UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2018

 

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

 

For the transition period from _______________ to _______________.

 

Commission file number: 000-55141

 

BTCS Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   90-1096644
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

9466 Georgia Avenue #124

Silver Spring, MD

  20901
(Address of principal executive offices)   (Zip Code)

 

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

 

 

(Former name, former address and former fiscal year, if changed since last report.)

 

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

 

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

 

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

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a company) Smaller reporting company [X]
Emerging growth company [  ]  

 

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

 

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

 

Applicable only to corporate issuers:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 19, 2018, there were 372,337,169 shares of common stock, par value $0.001, issued and outstanding.

 

 

 

 
 

 

BTCS INC.

TABLE OF CONTENTS

 

    Page
     
PART I - FINANCIAL INFORMATION
     
ITEM 1 Financial Statements 4
     
  Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 4
     
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited) 6
     
  Notes to the Unaudited Condensed Consolidated Financial Statements 7-11
     
ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
     
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 17
     
ITEM 4 Controls and Procedures 17
     
PART II - OTHER INFORMATION  
     
ITEM 1 Legal Proceedings 18
     
ITEM 1A Risk Factors 18
     
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds 18
     
ITEM 3 Defaults Upon Senior Securities 18
     
ITEM 4 Mine Safety Disclosures 18
     
ITEM 5 Other Information 18
     
ITEM 6 Exhibits 18
     
  Signature 19

 

2
 

 

PART I - FINANCIAL INFORMATION

 

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Plan of Operation.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements. Readers should review our risk factors in our filings with the Securities and Exchange Commission including our Form 10-K filed on March 14, 2018.

 

3
 

 

ITEM 1 Financial Statements

 

BTCS Inc. and Subsidiary

Condensed Consolidated Balance Sheets

 

    June 30, 2018     December 31, 2017  
    (Unaudited)        
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  
                 
Other assets:                
Property and equipment, net     3,388       1,235  
Total other assets     3,388       1,235  
                 
Total Assets   $ 243,816     $ 988,657  
                 
Liabilities and Stockholders’ Equity:                
Accounts payable and accrued expense   $ 69,067     $ 75,997  
Total current liabilities     69,067       75,997  
                 
Stockholders’ equity:                
Preferred stock; 20,000,000 shares authorized at 0.001 par value:                
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     -       25  
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       50  
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  
Additional paid in capital     114,657,833       114,667,080  
Accumulated deficit     (114,855,450 )     (114,117,539 )
Total stockholders’ equity     174,749       912,660  
                 
Total Liabilities and stockholders’ equity   $ 243,816     $ 988,657  

 

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

 

4
 

 

BTCS Inc. and Subsidiary

Condensed Consolidated Statements of Operations

(Unaudited)

 

    For the three months ended     For the six months ended  
    June 30,     June 30,  
    2018     2017     2018     2017  
Revenues                        
E-commerce   $ -     $ 358     $ -     $ 3,539  
Total revenues     -       358       -       3,539  
                                 
Operating expenses (income):                                
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       394,548  
                                 
Net loss from operations     (235,616 )     (214,744 )     (492,762 )     (391,009 )
                                 
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 )
                                 
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                                
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.

 

5
 

 

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.

 

6
 

 

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.

 

7
 

 

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.

 

8
 

 

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  

 

9
 

 

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  

 

10
 

 

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

 

11
 

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

ITEM 4 Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation, with the participation of our Chief Executive Officer, who is also our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of June 30, 2018 to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer concluded that as of June 30, 2018, our disclosure controls and procedures were not effective at the reasonable assurance level due to the following material weaknesses in our internal control over financial reporting:

 

Due to our small number of employees and limited resources, we have limited segregation of duties, as a result of which there is insufficient independent review of duties performed.
   
As a result of the limited number of accounting personnel, we rely on outside consultants for the preparation of our financial reports, including financial statements and management discussion and analysis, which could lead to overlooking items requiring disclosure.
   
Difficulty applying complex accounting principles.

 

Remediation Plan

 

When we have sufficient capital resources we intend to hire additional accounting staff, and operations and administrative executives and remediate each of the weaknesses in our disclosure controls and internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1 Legal Proceedings

 

None.

 

ITEM 1A Risk Factors

 

Not applicable to smaller reporting companies.

 

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

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.

 

The Company did not receive any proceeds from the aforementioned conversion of preferred stock.

 

ITEM 3 Defaults Upon Senior Securities

 

None.

 

ITEM 4 Mine Safety Disclosures

 

Not applicable.

 

ITEM 5 Other Information

 

None.

 

ITEM 6 Exhibits

 

The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-Q.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  BTCS Inc.
July 23, 2018    
  By: /s/ Charles Allen
    Charles Allen
    Chief Executive Officer, Chief Financial Officer and Director
    (Principal Executive Officer and Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

        Incorporated by Reference   Filed or Furnished
Exhibit #   Exhibit Description   Form   Date   Number   Herewith
3.1   Articles of Incorporation, as amended   10-K   3/31/11   3.1    
3.1(a)   Amendment No. 1 to Articles of Incorporation   8-K   3/25/13   3.1    
3.1(b)   Amendment No. 2 to Articles of Incorporation   8-K   2/5/14   3.1    
3.1(c)   Certificate of Amendment filed February 13, 2017   8-K   2/16/17   3.1    
3.1(d)   Certificate of Designation-Series C   8-K   5/26/17   10.1    
3.1(e)   Certificate of Designation-Series C-1   8-K   10/10/17   3.1    
3.2   Bylaws   S-1   5/29/08   3.2    
10.1   Form of Series A Warrant   8-K   5/26/17   10.2    
10.2   Form of Additional Warrant   8-K   5/26/17   10.3    
10.3   Form of Bonus Warrant   8-K   5/26/17   10.4    
10.4   Form of Registration Rights Agreement dated May 23, 2017   8-K   5/26/17   10.5    
10.5   Form of Securities Purchase Agreement dated May 23, 2017   8-K   5/26/17   10.6    
10.6   Employment Agreement - Charles Allen*   10-K   6/23/17   10.8    
10.7   Employment Agreement - Michael Handerhan*   10-K   6/23/17   10.9    
10.8   Form of Series B Warrant   8-K   10/10/17   10.1    
10.9   Form of Series C-1 Securities Purchase Agreement   8-K   10/10/17   10.2    
10.10   Form of Side Letter   8-K   10/10/17   10.3    
31.1   Certification of Principal Executive and Financial Officer (302)               Filed
32.1   Certification of Principal Executive and Principal Financial Officer (906)               Furnished**
101.INS   XBRL Instance Document               Filed
101.SCH   XBRL Taxonomy Extension Schema Document               Filed
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document               Filed
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document               Filed
101.LAB   XBRL Taxonomy Extension Label Linkbase Document               Filed
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document               Filed

 

* Represents compensatory plan of management.
   
** This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
   
+ Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.

 

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to BTCS Inc., 9466 Georgia Avenue #124, Silver Spring, MD 20901, Attention: Corporate Secretary.

 

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