BTCS(BTCS) - 2018 Q4 - Annual Report

PART I Business BTCS Inc. plans to acquire Digital Assets and blockchain businesses, having suspended mining due to market conditions, while avoiding Digital Securities to maintain regulatory compliance - The company's primary business plan, subject to financing, is to acquire Digital Assets (such as bitcoin and ether) and controlling interests in blockchain industry businesses29 32 - BTCS has suspended its transaction verification services (mining) business because it is not currently profitable, but plans to monitor the market and may re-enter if a positive return on investment becomes achievable35 128 - The company actively avoids participating in Initial Coin Offerings (ICOs), believing most constitute offerings of Digital Securities, to prevent violations of securities laws and the Investment Company Act of 194030 84 86 - The company's auditors have issued a going concern warning due to recurring operating losses, net operating cash flow deficits, and an accumulated deficit38 Industry and Market Overview (Bitcoin and Blockchain Technologies) This section details Bitcoin's decentralized nature, blockchain function, mining process, capped supply, and the evolving, uncertain global regulatory landscape for Digital Assets - Bitcoin is a decentralized Digital Asset operating on a peer-to-peer network, with transactions recorded on a public ledger called the Blockchain, with its value determined by supply and demand39 42 - New bitcoins are created through a competitive process called "mining," where participants solve complex mathematical problems to add blocks to the Blockchain; the reward for mining halves approximately every four years, and the total supply is capped at 21 million48 58 - The regulatory environment for Digital Assets is uncertain and evolving, with U.S. agencies like the SEC and CFTC asserting jurisdiction and international regulation varying widely from restrictive measures in China to licensing frameworks in Japan84 100 111 - The company analyzes whether Digital Assets are securities under the "investment contract" test to avoid inadvertently becoming an investment company under the 1940 Act, concluding that bitcoin is not a security, but acknowledging a risk that the SEC could deem ether a security86 96 98 Risk Factors The company, as a smaller reporting company, directs readers to principal risk factors detailed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - As a smaller reporting company, a separate Risk Factors section is not provided, with principal risks detailed within Item 7, the MD&A section130 Properties The company operates virtually with no leased office space, providing monthly stipends to its two employees for home office expenses - The company has no leased properties and its employees work virtually130 136 - The two executive officers are each paid $1,000 per month to cover expenses associated with their virtual office setups130 Legal Proceedings The company is not aware of any material, active, or pending legal proceedings against it - There are no known material, active, or pending legal proceedings against the company131 Mine Safety Disclosures This section is not applicable to the company's operations - Mine safety disclosures are not applicable137 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is quoted on the OTCQB, has never paid cash dividends, and details historical stock prices and recent unregistered security issuances - The company's common stock is quoted on the OTCQB under the symbol "BTCS"133 Common Stock Price History | Fiscal Year/Quarter | High ($) | Low ($) | | :--- | :--- | :--- | | Fiscal 2019 | | | | First Quarter (through Jan 24) | 0.213 | 0.0158 | | Fiscal 2018 | | | | First Quarter | 0.235 | 0.040 | | Second Quarter | 0.116 | 0.043 | | Third Quarter | 0.071 | 0.037 | | Fourth Quarter | 0.042 | 0.015 | | Fiscal 2017 | | | | First Quarter | 0.32 | 0.04 | | Second Quarter | 0.15 | 0.03 | | Third Quarter | 0.58 | 0.05 | | Fourth Quarter | 0.26 | 0.08 | - The company has never paid cash dividends and does not anticipate paying them in the foreseeable future, intending to use all available funds for business development141 - During 2018, the company issued common stock through conversions of Series B and Series C-1 Preferred Stock, a cashless warrant exercise, and a cash exercise of Series A Warrants that raised $57,000, and also issued a $200,000 promissory note146 147 148 150 Selected Financial Data This section is not applicable as the company has not provided selected financial data - No selected financial data was provided153 Management's Discussion and Analysis of Financial Condition and Results of Operations This section details the company's financial performance, critical liquidity challenges, and extensive risks related to its operations, personnel, and the volatile Digital Asset industry - The company has very limited operating capital and its existing liquidity is insufficient to fund operations for the foreseeable future, raising substantial doubt about its ability to continue as a going concern165 167 179 - Digital Assets are accounted for as indefinite-lived intangible assets, recorded at cost less any impairment, with impairment assessed quarterly and subsequent reversals of impairment losses not permitted173 174 175 - The company's internal controls were deemed ineffective, leading to erroneous accounting for Digital Assets and requiring a restatement of financial statements for the year ended December 31, 2017, and interim periods in 2018201 202 Results of Operations for the Years Ended December 31, 2018 and 2017 For 2018, the company reported zero revenue and a significantly reduced net loss of $0.8 million, primarily due to the absence of large non-cash fair value adjustments recorded in 2017 Consolidated Statements of Operations Summary | Metric | 2018 | 2017 (Restated) | | :--- | :--- | :--- | | Total Revenues | $0 | $4,480 | | Gross Profit | $0 | $4,320 | | Total Operating Expenses | $990,169 | $1,574,093 | | Net Loss from Operations | ($990,169) | ($1,569,773) | | Total Other Income (Expense) | $163,749 | ($43,894,796) | | Net Loss | ($826,420) | ($45,464,569) | | Net Loss Attributable to Common Stockholders | ($832,020) | ($45,464,569) | | Net Loss Per Share | ($0.00) | ($0.37) | - The substantial decrease in net loss from 2017 to 2018 was mainly due to a $43.7 million reduction in 'Other Expenses', primarily because 2017 included significant non-cash charges for fair value adjustments of warrant liabilities ($39.2 million) and convertible notes ($16.8 million) that did not recur in 2018161 162 Liquidity and Capital Resources The company faces a severe liquidity crisis with insufficient cash to fund operations for the next 12 months, leading to a "going concern" warning from auditors and an urgent need for additional capital - As of January 31, 2019, the company had approximately $91,850 in cash and no Digital Assets169 - The company does not have sufficient capital to meet its expenses over the next 12 months and requires significant additional financing to sustain operations165 170 - Due to recurring operating losses and cash flow deficits, there is substantial doubt about the company's ability to continue as a going concern167 171 Risk Factors This section outlines numerous risks, including the urgent need for financing, a history of losses, ineffective internal controls, dependence on key personnel, and the volatile regulatory and technological environment of Digital Assets - The company needs to secure additional financing, as its cash of $91,850 (as of Jan 31, 2019) is only sufficient to cover public company costs through May 1, 2019, without paying employees193 - The company's success is solely dependent on its two executive officers, Charles Allen and Michal Handerhan; the loss of either could have a material adverse effect, and the company has been unable to make payroll for them since December 1, 2018205 206 207 - There is a significant risk that Digital Assets the company holds could be deemed securities by regulators; if the value of such securities exceeds 40% of its total assets (excluding cash), the company could inadvertently violate the Investment Company Act of 1940, potentially forcing it to liquidate assets at a loss or cease operations261 262 263 - The Bitcoin Network is subject to risks including malicious actors gaining over 50% of processing power, forks in the blockchain creating competing networks, and the potential for alternative Digital Assets to reduce Bitcoin's prominence276 287 298 Quantitative And Qualitative Disclosures About Market Risk As a smaller reporting company, BTCS Inc. is not required to provide the information for this item - The company is not required to provide this information as it qualifies as a smaller reporting company362 Financial Statements and Supplementary Data This item is marked as "Not applicable" as the audited financial statements are provided later in the report - This section is marked "Not applicable," with the full financial statements presented at the end of the report363 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - There were no disagreements with accountants reported363 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2018, due to material weaknesses in internal control over financial reporting, leading to a financial restatement - Management concluded that disclosure controls and procedures were not effective as of December 31, 2018364 - Material weaknesses in internal control were identified, including insufficient segregation of duties, lack of controls over material transactions, and difficulty with complex accounting principles367 - The company's failure to follow GAAP for digital assets, which required a financial restatement, was a result of these ineffective controls370 Other Information This section provides the company's capitalization table as of January 31, 2019, detailing outstanding common stock and shares issuable from preferred stock and warrants Capitalization Table as of January 31, 2019 | Class of Security | Shares of Common Stock as Converted | | :--- | :--- | | Common Stock Issued and Outstanding | 387,281,530 | | Series C-1 Preferred Stock | 5,882,800 | | Warrants to Purchase Common Stock | 46,832,367 | PART III Directors, Executive Officers and Corporate Governance The company's leadership includes Charles W. Allen, Michal Handerhan, and David Garrity, with potential conflicts of interest noted for the executive officers and no formal code of ethics adopted - The executive team and board consist of Charles W. Allen (CEO, CFO, Chairman), Michal Handerhan (COO, Director), and David Garrity (Independent Director)375 - Potential conflicts of interest exist as CEO Charles Allen and COO Michal Handerhan are also officers and directors of Global Bit Ventures Inc. (GBV), another company in the cryptocurrency industry382 212 216 - The company has not yet adopted a code of ethics, citing its focus on business growth and financing386 Executive Compensation This section details executive and director compensation for 2018 and 2017, including accrued but unpaid salaries, employment agreements, and contingent bonuses Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Charles W. Allen, CEO | 2018 | 256,025 | - | 256,025 | | | 2017 | 235,389 | 75,000 | 310,389 | | Michal Handerhan, COO | 2018 | 198,550 | - | 198,550 | | | 2017 | 182,792 | 35,000 | 217,792 | - A significant portion of executive salaries for 2018 was accrued but unpaid: $66,506 for CEO Charles Allen and $52,138 for COO Michal Handerhan396 - Effective January 1, 2019, the annual salaries for the CEO and COO were increased to $345,000 and $215,000, respectively402 404 - The company agreed to pay contingent cash bonuses for 2018 of $256,025 to the CEO and $150,000 to the COO, which are deemed earned and payable upon the repayment or settlement of a $200,000 promissory note409 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section presents beneficial ownership as of January 31, 2019, showing executive officers and directors own less than 1% of common stock, with two institutional investors holding significant preferred stock - As of January 31, 2019, all officers and directors as a group beneficially owned less than 1% of the company's common stock419 - Two entities, Cavalry Fund I LP and DiamondRock LLC, are the most significant security holders, each owning 14,707 shares, or 50%, of the Series C-1 Convertible Preferred Stock419 Certain Relationships and Related Transactions, and Director Independence The company lacks a formal related-party transaction policy, notes a 2017 transaction where executives settled accrued salaries with shares, and identifies only one independent director - The company lacks a formal written policy for reviewing related-person transactions; the Board of Directors handles this responsibility423 - In March 2017, executives Charles Allen and Michal Handerhan settled accrued salaries by accepting shares in BitVault, Inc. and GCZ, Inc. that the company had previously written off as unrecoverable424 - Using NASDAQ standards, David Garrity is considered the only independent director on the board425 Principal Accounting Fees and Services This section details fees paid to the independent auditor, RBSM, for 2018 and 2017, and states the company's policy for Board pre-approval of all audit and non-audit services Audit Fees and Services | Fee Type | 2018 | 2017 | | :--- | :--- | :--- | | Audit Fees | $39,500 | $29,000 | | Tax Fees | $2,800 | $5,200 | | All Other Fees | - | - | | Total | $42,300 | $34,200 | - The company's policy is for the Board of Directors to pre-approve all audit and non-audit services provided by the independent accountants427 PART IV Exhibits and Financial Statement Schedules This section provides a comprehensive list of all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications - A comprehensive list of exhibits is provided, including Articles of Incorporation, Bylaws, various Certificates of Designation for preferred stock, securities purchase agreements, warrant forms, and employment agreements for executive officers431 Form 10-K Summary This section is not applicable - This section is marked as not applicable435 Financial Statements and Notes Report of Independent Registered Public Accounting Firm The independent auditor issued an opinion on the fair presentation of financial statements, including a "Going Concern" paragraph due to the company's accumulated deficit and recurring losses - The auditor's report includes a "Going Concern" paragraph, citing the company's accumulated deficit, recurring losses, and expected future losses as raising substantial doubt about its ability to continue444 Consolidated Financial Statements The consolidated financial statements for 2018 and 2017 (restated) show a significant decrease in total assets, a shift to a stockholders' deficit, zero revenue in 2018, and a net loss of $0.8 million Consolidated Balance Sheets | Balance Sheet Data (End of Period) | Dec 31, 2018 | Dec 31, 2017 (Restated) | | :--- | :--- | :--- | | Cash | $52,117 | $303,334 | | Digital Currencies | $0 | $217,119 | | Total Current Assets | $60,450 | $588,189 | | Total Assets | $63,153 | $589,424 | | Total Current Liabilities | $319,146 | $75,997 | | Total Stockholders' (Deficit) Equity | ($255,993) | $513,427 | Consolidated Statements of Operations | Statement of Operations Data (Full Year) | 2018 | 2017 (Restated) | | :--- | :--- | :--- | | Total Revenues | $0 | $4,480 | | Net Loss | ($826,420) | ($45,464,569) | | Net Loss Per Share | ($0.00) | ($0.37) | Consolidated Statements of Cash Flows | Cash Flow Data (Full Year) | 2018 | 2017 (Restated) | | :--- | :--- | :--- | | Net cash used in operating activities | ($505,619) | ($1,488,254) | | Net cash used in investing activities | ($2,598) | $400 | | Net cash provided by financing activities | $257,000 | $1,696,120 | | Net (decrease) increase in cash | ($251,217) | $208,266 | Notes to Consolidated Financial Statements These notes provide critical context, detailing the 2017 financial restatement, reiterating the going concern doubt, outlining Digital Asset accounting policies, and summarizing equity transactions - The 2017 financial statements were restated to correct the accounting for digital currencies, now treated as intangible assets at cost less impairment rather than fair value, which reduced 2017 year-end digital currency assets and stockholders' equity by approximately $399,000471 476 - The company's ability to continue as a going concern is in substantial doubt due to recurring operating losses, net operating cash flow deficits, and an accumulated deficit, with its continuation dependent on obtaining additional financial support486 - The accounting policy for Digital Assets is to record them at cost and assess for impairment quarterly, where impairment exists if fair value is less than cost basis, and subsequent reversals are not permitted once an impairment loss is recognized489 490 492 - As of December 31, 2018, the company had approximately $5.54 million in federal and state net operating loss carryforwards, beginning to expire in 2034, with a full valuation allowance recorded against related deferred tax assets as realization is not more likely than not561