BTCS Inc. 10-Q

ITEM 1 Financial Statements BTCS Inc. Condensed Balance Sheets June 30, December 31, 2021 2020 (Unaudited) Assets: Current assets: Cash $ 2,915,842 $ 524,135 Digital assets/currencies 2,649,607 995,652 Prepaid expense 598,212 31,875 Total current assets 6,163,661 1,551,662 Other assets: Property and equipment, net 3,175 230 Staked digital assets/currencies 8,264,543 - Total other assets 8,267,718 230 Total Assets $ 14,431,379 $ 1,551,892 Liabilities and Stockholders’ Equity Accounts payable and accrued expense $ 156,829 $ 26,288 Accrued compensation 3,687 350,376 Convertible notes payable, net 1,266,712 131,941 Total current liabilities 1,427,228 508,605 Stockholders’ equity: Preferred stock; 20,000,000 shares authorized at $ 0.001 par value: - - Series B Convertible Preferred stock: 0 shares issued and outstanding at June 30, 2021 and December 31, 2020; Liquidation preference $ 0.001 per share - - Series C-1 Convertible Preferred stock: 0 and 29,414 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively; Liquidation preference $ 0.001 per share - 29 Series C-2 Convertible Preferred stock: 1,100,000 and 0 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively; Liquidation preference $ 0.001 per share 6,203,101 - Common stock, 975,000,000 shares authorized at $ 0.001 par value, 57,123,458 and 42,011,617 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively 57,122 42,010 Additional paid in capital 137,908,063 120,541,135 Accumulated deficit ( 131,164,135 ) ( 119,539,887 ) Total stockholders’ equity 13,004,151 1,043,287 Total Liabilities and stockholders’ equity $ 14,431,379 $ 1,551,892 The accompanying notes are an integral part of these unaudited condensed financial statements. 4 BTCS Inc. Condensed Statements of Operations (Unaudited) 2021 2020 2021 2020 Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues Staking revenue $ 380,499 $ - $ 453,023 $ - Total revenues 380,499 - 453,023 - Cost of revenues Staking expenses 59,249 - 74,245 - Gross profit 321,250 - 378,778 - Operating expenses: General and administrative $ 312,967 $ 160,841 $ 866,948 $ 285,069 Research and development 245,336 - 328,269 - Compensation and related expenses 1,703,771 95,095 9,041,450 241,395 Marketing 1,365 1,365 2,786 4,055 Total operating expenses 2,263,439 257,301 10,239,453 530,519 Other (expenses) income: Interest expense ( 59,835 ) ( 102,792 ) ( 114,082 ) ( 108,814 ) Amortization on debt discount ( 572,675 ) - ( 1,134,771 ) ( 16,606 ) Impairment loss on digital assets/currencies ( 2,267,374 ) ( 58,527 ) ( 3,569,138 ) ( 132,952 ) Realized gains (loss) on digital asset/currency transactions - ( 1,682 ) 3,054,418 ( 1,682 ) Total other expenses ( 2,899,884 ) ( 163,001 ) ( 1,763,573 ) ( 260,054 ) Net loss $ ( 4,842,073 ) $ ( 420,302 ) $ ( 11,624,248 ) $ ( 790,573 ) Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock ( 16,177 ) - ( 32,353 ) - Deemed dividends related to recognition of downround adjustment to conversion amount for Series C-2 convertible preferred stock ( 198,663 ) - ( 5,020,883 ) - Net loss attributable to common stockholders $ ( 5,056,913 ) $ ( 420,302 ) $ ( 16,677,484 ) $ ( 790,573 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 0.09 ) $ ( 0.02 ) $ ( 0.32 ) $ ( 0.03 ) Weighted average number of common shares outstanding, basic and diluted 56,673,599 27,151,776 52,251,479 25,078,068 The accompanying notes are an integral part of these unaudited condensed financial statements. 5 BTCS Inc. Statements of Changes in Stockholders’ (Deficit) Equity (Unaudited) For the Three Months Ended June 30, 2021 Series C-1 Shares Series C-1 Amount Series C-2 Shares Series C-2 Amount Common Stock Shares Common Stock Amount Capital Deficit (Deficit) Series C-1 Convertible Series C-2 Convertible Additional Total Stockholders’ Preferred Stock Preferred Stock Common Stock Paid-in Accumulated Equity Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Balance March 31, 2021 - $ - 1,100,000 $ 5,988,261 55,891,645 $ 55,890 $ 135,637,119 $ ( 126,322,062 ) $ 15,359,208 Common stock issued including equity commitment fee, net - - - - 1,169,632 1,170 $ 798,830.00 - 800,000 Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock - - - 16,177 - - ( 16,177 ) - - Deemed dividends related to recognition of downround adjustment to conversion amount for Series C-2 convertible preferred stock - - - 198,663 - - ( 198,663 ) - - Stock-based compensation - - - 62,181 62 1,686,954 - 1,687,016 Conversion of convertible notes Conversion of convertible notes, Shares Beneficial conversion features associated with convertible notes payable Issuance of common stock and warrants for cash, net Issuance of common stock and warrants for cash, net, shares Issuance of Series C-2 convertible preferred stock Issuance of Series C-2 convertible preferred stock, Shares Conversion of Series C-1 Convertible Preferred stock Conversion of Series C-1 Convertible Preferred stock, Shares Beneficial conversion feature of Series C-2 convertible preferred stock Beneficial conversion feature of Series C-2 convertible preferred stock, Shares Warrant exercise Warrant exercise, Shares Stock-based compensation in connection with issuance of Series C-2 convertible preferred stock Stock-based compensation in connection with issuance of Series C-2 convertible preferred stock, Shares Net loss - - - - - - - ( 4,842,073 ) ( 4,842,073 ) Balance June 30, 2021 - $ - 1,100,000 $ 6,203,101 57,123,458 $ 57,122 $ 137,908,063 $ ( 131,164,135 ) $ 13,004,151 For the Three Months Ended June 30, 2020 Series C-1 Convertible Series C-2 Convertible Additional Total Stockholders’ Preferred Stock Preferred Stock Common Stock Paid-in Accumulated Equity Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Balance March 31, 2020 29,414 $ 29 - - - - - - - - - - 26,018,154 $ 26,017 $ 117,186,998 $ ( 117,354,064 ) $ ( 141,020 ) Common stock issued including equity commitment fee, net - - - 769,369 769 142,433 - 143,202 Conversion of convertible notes - - 1,403,854 1,403 210,054 - 211,457 Beneficial conversion features associated with convertible notes payable - - 269,231 269,231 Net loss - - - - - ( 420,302 ) ( 420,302 ) Balance June 30, 2020 29,414 $ 29 - - - - - - 28,191,377 $ 28,189 $ 117,808,716 $ ( 117,774,366 ) $ 62,568 For the Six Months Ended June 30, 2021 Series C-1 Convertible Series C-2 Convertible Additional Total Stockholders’ Preferred Stock Preferred Stock Common Stock Paid-in Accumulated (Deficit) Shares Amount Shares Amount Shares Amount Capital Deficit Equity Balance December 31, 2020 29,414 $ 29 - $ - 42,011,617 $ 42,010 $ 120,541,135 $ ( 119,539,887 ) $ 1,043,287 Common stock issued including equity commitment fee, net - - - - 2,887,776 2,888 2,811,245 - 2,814,133 Issuance of common stock and warrants for cash, net - - - - 9,500,000 9,500 8,855,500 - 8,865,000 Issuance of Series C-2 convertible preferred stock - - 1,100,000 1,100,000 - - - - 1,100,000 Conversion of Series C-1 Convertible Preferred stock ( 29,414 ) ( 29 ) - - 196,094 196 ( 167 ) - - Beneficial conversion features associated with convertible notes payable - - - - - - 1,000,000 - 1,000,000 Beneficial conversion feature of Series C-2 convertible preferred stock - - - ( 129,412 ) - - 129,412 - - Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock - - 32,353 - - ( 32,353 ) - - Deemed dividends related to recognition of downround adjustment to conversion amount for Series C-2 convertible preferred stock - - 5,020,883 - - ( 5,020,883 ) - - Warrant exercise - - - - 2,000,000 2,000 398,000 - 400,000 Stock-based compensation - - - - 527,971 528 9,226,174 - 9,226,702 Stock-based compensation in connection with issuance of Series C-2 convertible preferred stock - - - 179,277 - - - - 179,277 Net loss - - - - - - - ( 11,624,248 ) ( 11,624,248 ) Balance June 30, 2021 - $ - 1,100,000 $ 6,203,101 57,123,458 $ 57,122 $ 137,908,063 $ ( 131,164,135 ) $ 13,004,151 For the Six Months Ended June 30, 2020 Series C-1 Convertible Series C-2 Convertible Additional Total Stockholders’ Preferred Stock Preferred Stock Common Stock Paid-in Accumulated (Deficit) Shares Amount Shares Amount Shares Amount Capital Deficit Equity 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 - - - - 6,956,002 6,956 549,257 - 556,213 Conversion of convertible notes - - - - 1,403,854 1,403 210,054 - 211,457 Beneficial conversion features associated with convertible notes payable - - - - - - 269,231 - 269,231 Net loss - - - - - - - ( 790,573 ) ( 790,573 ) Balance June 30, 2020 29,414 $ 29 - - 28,191,377 $ 28,189 $ 117,808,716 $ ( 117,774,366 ) $ 62,568 The accompanying notes are an integral part of these unaudited condensed financial statements. 6 BTCS Inc. Condensed Statements of Cash Flows (Unaudited) 2021 2020 For the Six Months Ended June 30, 2021 2020 Net Cash flows used from operating activities: Net loss $ ( 11,624,248 ) $ ( 790,573 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 299 678 Amortization on debt discount 1,134,771 105,254 Stock-based compensation 9,226,702 - Stock-based compensation in connection with issuance of Series C-2 convertible preferred stock 179,277 Staking revenue ( 453,023 ) - Purchase of non-productive digital assets/currencies ( 5,761,549 ) ( 608,355 ) Sale of non-productive digital assets/currencies 4,274,491 - Realized gain on digital assets/currencies transactions ( 3,054,418 ) - Impairment loss on digital assets/currencies 3,569,138 132,952 Changes in operating assets and liabilities: Prepaid expenses and other current assets ( 566,337 ) ( 25,941 ) Accounts payable and accrued expenses 130,541 3,666 Accrued compensation ( 346,689 ) 66,796 Net cash used in operating activities ( 3,291,045 ) ( 1,115,523 ) Net cash used in investing activities: Purchase of productive digital assets/currencies for staking ( 8,493,136 ) - Purchase of property and equipment ( 3,245 ) - Net cash used in investing activities ( 8,496,381 ) - Net cash provided by financing activities: Proceeds from short term loan - 500,000 Proceeds from exercise of warrants 400,000 - Net proceeds from issuance of convertible notes 1,000,000 - Net proceeds from issuance of common stock and warrants for cash 8,865,000 - Net proceeds from issuance of common stock 2,814,133 556,213 Proceeds from issuance of Series C-2 convertible preferred stock 1,100,000 - Net cash provided by financing activities 14,179,133 1,056,213 Net increase (decrease) in cash 2,391,707 ( 59,310 ) Cash, beginning of period 524,135 143,098 Cash, end of period $ 2,915,842 $ 83,788 Supplemental disclosure of non-cash financing and investing activities: Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock $ 32,353 $ - Deemed dividends related to recognition of downround adjustment to conversion amount for Series C-2 convertible preferred stock $ 5,020,883 $ - Conversion of Series C-1 Preferred Stock $ 196 $ - Beneficial conversion feature of Series C-2 convertible preferred stock $ 129,412 $ - Beneficial conversion features associated with convertible notes payable $ 1,000,000 $ 269,231 Conversion of convertible note to common stock $ - $ 211,457 The accompanying notes are an integral part of these unaudited condensed financial statements. 7 BTCS Inc. Notes to Unaudited Condensed Financial Statements Note 1 - Business Organization and Nature of Operations BTCS Inc. (formerly Bitcoin Shop, Inc.), a Nevada corporation (the “Company”) was incorporated in 2008. In February 2014, the Company entered the business of hosting an online e-commerce marketplace where consumers could purchase merchandise using digital assets, including Bitcoin. The Company is currently focused on blockchain and digital currency ecosystems. In late 2014 we shifted our focus towards our transaction verification service business, also known as bitcoin mining, though in mid-2016 we ceased our mining operation at our North Carolina facility due to capital constraints. In January 2015, the Company began a rebranding campaign using its BTCS.com domain to better reflect its broadened strategy. The Company recently released its new website which included broader information on its strategy. In the first quarter of 2021, the Company resumed its blockchain infrastructure operations (previously referred to as transaction verification services) with a focus on securing proof-of-stake blockchains and anticipates this will be a core focus going forward. Blockchain infrastructure operations can broadly be defined as earning a reward for securing a blockchain by processing and validating transactions on that blockchain. The Company is developing a proprietary staking-as-a-service platform that would enable clients to stake and delegate supported cryptocurrencies through a non-custodial platform. The Company is also developing a proprietary digital asset data analytics platform aimed at enabling users to aggregate their portfolio holdings from multiple exchanges and wallets into a single platform to view and analyze performance, risk metrics, and potential tax implications. The internally developed platform utilizes digital asset exchange APIs to read user data and does not allow for the trading of assets. The Company employs a digital asset treasury strategy with a primary focus on disruptive non-security protocol layer assets such as Bitcoin and Ethereum. The Company receives digital assets from its blockchain infrastructure solutions business and acquires digital assets through open market purchases. The Company is not limiting its assets to a single type of digital asset and may hold a variety of digital assets. 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 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. Note 2 - Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying unaudited condensed financial statements do not include all of the information and notes required by GAAP for annual financial statements, but in the opinion of the Company’s management, reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The unaudited condensed financial statements and notes should be read in conjunction with the financial statements and notes for the year ended December 31, 2020. Note 3 - Liquidity, Financial Condition and Management’s Plan s 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 investments from third-party investors as well as from officers and directors of the Company. During the six months ended June 30, 2021, the Company received net proceeds of approximately $ 14.2 million from the issuance of a convertible note, common stock, warrants, and Series C-2 convertible preferred stock. As such, the Company has adequate cash to fund operations for at least the next twelve months. 8 Note 4 - Summary of Significant Accounting Policies There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2020 Annual Report. Staking Revenue The Company runs its own digital asset validating nodes and has entered into network-based smart contracts. Through these contracts, the Company provides cryptocurrency to stake a node for the purpose of processing and validating transactions and adding blocks to a respective blockchain network. The term of a smart contract can vary based on the rules of the respective blockchain and typically last a few weeks to months after it is cancelled by the operator and requires that the cryptocurrency staked remain locked up during the duration of the smart contract. In exchange for validating transactions and staking the cryptocurrency, the Company is entitled to all of the fixed cryptocurrency award for running the Company’s own node and successfully processing, validating and/or adding a block to the blockchain. The provision of processing and validating blockchain transactions is an output of the Company’s ordinary activities. Each separate block creation or validation under a smart contract with a network represents a performance obligation. The transaction consideration the Company receives, the fixed cryptocurrency awards, is non-cash consideration, which the Company measures at fair value on the date received. The fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency on the date of receipt. The satisfaction of the performance obligation for processing and validating blockchain transactions occurs at a point in time when confirmation is received from the network indicating that the validation is complete, and the awards are available for transfer. At that point, revenue is recognized. Cost of revenue The Company’s cost of revenue consists primarily of direct production costs related to the operations of processing and validating transactions on the network, rent and utilities for locations housing server nodes to the extent applicable, hosting costs if cloud-based servers are utilized and fees (including stock-based fees) paid to 3rd parties to assist in the software maintenance and operations of its nodes. Digital Assets Translations and Impairments Digital assets are included in the balance sheets as either current assets or other assets if they are staked and locked up for over one year. 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. Realized gain (loss) on sale of digital assets are included in other income (expense) in the statements of operations. We assign costs to transactions on a first-in, first-out basis. 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 lowest 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. 9 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. Use of Estimates The accompanying unaudited condensed financial statements have been prepared in conformity with 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 intangible assets, stock-based compensation, the valuation of derivative liabilities, the valuation of convertible preferred stock and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates, including the carrying amount of the intangible assets, if any, 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. Stock-based Compensation The Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest over a one-year period. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Expected Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term. 10 Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices. Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term. Expected Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models. Effective January 1, 2017, the Company elected to account for forfeited awards as they occur, as permitted by ASU 2016-09. Ultimately, the actual expenses recognized over the vesting period will be for those shares that vested. Prior to making this election, the Company estimated a forfeiture rate for awards at 0 %, as the Company did not have a significant history of forfeitures. Convertible Preferred Stock The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred stock subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including 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) are classified as temporary equity. At all other times, preferred shares are classified as stockholders’ equity. The Company evaluated the classification of its convertible preferred stock and determined that such instruments meet the criteria for equity classification. The Company has also evaluated its convertible preferred stock in accordance with the provisions of ASC 815, Derivatives and Hedging , including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred stock could generate a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. 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. 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. 11 The following financial instruments were not included in the diluted loss per share calculation as of June 30, 2021 and 2020 because their effect was anti-dilutive: Schedule of Earnings Per Share Anti-diluted As of June 30, 2021 2020 Warrants to purchase common stock 9,627,915 502,915 Series C-1 Convertible Preferred stock - 196,093 Series C-2 Convertible Preferred stock 40,117,648 - Convertible notes 2,392,631 4,048,583 Total 52,138,194 4,747,591 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 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. Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements. Note 5 - Note Payable 2020 December Promissory Note On December 16, 2020, the Company issued Cavalry Fund I LP (“Cavalry”) a $ 1,000,000 promissory note (the “2020 December Promissory Note”) 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. In connection with issuance of the 2020 December Promissory Note, the Company issued a Series C warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $ 0.20 , the Series C warrants were exercised for cash on January 15, 2021, resulting in proceeds of $ 400,000 to the Company. During the six months ended June 30, 2021, the Company recorded interest expense of approximately $ 60,000 for the 2020 December Promissory Note. As of June 30, 2021, the principal balance of the 2020 December Promissory Note was $1 million and accrued interest on the note payable amounted to approximately $ 64,000 . During the six months ended June 30, 2021, the Company recorded approximately $ 589,000 amortization of debt discount related to the 2020 December Promissory Note. 12 2021 Promissory Note On January 15, 2021, the Company issued Calvary the 2021 Promissory Note in consideration for $ 1,000,000 . The 2021 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 2021 Promissory Note. In connection with issuance of the Note, the Company issued a Series D warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $ 2.16 per share (the “Warrant”). Detachable warrants issued in a bundled transaction with debt and equity offerings are accounted for on a separate basis. The allocation of the issuance proceeds to the base instrument and to the warrants depends on the accounting classification of the separate warrant as equity or liability. If the warrants are classified as equity, then the allocation is made based upon the relative fair values of the base instrument and the warrants following the guidance in ASC 470-20-25-2. In this case, the Warrant is equity-classified, with the fair value at issuance was approximately $ 3,580,000 . As such, the Company recognized a beneficial conversion feature, resulting in a discount to the 2021 Promissory Note of approximately $ 782,000 with a corresponding credit to additional paid-in capital. In addition, the 2021 Promissory Note does not contain any embedded features that require bifurcation pursuant to ASC 815-15. At the issuance date, the 2021 Promissory Note was convertible into 705,716 shares of common stock at $ 1.41 per share, but the Company’s fair value of underlying common stock was $ 2.18 per share. As such, the Company recognized a beneficial conversion feature, resulting in an additional discount to the 2021 Promissory Note of approximately $ 218,000 with a corresponding credit to additional paid-in capital. During the six months ended June 30, 2021, the Company recorded interest expense of approximately $ 55,000 for the 2021 Promissory Note. As of June 30, 2021, the principal balance of the 2021 Promissory Note was $ 1 million and accrued interest on the note payable amounted to approximately $ 55,000 . During the six months ended June 30, 2021, the Company recorded approximately $ 546,000 amortization of debt discount related to the 2021 Promissory Note. Note 6 - Stockholders’ Equity Preferred Stock The Company is authorized to issue up to 20,000,000 shares of preferred stock. This preferred stock may be issued in one or more series, and shall have such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as shall be determined at the time of issuance by the Company’s board of directors without further action by the Company’s shareholders. On January 1, 2021, members of the Company’s management 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. The Company obtained an independent valuation of the Series C-2 and $ 179,277 of compensation expense was recognized, representing the difference between the fair value and the proceeds received. The Series C-2 is not mandatorily redeemable and is not unconditionally redeemable. The Series C-2 is callable by the Company. The Certificate of Designation required that the Company, within 180 days of the Initial Issuance Date, call a special meeting of stockholders seeking shareholder ratification of the issuance of the Series C-2. If the ratification of the issuance was not approved prior to the twelve-month anniversary of the Initial Issuance Date (the “Vote Deadline”), the Series C-2 would be redeemed at a price equal to 107 % of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. Provided; further, if the Company had filed a proxy with the SEC prior to the Vote Deadline but was unable to conduct a vote prior to the Vote Deadline then the Vote Deadline would have been extended until such time as the vote is conducted. The Series C-2 holders were not entitled to vote on the ratification. The call provision would have been automatically triggered if the ratification of the issuance was not approved in a special meeting of stockholders prior to the twelve-month anniversary of the Initial Issuance Date. The Company held the meeting within the required period and the Series C-2 is no longer redeemable. 13 Based on the guidance in ASC 480-10-S99 (“ASR 268”), a redeemable equity instrument is not to be included in permanent equity. Rather, it should be reported between long-term debt and stockholders’ equity, without a subtotal that might imply it is a part of stockholders’ equity (i.e., “temporary equity” or “mezzanine capital”). ASR 268 specifies that redeemable stock is any type of equity security, including common or preferred stock, when it has any condition for redemption which is not solely within the control of the issuer without regard to probability. The Series C-2 Certificate of Designation required the Company to redeem the Series C-2 if stockholder approval was not received by the Vote Deadline. Stockholder approval was not considered to be “solely within the Company’s control.” Stockholder approval occurred on March 31, 2021, at which time the Series C-2 was no longer callable by the Company. As such, the Series C-2 was initially classified in temporary equity under ASR 268 and was reclassified to permanent equity upon stockholder approval on March 31, 2021. The holders of Series C-2 shall be entitled to receive dividends or distributions on each share of Series C-2 on an “as-converted basis” into Common Stock when and if dividends are declared on the Common Stock by the Board of Directors. Dividends shall be paid in cash or property, as determined by the Board of Directors. At any time or times on or after the two-year anniversary of the Initial Issuance Date, each Holder shall be entitled to convert any portion of the outstanding Series C-2 held by such Holder into validly issued, fully-paid and non-assessable shares of Common at the Conversion Rate. The Conversion Amount is subject to adjustment for certain capitalization and Anti-Dilution Events. The Series C-2 will automatically be converted at the earlier of: (i) the four-year anniversary of the Initial Issuance Date, and (ii) simultaneously with the Company’s Common Stock being listed on a national securities exchange. The Conversion Rate is based upon the Conversion Price of $ 0.17 which resulted in a beneficial conversion feature at the time of issuance. As such, the Company recognized a beneficial conversion amount of $ 129,412 as a reduction to the carrying amount of the convertible instrument. This discount will be amortized as a dividend over two years, the earliest conversion date. The Conversion Amount may be adjusted due to certain Anti-Dilution Events. 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 Anti-Dilution Amount per share of Series C-2 shall be the product of: (i) 0.0000004, and (ii) the aggregate amount of all capital raised by the Company after the Initial Issuance Date (the “Capital Raised”). Provided; further, for the determination of the Anti-Dilution Amount, the amount of Capital Raised shall be limited to $13 million, regardless of how much capital the Company raises. In the event capital is raised simultaneous with a listing on a national securities exchange and the automatic conversion of the Series C-2 then such funds shall be included in the Capital Raised for the purpose of determining the Anti-Dilution Amount. As of June 30, 2021, $13,715,008 of Capital Raised triggered an adjustment to the Conversion Amount. The Company recognized the effect of the down-round protection when the capital raises occurred as the difference between: (1) the financial instrument’s fair value (without the down round feature) using the pre-trigger exercise price, and (2) the financial instrument’s fair value (without the down round feature) using the reduced exercise price. The value of the effect of the down round feature of $5,020,883 was treated as a dividend and a reduction to income available to common shareholders in the basic EPS calculation . As of June 30, 2021, the Series C-2 was convertible into 40,117,648 shares of common stock. Common Stock Issuance of Shares Pursuant to Equity Line of Credit Purchase Agreement On January 28, 2021, the Company filed a registration statement on Form S-1 seeking to register 4,000,000 shares (the “Registration Statement”). The Registration Statement was declared effective by the SEC on February 1, 2021. During the six months ended June 30, 2021, the Company issued 2,887,776 shares of common stock (inclusive of 164,212 pro-rata commitment shares) under the Registration Statement pursuant to the equity line of credit purchase agreement with Cavalry (the “Equity Line”) resulting in aggregate net proceeds of $ 2,814,133 (net of $ 875 in transfer agent fees) and $ 2,815,008 in gross proceeds at a per share price of approximately $ 0.975 (inclusive of the pro-rata commitment shares). 14 Issuance of Shares Pursuant to Registered Direct Offering On March 4, 2021, the Company closed on a securities purchase agreement (the “Purchase Agreement”) with institutional investors, pursuant to which the Company sold and issued, in a registered direct offering, 9,500,000 shares of the Company’s common stock, at a purchase price per share of $ 1.00 and immediately exercisable five -year warrants to purchase 7,125,000 shares of common stock at an exercise price of $ 1.15 per share (the “Warrants” and together with the common stock, the “Securities”). Gross proceeds from the offering was $ 9.5 million. Net proceeds were $ 8.9 million after deducting placement agent fees and other offering expenses paid for by the Company. The Purchase Agreement contains representations, warranties, indemnifications and other provisions customary for transactions of this nature. Pursuant to the Purchase Agreement, subject to limited exceptions, each of the Company and its officers and directors agreed not to, and not to publicly disclose the intention to, sell or otherwise dispose of, any shares of common stock or any securities convertible into, or exchangeable or exercisable for, common stock, for a period ending 60 days after the date of the prospectus supplement for this offering. The Company also entered into a placement agent agreement (the “PA Agreement”) with A.G.P./Alliance Global Partners (“AGP”), pursuant to which AGP agreed to serve as the exclusive placement agent for the Company in connection with that offering. The Company paid AGP a cash placement fee equal to 7.0 % of the aggregate gross proceeds raised in the offering (reduced to 3.5 % for certain investors) and reimbursed the placement agent for its legal fees and other accountable expenses in the amount of $ 40,000 . Issuance of Shares Pursuant to Cash Exercise of Series C Warrants 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 Cavalry would exercise early for cash provided that the Company register the underlying shares of common stock within 30 days of exercise. Issuance of Shares Due to Conversion of Series C-1 Preferred Stock On March 30, 2021, the Company issued 196,094 shares of common stock upon the conversion of 29,414 shares of Series C-1 Convertible Preferred stock. After this conversion, there were no Series C-1 shares outstanding so the Company filed a Certificate of Withdrawal with the Secretary of State of the State of Nevada. The Certificate of Withdrawal eliminated from the Articles of Incorporation of the Company all matters set forth in the Series C-1. Issuance of Restricted Stock to Service Providers During the six months ended June 30, 2021, the Company issued to four service providers of the Company a total of 527,971 shares of restricted common stock, representing a total fair value of $ 0.6 million. 2021 Equity Incentive Plan The Company’s 2021 Equity Incentive Plan (the “2021 Plan”) was effective on January 1, 2021 and approved by shareholders on March 31, 2021. The Company has reserved 20,000,000 shares of common stock for issuance pursuant to the 2021 Plan. Options On January 1, 2021, the Board of Directors of the Company approved the grant of 12 million stock options with an exercise price of $ 0.19 under the Company’s 2021 Plan to Messrs. David Garrity a director, and Charles Allen and Michal Handerhan, executive officers and directors of the Company. Effective as of January 1, 2021, the Company and each optionee executed Stock Option Agreements evidencing the option grants. While stockholder approval (or ratification) of the grants was not required (under either the Stock Option Agreements or by the resolutions of the Board of Directors approving such grants), the Board of Directors voluntarily caused the Company to seek shareholder ratification of the grants to limit any potential exposure to breach of fiduciary duty claims. As a result, based on the guidance in ASC 718, the date the stockholders ratified the grants (March 31, 2021) is the deemed grant date solely with respect to GAAP for those stock options. Of the stock options: (i) 4.8 million options will vest on January 1, 2022 and (ii) the remaining options vested (prior to March 31, 2021) based upon the Company’s stock price meeting certain milestones. 15 On April 1, 2021, the Company granted 350,000 stock options with an exercise price of $ 1.03 to Charles B. Lee and Carol Van Cleef, directors of the Company. Of the stock options: (i) 140,000 options will vest on April 1, 2022 and (ii) the remaining 210,000 options vest based upon the Company’s stock price meeting certain milestones. The Company records compensation expense for the 140,000 options granted on April 1, 2021 based on the estimated fair value of the options on the deemed grant date using the Black-Scholes formula, utilizing assumptions laid out in the table below. The Company uses historical data to determine exercise behavior, volatility and forfeiture rate of the options. For the 210,000 options granted on April 1, 2021 that vest based upon the Company’s stock price meeting certain milestones, the Company records compensation expense based on the estimated fair value of the options using a Monte-Carlo simulation. The following weighted-average assumptions were used to estimate the fair value of options granted during the six months ended 2021 and 2020 for both the Black-Scholes formula and the Monte-Carlo simulation: Summary of Weighted-average Assumptions Used to Estimate Fair Value For the six months ended June 30, 2021 2020 Exercise price $ 0.21 - Term (years) 2.50 - 3.30 - Expected stock price volatility 185.9 % - Risk-free rate of interest 0.34 % - Expected Volatility : The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option. Risk-Free Interest Rate : The risk-free interest rate is based on the U.S. treasury zero-coupon yield curve in effect at the time of grant for the expected term of the option. Expected Term : The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on the expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns. For awards vesting upon the achievement of a service condition, compensation cost measured on the grant date will be recognized on a straight-line basis over the vesting period. For awards vesting upon the achievement of the market conditions which were met at the date of grant, compensation cost measured on the date of grant was immediately recognized. For awards vesting upon the achievement of the market conditions which were not met at the date of grant, compensation cost measured on the grant date will be recognized on a straight-line basis over the vesting period based on estimation using a Monte-Carlo simulation. 16 A summary of options activity under the Company’s stock option plan for six months ended June 30, 2021 is presented below: Summary of Option Activity Number of Shares Weighted Average Exercise Price Total Intrinsic Value Weighted Average Remaining Contractual Life (in years) Outstanding as of December 31, 2020 - $ - $ - - Employee options granted 12,350,000 0.21 5,436,000 4.8 Outstanding as of June 30, 2021 12,350,000 $ 0.21 $ 5,436,000 4.8 Options vested and exercisable 7,200,000 $ 0.19 $ 3,261,600 4.8 RSUs On January 1, 2021, the Board of Directors of the Company approved 2.75 million restricted stock unit grants under the Company’s 2021 Equity Incentive Plan to Messrs. David Garrity a director, and Charles Allen and Michal Handerhan, executive officers and directors of the Company. Effective as of January 1, 2021, the Company and each recipient executed a Restricted Stock Agreement evidencing the stock grants. While stockholder approval (or ratification) of the grants was not required (under either the Restricted Stock Agreements or by the resolutions of the Board of Directors approving such grants), the Board of Directors voluntarily caused the Company to seek shareholder ratification of the grants to limit any potential exposure to breach of fiduciary duty claims. As a result, based on the guidance in ASC 718, the date the stockholders ratified the grants (March 31, 2021) is the deemed grant date solely with respect to GAAP for those restricted stock grants. The restricted stock units vest when the Company lists its Common Stock on a national securities exchange. As of June 30, 2021, the restricted stock units remained unvested. The cost of stock-based compensation for restricted stock units is measured based on the closing fair market value of the Company’s common stock at the deemed grant date. Because the listing on a national securities exchange is not deemed probable of occurring until the event occurs, compensation cost measured on the deemed grant date will not be recognized until the listing actually occurs. On April 1, 2021, the Company granted a total of 150,000 restricted stock units to Charles B. Lee and Carol Van Cleef, directors of the Company. The restricted stock units vest when the Company lists its Common Stock on a national securities exchange. As of June 30, 2021, the restricted stock units remained unvested. The cost of stock-based compensation for restricted stock units is measured based on the closing fair market value of the Company’s common stock at the deemed grant date. Because the listing on a national securities exchange is not deemed probable of occurring until the event occurs, compensation cost measured on the deemed grant date will not be recognized until the listing actually occurs. On June 28, 2021, the Company granted 507,813 restricted stock units to Andrew Lee, the Company’s Chief Financial Officer. The restricted stock units will vest over a five -year period as follows: 20 % of the 507,813 restricted stock units will vest on the one-year anniversary of the grant date, and the remaining 80% will vest monthly over the following four years with vesting occurring on the last day of each respective month. The grant date fair value of restricted stock units was approximately $ 0.3 million. A summary of the Company’s restricted stock units granted under the 2021 Plan during the six months ended June 30, 2021 are as follows: Summary of Restricted Stock Number of Restricted Stock Units Weighted Average Grant Day Fair Value Non-vested at December 31, 2020 - $ - Granted 3,407,813 0.97 Non-vested at June 30, 2021 3,407,813 $ 0.97 Stock-based Compensation Stock-based compensation expense for the three months ended June 30, 2021 was approximately $ 8.8 million, comprised of $ 136,000 for the issuance of restricted common stock to service providers not pursuant to the 2021 Plan and approximately $ 8.6 million in connection with options issued pursuant to the 2021 Plan. Unrecognized compensation expense for the Company was $ 3.7 million on June 30, 2021. Stock-based compensation expense is recorded as a part of selling, general and administrative expenses, compensation expenses and cost of revenues. Note 7 - Employee Benefit Plans The Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially all qualified employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary contributions of up to 100 % of employee contributions. During the six months ended June 30, 2021, the Company made contributions to the 401(k) Plan of $ 39,000 . Note 8 - Subsequent Events None 17