BTCS Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities and Exchange Commission Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Securities and Exchange Commission Rule 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, management concluded that our disclosure controls and procedures were not operating effectively as of December 31, 2020. Our disclosure controls and procedures were not effective because of the “material weakness” described below. (b) Management’s annual report on internal control over financial reporting. SEC rules implementing Section 404 of the Sarbanes-Oxley Act of 2002 require our 2019 Annual Report on Form 10-K to contain management’s report regarding the effectiveness of internal control over financial reporting. As a basis for our report, we tested and evaluated the design, documentation, and operating effectiveness of our internal control. Management is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting consists of policies and procedures that are designed and operated to provide reasonable assurance about the reliability of the Company’s financial reporting and its process for preparing financial statements in accordance with U.S. GAAP. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time. Based on management’s evaluation as of December 31, 2020, our management identified the material weaknesses set forth below in our internal control over financial reporting: The Company’s process for internally reporting material information in a systematic manner to allow for timely filing of material information is ineffective, due to its inherent limitations from being a small company, and there exist material weaknesses in internal control over financial reporting that contribute to the weaknesses in our disclosure controls and procedures. These weaknesses include: ● insufficient segregation of duties and oversight of work performed in our finance and accounting function due to limited personnel; ● lack of controls in place to ensure that all material transactions and developments impacting the financial statements are reflected; and ● difficulty applying complex accounting principles. Our management concluded that in light of the material weaknesses described above, the Company did not maintain effective internal control over financial reporting as of December 31, 2020 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the COSO. Subsequent to the Company’s filing its annual report for the year ended December 31, 2019, the Board of Directors of the Company concluded that due to ineffective controls we failed to follow U.S. GAAP in accounting for our Digital Assets. The Company erroneously classified a $374,979 purchase of digital currencies as an investing activity which was re-classified to an operating activity in the statement of cash flows on the Company’s amended annual report filed on June 22, 2020. This failure arose from a material weakness which required us to restate our financial statements for the year ended December 31, 2019. 28 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting during the fourth quarter of the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2020. Our Board of Directors has adopted a Code of Ethics applicable to all officers, directors and employees, which is available on our website (http://www.btcs.com) under “Corporate Governance.” We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Ethics and by posting such information on our website at the address and location specified above. ITEM 11: EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2020. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2020. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2020. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated by reference to our Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2020. PART IV ITEM 15. EXHIBITS (a) Documents filed as part of the report. (1) Financial Statements. See Index to Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Financial Statements are filed herewith in response to this Item. (2) Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the financial statements or notes included in this report. (3) Exhibits. See the Exhibit Index. EXHIBIT INDEX Incorporated by Reference Exhibit No. Description Filed/Furnished Herewith Form Exhibit No. Filing Date 3.1 Articles of Incorporation 10-K 3.1 3/31/11 3.1(a) Amendment No. 1 To Articles of Incorporation 8-K 3.1 3/25/13 3.1(b) Amendment No. 2 To Articles of Incorporation 8-K 3.1 2/5/14 3.1(c) Amendment No. 3 To Articles of Incorporation 8-K 3.1 4/9/19 3.1(d) Certificate of Designation for Series A Preferred Stock 8-K 3.1 12/9/16 3.1(e) Certificate of Designation for Series B Convertible Preferred Stock 8-K 3.1 3/15/17 3.1(f) Certificate of Correction to Series B Convertible Preferred Stock 8-K 3.1 3/30/17 3.1(g) Certificate of Designation for Series C-1 Convertible Preferred Stock 8-K 3.1 10/10/17 29 3.1(h) Amended and Restated Certificate of Designation of Series C-1 Convertible Preferred Stock 8-K 3.2 12/7/17 3.1(i) Certificate of Amendment to the Series C-1 Certificate of Designation 8-K 4.1 12/3/19 3.1(j) Certificate of Designation for Series C-2 Convertible Preferred Stock 8-K 4.1 1/6/21 3.1(k) Certificate of Withdrawal of Certificate of Designation for Series B Convertible Preferred Stock 8-K 3.2 1/22/21 3.1(l) Certificate of Withdrawal of Certificate of Designation for Series A Preferred Stock 8-K 3.1 1/22/21 3.1(m) Certificate of Correction to Series C-2 Convertible Preferred Stock 8-K 3.3 1/22/21 3.2 Certificate of Amendment filed February 13, 2017 8-K 3.1 2/16/17 3.3 Bylaws of TouchIT Technologies, Inc. S-1 3.2 5/29/08 3.4 Articles of Merger 8-K/A 3.1 7/31/15 3.5 Agreement and Plan of Merger 8-K/A 3.2 7/31/15 4.1 Convertible Note dated as of September 18, 2019 8-K 4.1 9/19/19 4.2 Convertible Note dated as of November 7, 2019 8-K 4.1 11/7/19 4.3 Convertible Note dated as of April 17, 2020 8-K 4.1 4/20/20 4.4 Convertible Note dated as of December 16, 2020 8-K 4.1 12/16/20 10.1 Securities Escrow Agreement dated February 19, 2016 8-K 10.1 2/22/16 10.2 Securities Purchase Agreement dated June 6, 2016 8-K 10.1 6/7/16 10.3 20% Original Issue Discount Junior Convertible note due December 5, 2016 8-K 10.2 6/7/16 10.4 Security Agreement dated June 6, 2016 8-K 10.3 6/7/16 10.5 Pledge Agreement dated June 6, 2016 8-K 10.4 6/7/16 10.6 Subsidiary Guaranty dated June 6, 2016 8-K 10.5 6/7/16 10.7 Amendment to Subscription Agreement dated May 27, 2016 8-K 10.6 6/7/16 10.8 Form of Warrant Exercise Agreement dated as of June 8, 2016 8-K 10.1 6/10/16 10.9 Convertible Promissory Note dated December 6, 2016 8-K 10.1 12/9/16 10.10 Form of Note Leak-Out Agreement dated March 2, 2017 8-K 99.1 3/15/17 10.11 Form of January Leak-Out Agreement dated February 8, 2017 8-K 99.2 3/15/17 10.12 Form of April Leak-Out Agreement dated February 6, 2017 8-K 99.3 3/15/17 10.13 Form of January Lock-Up Agreement dated February 8, 2017 8-K 99.4 3/15/17 10.14 Form of April Lock-Up Agreement dated February 6, 2017 8-K 99.5 3/15/17 10.15 Settlement Agreement and Note dated March 22, 2017 8-K 10.1 3/23/17 10.16 Form of Series A Common Stock Purchase Warrant dated May 24, 2017 8-K 10.2 5/26/17 10.17 Form of Additional Common Stock Purchase Warrant dated May 24, 2017 8-K 10.3 5/26/17 30 10.18 Form of Bonus Common Stock Purchase Warrant dated May 24, 2017 8-K 10.4 5/26/17 10.19 Form of Registration Right Agreement dated as of May 24, 2017 8-K 10.5 5/26/17 10.20 Form of Securities Purchase Agreement dated as of May 24, 2017 8-K 10.6 5/26/17 10.21 Employment Agreement - Charles Allen (2) 10-K 10.8 6/23/17 10.21(a) Amendment to Employment Agreement - Charles Allen (2) 10-K 10.15(a) 3/23/20 10.22 Employment Agreement - Michael Handerhan (2) 10-K 10.9 6/23/17 10.22(a) Amendment to Employment Agreement – Michal Handerhan (2) 10-K 10.16(a) 3/23/20 10.23 Form of Series B Common Stock Purchase Warrant dated October 10, 2017 8-K 10.1 10/10/17 10.24 Form of Series C-1 Securities Purchase Agreement dated October 10, 2017 8-K 10.2 10/10/17 10.25 Form of Side Letter dated October 4, 2017 8-K 10.3 10/10/17 10.26 Amended Series A Common Stock Purchase Warrant dated May 24, 2017 8-K 10.3 12/7/17 10.27 Amended Additional Common Stock Purchase Warrant dated May 24, 2017 8-K 10.4 12/7/17 10.28 Amended Bonus Common Stock Purchase Warrant dated May 24, 2017 8-K 10.5 12/7/17 10.29 Amended Series B Common Stock Purchase Warrant dated October 10, 2017 8-K 10.6 12/7/17 10.30 Amended Amendment to Securities Agreement dated December 7, 2017 8-K 10.7 12/7/17 10.31 Form of Series C Common Stock Purchase Warrant dated October 11, 2018 10-K/A 10.31 10/12/18 10.32 Equity Line Purchase Agreement dated as of May 13, 2019 8-K 10.1 5/16/19 10.33 Registration Rights Agreement dated as of May 13, 2019 8-K 10.2 5/16/19 10.34 Note Exchange Agreement dated as of September 18, 2019 8-K 10.1 9/19/19 10.35 Side Letter dated as of November 7, 2019 8-K 10.1 11/7/19 10.36 Side Letter with Cavalry Fund I LP dated April 17, 2020 8-K 10.1 4/20/20 10.37 Side Letter with Cavalry Fund I LP dated December 16, 2020 8-K 10.1 12/16/20 10.38 Form of Series C Common Stock Purchase Warrant dated December 16, 2020 8-K 10.2 12/16/20 10.39 Form of Subscription Agreement –Series C-2 Convertible Preferred Stock 8-K 10.1 1/4/21 21.1 List of Subsidiaries (1) 31 Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) 32 Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3) 101.INS XBRL Instance Document (1) 101.SCH XBRL Taxonomy Extension Schema (1) 101.CAL XBRL Taxonomy Extension Calculation Linkbase (1) 101.DEF XBRL Taxonomy Extension Definition Linkbase (1) 101.LAB XBRL Taxonomy Extension Label Linkbase (1) 101.PRE XBRL Taxonomy Extension Presentation Linkbase (1) (1) Filed herein (2) Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate. (3) Furnished herein ITEM 16. FORM 10-K SUMMARY. Not applicable. 31 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on January 26, 2021. BTCS INC. Date: January 26, 2021 By: /s/ Charles Allen Charles W. Allen Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of BTCS Inc. and in the capacities and on the dates indicated. Signature Title Date /s/ Charles Allen Chief Executive Officer and Chief January 26, 2021 Charles W. Allen Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer) and Chairman of the Board of Directors /s/ Michal Handerhan Director January 26, 2021 Michal Handerhan /s/ David Garrity Director January 26, 2021 David Garrity 32 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of BTCS Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of BTCS Inc. (The “Company”) as of December 31, 2020 and 2019 and the related statements of operations, stockholders’ (deficit) equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. The Company's Ability to Continue as a Going Concern The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the accompanying financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, and has an accumulated deficit that raises substantial doubt about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plan in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Description of the matter As discussed in Note 4 to the financial statements, the Company’s balance sheet includes digital currencies which are recorded at cost less impairment. Significant judgment is exercised by the Company in determining the impairment for these digital assets because there is limited authoritative accounting guidance regarding accounting for digital assets. How we addressed the matter in our audit Our principal audit procedures related to the Company’s impairment of digital assets included the following: We obtained an understanding of the Company’s accounting for digital assets. We evaluated how management calculated the impairment and assessed whether the methodology was consistent with industry practices. We also tested the observable assumptions used in the impairment calculation on a sample basis and the mathematical accuracy of the calculations. In addition, we also evaluated the reasonableness of the impairment. /s/ RBSM LLP We have served as the Company’s auditor since 2016. Henderson, Nevada January 26, 2021 New York | Washington, DC | California | Nevada China | India | Greece Member of ANTEA International with offices worldwide F- 1 BTCS Inc. Balance Sheets December 31, December 31, 2020 2019 Assets: Current assets: Cash $ 524,135 $ 143,098 Digital currencies 995,652 252,903 Prepaid expense 31,875 24,008 Total current assets 1,551,662 420,009 Other assets: Property and equipment, net 230 1,344 Total other assets 230 1,344 Total Assets $ 1,551,892 $ 421,353 Liabilities and Stockholders’ Equity (Deficit): Accounts payable and accrued expense $ 26,288 $ 28,324 Accrued compensation 350,376 416,935 Convertible notes payable, net 131,941 159,854 Total current liabilities 508,605 605,113 Stockholders’ equity (deficit): Preferred stock; 20,000,000 shares authorized at $0.001 par value: Series B Convertible Preferred stock: 0 shares issued and outstanding at December 31, 2020 and 2019; Liquidation preference $0.001 per share - - Series C-1 Convertible Preferred stock: 29,414 shares issued and outstanding at December 31, 2020 and 2019; Liquidation preference $0.001 per share 29 29 Common stock, 975,000,000 shares authorized at $0.001 par value, 42,011,617 and 19,831,521 shares issued and outstanding at December 31, 2020 and 2019, respectively 42,010 19,830 Additional paid in capital 120,541,135 116,780,174 Accumulated deficit (119,539,887 ) (116,983,793 ) Total stockholders’ equity (deficit) 1,043,287 (183,760 ) Total Liabilities and stockholders’ equity (deficit) $ 1,551,892 $ 421,353 The accompanying notes are an integral part of these financial statements. F- 2 BTCS Inc. Statements of Operations For the years ended December 31, 2020 2019 Operating expenses: General and administrative $ 1,934,449 $ 1,422,394 Research and development 45,450 - Marketing 6,350 9,989 Total operating expenses 1,986,249 1,432,383 Other expense: Interest expense (402,663 ) (86,142 ) Impairment loss on digital currencies (165,331 ) (121,117 ) Realized loss on digital currencies transactions (1,851 ) (959 ) Total other expenses (569,845 ) (208,218 ) Net loss $ (2,556,094 ) $ (1,640,601 ) Deemed dividend related to reduction of warrant strike price - (95,708 ) Net loss attributable to common stockholders $ (2,556,094 ) $ (1,736,309 ) Net loss per share attributable to common stockholders, basic and diluted $ (0.09 ) $ (0.11 ) Weighted average number of common shares outstanding, basic and diluted 29,835,396 15,885,129 The accompanying notes are an integral part of these financial statements. F- 3 BTCS Inc. Statement of Stockholders’ (Deficit) Equity For the years ended December 31, 2020 and 2019 Series C-1 Convertible Additional Total Stockholders’ Preferred Stock Common Stock Paid-in Accumulated (Deficit) Shares Amount Shares Amount Capital Deficit Equity Balance December 31, 2018 29,414 $ 29 12,515,201 $ 12,515 $ 115,074,655 $ (115,343,192 ) $ (255,993 ) Common stock issued including equity commitment fee, net - - 4,642,108 4,642 1,157,358 - 1,162,000 Conversion of convertible notes and interest - - 1,931,788 1,931 216,040 - 217,971 Beneficial conversion features associated with convertible notes payable - - - - 104,493 - 104,493 Fractional shares adjusted for reverse split - - 16,860 17 (17) - - Warrant exercise - - 725,564 725 227,645 - 228,370 Net loss - - - - - (1,640,601 ) (1,640,601 ) Balance December 31, 2019 29,414 $ 29 19,831,521 $ 19,830 $ 116,780,174 $ (116,983,793 ) $ (183,760 ) Common stock issued including equity commitment fee, net - - 15,231,633 15,232 1,838,808 - 1,854,040 Conversion of convertible notes and interest - - 6,948,463 6,948 739,808 - 746,756 Beneficial conversion features associated with convertible notes payable - - - - 1,182,345 - 1,182,345 Net loss - - - - - (2,556,094 ) (2,556,094 ) Balance December 31, 2020 29,414 $ 29 42,011,617 $ 42,010 $ 120,541,135 $ (119,539,887 ) $ 1,043,287 The accompanying notes are an integral part of these financial statements. F- 4 BTCS Inc. Statements of Cash Flows For the years ended December 31, 2020 2019 Net Cash flows used from operating activities: Net loss $ (2,556,094 ) $ (1,640,601 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 1,114 1,359 Amortization on debt discount 354,432 64,345 Purchase of digital currencies (908,079 ) (374,979 ) Realized loss on digital currencies transactions - 959 Impairment loss on digital currencies 165,331 121,117 Interest expense 20,630 Changes in operating assets and liabilities: Prepaid expenses and other current assets (7,867 ) (15,675 ) Accounts payable and accrued expenses 44,719 11,423 Accrued compensation (66,559 ) 312,033 Net cash used in operating activities (2,973,003 ) (1,499,389 ) Net cash provided by financing activities: Proceeds from exercise of warrants - 228,370 Proceeds from short term loan 1,500,000 200,000 Net proceeds from issuance of common stock 1,854,040 1,162,000 Net cash provided by financing activities 3,354,040 1,590,370 Net increase in cash 381,037 90,981 Cash, beginning of year 143,098 52,117 Cash, end of year $ 524,135 $ 143,098 Supplemental disclosure of non-cash financing and investing activities: Conversion of convertible note and interest to common stock $ 746,756 $ 150,000 Exchange of promissory note and accrued interest into convertible note $ 217,973 Fractional shares adjusted for reverse split $ - $ 17 Deemed dividend $ - $ 95,708 Beneficial conversion features associated with convertible notes payable $ 1,182,345 $ 54,493 The accompanying notes are an integral part of these financial statements. F- 5 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Note 1 - Organization and Description of Business and Recent Developments BTCS Inc. (formerly Bitcoin Shop, Inc.), a Nevada corporation (the “Company”) was incorporated in 2008. In February 2014, the Company entered the business of hosting an online ecommerce marketplace where consumers could purchase merchandise using Digital Assets, including bitcoin and is currently focused on blockchain and digital currency ecosystems. In January 2015, the Company began a rebranding campaign using its BTCS.COM domain (shorthand for Blockchain Technology Consumer Solutions) to better reflect its broadened strategy. The Company released its new website which included broader information on its strategy. In late 2014 we shifted our focus towards our transaction verification service business, also known as bitcoin mining, though in mid-2016 we ceased our mining operation at our North Carolina facility due to capital constraints. 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 certain limitations regarding Digital Securities. The Company has not participated in any initial coin offerings as it believes most of the offerings entail the offering of Digital Securities and require registration under the Securities Act and under state securities laws or can only be sold to accredited investors in the United States. Since about July 2017, initial coin offerings using Digital Securities have been (or should be) limited to accredited investors. Because we cannot qualify as an accredited investor, we do not intend to acquire coins in initial coin offerings or from purchasers in such offerings. Further, the Company does not intend to participate in registered or unregistered initial coin offerings. The Company will carefully review its purchases of Digital Securities to avoid violating the 1940 Act and seek to reduce potential liabilities under the federal securities laws. The Company is also seeking to acquire controlling interests in businesses in the blockchain industry. The Company is also internally developing a digital asset data analytics platform to provide information to users, 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 market is rapidly evolving and there can be no assurances that we will be competitive with industry participants that have or may have greater resources than us. Amendment to Articles of Incorporation On April 5, 2019, the Company filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Nevada Secretary of State to effect a one-for 30 reverse split of the Company’s class of common stock. The Amendment took effect on April 9, 2019. No fractional shares were or will be issued or distributed as a result of the Amendment. Fractional shares resulting from the reverse split were rounded up to the nearest whole share. Numbers of shares of the Company’s preferred stock were not affected by the Reverse Stock Split; however, the conversion ratios have been adjusted to reflect the Reverse Stock Split. The financial statements have been retroactively restated to reflect the reverse stock split. Note 2 - Basis of Presentation The Company maintains its books of account and prepares financial statements in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”). The Company’s fiscal year ends on December 31. Note 3 - Liquidity, Financial Condition and Management’s Plans The Company has commenced its planned operations but has limited operating activities to date. The Company has financed its operations since inception using proceeds received from capital contributions made by its officers and proceeds in financing transactions. Notwithstanding, the Company has limited revenues, limited capital resources and is subject to all of the risks and uncertainties that are typical of an early stage enterprise. Significant uncertainties include, among others, whether the Company will be able to raise the capital it needs to finance its longer-term operations and whether such operations, if launched, will enable the Company to sustain operations as a profitable enterprise. F- 6 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Our working capital needs are influenced by our level of operations, and generally decrease with higher levels of revenue. The Company used $2,973,003 of cash in its operating activities for the year ended December 31, 2020. The Company incurred $2,556,094 net loss for the year ended December 31, 2020. The Company had cash of $524,135 and working capital of $1,043,057 at December 31, 2020. The Company expects to incur losses into the foreseeable future as it undertakes its efforts to execute its business plans. The Company will require significant additional capital to sustain its short-term operations and make the investments it needs to execute its longer-term business plan. The Company’s existing liquidity is not sufficient to fund its operations and anticipated capital expenditures for the foreseeable future. The Company is currently seeking to obtain additional equity financing, primarily through the Equity Line Purchase Agreement with Cavalry and seeking to obtain additional equity linked debt financing, however there are currently no other commitments of debt or equity in place for further financing nor is there any assurance that such financing will be available to the Company on favorable terms, if at all. Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The financial statements have been prepared assuming the Company will continue as a going concern. The Company has not made adjustments to the accompanying financial statements to reflect the potential effects on the recoverability and classification of assets or liabilities should the Company be unable to continue as a going concern. The Company continues to incur ongoing administrative and other operating expenses, including public company expenses, in excess of revenues. While the Company continues to implement its business strategy, it intends to finance its activities by: ● managing current cash and cash equivalents on hand from the Company’s past debt and equity offerings by controlling costs, ● seeking additional financing through sales of additional securities whether through Cavalry or other investors. Note 4- Summary of Significant Accounting Policies A summary of the significant accounting policies applied in the preparation of the accompanying financial statements is as follows: Concentration of Cash The Company maintains cash balances at two financial institutions in checking accounts and money market accounts. The Company considers all highly liquid investments with original maturities of six months or less when purchased to be cash and cash equivalents. As of December 31, 2020 and 2019, the Company had approximately $524,000 and $143,000 in cash. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December 31, 2020 and 2019, the Company had $274,135 and $0 in excess of the FDIC insured limit, respectively. Digital Assets Translations and Remeasurements Digital Assets are included in current assets in the balance sheets. Digital Assets are recorded at cost less impairment. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. F- 7 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Realized gain (loss) on sale of Digital Assets are included in other income (expense) in the statements of operations. The Company assesses impairment of Digital Assets quarterly if the fair value of Digital Assets is less than its cost basis. The Company recognizes impairment losses on Digital Assets caused by decreases in fair value using the average U.S. dollar spot price of the related Digital Asset as of each impairment date. Such impairment in the value of Digital Assets are recorded as a component of costs and expenses in our statements of operations. Internally Developed Software Internally developed software consisting of the core technology of the Company’s digital asset data analytics 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 leasehold improvements, computer, equipment and office furniture and fixtures, all of which are recorded at cost. Depreciation and amortization is recorded using the straight-line method over the respective useful lives of the assets ranging from three to five years. Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. Fair Value of Financial Instruments Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used to measure fair value: Level 1 - quoted prices in active markets for identical assets or liabilities Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions) Use of Estimates The accompanying 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. F- 8 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Employee Stock-Based Compensation The Company accounts for stock-based compensation in accordance with ASC 718 Compensation - Stock Compensation (“ASC 718”). ASC 718 addresses all forms of share-based payment (“SBP”) awards including shares issued under employee stock purchase plans and stock incentive shares. Under ASC 718 awards result in a cost that is measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will result in a charge to operations. Advertising Expense Advertisement costs are expensed as incurred and included in marketing expenses. Advertising expenses amounted to approximately $6,000 and $10,000 for the years ended December 31, 2020 and 2019, 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 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 December 31, 2020 and 2019 because their effect was anti-dilutive: As of As of December 31, 2020 2019 Warrants to purchase common stock 2,502,915 937,904 Series C-1 Convertible Preferred stock 196,093 196,093 Convertible notes 8,097,166 3,676,471 Total 10,796,174 4,810,468 Preferred Stock The Company applies the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity. The Company’s preferred shares do not feature any redemption rights within the holders’ control or conditional redemption features not within the Company’s control as of December 31, 2020 and 2019. Accordingly, all issuances of preferred stock are presented as a component of stockholders’ equity. Convertible Instruments The Company has evaluated the Series C-1 Convertible Preferred Stock (“Preferred Stock”) component of the Private Placement and determined it should be considered an “equity host” and not a “debt host” as defined by ASC 815, Derivatives and Hedging. This evaluation is necessary in order to determine if any embedded features require bifurcation and, therefore, separate accounting as a derivative liability. The Company’s analysis followed the “whole instrument approach,” which compares an individual feature against the entire preferred stock instrument which includes that feature. The Company’s analysis was based on a consideration of the Preferred Stock’s economic characteristics and risks and more specifically evaluated all the stated and implied substantive terms and features including (i) whether the Preferred Stock included redemption features, (ii) whether the preferred stockholders were entitled to dividends, (iii) the voting rights of the Preferred Stock and (iv) the existence and nature of any conversion rights. As a result of the Company’s determination that the Preferred Stock is an “equity host,” the embedded conversion feature is not considered a derivative liability. F- 9 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Beneficial Conversion Feature of Convertible Notes Payable The Company accounts for convertible notes payable in accordance with the guidelines established by the FASB Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options. The beneficial conversion feature of a convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a beneficial conversion feature related to the issuance of a convertible note when issued. The discounted face value is then used to measure the effective conversion price of the note. The effective conversion price and the market price of the Company’s common stock are used to calculate the intrinsic value of the conversion feature. The intrinsic value is recorded in the financial statements as a debt discount from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense. 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 is currently evaluating the impact of this standard 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 U.S. 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 is currently evaluating the impact of this standard on its financial statements and related disclosures. Note 5 - Note Payable 2019 Promissory Note On November 7, 2019, the Company issued Cavalry Fund I LP (“Cavalry”) a $200,000 promissory note (the “2019 Promissory Note”). The 2019 Promissory Note is due on August 7, 2020 and is: (i) convertible at a 20% discount to the closing price of the Company’s common stock on the date before exercise with a floor price of $0.02 per share, (ii) shall bear interest at 12% per annum (payable at maturity) and in the event of default bears interest at a rate of 20%, (iii) convertible at the Company’s option subject to certain limitations as set forth in the 2019 Promissory Note, and (iv) may be prepaid by the Company. In addition, the Convertible Note does not contain any embedded features that require bifurcation pursuant to ASC 815-15. At the issuance date, the Convertible Note was convertible into 2,173,913 shares of common stock at $0.09 per share, but the Company’s fair value of underlying common stock was $0.12 per share. As such, the Company recognized a beneficial conversion feature, resulting in a discount to the Notes of approximately $50,000 with a corresponding credit to additional paid-in capital. On April 6, 2020, the Company issued a total of 735,294 shares of the Company’s common stock for the conversion of $50,000 of principal on the 2019 Promissory Note. On May 7, 2020, the Company issued a total of 632,736 shares of the Company’s common stock for the conversion of the remaining $150,000 of principal and $2,000 of interest on the 2019 Promissory Note. On May 11, 2020, the Company issued a total of 35,824 shares of the Company’s common stock for the conversion of the remaining accrued interest of $9,458 on the 2019 Promissory Note. During the year ended December 31, 2020, the Company recorded approximately $40,000 in interest expense related to amortization on debt discount related to the 2019 Promissory Note. During the year ended December 31, 2020, the Company recorded interest expense of approximately $8,000. As of December 31, 2020, the principal balance of the 2019 Promissory Note was $0. F- 10 BTCS Inc. NOTES TO FINANCIAL STATEMENTS 2020 April Promissory Note On April 17, 2020, the Company issued Cavalry a $500,000 promissory note (the “2020 April Promissory Note”) in consideration for $500,000. The 2020 April Promissory Note is (i) due on February 17, 2021, (ii) 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 $0.01 per share and (iii) shall bear interest at 12% per annum (payable at maturity). Subject to certain limitations, the Company may force conversion of the 2020 April Promissory Note. In addition, this note does not contain any embedded features that require bifurcation pursuant to ASC 815-15. At the issuance date, the Convertible Note was convertible into 7,770,008 shares of common stock at $0.064 per share, but the Company’s fair value of underlying common stock was $0.099 per share. As such, the Company recognized a beneficial conversion feature, resulting in a discount to this note of approximately $269,000 with a corresponding credit to additional paid-in capital. From November 2 to December 3, 2020, the Company issued a total of 5,200,906 shares of the Company’s common stock for the conversion of the $500,000 of principal of 2020 April Promissory Note. On December 16, 2020, the Company issued a total of 343,703 shares of the Company’s common stock for the conversion of accrued interest of $35,298 on the 2020 April Promissory Note. During the year ended December 31, 2020, the Company recorded approximately $269,000 in interest expense related to amortization on debt discount related to the 2020 April Promissory Note. During the year ended December 31, 2020, the Company recorded interest expense of approximately $35,000. As of December 31, 2020, the principal balance of the 2020 Promissory Note was $0. 2020 December Promissory Note On December 16, 2020, the Company issued Cavalry a $1,000,000 promissory note (the “2020 December Promissory Note”) and a Series C warrant to purchase 2,000,0000 shares of the Company’s Common Stock (the “Warrant”) in consideration for $1,000,000. The 2020 December Promissory Note is (i) due on October 16, 2021, (ii) 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 and (iii) shall bear interest at 12% per annum (payable at maturity). Subject to certain limitations, the Company may force conversion of the 2020 December Promissory Note. The 2,000,000 Warrants are exercisable for cash only at $0.20 per share, over a two-year period, and does not contain anti-dilution or price protection. During the year ended December 31, 2020, the Company recorded approximately $45,000 in interest expense related to amortization on debt discount related to the 2020 December Promissory Note. As of December 31, 2020, the remaining unamortized debt discount related to the 2020 December Promissory Note was approximately $868,000. During the year ended December 31, 2020, the Company recorded interest expense of approximately $5,000. As of December 31, 2020, the principal balance of the 2020 December Promissory Note was $1,000,000. Accounts Payable During the year ended December 31, 2020, the Company recorded compensation payable, to Charles Allen, its CEO, and Michal Handerhan, its COO, of approximately $349,000 this relates to the achievement of performance milestones set forth in the 2019 Contingent Bonuses. Note 6 - Stockholders’ Equity (Deficit) Amendment to Articles of Incorporation On April 5, 2019, the Company filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Nevada Secretary of State to effect a one-for 30 reverse split of the Company’s class of common stock. The Amendment took effect on April 9, 2019. No fractional shares were or will be issued or distributed as a result of the Amendment. Fractional shares resulting from the reverse split were rounded up to the nearest whole share. Numbers of shares of the Company’s preferred stock were not affected by the Reverse Stock Split; however, the conversion ratios have been adjusted to reflect the Reverse Stock Split. The financial statements have been retroactively restated to reflect the reverse stock split. Preferred Stock We are authorized to issue 20,000,000 shares of $0.001 par value preferred stock in one or more series with such designations, voting powers, if any, preferences and relative, participating, optional or other special rights, and such qualifications, limitations and restrictions, as are determined by resolution of our board of directors. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of our company without further action by shareholders and could adversely affect the rights and powers, including voting rights, of the holders of common stock. In certain circumstances, the issuance of preferred stock could depress the market price of the common stock. Series C-1 Preferred Stock We have 29,414 shares of outstanding Series C-1 Convertible Preferred Stock (the “Series C-1”) which converts into 196,093 shares of common stock. Each share of Series C-1 converts into approximately 6.667 shares of common stock. The Certificate of Designation contains what is commonly referred to as a blocker which limits the number of shares of common stock which the holder may “beneficially own” to 4.99% of the common stock issued and outstanding. Under Rule 13d-3 of the Exchange Act, in determining beneficial ownership the holder must consider shares of common stock that may be issued upon conversion or exercise of other securities within 60-days of the date of calculation and which are not subject to any limitation on conversion or exercise. The Series C-1 also contains a provision requiring the Company to treat all holders equally. F- 11 BTCS Inc. NOTES TO FINANCIAL STATEMENTS 2019 Activities On April 18, 2019, the Company issued 16,860 shares of Common Stock in connection with the one-for 30 reverse split resulting from the rounding up of fractional shares of Common Stock to the whole shares of Common Stock. During 2019, the Company issued 4,642,108 shares of Common Stock (including 333,334 commitment shares and 68,532 pro-rata commitment shares) under the Purchase Agreement with Cavalry resulting in aggregate proceeds of approximately $1.16 million. During 2019, the Company issued 725,564 shares of Common Stock for the cash exercise of Series A Warrants, Additional Warrants, and Bonus Warrants resulting in aggregate proceeds of $228,000 to the Company. During 2019, the Company issued a total of 1,931,788 shares of the Company’s Common Stock for the conversion of approximately $200,000 of principal and $18,000 of interest on the Convertible Note. Equity Line Purchase Agreement On May 13, 2019, the Company entered into an equity line purchase agreement with Cavalry (the “Purchase Agreement”) pursuant to which Cavalry agreed to purchase from the Company, at Company’s sole discretion, up to $10,000,000 of common stock (subject to certain limitations) from time to time over a 36-month period. In consideration for entering into the $10 million Purchase Agreement, the Company issued to Cavalry 333,334 shares of common stock as a commitment fee and will issue up to 583,334 shares of common stock pro rata as Cavalry purchases additional shares. Concurrently with the execution of the Purchase Agreement on May 13, 2019, the Company and Cavalry also entered into a registration rights agreement (the “Registration Rights Agreement”), pursuant to which the Company agreed, among other things, to file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”), no later than May 23, 2019 to register for resale by Cavalry under the Securities Act of 1933 (the “Act”), the shares of common stock that the Company may elect to issue and sell to Cavalry from time to time under the Purchase Agreement. The Registration Rights Agreement provides that in the event the Company is unable to register sufficient shares under the Registration Statement, the Company will be required to file additional registration statements such that sufficient registered shares are available for issuance and sale to Cavalry under the Purchase Agreement. The Company filed a Registration Statement on Form S-1 seeking to register 4,374,741 shares. The Registration Statement was declared effective by the SEC on May 28, 2019. Provided the Registration Statement remains current and effective and the conditions set forth in the Purchase Agreement are satisfied, the Company may, from time to time and at its sole discretion, direct Cavalry to purchase shares of the Company’s common stock during trading hours (“Intraday Puts”) and after trading hours until 7 p.m. New York time (“Aftermarket Puts”) (either an Intraday Put or an Aftermarket Put may be referred to as a “Put”). The Company may make multiple Puts each day subject to delivery of the shares associated with prior Puts. The number of shares that may be sold under an Intraday Put shall be equal to the total daily trading dollar volume (“Daily Trading Dollar Volume”) for the trading day prior to the applicable Put date, divided by the Intraday Purchase Price (such shares being the “Intraday Put Share Limit”). The “Intraday Purchase Price” means the lower of: (i) 94% of the lowest sale price on the trading day prior to the applicable Put date, and (ii) 94% of the arithmetic average of the three lowest closing prices for the Company’s common stock during the 12 consecutive trading days ending on the Trading Day immediately preceding such Put date. The number of shares that may be sold under an Aftermarket Put shall be equal to the Daily Trading Dollar Volume, divided by the Aftermarket Put Price (such shares being the “Aftermarket Put Share Limit”). The “Aftermarket Put Price” means: the lower of: (i) the lowest Sale Price on the applicable Put date, and (ii) the arithmetic average of the three lowest closing prices for the Company’s common stock during the 12 consecutive trading days ending on the trading day immediately preceding such Put date. F- 12 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Upon mutual agreement of Cavalry and the Company and subject to written confirmation by Cavalry that such agreement will not result in violation of the 4.99% beneficial ownership limitation, the Company may increase the Intraday Put Share Limit or the Aftermarket Put Share Limit, as applicable, for any Put to include an amount equal to $2,000,000 in Put shares at the applicable Purchase Price, in each case in addition to the applicable Intraday Put Share Limit or Aftermarket Put Share Limit. In all instances, the Company may not sell shares of its common stock to Cavalry under the Purchase Agreement if it would result in Cavalry beneficially owning more than 4.99% of the Company’s common stock or if the closing price the trading day immediately preceding the Put date is below $0.005. As of December 31, 2019, the Company sold all 4,374,741 shares available for sale under the Registration Statement for total proceeds of $1,146,014, net of cost of $12,625. The Company also issued 333,334 commitment shares and 68,532 pro-rata commitment shares which were registered under the Registration Statement. On September 5, 2019, the Company filed a second Registration Statement on Form S-1 seeking to register 6,454,000 shares. The second Registration Statement was declared effective by the SEC on December 20, 2019. As of December 31, 2019, the Company sold 267,367 shares available for sale under the second Registration Statement for total proceeds of $15,986. 2020 Activities During the year ended December 31, 2020, the Company issued 6,186,633 shares of common stock (including 24,219 pro-rata commitment shares) under the second Registration Statement pursuant to the Purchase Agreement with Cavalry resulting in aggregate proceeds of approximately $415,000. On June 22, 2020, the Company filed a third Registration Statement on Form S-1 seeking to register 9,045,000 shares. The third Registration Statement was declared effective by the SEC on June 26, 2020. During the year ended December 31, 2020, Company issued 9,045,000 shares of common stock (including 84,303 pro-rata commitment shares) under the third Registration Statement pursuant to the Purchase Agreement with Cavalry resulting in aggregate proceeds of approximately $1,445,000 million. On April 6, 2020, the Company issued a total of 735,294 shares of the Company’s common stock for the conversion of $50,000 of principal on the 2019 Promissory Note. On May 7, 2020, the Company issued a total of 632,736 shares of the Company’s common stock for the conversion of the remaining $150,000 of principal and $2,000 of interest on the 2019 Promissory Note. On May 11, 2020, the Company issued a total of 35,824 shares of the Company’s common stock for the conversion of the remaining accrued interest of $9,458 on the 2019 Promissory Note. From November 2 to December 3, 2020, the Company issued a total of 5,200,906 shares of the Company’s common stock for the conversion of the $500,000 of principal of 2020 April Promissory Note. On December 16, 2020, the Company issued a total of 343,703 shares of the Company’s common stock for the conversion of accrued interest of $35,298 on the 2020 April Promissory Note. F- 13 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Stock Purchase Warrants The following is a summary of warrant activity for the year ended December 31, 2020 and 2019: Number of Warrants Outstanding as of December 31, 2018 1,955,274 Warrants exercise for cash (725,564 ) Expiration of warrant (291,806 ) Outstanding as of December 31, 2019 937,904 Issuance of Series C Warrants 2,000,000 Expiration of warrant (434,989 ) Outstanding as of December 31, 2020 2,502,915 Note 7 - Employment Agreements Charles W. Allen On June 22, 2017, we entered into an employment agreement with Charles Allen (the “Allen Employment Agreement”), whereby Mr. Allen agreed to serve as our Chief Executive Officer and Chief Financial Officer for a period of two (2) years, subject to renewal, in consideration for an annual salary of $245,000. Additionally, under the terms of the Allen Employment Agreement, Mr. Allen shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Allen shall be entitled to participate in all benefits plans we provide to our senior executive. We shall reimburse Mr. Allen for all reasonable expenses incurred in the course of his employment. The Company shall pay the Executive $500 per month to cover telephone and internet expenses. If the Company does not provide office space to the Executive the Company will pay the Executive an additional $500 per month to cover expenses in connection with their office space needs. On February 6, 2019 we amended the Allen Employment Agreement whereby the annual salary was increased to $345,000 per year effective January 1, 2019, all other terms of the Allen Employment Agreement remained unchanged including the Annual Increase. For the year ended December 31, 2020, Mr. Allen’s annual salary was $360,525. Michal Handerhan On June 22, 2017, we entered into an employment agreement with Michal Handerhan (the “Handerhan Employment Agreement”), whereby Mr. Handerhan agreed to serve as our Chief Operating Officer and Secretary for a period of two (2) years, subject to renewal, in consideration for an annual salary of $190,000. Additionally, under the terms of the Handerhan Employment Agreement, Mr. Handerhan shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Handerhan shall be entitled to participate in all benefits plans we provide to our senior executive. We shall reimburse Mr. Handerhan for all reasonable expenses incurred in the course of his employment. The Company shall pay the Executive $500 per month to cover telephone and internet expenses. If the Company does not provide office space to the Executive the Company will pay the Executive an additional $500 per month to cover expenses in connection with their office space needs. On February 6, 2019 we amended the Handerhan Employment Agreement whereby the annual salary was increased to $215,000 per year effective on January 1, 2019, all other terms of the Handerhan Employment Agreement remained unchanged including the Annual Increase. For the year ended December 31, 2020 Mr. Handerhan’s annual salary was $224,675. On March 31, 2020, Charles Allen, the Company’s Chief Executive Officer and Chief Financial Officer, and Michal Handerhan, the Company’s Chief Operating Officer, agreed to defer 35% of their cash compensation during the second quarter 2020 (the “Period”) and refrain from making any payments during the Period on accrued and unpaid compensation owed prior to the Period. The Company subsequently paid the deferred compensation for the Period. F- 14 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Termination/Severance Provisions The terms of the Allen Employment Agreement and Handerhan Employment Agreement (collectively the “Employment Agreements”) provide each of Messrs. Allen and Handerhan (the “Executives”) certain, severance and change of control benefits if the Executive resigns from the Company for good reason or the Company terminates him other than for cause. In such circumstances, the Executive would be entitled to a lump sum payment equal to (i) the Executive’s then-current base salary, and (ii) payment on a pro-rated basis of any bonus or other payments earned in connection with any bonus plan to which the Executive was a participant. In addition, the severance benefit for the Executives the employment agreements include the Company continuing to pay for medical and life insurance coverage for up to one year following termination. If, within eighteen months following a change of control (as defined below), the Executive’s employment is terminated by the Company without cause or he resigns from the Company for good reason, the Executive will receive certain severance compensation. In such circumstances, the cash benefit to the Executive will be a lump sum payment equal to two times (i) his then-current base salary and (ii) his prior year cash bonus and incentive compensation. Upon the occurrence of a change of control, irrespective of whether his employment with the Company terminates, each Executive’s stock options and equity-based awards will immediately vest. A “change of control” for purposes of the Employment Agreements means any of the following: (i) the sale or partial sale of the Company to an un-affiliated person or entity or group of un-affiliated persons or entities pursuant to which such party or parties acquire shares of capital stock of the Company representing at least twenty five (25%) of the fully diluted capital stock (including warrants, convertible notes, and preferred stock on an as converted basis) of the Company; (ii) the sale of the Company to an un-affiliated person or entity or group of such persons or entities pursuant to which such party or parties acquire all or substantially all of the Company’s assets determined on a consolidated basis, or (iii) Incumbent Directors (Mr. Allen and Mr. Handerhan) cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the board of directors of the Company. Additionally, pursuant to the terms of the Employment Agreements, we have entered into an indemnification agreement with each executive officer. Bonuses On December 14, 2017, the Company agreed to pay Charles Allen, its CEO, and Michal Handerhan, its COO, cash bonuses of $75,000 and $35,000, respectively for 2017. The Company further agreed to pay Mr. Allen and Mr. Handerhan contingent cash bonuses of $175,000 and $75,000 respectively (the “2017 Contingent Bonuses”) which will be deemed earned on the earlier of i) the closing of a merger approved by the Board, ii) the closing of one or many financings in 2018 totaling over $1.25 million in gross proceeds, or iii) the Company having cash and the fair market value of Digital Assets valued at over $1.5 million. Provided further that the 2017 Contingent Bonuses if deemed earned will only be payable if the Company has at least $1.25 million in cash and the fair market value of Digital Assets prior to paying the bonuses. The 2017 Contingent Bonuses are not conditioned upon the continued service of either Mr. Allen or Mr. Handerhan and do not expire. The conditions to earn the 2017 Contingent Bonuses have been achieved and the 2017 Contingent Bonuses have been paid. On February 6, 2019, the Company agreed to pay Charles Allen, its CEO, and Michal Handerhan, its COO, contingent cash bonuses of $256,025 and $150,000, respectively for 2018 (the “2018 Contingent Bonuses”) which will be deemed earned and payable upon the repayment and / or settlement of the $200,000 Promissory Note issued on December 18, 2018. On September 18, 2019, the Company exchanged the $200,000 Promissory Note and accrued interest of $17,973 for a $217,973 Convertible Promissory Note due on December 18, 2019 (the “New Note”). From September 18, 2019 through October 16, 2019 the Company issued 1,931,788 shares of the Company’s Common Stock for the conversion of all $217,973 principal on the New Note. The Company subsequently paid all the accrued interest expense of $905 on the New Note as such the conditions to earn the 2018 Contingent Bonuses have been achieved and the 2018 Contingent Bonuses have been paid. F- 15 BTCS Inc. NOTES TO FINANCIAL STATEMENTS On January 19, 2020, the Company agreed to pay Charles Allen, its CEO, and Michal Handerhan, its COO, cash bonuses of $15,000 and $10,000, respectively for 2019. The Company also agreed to pay Mr. Allen and Mr. Handerhan contingent cash bonuses of $462,000 and $235,750 (collectively the “2019 Contingent Bonuses”). The Contingent Cash Bonuses will be earned and payable upon the achievement or satisfaction of any one of the following performance goals or criteria: 1) The Company either: i) consummates a merger with another company which would constitute a change of control, or ii) signs a letter of intent (an “LOI”), approved by the board, to merge with another company which would constitute a change of control, 2) the combined value of the Company’s cash and fair market value of Digital Assets (collectively the “Assets”) at any point in time are: i) greater than or equal to $1.25 million, then 25% of the Contingent Cash Bonuses will be deemed earned and payable, ii) greater than or equal to $1.75 million (excluding any portion of Contingent Cash Bonuses previously earned whether paid or accrued), then 25% of the Contingent Cash Bonuses will be deemed earned and payable, iii) greater than or equal to $2 million (excluding any portion of Contingent Cash Bonuses previously earned whether paid or accrued), then the remaining 50% of the Contingent Cash Bonuses will be deemed earned and payable, and 3) provided further if the Company and Mr. Allen or Mr. Handerhan agree to exchange their respective Contingent Cash Bonus or a portion thereof for equity securities (not debt) then the above performance criteria do not need to be achieved with respect to the portion of Contingent Cash Bonuses exchanged for equity. The Contingent Cash Bonuses are not conditioned upon the continued service of Mr. Allen or Mr. Handerhan and do not expire. The conditions to earn the 2019 Contingent Bonuses have been achieved and the 2019 Contingent Bonuses have been paid. The amendments to the Employment Agreements, the 2017 Contingent Bonuses, the 2018 Contingent Bonuses, and the 2019 Contingent Bonuses were approved unanimously by the Board. Note 8 - Income Taxes The Company had no income tax expense due to operating loss incurred for the years ended December 31, 2020 and 2019. The tax effects of temporary differences and tax loss and credit carry forwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 2020 and 2019 are comprised of the following: As of December 31, 2020 2019 Deferred tax assets: Net-operating loss carryforward (federal & state) $ 2,166,158 $ 1,558,626 Other - - Total Deferred Tax Assets 2,166,158 1,558,626 Valuation allowance (2,166,158 ) (1,558,626 ) Deferred Tax Asset, Net of Allowance $ - $ - At December 31, 2020, the Company had net operating loss (“NOL”) carry forwards for federal and state tax purposes of approximately $9.23 million and $3.61 million respectively which begins to expire in 2034. The NOLs carryforward amounts identified in the table above are comprised of both the federal NOLs and state NOLs. The tax effected federal NOL is $1.94 million and the state NOL carryforward available is $0.228 million. The state NOL carryforward available to the Company is taken from the actual state tax returns filed in previous years. The only state whereby NOL carryforwards are available is Maryland as that is the only state that has losses apportioned to it based on state income tax rules. The other state in which the Company has filed and continues to file corporate income tax returns is Pennsylvania. Because Pennsylvania uses the single receipts factor to apportion taxable income (loss), since there are no receipts earned by the Company, the Pennsylvania state apportionment factor is zero and there are no Pennsylvania NOLs available to be carried forward. The 20-year carryforward period has been replaced with an indefinite carryforward period for these NOLs generated in tax years beginning after December 31, 2017 and future years. Prior to the February 5, 2014 merger, the Company had generated net operating losses, which the Company’s preliminary analysis indicates would be subject to significant limitations pursuant to Internal Revenue Code Section 382. The Company has not completed its IRC Section 382 Valuation, as required and the NOL’s because of potential change of ownerships might be completely worthless. Therefore, management of the Company has recorded a Full Valuation Reserve, since it is more likely than not that no benefit will be realized for the Deferred Tax Assets. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. In case the deferred tax assets will not be realized in future periods, the Company has provided a valuation allowance for the full amount of the deferred tax assets at December 31, 2020 and 2019. The valuation allowance increased by approximately $0.607 million as of December 31, 2020. F- 16 BTCS Inc. NOTES TO FINANCIAL STATEMENTS The expected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as follows: For the years ended December 31, 2020 2019 Statutory Federal Income Tax Rate (21.0 )% (21.0 )% State Taxes, Net of Federal Tax Benefit (6.3 )% (6.3 )% Federal tax rate change 0.0 % 0.0 Other 27.3 % 27.3 Change in Valuation Allowance (0.0 )% (0.0 )% Income Taxes Provision (Benefit) - % - % The Company has not identified any uncertain tax positions requiring a reserve as of December 31, 2020 and 2019. 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. On January 1, 2021, Messrs. David Garrity a director, and Charles Allen and Michal Handerhan, executive officers and directors of the Company subscribed for 1,100,000 shares of the Company’s to be designated Series C-2 Convertible Preferred Stock (the “Series C-2”), for a total of $1,100,000 at $1.00 per Share of Series C-2. Subsequently the Company received all funds and filed the Series C-2 Certificate of Designation with the State of Nevada. The material terms of the Series C-2 (as corrected) are summarized as follows: Redemption and Stockholder Approval : Under the terms of the Series C-2, the Company shall call a special meeting of stockholders within 180 days of the initial issuance date seeking stockholder ratification of the issuance of the Series C-2. If the ratification of the issuance is not approved prior to the twelve-month anniversary of the initial issuance date (the “Vote Deadline”), the Series C-2 will be redeemed at a price equal to 107% of (i) the stated value per share, or $1.07 per share, plus (ii) all unpaid dividends thereon. If the Company has filed a proxy with the Securities and Exchange Commission prior to the Vote Deadline and is unable to conduct a vote prior to the Vote Deadline then the Vote Deadline will be extended until such time as the vote is conducted. The Series C-2 will not be entitled to vote on the ratification. Conversion : Each share of Series C-2 is convertible into shares of the Company’s common stock, par value $0.001 per share, beginning on the two-year anniversary of the initial issuance date at a per-share conversion rate determined by dividing the stated value by $0.17, subject to anti-dilution adjustment provisions described below, if applicable. Further, the Series C-2 automatically converts into shares of common stock upon the earlier of: (i) the four-year anniversary of the initial issuance date, and (ii) the Company’s common stock being listed on a national securities exchange. Ranking : The Series C-2 ranks senior to the Company’s common stock, and to all other classes and series of equity securities of the Company which by their terms do not rank pari passu or senior to the Series C-2. The Series C-2 is subordinate to and ranks junior to all indebtedness of the Company. The holders of the Series C-2 are entitled to receive dividends or distributions on each share of Series C-2 on an as converted basis. Voting Rights : If the issuance of the Series C-2 is ratified by the stockholders of the Company, each share of Series C-2 shall vote on an as converted basis with the common stock or other equity securities of the Company on a two vote per one share of common stock basis. The common stock into which the Series C-2 is convertible shall, when issued, have all the same voting rights as other issued and outstanding common stock of the Company. Anti-Dilution Adjustment : If at any time after the initial issuance date, the Company raises capital equal to or in excess of $5 million by issuing common stock or common stock equivalents, then the following amount will be added to the numerator of the per-share conversion formula: the product of: (i) 0.0000004, and (ii) the aggregate amount of all capital raised by the Company after the initial issuance date, subject to a $13 million cap. On January 1, 2021, the Board of Directors of the Company approved grants of the following performance-based awards (“Awards”) under the Company’s 2021 Equity Incentive Plan: (i) 12 million stock options with an exercise price of $0.19 (the closing stock price on the last trade date immediately prior to the grant) and (ii) 2.75 million restricted stock units, to Messrs. Allen and Handerhan, directors and executive officers of the Company and Messrs Garrity a director of the Company. Of the Awards, Mr. Allen, was granted 7,500,000 stock options and 2,000,000 restricted stock units, Mr. Handerhan was granted 3,500,000 stock options and 500,000 restricted stock units, Mr. Garrity was granted 1,000,000 stock options and 250,000 restricted stock units. The vesting and exercisability of these Awards, which are subject to stockholder approval, are summarized as follows: 4.8 million options will vest on January 1, 2022 and the remaining options and the restricted stock units will vest based upon the following milestones: ● 1,800,000 options when the trailing 20-day average trading price is greater than or equal to $0.228 ● 1,800,000 options when the trailing 20-day average trading price is greater than or equal to $0.274 ● 1,800,000 options when the trailing 20-day average trading price is greater than or equal to $0.328 ● 1,800,000 options when the trailing 20-day average trading price is greater than or equal to $0.394 ● 2,750,000 restricted stock units when the Company lists its Common Stock on the Nasdaq or NYSE The trading price shall be defined as the closing price on each such day. The Company intends to seek stockholder approval for the vesting and exercisability of the foregoing equity incentive plan award s at the same special meeting to be held for the ratification of the Series C-2 issuance. F- 17 BTCS Inc. NOTES TO FINANCIAL STATEMENTS On January 11, 2021, the Company issued RedChip Companies Inc. 400,000 shares of common stock in connection with an 18 month investor relations engagement. On January 15, 2021, the Company issued Cavalry a $1,000,000 promissory note (the “2021 Promissory Note”) and a Series D warrant to purchase 2,000,0000 shares of the Company’s Common Stock (the “Series D Warrant”) in consideration for $1,000,000. The 2021 December Promissory Note is (i) due on November 15, 2021, (ii) 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 and (iii) shall bear interest at 12% per annum (payable at maturity). Subject to certain limitations, the Company may force conversion of the Promissory Note. The 2,000,000 Series D Warrants are exercisable for cash only at $2.16 per share, over a two-year period, and do not contain anti-dilution or price protection. On January 15, 2021, the Company issued 2,000,000 shares of the Company’s Common Stock to Cavalry upon the exercise of all their Series C warrants and payment of the exercise price of $400,000. Cavalry and the Company entered into an agreement whereby the Cavalry would exercise early for cash provided that the Company register the underlying shares of Common Stock within 30 days of exercise. All of the above offerings and sales were deemed to be exempt under Section 4(a)(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of accredited investors, and transfer was restricted by us in accordance with the requirements of the Securities Act of 1933. Each investor agreed that it was purchasing for investment and not with a view to distribution. On January 21, 2021, the Company filed a Certificate of Withdrawal with the Secretary of State of the State of Nevada. The Certificate of Withdrawal, which was effective upon filing, eliminated from the Articles of Incorporation of the Company all matters set forth in the Company’s Certificate of Designation with respect to the Company’s Series A Preferred Stock that had been previously filed with the Secretary of State of the State of Nevada on December 9, 2016. No shares of the Series A Preferred Stock were issued or outstanding at the time of the filing of the Certificate of Withdrawal, and none will be issued. On January 21, 2021, the Company filed a Certificate of Withdrawal with the Secretary of State of the State of Nevada. The Certificate of Withdrawal, which was effective upon filing, eliminated from the Articles of Incorporation of the Company all matters set forth in the Company’s Certificate of Designation with respect to the Company’s Series B Convertible Preferred Stock that had been previously filed with the Secretary of State of the State of Nevada on March 15, 2017. No shares of the Series B Convertible Preferred Stock were issued or outstanding at the time of the filing of the Certificate of Withdrawal, and none will be issued. On January 6, 2021, the Company issued Series C-2 Preferred Stock to Messrs. David Garrity, a director, and Charles Allen and Michal Handerhan, executive officers and directors of the Company. After further review, the Company determined that there was a scrivener’s error in Section 6 (Ant-Dilution Adjustment) of the Certificate of Designation. The formula was meant to be the product of (i) 0.0000004 (as opposed to the filed 0.000002), and (ii) the aggregate amount of all capital raised by the Company after the initial issuance date, subject to a $13 million cap. On January 21, 2021 the Company filed a Certificate of Correction in the state of Nevada to fix this error. F- 18