ITEM
1 Financial Statements
BTCS
Inc. and Subsidiary
Condensed
Consolidated Balance Sheets
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|
June
30, 2018
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|
|
December
31, 2017
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|
|
|
(Unaudited)
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|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
32,440
|
|
|
$
|
303,334
|
|
Digital currencies
|
|
|
139,655
|
|
|
|
616,352
|
|
Prepaid expense
|
|
|
68,333
|
|
|
|
67,736
|
|
Total current
assets
|
|
|
240,428
|
|
|
|
987,422
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|
|
|
|
|
|
|
|
|
|
Other assets:
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|
|
|
|
|
|
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Property and
equipment, net
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|
|
3,388
|
|
|
|
1,235
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|
Total other assets
|
|
|
3,388
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|
|
|
1,235
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
243,816
|
|
|
$
|
988,657
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued expense
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|
$
|
69,067
|
|
|
$
|
75,997
|
|
Total current
liabilities
|
|
|
69,067
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|
|
|
75,997
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|
|
|
|
|
|
|
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Stockholders’ equity:
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Preferred stock; 20,000,000 shares authorized at 0.001 par value:
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|
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|
|
|
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Series B Convertible Preferred stock:
0 and 25,877 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively; Liquidation preference 0.001
per share
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|
|
-
|
|
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25
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|
Series C-1 Convertible Preferred stock:
29,414 shares issued and outstanding at June 30, 2018 and December 31, 2017; Liquidation preference 0.001 per share
|
|
|
29
|
|
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50
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Common stock, 975,000,000 shares authorized
at 0.001 par value, 372,337,169 and 363,043,769 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
|
|
|
372,337
|
|
|
|
363,044
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|
Additional paid in capital
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|
|
114,657,833
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|
|
|
114,667,080
|
|
Accumulated deficit
|
|
|
(114,855,450
|
)
|
|
|
(114,117,539
|
)
|
Total stockholders’
equity
|
|
|
174,749
|
|
|
|
912,660
|
|
|
|
|
|
|
|
|
|
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Total
Liabilities and stockholders’ equity
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|
$
|
243,816
|
|
|
$
|
988,657
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|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BTCS
Inc. and Subsidiary
Condensed
Consolidated Statements of Operations
(Unaudited)
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For
the three months ended
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For
the six months ended
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June
30,
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June
30,
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|
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2018
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2017
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2018
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2017
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Revenues
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|
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E-commerce
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$
|
-
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|
$
|
358
|
|
|
$
|
-
|
|
|
$
|
3,539
|
|
Total revenues
|
|
|
-
|
|
|
|
358
|
|
|
|
-
|
|
|
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3,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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General and administrative
|
|
|
234,131
|
|
|
|
215,022
|
|
|
|
489,792
|
|
|
|
394,408
|
|
Marketing
|
|
|
1,485
|
|
|
|
80
|
|
|
|
2,970
|
|
|
|
140
|
|
Total
operating expenses
|
|
|
235,616
|
|
|
|
215,102
|
|
|
|
492,762
|
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|
|
394,548
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|
|
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|
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|
|
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|
|
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|
Net
loss from operations
|
|
|
(235,616
|
)
|
|
|
(214,744
|
)
|
|
|
(492,762
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)
|
|
|
(391,009
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other (expenses) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustments
for warrant liabilities
|
|
|
-
|
|
|
|
1,485,813
|
|
|
|
-
|
|
|
|
(31,687,073
|
)
|
Fair value adjustments
for convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,849,071
|
)
|
Loss on issuance
of Series C Convertible Preferred stock
|
|
|
-
|
|
|
|
(2,809,497
|
)
|
|
|
-
|
|
|
|
(2,809,497
|
)
|
Gain on extinguishment
of debt
|
|
|
-
|
|
|
|
(6,870
|
)
|
|
|
-
|
|
|
|
15,866,197
|
|
Gain on settlement
of derivative liability
|
|
|
-
|
|
|
|
2,136,971
|
|
|
|
-
|
|
|
|
2,136,971
|
|
Loss from lease
termination
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(177,389
|
)
|
Liquidated damages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(693,000
|
)
|
Revaluation of digital
currencies
|
|
|
(12,419
|
)
|
|
|
-
|
|
|
|
(193,235
|
)
|
|
|
-
|
|
Realized
gain (loss) on sale of digital currencies
|
|
|
11,265
|
|
|
|
-
|
|
|
|
(51,914
|
)
|
|
|
-
|
|
Total
other (expense) income
|
|
|
(1,154
|
)
|
|
|
806,417
|
|
|
|
(245,149
|
)
|
|
|
(34,212,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(236,770
|
)
|
|
$
|
591,673
|
|
|
$
|
(737,911
|
)
|
|
$
|
(34,603,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss per share,
basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding,
basic and diluted
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Basic and Diluted
|
|
|
371,326,525
|
|
|
|
66,171,066
|
|
|
|
369,781,431
|
|
|
|
43,079,285
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BTCS
Inc. and Subsidiary
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
For
the six months ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
Net Cash flows used
from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(737,911
|
)
|
|
$
|
(34,603,871
|
)
|
Adjustments to reconcile net loss to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization expenses
|
|
|
445
|
|
|
|
920
|
|
Issuance of common
stock for services
|
|
|
-
|
|
|
|
10,000
|
|
Change in fair value
of digital currencies
|
|
|
193,235
|
|
|
|
-
|
|
Fair value adjustments
for warrant liabilities
|
|
|
-
|
|
|
|
31,687,073
|
|
Fair value adjustments
for convertible notes
|
|
|
-
|
|
|
|
16,849,071
|
|
Realized loss on
sale of digital currencies
|
|
|
51,914
|
|
|
|
-
|
|
Gain on extinguishment
of debt
|
|
|
-
|
|
|
|
(15,866,197
|
)
|
Loss from lease
termination
|
|
|
-
|
|
|
|
177,389
|
|
Loss on issuance
of Series C Convertible Preferred stock
|
|
|
-
|
|
|
|
2,809,497
|
|
Gain on settlement
of derivative liability
|
|
|
-
|
|
|
|
(2,136,971
|
)
|
Liquidated damages
|
|
|
-
|
|
|
|
693,000
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
and other current assets
|
|
|
(597
|
)
|
|
|
(28,019
|
)
|
Accounts
payable
|
|
|
(6,930
|
)
|
|
|
(539,313
|
)
|
Net
cash used in operating activities
|
|
|
(499,844
|
)
|
|
|
(947,421
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided
by (used in) investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale
of digital currencies
|
|
|
231,548
|
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(2,598
|
)
|
|
|
(1,484
|
)
|
Net cash provided
by (used in) investing activities
|
|
|
228,950
|
|
|
|
(1,484
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided
by financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from
issuance of Series C Convertible Preferred Stock and warrants for cash in an offering
|
|
|
-
|
|
|
|
925,114
|
|
Payment
to settle an investor loan
|
|
|
-
|
|
|
|
(54,000
|
)
|
Net cash provided
by financing activities
|
|
|
-
|
|
|
|
871,114
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(270,894
|
)
|
|
|
(77,791
|
)
|
Cash, beginning of period
|
|
|
303,334
|
|
|
|
95,068
|
|
Cash, end of period
|
|
$
|
32,440
|
|
|
$
|
17,277
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure
of non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
Conversion of Series
B Convertible Preferred Stock to common stock
|
|
$
|
5,175
|
|
|
$
|
32,403
|
|
Conversion of Series
C-1 Convertible Preferred Stock to common stock
|
|
$
|
4,118
|
|
|
$
|
-
|
|
Issuance of common
stock due to Anti-Dilution provision
|
|
$
|
-
|
|
|
$
|
14,517
|
|
Cashless warrant exercise
|
|
$
|
-
|
|
|
$
|
24,628
|
|
Management redemption
from escrow account
|
|
$
|
-
|
|
|
$
|
400
|
|
Fractional shares
adjusted for reverse split
|
|
$
|
-
|
|
|
$
|
4
|
|
Issuance of common
stock for settlement of debt
|
|
$
|
-
|
|
|
$
|
90,168,290
|
|
Preferred converted
to Common Stock
|
|
$
|
-
|
|
|
$
|
(162
|
)
|
Preferred issued for conversion of notes
|
|
$
|
-
|
|
|
$
|
1,160
|
|
The
accompanying notes are an integral part of these 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.
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 and/or blockchain,
subject to the limitations regarding Digital Securities. The Company is also seeking to acquire controlling interests in businesses
in the blockchain industry. We do not intend to operate outside of the Digital Asset and blockchain industries.
The Company has not participated in any initial coin offerings as it believes most of the offerings entail
the offering of Digital Securities and require registration under the Securities Act and under state securities laws, or can only
be sold to accredited investors in the United States. Since about July 2017, initial coin offerings using Digital Securities have
been (or should be) limited to accredited investors. Because we cannot qualify as an accredited investor, we do not intend to
acquire coins in initial coin offerings or from purchasers in such offerings. Further, the Company does not intend to participate
in registered or unregistered initial coin offerings. The Company will carefully review its purchases of Digital Securities to
avoid violating the 1940 Act and seek to reduce potential liabilities under the federal securities laws.
Digital asset blockchains
are typically maintained by a network of participants which run servers which secure their blockchain. The market is rapidly evolving
and there can be no assurances that we will be competitive with industry participants that have or may have greater resources
than us.
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 in
the opinion of the Company’s management, reflect all adjustments consisting of normal, recurring adjustments, that are necessary
for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim
results are not necessarily indicative of results for a full year. The unaudited condensed consolidated financial statements and
notes should be read in conjunction with the financial statements and notes for the year ended December 31, 2017.
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.
Our
working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. The Company
used approximately $0.5 million of cash in its operating activities for the six months ended June 30, 2018. The Company incurred
$0.7 million net loss for the six months ended June 30, 2018. The Company had cash of approximately $32,000, digital currencies
of approximately $0.14 million and a working capital of approximately $0.2 million at June 30, 2018. The Company expects
to incur losses into the foreseeable future as it undertakes its efforts to execute its business plans.
The
Company will require significant additional capital to sustain its short-term operations and make the investments it needs to
execute its longer-term business plan. The Company’s existing liquidity is not sufficient to fund its operations and anticipated
capital expenditures for the foreseeable future. The Company is currently seeking to obtain additional debt or equity financing,
however there are currently no commitments in place for further financing nor is there any assurance that such financing will
be available to the Company on favorable terms, if at all.
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about
the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The condensed
consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not
made adjustments to the accompanying condensed consolidated financial statements to reflect the potential effects on the recoverability
and classification of assets or liabilities should the Company be unable to continue as a going concern.
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 2017
Annual Report.
Basis
of Presentation and Principles of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary BTCS
Digital Manufacturing. All significant intercompany balances and transactions have been eliminated in consolidation.
Concentration
of Cash
The
Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company considers
all highly liquid investments with original maturities of six months or less when purchased to be cash and cash equivalents. As
of June 30, 2018 and December 31, 2017, the Company had approximately $32,000 and $303,000 in cash and cash equivalents. The Company
has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Digital
Currencies Translations and Remeasurements
The
Company accounts for digital currencies, which it considers to be an asset, at their initial cost and subsequently remeasures
the carrying amounts of digital currencies it owns at each reporting date based on their current fair value. The changes in the
fair value of digital currencies are included as a component of income or loss. The Company currently classifies digital currencies
as a current asset.
The
Company obtains the equivalency rate of bitcoins to USD from various exchanges including, Bitstamp and Coinbase. The equivalency
rate obtained from these sources represents a generally well recognized quoted price in an active market for bitcoins, which market
and related database are accessible to the Company on an ongoing basis.
Use
of Estimates
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“US GAAP”). This requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses during the period. The Company’s significant
estimates and assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, the valuation
of derivative liabilities, and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s
estimates, including the carrying amount of the intangible assets, could be affected by external conditions, including those unique
to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on
the Company’s estimates and could cause actual results to differ from those estimates and assumptions.
Fair
Value of Financial Instruments
Financial
instruments, including cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are
carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company
measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes
the use of unobservable inputs when measuring fair value.
The
Company uses three levels of inputs that may be used to measure fair value:
Level
1 - quoted prices in active markets for identical assets or liabilities
Level
2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
Net
Loss per Share
Basic
loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares
and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the Company’s
convertible preferred stock and warrants. Diluted loss per share excludes the shares issuable upon the conversion of preferred
stock and warrants from the calculation of net loss per share if their effect would be anti-dilutive.
The
following financial instruments were not included in the diluted loss per share calculation as of June 30, 2018 and 2017 because
their effect was anti-dilutive:
|
|
As
of June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants to purchase common
stock
|
|
|
62,064,634
|
|
|
|
122,418,645
|
|
Series B Convertible Preferred stock
|
|
|
-
|
|
|
|
199,785,600
|
|
Series C-1 Convertible
Preferred stock
|
|
|
5,882,800
|
|
|
|
15,873,600
|
|
Total
|
|
|
67,947,434
|
|
|
|
338,077,845
|
|
Adoption
of Recent Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified
by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08,
“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net),” ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing,” and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients.” The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict
the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies may adopt
the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or
a cumulative effect upon adoption approach. The Company adopted ASU 2014-09 on January 1, 2018, using the modified retrospective
approach. 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 condensed consolidated financial position, results of operations, equity
or cash flows.
Other recent accounting
pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's
present or future financial statements.
Note
5 - 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 June 30, 2018 and December
31, 2017:
|
|
Fair
value measured at June 30, 2018
|
|
|
|
Total
carrying
value at June 30,
|
|
|
Quoted
prices
in active markets
|
|
|
Significant
other
observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2018
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
139,655
|
|
|
$
|
139,655
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Fair
value measured at December 31, 2017
|
|
|
|
Total
carrying
value at December 31,
|
|
|
Quoted
prices
in active markets
|
|
|
Significant
other
observable inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
2017
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
616,352
|
|
|
$
|
616,352
|
|
|
|
-
|
|
|
|
-
|
|
There
were no transfers between Level 1, 2 or 3 during the six months ended June 30, 2018.
Level
1 Valuation Techniques
The
fair values of Level 1 digital currencies are determined using the equivalency rate of bitcoins to USD from various exchanges
including, Bitstamp, Kraken and Coinbase. The equivalency rate obtained from these sources represents a generally well recognized
quoted price in an active market for bitcoins, which market and related database are accessible to the Company on an ongoing basis.
The
following table sets forth a summary of the changes in the fair value of the Company’s Level 1 financial assets that are
measured at fair value on a recurring basis:
Digital currencies at fair value - January 1, 2018
|
|
$
|
616,352
|
|
Realized loss on sale of digital currencies
|
|
|
(51,914
|
)
|
Change in fair value of digital currencies
|
|
|
(193,235
|
)
|
Proceeds from
sale of digital currencies
|
|
|
(231,548
|
)
|
Digital Currency
at fair value - June 30, 2018
|
|
$
|
139,655
|
|
Note
6 - Stockholders’ Equity
On
January 1, 2018, the Company issued 5,175,400 shares of Common Stock upon the conversion of 25,877 shares of Series B Convertible
Preferred stock.
On
April 20, 2018, the Company issued 392,200 shares of Common Stock upon the conversion of 1,961 shares of Series C-1 Convertible
Preferred stock.
On
April 4, 2018, the Company issued 1,176,600 shares of Common Stock upon the conversion of 5,883 shares of Series C-1 Convertible
Preferred stock.
On
April 4, 2018, the Company issued 2,549,200 shares of Common Stock upon the conversion of 12,746 shares of Series C-1 Convertible
Preferred stock.
Note
7 - Subsequent Events:
None
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 March 14, 2018.
Overview
We
are 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. To our knowledge, we are one of a few public companies intending to acquire both Digital Assets
and a controlling interest in one or more businesses in the Digital Asset and blockchain industries.
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 and/or blockchain,
subject to the limitations regarding Digital Securities. The Company is also seeking to acquire controlling interests in businesses
in the blockchain industry. We do not intend to operate outside of the Digital Asset and blockchain industries.
The Company has not
participated in any initial coin offerings as it believes most of the offerings entail the offering of Digital Securities and
require registration under the Securities Act and under state securities laws, or can only be sold to accredited investors in
the United States. Since about July 2017, initial coin offerings using Digital Securities have been (or should be) limited to
accredited investors. Because we cannot qualify as an accredited investor, we do not intend to acquire coins in initial coin offerings
or from purchasers in such offerings. Further, the Company does not intend to participate in registered or unregistered initial
coin offerings. The Company will carefully review its purchases of Digital Securities to avoid violating the 1940 Act and seek
to reduce potential liabilities under the federal securities laws.
Digital asset blockchains
are typically maintained by a network of participants which run servers which secure their blockchain. The market is rapidly evolving
and there can be no assurances that we will be competitive with industry participants that have or may have greater resources
than us.
Blockchain
Technology and Digital Asset Initiatives
We are also focused
on Digital Assets and blockchain technologies. Subject to additional financing, 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 fallen substantially 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.
Our current framework
or criteria is to seek and evaluate acquisition targets in the blockchain and Digital Asset sector which (i) align with our business
model of acquiring Digital Assets or acquiring a controlling interest in one or more blockchain technology related business ventures,
and (ii) have sufficient capital to provide working capital and cover public company expenses. Our acquisition activities are
spearheaded by Charles Allen, our Chief Executive Officer who regularly communicates with Mr. David Garrity, one of our independent
directors who is also seeking acquisition targets.
Transaction Verification Service Business
(Digital Asset mining e.g. bitcoin, Suspended)
We believe that
with additional funding we may be able to resume our transaction verification services business (Digital Asset mining e.g. bitcoin)
and believe this may provide revenue growth. If we are successful in resuming our transaction verification services business,
we anticipate utilizing outsourced data centers and may diversify operations by securing other blockchains in addition to bitcoins.
If we resume our mining operations, we do not intend to actively trade the Digital Assets but rather hold them for our own account
and sell them for U.S. dollars or other currencies including virtual currencies.
Transaction verification
entails running ASIC (application-specific integrated circuit) servers or other specialized servers which solve a set of prescribed
complex mathematical calculations in order to add a block to a blockchain and thereby confirm Digital Asset transactions. A party
which is successful in adding a block to the blockchain, is awarded a fixed number of Digital Assets for our effort.
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, 2017 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.
We
continue to incur ongoing administrative and other expenses, including public company expenses, in excess of revenue and capital
raises. 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 recent equity offerings, and
|
|
|
●
|
seeking
additional funds raised through the sale of additional securities in the future.
|
Results
of Operations for the Three Months Ended June 30, 2018 and 2017
The
following table reflects our operating results for the three months ended June 30, 2018 and 2017:
|
|
For
the three months ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
E-commerce
|
|
$
|
-
|
|
|
$
|
358
|
|
Total revenues
|
|
|
-
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
234,131
|
|
|
|
215,022
|
|
Marketing
|
|
|
1,485
|
|
|
|
80
|
|
Total
operating expenses
|
|
|
235,616
|
|
|
|
215,102
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
|
(235,616
|
)
|
|
|
(214,744
|
)
|
|
|
|
|
|
|
|
|
|
Other (expenses) income:
|
|
|
|
|
|
|
|
|
Fair value adjustments
for warrant liabilities
|
|
|
-
|
|
|
|
1,485,813
|
|
Loss on issuance
of Series C Convertible Preferred stock
|
|
|
-
|
|
|
|
(2,809,497
|
)
|
Gain on extinguishment
of debt
|
|
|
-
|
|
|
|
(6,870
|
)
|
Gain on settlement
of derivative liability
|
|
|
-
|
|
|
|
2,136,971
|
|
Revaluation of digital
currencies
|
|
|
(12,419
|
)
|
|
|
-
|
|
Realized
gain (loss) on sale of digital currencies
|
|
|
11,265
|
|
|
|
-
|
|
Total
other (expense) income
|
|
|
(1,154
|
)
|
|
|
806,417
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(236,770
|
)
|
|
$
|
591,673
|
|
Revenues
Revenues for the three
months ended June 30, 2018 and 2017 were approximately $0 and $400, respectively. Revenues represent net revenue earned from the
processing of customer transactions through our ecommerce website.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2018 and 2017 were approximately $236,000 and $215,000, respectively. The increase
in operating expenses over the prior year mostly relates to increases in general and administrative expenses.
Other
(Expenses) Income
Other
expense for the three months ended June 30, 2018 was approximately $1,000 and other income for the three months ended June 30,
2017 was approximately $806,000. The decrease in other income over the prior year primarily relates to decrease in fair value
adjustments for warrant liabilities of $1.5 million, decrease in gain on settlement of derivative liability of $2.1 million, and
is offset by decrease in loss on issuance of Series C Convertible Preferred stock of $2.8 million.
Net
(Loss) Income
Net
(loss) income for the three months ended June 30, 2018 and 2017 was approximately $(0.2) million and $0.6 million, respectively.
The decrease in other income over the prior year primarily relates to decrease in fair value adjustments for warrant liabilities
of $1.5 million, decrease in gain on settlement of derivative liability of $2.1 million, and is offset by decrease in loss on
issuance of Series C Convertible Preferred stock of $2.9 million.
Results
of Operations for the Six Months Ended June 30, 2018 and 2017
The
following table reflects our operating results for the six months ended June 30, 2018 and 2017:
|
|
For
the six months ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
E-commerce
|
|
$
|
-
|
|
|
$
|
3,539
|
|
Total revenues
|
|
|
-
|
|
|
|
3,539
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
489,792
|
|
|
|
394,408
|
|
Marketing
|
|
|
2,970
|
|
|
|
140
|
|
Total
operating expenses
|
|
|
492,762
|
|
|
|
394,548
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
|
(492,762
|
)
|
|
|
(391,009
|
)
|
|
|
|
|
|
|
|
|
|
Other (expenses) income:
|
|
|
|
|
|
|
|
|
Fair value adjustments
for warrant liabilities
|
|
|
-
|
|
|
|
(31,687,073
|
)
|
Fair value adjustments
for convertible notes
|
|
|
-
|
|
|
|
(16,849,071
|
)
|
Loss on issuance
of Series C Convertible Preferred stock
|
|
|
-
|
|
|
|
(2,809,497
|
)
|
Gain on extinguishment
of debt
|
|
|
-
|
|
|
|
15,866,197
|
|
Gain on settlement
of derivative liability
|
|
|
-
|
|
|
|
2,136,971
|
|
Loss from lease
termination
|
|
|
-
|
|
|
|
(177,389
|
)
|
Liquidated damages
|
|
|
-
|
|
|
|
(693,000
|
)
|
Revaluation of digital
currencies
|
|
|
(193,235
|
)
|
|
|
-
|
|
Realized
gain (loss) on sale of digital currencies
|
|
|
(51,914
|
)
|
|
|
-
|
|
Total
other expense (income)
|
|
|
(245,149
|
)
|
|
|
(34,212,862
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(737,911
|
)
|
|
$
|
(34,603,871
|
)
|
Revenues
Revenues for the six months
ended June 30, 2018 and 2017 were approximately $0 and $4,000, respectively. Revenues represent net revenue earned from the processing
of customer transactions through our ecommerce website.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2018 and 2017 were approximately $493,000 and $395,000, respectively. The increase
in operating expenses over the prior year mostly relates to increases in general and administrative expenses.
Other
Expenses
Other
expense for the three months ended June 30, 2018 and 2017 was approximately $0.2 million and $34.2 million, respectively. The
decrease in other expenses over the prior year primarily relates to increases in fair value adjustments for warrant liabilities
of $31.7 million, fair value adjustments for convertible notes of $16.8 million and loss on issuance of Preferred C of $2.8 million,
and is offset by gain on settlement of derivative liability of $2.1 million, increase in gain on extinguishment of debt of $15.9
million, all of which are non-cash expenses.
Net
Loss
Net
loss for the six months ended June 30, 2018 and 2017 was approximately $0.7 million and $34.6 million, respectively. The decrease
in net loss for the six months ended June 30, 2018 resulted primarily from increases in fair value adjustments for warrant liabilities
of $31.7 million, fair value adjustments for convertible notes of $16.8 million and loss on issuance of Preferred C of $2.8 million,
and is offset by gain on settlement of derivative liability of $2.1 million, increase in gain on extinguishment of debt of $15.9
million.
Liquidity
and Capital Resources
Net
Cash from Operating Activities
Net
cash used in operating activities was approximately $0.5 million for the six months ended June 30, 2018. Net cash used in operating
activities for the six months ended June 30, 2018 was primarily driven by a $0.7 million net loss, partially offset by $0.2 million
of change in fair value of digital currencies.
Net
cash used in operating activities was approximately $1.0 million for the six months ended June 30, 2017. Net cash used in operating
activities for the six months ended June 30, 2017 was primarily driven by a $34.6 million net loss and gain on extinguishment
of debt of $15.9 million, offset by $31.7 million of fair value adjustment for warrant liabilities, $16.8 million of fair value
adjustment for convertible notes and $2.8 million of loss on issuance of Preferred C.
Net
Cash from Investing Activities
Net
cash provided by investing activities was $0.2 million for the six months ended June 30, 2018. The cash provided by investing
activities for the six months ended June 30, 2018, primarily resulted from approximately $0.2 million net proceeds from sale of
digital currencies, partially offset by $2,600 for purchase of property and equipment.
Net
cash used in investing activities for the six months ended June 30, 2017 was approximately $1,500 for purchase of property and
equipment.
Net
Cash from Financing Activities
Net
cash provided by financing activities was $0 for the six months ended June 30, 2018.
Net
cash provided by financing activities was approximately $871,000 for the six months ended June 30, 2017. On May 25, 2017, we received
a net $925,114 from four institutional investors in exchange for the issuance of a new class of Series C Convertible Preferred
Stock and three types of warrants. We also paid a note holder $54,000 to settle the 2% Promissory Note issued on January 19, 2015.
Liquidit
y
On
June 30, 2018, we had current assets of approximately $0.2 million and current liabilities of approximately $69,000, rendering
a working capital of approximately $0.2 million.
Our
working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. The Company
used approximately $0.5 million of cash in its operating activities for the six months ended June 30, 2018. The Company incurred
a $0.7 million net loss for the six months ended June 30, 2018. The Company had cash of approximately $32,000 and working capital
of approximately $0.2 million at June 30, 2018. The Company expects to incur losses into the foreseeable future as it undertakes
its efforts to execute its 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 condensed consolidated financial statements have been prepared assuming we will
continue as a going concern. We have not made adjustments to the accompanying condensed consolidated financial statements to reflect
the potential effects on the recoverability and classification of assets or liabilities should 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 the 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.
|
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 Condensed Consolidated Financial Statements.
Cautionary
Note Regarding Forward-Looking Statements
This
report contains forward-looking statements including our liquidity and the Proposed Merger. 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 our ability to raise capital on favorable terms and unanticipated issues
with respect to consummating our Proposed Merger.
Further
information on our risk factors is contained in our filings with the SEC, including our Form 10-K filed on March 14, 2018, as
it may be amended. 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.