000 shares authorized at $0.001 par value, 19,831,521 and 12,515,201 shares issued and outstanding at December 31, 2019 and 2018, respectively     19,830       12,515  
Additional paid in capital     116,780,174       115,074,655  
Accumulated deficit     (116,983,793 )     (115,343,192 )
Total stockholders’ deficit     (183,760 )     (255,993 )
                 
Total Liabilities and stockholders’ deficit   $ 421,353     $ 63,153  

 

The accompanying notes are an integral part of these financial statements.

 

  F- 2  

 

 

BTCS Inc.

Statements of Operations

 

    For the years ended  
    December 31,  
    2019     2018  
             
Operating expenses:                
General and administrative   $ 1,422,394     $ 986,525  
Marketing     9,989       3,644  
Total operating expenses     1,432,383       990,169  
                 
Other (expense) income:                
Interest expense     (86,142 )     -  
Impairment loss on digital currencies     (121,117 )     -  
Realized (loss) gain on digital currencies transactions     (959 )     163,749  
Total other (expenses) income     (208,218 )     163,749  
                 
Net loss   $ (1,640,601 )   $ (826,420 )
Deemed dividend related to reduction of warrant strike price     (95,708 )     (5,600 )
Net loss attributable to common stockholders   $ (1,736,309 )   $ (832,020 )
                 
Net loss per share attributable to common stockholders, basic and diluted   $ (0.11 )   $ (0.07 )
                 
Weighted average number of common shares outstanding, basic and diluted     15,885,129       12,385,402  

 

The accompanying notes are an integral part of these financial statements.

 

  F- 3  

 

 

BTCS Inc.

Consolidated Statement of Stockholders’ Deficit

For the years ended December 31, 2019 and 2018

 

    Series B Convertible     Series C-1 Convertible                 Additional           Total  
    Preferred Stock     Preferred Stock     Common Stock     Paid-in     Accumulated     Stockholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     Equity (Deficit)  
Balance January 1, 2018 (Restated)     25,877     $ 25       50,004     $ 50       12,101,462     $ 12,101     $ 115,018,023     $ (114,516,772 )   $ 513,427  
Conversion of Series B Convertible Preferred stock to common stock     (25,877 )     (25 )     -       -       172,513       173       (148 )     -       -  
Conversion of Series C-1 Convertible Preferred stock to common stock     -       -       (20,590 )     (21 )     137,266       137       (116 )     -       -  
Cashless warrant exercise     -       -       -       -       8,961       9       (9 )     -       -  
Warrant exercise     -       -       -       -       94,999       95       56,905       -       57,000  
Net loss     -       -       -       -       -       -       -       (826,420 )     (826,420 )
Balance December 31, 2018     -     $ -       29,414     $ 29       12,515,201     $ 12,515     $ 115,074,655     $ (115,343,192 )   $ (255,993 )
Common stock issued including equity commitment fee, net     -       -       -       -       4,642,108       4,642       1,157,358       -       1,162,000  
Conversion of convertible notes     -       -       -       -       1,931,788       1,931       216,040       -       217,971  
Beneficial conversion features associated with convertible notes payable     -       -       -       -       -       -       104,493       -       104,493  
Fractional shares adjusted for reverse split                     -       -       16,860       17       (17 )     -       -  
Warrant exercise     -       -       -       -       725,564       725       227,645       -       228,370  
Net loss     -       -       -       -       -       -       -       (1,640,601 )     (1,640,601 )
Balance December 31, 2019     -     $ -       29,414     $ 29       19,831,521     $ 19,830     $ 116,780,174     $ (116,983,793 )   $ (183,760 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  F- 4  

 

 

BTCS Inc.

Consolidated Statements of Cash Flows

 

    For the years ended  
    December 31,  
    2019     2018  
     (RESTATED)        
Net Cash flows used from operating activities:                
Net loss   $ (1,640,601 )   $ (826,420 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation expenses     1,359       1,130  
Amortization on debt discount     64,345          
Realized loss (gain) on digital currencies transactions     959       (163,749 )
Proceeds from sale of digital currencies     -       380,868  

Purchase of digital currencies

   

(374,979

)     -  
Interest expense     20,630          
Impairment loss on digital currencies     121,117       -  
Changes in operating assets and liabilities:                
Prepaid expenses and other current assets     (15,675 )     59,403  
Accounts payable and accrued expenses     11,423       43,149  
Accrued compensation     312,033       -  
Net cash used in operating activities     (1,499,389 )     (505,619 )
                 
Net cash used in investing activities:                
Purchase of property and equipment     -       (2,598 )
Net cash used in investing activities     -     (2,598 )
                 
Net cash provided by financing activities:                
Proceeds from short term loan     200,000       200,000  
Proceeds from exercise of warrants     228,370       57,000  
Net proceeds from issuance of common stock     1,162,000       -  
Net cash provided by financing activities     1,590,370       257,000  
                 
Net increase (decrease) in cash     90,981       (251,217 )
Cash, beginning of period     52,117       303,334  
Cash, end of period   $ 143,098     $ 52,117  
                 
Cash paid for interest and taxes   $ 905     $ -  
                 
Supplemental disclosure of non-cash financing and investing activities:                
Conversion of Series B Convertible Preferred Stock to common stock   $ -     $ 5,175  
Conversion of Series C-1 Convertible Preferred Stock to common stock   $ -     $ 4,118  
Conversion of convertible note to common stock   $ 217,971     $ -  
Exchange of promissory note and accrued interest into convertible note   $ 217,973     $ -  
Cashless warrant exercise   $ -     $ 269  
Fractional shares adjusted for reverse split   $ 17     $ -  
Deemed dividend   $ 95,708     $ 5,600  
Beneficial conversion features associated with convertible notes payable   $ 104,493     $ -  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  F- 5  

 

 

BTCS Inc.

NOTES TO FINANCIAL STATEMENTS

 

Note 1 - Organization and Description of Business and Recent Developments

 

BTCS Inc. (formerly Bitcoin Shop, Inc.), a Nevada corporation (the “Company”) was incorporated in 2008. In February 2014, the Company entered the business of hosting an online ecommerce marketplace where consumers can purchase merchandise using Digital 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.

 

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. Fractional shares resulting from the reverse split were rounded up to the nearest whole share. 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 and Restatement of the Consolidated Financial Statements

 

Basis of Presentation

 

The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries, DM. DM was dissolved on May 2, 2018. The Company maintains its books of account and prepares financial statements in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”). The Company’s fiscal year ends on December 31. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Restatement of the Consolidated Financial Statements

 

The purpose of this amendment is to correct an error in the Company’s previously issued financial statements for the period ended December 31, 2019 in connection with the classification of the $374,979 purchase of digital currencies in the statement of cash flows. The $374,979 purchase of digital currencies has now been re-classified from an investing activity to an operating activity in the statement of cash flows.

 

There was no effect of the restatement to the Company’s consolidated balance sheet, consolidated statement of operations and consolidated statement of changes in stockholders’ deficit for the year ended December 31, 2019.

 

In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited financial statements.

 

The effect of the restatement on the Company’s consolidated statement of cash flows for the year ended December 31, 2019 are as follows:

 

    For the years ended December 31, 2019  
    As Previously Reported     Restatement Adjustment     As Restated  
Net cash used in operating activities   $ (1,124,410 )   $ (374,979 )   $ (1,499,389 )
Net cash used in investing activities     (374,979 )     374,979       -  
Net cash provided by financing activities     1,590,370       -       1,590,370  
Net increase in cash     90,981       -       90,981  

 

There was no impact to net cash provided by financing activities within our consolidated statement of cash flows nor was there an impact on the net increase in cash resulting from restatement.

 

The impacts of the restatement has been reflected throughout these financial statements, including the applicable footnotes, as appropriate.

 

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.

 

  F- 6  

 

 

BTCS Inc.

NOTES TO 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 $1.1 million of cash in its operating activities for the year ended December 31, 2019. The Company incurred $1.6 million net loss for the year ended December 31, 2019. The Company had cash of approximately $0.1 million and a negative working capital of approximately $0.2 million at December 31, 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 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:

 

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 whether through Cavalry or other investors.

 

Note 4- Summary of Significant Accounting Policies

 

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements is as follows:

 

Concentration of Cash

 

The Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company considers all highly liquid investments with original maturities of six months or less when purchased to be cash and cash equivalents. As of December 31, 2019 and 2018, the Company had approximately $143,000 and $52,000 in cash. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

 

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December 31, 2019 and 2018, the Company had $0 in excess of the FDIC insured limit.

 

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.

 

  F- 7  

 

 

BTCS Inc.

NOTES TO FINANCIAL STATEMENTS

 

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.

 

Property and Equipment

 

Property and equipment consists of leasehold improvements, computer, equipment and office furniture and fixtures, all of which are recorded at cost. Depreciation and amortization is recorded using the straight-line method over the respective useful lives of the assets ranging from three to five years. Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.

 

Fair Value of Financial Instruments

 

Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

 

The Company uses three levels of inputs that may be used to measure fair value:

 

Level 1 - quoted prices in active markets for identical assets or liabilities

 

Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

 

Use of Estimates

 

The accompanying 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 indefinite life intangible 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 indefinite life 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.

 

Income Taxes

 

The Company recognizes income taxes on an accrual basis based on tax positions taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized. Should they occur, the Company’s policy is to classify interest and penalties related to tax positions as income tax expense. Since the Company’s inception, no such interest or penalties have been incurred.

 

Employee Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with ASC 718 Compensation - Stock Compensation (“ASC 718”). ASC 718 addresses all forms of share-based payment (“SBP”) awards including shares issued under employee stock purchase plans and stock incentive shares. Under ASC 718 awards result in a cost that is measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will result in a charge to operations.

 

  F- 8  

 

 

BTCS Inc.

NOTES TO FINANCIAL STATEMENTS

 

Advertising Expense

 

Advertisement costs are expensed as incurred and included in marketing expenses. Advertising expenses amounted to approximately $10,000 and $4,000 for the years ended December 31, 2019 and 2018, respectively.

 

Net Loss per Share

 

Basic loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period. 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 December 31, 2019 and 2018 because their effect was anti-dilutive:

 

    As of December 31,  
    2019     2018  
Warrants to purchase common stock     937,904       1,955,264  
Series C-1 Convertible Preferred stock     196,093       196,093  
Convertible notes     3,676,471       -  
Total     4,810,468       2,151,357  

 

Preferred Stock

 

The Company applies the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity. The Company’s preferred shares do not feature any redemption rights within the holders’ control or conditional redemption features not within the Company’s control as of December 31, 2019 and 2018. Accordingly, all issuances of preferred stock are presented as a component of stockholders’ equity.

 

Convertible Instruments

 

The Company has evaluated the Series A Convertible Preferred Stock (“Preferred Stock”) component of the Private Placement and determined it should be considered an “equity host” and not a “debt host” as defined by ASC 815, Derivatives and Hedging. This evaluation is necessary in order to determine if any embedded features require bifurcation and, therefore, separate accounting as a derivative liability. The Company’s analysis followed the “whole instrument approach,” which compares an individual feature against the entire preferred stock instrument which includes that feature. The Company’s analysis was based on a consideration of the Preferred Stock’s economic characteristics and risks and more specifically evaluated all the stated and implied substantive terms and features including (i) whether the Preferred Stock included redemption features, (ii) whether the preferred stockholders were entitled to dividends, (iii) the voting rights of the Preferred Stock and (iv) the existence and nature of any conversion rights. As a result of the Company’s determination that the Preferred Stock is an “equity host,” the embedded conversion feature is not considered a derivative liability.

 

Beneficial Conversion Feature of Convertible Notes Payable

 

The Company accounts for convertible notes payable in accordance with the guidelines established by the FASB Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options. The beneficial conversion feature of a convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a beneficial conversion feature related to the issuance of a convertible note when issued.

 

  F- 9  

 

 

BTCS Inc.

NOTES TO FINANCIAL STATEMENTS

 

The discounted face value is then used to measure the effective conversion price of the note. The effective conversion price and the market price of the Company’s common stock are used to calculate the intrinsic value of the conversion feature. The intrinsic value is recorded in the financial statements as a debt discount from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.

 

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. Because the Company doesn’t have any customer contracts as of January 1, 2018, the adoption of ASU 2014-09 did not have a material impact on the Company’s financial position, results of operations, equity or cash flows.

 

In December 2019, the FASB issued 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.

 

Note 5 - Note Payable

 

2018 Note

 

On December 18, 2018, the Company issued a $200,000 promissory note to one institutional investor (the “Promissory Note”). The Promissory Note was 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%. By the maturity date of the Promissory Note, the Company made no payment in connection with this Promissory Note and accrued interest expense of $17,973. On September 18, 2019, the Company and holder of the Promissory Note agreed to exchange the Promissory Note, including $17,973 accrued and unpaid interest for a new $217,973 Convertible Note dated September 18, 2019 (the “Convertible Note”). The Convertible Note is due December 18, 2019 and is convertible at a 20% discount to the closing price of the Company’s common stock on the principal trading market on the date before exercise, provided however that the conversion price shall never be less than $0.10 per share. The Convertible Note shall bear interest at 12% per annum (payable at maturity) and may be prepaid by the Company. From September 18, 2019 to September 30, 2019, the Company issued a total of 1,252,058 shares of the Company’s Common Stock for the conversion of $150,000 of principal on the Convertible Note and made no payment in connection with this Convertible Note and accrued interest expense. On October 16, 2019, the Company issued a total of 679,730 shares of the Company’s Common Stock for the conversion of the remaining $67,973 of principal on the Convertible Note and subsequently paid all the accrued interest expense of $905 on the Convertible Note. The exchange of the Promissory Note into the Convertible Note met the definition of an extinguishment. However, the carrying amount of the Promissory Note and the fair value of the Convertible Note were comparable. Therefore, no gain or loss was recorded on the extinguishment. 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 1,746,579 shares of common stock at $0.12 per share, but the Company’s fair value of underlying common stock was $0.16 per share. As such, the Company recognized a beneficial conversion feature, resulting in a discount to the Notes of approximately $54,000 with a corresponding credit to additional paid-in capital. During the year ended December 31, 2019, the Company recorded approximately $54,000 in interest expense related to amortization on debt discount related to the Convertible Note.

 

2019 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. During the year ended December 31, 2019, the Company recorded approximately $10,000 in interest expense related to amortization on debt discount related to the 2019 Promissory Note. As of December 31, 2019, the Convertible Note had principal balance of $0.2 million, accrued interest on the note payable of approximately $4,000 and approximately $40,000 remaining unamortized debt discount. 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.

 

  F- 10  

 

 

BTCS Inc.

NOTES TO FINANCIAL STATEMENTS

 

Note 6 - Stockholders’ Equity

 

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. Fractional shares resulting from the reverse split were rounded up to the nearest whole share. 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.

 

2019 Activities

 

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.

 

During 2019, the Company issued 4,374,741 shares of Common Stock (including 333,334 commitment shares and 68,532 pro-rata commitment shares) under the Purchase Agreement with Cavalry resulting in aggregate proceeds of approximately $1.16 million.

 

During 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 $228 thousand to the Company.

 

During 2019, the Company issued a total of 1,931,788 shares of the Company’s Common Stock for the conversion of approximately $218,000 of principal on the Convertible Note.

 

Equity Line 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.

 

  F- 11  

 

 

BTCS Inc.

NOTES TO 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 December 31, 2019, the Company sold all 4,374,741 shares available for sale under the Registration Statement for total proceeds of $1,162,000, net of cost of $12,625.

 

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. As of December 31, 2019, the Company sold 267,367 shares available for sale under the second Registration Statement for total proceeds of $15,986.

 

2018 Activities

 

On January 1, 2018, the Company issued 172,513 shares of Common Stock upon the conversion of 25,877 shares of Series B Convertible Preferred stock.

 

On April 20, 2018, the Company issued 13,073 shares of Common Stock upon the conversion of 1,961 shares of Series C-1 Convertible Preferred stock.

 

On April 23, 2018, the Company issued 39,220 shares of Common Stock upon the conversion of 5,883 shares of Series C-1 Convertible Preferred stock.

 

On April 24, 2018, the Company issued 84,973 shares of Common Stock upon the conversion of 12,746 shares of Series C-1 Convertible Preferred stock.

 

On July 23, 2018, the Company issued 8,961 shares of Common Stock for the cashless exercise of 18,518 warrants.

 

On October 11, 2018 the Company issued four investors each 458,333 Series C Warrants or 1,833,333 warrants in aggregate. These Series C Warrants were not lawfully issued in accordance with the Nevada Revised Statutes (“NRS”).

 

On October 25, 2018 the Company and each of the four investors who hold the Series C Warrants agreed to cancel the Series C Warrants for no consideration. Accordingly, the Series C Warrants are not outstanding.

 

On November 13, 2018, pursuant to the Amendment to Securities Agreement dated December 7, 2017, the Company temporarily reduced the exercise price of 133,333 Series A Warrants from $0.085 to $0.02 (the “Offer”). The offer was made to all four investors who are record holders of the Series A Warrants on identical terms. Each investor had the option to exercise up to 33,333 Series A Warrants at the lower exercise price.

 

Over the course of November 13 through November 16, 2018, the Company issued 95,000 shares of Common Stock for the cash exercise of Series A Warrants through the Offer resulting in aggregate proceeds of $57,000 to the Company.

 

  F- 12  

 

 

BTCS Inc.

NOTES TO FINANCIAL STATEMENTS

 

Stock Purchase Warrants

 

The following is a summary of warrant activity for the year ended December 31, 2019 and 2018:

 

    Number of Warrants  
Outstanding as of December 31, 2017     2,068,831  
Issuance of Series C Warrants     1,833,333  
Cancellation of Series C Warrants for no consideration     (1,833,333 )
Cashless warrant exercise     (18,519 )
Warrants exercise for cash     (94,999 )
Expiration of warrant     (39 )
Outstanding as of December 31, 2018     1,955,274  
Warrants exercise for cash     (725,564 )
Expiration of warrant     (291,806 )
Outstanding as of December 31, 2019     937,904  

 

Note 7 - Employment Agreements

 

Charles W. Allen

 

On June 22, 2017, we entered into an employment agreement with Charles Allen (the “Allen Employment Agreement”), whereby Mr. Allen agreed to serve as our Chief Executive Officer and Chief Financial Officer for a period of two (2) years, subject to renewal, in consideration for an annual salary of $245,000. Additionally, under the terms of the Allen Employment Agreement, Mr. Allen shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Allen shall be entitled to participate in all benefits plans we provide to our senior executive. The Company accrued approximately $256,000 in bonuses during the year ended December 31, 2019 and did not pay or accrue any amount for bonuses during the year ended December 31, 2018. We shall reimburse Mr. Allen for all reasonable expenses incurred in the course of his employment. The Company shall pay the Executive $500 per month to cover telephone and internet expenses. If the Company does not provide office space to the Executive the Company will pay the Executive an additional $500 per month to cover expenses in connection with their office space needs.

 

On February 6, 2019 we amended the Allen Employment Agreement whereby the annual salary was increased to $345,000 per year effective January 1, 2019.

 

Michal Handerhan

 

On June 22, 2017, we entered into an employment agreement with Michal Handerhan (the “Handerhan Employment Agreement”), whereby Mr. Handerhan agreed to serve as our Chief Operating Officer and Secretary for a period of two (2) years, subject to renewal, in consideration for an annual salary of $190,000. Additionally, under the terms of the Handerhan Employment Agreement, Mr. Handerhan shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Handerhan shall be entitled to participate in all benefits plans we provide to our senior executive. The Company accrued approximately $150,000 in bonuses during the year ended December 31, 2019 and did not pay or accrue any amount for bonuses during the year ended December 31, 2018. We shall reimburse Mr. Handerhan for all reasonable expenses incurred in the course of his employment. The Company shall pay the Executive $500 per month to cover telephone and internet expenses. If the Company does not provide office space to the Executive the Company will pay the Executive an additional $500 per month to cover expenses in connection with their office space needs.

 

On February 6, 2019 we amended the Handerhan Employment Agreement whereby the annual salary was increased to $215,000 per year effective on January 1, 2019.

 

The terms of the Allen Employment Agreement and Handerhan Employment Agreement (collectively the “Employment Agreements”) provide each of Messrs. Allen and Handerhan (the “Executives”) certain, severance and change of control benefits if the Executive resigns from the Company for good reason or the Company terminates him other than for cause. In such circumstances, the Executive would be entitled to a lump sum payment equal to (i) the Executive’s then-current base salary, and (ii) payment on a pro-rated basis of any bonus or other payments earned in connection with any bonus plan to which the Executive was a participant. In addition, the severance benefit for the Executives the employment agreements include the Company continuing to pay for medical and life insurance coverage for up to one year following termination. If, within eighteen months following a change of control (as defined below), the Executive’s employment is terminated by the Company without cause or he resigns from the Company for good reason, the Executive will receive certain severance compensation. In such circumstances, the cash benefit to the Executive will be a lump sum payment equal to two times (i) his then-current base salary and (ii) his prior year cash bonus and incentive compensation. Upon the occurrence of a change of control, irrespective of whether his employment with the Company terminates, each Executive’s stock options and equity-based awards will immediately vest.

 

  F- 13  

 

 

BTCS Inc.

NOTES TO FINANCIAL STATEMENTS

 

A “change of control” for purposes of the Employment Agreements means any of the following: (i) the sale or partial sale of the Corporation to an un-affiliated person or entity or group of un-affiliated persons or entities pursuant to which such party or parties acquire shares of capital stock of the Corporation representing at least twenty five (25%) of the fully diluted capital stock (including warrants, convertible notes, and preferred stock on an as converted basis) of the Corporation; (ii) the sale of the Corporation to an un-affiliated person or entity or group of such persons or entities pursuant to which such party or parties acquire all or substantially all of the Corporation’s assets determined on a consolidated basis, or (iii) Incumbent Directors (Mr. Allen and Mr. Handerhan) cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the board of directors of the Company.

 

Additionally, pursuant to the terms of the Employment Agreements, we have agreed to execute and deliver in favor of the Executives an indemnification agreement and to maintain directors’ and officers’ insurance with terms and in the amounts commensurate with our senior executive.

 

Note 8 - Income Taxes 

 

The Company had no income tax expense due to operating loss incurred for the years ended December 31, 2019 and 2018.

 

The tax effects of temporary differences and tax loss and credit carry forwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 2019 and 2018 are comprised of the following:

 

    As of December 31,  
    2019     2018  
Deferred tax assets:                
Net-operating loss carryforward   $

1,436,050

    $

1,117,532

 
Other     -       -  
                 
Total Deferred Tax Assets    

1,436,050

     

1,117,532

 
Valuation allowance    

(1,436,050

)     (1,117,532 )
Deferred Tax Asset, Net of Allowance   $ -     $ -  

 

At December 31, 2019, the Company had net operating loss carry forwards for federal and state tax purposes of approximately $6.84 million which begins to expire in 2034. For tax years beginning after December 31, 2017, NOLs generated can offset only 80% of taxable income in any given tax year. The 20-year carryforward period has been replaced with an indefinite carryforward period for these NOLs generated in 2018 and future years. Prior to the merger, the Company had generated net operating losses, which the Company’s preliminary analysis indicates would be subject to significant limitations pursuant to Internal Revenue Code Section 382. The Company has not completed its IRC Section 382 Valuation, as required and the NOL’s because of potential Change of Ownerships might be completely worthless. Therefore, Management of the Company has recorded a Full Valuation Reserve, since it is more likely than not that no benefit will be realized for the Deferred Tax Assets.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. In case the deferred tax assets will not be realized in future periods, the Company has provided a valuation allowance for the full amount of the deferred tax assets at December 31, 2019. The valuation allowance increased by approximately $0.32 million as of December 31, 2019.

 

The expected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as follows:

 

  F- 14  

 

 

BTCS Inc.

NOTES TO FINANCIAL STATEMENTS

 

    For the years ended December 31,  
    2019     2018  
Statutory Federal Income Tax Rate     (21.0 )%     (21.0 )%
State Taxes, Net of Federal Tax Benefit     (6.3 )%