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 certain 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 $0.3 million of cash in its operating activities for the nine months ended September 30, 2018. The Company
incurred $0.6 million net loss for the nine months ended September 30, 2018. The Company had cash of approximately $2,000, digital
currencies of approximately $16,000 and a negative working capital of approximately $96,000 at September 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 unaudited
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 unaudited 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:
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managing
current cash and cash equivalents on hand from the Company’s past debt and equity offerings by controlling costs,
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seeking
additional financing through sales of additional securities
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Note
4 - Summary of Significant Accounting Policies
There
have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2017
Annual Report.
Basis
of Presentation and Principles of Consolidation
The
accompanying unaudited 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 September 30, 2018 and December 31, 2017, the Company had approximately $2,000 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
Digital
currencies are included in current assets in the consolidated balance sheets. Digital currencies are recorded at cost less impairment.
An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when
events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.
Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first
perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company
concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized,
the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Realized
gain (loss) on sale of digital currencies is included in other income (expense) in the consolidated statements of operations.
Use
of Estimates
The
accompanying unaudited 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 September 30, 2018 and 2017
because their effect was anti-dilutive:
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As of September 30,
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2018
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2017
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Warrants to purchase common stock
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61,509,078
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52,669,694
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Series B Convertible Preferred stock
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155,663,400
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Series C Convertible Preferred stock
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15,873,600
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Series C-1 Convertible Preferred stock
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5,882,800
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-
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Total
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67,391,878
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224,206,694
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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.
In
August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain
disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded
the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an
analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate
statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which
a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. We are evaluating
the impact of this guidance on our condensed consolidated financial statements.
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 - 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 23, 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 24, 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.
On
July 23, 2018, the Company issued 268,817 shares of Common Stock for the cashless exercise of 555,556 warrants.
Note
6 - Subsequent Events:
On
October 11, 2018 the Company issued four investors each 13,750,000 Series C Warrants or 55,000,000 warrants in aggregate. These
Series C Warrants were not lawfully issued in accordance with the Nevada Revised Statutes (“NRS”).
On
October 25, 2018 the Company and each of the four investors who hold the Series C Warrants agreed to cancel the Series C Warrants
for no consideration. Accordingly, the Series C Warrants are not outstanding.