Notes
to Unaudited Condensed 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
Assets, including bitcoin and is currently focused on blockchain and digital currency ecosystems. In January 2015, the Company
began a rebranding campaign using its BTCS.COM domain (shorthand for Blockchain Technology Consumer Solutions) to better reflect
its broadened strategy. The Company released its new website which included broader information on its strategy. In late 2014
we shifted our focus towards our transaction verification service business, also known as bitcoin mining, though in mid-2016 we
ceased our transaction verification services operation at our North Carolina facility due to capital constraints.
Subject
to additional financing, the Company plans to acquire additional Digital Assets to provide investors with indirect ownership of
Digital Assets that are not securities, such as bitcoin and ether. The Company intends to acquire Digital Assets through open
market purchases. Additionally, the Company may acquire Digital Assets by resuming its transaction verification services business
through outsourced data centers and earning rewards in Digital Assets by securing their respective blockchains. We are not limiting
our assets to a single type of Digital Asset and may purchase a variety of Digital Assets that appear to benefit our investors,
subject to the certain limitations regarding Digital Securities. The Company is also seeking to acquire controlling interests
in businesses in the blockchain industry.
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.
Amendment
to Articles of Incorporation
On
April 5, 2019, the Company filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with
the Nevada Secretary of State to effect a one-for 30 reverse split of the Company’s class of common stock. The Amendment
took effect on April 9, 2019. No fractional shares were or will be issued or distributed as a result of the Amendment. Fractional
shares resulting from the reverse split were rounded up to the nearest whole share. Numbers of shares of the Company’s preferred
stock were not affected by the Reverse Stock Split; however, the conversion ratios have been adjusted to reflect the Reverse Stock
Split. The financial statements have been retroactively restated to reflect the reverse stock split.
Note
2 - Basis of Presentation
The
accompanying unaudited condensed 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 unaudited condensed 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 financial statements and notes should be read in conjunction with the financial
statements and notes for the year ended December 31, 2018.
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.
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Financial Statements
Our
working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. The Company
used approximately $0.9 million of cash in its operating activities for the nine months ended September 30, 2019. The Company
incurred $0.9 million net loss for the nine months ended September 30, 2019. The Company had cash of approximately $0.3 million
and a working capital of approximately $0.4 million at September 30, 2019. The Company expects to incur losses into the foreseeable
future as it undertakes its efforts to execute its business plans.
The
Company will require significant additional capital to sustain its short-term operations and make the investments it needs to
execute its longer-term business plan. The Company’s existing liquidity is not sufficient to fund its operations and anticipated
capital expenditures for the foreseeable future. The Company is currently seeking to obtain additional equity financing, primarily
through the Purchase Agreement with Cavalry and seeking to obtain additional equity linked debt financing, however there are currently
no other commitments of debt or equity in place for further financing nor is there any assurance that such financing will be available
to the Company on favorable terms, if at all.
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about
the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The financial
statements have been prepared assuming the Company will continue as a going concern. The Company has not made adjustments to the
accompanying financial statements to reflect the potential effects on the recoverability and classification of assets or liabilities
should the Company be unable to continue as a going concern.
The
Company continues to incur ongoing administrative and other operating expenses, including public company expenses, in excess of
revenues. While the Company continues to implement its business strategy, it intends to finance its activities by:
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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 whether through Cavalry or other investors.
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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 2018
Annual Report.
Digital
Assets Translations and Remeasurements
Digital
Assets are included in current assets in the consolidated balance sheets. Digital Assets are recorded at cost less impairment.
An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when
events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.
Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first
perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company
concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized,
the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Realized
gain (loss) on sale of Digital Assets are included in other income (expense) in the consolidated statements of operations.
The
Company assesses impairment of Digital Assets quarterly if the fair value of a Digital Asset was less than its cost basis on a
day during the quarter. The Company recognizes impairment losses on Digital Assets caused by decreases in fair value using the
U.S. dollar spot price of the related Digital Asset as of each impairment date. Such impairment in the value of Digital Assets
are recorded as a component of costs and expenses in our consolidated statements of operations. The Company recorded an impairment
loss of approximately $41,000 related to Digital Assets during the years ended September 30, 2019.
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Financial Statements
Use
of Estimates
The
accompanying unaudited condensed 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, if any, 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.
Convertible
Instruments
The
Company has evaluated the Series A Convertible Preferred Stock (“Preferred Stock”) component of the Private Placement
and determined it should be considered an “equity host” and not a “debt host” as defined by ASC 815, Derivatives
and Hedging. This evaluation is necessary in order to determine if any embedded features require bifurcation and, therefore, separate
accounting as a derivative liability. The Company’s analysis followed the “whole instrument approach,” which
compares an individual feature against the entire preferred stock instrument which includes that feature. The Company’s
analysis was based on a consideration of the Preferred Stock’s economic characteristics and risks and more specifically
evaluated all the stated and implied substantive terms and features including (i) whether the Preferred Stock included redemption
features, (ii) whether the preferred stockholders were entitled to dividends, (iii) the voting rights of the Preferred Stock and
(iv) the existence and nature of any conversion rights. As a result of the Company’s determination that the Preferred Stock
is an “equity host,” the embedded conversion feature is not considered a derivative liability.
Beneficial
Conversion Feature of Convertible Notes Payable
The
Company accounts for convertible notes payable in accordance with the guidelines established by the FASB Accounting Standards
Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options. The beneficial conversion feature of a
convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate
of conversion that is below market value or in-the-money when issued. The Company records a beneficial conversion feature related
to the issuance of a convertible note when issued.
The
discounted face value is then used to measure the effective conversion price of the note. The effective conversion price and the
market price of the Company’s common stock are used to calculate the intrinsic value of the conversion feature. The intrinsic
value is recorded in the financial statements as a debt discount from the face amount of the note and such discount is amortized
over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.
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, 2019 and 2018
because their effect was anti-dilutive:
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As of September 30,
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2019
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2018
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Warrants to purchase common stock
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1,229,710
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2,050,302
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Series C-1 Convertible Preferred stock
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196,093
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196,093
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Convertible notes
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581,957
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-
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Total
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2,007,761
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2,246,395
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BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Financial Statements
Recent
Accounting Pronouncements
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 was effective November 5, 2018. The implementation
of this rule did not have a material impact on the Company’s condensed 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 - Note Payable
On
December 18, 2018, the Company issued a $200,000 promissory note to one institutional investor (the “Promissory Note”).
The Promissory Note is due on September 18, 2019 and bears interest at a rate of 12%. In the event of default, the Promissory
Note bears interest at a rate of 20%.
By
the maturity date of the Promissory Note, the Company made no payment in connection with this Promissory Note and accrued interest
expense of $17,973.
On
September 18, 2019, the Company and holder of the Promissory Note agreed to exchange the Promissory Note, including $17,973 accrued
and unpaid interest for a new $217,973 Convertible Note dated September 18, 2019 (the “Convertible Note”). The Convertible
Note is due December 18, 2019 and is convertible at a 20% discount to the closing price of the Company’s common stock on
the principal trading market on the date before exercise, provided however that the conversion price shall never be less than
$0.10 per share. The Convertible Note shall bear interest at 12% per annum (payable at maturity) and may be prepaid by the Company.
Through
September 18, 2019 to September 30, 2019, the Company issued a total of 1,252,058 shares of the Company’s Common Stock for
the conversion of $150,000 of principal on the Convertible Note and made no payment in connection with this Convertible Note and
accrued interest expense.
The
exchange of the Promissory Note into the Convertible Note met the definition of an extinguishment. However, the carrying amount
of the Promissory Note and the fair value of the Convertible Note were comparable. Therefore, no gain or loss was recorded on
the extinguishment. In addition, the Convertible Note does not contain any embedded features that require bifurcation pursuant
to ASC 815-15.
At
the issuance date, the Convertible Note was convertible into 1,746,579 shares of common stock at $0.12 per share, but the Company’s
fair value of underlying common stock was $0.16 per share. As such, the Company recognized a beneficial conversion feature, resulting
in a discount to the Notes of approximately $54,000 with a corresponding credit to additional paid-in capital. The resulting debt
discount is presented net of the Convertible Note payable balance in the accompanying Condensed Balance Sheets and is amortized
to interest expense over the Convertible Note term.
During
the three and nine months ended September 30, 2019, the Company recorded approximately
$40,000 in interest expense related to amortization on debt discount. As of September 30, 2019, the Convertible Note had
principal balance of approximately $53,000 accrued interest on the note payable of approximately $500 and approximately $15,000
remaining unamortized debt discount.
Note
6 - Stockholders’ Equity
During
the nine months ended September 30, 2019, the Company issued 725,564 shares of Common Stock for the cash exercise of Series A
Warrants, Additional Warrants, and Bonus Warrants resulting in aggregate proceeds of $0.2 million to the Company.
On
April 18, 2019, the Company issued 16,860 shares of Common Stock in connection with the one-for 30 reverse split resulting from
the rounding up of fractional shares of Common Stock to the whole shares of Common Stock.
From
September 18, 2019 and September 25, 2019, the Company issued a total of 1,252,058 shares of the Company’s Common Stock
for the conversion of $150,000 of principal on the Convertible Note.
BTCS
Inc. and Subsidiary
Notes
to Unaudited Condensed Financial Statements
Purchase
Agreement
On
May 13, 2019, the Company entered into an equity line purchase agreement with Cavalry Fund I LP (“Cavalry”) (the “Purchase
Agreement”) pursuant to which Cavalry agreed to purchase from the Company, at Company’s sole discretion, up to $10,000,000
of common stock (subject to certain limitations) from time to time over a 36-month period. In consideration for entering into
the $10 million Purchase Agreement, the Company issued to Cavalry 333,334 shares of common stock as a commitment fee and will
issue up to 583,334 shares of common stock pro rata as Cavalry purchases additional shares.
Concurrently
with the execution of the Purchase Agreement on May 13, 2019, the Company and Cavalry also entered into a registration rights
agreement (the “Registration Rights Agreement”), pursuant to which the Company agreed, among other things, to file
a registration statement (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”),
no later than May 23, 2019 to register for resale by Cavalry under the Securities Act of 1933 (the “Act”), the shares
of common stock that the Company may elect to issue and sell to Cavalry from time to time under the Purchase Agreement. The Registration
Rights Agreement provides that in the event the Company is unable to register sufficient shares under the Registration Statement,
the Company will be required to file additional registration statements such that sufficient registered shares are available for
issuance and sale to Cavalry under the Purchase Agreement.
The
Company filed a Registration Statement on Form S-1 seeking to register 4,374,741 shares. The Registration Statement was declared
effective by the SEC on May 28, 2019. Provided the Registration Statement remains current and effective and the conditions set
forth in the Purchase Agreement are satisfied, the Company may, from time to time and at its sole discretion, direct Cavalry to
purchase shares of the Company’s common stock during trading hours (“Intraday Puts”) and after trading hours
until 7 p.m. New York time (“Aftermarket Puts”) (either an Intraday Put or an Aftermarket Put may be referred to as
a “Put”). The Company may make multiple Puts each day subject to delivery of the shares associated with prior Puts.
The
number of shares that may be sold under an Intraday Put shall be equal to the total daily trading dollar volume (“Daily
Trading Dollar Volume”) for the trading day prior to the applicable Put date, divided by the Intraday Purchase Price (such
shares being the “Intraday Put Share Limit”). The “Intraday Purchase Price” means the lower of: (i) 94%
of the lowest sale price on the trading day prior to the applicable Put date, and (ii) 94% of the arithmetic average of the three
lowest closing prices for the Company’s common stock during the 12 consecutive trading days ending on the Trading Day immediately
preceding such Put date.
The
number of shares that may be sold under an Aftermarket Put shall be equal to the Daily Trading Dollar Volume, divided by the Aftermarket
Put Price (such shares being the “Aftermarket Put Share Limit”). The “Aftermarket Put Price” means: the
lower of: (i) the lowest Sale Price on the applicable Put date, and (ii) the arithmetic average of the three lowest closing prices
for the Company’s common stock during the 12 consecutive trading days ending on the trading day immediately preceding such
Put date.
Upon
mutual agreement of Cavalry and the Company and subject to written confirmation by Cavalry that such agreement will not result
in violation of the 4.99% beneficial ownership limitation, the Company may increase the Intraday Put Share Limit or the Aftermarket
Put Share Limit, as applicable, for any Put to include an amount equal to $2,000,000 in Put shares at the applicable Purchase
Price, in each case in addition to the applicable Intraday Put Share Limit or Aftermarket Put Share Limit. In all instances, the
Company may not sell shares of its common stock to Cavalry under the Purchase Agreement if it would result in Cavalry beneficially
owning more than 4.99% of the Company’s common stock or if the closing price the trading day immediately preceding the Put
date is below $0.005.
As of September 30, 2019,
the Company sold all of the shares available for sale under the Registration Statement (4,374,741 shares) for total proceeds of
$1,146,389, net of cost of $12,250.
Note
7 - Subsequent Events
On
October 16, 2019, the Company issued a total of 679,730 shares of the Company’s Common Stock for the conversion of the remaining
$67,973 of principal on the Convertible Note and subsequently paid all the accrued interest expense of $905 on the Convertible
Note.
On
November 7, 2019, the Company issued a $200,000 promissory note (the “2019 Promissory Note”). The 2019 Promissory
Note is due on August 7, 2020 and is: (i) convertible at a 20% discount to the closing price of the Company’s common stock
on the date before exercise with a floor price of $0.02 per share, (ii) shall bear interest at 12% per annum (payable at maturity)
and in the event of default bears interest at a rate of 20%, (iii) convertible at the Company’s option subject to certain
limitations as set forth in the 2019 Promissory Note, and (iv) may be prepaid by the Company.