Note
5 - Property and Equipment
Property
and equipment consist of the following at September 30, 2016 and December 31, 2015:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Equipment
|
|
|
-
|
|
|
$
|
109,493
|
|
Computer
|
|
|
-
|
|
|
|
3,086
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
242,091
|
|
Transaction verification
servers
|
|
|
-
|
|
|
|
451,281
|
|
Total cost
|
|
|
-
|
|
|
|
805,951
|
|
Accumulated depreciation
and amortization
|
|
|
-
|
|
|
|
(316,531
|
)
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net
|
|
$
|
-
|
|
|
$
|
489,420
|
|
Depreciation
expense was approximately $0 and $88,000 for the three months ended September 30, 2016 and 2015, respectively, and $177,000 and
$202,000 for the nine months ended September 30, 2016 and 2015, respectively.
During
the nine months ended September 30, 2016, the Company purchased fixed assets of approximately $19,000, sold fixed assets amounting
to approximately $57,000, resulting in loss on sale of fixed assets of $11,000.
Due
to the financial nature of the Company, the Company impaired all fixed assets and recorded an approximately $241,000 impairment
charge in June 2016.
Note
6 - Investment at Cost
Spondoolies
The
Company had total investment of approximately $2.3 million to Spondoolies Tech Ltd. (“Spondoolies”) as of December
31, 2015.
On
May 5, 2016, the Company was informed that, on May 4, 2016, a hearing was held in the district court in Beersheva, Israel during
which certain parties sought appointment of a temporary liquidator for Spondoolies. As a result of the liquidation the Company
is no longer pursuing the acquisition of Spondoolies. The Company assessed impairment for the Spondoolies investment and determined
that this investment is not recoverable and as such fully impaired.
During
the nine months ended September 30, 2016, the Company recorded impairment loss of approximately $2.3 million.
Note
7 - Fair Value Measurements
The
Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
The
following table presents information about the Company’s liabilities measured at fair value on a recurring basis and the
Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2016 and December
31, 2015:
|
|
|
Fair
value measured at September 30, 2016
|
|
|
|
|
Total
carrying value at September 30,
|
|
|
|
|
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
|
2016
|
|
|
|
(Level
1)
|
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
200
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
11,977,349
|
|
|
|
|
|
|
|
|
|
$
|
11,977,349
|
|
Derivative
liabilities for shortfall of shares
|
|
$
|
7,401,321
|
|
|
|
|
|
|
|
|
|
$
|
7,401,321
|
|
Convertible
notes at fair value
|
|
$
|
2,576,819
|
|
|
|
|
|
|
|
|
|
$
|
2,576,819
|
|
|
|
Fair
value measured at December 31, 2015
|
|
|
|
Total
carrying value at
December 31,
|
|
|
Quoted
prices in active markets
|
|
|
Significant
other observable inputs
|
|
|
Significant
unobservable inputs
|
|
|
|
2015
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Currencies
|
|
$
|
17,036
|
|
|
$
|
17,036
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
3,794,153
|
|
|
|
|
|
|
|
|
|
|
$
|
3,794,153
|
|
Convertible notes
at fair value
|
|
|
1,781,156
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,781,156
|
|
There
were no transfers between Level 1, 2 or 3 during the nine months ended September 30, 2016.
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.
Changes
in Level 3 liabilities measured at fair value for the nine months ended September 30, 2016:
Derivative liabilities Balance
- January 1, 2016
|
|
$
|
3,794,153
|
|
Change in fair
value of derivative liability
|
|
|
8,183,196
|
|
Derivative liabilities
Balance - September 30, 2016
|
|
$
|
11,977,349
|
|
Derivative liabilities for shortfall of shares
Balance - January 1, 2016
|
|
$
|
-
|
|
Change
in fair value of derivative liability shortfall of shares
|
|
|
7,401,321
|
|
Derivative liabilities
for shortfall of shares Balance - September 30, 2016
|
|
$
|
7,401,321
|
|
Convertible notes at fair
value - January 1, 2016
|
|
$
|
1,781,156
|
|
Addition of convertible notes
|
|
|
100,000
|
|
Conversion of notes into common stock
|
|
|
(5,409,571
|
)
|
Loss on extinguishment of debt
|
|
|
2,859,338
|
|
Change in fair
value of convertible notes (including OID discount)
|
|
|
3,245,896
|
|
Convertible notes
at fair value - September 30, 2016
|
|
$
|
2,576,819
|
|
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 nine months ended September 30,
2016 is as follows:
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Warrant
Liabilities
Date
of valuation
|
|
September
30, 2016
|
|
Strike Price
|
|
|
0.0004 - 1.0000
|
|
Volatility
|
|
|
153%
- 269
|
%
|
Risk-free interest rate
|
|
|
0.35% - 1.03
|
%
|
Contractual life (in years)
|
|
|
0.35 to 4.21
|
|
Dividend yield (per share)
|
|
|
0
|
%
|
Derivative
Liabilities for shortfall of shares
Date
of valuation
|
|
September
30, 2016
|
|
Strike Price
|
|
|
0.00042
|
|
Volatility
|
|
|
231.78
|
%
|
Risk-free interest rate
|
|
|
1.01
|
%
|
Contractual life (in years)
|
|
|
4.0
|
|
Dividend yield (per share)
|
|
|
0
|
%
|
Convertible
Notes at Fair Value
Date
of valuation
|
|
September
30, 2016
|
|
Strike Price
|
|
|
0.00042
|
|
Volatility
|
|
|
181.2% - 297.40
|
%
|
Risk-free interest rate
|
|
|
0.25% - 0.31
|
%
|
Dividend yield (per share)
|
|
|
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.
Note
8 - Stock Based Compensation
Compensation
expense for all stock-based awards is measured on the grant date based on the fair value of the award and is recognized as an
expense, on a straight-line basis, over the employee’s requisite service period (generally the vesting period of the equity
award). The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model. Stock-based
compensation expense is recognized only for those awards that are expected to vest using an estimated forfeiture rate. The Company
estimates pre-vesting option forfeitures at the time of grant and reflects the impact of estimated pre-vesting option forfeitures
in compensation expense recognized. For options and warrants issued to non-employees, the Company recognizes stock compensation
costs utilizing the fair value methodology over the related period of benefit.
Stock-based
compensation expense was $0 and $3.6 million for the three months ended September 30, 2016 and 2015, respectively. Stock-based
compensation expense was $0 and $6.4 million for the nine months ended September 30, 2016 and 2015, respectively.
Stock
Options
There
are no stock options outstanding as of September 30, 2016 and December 31, 2015.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
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 24,000,000 shares of Common Stock (the “Escrow Shares”) into escrow.
The
return of 12,000,000 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 12,000,000 escrowed shares (the “Merger Escrow Shares”) to the
Principal Stockholders shall be based upon the successful consummation of the merger with Spondoolies-Tech Ltd. (“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 June 3, 2016 Amendment Agreement (as defined in Note 11 below) the Principal Stockholders each received $86 in connection
with their pro-rata portion of the Payment (as defined in Note 11 below). In April 2015, the Principal Stockholders each subscribed
for $20,000 in the Subscription Agreement (as defined in Note 11 below) for an aggregate of $40,000.
Note
10 - Notes Payable
On
June 6, 2016, the Company, entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
certain institutional investors (the “Purchasers”), pursuant to which the Purchaser subscribed for up to $375,000
of a 20% Original Issue Discount Junior Secured Convertible Notes (the “Junior Notes”). The aggregate principal amount
of the Junior Notes issued at the initial close is $125,000 and the Company received $100,000 after giving effect to the 20% original
issue discount. The lead investor was granted the option to require the Company to sell the Purchasers up to two additional Junior
Notes in the principal amount of $125,000 during each of the periods that begin with the Initial Closing Date and end (i) on or
before 45 days from the Initial Closing Date, and (ii) on or before 90 days from the Initial Closing Date.
The
Junior Notes bears no interest except in the event of default which interest rate is 24% per annum upon the occurrence of an Event
of Default (as defined in the Junior Notes), have a maturity date of December 5, 2016 and are convertible (principal, and interest)
at any time after the issuance date of the Junior Notes into shares of the Company’s Common Stock at a conversion price
equal to $0.30 per share. If an Event of Default has occurred, the Junior Note shall be convertible at 60% of the lowest closing
price during the prior twenty (20) trading days of the Company’s Common Stock.
The
Junior Notes contains certain covenants, such as restrictions on the incurrence of indebtedness, creation of liens, payment of
restricted payments, redemptions, payment of cash dividends and the transfer of assets. The Junior Notes also contains certain
adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar
transactions. In addition, subject to limited exceptions, each Purchaser will not have the right to convert any portion of the
Junior Note if such Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares
of the Company’s Common Stock outstanding immediately after giving effect to its conversion.
In
connection with the Company’s obligations under the Junior Notes, the Company and its subsidiaries (the “Subsidiaries”)
entered into a Security Agreement, Pledge Agreement and Subsidiary Agreement with the lead investor, as agent, pursuant to which
the Company and the Subsidiaries granted a lien on all assets of the Company (the “Collateral”) excluding permitted
indebtedness, for the benefit of the Purchasers, to secure the Company’s obligations under the Junior Notes. Upon an Event
of Default (as defined in the Junior Notes), the Purchaser may, among other things, collect or take possession of the Collateral,
proceed with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
As
a result of the Senior Note conversions, the Company became obligated to issue, subject to certain limitations, the following
additional securities: (i) 6,524,866,433 shares of Common Stock pursuant to “favored nations” provisions in certain
common stockholder subscription agreements which includes those anti-dilution shares of Common Stock previously disclosed; and
(ii) warrants to purchase 16,127,323,911 shares of Common Stock pursuant to “favored nations” provisions in certain
common stockholder subscription agreements which includes those anti-dilution warrants previously disclosed. These figures do
not reflect additional warrants to purchase Common Stock issuable to certain investors pursuant to the terms of the warrants issued
on December 16, 2016 which includes those anti-dilution warrants previously disclosed. The Company also lowered the conversion
price of the Company’s outstanding Junior Notes and Senior Notes to $0.00042. The Company does not currently have sufficient
authorized and unreserved shares to fulfill its obligations with respect to the issuance of new shares of Common Stock. While
no assurances can be made, the Company intends to seek shareholder approval to adjust the Company’s capitalization.
As
of the September 30, 2016 the Company did not have sufficient shares of Common Stock to fulfill its obligations with respect to
its Notes and warrants and has booked a derivative liability of $7,401,321 to account for the shortfall.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
11 - Stockholders’ Equity
On
June 3, 2016, the Company and investors from a private placement as of April 20, 2015 (the “Subscription Agreement”)
entered into an amendment agreement (the “Amendment Agreement”).
Pursuant
to the Amendment Agreement, the Company agreed to pay, on a pro-rata basis to all subscribers that purchased Units in the Offering,
and in proportion to the respective Units purchased by each subscriber, pursuant to the Subscription Agreement, an aggregate $250,000
(“Payment”) upon the occurrence of the following events and in the amounts and on payment dates set forth in connection
with such events: (i) in the event of a closing of any one or more equity or debt financing resulting in aggregate gross proceeds
from the date of this Amendment of $350,000 or less, a payment towards the then-remaining Payment equal to ten-percent (10%) of
such gross proceeds shall be made within three (3) business days of the closing of any such equity or debt financing; (ii) in
the event of a closing of any one or more equity or debt financing resulting in aggregate gross proceeds from the date of this
Amendment of $350,000 or more but less than $1,000,000, a payment towards the then-remaining Payment equal to twenty-percent (20%)
of such gross proceeds shall be made within three (3) business days of the closing of any such equity or debt financing; (iii)
at any of the Company’s fiscal-year-ends payment will be made in the amount of available cash prior to any payments of bonuses
payable to Mr. Allen, the Company’s CEO, CFO and Chairman, and Mr. Handerhan, the Company’s COO, Secretary and Director;
and (iv) upon closing of any one or more equity or debt financing resulting in aggregate gross proceeds from the date of this
Amendment of $1,000,000 or more, a payment of all then-remaining Payment within three (3) business days of the closing of any
such equity or debt financing.
In
consideration for the Payment, the Subscribers agreed to limit any remedies currently due, if any, or to which they may be entitled
in the future, under the “Favored Nations Provision” of the Subscription Agreement, to the additional issuance of
Common Stock of the Company and warrants (“Warrants”) to purchase Common Stock up to the Common Stock and Warrants
that would not result in each respective Subscriber beneficially owning over 4.99% of the Company’s issued and outstanding
Common Stock.
On
June 8, 2016, the Company and an investor (the “Investor”) holding a warrant dated January 19, 2015 (the “Warrant”)
to purchase 2,325,000 shares (the “Warrant Shares”) of the Company’s Common Stock entered into a warrant exercise
agreement (the “Exercise Agreement”).
Pursuant
to the Exercise Agreement, the Company agreed to accept as full payment for 500,000 of the Warrant Shares, an aggregate exercise
price equal to $27,500 (the “Exercise Price”) and the Investor irrevocably agreed to exercise the Warrant and deliver
the Exercise Price within 2 days of the Exercise Agreement.
Over
the course of June 8, 2016 through June 28, 2016, the Company issued 4,125,000 shares of Common Stock for the cash exercise of
warrants resulting in aggregate proceeds of $91,765 to the Company; this includes the $27,500 received in connection with the
Exercise Agreement mentioned above.
Over
the course of July 1, 2016 through August 1, 2016, the Company issued a total of 728,809,426 shares of the Company’s Common
Stock for: i) the conversion of $439,251 of principal and accrued interest on the Senior Notes, and ii) the cashless exercise
of warrants. The issuances were exempt from registration pursuant to Rule 506 under Regulation D, the investors are sophisticated
and familiar with our operations, and there was no solicitation in connection with the issuances.
None
of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.
No registration rights were granted to any of the purchasers. Following these issuances, there were 965,756,004 shares of our
Common Stock issued and outstanding which includes 13,000,000 shares of treasury stock, excluding shares held in treasury there
are 952,756,004 shares of our Common Stock issued and outstanding.
As
a result of the Senior Note conversions, the Company became obligated to issue, subject to certain limitations, the following
additional securities: (i) 6,524,866,433 shares of Common Stock pursuant to “favored nations” provisions in certain
common stockholder subscription agreements which includes those anti-dilution shares of Common Stock previously disclosed; (ii)
warrants to purchase 10,280,964,322 shares of Common Stock pursuant to “favored nations” provisions in certain
common stockholder subscription agreements which includes those anti-dilution warrants previously disclosed, and (iii) warrants
to purchase 5,845,414,589 shares of Common Stock pursuant to the terms of the warrants issued on December 16, 2016 which includes
those anti-dilution warrants previously disclosed. The Company also lowered the conversion price of the Company’s outstanding
Senior Notes and Junior Notes to $0.00042.
Note
12 - North Carolina Facility
On
July 20, 2016, DM suspended its North Carolina transaction verification services facility operations. The recent reduction in
the block reward from 25 bitcoins to 12.5 bitcoins, often referred to as the halving, coupled with the facilities cooling system
failing, has resulted in DM being unable to meet certain of its financial commitments. The Company has subsequently ceased operations
at DM.
On
August 8, 2016, DM discovered that its facility in North Carolina was broken into and certain of its equipment and approximately
165 Bitmain transaction verification servers leased from CSC were stolen. The value of the stolen equipment owned by the Company
does not appear to be material. The Company reported the theft to local authorities as well its insurance company regarding next
steps. The Company is currently working through the insurance company claims process for the benefit of CSC the Company’s
equipment finance provider which owns the stolen serves. CSC would be the payee with respect to any insurance proceeds received
in connection with the stolen servers.
On
September 1, 2016, DM gave cancelation notice to the landlord with respect to the lease of its North Carolina facility.
BTCS
Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
13 - Subsequent Events
On
December 6, 2016, the Company issued a total of $220,002 Convertible Promissory Notes (the “December 2016 Notes”)
to three accredited investors. The December 2016 Notes were issued in connection with a loan of $200,002 and the cancellation
of two $10,000 promissory notes previously issued by the Company to two of the investors. The December 2016 Notes are due on June
6, 2017 and bear interest at 8% per annum payable on the maturity date. In connection with the investments, the Company agreed
to use its best efforts (no later than 90 days from the original issuance date) to obtain shareholder approval to effectuate a
reverse stock split or increase its authorized capital (either, a “Charter Amendment”) in order to permit the exercise
and/or conversion of all of the Company’s outstanding securities into common stock including securities owed to holders
pursuant to anti-dilution protection. Further, the December 2016 Notes required the Company to designate a series of preferred
stock with super voting power and issue it to an executive officer of the Company. In furtherance of that provision, the Company
issued 100 shares of Series A Preferred Stock to Charles Allen, its Chief Executive Officer and a director, which provides Mr.
Allen with a majority of the Company’s outstanding voting power. See Item 5.03 below. Until such time as the Company effects
a Charter Amendment, the December 2016 Notes are convertible into a preferred stock which shall be designated and issued by the
Company and a Certificate of Designation designating the related rights and preferences of the preferred stock shall be filed
with the Secretary of State of Nevada within 15 days of the investment. After the Charter Amendment is effected, the December
2016 Notes will be convertible into Common Stock. The conversion price of the December 2016 Notes is $0.002 per
share.
The
Company may only use the proceeds of the December 2016 Notes for accrued and unpaid management compensation (subject to the $50,000
salary limitation as set forth in the April 20, 2015 Subscription Agreement Amended Agreement), unpaid out-of-pocket
expenses of employees, legal and accounting fees, and certain other fees and liabilities. The Company may not use any of the proceeds
towards payments to its outstanding note holders or investors that participated in the Company’s past financings.
Note
14 - Liquidated Damages
Pursuant
to the terms of the Company’s Senior Notes and Junior Notes the Company is required to issue shares of Common Stock to the
holders upon notice of conversion. The Company does have sufficient authorized shares of Common Stock to fulfill its obligations
with respect to its Senior Note and Junior Note holders and has booked a liquidated damages liability of $1,621,750 for
the nine months ended September 30, 2016.