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 e-commerce marketplace where consumers could purchase merchandise using Digital Assets,
including Bitcoin. The Company is currently focused on blockchain and digital currency ecosystems. 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 mining operation
at our North Carolina facility due to capital constraints. In January 2015, the Company began a rebranding campaign using its BTCS.com
domain to better reflect its broadened strategy. The Company recently released its new website which included broader information on
its strategy.
The
Company’s blockchain infrastructure operations focuses on securing next-generation blockchains and operating validator nodes on
various proof of stake-based blockchain networks, earning rewards of additional Digital Assets by actively validating transactions on
the networks. The Company is developing a Digital Asset Platform that would enable users to aggregate their Digital Asset portfolio holdings
from multiple exchanges and wallets into a single platform to view and analyze performance, risk metrics, and potential tax implications.
The internally developed platform utilizes Digital Asset exchange APIs to read user data and does not allow for the trading of assets.
We also are developing and plan to integrate into the Digital Asset Platform a proprietary Staking-as-a-Service feature that would enable
users participate in asset leveraging through securing blockchain protocols and to stake and delegating supported cryptocurrencies to
BTCS operated validator nodes through a non-custodial platform.
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
August 12, 2021, the Company filed a Certificate of Change with the Nevada Secretary of State to affect a 1-for-10 reverse split of the
Company’s class of Common Stock (the “Reverse Split”). The Certificate of Change became effective on August 13, 2021.
No
fractional shares were issued in connection with the Reverse Split and all such fractional interests were rounded up to the nearest whole
number of shares of Common Stock. The Company now has 97,500,000 shares of Common Stock authorized. Numbers of shares of the Company’s
preferred stock were not affected by the Reverse Split; however, the conversion ratios have been adjusted to reflect the Reverse Split.
The financial statements and notes to the financial statements have been retroactively restated to reflect the Reverse 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 for the three and six months ended June 30, 2022
are not necessarily indicative of results for the full year ended December 31, 2022. The unaudited condensed financial statements and
notes should be read in conjunction with the financial statements and notes for the year ended December 31, 2021.
Note
3 - Summary of Significant Accounting Policies
There
have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2021 Annual
Report.
Basis
of presentation
The
accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”).
Reclassifications
Certain
prior period amounts have been reclassified in order to conform with the current period presentation. These reclassifications have no
impact on the Company’s previously reported net income (loss).
Concentration
of Cash
The
Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company considers all
highly liquid investments with original maturities of six months or less when purchased to be cash and cash equivalents. As of June 30,
2022 and December 31, 2021, the Company had approximately $3.2 million and $1.4 million 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 June 30, 2022 and December
31, 2021, the Company had approximately $2.7 million and $0.9 million in excess of the FDIC insured limit, respectively.
Revenue
Recognition
The
Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers.
The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those
goods or services. The following five steps are applied to achieve that core principle:
| |
● |
Step
1: Identify the contract with the customer |
| |
● |
Step
2: Identify the performance obligations in the contract |
| |
● |
Step
3: Determine the transaction price |
| |
● |
Step
4: Allocate the transaction price to the performance obligations in the contract |
| |
● |
Step
5: Recognize revenue when the Company satisfies a performance obligation |
Revenue
is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration
the Company expects to be entitled to in exchange for those goods or services. The Company generates revenue through staking rewards.
The
Company has entered into network-based smart contracts by running its own Digital Asset validating nodes as well as by staking Digital
Assets with staking pools on nodes run by third-party operators (either directly or through exchanges). Through these contracts, the
Company provides cryptocurrency to stake on a node for the purpose of validating transactions and adding blocks to a respective blockchain
network. The term of a smart contract can vary based on the rules of the respective blockchain and typically last a few weeks to months
after it is canceled by the operator and requires that the cryptocurrency staked remain locked up during the duration of the smart contract.
In exchange for staking the cryptocurrency and validating transactions on blockchain networks, the Company is entitled to all of the
fixed cryptocurrency award for running the Company’s own node and is entitled to a fractional share of the fixed cryptocurrency
award a third-party staking pool operator receives (less digital asset transaction fees payable to the pool operator or exchanges, which
are immaterial and are recorded as a deduction from revenue), for successfully adding a block to the blockchain. The Company’s
fractional share of awards received by a third-party staking pool is based on the proportion of cryptocurrency the Company staked to
the staking pool node to the total cryptocurrency staked by all pool participants validating blockchain transactions.
The
provision of validating blockchain transactions is an output of the Company’s ordinary activities. Each separate block creation
or validation under a smart contract with a network represents a performance obligation. The transaction consideration the Company receives
- the cryptocurrency awards - is a non-cash consideration, which the Company measures at fair value on the date received. The fair value
of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. The satisfaction
of the performance obligation for transaction verification services occurs at a point in time when confirmation is received from the
network indicating that the validation is complete, and the awards are available for transfer. At that point, revenue is recognized.
Cost
of revenue
The
Company’s cost of revenue consists primarily of direct production costs related to the operations of validating transactions on
the network, rent and utilities for locations housing server nodes to the extent applicable, hosting costs if cloud-based servers are
utilized and fees (including stock-based fees) paid to 3rd parties to assist in software maintenance and operations of its nodes.
Digital
Assets Translations and Remeasurements
The
Company accounts for its Digital Assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles –Goodwill
and Other. 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.
Digital
Assets held are included in the balance sheets as either current assets or other assets if they are staked and locked up for over one
year. The Company’s Digital Assets are initially recorded at fair value upon receipt (or “carrying value”). The fair
value of Digital Assets is determined using the average U.S. dollar spot price of the related Digital Asset. On a quarterly basis, Digital
Assets are measured at carrying value, net of any impairment losses incurred since receipt. The Company will record impairment losses
as the fair value falls below the carrying value of the Digital Assets at any time during the period, as determined using the lowest
U.S. dollar spot price of the related Digital Asset subsequent to its acquisition. The Digital Assets can only be marked down when impaired
and not marked up when their value increases.
Such
impairment in the value of Digital Assets are recorded as a component of costs and expenses in our statements of operations. The Company
recorded impairment losses related to Digital Assets of approximately $12.2 million and $3.6 million during the six months ended June
30, 2022, and 2021, respectively
Impairment
losses cannot be recovered for any subsequent increase in fair value until the sale or disposal of the asset. Realized gain (loss) on
sale of Digital Assets are included in other income (expense) in the statements of operations. The Company recorded realized gains (losses)
on Digital Assets of approximately $470,000 and $3.1 million during the six months ended June 30, 2022 and 2021, respectively.
The
presentation of purchases and sales of Digital Assets on the Statement of Cash Flows is determined by the nature of the Digital Assets,
which can be characterized as productive (i.e. purchased for purposes of staking) or non-productive. The purchase of non-productive Digital
Assets and currencies are included as an operating activity, whereas the purchase of productive Digital Assets and currencies are included
as investing activities in accordance with ASC 230-10-20 Investing activities. Productive Digital Assets that are staked with
a lock-up period of less than 12 months are presented on the Balance Sheet as current assets. Staked Digital Assets with remaining lock-up
periods of greater than 12 months are presented as long-term other assets on the Balance Sheet.
Internally
Developed Software
Internally
developed software consisting of the core technology of the Company’s Digital Asset Platform which is being designed to allow user
to aggregate and analyze data from Digital Asset exchanges. For internally developed software, the Company uses both its own employees
as well as the services of external vendors and independent contractors. The Company accounts for computer software used in the business
in accordance with ASC 985-20 and ASC 350.
ASC
985-20, Software-Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, requires that software development costs
incurred in conjunction with product development be charged to research and development expense until technological feasibility is established.
Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized
cost or net realizable value of the related product. Some companies use a “tested working model” approach to establishing
technological feasibility (i.e., beta version). Under this approach, software under development will pass the technological feasibility
milestone when the Company has completed a version that contains essentially all the functionality and features of the final version
and has tested the version to ensure that it works as expected.
ASC
350, Intangibles-Goodwill and Other, requires computer software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. Costs incurred during the preliminary project stage and the post-implementation
stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property,
equipment and software. These costs generally consist of internal labor during configuration, coding, and testing activities. Capitalization
begins when (i) the preliminary project stage is complete, (ii) management with the relevant authority authorizes and commits to the
funding of the software project, and (iii) it is probable both that the project will be completed and that the software will be used
to perform the function intended.
Property
and Equipment
Property
and equipment consists of 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.
Use
of Estimates
The
accompanying financial statements have been prepared in conformity with U.S. 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, 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.
Accounting
for Warrants
The
Company accounts for the issuance of Common Stock purchase warrants issued in connection with the equity offerings in accordance with
the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require
physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares
(physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash
settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the
Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
In addition, Under ASC 815, registered Common Stock warrants that require the issuance of registered shares upon exercise and do not
expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative
warrant liabilities on the balance sheet as a current liability.
The
Company assessed the classification of Common Stock purchase warrants as of the date of each offering and determined that such instruments
originally met the criteria for equity classification; however, as a result of the Company no longer being in control of whether the
warrants may be cash settled, the instruments no longer qualify for equity classification. Accordingly, the Company classified the warrants
as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement
at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change in
the fair value of warrant liabilities” in the statements of operations. The fair value of the warrants has been estimated using
a Black-Scholes valuation model (see Note 4).
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.
Share-based
payment awards exchanged for services are accounted for at the fair value of the award on the estimated grant date.
Options
Stock
options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market
price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options often vest over
a one-year period.
The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating
the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment.
Restricted
Stock Units (RSUs)
For
awards vesting upon the achievement of a service condition, compensation cost measured on the grant date will be recognized on a straight-line
basis over the vesting period. Stock-based compensation expense for the market-based restricted stock units with explicit service conditions
is recognized on a straight-line basis over the longer of the derived service period or the explicit service period, regardless of whether
the market condition is satisfied. However, in the event that the explicit service period is not met, previously recognized compensation
cost would be reversed. Market-based restricted stock units subject to market-based performance targets require achievement of the performance
target as well as a service condition in order for these RSUs to vest.
The
Company estimates the fair value of market-based RSUs as of the grant date and expected derived term using a Monte Carlo simulation that
incorporates pricing inputs covering the period from the grant date through the end of the derived service period.
Dividends
On
January 5, 2022, the board of directors of the Company declared a non-recurring special dividend of $0.05 for each outstanding share
of Common Stock of the Company, payable to holders of record as of the close of business on March 17, 2022. The dividend distributions
are considered a return of capital as the distributions are in excess of the Company’s current and accumulated earnings and profits.
The return of capital distribution reduces the Company’s additional paid in capital balance. The Company will evaluate the appropriateness
of potential future dividends as the Company continues to grow its operations. Dividend distributions amounted to $635,000 and $0 during
the six months ended June 30, 2022 and 2021, respectively.
Advertising
Expense
Advertisement
costs are expensed as incurred and included in marketing expenses. Advertising and marketing expenses amounted to approximately $65,000
and $3,000 for the six months ended June 30, 2022 and 2021, 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,
convertible notes, restricted stock units, options and warrants. Diluted loss per share excludes the shares issuable upon the conversion
of preferred stock, notes and warrants from the calculation of net loss per share if their effect would be anti-dilutive.
The
following financial instruments were not included in the diluted loss per share calculation as of June 30, 2022 and 2021 because their
effect was anti-dilutive:
Schedule of Earnings Per Share Anti-diluted
| | |
| | | |
| | |
| | |
As
of June 30, | |
| | |
2022 | | |
2021 | |
| Warrants
to purchase common stock | |
| 945,837 | | |
| 962,794 | |
| Series
C-1 Convertible Preferred stock | |
| - | | |
| 4,011,765 | |
| Convertible
notes | |
| - | | |
| 239,264 | |
| Options | |
| 1,235,000 | | |
| - | |
| Non-vested
restricted stock awards units | |
| 1,644,198 | | |
| - | |
| Total | |
| 3,825,035 | | |
| 5,213,823 | |
Recent
Accounting Pronouncements
In
December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions
to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption
permitted. The Company adopted ASU No. 2019-12 effective January 1, 2021, and the adoption did not have a material impact on its financial
statements and related disclosures.
In
August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under
current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope
exception, and it also simplifies the diluted earnings per share calculation in certain areas. This guidance is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company adopted
ASU No. 2019-12 effective January 1, 2021, and the adoption did not have a material impact on its financial statements and related disclosures.
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
4 - Fair Value of Financial Assets and Liabilities
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)
The
following table presents the Company’s assets and liabilities that are measured at fair value at June 30, 2022 and December 31,
2021:
Schedule of Fair Value of Assets and Liabilities Valued on Recurring Basis
| | |
Fair
value measured at June 30, 2022 | |
| | |
Total
at
June 30, | | |
Quoted
prices in active markets | | |
Significant
other observable inputs | | |
Significant
unobservable inputs | |
| | |
2022 | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Warrant
Liabilities | |
$ | 783,750 | | |
$ | - | | |
$ | - | | |
$ | 783,750 | |
| | |
Fair
value measured at December 31, 2021 | |
| | |
Total
at December 31, | | |
Quoted
prices in active markets | | |
Significant
other
observable inputs | | |
Significant
unobservable inputs | |
| | |
2021 | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Warrant
Liabilities | |
$ | 1,852,500 | | |
$ | - | | |
$ | - | | |
$ | 1,852,500 | |
Level
3 Valuation Techniques
Level
3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination
of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair
value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
A
significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a
significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “change in fair value
of warrant liabilities” in the Company’s statements of operations.
On
March 2, 2021, the Company entered into a securities purchase agreement (the “Offering”) with certain purchasers pursuant
to which the Company agreed to sell an aggregate of (i) 950,000 shares of Common Stock, and (ii) Common Stock warrants (the “Warrants”)
to purchase up to 712,500 shares of Common Stock for gross proceeds of $9.5 million in a private placement. The closing of the Offering
occurred on March 4, 2021.
The
Warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions (as defined in the Warrants)
at the Company. At the time of issuance, the Company maintained control of certain fundamental transactions and as such the Warrants
were initially classified in equity. As of December 31, 2021, the Company no longer maintained control of certain fundamental transactions
as they did not control a majority of shareholder votes. As such, the Company may be required to cash settle the Warrants if a fundamental
transaction occurs which is outside the Company’s control. Accordingly, the Warrants are classified as liabilities. The Warrants
have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at
each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual
terms, maturity, risk free rates, as well as volatility.
The
Warrants require the issuance of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are
therefore accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the balance sheet as
a current liability.
A
summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s
warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and, as of June 30, 2022
and December 31, 2021, is as follows:
Summary of Valuation Methodology and Significant Unobservable Inputs Warrant Liabilities
| | |
June
30, 2022 | | |
December
31, 2021 | |
| Risk-free
rate of interest | |
| 3.01 | % | |
| 1.26 | % |
| Expected
volatility | |
| 165.8 | % | |
| 162.5 | % |
| Expected
life (in years) | |
| 3.68 | | |
| 4.18 | |
| Expected
dividend yield | |
| - | | |
| - | |
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. For the Warrants, the Company estimates expected
volatility giving primary consideration to the historical volatility of its Common Stock. The general expected volatility is based on
the standard deviation of the Company’s underlying stock price’s daily logarithmic returns. The expected life of the warrants
was determined by the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not historically
paid dividends on its Common Stock and does not expect to pay recurring dividends on its Common Stock in the future.
The
following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities for the six
months ended June 30, 2022 and 2021, that are measured at fair value on a recurring basis:
Schedule of Changes in Fair Value and Other Adjustments of Warrants
| | |
Fair
Value of Level 3 financial liabilities | |
| | |
June
30, | | |
June
30, | |
| | |
2022 | | |
2021 | |
| Beginning
balance | |
$ | 1,852,500 | | |
$ | - | |
| Warrant
liabilities classification | |
| - | | |
| - | |
| Fair
value adjustment of warrant liabilities | |
| (1,068,750 | ) | |
| - | |
| Ending
balance | |
$ | 783,750 | | |
$ | - | |
Note
5 - Stockholders’ Equity
Common
Stock
Reverse
Stock Split
On
August 25, 2021, the Company issued approximately 14,500 shares of Common Stock in connection with the 1-for-10 Reverse Split resulting
from the rounding up of fractional shares of Common Stock to the whole shares of Common Stock. The financial statements have been retroactively
restated to reflect the reverse stock split.
At
The Market Offering Agreement
On
September 14, 2021, the Company entered into an At-The-Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright
& Co., LLC, as agent (“H.C. Wainwright”), pursuant to which the Company may offer and sell, from time-to-time through
H.C. Wainwright, shares of the Company’s Common Stock having an aggregate offering price of up to $98,767,500 million (the “Shares”).
The Company will pay H.C. Wainwright a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares.
During
the six months ended June 30, 2022, the Company sold a total of 1,830,588 shares of Common Stock under the ATM Agreement for aggregate
total gross proceeds of approximately $10,944,000 at an average selling price of $5.98 per share, resulting in net proceeds of approximately
$10,604,000 after deducting commissions and other transaction costs.
2021
Equity Incentive Plan
The
Company’s 2021 Equity Incentive Plan (the “2021 Plan”) was effective on January 1, 2021 and approved by shareholders
on March 31, 2021. The Company has reserved 2,000,000 shares of Common Stock for issuance pursuant to the 2021 Plan. The Company received
shareholder approval on June 13, 2022 to increase the reserved amount under the 2021 Plan to 7,000,000 shares.
Options
On
January 1, 2021, the Board of Directors of the Company approved the grant of 1.2 million stock options with an exercise price of $1.90
under the Company’s 2021 Plan to Messrs. David Garrity a director, and Charles Allen and Michal Handerhan, executive officers and
directors of the Company. Effective as of January 1, 2021, the Company and each optionee executed Stock Option Agreements evidencing
the option grants. While stockholder approval (or ratification) of the grants was not required (under either the Stock Option Agreements
or by the resolutions of the Board of Directors approving such grants), the Board of Directors voluntarily caused the Company to seek
shareholder ratification of the grants to limit any potential exposure to breach of fiduciary duty claims. As a result, based on the
guidance in ASC 718, the date the stockholders ratified the grants (March 31, 2021) is the deemed grant date solely with respect to GAAP
for those stock options. Of the stock options: (i) 480,000 options vested on January 1, 2022 and (ii) the remaining options vested (prior
to March 31, 2021) based upon the Company’s stock price meeting certain milestones.
A
summary of option activity under the Company’s stock option plan for six months ended June 30, 2022 is presented below:
Summary of Option Activity
| | |
Number
of Shares | | |
Weighted
Average Exercise
Price | | |
Total
Intrinsic Value | | |
Weighted
Average Remaining Contractual Life
(in years) | |
| Outstanding
as of December 31, 2021 | |
| 1,235,000 | | |
$ | 2.14 | | |
$ | 1,488,000 | | |
| 4.3 | |
| Employee
options granted | |
| - | | |
| - | | |
| - | | |
| - | |
| Outstanding
as of June 30, 2022 | |
| 1,235,000 | | |
$ | 2.14 | | |
$ | - | | |
| 3.8 | |
| Options
vested and exercisable as of June 30, 2022 | |
| 1,224,500 | | |
$ | 2.07 | | |
$ | - | | |
| 3.8 | |
RSUs
Effective
January 2, 2022, the Board of Directors of the Company ratified the following arrangements approved by its Compensation Committee:
The
Board of Directors of the Company ratified grants of RSUs to each independent director. David Garrity, Carol Van Cleef and Charles Lee
were each granted 31,848 restricted stock units (the “Board Grants”). The Board Grants vest in four equal installments at
the end of each calendar quarter in 2022. As of March 31, 2022, 23,886 RSUs vested and are reflected as capital shares payable on the
Balance Sheet amounting to approximately $75,000.
The
Company’s executive officers were granted RSUs as part of a long-term incentive plan (“LTI”), with vesting terms set
for when the Company’s market capitalization reaches and sustains a market capitalization for 30 consecutive days above four defined
market capitalization thresholds of $100 million, $150 million, $200 million and $400 million.
Effective
February 22, 2022, upon appointment of Manish Paranjape as Chief Technology Officer of the Company, Mr. Paranjape was also granted RSUs
as part of the LTI plan, with consistent vesting terms set for when the Company’s market capitalization above the same four defined
market capitalization thresholds.
The
RSUs granted to each executive employee are as follows:
Schedule of Restricted Stock Units
| | |
| |
| |
| | |
Market
Cap Vesting Thresholds | |
| | |
| |
| |
Total | | |
| |
| Officer
Name | |
Title | |
Grant
Date | |
RSUs
Granted | | |
$
100 million | | |
$
150 million | | |
$
200 million | | |
$
400 million | |
| Charles
Allen | |
Chief
Executive Officer | |
1/2/2022 | |
| 694,444 | | |
| 173,611 | | |
| 173,611 | | |
| 173,611 | | |
| 173,611 | |
| Michal
Handerhan | |
Chief
Operations Officer | |
1/2/2022 | |
| 444,444 | | |
| 111,111 | | |
| 111,111 | | |
| 111,111 | | |
| 111,111 | |
| Michael
Prevoznik | |
Chief
Financial Officer | |
1/2/2022 | |
| 222,224 | | |
| 55,556 | | |
| 55,556 | | |
| 55,556 | | |
| 55,556 | |
| Manish
Paranjape | |
Chief
Technology Officer | |
2/22/2022 | |
| 160,184 | | |
| 40,046 | | |
| 40,046 | | |
| 40,046 | | |
| 40,046 | |
| | |
| |
| |
| 1,521,296 | | |
| 380,324 | | |
| 380,324 | | |
| 380,324 | | |
| 380,324 | |
To
the extent any market capitalization targets set forth above for Mr. Prevoznik and Mr. Paranjape are achieved, the RSUs will also be
subject to the following five-year vesting schedule: 20%
of the LTI RSUs which have met a market capitalization criteria will vest on the one-year anniversary of the grant date, and the remaining
80%
of the LTI RSUs which have met a market capitalization criteria will vest monthly over the four years following the one year anniversary
of the grant date.
For
awards vesting upon the achievement of a service condition, compensation cost measured on the grant date will be recognized on a straight-line
basis over the vesting period. Stock-based compensation expense for the market-based restricted stock units with explicit service conditions
is recognized on a straight-line basis over the longer of the derived service period or the explicit service period, regardless of whether
the market condition is satisfied. However, in the event that the explicit service period is not met, previously recognized compensation
cost would be reversed. Market-based restricted stock units subject to market-based performance targets require achievement of the performance
target as well as a service condition in order for these RSUs to vest.
The
Company estimates the fair value of market-based RSUs as of the grant date and expected derived term using a Monte Carlo simulation that
incorporates pricing inputs covering the period from the grant date through the end of the derived service period.
The
following weighted-average assumptions were used to estimate the fair value of options granted during the six months ended June 30, 2022
and 2021 for the Monte-Carlo simulation:
Schedule of Weighted-average Assumptions Used to estimate Fair Value
| | |
Six
Months Ended
June 30, | |
| | |
2022 | | |
2021 | |
| Vesting
Hurdle Price | |
$ | 19.39 | | |
| - | |
| Term
(years) | |
| 5.00 | | |
| - | |
| Expected
stock price volatility | |
| 103.7 | % | |
| - | |
| Risk-free
rate of interest | |
| 1.32 | % | |
| - | |
Expected
Volatility: The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility
is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the RSUs.
Risk-Free
Interest Rate: The risk-free interest rate is based on the U.S. treasury zero-coupon yield curve in effect at the time of grant for
the expected term of the RSUs.
Expected
Term: The Company’s expected term represents the weighted-average period that the Company’s RSUs are expected to be outstanding.
The expected term is based on the stipulated 5 year period from the grant date until the market based criteria are achieved. If the market-based
criteria are not achieved within the five year period from the grant date, the RSUs will not vest and shall expire.
Vesting
Hurdle Price: The vesting hurdle prices are determined by taking the vesting Market Cap criteria divided by the shares outstanding
as of the valuation dates.
A
summary of the Company’s restricted stock units granted under the 2021 Plan during the six months ended June 30, 2022 are as follows:
Summary of Restricted Stock
| | |
Number
of Restricted Stock Units | | |
Weighted
Average Grant Day Fair Value | |
| Nonvested
at December 31, 2021 | |
| 29,363 | | |
$ | 5.96 | |
| Granted | |
| 1,662,607 | | |
| 3.29 | |
| Vested | |
| (47,772 | ) | |
| 3.14 | |
| Forfeited | |
| - | | |
| - | |
| Nonvested
at June 30, 2022 | |
| 1,644,198 | | |
$ | 3.34 | |
Stock
Based Compensation
Stock-based
compensation expense is recorded as a part of selling, general and administrative expenses, compensation expenses and cost of revenues.
Stock-based compensation expense for the three and six months ended June 30, 2022 and 2021 was as follows:
Schedule of Stock-based Compensation Expense
| | |
| | | |
| | | |
| | | |
| | |
| | |
For
the Three Months Ended June 30, | | |
For
the Six Months Ended June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Employee
bonus stock awards | |
$ | - | | |
$ | - | | |
$ | 894,027 | | |
$ | - | |
| Employee
stock option awards | |
| 12,812 | | |
| 1,620,768 | | |
| 82,446 | | |
| 8,660,328 | |
| Employee
restricted stock unit awards | |
| 405,714 | | |
| 1,375 | | |
| 747,704 | | |
| 1,375 | |
| Non-employee
restricted stock awards | |
| 89,656 | | |
| 100,166 | | |
| 171,737 | | |
| 162,806 | |
| Series
C-2 Allocation | |
| - | | |
| - | | |
| - | | |
| 179,277 | |
| Stock-based
compensation | |
$ | 508,182 | | |
$ | 1,722,309 | | |
$ | 1,895,914 | | |
$ | 9,003,786 | |
Note
6 – Accrued Expenses
Accrued
expenses consist of the following:
Schedule of Accrued Expenses
| | |
| | | |
| | |
| | |
June
30, 2022 | | |
December
31, 2021 | |
| Compensation
and related expenses | |
$ | 140,187 | | |
$ | 7,334 | |
| Accounts
Payable | |
| 139,280 | | |
| 138,716 | |
| Other | |
| 3,757 | | |
| - | |
| Accrued
Expenses | |
$ | 283,224 | | |
$ | 146,050 | |
Accrued
compensation and related expenses include approximately $139,000
related to performance bonus accruals as of June 30, 2022.
Note
7 - Employee Benefit Plans
The
Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially all qualified
employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary contributions of
up to 100% of employee contributions. For the six months ended June 30, 2022, the Company made contributions to the 401(k) Plan of $45,000.
Note
8 – Liquidity
The
Company follows “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern”. The Company’s financial statements have been prepared assuming
that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities
in the normal course of business.
As
reflected in the financial statements, the Company has historically incurred a net loss and has an accumulated deficit at June 30, 2022,
a net loss and net cash used in operating activities for the reporting period then ended. The Company is implementing its business plan
and generating revenue; however, the Company’s cash position and liquid Digital Assets are sufficient to support its daily operations
over the next twelve months.
Note
9 - Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the 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 financial statements other than disclosed.
During
the period from July 1, 2022 to August 8, 2022, the Company sold a total of 261,743 shares of Common Stock under the ATM Agreement
for aggregate total gross proceeds of approximately $417,000 at an average selling price of $1.59 per share, resulting in net proceeds
of approximately $402,000 after deducting commissions and other transaction costs.