BTCS Inc. 10-K

ITEM 1. BUSINESS 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 Digital Asset Initiatives The Company acquires Digital Assets to provide investors with indirect ownership of Digital Assets that are not securities, such as bitcoin and ether. The Company acquires Digital Assets through open market purchases. 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 report regarding Digital Securities. As of December 31, 2020, the Company had the following Digital Assets: Digital Asset Units Held Fair Market Value Bitcoin (BTC) 66.923 $ 1,962,572 Ethereum (ETH) 2,674.235 $ 1,976,126 Total $ 3,938,698 As of January 22, 2021, the Company had the following Digital Assets: Digital Asset Units Held Fair Market Value Bitcoin (BTC) 78.534 $ 2,546,176 Ethereum (ETH) 3,020.256 $ 3,700,871 Total $ 6,247,047 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 Investment Company Act of 1940 (the “1940 Act”) and seek to reduce potential liabilities under the federal securities laws. See “Risk Factors” at page 14 and “Business” at pages 3-8. 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. Digital Asset Data Analytics Platform We are also focused on Digital Assets and blockchain technologies. We are currently internally developing a digital asset data analytics platform aimed at aggregating users’ information, such as tracking of multiple exchanges and wallets to aggregate portfolio holdings into a single platform to view and analyze performance, risk metrics, and potential tax implications. The platform utilizes digital asset exchange APIs to read user data and does not allow for the trading of assets. As a result of the pandemic, we have experienced delays in the development of the platform. Acquisition Initiatives The Company is also seeking to acquire controlling interests in businesses in the blockchain industry as further described in this report. 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. 3 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, and (ii) acquiring a controlling interest in one or more blockchain technology related business ventures. Our acquisition activities are spearheaded by Charles Allen, our Chief Executive Officer. We also monitor blockchain networks and may consider re-entering the digital asset mining business if and when we believe a positive return on investment is achievable. 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, 2020 financial statements that there is substantial doubt about our ability to continue as a going concern. The continuation of our business is dependent upon us raising additional funds. 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. 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. While we continue to implement our business strategy, we intend to finance our activities through: ● managing current cash and cash equivalents on hand from the Company’s past debt and equity offerings by controlling costs, and ● seeking additional financing through sales of additional securities whether through Cavalry or other investors. INDUSTRY AND MARKET OVERVIEW (DIGITAL ASSET AND BLOCKCHAIN TECHNOLOGIES) Blockchain and Digital Assets / Cryptocurrencies Generally Distributed blockchain technologies utilize a decentralized and encrypted ledger that is designed to offer a secure, efficient, verifiable, and permanent way of storing records and other information without the need for intermediaries. Digital Assets, which include and are often referred to as cryptocurrencies, serve multiple purposes. They can serve as a medium of exchange, store of value or unit of account, and provide non-financial and next generation uses. Blockchain technologies are being evaluated for a multitude of industries due to the belief in their ability to have a significant impact in many areas of business, finance, information management, and governance. Cryptocurrencies are decentralized currencies that enable near instantaneous transfers. Transactions occur via an open source, cryptographic protocol platform which uses peer-to-peer technology to operate with no central authority. An online network of nodes hosts a public transaction ledger, known as a blockchain, and each cryptocurrency is associated with a source code that comprises the basis for the cryptographic and algorithmic protocols governing its blockchain. In a cryptocurrency network, every peer node has its own copy of the blockchain, which contains records of every historical transaction - effectively containing records of all account balances. Each account is identified solely by its unique public key (making it effectively anonymous) and is secured with its associated private key (kept secret, like a password). The combination of private and public cryptographic keys constitutes a secure digital identity in the form of a digital signature, providing strong control of ownership. No single entity owns or operates a network. The infrastructure is collectively maintained by a decentralized public user base. As a network is decentralized, it does not rely on either governmental authorities or financial institutions to create, transmit or determine the value of the currency units. Rather, the value is determined by market factors, supply and demand for the units, the prices being set in transfers by mutual agreement or barter among transacting parties. Since transfers do not require involvement of intermediaries or third parties, there are currently limited transaction costs in direct peer-to-peer transactions. Units of cryptocurrency can be converted to fiat currencies, such as the U.S. dollar, at rates determined on various exchanges, such as Cumberland, Coinbase, Paxos, Kraken, Gemini, Bitstamp, and others. Cryptocurrency prices are quoted on various exchanges and fluctuate with extreme volatility. 4 We believe cryptocurrencies and Digital Assets offer many advantages over traditional, fiat currencies, although many of these factors also present potential disadvantages and may introduce additional risks, including: ● acting as a fraud deterrent, as cryptocurrencies are digital and cannot be counterfeited or reversed arbitrarily by a sender; ● immediate settlement; ● elimination of counterparty risk; ● no trusted intermediary required; ● lower fees; ● identity theft prevention; ● accessible by everyone; ● transactions are verified and protected through a confirmation process, which prevents the problem of double spending; ● decentralized – no central authority (government or financial institution); and ● recognized universally and not bound by government imposed or market exchange rates. However, cryptocurrencies may not provide all of the benefits they purport to offer at all or at any time. Bitcoin for example was first introduced in 2008 and was first introduced as a means of exchange in 2009. Bitcoin is a consensus network that enables a new payment system and a completely new form of digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, we believe bitcoin can be viewed as cash for the Internet. The bitcoin network shares a public ledger called a “blockchain.” This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing users to have full control over sending bitcoins from their addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This process is often called “mining” and is a proof-of-work consensus algorithm. As with many new and emerging technologies, there are potentially significant risks. Businesses (including the Company) which are seeking to develop, promote, adopt, transact or rely upon blockchain technologies and cryptocurrencies have a limited track record and operate within an untested new environment. These risks are not only related to the businesses the Company pursues, but the sector and industry as a whole, as well as the entirety of the concept behind blockchain and cryptocurrency as value. Alternative Digital Assets and Blockchain Technologies Bitcoins are not the only type of Digital Assets founded on math-based algorithms and cryptographic security, although it is considered the most prominent. Other Digital Assets (commonly referred to as “altcoins”, “coins”, “tokens”, or “protocol tokens”), have been developed since the Bitcoin Network’s inception. The Bitcoin Network, however, possesses the “first-to-market” advantage and thus far has captured the majority of the industry’s interest and market share. Ethereum, EOS and other blockchains for example are designed for non-financial and next generation uses (sometimes referred to as blockchain 2.0 projects). These uses include smart contracts and distributed registers built into or built atop their respective blockchains. Further, all blockchains require a consensus algorithm to secure the blockchain state which can be provided by either computational or financial resources. Mining mechanisms used by these algorithms are broadly divided into proof-of-work (“PoW”), in which nodes dedicate computational resources, and proof-of-stake (“PoS”), in which nodes dedicate financial resources. The intention behind both proof-of-work (computational resources) and proof-of-stake (financial resources) is to make it practically infeasible for any single malicious actor to have enough computational power or ownership stake to attack the blockchain network. With proof-of-work, a miner does some “work” using computers that consumes electricity and is rewarded with digital currency. The miner is, theoretically, converting electricity and computing power into a digital currency reward comprised of transaction fees and newly minted cryptocurrency. Bitcoin is an example of this and is by far the largest and most secure PoW blockchain. With proof-of-stake, miners are staking their holdings of a digital currency to participate in the consensus algorithm and bad behavior can be penalized by “slashing” the rewards of the miner. PoS requires less energy/electricity to be consumed and can give cryptocurrency holders who participate in staking a reward on their holdings in the base cryptocurrency. 5 We are actively evaluating other blockchain technologies that relate to Bitcoin 2.0 projects. The Company is examining and will continue to examine these other Digital Assets (including PoS assets) and Digital Securities and acquire them, subject to, existing market conditions, accounting and tax implications, and regulatory compliance. Business Profile and Risks The decision to pursue blockchain and Digital Asset businesses exposes the Company to risks associated with a new and untested strategic direction. The prices of Digital Assets have experienced substantial volatility, which may reflect “bubble” type volatility, meaning that high or low prices may have little or no merit, may be subject to rapidly changing investor sentiment, and may be influenced by factors such as technology, regulatory void or changes, fraudulent actors, manipulation, and media reporting. For example, in 2020, bitcoin’s low price was $4,971 and its high price was $29,374. Government Oversight Blockchain networks are a recent technological innovation and the regulatory schemes to which Digital Assets and their blockchain networks 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 in this report, the SEC’s July 25, 2017 DAO Report, its Chairman’s 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. 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 intends to acquire additional Digital Assets. The Company currently own and plans to expand its digital asset holdings. 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 14 and “Business” beginning on page 3. 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. As both the regulatory landscape develops and journalistic familiarity with Digital Assets increases, mainstream media’s understanding of them 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 Digital Assets Initiative The Company’s Digital Asset initiative will compete with other industry participants that focus on investing in and securing Digital Asset blockchains. 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 Digital Assets directly. Companies have raised substantial capital this year seeking to enter Digital Asset businesses. Our relative lack of capital is a competitive disadvantage. 6 Digital Asset Data Analytics Platform The Company’s current and future competition for our digital asset data analytics platform is centered on the following areas: ● Exchanges which currently offer more robust digital asset data analytics or will choose to enhance their platforms in the future such as eToro; ● other mobile applications, websites, niche aggregation sites, which offer similar services, such as BNCpro; ● providers of mobile applications and websites, that offer secure storage solutions for Digital Assets; ● existing financial service firms and data analytics firms serving traditional asset markets that choose to offer data analytic solutions for Digital Assets; and ● digital asset focused companies that offer exchange, payment processing, and financial services for Digital Assets. Many of our current and potential competitors have greater resources, longer histories, more users, and greater brand recognition. They may devote more resources to technology, infrastructure, marketing and may be able to more rapidly develop their solutions. Other companies also may enter into business combinations or alliances that strengthen their competitive positions. Our small team and relative lack of capital is a competitive disadvantage. 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” below. 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. However, we believe this may change as we continue to develop our digital asset data analytics platform. GROWTH STRATEGY Digital Assets Initiative As we continue to raise capital we plan to expand and diversify our Digital Asset holdings with a focus on disruptive protocol layer verticals such as smart contracts, data storage and Internet of things (IoT); provided, however that we do not intend to acquire Digital Assets which may constitute digital securities. We also plan to increase our holdings of bitcoin and ethereum. Digital Asset Data Analytics Platform Development The Company is currently internally developing a digital asset data analytics platform to aggregate user’s digital asset holding data derived from read-only API calls to connected exchanges. The platform solution is also being designed with a community focus that may allow users to share their trade history with other platform users. Our strategy has three key phases: first develop a robust platform and open it to public beta testing, second once the platform is open acquire users, and third monetize the platform. Our current focus is on developing the platform. Given our limited resources we can provide no definitive timeline as to when the platform will be open to beta testing though we anticipated this occurring in 2021, provided however as a result of the pandemic, we have experienced delays in the development of the platform, which may cause further delays. EMPLOYEES We currently have two employees and no part time employees. CAPITILIZATION The following table details the Company’s capitalization as of January 22, 2021. Class of Security Shares of Common Stock as Converted Common Stock Issued and Outstanding 44,411,617 Series C-1 Preferred Stock (29,414 shares at a 1:200 conversion ratio) 196,094 Warrants to purchase common stock 2,502,915 Total Shares Diluted 47,110,626 7 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: (i) the 2020 December Promissory Note which was issued on December 16, 2020, (ii) the 2021 Promissory Note which was issued on January 15, 2021, (iii) the Series C-2 Convertible Preferred stock which is subject to ratification by our shareholders, and (iv) any stock options or restricted stock units that are subject to ratification by our shareholders. The 2020 December Promissory Note is due on October 16, 2021 and is: (i) convertible at a 35% discount to the closing price of the Company’s common stock on the date before exercise with a floor price of $0.04 per share, (ii) shall bear interest at 12% per annum (payable at maturity), and (iii) convertible at the Company’s option subject to certain limitations as set forth in the 2020 December Promissory Note. The 2021 Promissory Note is due on November 15, 2021 and is: (i) convertible at a 35% discount to the closing price of the Company’s common stock on the date before exercise with a floor price of $0.75 per share, (ii) shall bear interest at 12% per annum (payable at maturity), and (iii) convertible at the Company’s option subject to certain limitations as set forth in the 2021 Promissory Note. Cautionary Note Regarding Forward Looking Statements This report contains forward-looking statements, including statements regarding our belief regarding the opportunities from businesses using blockchain technology, our belief regarding advantages of using cryptocurrencies and Digital Assets and other opportunities from purchasing Digital Assets, and our belief regarding our liquidity. All statements other than statements of historical facts contained in this report, 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. The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements. Further information on the risks and uncertainties affecting our business is contained in the Risk Factors below. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events. ITEM 1A. RISK FACTORS Not applicable to smaller reporting companies. However, our principal risk factors are described under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” ITEM 2. PROPERTIES. As of the date of this report the Company did not have any owned or leased properties. ITEM 3. LEGAL PROCEEDINGS. From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. We know of no material, active or pending legal proceedings against us. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. PART II