ITEM
1 Financial Statements
BTCS
Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
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March
31, 2017
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December
31, 2016
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Assets:
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|
|
|
|
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Current assets:
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|
|
|
|
|
|
|
Cash
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|
$
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4,341
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|
|
$
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95,068
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|
Digital currencies
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|
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199
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|
|
|
199
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|
Total current
assets
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4,540
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|
|
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95,267
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|
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Other assets:
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Websites
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-
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919
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Deposits
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1,885
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1,885
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Total other assets
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1,885
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2,804
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Total
Assets
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$
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6,425
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$
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98,071
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Liabilities and Stockholders'
Deficit:
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Accounts payable and accrued expense
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$
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965,837
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$
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770,497
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Short term loan
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45,000
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45,000
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Convertible notes
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-
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3,283,034
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Derivative liabilities
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5,079,807
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23,231,938
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Derivative liabilities for shortfall
of shares
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-
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|
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14,915,419
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Liquidated Damages
Liabilities
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-
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3,102,750
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Total current
liabilities
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6,090,644
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45,348,638
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Stockholders' deficit:
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Preferred stock; 20,000,000 shares authorized at 0.001 par value:
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Series B Convertible Preferred: 1,129,241
and 0 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively Liquidation preference 0.001 per
share
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1,128
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-
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Common stock, 975,000,000 shares authorized
at 0.001 par value, 41,924,720 and 16,095,929 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
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42,325
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16,097
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Treasury stock, at cost, 216,667 shares at March 31, 2017 and
December 31, 2016
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(617
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)
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(217
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)
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Additional paid in capital
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98,120,692
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23,785,756
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Accumulated deficit
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(104,247,747
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)
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(69,052,203
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)
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Total stockholders' deficit
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(6,084,219
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)
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(45,250,567
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)
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Total
Liabilities and stockholders' deficit
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$
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6,425
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$
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98,071
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The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BTCS
Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
(Unaudited)
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For
the three months ended
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March
31,
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2017
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2016
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Revenues
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E-commerce
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$
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3,181
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$
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-
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Transaction verification
services
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-
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191,403
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Hosting
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-
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7,740
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Total revenues
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3,181
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199,143
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Power and mining
expenses
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-
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(113,982
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)
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Gross profit
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3,181
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85,161
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Operating expenses (income):
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Marketing
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60
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7,575
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General and administrative
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179,386
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399,802
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Fair
value adjustments for digital currencies
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-
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(4,285
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)
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Total
operating expenses
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179,446
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403,092
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Net
loss from operations
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(176,265
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)
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(317,931
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)
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Other (expenses) income:
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Impairment loss
related to investment
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-
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(2,250,000
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)
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Fair value adjustments
for warrant liabilities
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(33,172,886
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)
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497,233
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Fair value adjustments
for convertible notes
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(16,849,071
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)
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35,010
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Interest expenses
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-
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(3,541
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)
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Gain on extinguishment
of debt
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15,873,067
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-
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Loss from lease
termination
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(177,389
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)
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-
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Liquidated damages
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(693,000
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)
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-
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Other
expenses
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-
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(112
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)
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Total other expenses
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(35,019,279
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)
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(1,721,410
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)
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Net
loss
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$
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(35,195,544
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)
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$
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(2,039,341
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)
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Net loss per share,
basic and diluted
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$
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(1.78
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)
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$
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(0.72
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)
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Weighted average number of shares outstanding,
basic and diluted
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Basic and diluted
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19,730,929
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2,841,342
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The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BTCS
Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
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For
the three months ended
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March
31,
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2017
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2016
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Net Cash flows used
from operating activities:
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Net loss
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$
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(35,195,544
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)
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$
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(2,039,341
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)
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Adjustments to reconcile net loss to
net cash used in operating activities:
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Depreciation and
amortization expenses
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919
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94,845
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Change in fair value
of digital currencies
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-
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(4,285
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)
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Fair value adjustments
for warrant liabilities
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33,172,886
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(497,233
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)
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Fair value adjustments
for convertible notes
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16,849,071
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(35,010
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)
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Gain on extinguishment
of debt
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(15,873,067
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)
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|
|
-
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Loss from lease
termination
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177,389
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-
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Impairment loss
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-
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2,250,000
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Liquidated damages
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693,000
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-
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Changes in operating assets and liabilities:
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Digital currencies
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-
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(24,196
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)
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Accounts receivable
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-
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(3,780
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)
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Prepaid expenses
and other current assets
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-
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(5,796
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)
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Accounts
payable
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84,619
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(89,512
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)
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Net cash used
in operating activities
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(90,727
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)
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(354,308
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)
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Net cash used in
investing activities:
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Purchase of property
and equipment
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-
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(11,208
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)
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Sale of property
and equipment, net
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|
-
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2,652
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Refund
of lease deposit
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-
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300,889
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Net cash provided
by investing activities
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-
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292,333
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Net decrease in cash
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(90,727
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)
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(61,975
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)
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Cash, beginning of period
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95,068
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124,535
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Cash, end of period
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$
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4,341
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$
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62,560
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Supplemental disclosure
of non-cash financing and investing activities:
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Cashless warrant exercise
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$
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4,534
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$
|
-
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Fractional shares
adjusted for reverse split
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$
|
4
|
|
|
$
|
-
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FN Anti-Dilution Issuance of Common Stock
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$
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14,517
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$
|
-
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Conversion of Series
B Preferred Stock
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$
|
6,340
|
|
|
$
|
-
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Management Redemption
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$
|
400
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$
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-
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Settlement of notes and warrants
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$
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90,168,290
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$
|
-
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Preferred converted to Common Stock
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$
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(32
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)
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$
|
-
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Preferred issued for conversion of notes
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$
|
1,160
|
|
|
$
|
-
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|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BTCS
Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note
1 - Business Organization and Nature of Operations
BTCS
Inc. (formerly Bitcoin Shop, Inc.), a Nevada Corporation (the “Company”) was incorporated in 2008. In February 2014,
the Company entered the business of hosting an online ecommerce marketplace where consumers can purchase merchandise using digital
currencies, including bitcoin and is currently focused on blockchain and digital currency ecosystems. In January 2015, the Company
began a rebranding campaign using its BTCS.COM domain (shorthand for Blockchain Technology Consumer Solutions) to better reflect
its broadened strategy. The Company released its new website which included broader information on its strategy. In late 2014
we shifted our focus towards our transaction verification service business, also known as bitcoin mining, though in mid 2016 we
ceased our transaction verification services operation at our North Carolina facility due to capital constraints. Although our
ecommerce marketplace is still online we are no longer developing, marketing or supporting it.
The
Company is an early entrant in the Digital Asset market and one of the first U.S. publicly traded companies to be involved with
Digital Assets and blockchain technologies. Subject to additional financing, the Company plans to create a portfolio of digital
assets including bitcoin and other “protocol tokens” to provide investors a diversified pure-play exposure to the
bitcoin and blockchain industries. The Company intends to acquire digital assets through: open market purchases, participating
in initial digital asset offerings (often referred to as initial coin offerings). Additionally, the Company may acquire digital
assets by resuming its transaction verification services business through outsourced data centers and earning rewards in digital
assets by securing their respective blockchains.
On
July 20, 2016, BTCS Digital Manufacturing (“DM”), a wholly owned subsidiary of the Company, suspended its North Carolina
transaction verification services facility operations. The reduction in the block reward from 25 bitcoins to 12.5 bitcoins, often
referred to as the halving, coupled with the facilities cooling system failing, resulted in DM being unable to meet certain of
its financial commitments. The Company has subsequently ceased operations at DM.
On
August 8, 2016, DM discovered that its facility in North Carolina was broken into and certain of its equipment and approximately
165 Bitmain transaction verification servers leased from CSC Leasing Company (“CSC”) were stolen. The value of the
stolen equipment owned by the Company was not material. The Company reported the theft to local authorities as well its insurance
company regarding next steps. The Company received payment from the insurance company in the amount of approximately $85,000 and
has assigned the payment to the benefit of CSC as part of the settlement agreement with CSC the Company’s equipment finance
provider which owned the stolen serves.
Reverse
Stock Split and Amendment to Certificate of Incorporation
On
February 13, 2017, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of
Nevada to implement a reverse stock split at a ratio of one-for-60. The reverse stock split became effective immediately.
On
February 15, 2017, the Company’s Common Stock began trading on the OTCQB under the symbol “BTCSD.” On approximately
March 15, 2017, the Common Stock resumed trading under the symbol “BTCS.”
The
Reverse Stock Split reduced the number of outstanding shares of Common Stock from 952,756,004 shares to 15,879,267 shares as of
December 31, 2016. All per share amounts and outstanding shares of Common Stock including stock options, restricted stock and
warrants, have been retroactively adjusted in these consolidated financial statements for all periods presented to reflect the
1-for-60 Reverse Stock Split. Further, exercise prices of stock options and warrants have been retroactively adjusted in these
consolidated financial statements for all periods presented to reflect the 1-for-60 Reverse Stock Split. Numbers of shares of
the Company’s preferred stock and convertible securities were not affected by the Reverse Stock Split; however, the conversion
ratios have been adjusted to reflect the Reverse Stock Split.
Note
2 - Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q
and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying condensed consolidated
financial statements do not include all of the information and notes required by GAAP for annual financial statements, but reflect
all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented. In the opinion of the Company’s management, all
adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position
and the results of operations for the periods presented have been included. Interim results are not necessarily indicative of
results for a full year. The condensed consolidated financial statements and notes should be read in conjunction with the financial
statements and notes for the year ended December 31, 2016.
BTCS
Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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 members and proceeds in financing transactions.
On June 6, 2016, the Company, entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
certain institutional investors (the “Purchasers”), pursuant to which the Purchaser subscribed for up to $375,000
of a 20% Original Issue Discount Junior Secured Convertible Notes (the “Junior Notes”). The aggregate principal amount
of the Junior Notes issued at the initial close was $125,000 and the Company received $100,000 after giving effect to the 20%
original issue discount. In June 2016, the Company issued 68,750 shares of Common Stock for the cash exercise of warrants resulting
in aggregate proceeds of approximately $92,000. On December 6, 2016, the Company issued a total of $220,002 Convertible Promissory
Notes (the “December 2016 Notes”) to three accredited investors. The December 2016 Notes were issued in connection
with a loan of $200,002 and the cancellation of two $10,000 promissory notes previously issued by the Company to two of the investors.
Notwithstanding,
the Company has limited revenues, limited capital resources and is subject to all of the risks and uncertainties that are typical
of an early stage enterprise. Significant uncertainties include, among others, whether the Company will be able to raise the capital
it needs to finance its longer term operations and whether such operations, if launched, will enable the Company to sustain operations
as a profitable enterprise.
Our
working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. The Company
used approximately $91,000 of cash in its operating activities for the three months ended March 31, 2017. The Company incurred
$35.2 million net loss for the three months ended March 31, 2017. The Company had cash of approximately $4,000 and a working capital
deficiency of approximately $6.1 million at March 31, 2017, which includes $5.1 million for the fair value of derivative liabilities.
The Company expects to incur losses into the foreseeable future as it undertakes its efforts to execute its business plans.
The
Company will require significant additional capital to sustain its short-term operations and make the investments it needs to
execute its longer term business plan. The Company’s existing liquidity is not sufficient to fund its operations and anticipated
capital expenditures for the foreseeable future. The Company is currently seeking to obtain additional debt or equity financing,
however there are currently no commitments in place for further financing nor is there any assurance that such financing will
be available to the Company on favorable terms, if at all.
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about
the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The consolidated
financial statements have been prepared assuming the Company will continue as a going concern. The Company has not made adjustments
to the accompanying consolidated financial statements to reflect the potential effects on the recoverability and classification
of assets or liabilities should the Company be unable to continue as a going concern.
The
Company continues to incur ongoing administrative and other operating expenses, including public company expenses, in excess of
revenues. While the Company continues to implement its business strategy, it intends to finance its activities by:
●
|
managing
current cash and cash equivalents on hand from the Company’s past debt and equity offerings by controlling costs,
|
|
|
●
|
seeking
additional financing through sales of additional securities
|
Note
4 - Summary of Significant Accounting Policies
There
have been no material changes in the Company’s significant accounting policies to those previously disclosed in the
2016 Annual Report.
Concentration
of Cash
The Company maintains cash
balances at two financial institutions in checking accounts and money market accounts. The Company considers all highly liquid
investments with original maturities of three months or less when purchased to be cash and cash equivalents. As of March 31,
2017 and December 31, 2016, the Company had $4,000 and 95,000 in cash and cash equivalents. The Company has
not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
BTCS
Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Derivative
Instruments
We
account for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in accordance
with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities, or ASC 815, as well as related interpretations
of this topic. In accordance with this topic, derivative instruments and hybrid instruments are recognized as either assets or
liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives
that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in
fair value recognized as either a gain or loss in earnings. We determine the fair value of derivative instruments and hybrid instruments
based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of
each instrument. The Company used a Monte Carlo model to separately value the Warrants issued in connection with the convertible
notes in order to take into account the possibility of an adjustment to the exercise price associated with new rounds of financing
in the future.
Use
of Estimates
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“US GAAP”). This requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses during the period. The Company’s significant
estimates and assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, the valuation
of derivative liabilities, and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s
estimates, including the carrying amount of the intangible assets, could be affected by external conditions, including those unique
to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on
the Company’s estimates and could cause actual results to differ from those estimates and assumptions.
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. Net income (loss) attributable to common stockholders includes the effect of the deemed
capital contribution on extinguishment of preferred stock and the deemed dividend related to the immediate accretion of beneficial
conversion feature of convertible preferred stock. 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
incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of
the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes
the shares issuable upon the conversion of preferred stock and the exercise of stock options and warrants from the calculation
of net loss per share if their effect would be anti-dilutive.
The
following financial instruments were not included in the diluted loss per share calculation as of March 31, 2017 and 2016 because
their effect was anti-dilutive:
|
|
As
of March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants to purchase Common Stock
|
|
|
105,610,725
|
|
|
|
29,203,352
|
|
Convertible notes
|
|
|
-
|
|
|
|
4,833,333
|
|
Series B Preferred Stock
|
|
|
225,848,200
|
|
|
|
-
|
|
Total
|
|
|
331,458,925
|
|
|
|
34,036,685
|
|
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, an updated standard on revenue recognition.
ASU No. 2014-09 provides enhancements to the quality and consistency of how revenue is reported by companies while also improving
comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP.
The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers
in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The
new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously
addressed comprehensively and improve guidance for multiple-element arrangements. In July 2015, the FASB voted to approve a one-year
deferral of the effective date of ASU No. 2014-09, which will be effective for the Company in the first quarter of fiscal year
2018 and may be applied on a full retrospective or modified retrospective approach. The Company is evaluating the impact
of implementation and transition approach of this standard on its consolidated financial statements.
BTCS
Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
In
January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No.
2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies
the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment
to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance
sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in
the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure
the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation
of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the
accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance
on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The Company is currently evaluating the impact that ASU No. 2016-01 will have on its consolidated financial
statements and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840) and
provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The
new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the
principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether
lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively.
A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve
months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance
for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption
permitted upon issuance. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(“ASU 2016-08”). The purpose of ASU 2016-08 is to clarify the implementation of guidance on principal versus agent
considerations. The amendments in ASU 2016-08 are effective for interim and annual reporting periods beginning after December
15, 2017. The Company is currently assessing the impact of ASU 2016-08 on the consolidated financial statements and related disclosures.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized
cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount
of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value
and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective
on January 1, 2020. Early adoption will be available on January 1, 2019. The Company is currently evaluating the effect that the
updated standard will have on its consolidated financial statements and related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments,
which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. The Company is currently evaluating the impact of this new pronouncement on its consolidated statements
of cash flows.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill
Impairment. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation.
A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed
the carrying amount of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year
2021 is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed
on testing dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on its consolidated
financial statements.
In
May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
,
which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under
the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of
the award (as equity or liability) changes as a result of the change in terms or conditions. It is effective prospectively for
the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. The Company
is currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures, but does
not expect it to have a significant impact.
BTCS
Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging
(Topic 815).
The amendments in Part I of this Update change the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements
for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.
For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS)
in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as
a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion
options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features
(in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments
in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as
pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business
entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal
years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments
in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
The Company is currently evaluating the impact of adopting this standard on the consolidated financial statements and disclosures.
Note
5 - Fair Value Measurements
The
Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy.
The
following table presents information about the Company’s liabilities measured at fair value on a recurring basis and the
Company’s estimated level within the fair value hierarchy of those assets and liabilities as of March 31, 2017 and December
31, 2016:
|
Fair
value measured at March 31, 2017
|
|
|
Total
carrying value at March 31,
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2017
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
199
|
|
|
$
|
199
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
5,079,807
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
5,079,807
|
|
|
|
Fair
value measured at December 31, 2016
|
|
|
|
Total
carrying value at December 31,
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2016
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
199
|
|
|
$
|
199
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
23,231,938
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
23,231,938
|
|
Derivative
liabilities for shortfall of shares
|
|
|
14,915,419
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,915,419
|
|
Convertible
notes inclusive of derivative liabilities
|
|
|
3,283,034
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,283,034
|
|
There
were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2017.
The
following table presents additional information about Level 3 assets and liabilities measured at fair value. Both observable and
unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category.
As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in fair
value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable
long-dated volatilities) inputs.
BTCS
Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Changes
in Level 3 liabilities measured at fair value for the three months ended March 31, 2017:
Derivative liabilities
balance - January 1, 2017
|
|
$
|
23,231,938
|
|
Conversion of warrant liabilities
|
|
|
(51,325,017
|
)
|
Fair value adjustments
for warrant liabilities
|
|
|
33,172,886
|
|
Derivative liabilities
balance - March 31, 2017
|
|
$
|
5,079,807
|
|
Derivative liabilities
for shortfall of shares balance - January 1, 2017
|
|
$
|
14,915,419
|
|
Conversion of shortfall shares
liabilities
|
|
|
(14,915,419
|
)
|
Derivative liabilities
for shortfall of shares balance - March 31, 2017
|
|
$
|
-
|
|
Convertible notes at fair
value - January 1, 2017
|
|
$
|
3,283,034
|
|
Conversion of convertible notes
|
|
|
(20,132,105
|
)
|
Change in fair
value of convertible notes (including OID discount)
|
|
|
16,849,071
|
|
Convertible
notes at fair value - March 31, 2017
|
|
$
|
-
|
|
The
Company’s derivative liabilities are measured at fair value using the Monte Carlo simulation valuation methodology. A summary
of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
derivative liabilities that are categorized within Level 3 of the fair value hierarchy for the three months ended March 31, 2017
is as follows:
Warrant
Liabilities
Date
of valuation
|
|
March
2, 2017
|
|
|
March
31, 2017
|
|
Strike Price
|
|
0.025 - 18.000
|
|
|
0.025 - 18.000
|
|
Volatility
|
|
186.7% - 208.3
|
%
|
|
190.71% - 223.85
|
%
|
Risk-free interest rate
|
|
|
1.25%
- 1.83
|
%
|
|
|
1.20%
- 1.51
|
%
|
Contractual life (in years)
|
|
|
1.79
to 3.79
|
|
|
|
1.71
to 3.04
|
|
Dividend yield (per share)
|
|
|
0
|
|
|
|
0
|
|
Convertible
Notes at Fair Value
Date
of valuation
|
|
March
2, 2017
|
|
Strike Price
|
|
|
0.32
|
|
Volatility
|
|
|
267.8
|
%
|
Risk-free interest rate
|
|
|
0.68
|
%
|
Dividend yield (per share)
|
|
|
0
|
|
The
development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the
responsibility of the Company’s Management.
Note
6 - Related Party Transactions
On
January 30, 2017, the Company received 24,000,000 pre-split shares (400,000 shares post-split) of Common Stock for cancelation
for no consideration (the “Escrow Shares”). The Escrow Shares were placed in escrow by Charles Allen our Chief Executive
Officer, Chief Financial Officer and Chairman, and Michal Handerhan, our Chief Operating Officer and corporate secretary (collectively,
the “Principal Stockholders”) pursuant to a securities escrow agreement dated February 19, 2016 (the “Securities
Escrow Agreement”). The Company recorded an adjustment to additional paid-in capital for $400 related to this transaction.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
7 - Notes Payable
On
June 6, 2016, the Company, entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
certain institutional investors (the “Purchasers”), pursuant to which the Purchaser subscribed for up to $375,000
of 20% Original Issue Discount Junior Secured Convertible Notes (the “Junior Notes”). The aggregate principal amount
of the Junior Notes issued at the initial close is $125,000 and the Company received $100,000 after giving effect to the 20% original
issue discount. The lead investor was granted the option to require the Company to sell the Purchasers up to two additional Junior
Notes in the principal amount of $125,000 during each of the periods that begin with the Initial Closing Date and end (i) on or
before 45 days from the Initial Closing Date, and (ii) on or before 90 days from the Initial Closing Date.
The
Junior Notes bear no interest except in the event of default which interest rate is 24% per annum upon the occurrence of an Event
of Default (as defined in the Junior Notes), have a maturity date of December 5, 2016 and are convertible (principal, and interest)
at any time after the issuance date of the Junior Notes into shares of the Company’s Common Stock at a conversion price
equal to $18.00 per share. If an Event of Default has occurred, the Junior Note shall be convertible at 60% of the lowest closing
price during the prior twenty (20) trading days of the Company’s Common Stock. The Junior Notes were exchanged for Series
B Preferred shares and were not outstanding on March 31, 2017.
The
Junior Notes contain certain covenants, such as restrictions on the incurrence of indebtedness, creation of liens, payment of
restricted payments, redemptions, payment of cash dividends and the transfer of assets. The Junior Notes also contain certain
adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar
transactions. In addition, subject to limited exceptions, each Purchaser will not have the right to convert any portion of the
Junior Note if such Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares
of the Company’s Common Stock outstanding immediately after giving effect to its conversion.
In
connection with the Company’s obligations under the Junior Notes, the Company and its subsidiaries (the “Subsidiaries”)
entered into a Security Agreement, Pledge Agreement and Subsidiary Agreement with the lead investor, as agent, pursuant to which
the Company and the Subsidiaries granted a lien on all assets of the Company (the “Collateral”) excluding permitted
indebtedness, for the benefit of the Purchasers, to secure the Company’s obligations under the Junior Notes. Upon an Event
of Default (as defined in the Junior Notes), the Purchaser may, among other things, collect or take possession of the Collateral,
proceed with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
As
a result of the Senior Note conversions, the Company became obligated to issue, subject to certain limitations, the following
additional securities: (i) 108,747,790 shares of Common Stock pursuant to “favored nations” provisions in certain
common stockholder subscription agreements which includes those anti-dilution shares of Common Stock previously disclosed; (ii)
warrants to purchase 171,349,405 shares of Common Stock pursuant to “favored nations” provisions in certain common
stockholder subscription agreements which includes those anti-dilution warrants previously disclosed, and (iii) warrants to purchase
97,423,579 shares of Common Stock pursuant to the terms of the warrants issued on December 16, 2016 which includes those anti-dilution
warrants previously disclosed. The Company also lowered the conversion price of the Company’s outstanding Senior Notes and
Junior Notes to $0.025.
On
March 9, 2017, the Company completed a securities exchange offer (the “Note Offer”) with its three convertible note
holders (the “Note Holders”). Pursuant to the Note Offer the Note Holders agreed to exchange i) $868,897 of 5% Original
Issue Discount 10% Senior Convertible Note Due September 16, 2016, originally issued in December 2015 and all accrued interest
and liquidated damages owed (collectively the “Senior Notes”), ii) $175,000 of 20% Original Issue Discount Junior
Convertible Notes Due December 5, 2016, originally issued in June 2016 and all accrued interest and liquidated damages owed (collectively
the “Junior Notes”), iii) $220,002 of 8% Convertible Notes Due June 6, 2017, originally issued in December 2016 and
all accrued interest owed (collectively the “Convertible Notes”), and iv) 97,423,579 warrants (the “Senior Warrants”)
for 845,631 shares of Series B Convertible Preferred Stock (the “Preferred”). After giving effect to the Note Offer
the Company no longer had any Senior Notes, Junior Notes or Convertible Notes outstanding. A gain of $15.9 million was booked
for the extinguishment of $90.2 million liabilities associated with convertible notes, warrant liabilities, shortfall shares liabilities
and liquidated damages.
Note
8 - Stockholders’ Equity
Reverse
Stock Split and Amendment to Certificate of Incorporation
On
February 13, 2017, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of
Nevada to implement a reverse stock split at a ratio of one-for-60. The reverse stock split became effective immediately.
On
February 15, 2017, the Company’s Common Stock began trading on the OTCQB under the symbol “BTCSD.” On approximately
March 15, 2017, the Common Stock resumed trading under the symbol “BTCS.”
The
Reverse Stock Split reduced the number of outstanding shares of Common Stock from 952,756,004 shares to 15,879,267 shares as of
December 31, 2016. All per share amounts and outstanding shares of Common Stock including stock options, restricted stock and
warrants, have been retroactively adjusted in these consolidated financial statements for all periods presented to reflect the
1-for-60 Reverse Stock Split. Further, exercise prices of stock options and warrants have been retroactively adjusted in these
consolidated financial statements for all periods presented to reflect the 1-for-60 Reverse Stock Split. 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.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
2017
Activities
On
February 28, 2017, the Company issued 4,370 shares of Common Stock in connection with the 60:1 reverse stock split resulting from
the rounding up of fractional shares of Common Stock to the whole shares of Common Stock.
On
March 9, 2017, as a result of the Note Offer (described in Note 7) becoming effective, a securities exchange offer made to the
Company’s January 19, 2015 investors (the “January Offer”) was accepted by certain of those investors (the “January
Investors”). Pursuant to the January Offer the January Investors agreed to exchange i) 12,052,344 shares of Common Stock
owed pursuant to the favored nations provision of the January 19, 2015 subscription agreement (the “January Agreement”),
and ii) 30,130,861 warrants owed pursuant to the favored nations provision of the January Agreement for 210,919 shares of Preferred.
On
March 9, 2017, as a result of the Note Offer (described in Note 7) becoming effective, a securities exchange offer made to the
Company’s April 19, 2015 investors (the “April Offer”) was accepted by certain of those investors (the “April
Investors”). Pursuant to the April Offer, the April Investors agreed to exchange i) 20,110,699 shares of Common Stock owed
pursuant to the favored nations provision of the April 19, 2015 subscription agreement (the “April Agreement”), and
ii) 28,154,980 warrants owed pursuant to the favored nations provision of the April Agreement for 104,391 shares of Preferred.
On
March 15, 2017, the Company issued investors who participated in its: i) January 19, 2015 financing and rejected the January Offer,
and ii) April 19, 2015 financing and rejected the April Offer an aggregate of 14,517,352 share of Common Stock and 112,782,487
warrants. The Common Stock and warrant issuances were made pursuant to the favored nations provision of the January Agreement
and April Agreement.
On
March 15, 2017, the Company filed a Certificate of Designation for the Preferred with the Secretary of State of the State of Nevada.
The Preferred Certificate of Designation provides authorization for the issuance of 1,160,941 shares of Preferred, par value $0.001.
On March 22, 2017, the
Company entered into a Settlement Agreement and Note (the “CSC Agreement”) with CSC Leasing Company (“CSC”)
with respect to the equipment lease schedule entered into between CSC and the Company (the “CSC Lease”). Pursuant
to the CSC Agreement the Company has agreed to: i) issue CSC 833,333 shares valued at $61,667 of the Company’s Common
Stock (the “Shares”), and ii) pay CSC $200,000 (the “Cash Payment”).
Between
March 15, 2017 and March 31, 2017, the Company issued 4,533,682 shares of Common Stock for the cashless exercise of 7,468,597
warrants.
Between
March 28, 2017 and March 31, 2017, the Company issued 6,340,000 shares of Common Stock upon the conversion of 31,700 shares of
Series B Convertible Preferred stock.
Note
9 - Subsequent Events
Between
April 1, 2017 and July 28, 2017, the Company issued 20,099,018 shares of Common Stock for the cashless exercise of 30,486,990
warrants.
Between April 1, 2017
and August 9, 2017, the Company issued 31,862,600 shares of Common Stock upon the conversion of
159,313
shares of Series B Convertible Preferred stock.
On
April 26, 2017, the Company entered into a Settlement Agreement with RK Equity Advisors, LLC, and Pickwick Capital Partners, LLC
(collectively “RKPCP”) pursuant to which the Company terminated the engagement letter with RKPCP including all provisions
and any obligations to pay future fees. As consideration for the termination the Company issued Pickwick Capital Partners, LLC
125,000 shares of Common Stock.
On May 25, 2017 the Company
raised $1 million in cash from four institutional investors in exchange for the issuance of $1,111,111 of a new class of Series
C Convertible Preferred Stock (“Series C”) and three types of warrants as described below. The 79,368 Series C shares
are initially convertible into 15,873,600 shares of Common Stock. The Series C is convertible at $0.70 per share or approximately
$0.063 per share after giving effect to the additional $111,111, subject to reduction in the event of future sales of equity securities
and Common Stock equivalents (with customary exemptions) at a lower price. The Company is subject to a number of customary
covenants and a restriction on the incurrence of indebtedness for one year. Within 120 days, the Company has agreed to file a
registration statement covering the Common Stock issuable upon exercise of the registrable securities described below.
The registration statement will cover 47,302,176 shares of common underlying the Series A Warrants, Additional Warrants, and Bonus
Warrants, which warrants are described below:
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
15,873,600
Series A Warrants exercisable at $0.085 per share, subject to adjustment, over a five-year period;
15,714,288 Additional
Warrants exercisable at $0.085 per share, subject to adjustment, over a period which is the earlier of (i) one-year after the
effective date of a registration statement covering the warrant shares, or (ii) three years from the date of issuance. The Additional
Warrants are callable by the Company for nominal consideration if the Common Stock trades above $0.17 per share and the
daily volume is more than $50,000 for at least 20 trading days;
15,714,288
Bonus Warrants exercisable at $0.17 per share, over a three-year period. The Bonus Warrants are also callable for nominal consideration
but the threshold price is more than $0.30 per share.
On
May 31, 2017 the holder of the $45,000 Promissory Note agreed to waive all rights they’re entitled to with respect to the
default on the Promissory Note for a onetime payment of $54,000 (the “Payment”) which includes principal and accrued
interest since January 19, 2015, provided that the Payment is paid on or before June 30, 2017 (the “Payment Deadline”).
If the Payment is not made on or before the Payment Deadline then the default interest rate shall be thirty percent per year.
The Payment was made prior to the Payment Deadline.
ITEM
2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain
statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking
statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans,
believes, seeks, estimates and similar expressions identify such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume
no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting
forward-looking statements. Factors that could cause or contribute to these differences include those discussed in the Risk Factors
contained in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 23, 2017.
Overview
During
the past year, we have worked with certain investors to remove portions of our debt and raise capital. While we need to raise
additional capital, our goal is to re-enter the Digital Assets business once we are able to raise the necessary capital. We cannot
assure you we will be successful in raising the capital or assuming we can, be able to develop a successful business.
Going
Concern
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, our independent auditors have indicated
in their report on our December 31, 2016 financial statements that there is substantial doubt about our ability to continue as
a going concern.
The
continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or convertible
debt securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial
loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Subject
to additional financing, the Company plans to create a portfolio of digital assets including bitcoin and other “protocol
tokens” to provide investors a diversified pure-play exposure to the bitcoin and blockchain industries. The Company intends
to acquire digital assets through: open market purchases, participating in initial digital asset offerings (often referred to
as initial coin offerings). Additionally, the Company may acquire digital assets by resuming its transaction verification services
business through outsourced data centers and earning rewards in digital assets by securing their respective blockchains.
We
continue to incur ongoing administrative and other expenses, including public company expenses, in excess of corresponding (non-financing
related) revenue. While we continue to implement our business strategy, we intend to finance our activities through:
●
|
managing
current cash and cash equivalents on hand from the Company’s past equity offerings, and
|
|
|
●
|
seeking
additional funds raised through the sale of additional securities in the future.
|
Results
of Operations for the Three Months Ended March 31, 2017 and 2016
The
following table reflects our operating results for the three months ended March 31, 2017 and 2016:
|
|
For
the three months ended
|
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
E-commerce
|
|
$
|
3,181
|
|
|
$
|
-
|
|
Transaction verification
services
|
|
|
-
|
|
|
|
191,403
|
|
Hosting
|
|
|
-
|
|
|
|
7,740
|
|
Total revenues
|
|
|
3,181
|
|
|
|
199,143
|
|
Power and mining expenses
|
|
|
-
|
|
|
|
(113,982
|
)
|
Gross profit
|
|
|
3,181
|
|
|
|
85,161
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
60
|
|
|
|
7,575
|
|
General and administrative
|
|
|
179,386
|
|
|
|
399,802
|
|
Fair value adjustments
for digital currencies
|
|
|
-
|
|
|
|
(4,285
|
)
|
Total operating
expenses
|
|
|
179,446
|
|
|
|
403,092
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations
|
|
|
(176,265
|
)
|
|
|
(317,931
|
)
|
|
|
|
|
|
|
|
|
|
Other (expenses)
income:
|
|
|
|
|
|
|
|
|
Impairment loss
related to investment
|
|
|
-
|
|
|
|
(2,250,000
|
)
|
Fair value adjustments
for warrant liabilities
|
|
|
(33,172,886
|
)
|
|
|
497,233
|
|
Fair value adjustments
for convertible notes
|
|
|
(16,849,071
|
)
|
|
|
35,010
|
|
Interest expenses
|
|
|
-
|
|
|
|
(3,541
|
)
|
Gain on extinguishment
of debt
|
|
|
15,873,067
|
|
|
|
-
|
|
Loss from lease
termination
|
|
|
(177,389
|
)
|
|
|
-
|
|
Liquidated damages
|
|
|
(693,000
|
)
|
|
|
-
|
|
Other expenses
|
|
|
-
|
|
|
|
(112
|
)
|
Total other expenses
|
|
|
(35,019,279
|
)
|
|
|
(1,721,410
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(35,195,544
|
)
|
|
$
|
(2,039,341
|
)
|
Revenues
Revenues
for the three months ended March 31, 2017 and 2016 were approximately $3,000 and $199,000, respectively. Revenues represent net
revenue earned from the processing of customer transactions through our ecommerce website, through fees earned from our transaction
verification service business, and fees charged for hosting services. The decrease of approximately $196,000 in our revenues is
mainly a result of the Company suspending its operations at its North Carolina transaction verification services facility in July
2016.
Power
and Mining Expenses
Power
and mining expenses for the three months ended March 31, 2017 and 2016 were approximately $0 and $114,000, respectively. The decrease
in the power and mining expenses is the result of the reduction in mining activities and related electric costs for our transaction
verification services business. Our electricity cost is a variable expense subject to certain demand charges which change based
upon on and off peak usage and seasonal billing rates. Our power consumption and resulting electricity cost is determined by the
power settings of our transaction verification servers and other ancillary equipment used in the building.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2017 and 2016 were approximately $179,000 and $400,000, respectively. The decrease
in operating expenses over the prior year mostly relates to decreases in general and administrative expenses. General and administrative
expense was lower primarily due to a $90,000 decrease in depreciation expense after impairment loss on fixed assets in June 2016.
The decrease is also a result of the fact that we used less services.
Other
Expenses
Other
expense for the three months ended March 31, 2017 and 2016 was approximately $35.0 million and $1.7 million, respectively. The
increase in other expenses over the prior year primarily relates to increases in fair value adjustments for warrant liabilities
of $33.2 million, fair value adjustments for convertible notes of $16.8 million and is offset by gain on extinguishment of debt
of $15.9 million, all of which are non-cash expenses.
Net
Loss
Net
loss for the three months ended March 31, 2017 was approximately $35.2 million, net loss for the three months ended March 31,
2016 was approximately $2.0 million, respectively. The increase in net loss for the three months ended March 31, 2017 resulted
primarily from fair value adjustments for warrant liabilities of $33.2 million, fair value adjustments for convertible notes of
$16.8 million.
Liquidity
and Capital Resources
On
March 31, 2017, we had current assets of approximately $4,000 and current liabilities of approximately $6.0 million, rendering
a deficit of working capital of approximately $6.0 million, which includes $5.1 million for the non-cash fair value of derivative
liabilities. On December 6, 2016, the Company issued a total of $220,002 Convertible Promissory Notes (the “December 2016
Notes”) to three accredited investors. The December 2016 Notes were issued in connection with a loan of $200,002 and the
cancellation of two $10,000 promissory notes previously issued by the Company to two of the investors. The December 2016 Notes
are due on June 6, 2017 and bear interest at 8% per annum payable on the maturity date. The conversion price of the December 2016
Notes is $0.12 per share. The December 2016 Notes were exchanged for Series B Preferred shares and were not outstanding on March
31, 2017.
Our
working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. We used
approximately $91,000 of cash in operating activities for the three months ended March 31, 2017. We incurred approximately a $35.2
million net loss for the three months ended March 31, 2017. We had cash of approximately $4,000 at March 31, 2017. We expect to
incur losses into the foreseeable future as we undertake efforts to execute our business plans.
We
will require significant additional capital to sustain short-term operations and make the investments needed to execute our longer
term business plan. Our existing liquidity is not sufficient to fund operations and anticipated capital expenditures for the foreseeable
future, and we do not have sufficient cash resources to support our current operations for the next 12 months, and will need additional
funding to resume revenue generating activities. If we attempt to obtain additional debt or equity financing, we cannot provide
assurance that such financing will be available to us on favorable terms, if at all.
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about
our ability to continue as a going concern. The consolidated financial statements have been prepared assuming we will continue
as a going concern. We have not made adjustments to the accompanying consolidated financial statements to reflect the potential
effects on the recoverability and classification of assets or liabilities should we be unable to continue as a going concern.
We
continue to incur ongoing administrative and other expenses, including public company expenses, primarily accounting and legal
fees, in excess of corresponding (non-financing related) revenue. While we continue to implement 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,
|
|
|
●
|
seeking
additional funds raised through the sale of additional securities in the future, and
|
|
|
●
|
increasing
revenue from its transaction verification services business.
|
Cash
Flows for the Three Months Ended March 31, 2017 and 2016
Net
Cash from Operating Activities
Net
cash used in operating activities was approximately $91,000 for the three months ended March 31, 2017. Net cash used in operating
activities for the three months ended March 31, 2017 was primarily driven by a $35.2 million net loss and gain on extinguishment
of debt of $15.9 million, offset by $33.2 million of fair value adjustment for warrant liabilities $16.8 million of fair value
adjustment for convertible notes.
Net
cash used in operating activities was approximately $354,000 for the three months ended March 31, 2016. Net cash used in operating
activities for the three months ended March 31, 2016 was primarily driven by a $2.0 million net loss, offset by $2.3 million of
impairment loss related to our investment in Spondoolies Tech Ltd..
Net
Cash from Investing Activities
Net
cash provided by investing activities for the three months ended March 31, 2017 was $0.
Net
cash provided by investing activities for the three months ended March 31, 2016 was approximately $292,000 and primarily due to
a refund of lease deposit of $301,000.
Net
Cash from Financing Activities
Net
cash provided by financing activities was $0 million for the three months ended March 31, 2017 and March 31, 2016.
Off
Balance Sheet Transactions
We
are not a party to any off balance sheet transactions. We have no guarantees or obligations other than those which arise out of
normal business operations.
Principal
Accounting Estimates
In
response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, the Company has selected its most subjective accounting estimation processes for purposes of explaining the methodology
used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects
on the Company’s financial condition. These estimates involve certain assumptions that if incorrect could create a material
adverse impact on the Company’s results of operations and financial condition.
There
were no material changes to our principal accounting estimates during the period covered by this report.
RECENT
ACCOUNTING PRONOUNCEMENTS
For
information on recent accounting pronouncements, see Note 4 to the Unaudited Consolidated Financial Statements.
Cautionary
Note Regarding Forward-Looking Statements
This
report contains forward-looking statements including our liquidity. Forward-looking statements can be identified by words such
as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,”
“expects” and similar references to future periods.
Forward-looking
statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions.
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances
that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements.
We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical
fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially
from those in the forward-looking statements include the market for microcap companies and our ability to effect a reverse stock
split and capital increase as publicly disclosed.
Further
information on our risk factors is contained in our filings with the SEC, including our Form 10-K. Any forward-looking statement
made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may
emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update
any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required
by law.