As
filed with the Securities and Exchange Commission on December 4, 2019
Registration
No. 333-233638
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
PRE-EFFECTIVE
AMENDMENT TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
AMENDMENT
NO. 1
BTCS
Inc.
(Exact
name of registrant as specified in its charter)
Nevada
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7372
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90-1096644
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(State
or Other Jurisdiction of
Incorporation or Organization)
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(Primary
Standard Industrial
Classification Code Number)
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(I.R.S.
Employer
Identification Number)
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9466
Georgia Avenue #124
Silver
Spring, Maryland 20901
(202)
430-6576
(Address,
including zip code, and telephone number including
area code, of Registrant’s principal executive offices)
Charles
W. Allen
Chief
Executive Officer of BTCS Inc.
9466
Georgia Avenue #124
Silver
Spring, Maryland 20901
(202)
430-6576
(Name,
address, including zip code, and telephone number
including area code, of agent for service)
With
copies to:
Michael
D. Harris, Esq.
Brian
S. Bernstein, Esq.
Nason,
Yeager, Gerson, Harris & Fumero, P.A.
3001
PGA Blvd., Suite 305
Palm
Beach Gardens, FL 33410
(561)
686-3307
Approximate
date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared
effective.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box. [X]
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for the
same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
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 [ ]
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Non-accelerated
filer [X]
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Smaller
reporting company [X]
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Emerging
growth company [ ]
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If
an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
[ ]
The
registrant hereby amends this registration statement on such date or date(s) as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective
on such date as the Commission acting pursuant to said Section 8(a) may determine.
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of
Securities
to be Registered
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Amount
to
be
Registered(1)
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Proposed
Maximum
Offering
Price
Per Share
(2)
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Proposed
Maximum
Aggregate
Offering
Price
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Amount
of
Registration
Fee
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Common stock, $0.001 par
value per share
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6,454,000
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$
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0.08
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$
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516,320
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$
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67.02
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Total
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6,454,000
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$
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516,320
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$
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67.02
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(1)
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Pursuant to Rule
416 under the Securities Act, the shares being registered hereunder include such indeterminate number of shares as may be
issuable with respect to the shares being registered hereunder as a result of stock splits, stock dividends or similar transactions.
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(2)
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Estimated solely
for purposes of calculating the amount of the registration fee pursuant to Rule 457(c). The offering price per share and the
aggregate offering price are based upon the average of the high and low prices of the registrant’s common stock as reported
on the OTCQB on December 2, 2019.
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The
information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission of which this prospectus is a part becomes effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
Subject
to Completion, Dated December 4, 2019
BTCS
INC.
PROSPECTUS
6,454,000
Shares of common stock
This
prospectus relates to the sale of up to 6,454,000 shares of our common stock which may be offered by the selling stockholder,
Cavalry Fund I, LP which we refer to as “Cavalry.” The shares of common stock being offered by the selling stockholder
are outstanding or issuable pursuant to the Cavalry Equity Line Purchase Agreement. See “The Cavalry Transaction”
for a description of the Purchase Agreement. Also, please refer to “Selling Stockholder” beginning on page 55. Such
registration does not mean that Cavalry will actually offer or sell any of these shares. We will not receive any proceeds from
the sales of the above shares of our common stock by the selling stockholder; however we will receive proceeds under the Purchase
Agreement if we sell shares to the selling stockholder.
Our
common stock trades on the OTC Markets, Inc., or OTCQB, under the symbol “BTCS”. On December 2, 2019,
the last reported sale price for our common stock on the OTCQB was $0.08 per share.
The
common stock offered in this prospectus involves a high degree of risk. See “Risk Factors” beginning on page 5 of
this prospectus to read about factors you should consider before buying shares of our common stock.
As
of the date of this prospectus, the Company had 19,564,154 shares of common stock outstanding of which 835 shares were
held by affiliates. Therefore, the Company’s public float is 19,563,319 shares and the number of shares being registered
hereunder is approximately 32.99% of the public float.
The
selling stockholder is an “underwriter” within the meaning of the Securities Act of 1933. The selling stockholder
is offering these shares of common stock. The selling stockholder may sell all or a portion of these shares from time to time
in market transactions through any market on which our common stock is then traded, in negotiated transactions or otherwise, and
at prices and on terms that will be determined by the then prevailing market price or at negotiated prices directly or through
a broker or brokers, who may act as agent or as principal or by a combination of such methods of sale. The selling stockholder
will receive all proceeds from the sale of the common stock. For additional information on the methods of sale, you should refer
to the section entitled “Plan of Distribution.”
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus is ________________, 2019
TABLE
OF CONTENTS
You
should rely only on information contained in this prospectus. We have not authorized anyone to provide you with information that
is different from that contained in this prospectus. The selling stockholder is not offering to sell or seeking offers to buy
shares of common stock in jurisdictions where offers and sales are not permitted. We are responsible for updating this prospectus
to ensure that all material information is included and will update this prospectus to the extent required by law.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully including
the section entitled “Risk Factors” before making an investment decision. BTCS, Inc., is referred to throughout this
prospectus as “BTCS,” “we,” “our” or “us.”
Introduction
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.
Our
Business
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 limitations contained within this prospectus regarding Digital Securities. The Company is also seeking to acquire
controlling interests in businesses in the blockchain industry as further described in this prospectus.
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. See “Risk Factors” beginning on page 5
and “Business” beginning on page 34.
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 been subject to substantial volatility 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. As disclosed in this prospectus we have
limited cash, and accordingly as a critical framework element are seeking acquisition targets with sufficient capital which may
help us sustain our operations without having us rely on toxic funding structures. 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. However, given the current network difficulties and price levels to
mine both ethereum and bitcoin we do not believe mining offers a positive return on investment at present. We plan to monitor
the blockchain networks and subject to additional funding re-enter the mining business when we believe a positive return on investment
is achievable. 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, 2018 financial statements that there is substantial doubt about our ability to continue as
a going concern.
Corporate
Information
We
are a Nevada corporation. Our principal executive offices are located at 9466 Georgia Avenue #124 Silver Spring, MD 20901. Our
phone number is (202) 430-6576 and our website can be found at www.btcs.com. The information on our website is not incorporated
into this prospectus.
THE
OFFERING
Common
stock outstanding prior to the offering:
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19,564,154
shares
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Common
stock offered by the selling stockholder:
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6,454,000
shares
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Common
stock outstanding immediately following the offering:
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26,018,154
shares
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Use
of proceeds:
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We
will not receive any proceeds from the sale of the shares of common stock.
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Risk
Factors:
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See
“Risk Factors” beginning on page 5 of this prospectus for a discussion of factors you should carefully consider
before deciding to invest in shares of our common stock.
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Stock
Symbol:
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“BTCS”
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The
number of shares of common stock to be outstanding prior to and after this offering excludes:
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●
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a
total of 937,904 shares of common stock issuable upon the exercise of warrants with a weighted average exercise price
of $4.08 per share; and
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●
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a
total of 196,094 shares of common stock issuable upon the conversion of Series C-1 Convertible Preferred Stock.
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The
Offering
On
May 13, 2019, we entered into an equity line purchase agreement with Cavalry (the “Purchase Agreement”) pursuant to
which Cavalry has agreed to purchase from us up to $10,000,000 of our common stock (subject to certain limitations) from time
to time over a 36-month period. Also on May 13, 2019, we entered into a Registration Rights Agreement (“Registration Rights
Agreement”), with Cavalry, pursuant to which we have filed with the Securities and Exchange Commission (the “SEC”),
the registration statement that includes this prospectus to register for resale under the Securities Act of 1933 (the “Securities
Act”), the shares that have been or may be issued to Cavalry under the Purchase Agreement.
We
do not have the right to commence any sales to Cavalry under the Purchase Agreement until the SEC has declared effective the registration
statement of which this prospectus forms a part. Thereafter, we may, from time to time and at our sole discretion, direct Cavalry
to purchase shares of our 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”).
“Put Date” mean the date when the Put occurs. On May 24, 2019, a registration statement was declared effective and
we sold 3,973,809 shares to Cavalry in exchange for $1,158,639 and issued 67,598 shares as additional pro rata commitment shares
under that registration statement.
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”) as reported on the Principal Market 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 as reported on the
Principal Market, 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, we
may not sell shares of our common stock to Cavalry under the Purchase Agreement if it would result in Cavalry beneficially owning
more than 4.99% of our common stock or if the closing price the trading day immediately preceding the Put date is below $0.005.
See
“The Cavalry Transaction” beginning on page 57. The purchase price per share will be equitably adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the Trading Days used to compute
such price. We may at any time in our sole discretion terminate the Purchase Agreement without fee, penalty or cost upon one business
day notice. Cavalry may not assign or transfer its rights and obligations under the Purchase Agreement. When we refer to “Trading
Days” in this prospectus we mean a day on which the Company’s principal market is open for business.
As
of December 2, 2019, there were 19,564,154 shares of our common stock outstanding, of which approximately 19,563,319
shares were held by non-affiliates. Although the Purchase Agreement provides that we may sell up to $10,000,000 of our common
stock to Cavalry, only 6,454,000 shares of our common stock are being offered under this prospectus, which represents (i)
225,890 shares which we are required to issue pro rata in the future as a commitment fee if and when we sell shares to
Cavalry under the Purchase Agreement, and (ii) 6,228,110 shares which Cavalry may sell from time to time in accordance
with the Purchase Agreement. Cavalry may not assign or transfer its rights and obligations under the Purchase Agreement. If all
of the 6,454,000 shares offered by Cavalry under this prospectus were issued and outstanding as of the date hereof, such
shares would represent approximately 24.81% of the total number of shares of our common stock outstanding (inclusive of
the shares being registered hereunder) and approximately 24.81% of the total number of outstanding shares held by non-affiliates
(inclusive of the shares being registered hereunder) and, in each case as of the date hereof. If we elect to issue and sell more
than the shares offered under this prospectus to Cavalry, which we have the right, but not the obligation, to do, we must first
register for resale under the Securities Act any such additional shares, which could cause additional substantial dilution to
our stockholders. The number of shares ultimately offered for resale by Cavalry is dependent upon the number of shares we sell
to Cavalry under the Purchase Agreement. Based on the terms of the Purchase Agreement, we will not be able to sell the full amount
of shares registered hereunder at an average price of higher than $0.622 per share. In such a case, we will be required to file
a new registration statement registering additional pro rata commitment shares before all such shares registered hereunder may
be sold to Cavalry, which subsequent registration statement would also include additional Put shares.
Issuances
of our common stock in this offering will not affect the rights or privileges of our existing stockholders, except that the economic
and voting interests of each of our existing stockholders will be diluted as a result of any such issuance. Although the number
of shares of common stock that our existing stockholders own will not decrease, the shares owned by our existing stockholders
will represent a smaller percentage of our total outstanding shares after any such issuance to Cavalry.
RISK
FACTORS
There
are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually
occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading
price of our common stock could decline and investors could lose all or part of their investment.
Risks
Related to Our Company
We
need to secure additional financing.
We
require additional funds since we have very limited operating capital and negative working capital. As of December 2,
2019, we had approximately $196,071 in cash and the fair market value of our Digital Assets was approximately
$296,340. Our cash as of the date of this prospectus is expected, to only be sufficient to cover our public company
costs through April 2020 depending on expenses which excludes: i) the repayment of the $200,000 convertible
promissory note (the “2019 Promissory Note”) which is held by the selling stockholder, and ii) the
payment of the 2018 Contingent Bonuses.
We
anticipate that we will incur operating losses for the foreseeable future.
Our
cash burn rate is approximately $80,000 per month, may increase as we continue to spend additional cash on legal and accounting
expenses in connection with our public reporting requirements. If we are not successful in securing additional financing including
toxic funding, we will likely be required to cease operations.
If
we do not raise additional debt or equity capital, we may not be able to pay all of our indebtedness.
In
May 2019, we signed a Purchase Agreement with Cavalry. We may direct Cavalry to purchase shares of our common stock up to $10,000,000
under the Purchase Agreement over a 36-month period assuming there is an effective registration statement covering the shares.
The
extent we rely on Cavalry as a source of funding will depend on a number of factors including, the prevailing market price of
our common stock and volume of trading and the extent to which we are able to secure working capital from other sources. If obtaining
sufficient funding from Cavalry does not occur or is prohibitively dilutive, we will need to secure another source of funding
in order to satisfy our working capital needs. Should the financing we require to sustain our working capital needs be unavailable
or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating
results, financial condition and prospects.
If
we do not raise the necessary working capital, we will not be able to remain operational.
Our
auditors have issued a “going concern” audit opinion.
Our
independent auditors have indicated in their report on our December 31, 2018 and 2017 financial statements that there is substantial
doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements
have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if
we do not continue as a going concern. Therefore, you should not rely on our consolidated balance sheet as an indication of the
amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to shareholders,
in the event of liquidation.
We
have a limited operating history and a history of operating losses, and expect to incur significant additional operating losses.
We
have a limited operating history. Therefore, there is limited historical financial information upon which to base an evaluation
of our performance. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently
encountered by companies in their early stages of operations. We have generated net losses of $0.8 million and $45.5 million for
the years ended December 31, 2018 and 2017, respectively. We expect to incur additional net losses over the next several years
as we seek to expand operations. The amount of future losses and when, if ever, we will achieve profitability are uncertain. If
we are unsuccessful at executing on our business plan, our business, prospects, and results of operations may be materially adversely
affected.
We
have an evolving business model.
As
Digital Assets and blockchain technologies become more widely available, we expect the services and products associated with them
to evolve. In 2017, the SEC issued a DAO Report that promoters that use initial coin offerings or token sales to raise capital
may be engaged in the offer and sale of securities in violation of the Securities Act and the Securities Exchange Act of 1934
(the “Exchange Act”). This may cause us to potentially change our future business in order to comply fully with the
federal securities laws as well as applicable state securities laws. As a result, to stay current with the industry, our business
model may need to evolve as well. From time to time we may modify aspects of our business model relating to our product mix and
service offerings. We cannot offer any assurance that these or any other modifications will be successful or will not result in
harm to the business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and
negatively affect our operating results.
Because
we lack effective internal controls and disclosure controls we erroneously accounted for Digital Assets using a fair value methodology
which was not consistent with United States generally accepted accounting principles (“US GAAP”) and required us to
restate our financial statements for the year ended December 31, 2017 and the three and six months ended March 31, 2018 and June
30, 2018, our failure to establish and maintain effective internal control over financial reporting could result in material misstatements
in our financial statements and a failure to meet our reporting and financial obligations which could have a material adverse
effect on our financial condition.
Maintaining
effective internal control over financial reporting is necessary for us to produce reliable financial statements. As discussed
in this prospectus, our internal controls and disclosure controls were not effective as of December 31, 2018. Because of our ineffective
controls and material weaknesses, we did not account for our Digital Assets correctly in our financial statements and recently
restated our audited financial statements for the year ended December 31, 2017 and the unaudited financial statements for the
quarters ended March 31, 2018 and June 30, 2018.
A
material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis.
While
the Company is now following U.S. GAAP in accounting for its Digital Assets, it has not remediated its material weaknesses. There
can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise
in the future. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal
control over financial reporting, could result in material misstatements in our financial statements and cause us to fail to meet
our reporting and financial obligations, which in turn could have a material adverse effect on our financial condition and the
trading price of our common stock.
The
loss of our executive officers Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan,
our Chief Operating Officer, could have a material adverse effect on us.
Our
success depends solely on the continued services of our executive officers, particularly Charles Allen, our Chairman, Chief Executive
Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, who have extensive market knowledge and
long-standing industry relationships. In particular, our reputation among and our relationships with key Digital Asset industry
leaders are the direct result of a significant investment of time and effort by these individuals to build our credibility in
a highly specialized industry. The loss of services of either Charles Allen or Michal Handerhan, could diminish our business and
growth opportunities and our relationships with key leaders in the Digital Asset industry and could have a material adverse effect
on us.
In
the past as we suffered liquidity concerns, we were unable to pay these officers. Neither exercised their right to terminate their
employment agreement.
As
a result of the Company’s past inability to compensate its officers at generally accepted market levels and its historic
failure to either make payroll or make payroll on a timely basis, its officers choose to devote a substantial amount of their
time to involvement with other companies or on other projects. Although our officers are now receiving compensation their services,
we can provide no assurances that we will not suffer liquidity issues in the near future as we implement our business plan. If
the Company is unable to pay our officers their compensation, they may again devote time to other projects which may have a material
adverse effect on us.
The
loss of Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating
Officer, would have a material adverse effect on us.
The
simultaneous loss of services of both Charles Allen and Michal Handerhan, would result in the Company having no officers or employees
and would subsequently cease all operations which would have a material adverse effect on us. See the second risk factor below
on the loss of our executive officers and employees.
Michal
Handerhan our Chief Operating Officer has notified the Company that in the event of the departure of Charles Allen, our Chairman,
Chief Executive Officer and Chief Financial Officer from the Company he may terminate his employment and may resign as an officer
and director of the Company, which would have a material adverse effect on us.
We
have no other officers and only one other director. The simultaneous loss of Charles Allen, our Chairman, Chief Executive Officer
and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, would have a material adverse effect on us. Their
Employment Agreements permit them to resign for Good Reason which includes non-payment of salaries. In the event both of officers
terminate their Employment Agreements for Good Reason, this would result in the Company owing them $560,000 and would leave the
Company without officers or employees which may have a material adverse effect upon us.
Any
inability to attract and retain additional personnel could affect our ability to successfully grow our business.
Our
future success depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial,
editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense. Our failure to
retain and attract the necessary technical, managerial, editorial, merchandising, marketing, and customer service personnel could
harm our business.
We
may need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization
and to satisfy new reporting requirements.
We
are required to comply with a variety of reporting, accounting and other rules and regulations. Compliance with existing requirements
is expensive. We may need to implement additional finance and accounting systems, procedures and controls to satisfy our reporting
requirements and such further requirements may increase our costs and require additional management time and resources. Our internal
control over financial reporting is determined to be ineffective. Such failure could cause investors to lose confidence in our
reported financial information, negatively affect the market price of our common stock, subject us to regulatory investigations
and penalties, and adversely impact our business and financial condition.
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters
could significantly affect our financial results.
Generally
accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard
to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, estimating valuation
allowances and accrued liabilities (including allowances for returns, credit card chargebacks, doubtful accounts and obsolete
and damaged inventory), internal use software and website development (acquired and developed internally), accounting for income
taxes, valuation of long-lived and intangible assets and goodwill, stock-based compensation and loss contingencies, are highly
complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation
or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected
financial performance.
Natural
disasters and geo-political events could adversely affect our business.
Natural
disasters, including hurricanes, cyclones, typhoons, tropical storms, floods, earthquakes and tsunamis, weather conditions, including
winter storms, droughts and tornados, whether as a result of climate change or otherwise, and geo-political events, including
civil unrest or terrorist attacks, that affect us or other service providers could adversely affect our business.
Since
there has been limited precedence set for financial accounting of Digital Assets other than Digital Securities, it is unclear
how we will be required to account for Digital Asset transactions in the future.
Since
there has been limited precedence set for the financial accounting of Digital Assets other than Digital Securities, it is unclear
how we will be required to account for Digital Asset transactions or assets. Furthermore, a change in regulatory or financial
accounting standards could result in the necessity to restate our financial statements. Such a restatement could negatively impact
our business, prospects, financial condition and results of operation.
We
are subject to the information and reporting requirements of the Exchange Act), and other federal securities laws, including compliance
with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).
The
costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited reports to
shareholders will cause our expenses to be higher than they would have been if we were privately held. It may be time consuming,
difficult and costly for us to develop, implement and maintain the internal controls and reporting procedures required by the
Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order
to develop and implement appropriate internal controls and reporting procedures.
If
we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results
accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation
and adversely impact the trading price of our common stock. During our assessment of the effectiveness of internal control over
financial reporting as of December 31, 2018, management identified a significant deficiency in our disclosure controls and procedures
which may lead to a failure to prevent or detect misstatements.
Effective
internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable
financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control
environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current
internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. During
our assessment of the effectiveness of internal control over financial reporting as of December 31, 2018, management identified
a significant deficiency related to presence of weakness in our disclosure control and procedure resulting from limited internal
audit functions. Because of our inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with any policies and procedures may deteriorate.
Public
company compliance may make it more difficult to attract and retain officers and directors.
The
Sarbanes-Oxley Act and rules implemented by the Securities and Exchange Commission have required changes in corporate governance
practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs in
2019 and beyond and to make certain activities more time consuming and costly. The impact of the SEC’s July 25, 2017 report
on Digital Securities (the “DAO Report”) as well as recent enforcement actions and speeches made by the SEC’s
Chairman will increase our compliance and legal costs. More recently, the SEC’s Chairman commented that most initial coin
offerings (a type of Digital Asset) involve the offer of a Digital Security. As a public company, we also expect that these rules
and regulations will make it more difficult and expensive for us to obtain director and officer liability insurance in the future
and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of
directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
Our
stock price may be volatile.
The
market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors,
many of which are beyond our control, including the following:
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changes
in our industry including changes which adversely affect bitcoin and other Digital Assets;
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sales
by Cavalry;
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competitive
pricing pressures;
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continued
volatility in the stock prices of Digital Assets issuers;
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continued
volatility in the price of bitcoin and other Digital Assets;
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our
ability to obtain working capital financing;
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additions
or departures of key personnel including our executive officers;
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sales
of our common stock;
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conversion
of our Series C-1 Convertible Preferred Stock and the subsequent sale of the underlying common stock;
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exercise
of our warrants and the subsequent sale of the underlying common stock;
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our
ability to execute our business plan;
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operating
results that fall below expectations;
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loss
of any strategic relationship;
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regulatory
developments; and
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economic
and other external factors.
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In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock. As a result, you may be unable to resell your shares at a desired price.
We
have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited
to the value of our common stock.
We
have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends
on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such
time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because
a return on your investment will only occur if our stock price appreciates.
There
is currently a limited trading market for our common stock and we cannot ensure that one will be sustained.
Our
shares of common stock are not traded on a national securities exchange, and the price, may not reflect our actual or perceived
value. There can be no assurance that there will be an active market for our shares of common stock in the future. The market
liquidity will be dependent on the perception of our operating business, among other things. We may, in the future, take certain
steps, including utilizing investor awareness campaigns, press releases, road shows and conferences to increase awareness of our
business and any steps that we might take to bring us to the awareness of investors may require we compensate consultants with
cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result
in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment at a price that reflects
the value of the business and trading may be at an inflated price relative to the performance of our company due to, among other
things, availability of sellers of our shares. The price of our common stock has been highly volatile. Because there may be a
low price for our shares of common stock and because of our involvement in the Digital Asset business, many brokerage firms or
clearing firms may not be willing to effect transactions in the securities or accept our shares for deposit in an account. Even
if an investor finds a broker willing to effect a transaction in the shares of our common stock, the combination of brokerage
commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions
will not permit the use of low priced shares of common stock as collateral for any loans.
Because
our common stock does not trade on a national securities exchange, the prices of our common stock may be more volatile and lower
than if we were listed.
Our
common stock trades on the OTCQB operated by OTC Markets Group Inc. This market is not a national securities exchange. While our
common stock trading has been relatively active, generally the OTCQB does not have the same level of activity as a national securities
exchange like Nasdaq. Most institutions will not purchase a security unless it is on a national securities exchange. In addition,
they do not purchase stocks that trade below $5 per share. We may, in the future, take certain steps, including utilizing investor
awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might
take to bring us to the awareness of investors may require we compensate consultants with cash and/or stock. There can be no assurance
that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently,
investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business and
trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers
of our shares.
Our
common stock is deemed a “penny stock,” which would make it more difficult for our investors to sell their shares.
Our
common stock is subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock
rules generally apply to companies whose common stock is not listed on the Nasdaq Stock Market or other national securities exchange
or trades at less than $5.00 per share. These rules require, among other things, that brokers who trade penny stock to persons
other than “established customers” complete certain documentation, make suitability inquiries of investors and provide
investors with certain information concerning trading in the security, including a risk disclosure document and quote information
under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock
rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain
subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities.
Because our common stock is subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
Our
articles of incorporation allow for our board to create new series of preferred stock without further approval by our shareholders,
which could adversely affect the rights of the holders of our common stock.
Our
board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of
directors also has the authority to issue preferred stock without further shareholder approval. As a result, our board of directors
could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right
to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board
of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or
that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution
to our existing shareholders.
Substantial
future sales of our common stock by us or by our existing shareholders (including the selling stockholder) could cause our stock
price to fall.
Additional
equity financings (in addition to the shares issued under the Purchase Agreement) or other share issuances by us, including shares
issued in connection with strategic alliances and corporate partnering transactions, could adversely affect the market price of
our common stock. Sales by existing shareholders (including the selling stockholder) of a large number of shares of our common
stock in the public market or the perception that additional sales could occur could cause the market price of our common stock
to drop.
We
may be accused of infringing intellectual property rights of third parties.
We
may be subject to legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability
of damages, royalties and the potential for injunctive relief has increased the defense litigation costs of patent infringement
claims, especially those asserted by third parties whose sole or primary business is to assert such claims. Such claims, even
if not meritorious, may result in significant expenditure of financial and managerial resources, and the payment of damages or
settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or business processes
we currently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may
not be available on financially feasible terms or terms acceptable to us or at all. In addition, we may not be able to obtain
on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing ecommerce
services to other businesses and individuals under commercial agreements.
Risks
Related to the Bitcoin Network and Bitcoins
The
following risks relate to our proposed business and the effects upon us assume we obtain financing in a sufficient amount to re-enter
this business.
The
further development and acceptance of the Bitcoin Network and other Digital Asset systems, which represent a new and rapidly changing
industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance
of the Bitcoin Network may adversely affect an investment in our Company.
Digital
Assets such as bitcoins that may be used, among other things, to buy and sell goods and services are a new and rapidly evolving
industry of which the Bitcoin Network is a prominent, but not unique, part. The growth of the Digital Assets industry in general,
and the Bitcoin Network in particular, is subject to a high degree of uncertainty. The factors affecting the further development
of the Digital Assets industry, as well as the Bitcoin Network, include:
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worldwide growth in the adoption and use of bitcoins and other Digital Assets;
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government
and quasi-government regulation of bitcoins and other Digital Assets and their use, or restrictions on or regulation of access
to and operation of the Bitcoin Network or similar Digital Assets systems;
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the
maintenance and development of the open-source software protocol of the Bitcoin Network;
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changes
in consumer demographics and public tastes and preferences;
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the
availability and popularity of other forms or methods of buying and selling goods and services, including new means of using
fiat currencies;
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general
economic conditions and the regulatory environment relating to Digital Assets; and
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the
impact of regulators focusing on Digital Assets and Digital Securities and the costs associated with such regulatory oversight.
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A
decline in the popularity or acceptance of the Bitcoin Network could adversely affect an investment in us.
Because
Digital Assets may be determined to be Digital Securities, we may inadvertently violate the 1940 Act and incur large losses as
a result and potentially be required to register as an investment company or terminate operations.
Digital
Assets we may own in the future may be determined to be Digital Securities by the SEC or a court. If a Digital Asset we were to
hold was later determined to be a Digital Security, we could inadvertently become an investment company, as defined by the 1940
Act, if the value of the Digital Securities we owned exceeded 40% of our assets excluding cash. We are subject to the following
risks:
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Contrary
to legal advice, the SEC or a court may conclude that bitcoin, ether, or other Digital
Assets we later acquire to be securities;
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Based
on legal advice, we may acquire other Digital Assets which we have been advised are not securities but later are held to be
securities;
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We
may knowingly acquire Digital Assets that are securities and acquire minority investments in businesses which investments
are securities; and
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Regardless
of the internal procedures we take to avoid surpassing the 40% threshold, future volatility during the course of a day may
cause use to exceed the 40% threshold.
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If
we exceed the test, we will have one-year to reduce our holdings of securities below the 40% threshold. However, that can only
occur once during a three-year period. Accordingly, if changes in the classification of Digital Assets causes us to exceed the
40% threshold, we may experience large losses when we liquidate securities as a result of continued volatility. Further, if we
elect to sell a private investment, not only may it be difficult to find a buyer but we could incur a significant loss on the
sale of a private investment due to not only the lack of liquidity but also the entity’s poor performance. If we are able
to come below the 40% threshold and again face the same problem, it is likely we will be forced to terminate operations, sell
all assets and distribute cash to our shareholders who will likely suffer very large losses. Further, the cost of distributing
cash to our shareholders may exceed the amount of cash on hand in which case we would use our remaining funds to wind down the
Company.
If
we acquire Digital Securities, even unintentionally, we may violate the Investment Company Act and incur potential third-party
liabilities.
We
expect that if we obtain sufficient financing, we will acquire a portfolio of Digital Assets including bitcoins, ether and Digital
Securities. There is an increased regulatory examination of Digital Assets and Digital Securities. This has led to regulatory
and enforcement activities. In order to limit our acquisition of Digital Securities to stay within the 40% threshold, we will
examine the manner in which Digital Assets were initially marketed to determine if they may be deemed Digital Securities and subject
to federal and state securities laws. Even if we conclude that a particular Digital Asset is not a security under the Securities
Act, certain states including California take a stricter view of the term “investment contract” which means the Digital
Asset may have violated applicable state securities laws. This will result in increased compliance costs and legal fees. If our
examination of a Digital Asset is incorrect, we may incur regulatory penalties and private investor liabilities since Section
5 of the Securities Act is a strict liability statute much like selling spoiled milk and state securities laws generally impose
liability for negligence for misrepresentations.
Currently,
there is relatively small use of bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators,
thus contributing to price volatility that could adversely affect an investment in us.
As
relatively new products and technologies, bitcoins and the Bitcoin Network have only recently become widely accepted as a means
of payment for goods and services by many major retail and commercial outlets, and use of bitcoins by consumers to pay such retail
and commercial outlets remains limited. Conversely, a significant portion of bitcoin demand is generated by speculators and investors
seeking to profit from the short- or long-term holding of bitcoins. A lack of expansion by bitcoins into retail and commercial
markets, or a contraction of such use, may result in increased volatility or a reduction in the price of bitcoin, either of which
could adversely impact an investment in us.
Because
Facebook is seeking to develop a cryptocurrency, it may adversely affect the value of bitcoins and Digital Assets.
In
May 2019, Facebook announced its plans for a cryptocurrency called Libra. The massive social network and 27 other partners are
touting the Libra digital coin and Facebook’s corresponding digital wallet, Calibra, as a way to make sending payments around
the world as easy as it is to send a photo. Because Facebook is a leader in social media, when and if it launches its coins,
it could adversely affect the value of bitcoins and Digital Assets.
Significant
Bitcoin Network contributors could propose amendments to the Bitcoin Network’s protocols and software that, if accepted
and authorized by the Bitcoin Network, could adversely affect an investment in us.
A
small group of individuals contribute to the Bitcoin Core project on Github. This group of contributors is currently headed by
Wladimir J. van der Laan, the current lead maintainer. These individuals can propose refinements or improvements to the Bitcoin
Network’s source code through one or more software upgrades that alter the protocols and software that govern the Bitcoin
Network and the properties of bitcoin, including the irreversibility of transactions and limitations on the mining of new bitcoin.
Proposals for upgrades and discussions relating thereto take place on online forums. For example, there is an ongoing debate regarding
altering the Blockchain by increasing the size of blocks to accommodate a larger volume of transactions. Although some proponents
support an increase, other market participants oppose an increase to the block size as it may deter miners from confirming transactions
and concentrate power into a smaller group of miners. To the extent that a significant majority of the users and miners on the
Bitcoin Network install such software upgrade(s), the Bitcoin Network would be subject to new protocols and software that may
adversely affect an investment in the Shares. In the event a developer or group of developers proposes a modification to the Bitcoin
Network that is not accepted by a majority of miners and users, but that is nonetheless accepted by a substantial plurality of
miners and users, two or more competing and incompatible Blockchain implementations could result. This is known as a “hard
fork.” In such a case, the “hard fork” in the Blockchain could materially and adversely affect the perceived
value of bitcoin as reflected on one or both incompatible Blockchains, which may adversely affect an investment in us.
Bitcoin
has forked three times and additional forks may occur in the future which may affect the value of bitcoin held by the Company.
Since
August 1, 2017, bitcoin’s blockchain was forked three times creating Bitcoin Cash, Bitcoin Gold and Bitcoin SV. The forks
resulted in a new blockchain being created with a shared history, and a new path forward. The value of the newly created Bitcoin
Cash, Bitcoin Gold and Bitcoin SV may or may not have value in the long run and may affect the price of bitcoin if interest is
shifted away from bitcoin to the newly created Digital Assets. The value of bitcoin after the creation of a fork is subject to
many factors including the value of the fork product, market reaction to the creation of the fork product, and the occurrence
of forks in the future. As such, the value of bitcoin could be materially reduced if existing and future forks have a negative
effect on bitcoin’s value.
The
open-source structure of the Bitcoin Network protocol means that the contributors to the protocol are generally not directly compensated
for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could
damage the Bitcoin Network and an investment in us.
The
Bitcoin Network operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core project on GitHub.
As an open source project, Bitcoin is not represented by an official organization or authority. As the Bitcoin Network protocol
is not sold and its use does not generate revenues for contributors, contributors are generally not compensated for maintaining
and updating the Bitcoin Network protocol. Although the MIT Media Lab’s Digital Currency Initiative funds the current maintainer
Wladimir J. van der Laan, among others, this type of financial incentive is not typical. The lack of guaranteed financial incentive
for contributors to maintain or develop the Bitcoin Network and the lack of guaranteed resources to adequately address emerging
issues with the Bitcoin Network may reduce incentives to address the issues adequately or in a timely manner. This may adversely
affect an investment in us.
If
a malicious actor or botnet obtains control in excess of 50% of the processing power active on the Bitcoin Network, it is possible
that such actor or botnet could manipulate the Blockchain in a manner that adversely affects an investment in us.
If
a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions
of the computers) obtains a majority of the processing power dedicated to mining on the Bitcoin Network, it may be able to alter
the Blockchain on which the Bitcoin Network and all bitcoin transactions rely by constructing alternate blocks if it is able to
solve for such blocks faster than the remainder of the miners on the Bitcoin Network can add valid blocks. In such alternate blocks,
the malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new
bitcoins or transactions using such control. Using alternate blocks, the malicious actor could “double-spend” its
own bitcoins (i.e., spend the same bitcoins in more than one transaction) and prevent the confirmation of other users’ transactions
for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of
the processing power on the Bitcoin Network or the bitcoin community does not reject the fraudulent blocks as malicious, reversing
any changes made to the Blockchain may not be possible. Such changes could adversely affect an investment in us.
In
late May and early June 2014, a mining pool known as GHash.io approached and, during a 24- to 48-hour period in early June may
have exceeded, the threshold of 50% of the processing power on the Bitcoin Network. To the extent that GHash.io did exceed 50%
of the processing power on the network, reports indicate that such threshold was surpassed for only a short period, and there
are no reports of any malicious activity or control of the Blockchain performed by GHash.io. Furthermore, the processing power
in the mining pool appears to have been redirected to other pools on a voluntary basis by participants in the GHash.io pool, as
had been done in prior instances when a mining pool exceeded 40% of the processing power on the Bitcoin Network. The approach
to and possible crossing of the 50% threshold indicate a greater risk that a single mining pool could exert authority over the
validation of bitcoin transactions. To the extent that the bitcoin ecosystem, including the Core Developers and the administrators
of mining pools, do not act to ensure greater decentralization of bitcoin mining processing power, the feasibility of a malicious
actor obtaining in excess of 50% of the processing power on the Bitcoin Network (e.g., through control of a large mining pool
or through hacking such a mining pool) will increase, which may adversely impact an investment in us.
If
the award of bitcoin for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize
miners, miners may cease expending hashrate to solve blocks and confirmations of transactions on the Blockchain could be slowed
temporarily. A reduction in the hashrate expended by miners on the Bitcoin Network could increase the likelihood of a malicious
actor obtaining control in excess of 50) of the aggregate hashrate active on the Bitcoin Network or the Blockchain, potentially
permitting such actor to manipulate the Blockchain in a manner that adversely affects an investment in us.
As
the award of new bitcoin for solving blocks declines, and if transaction fees are not sufficiently high, miners may not have an
adequate incentive to continue mining and may cease their mining operations. The current fixed reward for solving a new block
is 12.5 bitcoin per block; the reward decreased from 25 bitcoin in July 2016. It is estimated that it will halve again in about
four years. This reduction may result in a reduction in the aggregate hashrate of the Bitcoin Network as the incentive for miners
will decrease. Moreover, miners ceasing operations would reduce the aggregate hashrate on the Bitcoin Network, which would adversely
affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to the Blockchain
until the next scheduled adjustment in difficulty for block solutions) and make the Bitcoin Network more vulnerable to a malicious
actor obtaining control in excess of 50% of the aggregate hashrate on the Bitcoin Network. Periodically, the Bitcoin Network has
adjusted the difficulty for block solutions so that solution speeds remain in the vicinity of the expected ten minute confirmation
time targeted by the Bitcoin Network protocol. The Company believes that from time to time there will be further considerations
and adjustments to the Bitcoin Network regarding the difficulty for block solutions. More significant reductions in aggregate
hashrate on the Bitcoin Network could result in material, though temporary, delays in block solution confirmation time. Any reduction
in confidence in the confirmation process or aggregate hashrate of the Bitcoin Network may negatively impact the value of bitcoin,
which will adversely impact an investment in us.
To
the extent that the profit margins of Bitcoin mining operations are not high, operators of Bitcoin mining operations are more
likely to immediately sell bitcoins earned by mining in the Bitcoin Exchange Market, resulting in a reduction in the price of
bitcoins that could adversely impact an investment in us.
Over
the past three years, Bitcoin Network mining operations have evolved from individual users mining with computer processors, graphics
processing units and first-generation ASIC servers. Currently, new processing power brought onto the Bitcoin Network is predominantly
added by incorporated and unincorporated “professionalized” mining operations. Professionalized mining operations
may use proprietary hardware or sophisticated ASIC machines acquired from ASIC manufacturers. They require the investment of significant
capital for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing facilities),
incurring of electricity costs and the employment of technicians to operate the mining farms. As a result, professionalized mining
operations are of a greater scale than prior Bitcoin Network miners and have more defined, regular expenses and liabilities. These
regular expenses and liabilities require professionalized mining operations to more immediately sell bitcoins earned from mining
operations on the Bitcoin Exchange Market, whereas it is believed that individual miners in past years were more likely to hold
newly mined bitcoins for more extended periods. The immediate selling of newly mined bitcoins greatly increases the supply of
bitcoins on the Bitcoin Exchange Market, creating downward pressure on the price of bitcoins.
The
extent to which the value of bitcoin mined by a professionalized mining operation exceeds the allocable capital and operating
costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher
percentage of its newly mined bitcoin rapidly if it is operating at a low profit margin-and it may partially or completely cease
operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold into the Bitcoin
Exchange Market more rapidly, thereby potentially reducing bitcoin prices. Lower bitcoin prices could result in further tightening
of profit margins, particularly for professionalized mining operations with higher costs and more limited capital reserves, creating
a network effect that may further reduce the price of bitcoin until mining operations with higher operating costs become unprofitable
and remove mining power from the Bitcoin Network. The network effect of reduced profit margins resulting in greater sales of newly
mined bitcoin could result in a reduction in the price of bitcoin that could adversely impact an investment in us.
To
the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transaction
fee will not be recorded on the Blockchain until a block is solved by a miner who does not require the payment of transaction
fees. Any widespread delays in the recording of transactions could result in a loss of confidence in the Bitcoin Network, which
could adversely impact an investment in us.
To
the extent that any miners cease to record transactions in solved blocks, such transactions will not be recorded on the Blockchain.
Currently, there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks; however,
to the extent that any such incentives arise (e.g., a collective movement among miners or one or more mining pools forcing bitcoin
users to pay transaction fees as a substitute for or in addition to the award of new bitcoins upon the solving of a block), actions
of miners solving a significant number of blocks could delay the recording and confirmation of transactions on the Blockchain.
Any systemic delays in the recording and confirmation of transactions on the Blockchain could result in greater exposure to double-spending
transactions and a loss of confidence in the Bitcoin Network, which could adversely impact an investment in us.
The
acceptance of Bitcoin Network software patches or upgrades by a significant, but not overwhelming, percentage of the users and
miners in the Bitcoin Network could result in a “fork” in the Blockchain, resulting in the operation of two separate
networks until such time as the forked Blockchains are merged. The temporary or permanent existence of forked Blockchains could
adversely impact an investment in us.
Bitcoin
is an open source project and, although there is an influential group of leaders in the Bitcoin Network community including the
Core Developers, there is no official developer or group of developers that formally controls the Bitcoin Network. Any individual
can download the Bitcoin Network software and make any desired modifications, which are proposed to users and miners on the Bitcoin
Network through software downloads and upgrades, typically posted to the bitcoin development forum on GitHub.com. A substantial
majority of miners and bitcoin users must consent to those software modifications by downloading the altered software or upgrade
that implements the changes; otherwise, the changes do not become a part of the Bitcoin Network. Since the Bitcoin Network’s
inception, changes to the Bitcoin Network have been accepted by the vast majority of users and miners, ensuring that the Bitcoin
Network remains a coherent economic system; however, a developer or group of developers could potentially propose a modification
to the Bitcoin Network that is not accepted by a vast majority of miners and users, but that is nonetheless accepted by a substantial
population of participants in the Bitcoin Network. In such a case, and if the modification is material and/or not backwards compatible
with the prior version of Bitcoin Network software, a fork in the Blockchain could develop and two separate Bitcoin Networks could
result, one running the pre-modification software program and the other running the modified version (i.e., a second “Bitcoin”
network). Such a fork in the Blockchain typically would be addressed by community-led efforts to merge the forked Blockchains,
and several prior forks have been so merged. This kind of split in the Bitcoin Network could materially and adversely impact an
investment in us and, in the worst case scenario, harm the sustainability of the Bitcoin Network’s economy.
Intellectual
property rights claims may adversely affect the operation of the Bitcoin Network.
Third
parties may assert intellectual property claims relating to the holding and transfer of Digital Assets and their source code.
Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in the
Bitcoin Network’s long-term viability or the ability of end-users to hold and transfer bitcoins may adversely affect an
investment in us. Additionally, a meritorious intellectual property claim could prevent us and other end-users from accessing
the Bitcoin Network or holding or transferring their bitcoins. As a result, an intellectual property claim against us or other
large Bitcoin Network participants could adversely affect an investment in us.
The
Bitcoin Exchanges on which bitcoins trade are relatively new and, in most cases, largely unregulated and may therefore be more
exposed to fraud and failure than established, regulated exchanges for other products. To the extent that the Bitcoin Exchanges
representing a substantial portion of the volume in bitcoin trading are involved in fraud or experience security failures or other
operational issues, such Bitcoin Exchanges’ failures may result in a reduction in the price of bitcoin and can adversely
affect an investment in us.
The
Bitcoin Exchanges on which the bitcoins trade are new and, in most cases, largely unregulated. Furthermore, many Bitcoin Exchanges
(including several of the most prominent US Dollar denominated Bitcoin Exchanges) do not provide the public with significant information
regarding their ownership structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace
may lose confidence in, or may experience problems relating to, Bitcoin Exchanges, including prominent exchanges handling a significant
portion of the volume of bitcoin trading.
Over
the past four years, a number of Bitcoin Exchanges have been closed due to fraud, failure or security breaches. In many of these
instances, the customers of such Bitcoin Exchanges were not compensated or made whole for the partial or complete losses of their
account balances in such Bitcoin Exchanges. While smaller Bitcoin Exchanges are less likely to have the infrastructure and capitalization
that make larger Bitcoin Exchanges more stable, larger Bitcoin Exchanges are more likely to be appealing targets for hackers and
“malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information
or gain access to private computer systems). Further, the collapse of the largest Bitcoin Exchange in 2014 suggests that the failure
of one component of the overall Bitcoin ecosystem can have consequences for both users of a Bitcoin Exchange and the Bitcoin industry
as a whole.
In
2018, China shut down Bitcoin Exchanges and other virtual currency trading platforms. A Wall Street Journal article reported that
China accounted for the bulk of global bitcoin trading as of early 2018. Further, in late January 2018, the Wall Street Journal
reported that $530 million of cryptocurrency was missing from a Japanese exchange. On May 7, 2019, Coindesk reported that approximately
$41 million in Bitcoin was stolen from crypto exchange Binance.
It
has been reported that Bithumb, a South Korea exchange was hacked, resulting in a $180 million loss. This followed its reported
loss of $350 million in 2018. In 2019, the Chief Executive Officer of Quadriga, the largest exchange in Canada, died without providing
for an alternative way to access its systems causing a reported $200 million loss.
A
lack of stability in the Bitcoin Exchange Market and the closure or temporary shutdown of Bitcoin Exchanges due to fraud, business
failure, hackers or malware, or government-mandated regulation may reduce confidence in the Bitcoin Network and result in greater
volatility in bitcoin value. These potential consequences of a Bitcoin Exchange’s failure could adversely affect an investment
in us.
Political
or economic crises may motivate large-scale sales of Bitcoins, which could result in a reduction in Bitcoin value and adversely
affect an investment in us.
As
an alternative to fiat currencies that are backed by central governments, Digital Assets such as bitcoins, which are relatively
new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and
selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless,
political or economic crises may motivate large-scale acquisitions or sales of bitcoins either globally or locally. Large-scale
sales of bitcoins would result in a reduction in bitcoin value and could adversely affect an investment in us.
Demand
for bitcoin is driven, in part, by its status as the most prominent and secure Digital Asset. It is possible that a Digital Asset
other than bitcoins could have features that make it more desirable to a material portion of the Digital Asset user base, resulting
in a reduction in demand for bitcoins, which could have a negative impact on the price of bitcoins and adversely affect an investment
in us.
The
Bitcoin Network and bitcoins, as an asset, hold a “first-to-market” advantage over other Digital Assets. This first-to-market
advantage is driven in large part by having the largest user base and, more importantly, the largest combined mining power in
use to secure the Blockchain and transaction verification system. Having a large mining network results in greater user confidence
regarding the security and long-term stability of a Digital Asset’s network and its block chain; as a result, the advantage
of more users and miners makes a Digital Asset more secure, which makes it more attractive to new users and miners, resulting
in a network effect that strengthens the first-to-market advantage.
As
of December 2, 2019, there were over 2,300 alternate Digital Assets (or altcoins) tracked by CoinMarketCap, having
a total market capitalization (including the market capitalization of bitcoin) of approximately $201 billion, using market
prices and total outstanding supply of each Digital Asset. This included altcoins using a “proof of work” mining structure
similar to Bitcoin, and those using a “proof of stake” transaction verification system that is different than Bitcoin’s
mining system (e.g., Peercoin, Bitshares and NXT). As of December 2, 2019, bitcoin’s $132 billion market capitalization
was approximately eight times the size of the $16 billion market cap of ETH, the second largest Digital Asset.
Despite the marked first-mover advantage of the Bitcoin Network over other Digital Assets, it is possible that another Digital
Asset could become materially popular due to either a perceived or exposed shortcoming of the Bitcoin Network protocol that is
not immediately addressed by the Bitcoin contributor community or a perceived advantage of an altcoin that includes features not
incorporated into Bitcoin. If a Digital Asset obtains significant market share (either in market capitalization, mining power
or use as a payment technology), this could reduce bitcoin’s market share as well as other Digital Assets we may become
involved in and have a negative impact on the demand for, and price of, such Digital Assets and could adversely affect an investment
in us.
Our
ability to adopt technology in response to changing security needs or trends poses a challenge to the safekeeping of our Digital
Assets.
The
history of the Bitcoin Exchange Market has shown that Bitcoin Exchanges and large holders of bitcoins must adapt to technological
change in order to secure and safeguard their bitcoins and other Digital Assets. We rely on Bitgo Inc.’s multi-signature
enterprise storage solution to safeguard our bitcoins from theft, loss, destruction or other issues relating to hackers and technological
attack. We believe that it may become a more appealing target of security threats as the size of our bitcoin holdings grow. To
the extent that either Bitgo Inc. or we are unable to identify and mitigate or stop new security threats, our bitcoins may be
subject to theft, loss, destruction or other attack, which could adversely affect an investment in us.
Security
threats to us could result in, a loss of Company’s Digital Assets, or damage to the reputation and our brand, each of which
could adversely affect an investment in us.
Security
breaches, computer malware and computer hacking attacks have been a prevalent concern in the Bitcoin Exchange Market since the
launch of the Bitcoin Network. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information
or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment,
and the inadvertent transmission of computer viruses, could harm our business operations or result in loss of our bitcoins and
other Digital Assets. Any breach of our infrastructure could result in damage to our reputation which could adversely affect an
investment in us. Furthermore, we believe that, as our assets grow, it may become a more appealing target for security threats
such as hackers and malware.
We
will primarily rely on Bitgo Inc.’s multi-signature enterprise storage solution to safeguard our bitcoins from theft, loss,
destruction or other issues relating to hackers and technological attack. Nevertheless, Bitgo Inc.’s security system may
not be impenetrable and may not be free from defect or immune to acts of God, and any loss due to a security breach, software
defect or act of God will be borne by us. In January 2018, the Japanese cryptocurrency exchange Coincheck reported that hackers
breached Coincheck’s security and stole approximately $530 million worth of cryptocurrency. Our bitcoins and other Digital
Assets are also stored with exchanges such as Itbit, Kraken and Coinbase and others prior to selling them.
On
February 1, 2019, a 20 year old hacker pled guilty to stealing more than $5,000,000 worth of crypto currency from 40 victims through
SIM swapping. The hacker is the first individual convicted of a crime for SIM swapping, which is growing increasingly popular
with criminals as a way to steal crypto currency. In SIM swapping, hackers call a telecoms company posing as their target and
claim that their SIM card has been lost, and that they would like their number to be ported to a new card. The criminals can convince
phone companies that they are who they claim to be by providing social security numbers or addresses. Once the telecoms company
transfers the number to a new SIM, hackers can bypass two-step authentication measures for accounts by using the phone as a recovery
method. By using this method and acquiring someone’s phone number, a hacker can get into every account the person owns within
minutes and that person cannot do anything about it.
The
security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of
an employee of ours, or otherwise, and, as a result, an unauthorized party may obtain access to our, private keys, data or bitcoins.
Additionally, outside parties may attempt to fraudulently induce employees of ours to disclose sensitive information in order
to gain access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until
launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an
actual or perceived breach of our security system occurs, the market perception of the effectiveness of our security system could
be harmed, which could adversely affect an investment in us.
In
the event of a security breach, we may be forced to cease operations, or suffer a reduction in assets, the occurrence of each
of which could adversely affect an investment in us.
A
loss of confidence in our security system, or a breach of our security system, may adversely affect us and the value of an investment
in us.
We
will take measures to protect us and our bitcoins and other Digital Assets from unauthorized access, damage or theft; however,
it is possible that the security system may not prevent the improper access to, or damage or theft of our bitcoins. A security
breach could harm our reputation or result in the loss of some or all of our bitcoins. A resulting perception that our measures
do not adequately protect our Digital Assets could result in a loss of current or potential shareholders, reducing demand for
our common stock and causing our shares to decrease in value.
Bitcoin
transactions are irrevocable and stolen or incorrectly transferred bitcoins may be irretrievable. As a result, any incorrectly
executed Bitcoin transactions could adversely affect an investment in us.
Bitcoin
(and other Digital Asset) transactions are not, from an administrative perspective, reversible without the consent and active
participation of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on the
Bitcoin Network. Once a transaction has been verified and recorded in a block that is added to the Blockchain, an incorrect transfer
of Digital Assets or a theft of Digital Assets generally will not be reversible and we may not be capable of seeking compensation
for any such transfer or theft. Although our transfers of bitcoins will regularly be made to or from vendors, consultants, services
providers, etc. it is possible that, through computer or human error, or through theft or criminal action, our bitcoins could
be transferred from us in incorrect amounts or to unauthorized third parties. To the extent that we are unable to seek a corrective
transaction with such third party or is incapable of identifying the third party which has received our bitcoins through error
or theft, we will be unable to revert or otherwise recover incorrectly transferred Company Digital Assets. To the extent that
we are unable to seek redress for such error or theft, such loss could adversely affect an investment in us.
Our
bitcoins and other Digital Assets may be subject to loss, damage, theft or restriction on access.
There
is a risk that part or all of our bitcoins we acquire could be lost, stolen or destroyed. We believe that our bitcoins and other
Digital Assets will be an appealing target to hackers or malware distributors seeking to destroy, damage or steal our bitcoin
and other Digital Assets. Although we primarily utilize Bitgo Inc.’s enterprise multi-signature storage solution for our
bitcoins, to minimize the risk of loss, damage and theft, we cannot guarantee that it will prevent such loss, damage or theft,
whether caused intentionally, accidentally or by act of God. Access to our Digital Assets could also be restricted by natural
events (such as an earthquake or flood) or human actions (such as a terrorist attack). Any of these events may adversely affect
our operations and, consequently, an investment in us.
The
limited rights of legal recourse against us, and our lack of insurance protection expose us and our shareholders to the risk of
loss of our bitcoins and other Digital Assets for which no person is liable.
The
bitcoins and other Digital Assets held by us are not insured. Therefore, a loss may be suffered with respect to our bitcoins which
is not covered by insurance and for which no person is liable in damages which could adversely affect our operations and, consequently,
an investment in us.
Bitcoins
and other Digital Assets held by us are not subject to FDIC or SIPC protections.
We
will not hold our bitcoins and other Digital Assets with a banking institution or a member of the Federal Deposit Insurance Corporation
(“FDIC”) or the Securities Investor Protection Corporation (“SIPC”) and, therefore, our Digital Assets
are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions.
We
may not have adequate sources of recovery if our bitcoins and other Digital Assets are lost, stolen or destroyed.
If
our bitcoins or other Digital Assets are lost, stolen or destroyed under circumstances rendering a party liable to us, the responsible
party may not have the financial resources sufficient to satisfy our claim. For example, as to a particular event of loss, the
only source of recovery for us might be limited, to the extent identifiable, other responsible third parties (e.g., a thief or
terrorist), any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim
of ours.
The
sale of our bitcoins or other Digital Assets to pay expenses at a time of low prices could adversely affect an investment in us.
We
may sell bitcoins or other Digital Assets to pay expenses on an as-needed basis, irrespective of then-current prices. The extreme
volatility of bitcoin and other Digital Assets could mean that prices are low when we need to sell. Consequently, our Digital
Assets may be sold at a time when the prices are low, which could adversely affect an investment in us.
Intellectual
property rights claims may adversely affect an investment in us.
We
are not aware of any intellectual property claims that may prevent us from operating and holding bitcoins or other Digital Assets;
however, third parties may assert intellectual property claims relating to the operation of us and the mechanics instituted for
the investment in, holding of and transfer of bitcoins or other Digital Assets. Regardless of the merit of an intellectual property
or other legal action, any legal expenses to defend or payments to settle such claims would be extraordinary expenses and be borne
by us through the sale of our bitcoins and other Digital Assets. Additionally, a meritorious intellectual property claim could
prevent us from operating and force us to liquidate our bitcoins and other Digital Assets. As a result, an intellectual property
claim against us could adversely affect an investment in us.
Regulatory
changes or actions may restrict the use of Digital Assets or the operation of trading markets in a manner that adversely affects
an investment in us.
Until
a few years ago, little or no regulatory attention has been directed toward bitcoin, other Digital Assets and the markets where
they trade by U.S. federal and state governments, foreign governments and self-regulatory agencies. As bitcoin has grown in popularity
and in market size and initial coin offerings which tend to be Digital Securities, the SEC, Federal Reserve Board, U.S. Congress
and certain other U.S. agencies (e.g., the CFTC, FinCEN and the Federal Bureau of Investigation) have begun to examine the operations
of the initial coin offerings, Bitcoin Network, bitcoin users and the Bitcoin Exchange Market.
On
July 25, 2017, the SEC issued its DAO Report which concluded that Digital Assets or tokens issued for the purpose of raising funds
may be securities within the meaning of the federal securities laws. The DAO Report focused on the activities of a virtual organization
which offered tokens in exchange for ether which is the second largest reported digital currency. The DAO Report emphasized that
whether Digital Asset is a security is based on the facts and circumstances. Although the Company’s activities are not focused
on raising capital or assisting others that do so, the federal securities laws are very broad, and there can be no assurances
that the SEC will not take enforcement action against the Company in the future including for the sale of unregistered securities
in violation of the Securities Act or acting as an unregistered investment company in violation of the Investment Company Act.
The SEC has taken various actions against persons or entities misusing bitcoin in connection with fraudulent schemes (i.e., Ponzi
scheme), inaccurate and inadequate publicly disseminated information, and the offering of unregistered securities. More recently,
the SEC suspended trading in three Digital Asset public companies. Since issuing the DAO Report the SEC Chairman has stated that
the SEC is carefully examining initial coin offerings and similar areas involving Digital Assets for their compliance with the
Securities Act. On November 16, 2018, the SEC announced its first civil penalties solely targeting ICO securities registration
violators in reference to settled charges against ICO issuers CarrierEQ, Inc., (“Airfox”) and Paragon Coin, Inc. (“Paragon”).
Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, stated that “we have made it clear that companies
who issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities.”
Unlike Slock.It, which faced no penalty, Airfox and Paragon were each ordered to: 1) pay $250,000 in penalties, 2) register their
tokens pursuant to the Exchange Act, and 2) to file periodic reports with the SEC for at least a year.
Very
recently, it has been publicly reported that the SEC staff has been issuing subpoenas seeking information about initial coin offerings.
Although we have never invested in initial coin offering, lawsuits filed by the SEC claiming that initial coin offering issuers
and cryptocurrency public companies violate the Securities Act and the Exchange Act and the resulting publicity may have a material
adverse effect on the prices of Digital Assets we own and otherwise adversely affect opportunities in the Blockchain industry,
which in turn will have an adverse impact on our business and prospects.
The
CFTC has determined that bitcoin and other virtual currencies are commodities and the sale of derivatives based on digital currencies
must be done in accordance with the provisions of the CEA and CFTC regulations. Also of significance, is that the CFTC appears
to have taken the position that bitcoin is not encompassed by the definition of currency under the CEA and CFTC regulations. The
CFTC defined bitcoin and other “virtual currencies” as “a digital representation of value that functions as
a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin
and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United
States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of
exchange in the country of issuance.” To the extent that bitcoin itself is determined to be a security, commodity future
or other regulated asset, or to the extent that a US or foreign government or quasi-governmental agency exerts regulatory authority
over the Bitcoin Network or bitcoin trading and ownership, trading or ownership in bitcoin or an investment in us may be adversely
affected.
The
CFTC affirmed its approach to the regulation of bitcoin and bitcoin-related enterprises on June 2, 2016, when the CFTC settled
charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its Order, the CFTC found that Bitfinex engaged in “illegal,
off-exchange commodity transactions and failed to register as a futures commission merchant” when it facilitated borrowing
transactions among its users to permit the trading of bitcoin on a “leveraged, margined or financed basis” without
first registering with the CFTC. In 2017 the CFTC stated that it would consider bitcoin and other virtual currencies as commodities
or derivatives depending on the facts of the offering. In December 2017, bitcoin futures trading commenced on two CFTC regulated
futures markets. In 2018 two federal district courts determined that Digital Assets were commodities and can be regulated by the
CFTC as such.
Local
state regulators such as the NYSDFS have also initiated examinations of bitcoin, the Bitcoin Network and the regulation thereof.
The NYSDFS began requiring New York based companies to have a “BitLicense” in June 2015. The “BitLicense”
regulates the conduct of businesses that are involved in “virtual currencies” in New York or with New York customers,
and prohibits any person or entity involved in such activity to conduct activities without a license. Out of concern of over regulating
cryptocurrency, New York has formed a task force to further study the scope of its regulation.
Additionally,
a U.S. federal magistrate judge in the U.S. District Court for the Eastern District of Texas has ruled that “Bitcoin is
a currency or form of money,” a Florida circuit court judge determined that bitcoin did not qualify as money or “tangible
wealth,” and an opinion from the U.S. District Court for the Northern District of Illinois identified bitcoin as “virtual
currency.” Additionally, two CFTC commissioners publicly expressed a belief that derivatives based on bitcoin are subject
to the same regulation as those based on commodities, and the IRS released guidance treating bitcoin as property that is not currency
for U.S. federal income tax purposes. Taxing authorities of a number of U.S. states have also issued their own guidance regarding
the tax treatment of bitcoin for state income or sales tax purposes. On June 28, 2014, the Governor of the State of California
signed into law a bill that removed state-level prohibitions on the use of alternative forms of currency or value (including bitcoin).
The bill indirectly authorizes bitcoin’s use as an alternative form of money in the state. In February 2015, a bill was
introduced in the California State Assembly to establish a licensing regime for businesses engaging in “virtual currencies.”
In September 2015, the bill was ordered to become an inactive file and as of the date of this prospectus there hasn’t been
further consideration by the California State Assembly. As of August 2016, the bill was withdrawn from consideration for vote
for the remainder of the year. In March of 2019, California Assembly Majority Leader Ian Calderon introduced Assembly Bill 1489,
which would govern virtual currency business activity that takes place with or on behalf of California residents. The proposes
to require companies to go through a regulatory approval process to conduct crypto-related activities in the state by requiring
licensure with stipulations on net worth, security, and reserves. Entities would be subject to examination, consolidations and
data sharing to maintain compliance. As presently drafted, Bill 1489 does not consider virtual currencies (also known as cryptocurrencies
and digital assets) to be legal tender, whether or not it is denominated in legal tender. It states that virtual currency is a
representation of value for exchange, storage of value, or unit of account.
Bitcoin
currently faces an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such as
the European Union, China and Russia. While certain governments such as Germany, where the Ministry of Finance has declared bitcoin
to be “Rechnungseinheiten” (a form of private money that is recognized as a unit of account, but not recognized
in the same manner as fiat currency), have issued guidance as to how to treat bitcoin, most regulatory bodies have not yet issued
official statements regarding intention to regulate or determinations on regulation of bitcoin, the Bitcoin Network and bitcoin
users.
Among
those for which preliminary guidance has been issued in some form, Canada and Taiwan have labeled bitcoin as a digital or virtual
currency, distinct from fiat currency, while Sweden and Norway are among those to categorize bitcoin as a form of virtual asset
or commodity. In Australia, a GST (similar to the European value added tax (“VAT”)) is currently applied to bitcoin,
forcing a ten (10) percent markup on top of market price, essentially preventing the operation of any Bitcoin Exchange. This may
be undergoing a change, however, since the Senate Economics References Committee and the Productivity Commission recommended that
digital currency be treated as money for GST purposes to remove the double taxation. The United Kingdom determined that the VAT
will not apply to bitcoin sales. Since December 2013, China, Iceland, Vietnam and Russia have taken a more restrictive stance
toward bitcoin and, thereby, have reduced the rate of expansion of bitcoin use in each country. In May 2014, the Central Bank
of Bolivia banned the use of bitcoin as a means of payment. In the summer and fall of 2014, Ecuador announced plans for its own
state-backed electronic money, while passing legislation that prohibits the use of decentralized Digital Assets such as bitcoin.
In July 2016, economists at the Bank of England advocated that central banks issue their own digital currency, and the House of
Lords and Bank of England started discussing the feasibility of creating a national virtual currency, the BritCoin. As of July
2016, Iceland was studying how to create a system in which all money is created by a central bank, and Canada was beginning to
experiment with a digital version of its currency called CAD-COIN, intended to be used exclusively for interbank payments. On
August 24, 2017, Canada issued guidance stating the sale of cryptocurrency may constitute an investment contract in accordance
with Canadian law for determining if an investment constitutes a security. In July 2016, the Russian Ministry of Finance indicated
it supports a proposed law that bans bitcoin domestically but allows for its use as a foreign currency. Russia recently issued
several releases indicating they may begin regulating bitcoin and licensing miners and entities engaging in initial coin offerings.
Conversely, regulatory bodies in some countries such as India and Switzerland have declined to exercise regulatory authority when
afforded the opportunity. In April 2015, the Japanese Cabinet approved proposed legal changes that would reportedly treat bitcoin
and other Digital Assets as included in the definition of currency. These regulations would, among other things, require market
participants, including exchanges, to meet certain compliance requirements and be subject to oversight by the Financial Services
Agency, a Japanese regulator. In September 2017 Japan began regulating Bitcoin Exchanges and registered several such exchanges
to operate within Japan. In July 2016, the European Commission released a draft directive that proposed applying counter-terrorism
and anti-money laundering regulations to virtual currencies, and, in September 2016, the European Banking authority advised the
European Commission to institute new regulation specific to virtual currencies, with amendments to existing regulation as a stopgap
measure. Various foreign jurisdictions may, in the near future, adopt laws, regulations or directives that affect the Bitcoin
Network and its users, particularly Bitcoin Exchanges and service providers that fall within such jurisdictions’ regulatory
scope. Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance
of bitcoin by users, merchants and service providers outside of the United States and may therefore impede the growth of the bitcoin
economy. On September 4, 2017, reports were published that China may begin prohibiting the practice of using cryptocurrency for
capital fundraising. Additional reports have surfaced that China is considering regulating Bitcoin Exchanges by enacting a licensing
regime wherein Bitcoin Exchanges may legally operate. In April 2019, China’s National Development Reform Commission listed
crypto-mining among a variety of industries it intends to eliminate. In October 2018, The Shenzhen Court of International Arbitration
of China published a case analysis on contract disputes between parties to a share transfer agreement involving cryptocurrencies
and held that cryptocurrency was protected as property in China. In September 2017, the Financial Services Commission of South
Korea released a statement that initial coin offerings would be prohibited as a fundraising tool. In December of 2018, the South
Korea’s Financial Services Commission, the country’s top financial regulator, stated that six bills related to the
regulation of cryptocurrencies had been submitted to the National Assembly. One of the bills would require all persons in charge
of a cryptocurrency transfer business - including trading, brokerage and management – to register with the Financial Services
Commission. In June 2017, India’s government ruled in favor of regulating bitcoin. In December 2017, India’s finance
minister told the media that the government does not consider bitcoin a legal tender. In April 2018, the Reserve Bank of India
issued a statement to all entities regulated by the Reserve Bank, stating that they must cease all activities related to cryptocurrency.
The Internet and Mobile Association of India challenged the ban via petition to the Supreme Court of India, which ordered the
Reserve Bank of India to devise a clear regulation regarding cryptocurrency. The Supreme Court of India will resume hearing the
case in July 2019. In 2018, Australia passed legislation which requires digital currency exchange providers to register with AUSTRAC
(the Australian Transaction Reports and Analysis Centre). In its budget summary for 2017-2018, the Australian government stated
that, as part of its plan to make it easier for digital currency businesses to operate in the country, purchases of digital currency
will no longer be subject to the general sales tax.
The
effect of any future regulatory change on us, bitcoins, or other Digital Assets is impossible to predict, but such change could
be substantial and adverse to us and could adversely affect an investment in us.
It
may be illegal now, or in the future, to acquire, own, hold, sell or use bitcoins or other Digital Assets in one or more countries,
and ownership of, holding or trading in our Company’s securities may also be considered illegal and subject to sanction.
Although
currently bitcoins and other Digital Assets are not regulated or are lightly regulated in most countries, including the United
States, one or more countries such as China and Russia may take regulatory actions in the future that severely restricts the right
to acquire, own, hold, sell or use bitcoins or other Digital Assets or to exchange Digital Assets for currency. Such an action
may also result in the restriction of ownership, holding or trading in our securities. Such restrictions may adversely affect
an investment in us.
If
we become an inadvertent investment company in violation of the 1940 Act, our failure to register under the 1940 Act will adversely
affect us and you will likely lose your entire investment.
Under
the 1940 Act, a company may be deemed an investment company under if the value of its investment securities is more than 40% of
its total assets (exclusive of government securities and cash items) on a consolidated basis.
In
the event that the Digital Assets held by us exceed 40% of our total assets, exclusive of cash, we may inadvertently become an
investment company. While we are putting in place policies that we expect will work to keep the investment securities held by
us at less than 40% of our total assets, which may include actively monitoring the value of our investment securities, acquiring
assets bitcoin with our cash, or liquidating our investment securities.
The
Rules under the 1940 Act permit a company to breach the 40% threshold once every three years assuming it reduces its investment
securities below 40% within one year. Otherwise registration under the 1940 Act would be required.
The
40% requirement may limit our ability to make certain investments or enter into joint ventures that could otherwise have a positive
impact on our earnings. In any event, we do not intend to become an investment company engaged in the business of investing and
trading securities. The failure to register when required would likely make our common stock worthless.
If
we become an investment company and fail to register, we would have to stop doing almost all business. Registration is time consuming
and restrictive and would require a restructuring of our operations, and we would be very constrained in the kind of business
we could do as a registered investment company. Further, we would become subject to substantial regulation concerning management,
operations, transactions with affiliated persons and portfolio composition, and would need to file reports under the 1940 Act
regime. The cost of such compliance would result in the Company incurring substantial additional expenses, and the failure to
register if required would have a materially adverse impact to conduct our operations.
If
regulatory changes or interpretations of our activities require our registration as a MSB under the regulations promulgated by
FinCEN under the authority of the U.S. Bank Secrecy Act, we may be required to register and comply with such regulations. If regulatory
changes or interpretations of our activities require the licensing or other registration of us as a money transmitter (or equivalent
designation) under state law in any state in which we operate, we may be required to seek licensure or otherwise register and
comply with such state law. In the event of any such requirement, to the extent the Company decides to continue, the required
registrations, licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also
decide to cease the Company’s operations. Any termination of certain Company operations in response to the changed regulatory
circumstances may be at a time that is disadvantageous to investors.
To
the extent that the activities of the Company cause it to be deemed a MSB under the regulations promulgated by FinCEN under the
authority of the U.S. Bank Secrecy Act, the Company may be required to comply with FinCEN regulations, including those that would
mandate the Company to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.
To
the extent that the activities of the Company cause it to be deemed a “money transmitter” (or equivalent designation)
under state law in any state in which the Company operates, the Company may be required to seek a license or otherwise register
with a state regulator and comply with state regulations that may including the implementation of anti-money laundering programs,
maintenance of certain records and other operational requirements. Currently, the NYSDFS has finalized its “BitLicense”
framework for businesses that conduct “virtual currency business activity,” the Conference of State Bank Supervisors
has proposed a model form of state level “virtual currency” regulation and additional state regulators including those
from California, Idaho, Virginia, Kansas, Texas, South Dakota and Washington have made public statements indicating that virtual
currency businesses may be required to seek licenses as money transmitters. In July 2016, North Carolina updated the law to define
“virtual currency” and the activities that trigger licensure in a business friendly approach that encourages companies
to use virtual currency and blockchain technology. Specifically, the North Carolina law does not require miners or software providers
to obtain a license for multi-signature software, smart contract platforms, smart property, colored coins and non-hosted, non-custodial
wallets. Starting January 1, 2016, New Hampshire requires anyone exchanges a digital currency for another currency must become
a licensed and bonded money transmitter. In numerous other states, including Connecticut and New Jersey, legislation is being
proposed or has been introduced regarding the treatment of bitcoin and other Digital Assets. The Company will continue to monitor
for developments in such legislation, guidance or regulations.
Such
additional federal or state regulatory obligations may cause the Company to incur extraordinary expenses, possibly affecting an
investment in the Resale Shares in a material and adverse manner. Furthermore, the Company and its service providers may not be
capable of complying with certain federal or state regulatory obligations applicable to MSBs and MTs. If the Company is deemed
to be subject to and determines not to comply with such additional regulatory and registration requirements, we may act to dissolve
and liquidate the Company. Any such action may adversely affect an investment in us.
Current
interpretations require the regulation of bitcoins and other Digital Assets under the CEA by the CFTC, we may be required to register
and comply with such regulations. To the extent that we decide to continue operations, the required registrations and regulatory
compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any
disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
Current
and future legislation, CFTC and other regulatory developments, including interpretations released by a regulatory authority,
may impact the manner in which bitcoins and other Digital Assets are treated for classification and clearing purposes. In particular,
derivatives on these assets are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain
as to how future regulatory developments will impact the treatment of bitcoins and other Digital Assets under the law.
Bitcoins
have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation
under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to
register as a commodity pool operator and to register us as a commodity pool with the CFTC through the National Futures Association.
Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting
an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek
to cease certain of our operations. Any such action may adversely affect an investment in us. No CFTC orders or rulings are applicable
to our business.
If
regulatory changes or interpretations require the regulation of bitcoins and other Digital Assets (in contrast to Digital Securities)
under the Securities Act and Investment Company Act by the SEC, we may be required to register and comply with such regulations.
To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result in
extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. This would likely have a material
adverse effect on us and investors may lose their investment.
Current
and future legislation and SEC rulemaking and other regulatory developments, including interpretations released by a regulatory
authority, may impact the manner in which bitcoins are treated for classification and clearing purposes. The SEC’s July
25, 2017 DAO Report expressed its view that Digital Assets may be securities depending on the facts and circumstances. As of the
date of this prospectus, we are not aware of any rules that have been proposed to regulate the Digital Assets we hold as securities.
We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins and other Digital Assets under
the law. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting
an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek
to cease certain of our operations. Any such action may adversely affect an investment in us.
To
the extent that Digital Assets including bitcoins are deemed by the SEC to fall within the definition of a security, we may be
required to register and comply with additional regulation under the Investment Company Act, including additional periodic reporting
and disclosure standards and requirements and the registration of our Company as an investment company. Additionally, one or more
states may conclude bitcoins are a security under state securities laws which would require registration under state laws including
merit review laws which would adversely impact us since we would likely not comply. As stated earlier in this prospectus, some
states including California define the term “investment contract” more strictly than the SEC. Such additional registrations
may result in extraordinary, non-recurring expenses of our Company, thereby materially and adversely impacting an investment in
our Company. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease
all or certain parts of our operations. Any such action would likely adversely affect an investment in us and investors may suffer
a complete loss of their investment.
The
Company does not currently have any mining operations but may resume its mining operations through outsourced data centers if
it receives additional capital. To the extent that the Company resumes mining operations and acquires Digital Assets as a result
of mining, we do not intend to trade the Digital Assets until we determine, with the assistance of legal counsel, that the Digital
Assets are not securities, the Digital Assets would only be used for our own account.
As
discussed at page 43 and 44 we do not think that bitcoin and ether are securities. As such, we do not intend to acquire securities
in amounts that are equal to or greater than 40% of our assets. Should the total value of securities which we hold rise to more
than 40% of our assets (exclusive of cash) we note that SEC Rule 3a-2 under the 1940 Act allows an issuer to prevent itself from
being deemed an investment company if it reduces its holdings of securities to less than 40% of its assets (exclusive of cash)
and does not go above the 40% threshold more than once every three years. In order to comply with the 1940 Act, we anticipate
having increased management time and legal expenses in order to analyze which Digital Assets are securities and periodically analyze
our total holdings to ensure that we do not maintain more than 40% of our total assets (exclusive of cash) as securities. If our
view that ether is not a security is challenged by the SEC and courts uphold the challenge, we may inadvertently violate the 1940
Act and incur substantial legal fees in defending our position. In such case the legal fees may exceed our available assets which
could adversely affect an investment in us.
If
federal or state legislatures or agencies initiate or release tax determinations that change the classification of bitcoins or
other Digital Assets as property for tax purposes (in the context of when such Digital Assets are held as an investment), such
determination could have a negative tax consequence on our Company or our shareholders.
Current
IRS guidance indicates that Digital Assets such as bitcoins should be treated and taxed as property, and that transactions involving
the payment of bitcoins for goods and services should be treated as barter transactions. While this treatment creates a potential
tax reporting requirement for any circumstance where the ownership of a bitcoin passes from one person to another, usually by
means of bitcoin transactions (including off-Blockchain transactions), it preserves the right to apply capital gains treatment
to those transactions which may have adversely affect an investment in our Company.
On
December 5, 2014, the New York State Department of Taxation and Finance issued guidance regarding the application of state tax
law to Digital Assets such as bitcoins. The agency determined that New York State would follow IRS guidance with respect to the
treatment of Digital Assets such as bitcoins for state income tax purposes. Furthermore, they defined Digital Assets such as bitcoin
to be a form of “intangible property,” meaning the purchase and sale of bitcoins for fiat currency is not subject
to state income tax (although transactions of bitcoin for other goods and services maybe subject to sales tax under barter transaction
treatment). It is unclear if other states will follow the guidance of the IRS and the New York State Department of Taxation and
Finance with respect to the treatment of Digital Assets such as bitcoins for income tax and sales tax purposes. If a state adopts
a different treatment, such treatment may have negative consequences including the imposition of greater a greater tax burden
on investors in bitcoin or imposing a greater cost on the acquisition and disposition of bitcoins, generally; in either case potentially
having a negative effect on prices in the Bitcoin Exchange Market and may adversely affect an investment in our Company.
Foreign
jurisdictions may also elect to treat Digital Assets such as bitcoins differently for tax purposes than the IRS or the New York
State Department of Taxation and Finance. To the extent that a foreign jurisdiction with a significant share of the market of
bitcoin users imposes onerous tax burdens on bitcoin users, or imposes sales or value added tax on purchases and sales of bitcoins
for fiat currency, such actions could result in decreased demand for bitcoins in such jurisdiction, which could impact the price
of bitcoins and negatively impact an investment in our Company.
Risks
Related to Our Digital Assets Holdings
The
loss or destruction of a private key required to access a Digital Assets such as bitcoin may be irreversible. Our loss of access
to our private keys or our experience of a data loss relating to our Company’s Digital Assets could adversely affect an
investment in our Company.
Bitcoins
are controllable only by the possessor of both the unique public key and private key relating to the local or online digital wallet
in which the bitcoins are held. We are required by the operation of the Bitcoin Network to publish the public key relating to
a digital wallet in use by us when it first verifies a spending transaction from that digital wallet and disseminates such information
into the Bitcoin Network. We safeguard and keep private the private keys relating to our bitcoins not held at exchanges
by utilizing Bitgo Inc.’s enterprise multi-signature storage solution; to the extent a private key is lost, destroyed or
otherwise compromised and no backup of the private key is accessible, we will be unable to access the bitcoins held by it and
the private key will not be capable of being restored by the Bitcoin Network. Any loss of private keys relating to digital wallets
used to store our bitcoins could adversely affect an investment in us.
To
the extent that any of our Digital Assets are held by Exchanges, we may face heightened risks from cybersecurity attacks and financial
stability of the Exchanges.
The
Company will use Digital Asset exchanges to hold certain of the its Digital Assets; the Company’s bitcoin will either be
held directly by the Company in a bitcoin wallet utilizing Bitgo Inc.’s enterprise multi-signature storage solution or at
Digital Asset exchanges. All Digital Assets not held in the Company’s Bitgo wallets will be subject to the risks encountered
by a Digital Asset exchange including a DDoS Attack or other malicious hacking, a sale of the Digital Asset exchange, loss of
the Digital Assets by the Digital Asset exchange and other risks similar to those described on page 18 in a risk factor entitled
“Security threats to us could result in, a loss of Company’s Digital Assets, or damage to the reputation and our brand,
each of which could adversely affect an investment in us.” The Company may not maintain a custodian agreement with the Digital
Asset exchange that holds the Company’s Digital Assets. Exchange typically do not provide insurance and may lack the resources
to protect against hacking and theft. In the future we may acquire other Digital Assets that are held by Exchanges. If a material
amount of our Digital Assets are held by Exchanges, we may be materially and adversely affected if the Exchanges suffer cyberattacks
or incur financial problems.
Risks
Related to Our Future Transaction Verification Business
If
the award of bitcoins for solving blocks and transaction fees for recording transactions are not sufficiently high to cover expenses
related to running data center operations it may have adverse affects on an investment in us.
If
the award of new bitcoins for solving blocks declines and transaction fees are not sufficiently high, we may not have an adequate
incentive to restart our mining operations, which may adversely impact an investment in us.
As
the number of bitcoins awarded for solving a block in the Blockchain decreases, the incentive for miners to continue to contribute
processing power to the Bitcoin Network will transition from a set reward to transaction fees. Either the requirement from miners
of higher transaction fees in exchange for recording transactions in the Blockchain or a software upgrade that automatically charges
fees for all transactions may decrease demand for bitcoins and prevent the expansion of the Bitcoin Network to retail merchants
and commercial businesses, resulting in a reduction in the price of bitcoins that could adversely impact an investment in us.
In
order to incentivize miners to continue to contribute processing power to the Bitcoin Network, the Bitcoin Network may either
formally or informally transition from a set reward to transaction fees earned upon solving for a block. This transition could
be accomplished either by miners independently electing to record in the blocks they solve only those transactions that include
payment of a transaction fee or by the Bitcoin Network adopting software upgrades that require the payment of a minimum transaction
fee for all transactions. If transaction fees paid for Bitcoin transactions become too high, the marketplace may be reluctant
to accept bitcoins as a means of payment and existing users may be motivated to switch from bitcoins to another Digital Asset
or back to fiat currency. Decreased use and demand for bitcoins may adversely affect their value and may adversely impact an investment
in us.
Risks
Related to the Purchase Agreement with Cavalry
The
sale or issuance of our common stock to Cavalry may cause dilution and the sale of the shares of common stock acquired by Cavalry,
or the perception that such sales may occur, could cause the price of our common stock to fall.
On
May 13, 2019, we entered into the Purchase Agreement with Cavalry, pursuant to which Cavalry has committed to purchase up to $10,000,000
of our common stock. As of the date of this prospectus, we have directed Cavalry to purchase 3,973,809 shares (excluding the 67,598
pro rata commitment shares) and have received approximately $1,158,639. The purchase shares that may be sold pursuant to the Purchase
Agreement may be sold by us to Cavalry at our discretion from time to time over a 36-month period commencing after the SEC has
declared effective the registration statement that includes this prospectus. The purchase price for the shares that we may sell
to Cavalry under the Purchase Agreement will fluctuate based on the price of our common stock. Depending on market liquidity at
the time, sales of such shares may cause the trading price of our common stock to fall. Additionally, the amount that we may sell
to Cavalry will be limited to the Daily Trading Dollar Volume on the day of, or day before, the Put. If the trading volume and/or
price of our common stock is low, our ability to raise capital under the Purchase Agreement will be limited and/or take an extensive
time to raise capital.
We
generally have the right to control the timing and amount of any sales of our shares to Cavalry, except that, pursuant to the
terms of our agreements with Cavalry, we would be unable to sell shares to Cavalry on any day when the closing sale price of our
common stock is below $0.005 per share, subject to adjustment as set forth in the Purchase Agreement. Cavalry may ultimately purchase
all, some or none of the shares of our common stock that may be sold pursuant to the Purchase Agreement in connection with our
rights to direct Cavalry’s purchases at our discretion and, after it has acquired shares, Cavalry may sell all, some or
none of those shares. Therefore, sales to Cavalry by us could result in substantial dilution to the interests of other holders
of our common stock. Additionally, the sale of a substantial number of shares of our common stock to Cavalry, or the anticipation
of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at
a price that we might otherwise wish to effect sales.
We
may not be able to access sufficient funds under the Purchase Agreement with Cavalry when needed.
Our
ability to sell shares to Cavalry and obtain funds under the Purchase Agreement is limited by the terms and conditions in the
Purchase Agreement, including restrictions on when we may sell shares to Cavalry, restrictions on the amounts we may sell to Cavalry
at any one time, and a limitation on our ability to sell shares to Cavalry to the extent that it would cause Cavalry to beneficially
own more than 4.99% of our outstanding common stock. In addition, any amounts we sell under the Purchase Agreement may not satisfy
all of our funding needs, even if we are able and choose to sell all $10,000,000 under the Purchase Agreement. Assuming all 6.2
million additional Purchase Shares of our common stock
being offered under this prospectus that may be purchased by Cavalry are sold at $0.005 per share (the floor price mentioned herein),
we would receive approximately $31,141. If we elect to issue and sell more than the shares offered under this prospectus
to Cavalry, which we have the right, but not the obligation, to do, we must first register for resale under the Securities Act
any such additional shares.
We
elected to enter into the Purchase Agreement with Cavalry as we expect that amount of capital over the next 12 months will be
required for us to fully implement our business, operating and development plans. The extent we rely on Cavalry as a source of
funding will depend on a number of factors including, the prevailing market price and trading volume of our common stock and the
extent to which we are able to secure working capital from other sources. If obtaining sufficient funding from Cavalry were to
prove unavailable or prohibitively dilutive, we will need to secure another source of funding in order to satisfy our working
capital needs. Even if we sell all 6.2 million remaining Purchase Shares to
Cavalry, we may still need additional capital to fully implement our business, operating and development plans. Should the financing
we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences
could be a material adverse effect on our business, operating results, financial condition and prospects.
The
sale of our common stock to Cavalry will cause dilution and the sale of the shares by Cavalry could cause the price of our common
stock to decline.
The
number of shares ultimately offered for sale by Cavalry is dependent upon the number of shares sold to Cavalry under the Purchase
Agreement. The purchase price for the common stock to be sold to Cavalry pursuant to the Purchase Agreement will fluctuate based
on the price of our common stock. Depending upon market liquidity at the time, a sale of shares by Cavalry at any given time could
cause the trading price of our common stock to decline. After it has acquired such shares, Cavalry may sell all, some or none
of such shares. Therefore, sales to Cavalry by us under the Purchase Agreement will result in substantial dilution to the interests
of other holders of our common stock. The sale of a substantial number of shares of our common stock, or anticipation of such
sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price
that we might otherwise wish to effect sales. However, we have the right to control the timing and amount of any sales of our
shares to Cavalry.
FORWARD-LOOKING
STATEMENTS
This
prospectus includes forward-looking statements including statements regarding our liquidity, anticipated capital expenditures,
and expected sales to Cavalry.
All
statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial
position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements.
The words “believe,” “may,” “estimate,” “continue,” “anticipate,”
“intend,” “should,” “plan,” “could,” “target,” “potential,”
“is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended
to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our financial condition, results of operations,
business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions
described in “Risk Factors” elsewhere in this prospectus.
Other
sections of this prospectus may include additional factors which could adversely affect our business and financial performance.
New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the
impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause
actual results to differ materially from those contained in any forward-looking statements.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold from time to time by Cavalry. We will receive no
proceeds from the sale of shares of common stock by Cavalry in this offering. However, we may receive gross proceeds of up to
$10,000,000 under the Purchase Agreement. As of the date of this prospectus, we have received $1,158,639 from the sale of shares
of common stock to Cavalry under the Purchase Agreement. We estimate that the net proceeds to us from the sale of our common stock
to Cavalry pursuant to the Purchase Agreement will be up to $10 million over an approximately 36-month period (ending May 13,
2022), assuming that we sell the full amount of our common stock that we have the right, but not the obligation, to sell to Cavalry
under that agreement and other estimated fees and expenses. See “Plan of Distribution” elsewhere in this prospectus
for more information.
We
expect to use any proceeds that we receive under the Purchase Agreement for general corporate purposes, including compensating
our management.
CAPITALIZATION
Class
of Security
|
|
Shares
of
Common
Stock as
Converted
|
|
Common
Stock Issued and Outstanding
|
|
|
19,564,154
|
|
Series
C-1 Preferred Stock
|
|
|
196,094
|
|
Warrants
to Purchase Common Stock
|
|
|
937,904
|
|
Total
Shares Fully Diluted
|
|
|
20,698,152
|
|
The
table above describes the shares of common stock which are outstanding and/or are issuable under outstanding securities. The table
above does not include the 2019 Promissory Note which was issued to the selling stockholder on November
7, 2019.
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. The 2019 Promissory
Note is not related to this offering.
MARKET
FOR COMMON STOCK
Our
common stock is quoted on the OTCQB under the symbol “BTCS”. Our common stock last traded at $0.08
on December 2, 2019. As of that date there were approximately 139 shareholders of record. We believe that additional
beneficial owners of our common stock hold shares in street name.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of operations should be read in conjunction with our historical
financial statements and the notes to those statements that appear elsewhere in this prospectus. Certain statements in the discussion
contain forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives,
expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under “Risk Factors.”
Overview
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. The Company is also seeking to acquire a controlling interest in one or more companies 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. 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. 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. 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.
We
cannot assure you we will be successful in raising the capital or assuming we can, be able to develop a successful business.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
The
following table reflects our operating results for the three months ended September 30, 2019 and 2018:
|
|
For
the three months ended
|
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
251,439
|
|
|
$
|
271,844
|
|
Marketing
|
|
|
9,334
|
|
|
|
60
|
|
Total
operating expenses
|
|
|
260,773
|
|
|
|
271,904
|
|
|
|
|
|
|
|
|
|
|
Other (expense)
income:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(45,553
|
)
|
|
|
-
|
|
Impairment
loss on digital currencies
|
|
|
(40,698
|
)
|
|
|
-
|
|
Realized
(loss) gain on digital currencies transactions
|
|
|
(523
|
)
|
|
|
47,055
|
|
Total
other (expenses) income
|
|
|
(86,774
|
)
|
|
|
47,055
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(347,547
|
)
|
|
$
|
(224,849
|
)
|
Operating
Expenses
Operating
expenses for the three months ended September 30, 2019 and 2018 were approximately $0.3 million and $0.3 million, respectively.
The slight decrease in operating expenses over the prior year mostly relates to decreases in general and administrative expenses
as a result of cost cutting measures.
Other
(Expense) Income
Other
expense for the three months ended September 30, 2019 were approximately $87,000 as compared to other income for the three months
ended September 30, 2018 of approximately $47,000. The decrease in other income over the prior year primarily relates to decrease
in realized gain on sale of digital currencies, an increase in interest expense related to debt discount amortization and an increase
in impairment loss on digital currencies.
RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
The
following table reflects our operating results for the six months ended September 30, 2019 and 2018:
|
|
For
the nine months ended
|
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
803,075
|
|
|
$
|
761,636
|
|
Marketing
|
|
|
9,929
|
|
|
|
3,030
|
|
Total
operating expenses
|
|
|
813,004
|
|
|
|
764,666
|
|
|
|
|
|
|
|
|
|
|
Other (expense)
income:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(57,553
|
)
|
|
|
-
|
|
Impairment
loss on digital currencies
|
|
|
(40,698
|
)
|
|
|
-
|
|
Realized
(loss) gain on digital currencies transactions
|
|
|
(523
|
)
|
|
|
158,194
|
|
Total
other (expenses) income
|
|
|
(98,774
|
)
|
|
|
158,194
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(911,778
|
)
|
|
$
|
(606,472
|
)
|
Deemed
dividend related to reduction of warrant strike price
|
|
|
(95,708
|
)
|
|
|
-
|
|
Net
loss attributable to common stockholders
|
|
$
|
(1,007,486
|
)
|
|
$
|
(606,472
|
)
|
Operating
Expenses
Operating
expenses for the nine months ended September 30, 2019 and 2018 were approximately $0.8 million and $0.8 million, respectively.
The slight increase in operating expenses over the prior year mostly relates to increases in general and administrative expenses
as a result of salary increases to our executive management team.
Other
(Expense) Income
Other
expense for the nine months ended September 30, 2019 were approximately $99,000 as compared to other income for the nine months
ended September 30, 2018 of approximately $158,000. The decrease in other income over the prior year primarily relates to decrease
in realized gain on sale of digital currencies, an increase in interest expense related to debt discount amortization and an increase
in impairment loss on digital currencies.
Net
loss attributable to common stockholders
We
incurred $96,000 and $0 of deemed dividend related to reduction of warrant strike price during the nine months ended September
30, 2019 and 2018, respectively.
RESULTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
|
|
For
the years ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(RESTATED)
|
|
Revenues
|
|
|
|
|
|
|
E-commerce
|
|
$
|
-
|
|
|
$
|
4,480
|
|
Total
revenues
|
|
|
-
|
|
|
|
4,480
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
Power
and mining expenses
|
|
|
|
|
|
|
(160
|
)
|
Gross
profit
|
|
|
-
|
|
|
|
4,320
|
|
|
|
|
-
|
|
|
|
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
986,525
|
|
|
|
1,564,851
|
|
Marketing
|
|
|
3,644
|
|
|
|
9,242
|
|
Total
operating expenses
|
|
|
990,169
|
|
|
|
1,574,093
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
|
(990,169
|
)
|
|
|
(1,569,773
|
)
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income:
|
|
|
|
|
|
|
|
|
Fair
value adjustments for warrant liabilities
|
|
|
-
|
|
|
|
(39,222,099
|
)
|
Fair
value adjustments for convertible notes
|
|
|
-
|
|
|
|
(16,849,071
|
)
|
Loss
on issuance of Series C Convertible Preferred stock
|
|
|
-
|
|
|
|
(2,809,497
|
)
|
Loss
on issuance of Series C-1 Convertible Preferred stock
|
|
|
|
|
|
|
(478,035
|
)
|
Gain
on extinguishment of debt
|
|
|
-
|
|
|
|
15,918,867
|
|
Loss
from lease termination
|
|
|
-
|
|
|
|
(100,696
|
)
|
Liquidated
damages
|
|
|
-
|
|
|
|
(693,000
|
)
|
Realized
gain on sale of digital currencies
|
|
|
163,749
|
|
|
|
299,092
|
|
Other
income
|
|
|
-
|
|
|
|
39,643
|
|
Total
other income (expense)
|
|
|
163,749
|
|
|
|
(43,894,796
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(826,420
|
)
|
|
$
|
(45,464,569
|
)
|
Deemed
dividend related to reduction of warrant strike price
|
|
|
(5,600
|
)
|
|
|
-
|
|
Net
loss attributable to common stockholders
|
|
$
|
(832,020
|
)
|
|
$
|
(45,464,569
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share attributable to common stockholders, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and diluted
|
|
|
371,561,990
|
|
|
|
123,548,858
|
|
Revenues
Revenues
for the years ended December 31, 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.
Cost
of revenues
Cost
of revenues for the years ended December 31, 2018 and 2017 were approximately $0 and $160, respectively.
Operating
expenses
Operating
expenses for the years ended December 31, 2018 and 2017 were approximately $1.0 million and $1.6 million. The decrease in the
operating was primarily attributed to approximately $0.6 million decrease in general and administrative expenses, which includes
$0.4 million decrease in stock-based compensation expenses and $78,000 decrease in bonuses.
Other
Expenses
Other
income (expenses) for the years ended 2018 and 2017 was approximately $0.2 million and $43.9 million, respectively. The decrease
in other expenses over the prior year primarily relates to decreases in fair value adjustments for warrant liabilities of $39.2
million, fair value adjustments for convertible notes of $16.8 million and loss on issuance of Series C Convertible Preferred
Stock of $2.8 million, and is offset by an increase in gain on extinguishment of debt of $15.9 million, all of which are non-cash
expenses.
Net
loss attributable to common stockholders
We
incurred a $5,600 of deemed dividend related to reduction of warrant strike price during the year ended December 31, 2018.
LIQUIDITY
AND CAPITAL RESOURCES
Net
Cash from Operating Activities
Net
cash used in operating activities was approximately $0.9 million for the nine months ended September 30, 2019. Net cash used in
operating activities for the nine months ended September 30, 2019 was primarily driven by a $0.9 million net loss and changes
in operating assets and liabilities of $51,000, and was partially offset by impairment loss on digital assets of $41,000 and amortization
on debt discount of $40,000.
Net
cash used in operating activities was approximately $0.3 million for the nine months ended September 30, 2018. Net cash used in
operating activities for the nine months ended September 30, 2018 was primarily driven by a $0.6 million net loss and $0.2 million
realized gain on sale of digital currencies, and was offset by $0.4 million of proceeds from sale of digital currencies.
Net
Cash from Investing Activities
Net
cash used in investing activities for the nine months ended September 30, 2019 was approximately $0.2 million for purchase of
digital currencies.
Net
cash used in investing activities for the nine months ended September 30, 2018 was approximately $2,600 for purchase of property
and equipment.
Net
Cash from Financing Activities
Net
cash provided by financing activities was approximately $1.4 million for the nine months ended September 30, 2019, including $0.2
million from exercise of warrants and $1.1 million from selling a total of 4,374,741 shares of common stock under the Purchase
Agreement.
Net
cash provided by financing activities was $0 for the nine months ended September 30, 2018.
Liquidity
We
will require significant additional capital to sustain short-term operations and make the investments needed to execute our longer-term
business plan and repay our existing debt of $200,000 which becomes due on August 7, 2020. Our existing liquidity is not
sufficient to fund operations and anticipated capital expenditures for the foreseeable future, and, unless we are unable to get
this registration statement effective, we will not have sufficient cash resources to support our current operations for the next
12 months.
As
of December 2, 2019, the Company had approximately $196,071 of cash and the following Digital Assets:
Digital
Asset
|
|
Units
Held
|
|
|
Fair
Market Value
|
|
Bitcoin (BTC)
|
|
|
20.6303
|
|
|
$
|
150,525
|
|
Ethereum (ETH)
|
|
|
984.9688
|
|
|
$
|
145,815
|
|
Total
|
|
|
|
|
|
$
|
296,340
|
|
The Company has not participated
in any initial coin offering due to the fact that many, if not all, initial coin offerings constitute a Digital Security and because
of the SEC’s intense focus on legal compliance in this area. Because of the rules under the Securities Act, we are ineligible
to participate in an initial coin offering if it is for Digital Securities. Accordingly, we recently elected to not participate
in initial coin offerings in the future.
We
do not have sufficient capital to meet our expenses over the 12 months from the date of this prospectus. Our current cash is not
sufficient to sustain operations. We believe that our working capital needs of approximately
$1.65 million will be met over the next 12 months through sales of stock to Cavalry and the issuance of convertible notes or
other securities.
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 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. We cannot predict when
the SEC will declare this registration statement effective. Any delays in getting this registration statement effective and the
failure of our stock price and trading volume to increase will impact our ability to meet our working capital needs through Cavalry.
While we continue to implement our business strategy, if we are unable to get this registration statement effective, we
intend to finance our activities through the sale of additional securities in the future. If
we are unable to raise capital, we may not be able to remain operational.
Accounting
Treatment of Digital Assets
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 that is amortized over the remaining useful life of that asset, if any. 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 digital assets was less than its cost basis
on any day during the quarter. The Company recognizes impairment losses on Digital Assets caused by decreases in fair value
using the average U.S. dollar spot price of the related Digital Asset as of each impairment date. Such impairment in the value
of Digital Assets is recorded as a component of costs and expenses in our consolidated statements of operations. There were no
impairment losses related to Digital Assets during the years ended December 31, 2018 and 2017. The Company recorded an impairment
loss of approximately $41,000 related to Digital Assets during the quarter ended September 30, 2019.
GOING
CONCERN AND MANAGEMENT PLANS
The
audited consolidated financial statements for the year ended December 31, 2018, have been prepared on a going concern basis, which
implies that we will continue to realize our assets and discharge our liabilities and commitments in the normal course of business.
We have generated approximately $0 and $4,000 in revenues during the years ended December 31, 2018 and 2017, respectively, and
have never paid any dividends and are unlikely to pay dividends or generate substantial earnings in the immediate or foreseeable
future. Our continuation as a going concern is dependent upon the continued financial support from our shareholders, the ability
of our company to obtain necessary financing to achieve our operating objectives, and the attainment of profitable operations.
As of December 31, 2018, we have an accumulated deficit of $115.3 million since inception. As we do not have sufficient funds
for our planned or new operations, we will need to raise additional funds for operations. These factors, among others, raise substantial
doubt about our ability to continue as a going concern.
The
continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or convertible
debt securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial
loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Subject
to additional financing, the Company plans to 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.
Off
Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
We
believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management
discussion and analysis:
Accounting
Treatment of Digital Assets
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 that is amortized over the remaining useful life of that asset, if any. 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 digital assets was less than its cost basis
on any day during the quarter. The Company recognizes impairment losses on Digital Assets caused by decreases in fair value
using the average 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. There were no
impairment losses related to Digital Assets during the years ended December 31, 2018 and 2017.
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 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 went effective on November 5, 2018. This
final rule was effective in the fourth quarter of 2018. The SEC provided relief on the effective date until the first quarter
of 2019, and we adopted this rule in the first quarter of 2019.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present
or future financial statements.
BUSINESS
Subject
to additional financing, the Company plans to acquire 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
limitations contained within this prospectus regarding Digital Securities. The Company is also seeking to acquire controlling
interests in businesses in the blockchain industry as further described in this prospectus.
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. See “Risk Factors” beginning on page 5.
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. As disclosed in this prospectus we have
limited cash, and accordingly as a critical framework element are seeking acquisition targets with sufficient capital which may
help us sustain our operations without having us rely on toxic funding structures. 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. However, given the current network difficulties and price levels to
mine both ethereum and bitcoin we do not believe mining offers a positive return on investment at present. We plan to monitor
the blockchain networks and subject to additional funding re-enter the mining business when we believe a positive return on investment
is achievable. 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, 2018 financial statements that there is substantial doubt about our ability to continue as
a going concern.
INDUSTRY
AND MARKET OVERVIEW (BITCOIN AND BLOCKCHAIN TECHNOLOGIES)
Introduction
to Bitcoins and the Bitcoin Network
A
bitcoin is one type of a Digital Asset that is issued by, and transmitted through, an open source, math-based protocol platform
using cryptographic security that is known as the “Bitcoin Network.” The Bitcoin Network is an online, peer-to-peer
user network that hosts the public transaction ledger, known as the “Blockchain,” and the source code that comprises
the basis for the cryptography and math-based protocols governing the Bitcoin Network. No single entity owns or operates the Bitcoin
Network, the infrastructure of which is collectively maintained by a decentralized user base. Bitcoins can be used to pay for
goods and services or can be converted to fiat currencies, such as the US Dollar, at rates determined on Bitcoin Exchanges or
in individual end-user-to-end-user transactions under a barter system.
Bitcoins
are “stored” or reflected on the digital transaction ledger known as the “Blockchain,” which is a digital
file stored in a decentralized manner on the computers of each Bitcoin Network user. The Blockchain records the transaction history
of all bitcoins in existence and, through the transparent reporting of transactions, allows the Bitcoin Network to verify the
association of each bitcoin with the digital wallet that owns them. The Bitcoin Network and Bitcoin software programs can interpret
the Blockchain to determine the exact bitcoin balance, if any, of any digital wallet listed in the Blockchain as having taken
part in a transaction on the Bitcoin Network.
The
Blockchain is comprised of a digital file, downloaded and stored, in whole or in part, on all bitcoin users’ software programs.
The file includes all blocks that have been solved by miners and is updated to include new blocks as they are solved. As each
newly solved block refers back to and “connects” with the immediately prior solved block, the addition of a new block
adds to the Blockchain in a manner similar to a new link being added to a chain. Each new block records outstanding bitcoin transactions,
and outstanding transactions are settled and validated through such recording, the Blockchain represents a complete, transparent
and unbroken history of all transactions on the Bitcoin Network.
The
Bitcoin Network is decentralized and does not rely on either governmental authorities or financial institutions to create, transmit
or determine the value of bitcoins. Rather, bitcoins are created and allocated by the Bitcoin Network protocol through a “mining”
process subject to a strict, well-known issuance schedule. The value of bitcoins is determined by the supply of and demand for
bitcoins in the Bitcoin Exchange Market (and in private end-user-to-end-user transactions), as well as the number of merchants
that accept them. As bitcoin transactions can be broadcast to the Bitcoin Network by any user’s bitcoin software and bitcoins
can be transferred without the involvement of intermediaries or third parties, there are little or no transaction costs in direct
peer-to-peer transactions on the Bitcoin Network. Third party service providers such as Bitcoin Exchanges and bitcoin third party
payment processing services may charge significant fees for processing transactions and for converting, or facilitating the conversion
of, bitcoins to or from fiat currency.
Overview
of the Bitcoin Network’s Operations
In
order to own, transfer or use bitcoins, a person generally must have Internet access to connect to the Bitcoin Network. Bitcoin
transactions between parties occur very rapidly (within several seconds) and may be made directly between end-users without the
need for a third-party intermediary, although there are entities that provide third-party intermediary services. To prevent the
possibility of double-spending a single bitcoin, a user must notify the Bitcoin Network of the transaction by broadcasting the
transaction data to its network peers. The Bitcoin Network provides confirmation against double-spending by memorializing every
transaction in the Blockchain, which is publicly accessible and transparent. This memorialization and verification against double-spending
is accomplished through the bitcoin mining process, which adds “blocks” of data, including recent transaction information,
to the Blockchain.
Brief
Description of Bitcoin Transfers
Prior
to engaging in bitcoin transactions, a user generally must first install on its computer or mobile device a bitcoin software program
that will allow the user to generate a digital “wallet” (analogous to a bitcoin account). Alternatively, a user may
retain a third party to create a digital wallet to be used for the same purpose. Each such wallet includes one or more unique
digital addresses and verification system consisting of a “public key” and a “private key,” which are
mathematically related.
In
a bitcoin transaction, the bitcoin recipient must provide its digital address, which serves as a routing number to the recipient’s
digital wallet on the Blockchain, to the party initiating the transfer. The recipient, however, does not make public or provide
to the sender its related private key. The payor, or “spending” party, does reveal its public key in signing and verifying
its spending transaction to the Blockchain.
Neither
the recipient nor the sender reveal their digital wallet’s private key in a transaction, because the private key authorizes
access to, and transfer of, the funds in that digital wallet to other users. In the data packets propagated from a user’s
bitcoin software program onto the Bitcoin Network to allow transaction confirmation, the sending party must “sign”
its transaction with a data code derived from entering the private key into a “hashing algorithm.” The hashing algorithm
converts the private key into a digital signature, which signature serves as validation that the transaction has been authorized
by the holder of the digital wallet’s private key.
Transaction
Verification (Digital Asset Mining) & Creation of New Digital Assets
Transaction
Verification Process (Mining Process)
The
process by which bitcoins are “mined” results in new blocks being added to the Blockchain and new bitcoins being issued
to the miners. Miners engage in a set of prescribed complex mathematical calculations in order to add a block to the Blockchain
and thereby confirm bitcoin transactions included in that block’s data. Miners that are successful in adding a block to
the Blockchain are automatically awarded a fixed number of bitcoins for their effort; we also refer to this process of receiving
the aforementioned award as transaction verification services. This reward system is the method by which new bitcoins enter into
circulation to the public and is accomplished in the added block through the notation of the new bitcoin creation and their allocation
to the successful miner’s digital wallet. To begin mining, a user can download and run Bitcoin Network mining software,
which, like regular Bitcoin Network software programs, turns the user’s computer into a “node” on the Bitcoin
Network that validates blocks.
All
bitcoin transactions are recorded in blocks added to the Blockchain. Each block contains the details of some or all of the most
recent transactions that are not memorialized in prior blocks, a reference to the most recent prior block, and a record of the
award of bitcoins to the miner who added the new block. In order to add blocks to the Blockchain, a miner must map an input data
set (i.e., a reference to the immediately preceding block in the Blockchain, plus a block of the most recent Bitcoin Network transactions
and an arbitrary number called a “nonce”) to a desired output data set of predetermined length (“hash value”)
using the SHA-256 cryptographic hash algorithm. To “solve” or “calculate” a block, a miner must repeat
this computation with a different nonce until the miner generates a SHA-256 hash of a block’s header that has a value less
than or equal to the current target set by the Bitcoin Network. Each unique block can only be solved and added to the Blockchain
by one miner; therefore, all individual miners and mining pools on the Bitcoin Network are engaged in a competitive process and
are incentivized to increase their computing power to improve their likelihood of solving for new blocks.
The
cryptographic hash function that a miner uses is one-way only and is, in effect, irreversible: hash values are easy to generate
from input data (i.e., valid recent network transactions, Blockchain and nonce), but neither a miner nor participant is able to
determine the original input data solely from the hash value. As a result, generating a new valid block with a header less than
the target prescribed by the Bitcoin Network is initially difficult for a miner, yet other nodes can easily confirm a proposed
block by running the hash function just once with the proposed nonce and other input data. A miner’s proposed block is added
to the Blockchain once a majority of the nodes on the Bitcoin Network confirms the miner’s work, and the miner that solved
such block receives the reward of a fixed number of bitcoins (plus any transaction fees paid by transferors whose transactions
are recorded in the block). Therefore, “hashing” is akin to a mathematical lottery, and miners that have devices with
greater processing power (i.e., the ability to make more hash calculations per second) are more likely to be successful miners
because they can generate more hashes or “entries” into that lottery.
As
more miners join the Bitcoin Network and its processing power increases, the Bitcoin Network automatically adjusts the complexity
of the block-solving equation in an effort to set distribution such that newly-created blocks will be added to the Blockchain,
on average, approximately every ten minutes. Processing power is added to the Bitcoin Network at irregular rates that have grown
rapidly from early 2013 through 2019.
Incentives
for Transaction Verification (Mining)
Miners
dedicate substantial resources to mining. Given the increasing difficulty of the target established by the Bitcoin Network, current
miners must invest in expensive mining devices with adequate processing power to hash at a competitive rate. The first mining
devices were standard home computers; however, mining computers are currently designed solely for mining purposes. Such devices
included ASIC machines built by specialized companies like BitFury, Bitmain Technologies, 21 Inc., Canaan Creative, Halong Mining,
and BW. Miners also incur substantial electricity costs in order to continuously power and cool their devices while solving for
a new block.
The
Bitcoin Network is designed in such a way that the reward for adding new blocks to the Blockchain decreases over time and the
production (and reward) of bitcoins will eventually cease. Once such reward ceases, it is expected that miners will demand compensation
in the form of transaction fees to ensure that there is adequate incentive for them to continue mining. The amount of transaction
fees will be based upon the structural requirements necessary to provide sufficient revenue to incentivize miners, as counterbalanced
by the need to retain sufficient bitcoin users (and transactions) to make mining profitable.
Though
not free from doubt, bitcoin industry participants have expressed a belief that transaction fees would be enforced through (i)
mining operators collectively refusing to record transactions that do not include a payment of a transaction fee or (ii) the updating
of bitcoin software to require a minimum transaction fee payment. Under a regime whereby large miners require fees to record transactions,
a transaction where the spending party did not include a payment of transaction fees would not be recorded on the Blockchain until
a miner who does not require transaction fees solves for a new block (thereby recording all outstanding transaction records for
which it has received data). If popular bitcoin software for digital wallets were to require a minimum transaction fee, users
of such programs would be required to include such fees; however, because of the open-source nature of the Bitcoin Network, there
may be no way to require that all digital wallets include minimum transaction fees for spending transactions. Alternatively, a
future Bitcoin Network software update could simply build a small transaction fee payment into all spending transactions (e.g.,
by deducting a fractional number of bitcoins from all transactions on the Bitcoin Network as transaction fees).
The
Bitcoin Network protocol already includes transaction fee rules and the mechanics for awarding transaction fees to the miners
that solve for blocks in which the fees are recorded; however, users currently may opt not to pay transaction fees (depending
on the bitcoin software they use) and miners may choose not to enforce the transaction fee rules since, at present, the bitcoin
rewards are far more substantial than transaction fees. According to a recent Wall Street Journal article, much of the world’s
bitcoin mining occurs in China; it is unclear whether the Chinese crackdown on Digital Assets will impact mining activities or
whether if it does, what the adverse effects will be.
Mining
Pools
The
Bitcoin Network’s mining protocol was created in a manner to make it more difficult to solve for new blocks as the processing
power dedicated to mining increases (in order to maintain the 10 minute per block solution time average). Therefore, the difficulty
of finding a valid hash value has grown exponentially since the first blocks were mined. Currently, the likelihood that an individual
acting alone will be able to mine bitcoins is extremely low. As a result, mining “pools” have developed in which multiple
miners act cohesively and combine their processing power to solve blocks. When a pool solves a new block, the participating mining
pool members split the resulting reward based on the processing power they each contributed to solve for such block. Mining pools
provide participants with access to smaller, but steadier and more frequent, bitcoin payouts.
Mathematically
Controlled Supply
The
method for creating new bitcoins is mathematically controlled in a manner so that the supply of bitcoins grows at a limited rate
pursuant to a pre-set schedule. The number of bitcoins awarded for solving a new block is automatically halved every 210,000 blocks.
Thus, the current fixed reward for solving a new block is 12.5 bitcoins per block and the reward will decrease by half to become
6.25 bitcoins around June 2020 (based on estimates of the rate of block solution calculated by BitcoinClock.com). This deliberately
controlled rate of bitcoin creation means that the number of bitcoins in existence will never exceed 21 million and that bitcoins
cannot be devalued through excessive production unless the Bitcoin Network’s source code (and the underlying protocol for
bitcoin issuance) is altered. The Company monitors the Blockchain network and, as of December 2, 2019, based on the information
we collected from our network access, approximately 18.1 million bitcoins have been mined.
Modifications
to the Bitcoin Protocol
Bitcoin
is an open source project (i.e., a product whose source code is freely available to the public and that utilizes crowdsourcing
to identify possible issues, problems and defects) and there is no official developer or group of developers that controls the
Bitcoin Network. The Bitcoin Network’s development is overseen by a core group of developers, which varies from time to
time (“Core Developers”). The Core Developers are able to access and can propose alterations to the Bitcoin Network
source code hosted on GitHub, an online service and forum used to share and develop open source code. Other programmers have access
to and can propose changes to the bitcoin source code on GitHub, but the Core Developers have an elevated level of influence over
the process. As a result, the Core Developers are responsible for quasi-official releases of updates and other changes to the
Bitcoin Network’s source code. Users and miners must accept any changes made to the Bitcoin Network (including those proposed
by the Core Developers) by downloading the proposed modification of the source code.
A
modification of the source code is only effective with respect to the bitcoin users and miners that download it. Consequently,
as a practical matter, a modification to the source code (e.g., a proposal to increase the 21 million total limit on bitcoins
or to reduce the average confirmation time target from 10 minutes per block) only becomes part of the Bitcoin Network if accepted
by participants collectively having a substantial majority of the processing power on the Bitcoin Network. If a modification is
accepted only by a percentage of users and miners, a division in the Bitcoin Network will occur such that one network will run
the pre-modification source code and the other network will run the modified source code; such a division is known as a “fork”
in the Bitcoin Network. It should be noted that, although their power to amend the source code is effectively subject to the approval
of users and miners, the Core Developers have substantial influence over the development of the Bitcoin Network and the direction
of the bitcoin community.
Other
Blockchain Technologies
Core
Development of the bitcoin source code has increasingly focused on modifications of the bitcoin protocol to allow non-financial
and next generation uses (sometimes referred to as Bitcoin 2.0 projects). These uses include smart contracts and distributed registers
built into, built atop or pegged alongside the Blockchain. For example, the white paper for Blockstream, a program of which Core
Developers Jeff Garzik and Gregory Maxwell are a part, calls for the use of “pegged sidechains” to develop programming
environments that are built within block chain ledgers that can interact with and rely on the security of the Bitcoin Network
and Blockchain, while remaining independent thereof. We are actively evaluating other Blockchain technologies that relate to Bitcoin
2.0 projects. At this time, Bitcoin 2.0 projects remain in early stages and have not been materially integrated into the Blockchain
or Bitcoin Network.
Bitcoin
Value
Bitcoins
are an example of a Digital Asset that is not a fiat currency (i.e., a currency that is backed by a central bank or a national,
supra-national or quasi-national organization) and are not backed by hard assets or other credit. As a result, the value of bitcoins
is determined by the value that various market participants place on bitcoins through their transactions.
Exchange
Valuation
Due
to the peer-to-peer framework of the Bitcoin Network and the protocols thereunder, transferors and recipients of bitcoins are
able to determine the value of the bitcoins transferred by mutual agreement or barter with respect to their transactions. As a
result, the most common means of determining the value of a bitcoin is by surveying one or more Bitcoin Exchanges where bitcoins
are publicly bought, sold and traded (i.e., the Bitcoin Exchange Market).
On
each Bitcoin Exchange, bitcoins are traded with publicly disclosed valuations for each transaction, measured by one or more fiat
currencies such as the U.S. Dollar, the Euro or the Chinese Yuan. Bitcoin Exchanges typically report publicly on their site the
valuation of each transaction and bid and ask prices for the purchase or sale of bitcoins. Although each Bitcoin Exchange has
its own market price, it is expected that most Bitcoin Exchanges’ market prices should be relatively consistent with the
Bitcoin Exchange Market average since market participants can choose the Bitcoin Exchange on which to buy or sell bitcoins (i.e.,
exchange shopping). Arbitrage between the prices on various Bitcoin Exchanges is possible, but the imposition of fees and fiat
currency deposit/withdrawal policies appears to have, at times, prevented an active arbitrage mechanism among users on some Bitcoin
Exchanges. For example, delayed fiat currency withdrawals imposed by Mt. Gox resulted in Mt. Gox trading at a premium of up to
10 to 20 percent for several months through January 2014. In February 2014, Mt. Gox suspended trading, closed its website and
exchange service, and filed for a form of bankruptcy protection from creditors called minjisaisei, or civil rehabilitation, to
allow courts to seek a buyer. In April 2014, Mt. Gox began liquidation proceedings.
Even
in the absence of large trading fees and fiat currency deposit/withdrawal policies, price differentials across Bitcoin Exchanges
remain. For disclosure on the accounting of Digital Assets, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” beginning on page 28.
Forms
of Attack Against the Bitcoin Network
Exploitation
of Flaws in the Bitcoin Network’s Source Code
As
with any other computer code, the Bitcoin Network source code may contain certain flaws. Several errors and defects have been
found and corrected, including those that disabled some functionality for users, exposed users’ information, or allowed
users to create multiple views of the Bitcoin Network. Such flaws have been discovered and quickly corrected by the Core Developers
or the bitcoin community, thus demonstrating one of the advantages of open source codes that are available to the public: open
source codes rely on transparency to promote community-sourced identification and solution of problems within the code.
Reports
of flaws in or exploitations of the source code that allow malicious actors to take or create money in contravention of known
Bitcoin Network rules have been exceedingly rare. For example, in 2010, a hacker or group of hackers exploited a flaw in the Bitcoin
Network source code that allowed them to generate 184 billion bitcoins in a transaction and send them to two digital wallet addresses.
However, the bitcoin community and developers identified and reversed the manipulated transactions within approximately five hours,
and the flaw was corrected with an updated version of the bitcoin protocol. Another addressed issue with the Bitcoin Network source
code, “transaction malleability” was addressed by the Core Developers in a March 2013 software update. The Core Developers,
in conjunction with other developers and miners, work continuously to ensure that flaws are quickly fixed or removed.
Greater
than Fifty Percent of Network Computational Power
Malicious
actors can structure an attack whereby such actor gains control of more than half of the Bitcoin Network’s processing power
or “hashrate.” Computer scientists and cryptographers believe that the immense collective processing power of the
Bitcoin Network makes it impracticable for an actor to gain control of computers representing a majority of the processing power
on the Bitcoin Network. During May and June 2014, mining pool GHash.io’s hashing power approached 50 percent of the processing
power on the Bitcoin Network. During a brief period in early June 2014, the mining pool may have controlled in excess of one-half
of the Bitcoin Network’s processing power. Although no malicious activity or abnormal transaction recording was observed,
the incident establishes that it is possible that a substantial mining pool may accumulate close to or more than a majority of
the processing power on the Bitcoin Network.
If
a malicious actor acquired sufficient computational power necessary to control the Bitcoin Network (which amount would be well
in excess of fifty percent), it would be able to engage in double-spending, or prevent some or all transactions from being confirmed,
and prevent some or all other miners from mining any valid new blocks. The malicious actor or group of actors, however, would
not be able to reverse other people’s transactions, change the fixed number of bitcoins generated per new block, or transfer
previously existing bitcoins that belong to other users.
Cancer
Nodes
This
form of attack involves a malicious actor propagating “cancer nodes” to isolate certain users from the legitimate
Bitcoin Network. A target user functionally surrounded by cancer nodes would be put on a separate “network,” allowing
the malicious actor to relay only blocks created by the separate network and thus opening the target user to double-spending attacks.
By using cancer nodes, a malicious actor also can disconnect the target user from the bitcoin economy entirely by refusing to
relay any blocks or transactions. Bitcoin software programs make these attacks more difficult by limiting the number of outbound
connections through which users are connected to the Bitcoin Network.
Manipulating
Blockchain Formation
A
malicious actor may attempt to double-spend bitcoins by manipulating the formation of the Blockchain rather than through control
of the Bitcoin Network. In this type of attack, a miner creates a valid new block containing a double-spend transaction and schedules
the release of such attack block so that it is added to the Blockchain before a target user’s legitimate transaction can
be included in a block. Variations of this form of attack include the “Finney attack,” “race attack,”
and “vector76 attack.” All double-spend attacks require that the miner sequence and execute the steps of its attack
with sufficient speed and accuracy. Users and merchants can dramatically reduce the risk of a double-spend attack by waiting for
multiple confirmations from the Bitcoin Network before settling a transaction. The Bitcoin Network still may be used to execute
instantaneous, low-value transactions without confirmation to the extent the recipient of bitcoins determines that a malicious
miner would be unwilling to carry out a double-spend attack for low-value transactions because the reward from mining would be
higher than the small profit gained from double-spending. Users and merchants can take additional precautions by adjusting their
Bitcoin Network software programs to connect only to other well-connected nodes and to disable incoming connections. These precautions
reduce the risk of double-spend attacks involving manipulation of a target’s connectivity to the Bitcoin Network (as is
the case with vector76 and race attacks).
Historical
Chart of the Price of Bitcoins, 2018-2019
The
price of bitcoins is volatile and fluctuations are expected. Movements may be influenced by various factors, including, but not
limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties
around the world. Since our Transaction Verification Services business records revenue based on the price of earned bitcoins and
we may retain such bitcoins as an asset or as payment for future expenses, the relative value of such revenues may fluctuate,
as will the value of any bitcoins we retain. The following chart illustrates the fluctuating value of the US Dollar exchange rate
for bitcoins for the one-year period ending December 2, 2019, as reported by blockchain.com:
Uses
of Bitcoins
Global
Bitcoin Market
Global
trade in bitcoins consists of individual end-user-to-end-user transactions, together with facilitated exchange-based bitcoin trading.
A limited market currently exists for bitcoin-based derivatives. There is currently no reliable data on the total number or demographic
composition of users or miners on the Bitcoin Network.
Goods
and Services
Bitcoins
also can be used to purchase goods and services, either online or at physical locations, although reliable data is not readily
available about the retail and commercial market penetration of the Bitcoin Network. In addition to our Company in January 2014,
US national online retailers Overstock.com and TigerDirect began accepting bitcoin payments. Over the course of 2014, computer
hardware and software company Microsoft began accepting bitcoins as online payment for certain digital content, online retailer
NewEgg began accepting bitcoins, and computer hardware company Dell began accepting bitcoins. There are thousands of additional
online merchants that accept bitcoins, and the variety of goods and services for which bitcoins can be exchanged is increasing.
Currently, local, regional and national businesses, including Time Inc., Wikimedia, WordPress, Expedia, OKCupid, CheapAir Etsy,
Zynga, PizzaForCoins, Dish Network, Foodler, and more accept bitcoin. Bitcoin service providers such as BitPay, Coinbase and GoCoin
and online gift card retailers Gyft and eGifter provide other means to spend bitcoin for goods and services at additional retailers.
This includes gift cards for notable retailers like Dunkin Donuts, Best Buy, Target and Home Depot. Due to the severe volatility
of bitcoin, some bitcoin merchants will only give you a 10-minute window to complete your purchase. After that, the price may
update based on the new exchange rate. There are also many real-world locations that accept bitcoin throughout the world. In 2014,
PayPal announced a partnership with BitPay, Coinbase and GoCoin to expand their bitcoin-related services to PayPal’s merchant
customers, thereby significantly expanding the reach of bitcoin-accepting merchants. There are also websites that keep a running
archive of businesses that accept Bitcoin and allows users to search on a virtual map to discover these locations. www.Coinmap.org
hosts and updates a virtual map that enables people to add their businesses and edit information. Users can see for themselves
which businesses accept bitcoin, as well as the location of those businesses. To date, the rate of consumer adoption and use of
bitcoin in paying merchants has trailed the broad expansion of retail and commercial acceptance of bitcoin. Nevertheless, there
will likely be a strong correlation between continued expansion of the Bitcoin Network and its retail and commercial market penetration.
Anonymity
and Illicit Use
The
Bitcoin Network was not designed to ensure the anonymity of users, despite a common misperception to the contrary. All bitcoin
transactions are logged on the Blockchain and any individual or government can trace the flow of bitcoins from one address to
another. Off-Blockchain transactions occurring off the Bitcoin Network are not recorded and do not represent actual bitcoin transactions
or the transfer of bitcoins from one digital wallet address to another, though information regarding participants in an Off-Blockchain
transaction may be recorded by the parties facilitating such Off-Blockchain transactions. Digital wallet addresses are randomized
sequences of 27-34 alphanumeric characters that, standing alone, do not provide sufficient information to identify users; however,
various methods may be used to connect an address to a particular user’s identity, including, among other things, simple
Internet searching, electronic surveillance and statistical network analysis and data mining. Anonymity is also reduced to the
extent that certain Bitcoin Exchanges and other service providers collect users’ personal information, because such Bitcoin
Exchanges and service providers may be required to produce users’ information in order to comply with legal requirements.
In many cases, a user’s own activity on the Bitcoin Network or on Internet forums may reveal information about the user’s
identity.
Users
may take certain precautions to enhance the likelihood that they and their transactions will remain anonymous. For instance, a
user may send its bitcoins to different addresses multiple times to make tracking the bitcoins through the Blockchain more difficult
or, more simply, engage a so-called “mixing” or “tumbling” service to switch its bitcoins with those of
other users. However, these precautions do not guarantee anonymity and are illegal to the extent that they constitute money laundering
or otherwise violate the law.
As
with any other asset or medium of exchange, bitcoins can be used to purchase illegal goods or fund illicit activities. For example,
Silk Road, an anonymous online marketplace that sold illegal substances prior to its seizure and the arrest of its founder and
operator in October 2013, accepted only bitcoins. The use of bitcoins for illicit purposes, however, is not promoted by the Bitcoin
Network or the user community as a whole. Furthermore, we do not believe our ecommerce platform, which we no longer support or
are developing, has exposure to such uses because the products sold in our marketplace were curated by our management and the
sellers of those products are big box retailers with credible products and retail operations.
Alternative
Digital Assets
Bitcoins
are not the only type of Digital Assets founded on math-based algorithms and cryptographic security, although it is considered
the most prominent. Over, 2,300 other Digital Assets (commonly referred to as “altcoins”, “tokens”,
“protocol tokens”, or “Digital Assets”), have been developed since the Bitcoin Network’s inception,
including Ethereum, Ripple, Litecoin, Dash, and Monero. The Bitcoin Network, however, possesses the “first-to-market”
advantage and thus far has captured the majority of the industry’s market share and is secured by a mining network with
significantly more processing power than that of any other Digital Asset. The Company is examining and will continue to examine
these other Digital Assets including Digital Securities and acquire them, subject to financing, existing market conditions and
regulatory compliance.
Government
Oversight
The
Bitcoin Network is a recent technological innovation and the regulatory schemes to which bitcoin and the Bitcoin Network may be
subject have not been fully explored or developed. Recent actions taken by the SEC in its DAO Report that certain Digital Assets
may be securities and actions taken by the CFTC including its July 24, 2017 order approving the first derivative clearing organization
for digital currency swaps reflects that we may face increased government regulation and oversight. As stated earlier in this
prospectus, the SEC’s July 25, 2017 DAO Report, its Chairman’s recent remarks and concerns about the “Wild West”
nature of the Digital Assets market and reports that its staff is issuing subpoenas will adversely affect the Company’s
future acquisition of Digital Assets by limiting the amount of Digital Securities it may acquire and creating increased compliance
and legal costs. In the future before we acquire Digital Assets, we may be required to examine how they were originally offered
to determine if they were offered as an investment contract or security. Because of legal uncertainties, careful examination of
the results of our compliance review will be required by experienced securities counsel. Because we must stay under the Investment
Company’s 40% provisions, we will limit the amount of Digital Securities we acquire and establish procedures designed to
protect us from rapid fluctuations in value of our Digital Assets portfolio. If our compliance procedures and legal reviews prove
to be incorrect, we may incur the likelihood of prohibitive SEC penalties and/or private lawsuit defense costs and adverse rulings.
Following
the issuance of the DAO Report, promoters sought to evade it by callings coins “utility tokens” even where the developer
retained material future services that affected the profitability and future value of the coins. The SEC quickly stopped one such
initial coin offering, which clearly was intended to send a message.
The
Company does not currently own any virtual currencies, however, subject to additional funding intents to acquire virtual currencies.
The Company has previously owned bitcoin, ether and other virtual currencies and may acquire them in the future. In order to avoid
being an inadvertent investment company within the meaning of the 1940 Act, we actively focus on insuring that our ownership of
assets that are not securities will always exceed 60% of our total assets excluding cash. See “Risk Factors” beginning
on page 5 and “Business” beginning on page 34. The ownership of Digital Assets including digital securities may change
based on the definition of a security under the Securities Act and applicable court decisions. The key definition is the term
“investment contract” and what is an investment contract. In 1946 the U.S. Supreme Court held that an investment in
an orange grove operated and controlled by a third party was an investment contract and therefore a security subject to various
provisions of the federal securities laws.
In
the future if we acquire Digital Assets that may be a security we will analyze whether our ownership of the Digital Assets are
securities under the investment contract analysis from the leading case and the lower court cases which have followed it. The
test for determining if an asset is an investment contract based upon whether there was: (i) an investment of money, (ii) in a
common enterprise, (iii) with the expectation of profits, (iv) primarily through the efforts of others.
Bitcoin
The
Company currently owns Bitcoin and has therefor included the following analysis of Bitcoin.
Regardless
of how one obtains bitcoin it requires an investment of money (whether it be U.S. dollars, other currency, or virtual currency)
or mining. When a holder acquires bitcoin, the holder pays for the bitcoin with some form of currency, thus bitcoin satisfies
this prong of the test.
Courts
have focused on three distinct types of common enterprise: (i) horizontal commonality; (ii) broad vertical commonality; and (iii)
strict vertical commonality. The horizontal commonality test requires a pooling of investors and profit sharing.
The
holders of bitcoin do not pool their assets in a common entity or make payments to one common enterprise. Bitcoin is, by its design,
decentralized and has no common entity controlling it. Mining, buying, and selling of bitcoin are all decentralized exchanges
which do not feature the holders sharing in risks. Similarly, sellers of bitcoin do not share profits or risks with the purchasers
and each purchaser keeps his or her own profits. Bitcoin holders who see their holdings as an investment are viewing bitcoin as
an appreciating asset not as a common enterprise. Thus, bitcoin does not satisfy the test for horizontal commonality.
With
broad vertical commonality, the key is an investors’ dependence on the efforts and expertise of the promoter or in the case
of virtual currencies based on blockchain, the developer. There is no central promoter or common seller for bitcoin. Further,
an individual seller of bitcoin would not constitute a promoter. A court has concluded that when the seller is no longer involved
with the business there is no common enterprise. The lack of continuing management by the promoter or developer is similar to
the land development cases where the courts have concluded that initial development services do not lead to the conclusion that
the sale of a real estate parcel is a security. Thus, bitcoin does not satisfy the test for broad vertical commonality.
Strict
vertical commonality differs from broad vertical commonality by requiring that the fortunes of the investors be tied to the efforts
of the promoter or third parties; pooling is not an element. Because sellers of bitcoin do not provide further services or share
in future price increases, bitcoin does not satisfy the test for strict vertical commonality.
The
speculative fever surrounding bitcoin means that buyers of it often expect profits arising from value of the appreciation of bitcoin
just as has historically happened with gold and silver. While some holders may acquire bitcoin exclusively for the purpose of
transacting sales (similar to a currency), many holders acquire bitcoin in order to sell it at a later date when the value has
appreciated or depreciated.
The
Supreme Court’s use of “solely” has been interpreted by an appellate court to mean “the efforts made by
those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure
or success of the enterprise.” However, the effort to create profit need not come exclusively from the efforts of others
so long as the efforts of others are significant and primary. Bitcoin’s expectation of profits arise not from any efforts
of others but from mere hope for appreciation of value. This is similar to commodities such as gold or diamonds. As such, bitcoin
does not satisfy this prong of the Supreme Court’s test.
As
a result of failing to meet the prongs of the test for common enterprise and the efforts of others, we believe that bitcoin does
not constitute an investment contract and is not a security.
Ether
The
Company previously owned Ether but does not currently own Ether but may own Ether in the future and has therefor included the
following analysis of Ether.
As
mentioned in the SEC’s DAO Report, ether is a virtual currency originally created by the Ethereum Foundation that permits
the development by third parties of digitalized contracts on a decentralized blockchain platform called the Ethereum Blockchain.
The DAO Report refers to ether as a “virtual currency” which was used to purchase DAO tokens. The DAO Report could
have but did not concluded that ether is or may be a security. In the DAO Report the Commission concluded that the DAO tokens
under discussion were securities. As a virtual currency like bitcoin, the Company does not believe that ether is a security. Our
counsel has advised us that while it is clear that bitcoin is not a security and more likely than not that ether is not a security,
there is a risk that the SEC or a court may conclude otherwise. This is a factor that we must consider in evaluating whether we
have become or may become an investment company since it will never be practical for us to register under the 1940 Act. However,
due to cost considerations our counsel has not completed a full analysis as to whether or not ether is a security. Its view is
that when ether was initially developed it may have been an investment contract which is one part of the statutory definition
of a security. Nonetheless, while not settled, our counsel believes that while not free from doubt, it appears that ether presently
is a virtual currency and not an investment contract or security. Since bitcoin constitutes approximately 70% of our eligible
assets and we monitor this valuation on a daily basis, we do not believe it is in our shareholders’ interests or necessary
for the protection of investors to get a more definitive opinion on ether.
Until
February 2014, the only U.S. federal regulator to release official guidance on bitcoin and the Bitcoin Network was FinCEN, a bureau
of the U.S. Department of the Treasury responsible for the federal regulation of currency market participants. On March 18th,
2013, FinCEN issued interpretive guidance relating to the application of the Bank Secrecy Act to distributing, exchanging and
transmitting “virtual currencies.” More specifically, it determined that a Bitcoin user will not be considered a money
service business (“MSB”) or be required to register, report and perform recordkeeping; however, an administrator or
exchanger of bitcoin must be a registered money services business under FinCEN’s money transmitter regulations. As a result,
Bitcoin Exchanges that deal with U.S. residents or otherwise fall under U.S. jurisdiction are required to obtain licenses and
comply with FinCEN regulations. FinCEN released additional guidance on January 30, 2014, April 29, 2014, October 27, 2014 and
August 14, 2015, clarifying that most miners, software developers, hardware manufacturers, escrow service providers and investors
in bitcoin would not be required to register with FinCEN on the basis of such activity alone, but that Bitcoin Exchanges, payment
processors and convertible Digital Asset administrators would likely be required to register with FinCEN on the basis of the activities
described in the October 2014 and August 2015 letters.
Prior
to concluding that digital assets may be securities, the SEC has taken various actions against persons or entities misusing bitcoin
in connection with fraudulent schemes (i.e., Ponzi schemes), inaccurate and inadequate publicly disseminated information, and
the offering of unregistered securities. Clarity regarding the treatment of bitcoin was obtained on September 17, 2015, when the
CFTC instituted and settled the Coinflip case. The Coinflip order found that the respondents (i) conducted activity
related to commodity options transactions without complying with the provisions of the CEA and CFTC regulations, and (ii) operated
a facility for the trading of swaps without registering the facility as a SEF or DCM. The Coinflip order was significant
as it is the first time the CFTC determined that bitcoin and other virtual currencies are properly defined as commodities under
the CEA. Based on this determination, the CFTC applied CEA provisions and CFTC regulations that apply to transactions in commodity
options and swaps to the conduct of the bitcoin derivatives trading platform. Also of significance, is that the CFTC appears to
have taken the position that bitcoin is not encompassed by the definition of currency under the CEA and CFTC regulations. The
CFTC defined bitcoin and other “virtual currencies” as “a digital representation of value that functions as
a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin
and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United
States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of
exchange in the country of issuance.”
The
CFTC affirmed its approach to the regulation of bitcoin and bitcoin-related enterprises on June 2, 2016, when the CFTC settled
charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its Order, the CFTC found that Bitfinex engaged in “illegal,
off-exchange commodity transactions and failed to register as a futures commission merchant” when it facilitated borrowing
transactions among its users to permit the trading of bitcoin on a “leveraged, margined or financed basis” without
first registering with the CFTC. In 2017 the CFTC stated that it would consider bitcoin and other virtual currencies as commodities
or derivatives depending on the facts of the offering. The CME Group announced that it will permit trading of bitcoin futures
on its exchanges as early as December 2017.
On
March 25, 2014, the IRS released guidance on the treatment of virtual convertible currencies, such as bitcoin, for U.S. federal
income tax purposes. The guidance, the first issued by a U.S. government agency regarding the asset classification of bitcoin,
classified bitcoin as “property” that it is not currency for U.S. federal income tax purposes. The guidance clarified
that bitcoin could be held as capital assets and that holders of bitcoin were required to track gains and losses relating to their
cost basis at acquisition and their amount realized upon sale or other disposition of the bitcoin. The IRS also clarified that
bitcoin received as payment (e.g., as wages or, in the case of a miner, as a reward for solving a block) is included in the recipient’s
taxable income based on the fair market value of bitcoin when received. The IRS may revisit its treatment of Digital Assets, including
seeking enforcement of existing guidance or issuing new guidance, in response to recommendations in a September 2016 report by
the U.S. Treasury Inspector General for Tax Administration. The asset classification of bitcoin by the IRS is not controlling
on other government agencies for purposes other than those relating to U.S. federal income tax.
On
June 26, 2014, the U.S. Government Accountability Office publicly released a report to the Committee on Homeland Security and
Government Affairs that summarized regulatory, law enforcement and consumer protection assessments regarding the Bitcoin economy
and Bitcoin in general. The report recommended that the U.S. Consumer Financial Protection Bureau participate in inter-agency
working groups on Bitcoin to assess how the agency might address Bitcoin-related consumer protection issues. The report echoed,
in part, a May 7, 2014 investor alert published by the SEC that highlighted fraud and other concerns relating to certain investment
opportunities denominated in bitcoin and fraudulent and unregistered investment schemes targeted at participants in online Bitcoin
forums. In the fall of 2014, the SEC is reported to have initiated an inquiry into the sale of unregistered securities denominated
in bitcoin or altcoins, and into the sale of “crypto-equity” (i.e., tokens for use on altcoin programming platforms),
although the Company has not verified the scope or veracity of such reports due to the confidentiality of such inquiries.
As
of April 2016, the U.S. Congress, U.S. Senate Committee on Homeland Security and Government Affairs, U.S. Senate Committee on
Banking, Housing and Urban Affairs, the CFTC, the New York State Department of Financial Services (“NYSDFS”), and
the Conference of State Bank Supervisors had initiated formal inquiries into or held hearings on Digital Assets, including bitcoin,
and possible regulation thereof. Members of the private sector and representatives of the Department of Justice, Secret Service
and FinCEN (among other government agencies) had participated in such inquiries and hearings.
U.S.
state regulators, including the California Department of Financial Institutions, NYSDFS, Virginia Corporation Commission, Idaho
Department of Financial Services and Washington State Department of Financial Institutions, have similarly released interpretations
or mandates that Bitcoin Exchanges and similar Bitcoin service providers register on a state-level as MTs or MSB. In July 20-17,
Delaware amended its General Corporation Law to provide for the creation maintenance of certain required records by blockchain
technology and permit its use for electronic transmission of stockholder communications. In June 2014, the State of California
adopted legislation that would formally repeal laws that could be interpreted as making illegal the use of bitcoin or other Digital
Assets as a means of payment. In February 2015, a bill was introduced in the California State Assembly to establish a licensing
regime for businesses engaging in virtual currencies. In September 2015, the bill was ordered to become an inactive file and as
of the date of this prospectus there hasn’t been further consideration by the California State Assembly. As of August 2016,
the bill was withdrawn from consideration for vote for the remainder of the year.
The
NYSDFS began requiring “BitLicenses” in June 2015. The “BitLicense” regulates the conduct of businesses
that are involved in “virtual currencies” in New York or with New York customers and prohibits any person or entity
involved in such activity to conduct activities without a license. The “BitLicense” requires, among other things,
that licensees are adequately capitalized, maintain detailed books and records, adopt anti-money laundering policies, ensure they
have robust cyber security policies and incorporate a variety of other compliance policies. As of January 2017, the NYSDFS has
granted a “BitLicense” to three (3) market participants.
On
December 16, 2014, the Conference of State Bank Supervisors released for public comment a proposed model regulatory framework
for state regulation of participants in “virtual currency activities.” Although similar in some regards, the proposed
model framework does not track completely the BitLicense regulations in New York. The Conference of State Bank Supervisors proposed
framework is a non-binding model and would have to be independently adopted, in sum or in part, by state legislatures or regulators
on a case-by-case basis. In numerous other states, including Connecticut, North Carolina, New Hampshire and New Jersey, legislation
is being proposed or has been introduced regarding the treatment of bitcoin and other Digital Assets.
In
addition, various foreign jurisdictions may adopt laws, regulations or directives that affect Bitcoin. In October 2012, the European
Central Bank issued a report on “virtual currency” schemes indicating that Bitcoin may become the subject of regulatory
interest in the European Union. In August 2013, the German Ministry of Finance released an interpretation that labeled bitcoin
to be a form of private money or a unit of account that is not recognized as a full currency, but is subject to German tax laws.
A ruling by the Court of Justice of the European Union on October 22, 2015 found that a bitcoin exchange’s trading of bitcoin
for conventional currency (such as Euros or Swedish Krona) and vice versa was subject to value added tax (“VAT”) rules
because it constituted the supply of services for consideration. However, the court also found that bitcoin could qualify for
an exception reserved for transactions related to currency, bank notes, and other legal tender, and thus the bitcoin trading could
be exempted from VAT. The ruling shows that bitcoin tax treatment in the European Union has moved more closely in-line with that
of conventional currency. Foreign government bodies have also initiated public inquiries similar to those taken by US government
bodies, including public hearings on Digital Assets, including bitcoin, held by both the French and Canadian Senates. In October
2015, the European Court of Justice determined that exchanging transactions in Digital Assets are exempt from value-added taxes
in the same manner as traditional currencies. In July 2016, the European Commission released a draft directive that proposed applying
counter-terrorism and anti-money laundering regulations to virtual currencies, and in September 2016, the European Banking authority
advised the European Commission to institute new regulation specific to virtual currencies, with amendments to existing regulation
as a stopgap measure.
In
Russia, state agencies and prosecutors have released guidance or statements that have hampered the growth of bitcoin. In January
2014, anonymous electronic transfers were restricted to de minimis sums; although bitcoin transactions are not truly anonymous,
this measure has been taken to apply to the Bitcoin Network. Additionally, a central bank statement warned of the association
of bitcoin and money laundering and terrorist activity. In early February, a prosecutor implied that the use of bitcoin and bitcoin
themselves were not legal tender and were illegal, although whether this amounted to a ban on bitcoin has been questioned. In
April 2016, it was reported that the Russian Finance Ministry was considering proposing regulations that would prohibit the issuance
of all Digital Assets or their use in exchange for goods or services in Russia. However, in July 2016, in a significant change
in tone, the Russian Ministry of Finance indicated it supports a proposed law that bans bitcoin domestically but allows for its
use as a foreign currency. In October 2017, Russia issued several releases indicating they may begin regulating bitcoin and licensing
miners and entities engaging in initial coin offerings.
After
the United States, China and Russia were among the next tier of large bitcoin-using jurisdictions as of late 2013. The impact
of the restrictions has been seen in a decline of Chinese investment activity in bitcoin and a reduction in the number of bitcoin
nodes operating in Russia had continued into late 2014, despite a pickup in trading volume on Chinese Bitcoin Exchanges. Less
active bitcoin jurisdictions in Iceland (conversion between bitcoin and krona prohibited), Vietnam (financial services firms prohibited
from interacting with Bitcoin) and Bolivia (use of bitcoin prohibited by the Central Bank of Bolivia) have more severely restricted
the use of bitcoin with little impact on the global growth of bitcoin. Similarly, the reported ban on decentralized Digital Assets
in Ecuador (made in advance of plans to introduce a government backed electronic cash system) have had no visible impact on the
Bitcoin Network due to limited use of bitcoin in Ecuador.
While
jurisdictions such as Germany and China have taken a preliminary regulatory stance on bitcoin, some countries have declined to
apply regulation to bitcoin when afforded the opportunity. In June 2014, the Swiss government elected not to regulate bitcoin
use and issued guidance on the further development and future application of laws to bitcoin-related activity in Switzerland.
In 2017 Switzerland gave a swiss bank approval to manage assets based on bitcoin and other Digital Assets. Among others, Australia,
Finland and the Netherlands have joined Canada and Germany among the foreign countries releasing formal or informal tax guidance
regarding bitcoin income or operations. On August 24, 2017, Canada issued guidance stating the sale of cryptocurrency may constitute
the sale of investment contract in accordance with Canadian law for determining if an investment constitutes a security.
Due
in part to its international nature and the nascent stage of regulation, along with the limited experience with bitcoin of, and
language barriers between international journalists, information regarding the regulation of bitcoin in various jurisdictions
may be incomplete, inaccurate or unreliable. For example, news of the People’s Bank of China notice release on December
5, 2013 was followed by days of confusion relating to difficulty in interpreting and analyzing the content of the release. In
another instance, on July 29, 2013, a bitcoin service business in Thailand announced that, in a meeting with the Bank of Thailand,
regulators from the Foreign Exchange Administration and Policy Department had functionally banned bitcoin activity in the country,
leading to widespread reporting of a blanket ban. Later reporting, however, questioned whether the Bank of Thailand regulators
had the authority, or ever expressed the intention, to ban all bitcoin use in Thailand. Additionally, in the first quarter of
2014, the Bank of Thailand issued a warning to its citizens regarding the risks of bitcoin and stated that it is not a currency.
Despite these announcements, bitcoin exchanges continue to operate in Thailand converting bitcoin to and from Thai baht.
In
April 2015, the Japanese Cabinet approved proposed legal changes that would reportedly treat bitcoin and other Digital Assets
as included in the definition of currency. These regulations would, among other things, require market participants, including
exchanges, to meet certain compliance requirements and be subject to oversight by the Financial Services Agency, a Japanese regulator.
These changes were approved by the Japanese Diet in May 2016 and became effective in April 2017. In September 2017, Japan began
regulating Bitcoin Exchanges and registered several such exchanges to operate within Japan. Currently there are nine crypto currency
exchanges available in Japan. The fastest growing alternate way to buy Bitcoin in Japan is by way of an ATM. There are nine Bitcoin
ATMs in Japan, with six of them being in Tokyo. The advantage of these ATMs is that you can buy Bitcoin using your debit card,
get your tokens almost instantly, and also remain anonymous. The downside comes in the form of high transaction fees that range
between 5%-10%.
In
September 2017, the Financial Services Commission in South Korea released a statement that initial coin offerings would be prohibited
as a fundraising tool. In January 2018, the South Korean Justice Minister issued remarks about banning bitcoin and other Digital
Assets, although the President’s office clarified that no final decision has been made. Currently there are 7 crypto currency
exchanges available in South Korea.
In
June 2017, India’s government ruled in favor of regulating bitcoin and India’s ministry of Finance is currently developing
rules for such regulation. In April 2018, the Reserve Bank of India barred regulated entities from providing services to any individual
or business dealing in digital currencies. The Reserve Bank has given three months to regulated entities like banks to unwind
their positions with the entities related to cryptocurrencies.
In
February 2018, the Ontario Securities Commission recently approved a Blockchain exchange-traded fund for launch on the Toronto
Stock Exchange. Currently there are 19 crypto currency exchanges available in Canada. There is no federal or provincial legislation
that explicitly addresses cryptocurrencies and block chains in Canada. This raises the question of what Canadian laws apply to
cryptocurrencies. The Canadian Revenue Agency (CRA) declared that cryptocurrencies are taxable as commodities rather than currencies.
This means that any transactions that involve cryptocurrencies will be viewed as if they are barter transactions. On the CRA’s
website, the agency maintains that any good bought using digital currency must, for tax purposes, be included in the seller’s
income tax.
Australia
has previously introduced legislation to regulate Bitcoin Exchanges and increase anti-money laundering policies. Currently Australia
considers Bitcoin a currency like any other and allows entities to trade, mine, or buy it.
As
both the regulatory landscape develops and journalistic familiarity with bitcoin increases, mainstream media’s understanding
of Digital Assets and the regulation thereof may improve. Regulation of Digital Assets varies from country to country as well
as within countries. An increase in the regulation of Digital Assets may affect our proposed business by increasing compliance
costs or prohibiting certain or all of our proposed activities.
COMPETITION
Blockchain
Technology and Digital Assets Initiatives
Subject
to raising additional capital, the Company’s Digital Asset initiatives will compete with other industry participants that
focus on investing in and securing the Blockchains of bitcoin and other Digital Assets. Market and financial conditions, and other
conditions beyond the Company’s control, may make it more attractive to invest in other entities, or to invest in bitcoin
or Digital Assets directly. Companies have raised substantial capital this year seeking to enter the Digital Assets business.
Our lack of capital is a competitive disadvantage.
Transaction
Verification Service Business (digital asset mining e.g. bitcoin, Suspended)
While
our current Transaction Verification Services business is suspended we anticipate that if we resume our operations, which is subject
to additional financing, our current and future competition is centered on the following areas:
●
|
Vertically
integrated companies such as Bitfury, Bitmain Technologies, Canaan Creative, and BW which design and build ASIC servers and
are engaged in transaction verification services through the use of their own ASIC servers; and
|
|
|
●
|
Companies
that are engaged in transaction verification services which may have lower operating costs than our future operations.
|
Our
potential competitors may have greater resources, longer histories, more intellectual property, greater hashing capacity, and
lower cost operations. They may secure better terms from ASIC server suppliers, deploy ASIC servers faster than us, and devote
more resources to technology infrastructure. Other companies also may enter into business combinations or alliances that strengthen
their competitive positions.
ASSETS
The
Company’s sole asset (other than its cash balance and Digital Assets) is its human capital specifically Mr. Allen
and Mr. Handerhan, who have extensive market knowledge and long-standing business relationships within the industry. Our success
depends solely on their continued service. See “Risk Factors”.
INTELLECTUAL
PROPERTY AND TRADE SECRETS
We
have no intellectual property assets or licenses and rely upon the experience of our two executive officers in the Digital Assets
business as it has evolved.
GROWTH
STRATEGY
Transaction
Verification Services Growth Strategy
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. However, given the current network difficulties and price levels to
mine both ethereum and bitcoin we do not believe mining offers a positive return on investment at present. We plan to monitor
the blockchain networks and subject to additional funding re-enter the mining business when we believe a positive return on investment
is achievable. 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 blockchain.
EMPLOYEES
We
currently have two employees.
MANAGEMENT
The
following table presents information with respect to our officers and directors as of the date of this prospectus:
Name
and Address
|
|
Age
|
|
Date
First Elected or
Appointed
|
|
Position(s)
|
|
|
|
|
|
|
|
Charles
W. Allen
|
|
44
|
|
February
5, 2014
|
|
Chief
Executive Officer, Chief Financial Officer and Chairman
|
|
|
|
|
|
|
|
Michal
Handerhan
|
|
43
|
|
February
5, 2014
|
|
Chief
Operating Officer, Secretary and Director
|
|
|
|
|
|
|
|
David
Garrity
|
|
59
|
|
October
16, 2017
|
|
Independent
Director
|
Each
director serves until our next annual meeting of the stockholders or unless they resign earlier. The Board of Directors elects
officers and their terms of office are at the discretion of the Board of Directors.
Background
of Officers and Directors
The
following is a brief account of the education and business experience during at least the past five years of our officers and
directors, indicating the person’s principal occupation during that period, and the name and principal business of the organization
in which such occupation and employment were carried out.
Charles
W. Allen, age 44, has served as our Chief Executive Officer and Chief Financial Officer since February 5, 2014 and as
our Chairman of the Board since September 11, 2014. Mr. Allen is responsible for our overall corporate strategy and direction
as well as managing our corporate finances. Since January 12, 2018 Mr. Allen has been the CEO of Global Bit Ventures Inc. (“GBV”),
which has discontinued its operations. From October 10, 2017, Mr. Allen has been a director of GBV. Mr. Allen is also on the advisory
board of GoCoin LLC, a leading Digital Asset payment processor. Mr. Allen has extensive experience in business strategy and structuring
and executing a variety of investment banking and capital markets transactions, including financings, IPO’s and mergers
and acquisitions. From February, 2012 through January, 2014 Mr. Allen was a Managing Director at RK Equity Capital Markets LLC
(“RK”) and focused on natural resources investment banking and added to RK’s capital markets efforts. In August,
2012 Mr. Allen co-founded RK Equity Investment Corp. (“RKEIC”) and served as a member of its board from inception
through September 7, 2014. Mr. Allen has extensive experience in business strategy, investment banking and capital markets transactions.
Prior to his work in the blockchain industry he worked domestically and internationally on projects in technology, media, natural
resources, logistics, medical services and financial services. He has served as a Managing Director at numerous boutique investment
banks focused on advising and raising capital for small and mid-size companies. Mr. Allen received a B.S. in Mechanical Engineering
from Lehigh University and a M.B.A. from the Mason School of Business at the College of William & Mary. The Board concludes
that Mr. Allen’s background and leadership experiences in the industry qualify him to serve on the Board.
Michal
Handerhan, age 43, has served as our Chief Operating Officer since February 5, 2014 and was appointed as our Secretary
on March 11, 2014. Mr. Handerhan served as our Chairman of the Board from February 5, 2014 to September 11, 2014 and was a co-founder
of BitcoinShop.us LLC. Mr. Handerhan supports both our business and development strategy across the management team. Since January
12, 2018 Mr. Handerhan has been the Secretary and a director of GBV. From February, 2011 through February, 2014 Mr. Handerhan
served as an independent IT and web services consultant to the National Aeronautics and Space Administration (“NASA”).
From October, 2005 until February, 2014 Mr. Handerhan was the President and Chief Executive Officer of Meesha Media Group, LLC
which provided high-definition video production services, Web 2.0 development, database management, and social media solutions.
From March, 2002 through October, 2006 Mr. Handerhan served as a team leader for NASA in their Peer Review Services group. Prior
to working at NASA’s Peer Review Services group Mr. Handerhan served as the web developer for Folio Investments. Mr. Handerhan
received a B.S. in Computer Science from Czech Technical University. The Board concludes that Mr. Handerhan’s extensive
experiences in IT qualify him to serve on the Board.
David
Garrity, age 59, has served as our independent Director since October 16, 2017. Mr. Garrity has over 25 years’ experience
in the financial services industry, he has held senior roles including CFO and board of director positions for both publicly-held
and private companies, and has extensive experience in several disciplines including operating, advisory and research, and is
CEO of New York City based consulting firm, GVA Research. Mr. Garrity is a Partner at BTblock, a blockchain consultancy firm,
and a senior advisor at Quantum1Net which also has a focus on blockchain technology. During 2008 and 2009, Mr. Garrity served
as CFO and a director at Interclick, Inc., a behavioral targeting internet advertising network. From June 9, 2011 to May 14, 2013,
Mr. Garrity was Chief Financial Officer of Aspen Group, Inc., an online for-profit university. From May 14, 2013 through October
31, 2013, he was Executive Vice President Corporate Development for Aspen Group, Inc. From February 1, 2017, through January 2018,
Mr. Garrity was acting CFO of Mutualink, Inc., a private company developing secure distributed networking technologies to support
communications interoperability for public & private-sector clients. Mr. Garrity appears regularly on CNBC, BNN, Bloomberg,
The Financial Times, Asia Times, Yahoo Finance, and other media outlets.
CONFLICTS
OF INTEREST
Mr.
Garrity, a director, is a Partner at BTblock, a blockchain consultancy firm, and a senior advisor at Quantum1Net which also has
a focus on blockchain technology. It is possible that these activities will create conflicts in the future. Given our small size
and lack of financial resources, we may be hampered in recruiting independent directors.
BOARD
LEADERSHIP STRUCTURE AND ROLE IN RISK OVERSIGHT
Our
Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and
reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding the Company’s
assessment of risks. The Board of Directors focuses on the most significant risks facing us and our general risk management strategy,
and also ensures that risks undertaken by us are consistent with the Board of Directors’ appetite for risk. While the Board
of Directors oversees the Company, our management is responsible for day-to-day risk management processes. We believe this division
of responsibilities is the most effective approach for addressing the risks facing the Company and that our board leadership structure
supports this approach.
CODE
OF ETHICS
We
have not yet adopted a code of ethics that applies to our principal executive officers, principal financial officer, principal
accounting officer or controller, or persons performing similar functions, since we have been focusing our efforts on growing
our business and obtaining financing for our Company. We expect to adopt a code as we further develop our business.
FAMILY
RELATIONSHIPS
There
are no family relationships between any of our directors, executive officers or directors.
COMMITTEES
OF THE BOARD OF DIRECTORS
Due
to our size, we have not formally designated a nominating committee, an audit committee, a compensation committee, or committees
performing similar functions.
The
Board currently acts as our audit committee. Since we are still a developing company, the Board of Directors is still in the process
of finding an “audit committee financial expert” as defined in Regulation S-K.
EXECUTIVE
COMPENSATION
The
following summary compensation table sets forth information concerning compensation for services rendered in all capacities during
the fiscal years ended December 31, 2018 and 2017 awarded to, earned by or paid to our executive officers. The numbers in the
summary compensation table represent the actual amount of compensation accrued under Generally Accepted Accounting Principles.
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Total
($)
|
|
Charles
W. Allen, CEO
|
|
|
2018
|
|
|
|
256,025
|
(1)
|
|
|
-
|
|
|
|
256,025
|
|
|
|
|
2017
|
|
|
|
235,389
|
|
|
|
75,000
|
|
|
|
310,389
|
|
Michal
Handerhan, COO
|
|
|
2018
|
|
|
|
198,550
|
(2)
|
|
|
-
|
|
|
|
198,550
|
|
|
|
|
2017
|
|
|
|
182,792
|
|
|
|
35,000
|
|
|
|
217,792
|
|
(1)
Mr. Allen received cash compensation of $189,519 for the year ended December 31, 2018. The $256,025 includes accrued and unpaid
salary of $66,506 as of December 31, 2018.
(2)
Mr. Handerhan received cash compensation of $146,412 for the year ended December 31, 2018. The $198,550 includes accrued and unpaid
salary of $52,138 as of December 31, 2018.
Employment
Agreements with Executive Officers
As
a condition to our May 2016 financing, the Company was unable to pay each of its two officers and sole employees, Mr. Allen and
Mr. Handerhan, cash compensation, whether in base salary or bonus, in excess of $50,000 per year, including accrued and unpaid
salaries, until such time as the Company filed its Form 10-K for the period ending December 31, 2016. That compensation was paid
later in 2017.
To
achieve our compensation objective of retaining and motivating qualified executives, we believe that we need to provide our executive
officers with severance and change of control protections that are competitive with the protections offered by other companies.
Offering our executive officers these payments and benefits facilitates the operation of our business, allows them to better focus
their time, attention and capabilities on our business, provides for a clear and consistent approach to managing involuntary departures
with mutually understood separation benefits, and aligns with market practice.
Charles
W. Allen
On
June 22, 2017, we entered into an employment agreement with Charles Allen (the “Allen Employment Agreement”), whereby
Mr. Allen agreed to serve as our Chief Executive Officer and Chief Financial Officer for a period of two years, subject to renewal,
in consideration for an annual salary of $245,000. Additionally, under the terms of the Allen Employment Agreement, Mr. Allen
shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Allen shall be
entitled to participate in all benefits plans we provide to our senior executive. We shall reimburse Mr. Allen for all reasonable
expenses incurred in the course of his employment. The Company shall pay the Mr. Allen $500 per month to cover telephone and internet
expenses. If the Company does not provide office space to Mr. Allen the Company will pay him an additional $500 per month to cover
expenses in connection with their office space needs.
On
February 6, 2019 we amended the Allen Employment Agreement whereby the annual salary was increased to $345,000 per year effective
January 1, 2019.
Michal
Handerhan
On
June 22, 2017, we entered into an employment agreement with Michal Handerhan (the “Handerhan Employment Agreement”),
whereby Mr. Handerhan agreed to serve as our Chief Operating Officer and Secretary for a period of two years, subject to renewal,
in consideration for an annual salary of $190,000. Additionally, under the terms of the Handerhan Employment Agreement, Mr. Handerhan
shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Handerhan shall
be entitled to participate in all benefits plans we provide to our senior executive. We shall reimburse Mr. Handerhan for all
reasonable expenses incurred in the course of his employment. The Company shall pay Mr. Handerhan $500 per month to cover telephone
and internet expenses. If the Company does not provide office space to Mr. Handerhan the Company will pay him an additional $500
per month to cover expenses in connection with their office space needs.
On
February 6, 2019 we amended the Handerhan Employment Agreement whereby the annual salary was increased to $215,000 per year effective
on January 1, 2019.
The
terms of the Allen Employment Agreement and Handerhan Employment Agreement (collectively the “Employment Agreements”)
provide each of Messrs. Allen and Handerhan (the “Executives”) certain, severance and change of control benefits if
the Executive resigns from the Company for good reason or the Company terminates him other than for cause. In such circumstances,
the Executive would be entitled to a lump sum payment equal to (i) the Executive’s then-current base salary, and (ii) payment
on a pro-rated basis of any bonus or other payments earned in connection with any bonus plan to which the Executive was a participant.
In addition, the severance benefit for the Executives the employment agreements include the Company continuing to pay for medical
and life insurance coverage for up to one year following termination. If, within eighteen months following a change of control
(as defined below), the Executive’s employment is terminated by the Company without cause or he resigns from the Company
for good reason, the Executive will receive certain severance compensation. In such circumstances, the cash benefit to the Executive
will be a lump sum payment equal to two times (i) his then-current base salary and (ii) his prior year cash bonus and incentive
compensation. Upon the occurrence of a change of control, irrespective of whether his employment with the Company terminates,
each Executive’s stock options and equity-based awards will immediately vest.
A
“change of control” for purposes of the Employment Agreements means any of the following: (i) the sale or partial
sale of the Company to an un-affiliated person or entity or group of un-affiliated persons or entities pursuant to which such
party or parties acquire shares of capital stock of the Company representing at least twenty five (25%) of the fully diluted capital
stock (including warrants, convertible notes, and preferred stock on an as converted basis) of the Company; (ii) the sale of the
Company to an un-affiliated person or entity or group of such persons or entities pursuant to which such party or parties acquire
all or substantially all of the Company’s assets determined on a consolidated basis, or (iii) Incumbent Directors (Mr. Allen
and Mr. Handerhan) cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or
similar transaction, to constitute at least a majority of the board of directors of the Company.
Additionally,
pursuant to the terms of the Employment Agreements, we have entered into an indemnification agreement with each Executive Officer.
On
December 14, 2017, the Company agreed to pay Charles Allen, its CEO, and Michal Handerhan, its COO, cash bonuses of $75,000 and
$35,000, respectively for 2017. The Company further agreed to pay Mr. Allen and Mr. Handerhan contingent cash bonuses of $175,000
and $75,000 respectively (the “2017 Contingent Bonuses”) which will be deemed earned on the earlier of i) the closing
of a merger approved by the Board, ii) the closing of one or many financings in 2018 totaling over $1.25 million in gross proceeds,
or iii) the Company having cash and Digital Assets valued at over $1.5 million. Provided further that the 2017 Contingent Bonuses
if deemed earned will only be payable if the Company has at least $1.25 million in cash and Digital Assets prior to paying the
bonuses. The 2017 Contingent Bonuses are not conditioned upon the continued service of either Mr. Allen or Mr. Handerhan and do
not expire. As of the date of this prospectus the conditions to
earn the 2017 Contingent Bonuses have not yet been achieved.
On
February 6, 2019, the Company agreed to pay Charles Allen, its CEO, and Michal Handerhan, its COO, contingent cash bonuses of
$256,025 and $150,000, respectively for 2018 (the “2018 Contingent Bonuses”) which will be deemed earned and payable
upon the repayment and / or settlement of the $200,000 Promissory Note issued on December 18, 2018. On September 18, 2019,
the Company exchanged the $200,000 Promissory Note and accrued interest of $17,973 for a $217,973 Convertible Promissory Note
due on December 18, 2019 (the “New Note”). From September 18, 2019 through October 16, 2019 the Company issued 1,931,788
shares of the Company’s Common Stock for the conversion of all $217,973 principal on the New Note. The Company subsequently
paid all the accrued interest expense of $905 on the New Note. As of the date of this prospectus the conditions to earn the 2018
Contingent Bonuses have been achieved.
The
amendments to the Employment Agreements and 2018 Contingent Bonuses were approved unanimously by the Board.
DIRECTOR
COMPENSATION
The
following summary compensation table sets forth information concerning compensation for services rendered in all capacities during
the year ended December 31, 2018, awarded to, earned by or paid to our directors excluding executive officers. The numbers in
the summary compensation table represent the actual amount of compensation accrued under Generally Accepted Accounting Principles.
Name
and Principal Position
|
|
Year
|
|
All
other
Compensation
($)
|
|
|
Total
($)
|
|
Jonathan
Read, Director (1)
|
|
2018
|
|
|
11,667
|
|
|
|
11,667
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Garrity, Director
|
|
2018
|
|
|
20,000
|
|
|
|
20,000
|
|
(1)
|
Mr.
Read resigned as a director on July 30, 2018.
|
On
January 1, 2018 the Company entered into a one-year consulting agreement with GVA Research LLC (“GVA”) whereby it
will pay GVA a quarterly consulting fee of $13,750. David Garrity is the owner and principal of GVA and this is irrespective of
and not included in the Director compensation. The Company did not renew the GVA consulting agreement for 2019.
On
February 6, 2019 the Company reevaluated the level of compensation for its sole director and agreed to an annual director fee
of $18,750 per quarter or $75,000 per year effective January 1, 2019.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END TABLE
There
are no outstanding equity awards issued to our Named Executive Officers as of December 31, 2018.
PRINCIPAL
SHAREHOLDERS
The
following table sets forth certain information regarding beneficial ownership of our common stock and C-1 Convertible Preferred
Stock as of the date of this prospectus: (i) by each of our directors, (ii) by each of the Named Executive Officers, (iii) by
all of our executive officers and directors as a group, and (iv) by each person or entity known by us to beneficially own more
than 5% of any class of our outstanding voting shares. Unless otherwise noted, the address is c/o BTCS Inc., 9466 Georgia Avenue
#124, Silver Spring, MD 20901.
Title
of class
|
|
Name
and address of
beneficial
owner (2)
|
|
Amount
and nature of beneficial ownership (1)
|
|
|
Percent
of
class
(1)
|
|
Common
Stock
|
|
Charles
W. Allen
|
|
|
0
|
|
|
|
0
|
%
|
Common
Stock
|
|
Michal
Handerhan
|
|
|
0
|
|
|
|
0
|
%
|
Common
Stock
|
|
David
Garrity
|
|
|
835
|
|
|
|
*
|
|
|
|
All
officers and directors as a group (three persons)
|
|
|
835
|
|
|
|
*
|
|
Series
C-1 Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Cavalry
Fund I LP (2)
|
|
|
14,707
|
|
|
|
50
|
%
|
Preferred
Stock
|
|
DiamondRock
LLC (3)
|
|
|
14,707
|
|
|
|
50
|
%
|
*
Less than 1%
(1)
|
Percentage
ownership of common stock records only is determined based on shares owned together with securities exercisable or convertible
into shares of common stock within 60 days of December 2, 2019, for each shareholder. Beneficial ownership is determined
in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares
of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable
or exercisable within 60 days of the date of December 2, 2019, are deemed to be beneficially owned by the person holding
such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person. As of December 2, 2019, there were 19,564,154
shares of our common stock issued and outstanding. The holders of the outstanding preferred stock have blockers which
limit their voting and conversion privileges to 4.99% of outstanding common stock within the foregoing 60 day periods. The
percentages reflect their ownership of each series of preferred stock, which is not subject to any blocker.
|
(2)
|
Cavalry
Fund I Management LLC, the investment manager of Cavalry Fund I LP, has voting and investment power over these securities.
Thomas Walsh is the managing member of Cavalry Fund I Management LLC, which is the general partner of Cavalry Fund I LP. Thomas
Walsh disclaims beneficial ownership over these securities. Cavalry is the selling stockholder. Address is: 61 Kinderkamack
Road Woodcliff Lake, NJ 07677.
|
|
|
(3)
|
Neil
Rock has voting and dispositive power over shares held by DiamondRock, LLC. Address is 425 East 63rd Street, New
York, NY 10065.
|
RELATED
PERSON TRANSACTIONS
Review
of Related Person Transactions
We
do not have a formal written policy for the review and approval of transactions with related parties. Our Board of Directors is
responsible for reviewing and approving or ratifying related-persons transactions.
Related
Person Transactions
On
March 31, 2017, the Company entered into salary settlement agreements (the “Settlement Agreements”) with each of Charles
Allen and Michal Handerhan pursuant to which each agreed to exchange $2,500 in accrued and unpaid salaries for 87,936 shares of
series seed preferred stock in BitVault, Inc. and 13,963 common shares in GCZ, Inc. (collectively the “Settlement Shares”).
In fiscal year 2014, the Company had written the Settlement Shares off as unrecoverable.
DIRECTOR
INDEPENDENCE
Our
common stock is quoted on the OTCQB quotation system, which does not have director independence requirements. Using the definition
of independence set forth in the rules of the NASDAQ Stock Market, neither Mr. Allen nor Mr. Handerhan would be considered an
independent director; however, Mr. Garrity would be deemed an independent director.
SELLING
STOCKHOLDER
This
prospectus relates to the possible resale by the selling stockholder, Cavalry, of shares of common stock that have been or may
be issued to Cavalry pursuant to the Purchase Agreement. We are filing the registration statement of which this prospectus forms
a part pursuant to the provisions of the Registration Rights Agreement, which we entered into with Cavalry on May 13, 2019 concurrently
with our execution of the Purchase Agreement, in which we agreed to provide certain registration rights with respect to sales
by Cavalry of the shares of our common stock that have been or may be issued to Cavalry under the Purchase Agreement.
Cavalry,
as the selling stockholder, may, from time to time, offer and sell pursuant to this prospectus any or all of the shares that we
have sold or may sell to Cavalry under the Purchase Agreement. The selling stockholder may sell some, all or none of its shares.
We do not know how long the selling stockholder will hold the shares before selling them, and we currently have no agreements,
arrangements or understandings with the selling stockholder regarding the sale of any of the shares.
The
following table presents information regarding the selling stockholder and the shares that it may offer and sell from time to
time under this prospectus. The table is prepared based on information supplied to us by the selling stockholder, and reflects
its holdings as of December 2, 2019. Neither Cavalry nor any of its affiliates has held a position or office, or had any
other material relationship, with us or any of our predecessors or affiliates. As used in this prospectus, the term “selling
stockholder” includes Cavalry and any donees, pledgees, transferees or other successors in interest selling shares received
after the date of this prospectus from Cavalry as a gift, pledge or other non-sale related transfer. Beneficial ownership is determined
in accordance with Rule 13d-3(d) promulgated by the SEC under the Exchange Act. The percentage of shares beneficially owned prior
to the offering is based on 19,564,154 shares of our common stock actually outstanding as of December 2, 2019.
Selling
Stockholder
|
|
Shares
Beneficially Owned Before this Offering
|
|
|
Percentage
of Outstanding Shares Beneficially Owned Before this Offering
|
|
|
Number
of
Shares being
Registered
to
be Sold in
the Offering
|
|
|
Percentage
of Outstanding Shares Beneficially Owned After this Offering
|
|
Cavalry
Fund I, LP(1)
|
|
|
98,047
|
(2)
|
|
|
0.50
|
%
|
|
|
6,454,000
|
|
|
|
*
|
|
*Less
than 1%.
(1)
|
Cavalry
Fund I Management LLC, the investment manager of Cavalry Fund I LP, has voting and investment power over these securities.
Thomas Walsh is the managing member of Cavalry Fund I Management LLC, which is the general partner of Cavalry Fund I LP.
|
(2)
|
Represents 98,047 shares issuable upon the
conversion of Series C-1 which are not registered hereby. See the description under the heading “The Cavalry
Transaction” for more information about the Purchase Agreement.
|
THE
CAVALRY TRANSACTION
General
On
May 13, 2019, we entered into the Purchase Agreement and the Registration Rights Agreement with Cavalry. Pursuant to the terms
of the Purchase Agreement, Cavalry has agreed to purchase from us up to $10,000,000 of our common stock (subject to certain limitations)
from time to time over a 36-month period. Pursuant to the terms of the Registration Rights Agreement, we have filed with the SEC
the registration statement that includes this prospectus to register for resale under the Securities Act the shares that have
been or may be issued to Cavalry under the Purchase Agreement.
Concurrently
with the execution of the Purchase Agreement on May 13, 2019, we issued to Cavalry 333,334 shares of our common stock as a fee
for its commitment to purchase additional shares of our common stock under the Purchase Agreement. Other than the shares of our
common stock that we have already issued to Cavalry as described above, we do not have the right to commence any sales to Cavalry
under the Purchase Agreement until the SEC has declared effective the registration statement of which this prospectus forms a
part. Thereafter and upon satisfaction of the other conditions set forth in the Purchase Agreement, we may, from time to time
and at our sole discretion, elect to direct Intraday Puts and Aftermarket Puts. On May 24,
2019, a registration statement was declared effective and since then we sold 3,973,809 Put shares to Cavalry under the
Purchase Agreement for $1,158,639 and issued 67,598 shares as additional
pro rata commitment shares.
The
number of shares that may be sold under an Intraday Put shall be equal to the Daily Trading Dollar Volume as reported on the Principal
Market for the trading day prior to the applicable Put Date, divided by the Intraday Purchase Price. 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 as reported on the
Principal Market, divided by the Aftermarket Put Price. 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, we
may not sell shares of our common stock to Cavalry under the Purchase Agreement if it would result in Cavalry beneficially owning
more than 4.99% of our common stock.
The
purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split,
or other similar transaction occurring during the Trading Days used to compute such price. We may at any time in our sole discretion
terminate the Purchase Agreement without fee, penalty or cost upon one business day notice. Cavalry may not assign or transfer
its rights and obligations under the Purchase Agreement.
We
issued 333,334 shares of our stock to Cavalry as a commitment fee for entering into the Purchase Agreement and we are obligated
to issue up to an additional 583,334 shares pro rata (of which 67,598 have been issued) as Cavalry purchases up to $10,000,000
of our common stock as directed by us. Cavalry may not assign or transfer its rights and obligations under the Purchase Agreement.
Minimum
Purchase Price
Under
the Purchase Agreement, we have set a floor price of $0.005 per share. Cavalry shall not purchase any shares of our common stock
on any day that the most recent closing sale price of our common stock is below the floor price.
Events
of Default
Events
of default under the Purchase Agreement include the following:
|
●
|
the
effectiveness of the registration statement of which this prospectus forms a part lapses for any reason (including, without
limitation, the issuance of a stop order), or any required prospectus supplement and accompanying prospectus are unavailable
for the resale by Cavalry of our common stock offered hereby, and such lapse or unavailability continues for a period of 10
consecutive Trading Days or for more than an aggregate of 30 business days in any 365-day period;
|
|
|
|
|
●
|
suspension
by our principal market of our common stock from trading for a period of three consecutive Trading Days;
|
|
|
|
|
●
|
the
de-listing of our common stock from our principal market, provided our common stock is not immediately thereafter trading
on the New York Stock Exchange, The NASDAQ Capital Market, The NASDAQ Global Market, The NASDAQ Global Select Market, the
NYSE MKT, the NYSE Arca, the OTC Pink or the OTCQX operated by the OTC Markets Group, Inc. (or nationally recognized successor
to any of the foregoing);
|
|
|
|
|
●
|
the
transfer agent’s failure for three Trading Days to issue to Cavalry shares of our common stock which Cavalry is entitled
to receive under the Purchase Agreement;
|
|
|
|
|
●
|
any
breach of the representations or warranties or covenants contained in the Purchase Agreement or any related agreement which
has or which could have a material adverse effect on us subject to a cure period of five Trading Days;
|
|
|
|
|
●
|
any
participation in insolvency or bankruptcy proceedings by or against us; or
|
|
|
|
|
●
|
ceasing
to be DTC eligible.
|
Cavalry
does not have the right to terminate the Purchase Agreement upon any of the events of default set forth above. During an event
of default, all of which are outside of Cavalry’s control, shares of our common stock cannot be sold by us or purchased
by Cavalry under the Purchase Agreement.
Our
Termination Rights
We
have the unconditional right, at any time, for any reason and without any payment or liability to us, to give notice to Cavalry
to terminate the Purchase Agreement. In the event of bankruptcy proceedings by or against us, the Purchase Agreement will automatically
terminate without action of any party.
No
Short-Selling or Hedging by Cavalry
Cavalry
has agreed that neither it nor any of its affiliates shall engage in any direct or indirect short-selling or hedging of our common
stock during any time prior to the termination of the Purchase Agreement.
Effect
of Performance of the Purchase Agreement on Our Stockholders
All
of the shares registered in this offering which may be sold by us to Cavalry under the Purchase Agreement are expected to be freely
tradable. It is anticipated that shares registered in this offering will be sold over a period of up to 36 months commencing on
the date that the registration statement including this prospectus becomes effective. The sale by Cavalry of a significant amount
of shares registered in this offering at any given time could cause the market price of our common stock to decline and to be
highly volatile. Cavalry may ultimately purchase all, some or none of the shares of common stock registered in this offering.
If we sell these shares to Cavalry, Cavalry may sell all, some or none of such shares. Therefore, sales to Cavalry by us under
the Purchase Agreement may result in substantial dilution to the interests of other holders of our common stock. In addition,
if we sell a substantial number of shares to Cavalry under the Purchase Agreement, or if investors expect that we will do so,
the actual sales of shares or the mere existence of our arrangement with Cavalry may make it more difficult for us to sell equity
or equity-related securities in the future at a time and at a price that we might otherwise wish to effect such sales. However,
we have the right to control the timing and amount of any sales of our shares to Cavalry and the Purchase Agreement may be terminated
by us at any time at our discretion without any cost to us.
Pursuant
to the terms of the Purchase Agreement, we have the right, but not the obligation, to direct Cavalry to purchase up to $10,000,000
of our common stock. We may be authorized to issue and sell to Cavalry under the Purchase Agreement more shares of our common
stock than are offered under this prospectus. If we choose to do so, we must first register for resale under the Securities Act
any such additional shares, which could cause additional substantial dilution to our stockholders. The number of shares ultimately
offered for resale by Cavalry under this prospectus is dependent upon the number of shares we direct Cavalry to purchase under
the Purchase Agreement.
The
following table sets forth the amount of gross proceeds we would receive from Cavalry from our sale of shares to Cavalry under
the Purchase Agreement at varying purchase prices:
Assumed
Average
Purchase Price Per
Share ($)
|
|
|
Number
of
Registered Shares
to be Issued if Full
Purchase (1)
|
|
|
Number
of Registered Shares We Will Receive Proceeds From
|
|
|
Percentage
of
Outstanding
Shares After
Giving Effect to the
Issuance to Cavalry (2)
|
|
|
Proceeds
from
the Sale of
Shares to Cavalry
Under the
$10M Purchase
Agreement ($)
|
|
|
0.005
|
(3)
|
|
|
6,454,000
|
|
|
|
6,228,110
|
|
|
|
24.81
|
%
|
|
|
31,141
|
|
|
0.08
|
(4)
|
|
|
6,454,000
|
|
|
|
6,228,110
|
|
|
|
24.81
|
%
|
|
|
498,249
|
|
|
0.622
|
(5)
|
|
|
6,454,000
|
|
|
|
6,228,110
|
|
|
|
24.81
|
%
|
|
|
3,872,396
|
|
(1)
|
Although
the Purchase Agreement provides that we may sell up to $10,000,000 of our common stock to Cavalry, we are only registering
6,454,000 purchase shares under this prospectus, inclusive of 225,890 pro rata commitment shares. As a result,
we have included in this column only those shares that we are registering in this offering including the pro rata commitment
shares issuable to Cavalry which no proceeds will be attributable to.
|
|
|
(2)
|
The
denominator is based on 19,564,154 shares outstanding, and includes the number of shares set forth in the adjacent
column which includes the commitment fee issued pro rata up to the additional $10,000,000 million of our stock if purchased
by Cavalry and 4,374,741 shares previously issued to Cavalry under the Purchase Agreement. The numerator is based on the number
of shares issuable under the Purchase Agreement. The number of shares in such column does not include shares that may be issued
to Cavalry under the Purchase Agreement which are not registered in this offering.
|
|
|
(3)
|
Under
the Purchase Agreement, Cavalry shall not purchase any shares of our common stock on any day that the most recent closing
sale price of our common stock is or was below $0.005.
|
|
|
(4)
|
The
closing sale price of our shares of common stock on December 2, 2019.
|
|
|
(5)
|
Only
225,890 pro rata commitment shares, rather than the remaining 289,846 pro rata commitment shares issuable to
Cavalry under the Purchase Agreement, are registered hereunder. Based on the terms of the Purchase Agreement, we will not
be able to sell the full amount of shares registered hereunder at an average price of higher than $0.622 per share. In such
a case, we will be required to file a new registration statement registering additional pro rata commitment shares before
all such shares registered hereunder may be sold to Cavalry, which subsequent registration statement would also include additional
Put shares.
|
DESCRIPTION
OF SECURITIES
We
are authorized to issue 975,000,000 shares of common stock, par value $0.001 per share, and 20,000,000 shares of preferred stock,
par value $0.001 per share.
Common
Stock
The
holders of common stock are entitled to one vote per share on all matters submitted to a vote of shareholders, including the election
of directors. There is no cumulative voting in the election of directors. The holders of common stock are entitled to any dividends
that may be declared by the board of directors out of funds legally available for payment of dividends subject to the prior rights
of holders of preferred stock and any contractual restrictions we have against the payment of dividends on common stock. In the
event of our liquidation or dissolution, holders of common stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive
rights and have no right to convert their common stock into any other securities.
Preferred
Stock
We
are authorized to issue 20,000,000 shares of $0.001 par value preferred stock in one or more series with such designations, voting
powers, if any, preferences and relative, participating, optional or other special rights, and such qualifications, limitations
and restrictions, as are determined by resolution of our board of directors. The issuance of preferred stock may have the effect
of delaying, deferring or preventing a change in control of our company without further action by shareholders and could adversely
affect the rights and powers, including voting rights, of the holders of common stock. In certain circumstances, the issuance
of preferred stock could depress the market price of the common stock.
Series
C-1 Preferred Stock
We
have 29,414 shares of outstanding Series C-1 Convertible Preferred Stock (the “Series C-1”). Each share of Series
C-1 converts into approximately 6.667 shares of common stock. The Certificate of Designation contains what is commonly referred
to as a blocker which limits the number of shares of common stock which the holder may “beneficially own” to 4.99%
of the common stock issued and outstanding. Under Rule 13d-3 of the Exchange Act, in determining beneficial ownership the holder
must consider shares of common stock that may be issued upon conversion or exercise of other securities within 60-days of the
date of calculation and which are not subject to any limitation on conversion or exercise. The Series C-1 also contains a provision
requiring the Company to treat all holders equally.
Anti-takeover
Effects of Nevada Law and of Our Charter and Bylaws
In
addition to the features of our charter related to the issuance of preferred stock, which are described above, the NRS contain
several provisions which may make a hostile take-over or change of control of our Company more difficult to accomplish. They include
the following:
Nevada
law, any one or all of the directors of a corporation may be removed by the holders of not less than two-thirds of the voting
power of a corporation’s issued and outstanding stock. All vacancies on the board of directors of a Nevada corporation may
be filled by a majority of the remaining directors, though less than a quorum, unless the articles of incorporation provide otherwise.
In addition, unless otherwise provided in the articles of incorporation, the board may fill the vacancies for the entire remainder
of the term of office of the resigning director or directors. Our Articles of Incorporation do not provide otherwise.
In
addition, Nevada law provides that unless otherwise provided in a corporation’s articles of incorporation or bylaws, shareholders
do not have the right to call special meetings. Our Articles of Incorporation and our Bylaws do not give shareholders this right.
In accordance with Nevada law, we also require advance notice of any shareholder proposals.
Nevada
law provides that, unless otherwise prohibited by any bylaws adopted by the shareholders, the board of directors may amend any
bylaw, including any bylaw adopted by the shareholders. Pursuant to Nevada law, our Articles of Incorporation grant the authority
to adopt, amend or repeal bylaws exclusively to our directors.
Nevada’s
“combinations with interested stockholders” statutes prohibit certain business “combinations” between
certain Nevada corporations and any person deemed to be an “interested stockholder” for two years after the such person
first becomes an “interested stockholder” unless (i) the corporation’s board of directors approves the combination
(or the transaction by which such person becomes an “interested stockholder”) in advance, or (ii) the combination
is approved by the board of directors and sixty percent of the corporation’s voting power not beneficially owned by the
interested stockholder, its affiliates and associates. Furthermore, in the absence of prior approval, certain restrictions may
apply even after such two-year period. For purposes of these statutes, an “interested stockholder” is any person who
is (x) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares
of the corporation, or (y) an affiliate or associate of the corporation and at any time within the two previous years was the
beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation.
Subject to certain timing requirements set forth in the statutes, a corporation may elect not to be governed by these statutes.
However, we have not included any such provision in our Articles of Incorporation or Bylaws, which means these provisions apply
to us.
Nevada’s
“acquisition of controlling interest” statutes contain provisions governing the acquisition of a controlling interest
in certain Nevada corporations. These “control share” laws provide generally that any person who acquires a “controlling
interest” in certain Nevada corporations may be denied certain voting rights, unless a majority of the disinterested stockholders
of the corporation elects to restore such voting rights. These statutes provide that a person acquires a “controlling interest”
whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the NRS, would
enable that person to exercise (1) one-fifth or more, but less than one-third, (2) one-third or more, but less than a majority
or (3) a majority or more, of all of the voting power of the corporation in the election of directors. Once an acquirer crosses
one of these thresholds, shares which it acquired in the transaction taking it over the threshold and within the 90 days immediately
preceding the date when the acquiring person acquired or offered to acquire a controlling interest become “control shares”
to which the voting restrictions described above apply. Our Articles of Incorporation and Bylaws currently contain no provisions
relating to these statutes, and unless our Articles of Incorporation or Bylaws in effect on the tenth day after the acquisition
of a controlling interest were to provide otherwise, these laws would apply to us if we were to (i) have 200 or more stockholders
of record (at least 100 of which have addresses in the State of Nevada appearing on our stock ledger) and (ii) do business in
the State of Nevada directly or through an affiliated corporation. As of the date of this prospectus, we have less than 100 record
stockholders with Nevada addresses. However, if these laws were to apply to us, they might discourage companies or persons interested
in acquiring a significant interest in or control of the company, regardless of whether such acquisition may be in the interest
of our shareholders.
Dividends
We
have not paid dividends on our common stock since inception and do not plan to pay dividends on our common stock in the foreseeable
future.
Transfer
Agent
We
have appointed Equity Stock Transfer as our stock transfer agent. Its address is 237 W 37th Street, Suite 602, New York, NY 10018
and its telephone number is (212) 575-5757 and email address is: info@equitystock.com
PLAN
OF DISTRIBUTION
The
selling stockholder named above and any of their transferees, pledgees and successors-in-interest may, from time to time, sell
any or all of their shares of common stock on OTC Markets or any other stock exchange, market or trading facility on which the
shares of our common stock are traded or in private transactions. These sales may be at fixed prices and prevailing market prices
at the time of sale, at varying prices or at negotiated prices. The selling stockholder may use any one or more of the following
methods when selling shares:
|
●
|
Ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
|
|
|
●
|
Block
trades in which the broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
|
|
|
|
|
●
|
Purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
|
|
|
|
|
●
|
Privately
negotiated transactions;
|
|
|
|
|
●
|
Broker-dealers
may agree with the selling stockholder to sell a specified number of such shares at a
stipulated price per share; or
|
|
|
|
|
●
|
A
combination of any such methods of sale.
|
Broker-dealers
engaged by the selling stockholder may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholder (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser)
in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction
not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction
a markup or markdown in compliance with FINRA IM-2440.
The
selling stockholder is an underwriter within the meaning of the Securities Act and any broker-dealers or agents that are involved
in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The selling stockholder
has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person
to distribute the common stock of our company. Pursuant to a requirement by FINRA, the maximum commission or discount to be received
by any FINRA member or independent broker-dealer may not be greater than 8% of the gross proceeds received by us for the sale
of any securities being registered pursuant to Rule 415 promulgated under the Securities Act.
Discounts,
concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the selling
stockholder. The selling stockholder may agree to indemnify any agent, dealer, or broker-dealer that participates in transactions
involving sales of the shares if liabilities are imposed on that person under the Securities Act.
We
are required to pay certain fees and expenses incurred by us incident to the registration of the shares covered by this prospectus.
We have agreed to indemnify the selling stockholder against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act. We will not receive any proceeds from the resale of any of the shares of our common stock by the selling
stockholder. We may, however, receive proceeds from the sale of our common stock under the Purchase Agreement with the selling
stockholder.
The
shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws.
In addition, in certain states, the shares may not be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously
engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation
M, prior to the commencement of the distribution. In addition, the selling stockholder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases
and sales of shares of the common stock by the selling stockholder or any other person. We will make copies of this prospectus
available to the selling stockholder.
Although
the selling stockholder has agreed not to enter into any “short sales” of our common stock, sales after delivery of
a put notice of a number of shares reasonably expected to be purchased under a put notice shall not be deemed a “short sale.”
Accordingly, the selling stockholder may enter into arrangements it deems appropriate with respect to sales of shares of our common
stock after it receives a put notice under the Purchase Agreement so long as such sales or arrangements do not involve more than
the number of put shares reasonably expected to be purchased by the selling stockholder under such put notice.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
BTCS pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
LEGAL
MATTERS
The
validity of the securities offered hereby will be passed upon for us by Nason, Yeager, Gerson, Harris & Fumero, P.A., Palm
Beach Gardens, Florida.
EXPERTS
The
consolidated financial statements appearing in this prospectus and registration statement for the 12 months ended December 31,
2018 and 2017 have been audited by RBSM LLP, an independent registered public accounting firm as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and
auditing.
ADDITIONAL
INFORMATION
We
have filed with the SEC a registration statement on Form S-1, including the exhibits, schedules, and amendments to this registration
statement, under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus, which
is part of the registration statement, does not contain all the information set forth in the registration statement. For further
information with respect to us and the shares of our common stock to be sold in this offering, we make reference to the registration
statement.
We
are an Exchange Act reporting company and are required to file periodic reports on Form 10-K and 10-Q and current reports on Form
8-K. You may read and copy all or any portion of the registration statement or any other information, at the SEC’s Internet
website, which is located at www.sec.gov and which also contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
No.
|
Report
of Independent Registered Public Accounting Firms
|
F-1
|
Balance
Sheet as of December 31, 2018 and December 31, 2017
|
F-2
|
Statement
of Operations for the Years Ended December 31, 2018 and 2017
|
F-3
|
Statement
of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
|
F-4
|
Statement
of Cash Flows for the Years Ended December 31, 2018 and 2017
|
F-5
|
Notes
to Consolidated Financial Statements
|
F-6
|
|
|
Condensed Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018
|
F-19
|
Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)
|
F-20
|
Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)
|
F-21
|
Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)
|
F-22
|
Notes to the Unaudited Condensed Financial Statements
|
F-23
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders
of BTCS Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of BTCS Inc. and subsidiary (The “Company”) as of December
31, 2018 and 2017 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows
for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the consolidated
financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2018 and 2017, and the consolidated results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally
accepted in the United States of America.
The
Company’s Ability to Continue as a Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 4 to the consolidated financial statements, the Company has an accumulated deficit, recurring losses, and
expects continuing future losses, and has stated that substantial doubt exists about the Company’s ability to continue as
a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters
are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
RBSM LLP
|
|
We
have served as the Company’s auditor since 2016.
|
|
|
|
Henderson,
Nevada
|
|
February
6, 2019
|
|
BTCS
Inc. and Subsidiaries
Consolidated
Balance Sheets
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
(RESTATED)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
52,117
|
|
|
$
|
303,334
|
|
Digital
currencies
|
|
|
-
|
|
|
|
217,119
|
|
Prepaid
expense
|
|
|
8,333
|
|
|
|
67,736
|
|
Total
current assets
|
|
|
60,450
|
|
|
|
588,189
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
2,703
|
|
|
|
1,235
|
|
Total
other assets
|
|
|
2,703
|
|
|
|
1,235
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
63,153
|
|
|
$
|
589,424
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ (Deficit) Equity:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expense
|
|
$
|
119,146
|
|
|
$
|
75,997
|
|
Short
term loan
|
|
|
200,000
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
319,146
|
|
|
|
75,997
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
(deficit) 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 December 31, 2018 and 2017, respectively; Liquidation
preference 0.001 per share
|
|
|
-
|
|
|
|
25
|
|
Series
C-1 Convertible Preferred stock: 29,414 and 50,004 shares issued and outstanding at December 31, 2018 and 2017, respectively;
Liquidation preference 0.001 per share
|
|
|
29
|
|
|
|
50
|
|
Common
stock, 975,000,000 shares authorized at 0.001 par value, 375,455,986 and 363,043,769 shares issued and outstanding at December
31, 2018 and 2017, respectively
|
|
|
375,456
|
|
|
|
363,044
|
|
Additional
paid in capital
|
|
|
114,711,714
|
|
|
|
114,667,080
|
|
Accumulated
deficit
|
|
|
(115,343,192
|
)
|
|
|
(114,516,772
|
)
|
Total
stockholders’ (deficit) equity
|
|
|
(255,993
|
)
|
|
|
513,427
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and stockholders’ (deficit) equity
|
|
$
|
63,153
|
|
|
$
|
589,424
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BTCS
Inc. and Subsidiaries
Consolidated
Statements of Operations
|
|
For
the years ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(RESTATED)
|
|
Revenues
|
|
|
|
|
|
|
E-commerce
|
|
$
|
-
|
|
|
$
|
4,480
|
|
Total
revenues
|
|
|
-
|
|
|
|
4,480
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
Power
and mining expenses
|
|
|
|
|
|
|
(160
|
)
|
Gross
profit
|
|
|
-
|
|
|
|
4,320
|
|
|
|
|
-
|
|
|
|
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
986,525
|
|
|
|
1,564,851
|
|
Marketing
|
|
|
3,644
|
|
|
|
9,242
|
|
Total
operating expenses
|
|
|
990,169
|
|
|
|
1,574,093
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
|
(990,169
|
)
|
|
|
(1,569,773
|
)
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income:
|
|
|
|
|
|
|
|
|
Fair
value adjustments for warrant liabilities
|
|
|
-
|
|
|
|
(39,222,099
|
)
|
Fair
value adjustments for convertible notes
|
|
|
-
|
|
|
|
(16,849,071
|
)
|
Loss
on issuance of Series C Convertible Preferred stock
|
|
|
-
|
|
|
|
(2,809,497
|
)
|
Loss
on issuance of Series C-1 Convertible Preferred stock
|
|
|
|
|
|
|
(478,035
|
)
|
Gain
on extinguishment of debt
|
|
|
-
|
|
|
|
15,918,867
|
|
Loss
from lease termination
|
|
|
-
|
|
|
|
(100,696
|
)
|
Liquidated
damages
|
|
|
-
|
|
|
|
(693,000
|
)
|
Realized
gain on sale of digital currencies
|
|
|
163,749
|
|
|
|
299,092
|
|
Other
income
|
|
|
-
|
|
|
|
39,643
|
|
Total
other income (expense)
|
|
|
163,749
|
|
|
|
(43,894,796
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(826,420
|
)
|
|
$
|
(45,464,569
|
)
|
Deemed
dividend related to reduction of warrant strike price
|
|
|
(5,600
|
)
|
|
|
-
|
|
Net
loss attributable to common stockholders
|
|
$
|
(832,020
|
)
|
|
$
|
(45,464,569
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share attributable to common stockholders, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and diluted
|
|
|
371,561,990
|
|
|
|
123,548,858
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BTCS
Inc. and Subsidiaries
Consolidated
Statement of Stockholders’ Equity (Deficit)
For
the years ended December 31, 2018 and 2017
|
|
Series
B Convertible
|
|
|
Series
C Convertible
|
|
|
Series
C-1 Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
Stockholders’
|
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance
January 1, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
16,095,929
|
|
|
$
|
16,097
|
|
|
|
(216,667
|
)
|
|
$
|
(217
|
)
|
|
$
|
23,785,756
|
|
|
$
|
(69,052,203
|
)
|
|
$
|
(45,250,567
|
)
|
Issuance
of Series C Convertible Preferred Stock and warrants for cash in an offering (net of $3.7 million warrant liability, offset
by $2.8 million of loss on issuance of Series C Convertible Preferred Stock)
|
|
|
-
|
|
|
|
-
|
|
|
|
79,368
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance
of Series C-1 Convertible Preferred Stock and warrants for cash and digital currency in an offering (net of $1.5 million warrant
liability, offset by $478,000 of loss on issuance of Series C-1 Convertible Preferred Stock)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,710
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
-
|
|
Issuance
of common stock for settlement of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
833,333
|
|
|
|
833
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,834
|
|
|
|
-
|
|
|
|
61,667
|
|
Issuance
of Series B Convertible Preferred Stock in exchange for convertible notes payable
|
|
|
1,160,941
|
|
|
|
1,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74,299,064
|
|
|
|
-
|
|
|
|
74,300,224
|
|
Conversion
of Series B Convertible Preferred stock to common stock
|
|
|
(1,135,064
|
)
|
|
|
(1,135
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
227,012,800
|
|
|
|
227,013
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(225,878
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion
of Series C Convertible Preferred Stock to common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(79,368
|
)
|
|
|
(79
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
15,873,600
|
|
|
|
15,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,795
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion
of Series C-1 Convertible Preferred Stock to common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,706
|
)
|
|
|
(15
|
)
|
|
|
2,941,200
|
|
|
|
2,941
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,926
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock due to Anti-Dilution provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,517,352
|
|
|
|
14,517
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,517
|
)
|
|
|
-
|
|
|
|
-
|
|
Cashless
warrant exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,856,798
|
|
|
|
81,857
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,196,111
|
|
|
|
-
|
|
|
|
12,277,968
|
|
Management
redemption from escrow account
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(400,000
|
)
|
|
|
(400
|
)
|
|
|
400
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125,000
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
9,875
|
|
|
|
|
|
|
|
10,000
|
|
Issuance
of common stock as consideration for warrant Amendment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,400,000
|
|
|
|
4,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
435,600
|
|
|
|
|
|
|
|
440,000
|
|
Reclassification
from derivative liability to stockholders’ equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,138,704
|
|
|
|
-
|
|
|
|
4,138,704
|
|
Fractional
shares adjusted for reverse split
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,424
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
Cancellation
of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(616,667
|
)
|
|
|
(617
|
)
|
|
|
616,667
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,464,569
|
)
|
|
|
(45,464,569
|
)
|
Balance
December 31, 2017 (Restated)
|
|
|
25,877
|
|
|
$
|
25
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
50,004
|
|
|
$
|
50
|
|
|
|
363,043,769
|
|
|
$
|
363,044
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
114,667,080
|
|
|
$
|
(114,516,772
|
)
|
|
$
|
513,427
|
|
Conversion
of Series B Convertible Preferred stock to common stock
|
|
|
(25,877
|
)
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,175,400
|
|
|
|
5,175
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,150
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion
of Series C-1 Convertible Preferred stock to common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,590
|
)
|
|
|
(21
|
)
|
|
|
4,118,000
|
|
|
|
4,118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,097
|
)
|
|
|
-
|
|
|
|
-
|
|
Cashless
warrant exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
268,817
|
|
|
|
269
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(269
|
)
|
|
|
-
|
|
|
|
-
|
|
Warrant
exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,850,000
|
|
|
|
2,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,150
|
|
|
|
-
|
|
|
|
57,000
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(826,420
|
)
|
|
|
(826,420
|
)
|
Balance
December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
29,414
|
|
|
$
|
29
|
|
|
|
375,455,986
|
|
|
$
|
375,456
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
114,711,714
|
|
|
$
|
(115,343,192
|
)
|
|
$
|
(255,993
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
BTCS
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
For
the years ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(RESTATED)
|
|
Net
Cash flows used from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(826,420
|
)
|
|
$
|
(45,464,569
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expenses
|
|
|
1,130
|
|
|
|
1,169
|
|
Issuance
of common stock for services
|
|
|
-
|
|
|
|
10,000
|
|
Issuance
of common stock as consideration for warrant Amendment
|
|
|
-
|
|
|
|
440,000
|
|
Fair
value adjustments for warrant liabilities
|
|
|
-
|
|
|
|
39,222,099
|
|
Fair
value adjustments for convertible notes
|
|
|
-
|
|
|
|
16,849,071
|
|
Realized
gain on sale of digital currencies
|
|
|
(163,749
|
)
|
|
|
(299,092
|
)
|
Proceeds
from sale of digital currencies
|
|
|
380,868
|
|
|
|
332,172
|
|
Gain
on extinguishment of debt
|
|
|
-
|
|
|
|
(15,918,867
|
)
|
Loss
from lease termination
|
|
|
-
|
|
|
|
100,696
|
|
Loss
on issuance of Series C Convertible Preferred stock
|
|
|
-
|
|
|
|
2,809,497
|
|
Loss
on issuance of Series C-1 Convertible Preferred stock
|
|
|
-
|
|
|
|
478,035
|
|
Liquidated
damages
|
|
|
-
|
|
|
|
693,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
59,403
|
|
|
|
(67,736
|
)
|
Accounts
payable and accrued expenses
|
|
|
43,149
|
|
|
|
(673,729
|
)
|
Net
cash used in operating activities
|
|
|
(505,619
|
)
|
|
|
(1,488,254
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(2,598
|
)
|
|
|
(1,485
|
)
|
Refund
of lease deposit
|
|
|
-
|
|
|
|
1,885
|
|
Net
cash used in (provided by) investing activities
|
|
|
(2,598
|
)
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of Series C Convertible Preferred Stock and warrants for cash in an offering
|
|
|
-
|
|
|
|
925,115
|
|
Net
proceeds from issuance of Series C-1 Convertible Preferred Stock and warrants for cash and digital currency in an offering
|
|
|
-
|
|
|
|
825,005
|
|
Payment
to settle an investor loan
|
|
|
-
|
|
|
|
(54,000
|
)
|
Proceeds
from exercise of warrants
|
|
|
57,000
|
|
|
|
-
|
|
Proceeds
from short term loan
|
|
|
200,000
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
257,000
|
|
|
|
1,696,120
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash
|
|
|
(251,217
|
)
|
|
|
208,266
|
|
Cash,
beginning of period
|
|
|
303,334
|
|
|
|
95,068
|
|
Cash,
end of period
|
|
$
|
52,117
|
|
|
$
|
303,334
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
Conversion
of Series B Convertible Preferred Stock to common stock
|
|
$
|
5,175
|
|
|
$
|
227,013
|
|
Conversion
of Series C Convertible Preferred Stock to common stock
|
|
$
|
-
|
|
|
$
|
15,874
|
|
Conversion
of Series C-1 Convertible Preferred Stock to common stock
|
|
$
|
4,118
|
|
|
$
|
2,941
|
|
Issuance
of common stock due to Anti-Dilution provision
|
|
$
|
-
|
|
|
$
|
14,517
|
|
Cashless
warrant exercise
|
|
$
|
269
|
|
|
$
|
12,277,968
|
|
Management
redemption from escrow account
|
|
$
|
-
|
|
|
$
|
400
|
|
Preferred
issued for conversion of notes
|
|
$
|
-
|
|
|
$
|
1,160
|
|
Reclassification
between convertible notes and derivative liabilities
|
|
$
|
-
|
|
|
$
|
4,138,704
|
|
Fractional
shares adjusted for reverse split
|
|
$
|
-
|
|
|
$
|
4
|
|
Issuance
of Series C-1 Convertible Preferred Stock and warrants in exchange of digital currencies
|
|
$
|
-
|
|
|
$
|
250,000
|
|
Issuance
of Series B Convertible Preferred Stock to settle convertible notes payable
|
|
$
|
-
|
|
|
$
|
74,300,224
|
|
Issuance
of common stock for settlement of debt
|
|
$
|
-
|
|
|
$
|
61,667
|
|
Deemed
dividend related to reduction of warrant strike price
|
|
$
|
5,600
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Organization and Description of Business and Recent Developments
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.
Note
2 - Basis of Presentation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, DM. DM was
dissolved on May 2, 2018. The Company maintains its books of account and prepares consolidated financial statements in accordance
with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”). The Company’s fiscal
year ends on December 31. All significant intercompany balances and transactions have been eliminated in consolidation.
Note
3 - Restatement of the Consolidated Financial Statements
The
purpose of the restatement for the year ended December 31, 2017 was to correct errors in the Company’s previously issued
financial statements for the period ended December 31, 2017 in connection with the accounting for digital currencies as intangible
assets with indefinite lives and record such digital currencies at cost less impairment, if any. Management determined that the
Company’s digital currencies as of December 31, 2017 were accounted for in error and were overstated by approximately $399,000.
The
originally filed accounting policy regarding digital currencies transactions and remeasurement stated that:
“The
Company accounts for digital currencies, which it considers to be an operating 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 from operations. The Company currently classifies
digital currencies as a current asset. Digital currencies are considered a crypto-currency and the Company receives deposits in
various kinds of digital currencies including but not limited to bitcoins, litecoins and dogecoins from customer trade transactions.
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.”
The
updated accounting policy regarding digital currencies transactions and remeasurement state that:
“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 that is amortized over the remaining useful life of that asset, if any. 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.”
The
effect of the restatement on the Company’s consolidated balance sheet as of December 31, 2017 are as follows:
|
|
December
31, 2017
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
|
|
|
As
Restated
|
|
Digital
currencies
|
|
$
|
616,352
|
|
|
$
|
(399,233
|
)
|
|
$
|
217,119
|
|
Total
current assets
|
|
|
987,422
|
|
|
|
(399,233
|
)
|
|
|
588,189
|
|
Total
Assets
|
|
|
988,657
|
|
|
|
(399,233
|
)
|
|
|
589,424
|
|
Accumulated
deficit
|
|
|
(114,117,539
|
)
|
|
|
(399,233
|
)
|
|
|
(114,516,772
|
)
|
Total
stockholders’ equity
|
|
|
912,660
|
|
|
|
(399,233
|
)
|
|
|
513,427
|
|
Total
Liabilities and stockholders’ equity
|
|
|
988,657
|
|
|
|
(399,233
|
)
|
|
|
589,424
|
|
The
effect of the restatement on the Company’s consolidated statement of operations for the year ended December 31, 2017 are
as follows:
|
|
For
the year ended December 31, 2017
|
|
|
|
As
Previously
Reported
|
|
|
Restatement
Adjustment
|
|
|
As
Restated
|
|
Gross
profit
|
|
$
|
709,266
|
|
|
$
|
(704,946
|
)
|
|
$
|
4,320
|
|
Revaluation
of digital currencies
|
|
|
704,946
|
|
|
|
(704,946
|
)
|
|
|
-
|
|
Net
loss from operations
|
|
|
(864,827
|
)
|
|
|
(704,946
|
)
|
|
|
(1,569,773
|
)
|
Realized
gain on sale of digital currencies
|
|
|
-
|
|
|
|
299,092
|
|
|
|
299,092
|
|
Other
income
|
|
|
33,022
|
|
|
|
6,621
|
|
|
|
39,643
|
|
Total
other expenses
|
|
|
(44,200,509
|
)
|
|
|
305,713
|
|
|
|
(43,894,796
|
)
|
Net
loss
|
|
|
(45,065,336
|
)
|
|
|
(399,233
|
)
|
|
|
(45,464,569
|
)
|
Basic
and Diluted Loss per Share
|
|
|
(0.36
|
)
|
|
|
(0.01
|
)
|
|
|
(0.37
|
)
|
Basic
and Diluted Shares
|
|
|
123,548,858
|
|
|
|
-
|
|
|
|
123,548,858
|
|
The
effect of the restatement on the Company’s consolidated statement of stockholders’ equity (deficit) as of December
31, 2017 are as follows:
|
|
December
31, 2017
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
|
|
|
As
Restated
|
|
Net
loss
|
|
|
(45,065,336
|
)
|
|
|
(399,233
|
)
|
|
|
(45,464,569
|
)
|
Total
stockholders’ equity
|
|
|
912,660
|
|
|
|
(399,233
|
)
|
|
|
513,427
|
|
The
effect of the restatement on the Company’s consolidated statement of cash flows for the year ended December 31, 2017 are
as follows:
|
|
For
the year ended December 31, 2017
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
|
|
|
As
Restated
|
|
Net
loss
|
|
$
|
(45,065,336
|
)
|
|
$
|
(399,233
|
)
|
|
$
|
(45,464,569
|
)
|
Change
in fair value of digital currencies
|
|
|
(704,946
|
)
|
|
|
704,946
|
|
|
|
-
|
|
Realized
gain on sale of digital currencies
|
|
|
-
|
|
|
|
(299,092
|
)
|
|
|
(299,092
|
)
|
Proceeds
from sale of digital currencies
|
|
|
-
|
|
|
|
332,172
|
|
|
|
332,172
|
|
Decrease
in Digital Currencies
|
|
|
338,793
|
|
|
|
(338,793
|
)
|
|
|
-
|
|
Net
cash used in operating activities
|
|
|
(1,488,254
|
)
|
|
|
-
|
|
|
|
(1,488,254
|
)
|
There
was no impact to net cash used in investing activities or net cash used in financing activities within our consolidated statement
of cash flows nor was there an impact on the net decrease in cash resulting from restatement.
The
impacts of the restatement for the year ended December 31, 2017 has been reflected throughout these financial statements, including
the applicable footnotes, as appropriate.
Note
4 - 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 year ended December 31, 2018. The Company incurred
a $0.8 million net loss for the year ended December 31, 2018. The Company had cash of approximately $52,000 and a negative working
capital of approximately $0.3 million at December 31, 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.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about
the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The consolidated
financial statements have been prepared assuming the Company will continue as a going concern. The Company has not made adjustments
to the accompanying consolidated financial statements to reflect the potential effects on the recoverability and classification
of assets or liabilities should the Company be unable to continue as a going concern.
The
Company continues to incur ongoing administrative and other operating expenses, including public company expenses, in excess of
revenues. While the Company continues to implement its business strategy, it intends to finance its activities by:
●
|
managing
current cash and cash equivalents on hand from the Company’s past debt and equity offerings by controlling costs,
|
|
|
●
|
seeking
additional financing through sales of additional securities
|
Note
5- Summary of Significant Accounting Policies
A
summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements
is as follows:
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 December 31, 2018 and 2017, the Company had approximately $52,000 and $303,000 in cash. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December
31, 2018 and 2017, the Company had $0 and $53,000 in excess of the FDIC insured limit, respectively.
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 digital assets is less than its cost basis. The Company
recognizes impairment losses on Digital Assets caused by decreases in fair value using the average 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. There were no impairment losses related to Digital Assets during
the years ended December 31, 2018 and 2017.
Property
and Equipment
Property
and equipment consists of leasehold improvements, computer, equipment and office furniture and fixtures, all of which are recorded
at cost. Depreciation and amortization is recorded using the straight-line method over the respective useful lives of the assets
ranging from three to five years. Long-lived assets are reviewed for impairment whenever events or circumstances indicate that
the carrying amount of these assets may not be recoverable.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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)
Use
of Estimates
The
accompanying 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 indefinite life intangible 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 indefinite life 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.
Income
Taxes
The
Company recognizes income taxes on an accrual basis based on tax positions taken or expected to be taken in its tax returns. A
tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing
that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it
is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained
upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted
approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes
are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.
A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely
not be realized. Should they occur, the Company’s policy is to classify interest and penalties related to tax positions
as income tax expense. Since the Company’s inception, no such interest or penalties have been incurred.
Employee
Stock-Based Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718 Compensation - Stock Compensation (“ASC 718”).
ASC 718 addresses all forms of share-based payment (“SBP”) awards including shares issued under employee stock purchase
plans and stock incentive shares. Under ASC 718 awards result in a cost that is measured at fair value on the awards’ grant
date, based on the estimated number of awards that are expected to vest and will result in a charge to operations.
Advertising
Expense
Advertisement
costs are expensed as incurred and included in marketing expenses. Advertising expenses amounted to approximately $4,000 and $9,000
for the years ended December 31, 2018 and 2017, respectively.
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.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following financial instruments were not included in the diluted loss per share calculation as of December 31, 2018 and 2017 because
their effect was anti-dilutive:
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
to purchase common stock
|
|
|
58,657,911
|
|
|
|
62,064,634
|
|
Series
B Convertible Preferred stock
|
|
|
-
|
|
|
|
5,175,400
|
|
Series
C Convertible Preferred stock
|
|
|
-
|
|
|
|
10,000,800
|
|
Series
C-1 Convertible Preferred stock
|
|
|
5,882,800
|
|
|
|
-
|
|
Total
|
|
|
64,540,711
|
|
|
|
77,240,834
|
|
Preferred
Stock
The
Company applies the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification
and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments
and are measured at fair value. The Company classifies conditionally redeemable preferred shares (if any), which includes preferred
shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence
of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies
its preferred shares in stockholders’ equity. The Company’s preferred shares do not feature any redemption rights
within the holders’ control or conditional redemption features not within the Company’s control as of December 31,
2018 and 2017. Accordingly, all issuances of preferred stock are presented as a component of stockholders’ equity.
Convertible
Preferred Stock
The
Company has evaluated its convertible preferred stock and warrants in accordance with the provisions of ASC 815, Derivatives and
Hedging, including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred stock
could generate a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with
an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has
an effective strike price that is less than the market price of the underlying stock at the commitment date.
The
Company has evaluated its convertible preferred stock conversion 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 its convertible 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 its convertible preferred
stock is an “equity host,” the embedded conversion feature is not considered a derivative liability.
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 consolidated financial position, results of operations, equity or cash flows.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
6 - Stockholders’ Equity
Reverse
Stock Split and Amendment to Certificate of Incorporation
On
February 13, 2017, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of
Nevada to implement a reverse stock split at a ratio of one-for-60. The reverse stock split became effective immediately.
2017
Activities
On
February 28, 2017, the Company issued 4,370 shares of Common Stock in connection with the one-for-60 reverse stock split resulting
from the rounding up of fractional shares of Common Stock to the whole shares of Common Stock.
On
March 9, 2017, the Company completed a securities exchange offer (the “Note Offer”) with its three convertible note
holders (the “Note Holders”). Pursuant to the Note Offer the Note Holders agreed to exchange i) $868,897 of 5% Original
Issue Discount 10% Senior Convertible Note Due September 16, 2016, originally issued in December 2015 and all accrued interest
and liquidated damages owed (collectively the “Senior Notes”), ii) $175,000 of 20% Original Issue Discount Junior
Convertible Notes Due December 5, 2016, originally issued in June 2016 and all accrued interest and liquidated damages owed (collectively
the “Junior Notes”), iii) $220,000 of 8% Convertible Notes Due June 6, 2017, originally issued in December 2016 and
all accrued interest owed (collectively the “Convertible Notes”), and iv) 97,423,579 warrants (the “Senior Warrants”)
for 845,631 shares of Series B Convertible Preferred Stock (the “Preferred”). After giving effect to the Note Offer
the Company no longer has any Senior Notes, Junior Notes or Convertible Notes outstanding. The Note Offer also provided the Note
Holders with a three month right of first refusal to participate in the Company’s next financing and a one-year participation
right with respect to the Company next fully underwritten offering.
On
March 9, 2017, as a result of the Note Offer becoming effective, a securities exchange offer made to the Company’s January
19, 2015 investors (the “January Offer”) was accepted by certain of those investors (the “January Investors”).
Pursuant to the January Offer the January Investors agreed to exchange i) 12,052,344 shares of common stock owed pursuant to the
favored nations provision of the January 19, 2015 subscription agreement (the “January Agreement”), and ii) 30,130,861
warrants owed pursuant to the favored nations provision of the January Agreement for 210,919 shares of Preferred.
On
March 9, 2017, as a result of the Note Offer becoming effective, a securities exchange offer made to the Company’s April
19, 2015 investors (the “April Offer”) was accepted by certain of those investors (the “April Investors”).
Pursuant to the April Offer, the April Investors agreed to exchange i) 20,110,699 shares of Common Stock owed pursuant to the
favored nations provision of the April 19, 2015 subscription agreement (the “April Agreement”), and ii) 28,154,980
warrants owed pursuant to the favored nations provision of the April Agreement for 104,391 shares of Preferred. As a result of
the Note Offer, the January Offer and April Offer the Company issues a total of 1,160,941 shares of Preferred.
On
March 15, 2017, the Company issued investors who participated in its: i) January 19, 2015 financing and rejected the January Offer,
and ii) April 19, 2015 financing and rejected the April Offer an aggregate of 14,517,352 share of Common Stock and 112,782,487
warrants. The Common Stock and warrant issuances were made pursuant to the favored nations provision of the January Agreement
and April Agreement.
On
March 15, 2017, the Company filed a Certificate of Designation for the Preferred with the Secretary of State of the State of Nevada.
The Preferred Certificate of Designation provides authorization for the issuance of 1,160,941 shares of Preferred, par value $0.001.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
March 22, 2017, the Company entered into a Settlement Agreement and Note (the “CSC Agreement”) with CSC Leasing Company
(“CSC”) with respect to the equipment lease schedule entered into between CSC and the Company (the “CSC Lease”).
Pursuant to the CSC Agreement the Company has agreed to: i) issue CSC 833,333 shares valued at $61,667 of the Company’s
common stock (the “Shares”), and ii) pay CSC $200,000 (the “Cash Payment”).
On
April 4, 2017, the Company entered into a Settlement Agreement with RK Equity Advisors, LLC and Pickwick Capital Partners, LLC
with respect to the tail provision of the Engagement Letter dated August 19, 2015. Pursuant to the Settlement Agreement the Company
has agreed to: i) terminate the Engagement Letter including all provisions thereof and including any obligations to future fees,
and ii) convert the Estimated Liability into 125,000 shares of common stock of the Company, par value $0.001 per share at a price
of $0.10 per share. The total value of this transaction is $10,000.
On
May 25, 2017, the Company raised $1 million in cash from four institutional investors in exchange for the issuance of $1,111,111
of Series C. See Note 4 Liquidity, Financial Condition and Management’s Plans.
On
October 10, 2017, the Company entered into a Securities Purchase Agreement with four investors who committed $750,000 in cash
and $250,000 in bitcoin in exchange for a new class of Series C-1 Convertible Preferred Stock (the “Series C-1”) and
Series B Warrants exercisable at $0.135 per share (the “October Financing”). The Series C-1 is initially convertible
into shares of the Company’s common stock at an effective price $0.085 per share. Both the Series C-1 and Series B Warrants
are subject to adjustment in the event of future sales of the Company’s equity securities or common stock equivalents at
a lower price, subject to elimination of the price protection on the Exchange Date. The Company subsequently received another
$100,000 from an institutional investor which was held in escrow until the filing of the 10-Q.
Between
March 15, 2017 and December 19, 2017, the Company issued 81,856,798 shares of Common Stock for the cashless exercise of 111,244,318
warrants.
Between
March 28, 2017 and December 31, 2017, the Company issued 227,012,800 shares of Common Stock upon the conversion of 1,135,064 shares
of Series B Convertible Preferred stock.
Between
November 27, 2017 and November 29, 2017, the Company issued 15,873,600 shares of Common Stock upon the conversion of 79,368 shares
of Series C Convertible Preferred stock.
On
November 27, 2017, the Company issued 2,941,200 shares of Common Stock upon the conversion of 14,706 shares of Series C-1 Convertible
Preferred stock.
On
December 7, 2017, the Company entered into an Amendment to Securities Agreement with the holders of a majority of the Company’s
outstanding Convertible Preferred Stock Series C-1 amending the terms of the Company’s May 2017 Securities Purchase Agreement,
the Company’s October 2017 Securities Purchase Agreement (the “October SPA”), the Certificate of Designations,
Preferences, and Rights of the Series C-1 Convertible Preferred Stock, and the terms of the Series A Warrants, Additional Warrants,
Bonus Warrants, and Series B Warrants. The Company issued, on a pro-rata basis to the subscribers of the October SPA a total of
4,400,000 shares of common stock of the Company.
2018
Activities
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.
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.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
November 13, 2018, pursuant to the Amendment to Securities Agreement dated December 7, 2017, the Company temporarily reduced the
exercise price of 4,000,000 Series A Warrants from $0.085 to $0.02 (the “Offer”). The offer was made to all four investors
who are record holders of the Series A Warrants on identical terms. Each investor had the option to exercise up to 1,000,000 Series
A Warrants at the lower exercise price.
Over
the course of November 13 through November 16, 2018, the Company issued 2,850,000 shares of Common Stock for the cash exercise
of Series A Warrants through the Offer resulting in aggregate proceeds of $57,000 to the Company.
Stock
Purchase Warrants
The
following is a summary of warrant activity for the year ended December 31, 2018 and 2017:
|
|
Number
of Warrants
|
|
Outstanding
as of January 1, 2017
|
|
|
268,788,733
|
|
Issuance
of Series C Convertible Preferred Stock and warrants for cash in an offering
|
|
|
47,302,176
|
|
Issuance
of Series C-1 Convertible Preferred Stock and warrants for cash and digital currency in an offering
|
|
|
12,942,000
|
|
Issuance
of Series B Convertible Preferred Stock in exchange for convertible notes payable and warrants
|
|
|
(163,178,007
|
)
|
Ratchet
warrants issued due to price reset
|
|
|
7,454,050
|
|
Cashless
warrant exercise
|
|
|
(111,244,318
|
)
|
Outstanding
as of December 31, 2017
|
|
|
62,064,634
|
|
Issuance
of Series C Warrants
|
|
|
55,000,000
|
|
Cancellation
of Series C Warrants for no consideration
|
|
|
(55,000,000
|
)
|
Cashless
warrant exercise
|
|
|
(555,556
|
)
|
Warrants
exercise for cash
|
|
|
(2,850,000
|
)
|
Expiration
of warrant
|
|
|
(1,167
|
)
|
Outstanding
as of December 31, 2018
|
|
|
58,657,911
|
|
Note
7 - Fair Value Measurements
The
Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy.
There
were no transfers between Level 1, 2 or 3 during the years ended December 31, 2018 and 2017.
Level
3 Valuation Techniques
The
following table presents additional information about Level 3 assets and liabilities measured at fair value. Both observable and
unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category.
As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in fair
value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable
long-dated volatilities) inputs.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Changes
in Level 3 liabilities measured at fair value for the years ended December 31, 2018 and 2017:
Derivative
liabilities balance - December 31, 2016
|
|
$
|
23,231,938
|
|
Conversion
of warrant liabilities
|
|
|
(51,325,017
|
)
|
Fair
value adjustments for warrant liabilities
|
|
|
39,222,099
|
|
Cashless
warrant exercise
|
|
|
(12,277,968
|
)
|
Loss
on issuance of Series C Convertible Preferred stock
|
|
|
2,809,497
|
|
Net
proceeds from issuance of Series C Convertible Preferred Stock and warrants for cash in an offering
|
|
|
925,115
|
|
Loss
on issuance of Series C-1 Convertible Preferred stock
|
|
|
478,035
|
|
Net
cash proceeds from issuance of Series C-1 Convertible Preferred Stock and warrants for cash and digital currency in an offering
|
|
|
825,005
|
|
Net
digital currency proceeds from issuance of Series C-1 Convertible Preferred Stock and warrants for cash and digital currency
in an offering
|
|
|
250,000
|
|
Reclassification
between convertible notes and derivative liabilities
|
|
|
(4,138,704
|
)
|
Derivative
liabilities balance - December 31, 2017
|
|
$
|
-
|
|
|
|
|
|
|
Derivative
liabilities for shortfall of shares balance - December 31, 2016
|
|
$
|
14,915,419
|
|
Conversion
of shortfall shares liabilities
|
|
|
(14,915,419
|
)
|
Derivative
liabilities for shortfall of shares balance - December 31, 2017
|
|
$
|
-
|
|
|
|
|
|
|
Convertible
notes at fair value - December 31, 2016
|
|
$
|
3,283,034
|
|
Conversion
of convertible notes
|
|
|
(20,132,105
|
)
|
Change
in fair value of convertible notes (including OID discount)
|
|
|
16,849,071
|
|
Convertible
notes at fair value - December 31, 2017
|
|
$
|
-
|
|
The
Company’s derivative liabilities are measured at fair value using the Monte Carlo simulation valuation methodology. A summary
of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
derivative liabilities that are categorized within Level 3 of the fair value hierarchy for the year ended December 31, 2017 is
as follows:
Warrant
Liabilities
Date
of valuation
|
|
March
2, 2017
|
|
|
May
24, 2017
|
|
|
December
7, 2017
|
|
|
December
31, 2016
|
|
Strike
Price
|
|
|
0.025
- 18.000
|
|
|
|
0.085
|
|
|
|
0.025
- 0.085
|
|
|
|
0.03
- 60.0
|
|
Volatility
|
|
|
186.7%
- 208.3
|
%
|
|
|
210.10%
- 254.70
|
%
|
|
|
255.89%
- 465.94
|
%
|
|
|
118%
- 230
|
%
|
Risk-free
interest rate
|
|
|
1.25%
- 1.83
|
%
|
|
|
1.24%
- 1.79
|
%
|
|
|
1.67%
- 2.14
|
%
|
|
|
0.35%
- 2.23
|
%
|
Contractual
life (in years)
|
|
|
1.79
to 3.79
|
|
|
|
1.52
to 5.00
|
|
|
|
0.98
to 4.88
|
|
|
|
0.10
to 3.96
|
|
Dividend
yield (per share)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Senior
Convertible Notes at Fair Value
Date
of valuation
|
|
March
2, 2017
|
|
|
December
31, 2016
|
|
Strike
Price
|
|
|
0.32
|
|
|
|
0.0252
|
|
Volatility
|
|
|
267.8
|
%
|
|
|
300.42%
- 328.04
|
%
|
Risk-free
interest rate
|
|
|
0.68
|
%
|
|
|
0.51%
- 0.63
|
%
|
Dividend
yield (per share)
|
|
|
0
|
|
|
|
0
|
%
|
The
development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the
responsibility of the Company’s Management.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
8 - Employment Agreements
Charles
W. Allen
On
June 22, 2017, we entered into an employment agreement with Charles Allen (the “Allen Employment Agreement”), whereby
Mr. Allen agreed to serve as our Chief Executive Officer and Chief Financial Officer for a period of two (2) years, subject to
renewal, in consideration for an annual salary of $245,000. Additionally, under the terms of the Allen Employment Agreement, Mr.
Allen shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Allen shall
be entitled to participate in all benefits plans we provide to our senior executive. The Company did not pay or accrue any amount
for bonuses during the year ended December 31, 2018. We shall reimburse Mr. Allen for all reasonable expenses incurred in the
course of his employment. The Company shall pay the Executive $500 per month to cover telephone and internet expenses. If the
Company does not provide office space to the Executive the Company will pay the Executive an additional $500 per month to cover
expenses in connection with their office space needs.
Michal
Handerhan
On
June 22, 2017, we entered into an employment agreement with Michal Handerhan (the “Handerhan Employment Agreement”),
whereby Mr. Handerhan agreed to serve as our Chief Operating Officer and Secretary for a period of two (2) years, subject to renewal,
in consideration for an annual salary of $190,000. Additionally, under the terms of the Handerhan Employment Agreement, Mr. Handerhan
shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Handerhan shall
be entitled to participate in all benefits plans we provide to our senior executive. The Company did not pay or accrue any amount
for bonuses during the year ended December 31, 2018. We shall reimburse Mr. Handerhan for all reasonable expenses incurred in
the course of his employment. The Company shall pay the Executive $500 per month to cover telephone and internet expenses. If
the Company does not provide office space to the Executive the Company will pay the Executive an additional $500 per month to
cover expenses in connection with their office space needs.
The
terms of the Allen Employment Agreement and Handerhan Employment Agreement (collectively the “Employment Agreements”)
provide each of Messrs. Allen and Handerhan (the “Executives”) certain, severance and change of control benefits if
the Executive resigns from the Company for good reason or the Company terminates him other than for cause. In such circumstances,
the Executive would be entitled to a lump sum payment equal to (i) the Executive’s then-current base salary, and (ii) payment
on a pro-rated basis of any bonus or other payments earned in connection with any bonus plan to which the Executive was a participant.
In addition, the severance benefit for the Executives the employment agreements include the Company continuing to pay for medical
and life insurance coverage for up to one year following termination. If, within eighteen months following a change of control
(as defined below), the Executive’s employment is terminated by the Company without cause or he resigns from the Company
for good reason, the Executive will receive certain severance compensation. In such circumstances, the cash benefit to the Executive
will be a lump sum payment equal to two times (i) his then-current base salary and (ii) his prior year cash bonus and incentive
compensation. Upon the occurrence of a change of control, irrespective of whether his employment with the Company terminates,
each Executive’s stock options and equity-based awards will immediately vest.
A
“change of control” for purposes of the Employment Agreements means any of the following: (i) the sale or partial
sale of the Corporation to an un-affiliated person or entity or group of un-affiliated persons or entities pursuant to which such
party or parties acquire shares of capital stock of the Corporation representing at least twenty five (25%) of the fully diluted
capital stock (including warrants, convertible notes, and preferred stock on an as converted basis) of the Corporation; (ii) the
sale of the Corporation to an un-affiliated person or entity or group of such persons or entities pursuant to which such party
or parties acquire all or substantially all of the Corporation’s assets determined on a consolidated basis, or (iii) Incumbent
Directors (Mr. Allen and Mr. Handerhan) cease for any reason, including, without limitation, as a result of a tender offer, proxy
contest, merger or similar transaction, to constitute at least a majority of the board of directors of the Company.
Additionally,
pursuant to the terms of the Employment Agreements, we have agreed to execute and deliver in favor of the Executives an indemnification
agreement and to maintain directors’ and officers’ insurance with terms and in the amounts commensurate with our senior
executive.
Note
9 - Related Party Transactions
On
February 19, 2016, the Company entered into a securities escrow agreement (the “Securities Escrow Agreement”) with
Charles Allen its Chief Executive Officer, Chief Financial Officer and Chairman, and Michal Handerhan, its Chief Operating Officer
and corporate secretary (collectively, the “Principal Stockholders”). Pursuant to the Securities Escrow Agreement
and for the benefit of the Company’s public shareholders the Principal Stockholders voluntarily agreed to place stock certificates
representing 400,000 shares of Common Stock (the “Escrow Shares”) into escrow.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
return of 200,000 escrowed shares (the “Listing Escrow Shares”) to the Principal Stockholders shall be based upon
the successful listing of the Company’s Common Stock on a National Stock Exchange on or before December 31, 2016 (the “Listing
Condition”). The Listing Escrow Shares will be returned to the Company for cancelation for no consideration if the Company
fails to achieve the Listing Condition. The return of 200,000 escrowed shares (the “Merger Escrow Shares”) to the
Principal Stockholders shall be based upon the successful consummation of the merger with Spondoolies on or before December 31,
2016 (the “Merger Condition”). The Merger Escrow Shares will be returned to the Company for cancelation for no consideration
if the Company fails to achieve the Merger Condition.
Pursuant
to the Securities Escrow Agreement and for the benefit of the Company’s public shareholders the Principal Stockholders voluntarily
agreed to place stock certificates representing the Escrow Shares into escrow. The Company failed to list the Company’s
Common Stock on a national securities exchange on or before December 31, 2016 and failed to consummate the merger with Spondoolies-Tech
Ltd. on or before December 31, 2016. The escrow agent returned the shares to the Company for cancelation for no consideration.
On
January 30, 2017, the Company received 24,000,000 pre-split shares (400,000 shares post-split) of Common Stock for cancelation
for no consideration (the “Escrow Shares”). The Escrow Shares were placed in escrow by Charles Allen our Chief Executive
Officer, Chief Financial Officer and Chairman, and Michal Handerhan, our Chief Operating Officer and corporate secretary (collectively,
the “Principal Stockholders”) pursuant to a securities escrow agreement dated February 19, 2016 (the “Securities
Escrow Agreement”). The Company recorded an adjustment to additional paid-in capital for $400 related to this transaction.
Note
10 - Income Taxes
The
Company had no income tax expense due to operating loss incurred for the years ended December 31, 2018 and 2017.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “Tax Act”), which makes broad and complex changes to the U.S. tax code. Certain of these changes may be applicable
to the Company, including but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, creating
a new limitation on deductible interest expense, eliminating the corporate alternative minimum tax (“AMT”), modifying
the rules related to uses and limitations of net operating loss carryforwards generated in tax years ending after December 31,
2017, and changing the rules pertaining to the taxation of profits earned abroad. Changes in tax rates and tax laws are accounted
for in the period of enactment. The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently,
we have recorded a decrease related to deferred tax assets of approximately $0.5 million dollars exclusive of the corresponding
change in the valuation allowance, for the year ended December 31, 2018. Due to the full valuation allowance on the deferred tax
assets, there is no net adjustment to deferred tax expense or benefit due to the reduction of the corporate tax rate.
The
tax effects of temporary differences and tax loss and credit carry forwards that give rise to significant portions of deferred
tax assets and liabilities at December 31, 2018 and 2017 are comprised of the following:
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net-operating
loss carryforward
|
|
$
|
1,163,032
|
|
|
$
|
1,689,152
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Deferred Tax Assets
|
|
|
1,163,032
|
|
|
|
1,689,152
|
|
Valuation
allowance
|
|
|
(1,163,032
|
)
|
|
|
(1,689,152
|
)
|
Deferred
Tax Asset, Net of Allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
At
December 31, 2018, the Company had net operating loss carry forwards for federal and state tax purposes of approximately $5.54
million which begins to expire in 2034. For tax years beginning after December 31, 2017, NOLs generated can offset only 80% of
taxable income in any given tax year. The 20-year carryforward period has been replaced with an indefinite carryforward period
for these NOLs generated in 2018 and future years. Prior to the merger, the Company had generated net operating losses, which
the Company’s preliminary analysis indicates would be subject to significant limitations pursuant to Internal Revenue Code
Section 382. The Company has not completed its IRC Section 382 Valuation, as required and the NOL’s because of potential
Change of Ownerships might be completely worthless. Therefore, Management of the Company has recorded a Full Valuation Reserve,
since it is more likely than not that no benefit will be realized for the Deferred Tax Assets.
BTCS
Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. In case
the deferred tax assets will not be realized in future periods, the Company has provided a valuation allowance for the full amount
of the deferred tax assets at December 31, 2018. The valuation allowance decreased by approximately $0.5 million as of December
31, 2018.
The
expected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as follows:
|
|
For
the years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Statutory
Federal Income Tax Rate
|
|
|
(21.0
|
)%
|
|
|
(34.0
|
)%
|
State
Taxes, Net of Federal Tax Benefit
|
|
|
(6.3
|
)%
|
|
|
(5.4
|
)%
|
Federal
tax rate change
|
|
|
0.0
|
%
|
|
|
11.9
|
|
Other
|
|
|
27.3
|
%
|
|
|
38.8
|
|
Change
in Valuation Allowance
|
|
|
(0.0
|
)%
|
|
|
(11.3
|
)%
|
|
|
|
|
|
|
|
|
|
Income
Taxes Provision (Benefit)
|
|
|
-
|
%
|
|
|
-
|
%
|
The
Company has not identified any uncertain tax positions requiring a reserve as of December 31, 2018.
Note
11 - Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the consolidated financial statements are
issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would
have required adjustment or disclosure in the consolidated financial statements other than disclosed.
Over
the course of January 9, 2019 through January 31, 2019, the Company issued 11,825,544 shares of Common Stock for the cash exercise
of Series A Warrants, Additional Warrants, and Bonus Warrants resulting in aggregate proceeds of $148,843 to the Company.
BTCS
Inc. and Subsidiary
Condensed
Balance Sheets
|
|
September 30
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
296,553
|
|
|
$
|
52,117
|
|
Digital currencies
|
|
|
208,702
|
|
|
|
-
|
|
Prepaid expense
|
|
|
36,224
|
|
|
|
8,333
|
|
Total current assets
|
|
|
541,479
|
|
|
|
60,450
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,686
|
|
|
|
2,703
|
|
Total other assets
|
|
|
1,686
|
|
|
|
2,703
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
543,165
|
|
|
$
|
63,153
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity (Deficit):
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expense
|
|
$
|
61,647
|
|
|
$
|
14,244
|
|
Accrued compensation
|
|
|
16,816
|
|
|
|
104,902
|
|
Convertible notes payable, net
|
|
|
53,221
|
|
|
|
-
|
|
Short term loan
|
|
|
-
|
|
|
|
200,000
|
|
Total current liabilities
|
|
|
131,684
|
|
|
|
319,146
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock; 20,000,000 shares authorized at $0.001 par value:
|
|
|
|
|
|
|
|
|
Series B Convertible Preferred stock: 0 shares issued and outstanding at September 30, 2019 and December 31, 2018; Liquidation preference $0.001 per share
|
|
|
-
|
|
|
|
-
|
|
Series C-1 Convertible Preferred stock: 29,414 shares issued and outstanding at September 30, 2019 and December 31, 2018; Liquidation preference $0.001 per share
|
|
|
29
|
|
|
|
29
|
|
Common stock, 975,000,000 shares authorized at $0.001 par value, 18,884,424 and 12,515,201 shares issued and outstanding at September 30,2019 and December 31, 2018, respectively
|
|
|
18,885
|
|
|
|
12,515
|
|
Additional paid in capital
|
|
|
116,647,537
|
|
|
|
115,074,655
|
|
Accumulated deficit
|
|
|
(116,254,970
|
)
|
|
|
(115,343,192
|
)
|
Total stockholders’ equity (deficit)
|
|
|
411,481
|
|
|
|
(255,993
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and stockholders’ equity (deficit)
|
|
$
|
543,165
|
|
|
$
|
63,153
|
|
The
accompanying notes are an integral part of these unaudited condensed financial statements.
BTCS
Inc. and Subsidiary
Condensed
Statements of Operations
(Unaudited)
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
251,439
|
|
|
$
|
271,844
|
|
|
$
|
803,075
|
|
|
$
|
761,636
|
|
Marketing
|
|
|
9,334
|
|
|
|
60
|
|
|
|
9,929
|
|
|
|
3,030
|
|
Total operating expenses
|
|
|
260,773
|
|
|
|
271,904
|
|
|
|
813,004
|
|
|
|
764,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(45,553
|
)
|
|
|
-
|
|
|
|
(57,553
|
)
|
|
|
-
|
|
Impairment loss on digital currencies
|
|
|
(40,698
|
)
|
|
|
-
|
|
|
|
(40,698
|
)
|
|
|
-
|
|
Realized (loss) gain on digital currencies transactions
|
|
|
(523
|
)
|
|
|
47,055
|
|
|
|
(523
|
)
|
|
|
158,194
|
|
Total other (expenses) income
|
|
|
(86,774
|
)
|
|
|
47,055
|
|
|
|
(98,774
|
)
|
|
|
158,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(347,547
|
)
|
|
$
|
(224,849
|
)
|
|
$
|
(911,778
|
)
|
|
$
|
(606,472
|
)
|
Deemed dividend related to reduction of warrant strike price
|
|
|
-
|
|
|
|
-
|
|
|
|
(95,708
|
)
|
|
|
-
|
|
Net loss attributable to common stockholders
|
|
$
|
(347,547
|
)
|
|
$
|
(224,849
|
)
|
|
$
|
(1,007,486
|
)
|
|
$
|
(606,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders, basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic and diluted
|
|
|
15,841,314
|
|
|
|
12,418,059
|
|
|
|
14,120,866
|
|
|
|
12,357,057
|
|
The
accompanying notes are an integral part of these unaudited condensed financial statements.
BTCS
Inc. and Subsidiary
Statements
of Changes in Stockholders’ (Deficit) Equity
(Unaudited)
For
the Three Months Ended September 30, 2019
|
|
Series
C-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance
June 30, 2019
|
|
|
29,414
|
|
|
$
|
29
|
|
|
|
15,722,420
|
|
|
$
|
15,722
|
|
|
$
|
115,984,824
|
|
|
$
|
(115,907,423
|
)
|
|
$
|
93,152
|
|
Common stock issued
including equity commitment fee, net
|
|
|
-
|
|
|
|
-
|
|
|
|
1,909,946
|
|
|
|
1,910
|
|
|
|
459,473
|
|
|
|
-
|
|
|
|
461,383
|
|
Conversion of convertible
notes
|
|
|
-
|
|
|
|
-
|
|
|
|
1,252,058
|
|
|
|
1,253
|
|
|
|
148,747
|
|
|
|
-
|
|
|
|
150,000
|
|
Beneficial conversion
features associated with convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,493
|
|
|
|
|
|
|
|
54,493
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(347,547
|
)
|
|
|
(347,547
|
)
|
Balance
September 30, 2019
|
|
|
29,414
|
|
|
$
|
29
|
|
|
|
18,884,424
|
|
|
$
|
18,885
|
|
|
$
|
116,647,537
|
|
|
$
|
(116,254,970
|
)
|
|
$
|
411,481
|
|
For
the Three Months Ended September 30, 2018
|
|
Series
B
Convertible
Preferred
Stock
|
|
|
Series
C-1
Convertible
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance
June 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
29,414
|
|
|
$
|
29
|
|
|
|
12,411,241
|
|
|
$
|
12,411
|
|
|
$
|
115,017,759
|
|
|
$
|
(114,898,395
|
)
|
|
$
|
131,804
|
|
Cashless warrant exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,961
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(224,849
|
)
|
|
|
(224,849
|
)
|
Balance
September 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
29,414
|
|
|
$
|
29
|
|
|
|
12,420,202
|
|
|
$
|
12,420
|
|
|
$
|
115,017,750
|
|
|
$
|
(115,123,244
|
)
|
|
$
|
(93,045
|
)
|
For
the Nine Months Ended September 30, 2019
|
|
Series
C-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Convertible
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
(Deficit)
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance
December 31, 2018
|
|
|
29,414
|
|
|
$
|
29
|
|
|
|
12,515,201
|
|
|
$
|
12,515
|
|
|
$
|
115,074,655
|
|
|
$
|
(115,343,192
|
)
|
|
$
|
(255,993
|
)
|
Common stock issued
including equity commitment fee, net
|
|
|
-
|
|
|
|
-
|
|
|
|
4,374,741
|
|
|
|
4,375
|
|
|
|
1,142,014
|
|
|
|
-
|
|
|
|
1,146,389
|
|
Conversion of convertible
notes
|
|
|
-
|
|
|
|
-
|
|
|
|
1,252,058
|
|
|
|
1,252
|
|
|
|
148,748
|
|
|
|
-
|
|
|
|
150,000
|
|
Beneficial conversion
features associated with convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,493
|
|
|
|
-
|
|
|
|
54,493
|
|
Fractional shares adjusted
for reverse split
|
|
|
-
|
|
|
|
-
|
|
|
|
16,860
|
|
|
|
17
|
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
-
|
|
Warrant exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
725,564
|
|
|
|
726
|
|
|
|
227,644
|
|
|
|
-
|
|
|
|
228,370
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(911,778
|
)
|
|
|
(911,778
|
)
|
Balance
September 30, 2019
|
|
|
29,414
|
|
|
$
|
29
|
|
|
|
18,884,424
|
|
|
$
|
18,885
|
|
|
$
|
116,647,537
|
|
|
$
|
(116,254,970
|
)
|
|
$
|
411,481
|
|
For
the Nine Months Ended September 30, 2018
|
|
Series
B
Convertible
Preferred
Stock
|
|
|
Series
C-1
Convertible
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance
December 31, 2017
|
|
|
25,877
|
|
|
$
|
25
|
|
|
|
50,004
|
|
|
$
|
50
|
|
|
|
12,101,462
|
|
|
$
|
12,101
|
|
|
$
|
115,018,023
|
|
|
$
|
(114,516,772
|
)
|
|
$
|
513,427
|
|
Conversion of Series
B Convertible Preferred stock to common stock
|
|
|
(25,877
|
)
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
172,513
|
|
|
|
173
|
|
|
|
(148
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion of Series
C-1 Convertible Preferred stock to common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,590
|
)
|
|
|
(21
|
)
|
|
|
137,266
|
|
|
|
137
|
|
|
|
(116
|
)
|
|
|
-
|
|
|
|
-
|
|
Cashless warrant exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,961
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(606,472
|
)
|
|
|
(606,472
|
)
|
Balance
September 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
29,414
|
|
|
$
|
29
|
|
|
|
12,420,202
|
|
|
$
|
12,420
|
|
|
$
|
115,017,750
|
|
|
$
|
(115,123,244
|
)
|
|
$
|
(93,045
|
)
|
The
accompanying notes are an integral part of these unaudited condensed financial statements.
BTCS
Inc. and Subsidiary
Condensed
Statements of Cash Flows
(Unaudited)
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net Cash flows used from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(911,778
|
)
|
|
$
|
(606,472
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expenses
|
|
|
1,017
|
|
|
|
788
|
|
Amortization on debt discount
|
|
|
39,741
|
|
|
|
|
|
Realized (loss) gain on digital currencies transactions
|
|
|
523
|
|
|
|
(158,194
|
)
|
Proceeds from sale of digital currencies
|
|
|
-
|
|
|
|
359,801
|
|
Impairment loss on digital currencies
|
|
|
40,698
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(27,891
|
)
|
|
|
54,403
|
|
Accounts payable and accrued expenses
|
|
|
65,376
|
|
|
|
51,012
|
|
Accrued compensation
|
|
|
(88,086
|
)
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(880,400
|
)
|
|
|
(298,662
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities:
|
|
|
|
|
|
|
|
|
Purchase of digital currencies
|
|
|
(249,923
|
)
|
|
|
-
|
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(2,598
|
)
|
Net cash used in investing activities
|
|
|
(249,923
|
)
|
|
|
(2,598
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
228,370
|
|
|
|
-
|
|
Net proceeds from issuance of common stock
|
|
|
1,146,389
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
1,374,759
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
244,436
|
|
|
|
(301,260
|
)
|
Cash, beginning of period
|
|
|
52,117
|
|
|
|
303,334
|
|
Cash, end of period
|
|
$
|
296,553
|
|
|
$
|
2,074
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
Conversion of Series B Convertible Preferred Stock to common stock
|
|
$
|
-
|
|
|
$
|
5,175
|
|
Conversion of Series C-1 Convertible Preferred Stock to common stock
|
|
$
|
-
|
|
|
$
|
4,118
|
|
Conversion of convertible note to common stock
|
|
$
|
150,000
|
|
|
$
|
-
|
|
Exchange of promissory note and accrued interest into convertible note
|
|
$
|
217,973
|
|
|
$
|
-
|
|
Cashless warrant exercise
|
|
$
|
-
|
|
|
$
|
269
|
|
Fractional shares adjusted for reverse split
|
|
$
|
17
|
|
|
$
|
-
|
|
Deemed dividend
|
|
$
|
95,708
|
|
|
$
|
-
|
|
Beneficial conversion features associated with convertible notes payable
|
|
$
|
54,493
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed financial statements.
BTCS
Inc. and Subsidiary
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:
●
|
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 whether through Cavalry or other investors.
|
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:
|
|
As of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Warrants to purchase common stock
|
|
|
1,229,710
|
|
|
|
2,050,302
|
|
Series C-1 Convertible Preferred stock
|
|
|
196,093
|
|
|
|
196,093
|
|
Convertible notes
|
|
|
581,957
|
|
|
|
-
|
|
Total
|
|
|
2,007,761
|
|
|
|
2,246,395
|
|
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.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Other
Expenses of Issuance and Distribution.
The
following table sets forth the costs and expenses payable by us in connection with the issuance and distribution of the securities
being registered hereunder. No expenses shall be borne by the selling stockholder. All of the amounts shown are estimates, except
for the SEC Registration Fees.
SEC
registration fees
|
|
$
|
|
|
Accounting
fees and expenses
|
|
$
|
3,000
|
|
Legal
fees and expenses
|
|
$
|
15,000
|
|
Blue
sky fees
|
|
$
|
3,000
|
|
Miscellaneous
|
|
$
|
873
|
|
Total
|
|
$
|
21,873
|
|
Indemnification
of Directors and Officers.
Neither
our Articles of Incorporation nor Bylaws prevent us from indemnifying our officers, directors and agents to the extent permitted
under the NRS. NRS Section 78.7502 provides that a corporation shall indemnify any director, officer, employee or agent of a corporation
against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with any the defense
to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to NRS Section 78.7502(1) or 78.7502(2), or in defense of any claim, issue or matter
therein.
NRS
Section 78.7502(1) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or
proceeding if he: (a) is not liable pursuant to NRS Section 78.138; or (b) acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
NRS
Section 78.7502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred
by him in connection with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS Section 78.138;
or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to
the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent
jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
NRS
Section 78.747 provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually
liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The
court as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification
by us is against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of
such issue.
Recent
Sales of Unregistered Securities.
The
sales of unregistered securities of our Company subsequent to the year ended December 31, 2018 are summarized below:
On
April 18, 2019, the Company issued 16,803 shares of Common Stock in connection with the 30:1 reverse stock split resulting from
the rounding up of fractional shares of Common Stock to the whole shares of Common Stock.
On
September 18, 2019, the Company exchanged that certain $200,000 Promissory Note issued on December 18, 2018 (of which $17,973
of accrued interest was due) (the “Old Note”) for a $217,973 Convertible Promissory Note due on December 18, 2019
(the “New Note”). The New Note 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 $0.10 per share, (ii) shall bear interest at 12% per annum (payable at
maturity) and (iii) may be prepaid by the Company.
From
September 18, 2019 through October 16, 2019, the Company issued a total of 1,931,788 shares of the Company’s Common Stock
for the conversion of $217,973 of principal on the New 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. As partial consideration
for the loan, the Company entered into a letter agreement with Cavalry, whereby Cavalry was provided a nine-month participation
right in future financings. In accordance with the letter agreement, Cavalry is entitled to invest up to thirty 35% of the amount
of any debt, securities, or some other form of structured financing, including, without limitation, an equity line of credit in
the Company.
All
of the above offerings and sales were deemed to be exempt under Section 4(a)(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number
of accredited investors, and transfer was restricted by us in accordance with the requirements of the Securities Act of 1933.
Each investor agreed that it was purchasing for investment and not with a view to distribution.
Exhibits
and Financial Statement Schedules.
The
Exhibits provided for under the Exhibit Index are incorporated herein.
Undertakings
(a)
The undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i)
To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii)
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the Calculation of Registration Fee table in the effective registration statement.
(iii)
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
(2)
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4)
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant
to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule
430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement
or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document immediately prior to such date of first use.
(b)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, has duly caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the Town of Wayne, State of Pennsylvania, on December 4,
2019.
|
BTCS,
INC.
|
|
|
|
|
By:
|
/s/
Charles Allen
|
|
|
Charles
Allen
|
|
|
Chief
Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)
|
In
accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons
in the capacities and on the dates indicated.
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Charles Allen
|
|
Chief
Executive Officer and Chief Financial Officer (Principal Executive
|
|
December
4, 2019
|
Charles
Allen
|
|
Officer
and Principal Financial and Accounting Officer) and Chairman of the Board of Directors
|
|
|
|
|
|
|
|
/s/
Michal Handerhan
|
|
Director
|
|
December
4, 2019
|
Michal
Handerhan
|
|
|
|
|
|
|
|
|
|
/s/
David Garrity
|
|
Director
|
|
December
4, 2019
|
David
Garrity
|
|
|
|
|
EXHIBIT
INDEX
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
No.
|
|
Description
|
|
|
|
Form
|
|
Exhibit
No.
|
|
Filing
Date
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
Articles
of Merger
|
|
|
|
8-K/A
|
|
3.1
|
|
7/31/15
|
2.2
|
|
Agreement
and Plan of Merger
|
|
|
|
8-K/A
|
|
3.2
|
|
7/31/15
|
3.1
|
|
Amended
and Restated Articles of Incorporation, as of May 2010
|
|
|
|
10-K
|
|
3.1
|
|
3/31/11
|
3.1(a)
|
|
Certificate
of Amendment to Articles of Incorporation - Increase Authorized Capital
|
|
|
|
8-K
|
|
3.1
|
|
3/25/13
|
3.1(b)
|
|
Certificate
of Amendment to Articles of Incorporation - Increase Authorized Capital
|
|
|
|
8-K
|
|
3.1
|
|
2/5/14
|
3.1(c)
|
|
Certificate
of Amendment to Articles of Incorporation - Reverse Stock Split
|
|
|
|
8-K
|
|
3.1
|
|
2/16/17
|
3.1(d)
|
|
Certificate
of Amendment to Articles of Incorporation - Reverse Stock Split
|
|
|
|
8-K
|
|
3.1
|
|
4/9/19
|
3.1(e)
|
|
Certificate
of Designation for Series A Preferred Stock
|
|
|
|
8-K
|
|
3.1
|
|
12/9/16
|
3.1(f)
|
|
Certificate
of Designation for Series B Convertible Preferred Stock
|
|
|
|
8-K
|
|
3.1
|
|
3/15/17
|
3.1(g)
|
|
Certificate
of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock
|
|
|
|
8-K
|
|
3.1
|
|
3/30/17
|
3.1(h)
|
|
Certificate
of Designation for Series C Convertible Preferred Stock
|
|
|
|
8-K
|
|
10.1
|
|
5/26/17
|
3.1(i)
|
|
Certificate
of Designation for Series C-1 Convertible Preferred Stock
|
|
|
|
8-K
|
|
3.1
|
|
10/10/17
|
3.1(j)
|
|
Amended
and Restated Certificate of Designation of Preferences, Rights and Limitations of Series C-1 Convertible Preferred Stock
|
|
|
|
8-K
|
|
3.2
|
|
12/7/17
|
3.1(k)
|
|
Certificate
of Withdrawal of Certificate of Designation for Series C Convertible Preferred Stock
|
|
|
|
8-K
|
|
3.3
|
|
12/7/17
|
3.2
|
|
Bylaws
|
|
|
|
S-1
|
|
3.2
|
|
5/29/08
|
5.1
|
|
Opinion
of Nason, Yeager, Gerson, Harris & Fumero, P.A.
|
|
(1)
|
|
|
|
|
|
|
10.1
|
|
Form
of Promissory Note dated December 18, 2018
|
|
|
|
8-K
|
|
10.1
|
|
12/19/18
|
10.2
|
|
Form
of Side Letter dated December 18, 2018
|
|
|
|
8-K
|
|
10.2
|
|
12/19/18
|
10.3
|
|
Form
of Cancellation of Series C Warrant dated October 25, 2018
|
|
|
|
S-1/A
|
|
10.32
|
|
10/31/18
|
10.4
|
|
Form
of Series C Warrant dated October 11, 2018
|
|
|
|
10-K/A
|
|
10.31
|
|
10/12/18
|
10.5
|
|
Amended
Series A Common Stock Purchase Warrant
|
|
|
|
8-K
|
|
10.3
|
|
12/7/17
|
10.6
|
|
Amended
Additional Common Stock Purchase Warrant
|
|
|
|
8-K
|
|
10.4
|
|
12/7/17
|
10.7
|
|
Amended
Bonus Common Stock Purchase Warrant
|
|
|
|
8-K
|
|
10.5
|
|
12/7/17
|
10.8
|
|
Amended
Series B Common Stock Purchase Warrant
|
|
|
|
8-K
|
|
10.6
|
|
12/7/17
|
10.9
|
|
Amended
Amendment to Securities Agreement
|
|
|
|
8-K
|
|
10.7
|
|
12/7/17
|
10.10
|
|
Form
of Series B Common Stock Purchase Warrant dated October 2017
|
|
|
|
8-K
|
|
10.1
|
|
10/10/17
|
10.11
|
|
Form
of Series C-1 Securities Purchase Agreement dated October 2017
|
|
|
|
8-K
|
|
10.2
|
|
10/10/17
|
10.12
|
|
Form
of Side Letter dated October 2017
|
|
|
|
8-K
|
|
10.3
|
|
10/10/17
|
10.13
|
|
Form
of Warrant Exercise Agreement, dated as of June 8, 2016
|
|
|
|
8-K
|
|
10.1
|
|
6/10/16
|
10.14
|
|
Form
of Series A Warrant dated May 24, 2017
|
|
|
|
8-K
|
|
10.2
|
|
5/26/17
|
10.15
|
|
Form
of Additional Warrant dated May 24, 2017
|
|
|
|
8-K
|
|
10.3
|
|
5/26/17
|
10.16
|
|
Form
of Bonus Warrant dated May 24, 2017
|
|
|
|
8-K
|
|
10.4
|
|
5/26/17
|
10.17
|
|
Form
of Registration Right Agreement dated as of May 24, 2017
|
|
|
|
8-K
|
|
10.5
|
|
5/26/17
|
10.18
|
|
Form
of Securities Purchase Agreement dated as of May 25, 2017
|
|
|
|
8-K
|
|
10.6
|
|
5/26/17
|
10.19
|
|
Employment
Agreement - Charles Allen
|
|
(2)
|
|
10-K
|
|
10.8
|
|
6/23/17
|
10.20
|
|
Employment
Agreement - Michael Handerhan
|
|
(2)
|
|
10-K
|
|
10.9
|
|
6/23/17
|
10.21
|
|
Settlement
Agreement and Note dated March 22, 2017
|
|
|
|
8-K
|
|
10.1
|
|
3/23/17
|
10.22
|
|
Form
of Note Leak-Out Agreement dated March 2, 2017
|
|
|
|
8-K
|
|
99.1
|
|
3/15/17
|
10.23
|
|
Form
of January Leak-Out Agreement dated February 8, 2017
|
|
|
|
8-K
|
|
99.2
|
|
3/15/17
|
10.24
|
|
Form
of April Leak-Out Agreement dated February 6, 2017
|
|
|
|
8-K
|
|
99.3
|
|
3/15/17
|
10.25
|
|
Form
of January Lock-Up Agreement dated February 8, 2017
|
|
|
|
8-K
|
|
99.4
|
|
3/15/17
|
10.26
|
|
Form
of April Lock-Up Agreement dated February 6, 2017
|
|
|
|
8-K
|
|
99.5
|
|
3/15/17
|
10.27
|
|
Equity
Line Purchase Agreement – Cavalry
|
|
|
|
8-K
|
|
10.1
|
|
5/16/19
|
10.27(a)
|
|
Amendment
No 1. To the Equity Line Purchase Agreement - Cavalry
|
|
|
|
S-1/A
|
|
10.27(a)
|
|
5/28/19
|
10.28
|
|
Registration
Rights Agreement – Cavalry
|
|
|
|
8-K
|
|
10.2
|
|
5/16/19
|
10.29
|
|
Convertible Note dated as of September 18, 2019 – Cavalry
|
|
|
|
8-K
|
|
4.1
|
|
9/19/2019
|
10.30
|
|
Calvary Note Exchange Agreement dated as of September 18, 2019
|
|
|
|
8-K
|
|
10.1
|
|
9/19/2019
|
10.31
|
|
Convertible Note dated as of November 7, 2019 – Cavalry
|
|
|
|
8-K
|
|
4.1
|
|
11/7/19
|
10.32
|
|
Participation Rights Side Letter - Cavalry
|
|
|
|
8-K
|
|
10.1
|
|
11/7/19
|
10.33
|
|
Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series C-1 Convertible Preferred Stock
|
|
|
|
8-K
|
|
4.1
|
|
12/3/2019
|
23.1
|
|
Consent
of RBSM LLP
|
|
(1)
|
|
|
|
|
|
|
23.2
|
|
Consent
of Nason Yeager Gerson Harris & Fumero, P.A.
|
|
(3)
|
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
(1)
|
|
|
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
(1)
|
|
|
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
(1)
|
|
|
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
(1)
|
|
|
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
(1)
|
|
|
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
(1)
|
|
|
|
|
|
|
(1)
|
Filed
herein.
|
(2)
|
Management
contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
|
(3)
|
Contained
in Exhibit 5.1.
|