BTCS Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2022. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of December 31, 2022. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective could provide only reasonable assurance with respect to financial statement preparation and presentation. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022, based on the framework in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 Internal Control-Integrated Framework”). Based on our evaluation under the 2013 Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2022. 33 Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not Applicable. 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2022. Our Board 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2022. 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2022. 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2022. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2022. 34 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 2.1 Articles of Merger 8-K/A 3.1 7/31/15 2.2 Agreement and Plan of Merger 8-K/A 3.2 7/31/15 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) Certificate of Amendment filed February 13, 2017 8-K 3.1 2/16/17 3.1(d) Amendment No. 3 To Articles of Incorporation 8-K 3.1 4/9/19 3.1(e) Certificate of Change – Reverse Split 8-K 3.1 8/17/21 3.1(f) Certificate of Designation – Series V 8-K 3.1 1/31/23 3.2 Bylaws of TouchIT Technologies, Inc. S-1 3.2 5/29/08 3.2(a) Amendment No. 1 to the Bylaws 8-K 3.1 4/12/22 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 35 4.5 Convertible Note dated as of January 15, 2021 8-K 4.1 1/22/21 4.6 2021 Equity Incentive Plan (2) DEF 14A Annex A 4/25/22 4.6(a) Amendment No. 1 to the BTCS Inc. 2021 Equity Incentive Plan (2) DEF 14A Annex B 4/25/22 4.7 Description of Securities (1) 10.1 Employment Agreement - Charles Allen (2) 10-K 10.8 6/23/17 10.1(a) Amendment to Employment Agreement - Charles Allen (2) 10-K 10.15(a) 3/23/20 10.2 Employment Agreement - Michael Handerhan (2) 10-K 10.9 6/23/17 10.2(a) Amendment to Employment Agreement – Michal Handerhan (2) 10-K 10.16(a) 3/23/20 10.3 Offer Letter – Michael Prevoznik (2) 10-K 10.4 3/11/22 10.4 Offer Letter – Manish Paranjape (1) (2) 10.5 Equity Line Purchase Agreement dated as of May 13, 2019 8-K 10.1 5/16/19 10.6 Registration Rights Agreement dated as of May 13, 2019 8-K 10.2 5/16/19 10.7 Note Exchange Agreement dated as of September 18, 2019 8-K 10.1 9/19/19 10.8 Side Letter dated as of November 7, 2019 8-K 10.1 11/7/19 10.9 Side Letter with Cavalry Fund I LP dated April 17, 2020 8-K 10.1 4/20/20 10.10 Side Letter with Cavalry Fund I LP dated December 16, 2020 8-K 10.1 12/16/20 10.11 Form of Subscription Agreement –Series C-2 Convertible Preferred Stock 8-K 10.1 1/4/21 10.12 Series D Warrant dated as of January 15, 2021 8-K 10.1 1/22/21 10.13 Form of Securities Purchase Agreement, dated March 2, 2021, by and between the Company, the Purchasers, and the Placement Agent* 8-K 10.1 3/4/21 10.14 Placement Agent Agreement dated March 2, 2021 by and between the company and A.G.P./Alliance Global Partners 8-K 10.2 3/4/21 10.15 Common Stock Purchase Warrant dated March 2, 2021, by and between the Company and the Purchasers 8-K 10.3 3/4/21 21.1 List of Subsidiaries (1) 23.1 Consent of RBSM LLP (1) 31.1 Certification of the Principal Executive 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) 31.2 Certification of the 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 Inline XBRL Instance Document (1) 101.SCH Inline XBRL Taxonomy Extension Schema (1) 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase (1) 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase (1) 101.LAB Inline XBRL Taxonomy Extension Label Linkbase (1) 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase (1) 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). (1) * Exhibits and/or Schedules have been omitted. The Company hereby agrees to furnish to the SEC upon request any omitted information. (1) Filed herein (2) Indicates a management contract or compensatory plan. (3) Furnished herein ITEM 16. FORM 10-K SUMMARY. Not applicable. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2023. BTCS INC. Date: March 31, 2023 /s/ Charles Allen Charles W. Allen Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, 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 March 31, 2023 Charles W. Allen (Principal Executive Officer) and Chairman of the Board of Directors /s/ Michael Prevoznik Chief Financial Officer March 31, 2023 Michael Prevoznik (Principal Financial Officer and Principal Accounting Officer) /s/ Michal Handerhan Director March 31, 2023 Michal Handerhan /s/ Melanie Pump Director March 31, 2023 Melanie Pump /s/ Carol Van Cleef Director March 31, 2023 Carol Van Cleef /s/ Charlie Lee Director March 31, 2023 Charlie Lee 37 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, 2022 and 2021 and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. 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. F- 1 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. Going Concern As described further in Note 9 to the financial statements, the Company has suffered recurring losses from operations and does not have an established source of revenues sufficient to cover all of its operating costs. The ability of the Company to ultimately continue as a going concern is dependent on executing business plan and ultimately to attain profitable operations. The Company’s cash position and liquid Digital Assets are sufficient to support its daily operations over the next twelve months based on the cash flow forecasts provided by management. The cash used in operations in 2022 was approximately $800,000. At December 31, 2022, the Company had approximately $1.8 million of liquid Digital Assets (i.e. non-staked) and $2.1 million of cash. During the year ended December 31, 2022, the Company sold a total of 2,172,336 shares of Common Stock under the ATM Agreement for aggregate total net proceeds of approximately $11,126,331. The Company’s cash position and liquid Digital Assets are sufficient to support its daily operations over the next twelve months. Accordingly, the Company has determined that these factors alleviate the doubt as to the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. Management may to continue to fund its business by way of public or private offerings of the Company’s stock or through loans from private investors, in order satisfy the Company’s business objective for at least one year from the financial statement issuance date. However, the Company has concluded that these plans alleviate the doubt related to its ability to continue as a going concern. We determined the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and uncertainty regarding the Company’s available capital and the risk of bias in management’s judgments and assumptions in their determination. Our audit procedures related to the Company’s assertion on its ability to continue as a going concern included the following, among others: ● We assessed whether the Company’s determination that their alleviation of doubt about its ability to continue as a going concern was adequately disclosed. ● We reviewed and evaluated management’s plans including cash flow projections for alleviating the doubt about going concern. 587 /s/ RBSM LLP We have served as the Company’s auditor since 2016. Las Vegas, Nevada March 31, 2023 New York | Washington, DC | California | Nevada China | India | Greece Member of ANTEA International with offices worldwide F- 2 BTCS Inc. Balance Sheets December 31, 2022 December 31, 2021 Assets: Current assets: Cash $ 2,146,783 $ 1,400,867 Crypto assets 982 3,117,360 Investments, at value (Cost $ 100,000 ) 100,000 - Staked crypto assets 1,826,307 623,754 Prepaid expense 123,727 324,551 Total current assets 4,197,799 5,466,532 Other assets: Property and equipment, net 11,152 9,783 Staked crypto assets 5,708,624 8,625,678 Total other assets 5,719,776 8,635,461 Total Assets $ 9,917,575 $ 14,101,993 Liabilities and Stockholders’ Equity: Accounts payable and accrued expense $ 76,727 $ 138,716 Accrued compensation 295,935 7,334 Warrant liabilities 213,750 1,852,500 Total current liabilities 586,412 1,998,550 Stockholders’ equity: Common stock, 97,500,000 shares authorized at $ 0.001 par value, 13,107,149 and 10,528,212 shares issued and outstanding at December 31, 2022 and 2021, respectively 13,108 10,529 Additional paid in capital 160,800,263 147,682,384 Accumulated deficit ( 151,482,208 ) ( 135,589,470 ) Total stockholders’ equity 9,331,163 12,103,443 Total Liabilities and Stockholders’ Equity $ 9,917,575 $ 14,101,993 The accompanying notes are an integral part of these financial statements. F- 3 BTCS Inc. Statements of Operations 2022 2021 For the Year Ended December 31, 2022 2021 Revenues Validator revenue (net of fees) $ 1,692,454 $ 1,213,284 Total revenues 1,692,454 1,213,284 Cost of revenues Validator expense 426,440 $ 268,346 Gross profit 1,266,014 944,938 Operating expenses: General and administrative $ 1,916,193 $ 1,590,707 Research and development 611,758 712,736 Compensation and related expenses 3,313,638 15,583,258 Marketing 78,171 180,290 Impairment loss on crypto assets 13,348,874 3,845,899 Realized gains on crypto asset transactions ( 506,757 ) ( 3,054,418 ) Total operating expenses 18,761,877 18,858,472 Other income (expenses): Interest expense - ( 186,740 ) Amortization on debt discount - ( 1,868,059 ) Change in fair value of warrant liabilities 1,638,750 3,918,750 Distributions to warrant holders ( 35,625 ) - Total other income (expenses) 1,603,125 1,863,951 Net loss $ ( 15,892,738 ) $ ( 16,049,583 ) Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock - ( 45,541 ) Deemed dividends related to recognition of downround adjustment to conversion amount for Series C-2 convertible preferred stock - ( 5,020,883 ) Net loss attributable to common stockholders $ ( 15,892,738 ) $ ( 21,116,007 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 1.25 ) $ ( 3.09 ) Weighted average number of common shares outstanding, basic and diluted 12,732,914 6,840,665 The accompanying notes are an integral part of these financial statements. F- 4 BTCS Inc. Statement of Stockholders’ Equity For the Years Ended December 31, 2022 and 2021 Shares Amount Shares Amount Shares Amount Capital Deficit Equity 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 - $ - 4,201,035 $ 4,201 $ 120,578,944 $ ( 119,539,887 ) $ 1,043,287 Common stock issued including equity commitment fee, net - - - - 321,738 322 3,013,683 - 3,014,005 Issuance of common stock, net of offering cost / At-the-market offering - - - - 466,791 467 2,831,685 - 2,832,152 Issuance of common stock and warrants for cash, net - - - - 950,000 950 8,864,050 - 8,865,000 Warrant liabilities value related to Issuance of common stock - - - - - - ( 5,771,250 ) - ( 5,771,250 ) 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 ) - - 19,609 20 9 - - Conversion of Series C-2 Convertible Preferred stock - - ( 1,100,000 ) ( 6,216,289 ) 4,011,766 4,012 6,212,277 - - 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 - - - 45,541 - - ( 45,541 ) - - Deemed dividends related to recognition of downround adjustment to conversion amount for Series C-2 convertible preferred stock - - - 5,020,883 - - ( 5,020,883 ) - - Fractional shares adjusted for reverse split - - 14,477 15 ( 15 ) - - Warrant exercise - - - - 200,000 200 399,800 - 400,000 Stock-based compensation - - - - 342,796 342 15,490,213 - 15,490,555 Stock-based compensation in connection with issuance of Series C-2 convertible preferred stock - - - 179,277 - - - - 179,277 Net loss - - - - - - - ( 16,049,583 ) ( 16,049,583 ) Balance December 31, 2021 - $ - - $ - 10,528,212 $ 10,529 $ 147,682,384 $ ( 135,589,470 ) $ 12,103,443 Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balance December 31, 2021 10,528,212 $ 10,529 $ 147,682,384 $ ( 135,589,470 ) $ 12,103,443 Balance 10,528,212 $ 10,529 $ 147,682,384 $ ( 135,589,470 ) $ 12,103,443 Issuance of common stock, net of offering cost / At-the-market offering 2,172,336 2,172 11,124,159 - 11,126,331 Stock-based compensation 406,601 407 2,624,863 - 2,625,270 Dividend distributions - - ( 631,143 ) - ( 631,143 ) Net loss - - - ( 15,892,738 ) ( 15,892,738 ) Balance December 31, 2022 13,107,149 $ 13,108 $ 160,800,263 $ ( 151,482,208 ) $ 9,331,163 Balance 13,107,149 $ 13,108 $ 160,800,263 $ ( 151,482,208 ) $ 9,331,163 The accompanying notes are an integral part of these financial statements. F- 5 BTCS Inc. Statements of Cash Flows 2022 2021 For the Year Ended December 31, 2022 2021 Net Cash flows used from operating activities: Net loss $ ( 15,892,738 ) $ ( 16,049,583 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 4,039 939 Amortization on debt discount - 1,868,059 Stock-based compensation 2,625,270 15,490,555 Stock-based compensation in connection with issuance of Series C-2 convertible preferred stock - 179,277 Validator revenue ( 1,692,454 ) ( 1,213,284 ) Blockchain network fees (non-cash) 1,321 - Change in fair value of warrant liabilities ( 1,638,750 ) ( 3,918,750 ) Purchase of non-productive crypto assets - ( 5,761,550 ) Sale of non-productive crypto assets 2,547,325 4,274,491 Realized gain on crypto asset transactions ( 506,757 ) ( 3,054,418 ) Impairment loss on crypto assets 13,348,874 3,845,899 Changes in operating assets and liabilities: Prepaid expenses and other current assets 200,824 ( 292,676 ) Accounts payable and accrued expenses ( 62,332 ) 112,428 Accrued compensation 288,601 ( 343,042 ) Net cash used in operating activities ( 776,777 ) ( 4,861,655 ) Net cash used in investing activities: Purchase of productive crypto assets for validating ( 9,453,024 ) ( 9,462,279 ) Sale of productive crypto assets 585,595 - Purchase of investments ( 100,000 ) - Purchase of property and equipment ( 5,408 ) ( 10,491 ) Net cash used in investing activities ( 8,972,837 ) ( 9,472,770 ) Net cash provided by financing activities: Dividend distributions ( 630,801 ) - Proceeds from exercise of warrants - 400,000 Proceeds from issuance of Series C-2 convertible preferred stock - 1,100,000 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 - 3,014,005 Net proceeds from issuance common stock/ At-the-market offering 11,126,331 2,832,152 Payment to convertible notes principle - ( 2,000,000 ) Net cash provided by financing activities 10,495,530 15,211,157 Net increase in cash 745,916 876,732 Cash, beginning of period 1,400,867 524,135 Cash, end of period $ 2,146,783 $ 1,400,867 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 $ - $ 45,541 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 $ - $ 20 Conversion of Series C-2 Preferred Stock $ - $ 6,216,289 Beneficial conversion feature of Series C-2 convertible preferred stock $ - $ 129,412 Beneficial conversion features associated with convertible notes payable $ - $ 1,000,000 Dividends payable $ - $ - The accompanying notes are an integral part of these financial statements. F- 6 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 and is an early entrant in the crypto asset market with a primary focus on blockchain infrastructure and staking. The Company operates validator nodes on various DPoS and PoS-based blockchain networks and stakes the native crypto assets on those blockchains to earn rewards. The Company’s recently launched StakeSeeker, a comprehensive crypto dashboard and education center designed to empower users to better understand and grow their crypto holdings with innovative portfolio analytics and a non-custodial process to earn staking rewards through the direct participation in blockchain consensus algorithms. Staking-as-a-Service (“StaaS”) is a central component of BTCS’s strategy, allowing crypto asset holders to earn rewards by participating in network consensus mechanisms through staking and delegating their crypto assets to Company-operated validator nodes. The Company believes that StaaS provides a more accessible and cost-effective way for crypto asset holders to participate in blockchain networks’ consensus mechanisms, thereby promoting the growth and adoption of blockchain technology. The Company’s business is subject to various risks and uncertainties, including risks associated with the evolving regulatory landscape for crypto assets, risks associated with the volatility of crypto asset prices, and risks associated with the development and adoption of blockchain technology. The Company’s future success is dependent on various factors, including the growth of the crypto asset market, the adoption of blockchain technology, and the Company’s ability to effectively operate and grow its blockchain infrastructure operations and StaaS business. As of the date of the financial statements, the Company had recently launched its StakeSeeker platform, which is currently in beta. The Company plans to expand its PoS operations to secure other disruptive blockchain protocols that also allow for delegating and asset leveraging. The growth of both StakeSeeker’s user base as well as the number and size of staked cryptocurrencies by delegators to Company-run validator nodes are critical to the Company’s strategy and success. Amendment to Articles of Incorporation On August 12, 2021, the Company filed a Certificate of Change with the Nevada Secretary of State to affect a 1-for-10 reverse split of the Company’s class of Common Stock (the “Reverse Split”). The Certificate of Change became effective on August 13, 2021. No fractional shares were issued in connection with the Reverse Split and all such fractional interests were rounded up to the nearest whole number of shares of Common Stock. The Company now has 97,500,000 shares of Common Stock authorized. Numbers of shares of the Company’s preferred stock were not affected by the Reverse Split; however, the conversion ratios have been adjusted to reflect the Reverse Split. The financial statements and notes to the financial statements have been retroactively restated to reflect the Reverse 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. F- 7 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Note 3 - Summary of Significant Accounting Policies Basis of presentation The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). Reclassifications Certain prior period amounts have been reclassified in order to conform with the current period presentation. These reclassifications have no impact on the Company’s previously reported net income (loss). Concentration of Cash The Company maintains cash balances at four 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, 2022 and 2021, the Company had approximately $ 2.1 million and $ 1.4 million 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, 2022 and 2021, the Company had approximately $ 1.7 million and $ 0.9 million in excess of the FDIC insured limit, respectively. Revenue Recognition The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606 , Revenue from Contracts with Customers . The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: ● Step 1: Identify the contract with the customer ● Step 2: Identify the performance obligations in the contract ● Step 3: Determine the transaction price ● Step 4: Allocate the transaction price to the performance obligations in the contract ● Step 5: Recognize revenue when the Company satisfies a performance obligation Revenue is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company generates revenue through staking rewards. The Company has entered into network-based smart contracts by running its own crypto asset validator nodes (or “nodes”) as well as by staking crypto assets on nodes run by third-party operators (either directly or through crypto exchanges). Through these contracts, the Company provides cryptocurrency to stake on a node for the purpose of 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 canceled by the operator and requires that the cryptocurrency staked remain locked up during the duration of the smart contract. In exchange for staking the cryptocurrency and validating transactions on blockchain networks, the Company is entitled to all of the fixed cryptocurrency award for running the Company’s own node and is entitled to a fractional share of the fixed cryptocurrency award a third-party node operator receives (less crypto asset transaction fees payable to the node operator or exchanges, which are immaterial and are recorded as a deduction from revenue), for successfully validating or adding a block to the blockchain. The Company’s fractional share of awards received from delegating to a third-party validator node is based on the proportion of cryptocurrency the Company staked to the node to the total cryptocurrency staked by delegators to the node. The provision of 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 cryptocurrency award - is a 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. F- 8 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Cost of Revenue The Company’s cost of revenue consists primarily of direct production costs related to the operations of 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 software maintenance and operations of its nodes. Crypto Assets Translations and Remeasurements The Company accounts for its crypto assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles –Goodwill and Other . 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. Crypto assets held are included in the balance sheets as either current assets or other assets if they are staked and locked up for over one year. The Company’s crypto assets are initially recorded at fair value upon receipt (or “carrying value”). The fair value of crypto assets is determined using the U.S. dollar spot price of the related crypto asset. On a quarterly basis, crypto assets are measured at carrying value, net of any impairment losses incurred since receipt. The Company will record impairment losses as the fair value falls below the carrying value of the crypto assets at any time during the period, as determined using the lowest U.S. dollar spot price of the related crypto asset subsequent to its acquisition. The crypto assets can only be marked down when impaired and not marked up when their value increases. Such impairment in the value of crypto assets is recorded as a component of costs and expenses in our Statements of Operations. The Company recorded impairment losses of approximately $ 13.3 million and $ 3.8 million related to crypto assets during the years ended December 31, 2022 and 2021, respectively Impairment losses cannot be recovered for any subsequent increase in fair value until the sale or disposal of the asset. Realized gain (loss) on sale of crypto assets are included in other income (expense) in the statements of operations. The Company recorded realized gains (losses) on crypto assets of approximately $ 0.5 million and $ 3.1 million during the years ended December 31, 2022 and 2021, respectively. The presentation of purchases and sales of crypto assets on the Statement of Cash Flows is determined by the nature of the crypto assets, which can be characterized as productive (i.e. purchased for purposes of staking) or non-productive. The purchase of non-productive crypto assets and currencies are included as an operating activity, whereas the purchase of productive crypto assets and currencies are included as investing activities in accordance with ASC 230-10-20 Investing activities. Productive crypto assets that are staked with a lock-up period of less than 12 months are presented on the Balance Sheet as current assets. Staked crypto assets with remaining lock-up periods of greater than 12 months are presented as long-term other assets on the Balance Sheet. F- 9 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Internally Developed Software Internally developed software consists of the core technology of the Company’s Digital Asset Platform, which is being designed to allow users to track, monitor and analyze their aggregate cryptocurrency portfolio holdings by connecting their crypto exchanges and digital wallets as well as providing a non-custodial delegation process to earn staking rewards on crypto asset holdings. 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 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. 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- 10 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Accounting for Warrants The Company accounts for the issuance of Common Stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). In addition, Under ASC 815, registered Common Stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the balance sheet as a current liability. The Company assessed the classification of Common Stock purchase warrants as of the date of each offering and determined that such instruments originally met the criteria for equity classification; however, as a result of the Company no longer being in control of whether the warrants may be cash settled, the instruments no longer qualify for equity classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change in the fair value of warrant liabilities” in the statements of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation model (see Note 4). 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 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. Share-based payment awards exchanged for services are accounted for at the fair value of the award on the estimated grant date. Options 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 often 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. F- 11 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Restricted Stock Units (RSUs) 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. Stock-based compensation expense for the market-based restricted stock units with explicit service conditions is recognized on a straight-line basis over the longer of the derived service period or the explicit service period, regardless of whether the market condition is satisfied. However, in the event that the explicit service period is not met, previously recognized compensation cost would be reversed. Market-based restricted stock units subject to market-based performance targets require achievement of the performance target as well as a service condition in order for these RSUs to vest. The Company estimates the fair value of market-based RSUs as of the grant date and expected derived term using a Monte Carlo simulation that incorporates pricing inputs covering the period from the grant date through the end of the derived service period. Dividends On January 5, 2022, the Board of Directors (the “Board”) of the Company declared a non-recurring special dividend of $ 0.05 for each outstanding share of Common Stock of the Company, payable to holders of record as of the close of business on March 17, 2022. The dividend distributions are considered a return of capital as the distributions are in excess of the Company’s current and accumulated earnings and profits. The return of capital distribution reduces the Company’s additional paid in capital balance. The Company will evaluate the appropriateness of potential future dividends as the Company continues to grow its operations. Dividend distributions amounted to $ 631,000 and $ 0 during the years ended December 31, 2022 and 2021, respectively. Advertising Expense Advertisement costs are expensed as incurred and included in marketing expenses. Advertising and marketing expenses amounted to approximately $ 78,000 and $ 180,000 for the year ended December 31, 2022 and 2021, 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, restricted stock units, options 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, 2022 and 2021 because their effect was anti-dilutive: Schedule of Earnings Per Share Anti-diluted 2022 2021 As of December 31, 2022 2021 Warrants to purchase common stock 912,500 962,794 Options 1,150,000 1,235,000 Non-vested restricted stock awards units 1,590,553 29,363 Total 3,653,053 2,227,157 F- 12 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 adopted ASU No. 2019-12 effective January 1, 2021, and the adoption did not have a material impact 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 adopted ASU No. 2020-06 effective January 1, 2022, and the adoption did not have a material impact 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. F- 13 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Note 4 - Fair Value of Financial Assets and Liabilities The Company measures certain assets and liabilities at fair value. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. Financial instruments, including cash and cash equivalents, accounts and other receivables, 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 following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of December 31, 2022 and 2021: Schedule of Fair Value of Assets and Liabilities Valued on Recurring Basis Fair value measured at December 31, 2022 Total at December 31, Quoted prices in active markets Significant other observable inputs Significant unobservable inputs 2022 (Level 1) (Level 2) (Level 3) Assets Investments $ 100,000 $ - $ - $ 100,000 Liabilities Warrant Liabilities $ 213,750 $ - $ - $ 213,750 Fair value measured at December 31, 2021 Total at December 31, Quoted prices in active markets Significant other observable inputs Significant unobservable inputs 2021 (Level 1) (Level 2) (Level 3) Assets Investments $ - $ - $ - $ - Liabilities Warrant Liabilities $ 1,852,500 $ - $ - $ 1,852,500 The Company did not make any transfers between the levels of the fair value hierarchy during the years ended December 31, 2022 and 2021. The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets and liabilities for the years ended December 31, 2022 and 2021, that are measured at fair value on a recurring basis: Schedule of Changes in Fair Value and Other Adjustments of Warrants Fair value of Level 3 financial assets December 31, December 31, 2022 2021 Beginning balance $ - $ - Purchases 100,000 - Unrealized appreciation (depreciation) - - Ending balance $ 100,000 $ - Fair value of Level 3 financial liabilities December 31, December 31, 2022 2021 Beginning balance $ 1,852,500 $ - Warrant liabilities classification - 5,771,250 Fair value adjustment of warrant liabilities ( 1,638,750 ) ( 3,918,750 ) Ending balance $ 213,750 $ 1,852,500 F- 14 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Level 3 Valuation Techniques Level 3 financial assets consist of private equity investments for which there is no current public market for these securities such that the determination of fair value requires significant judgment or estimation. As of December 31, 2022, the Company’s Level 3 investments were carried at original cost of the investments, with a value of $ 100,000 . The Company has elected to apply the measurement alternative under ASC 321, Investments—Equity Securities , for these investments. Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the Company’s statements of operations. On March 2, 2021, the Company entered into a securities purchase agreement (the “Offering”) with certain purchasers pursuant to which the Company agreed to sell an aggregate of (i) 950,000 shares of Common Stock, and (ii) Common Stock warrants (the “Warrants”) to purchase up to 712,500 shares of Common Stock for gross proceeds of $ 9.5 million in a private placement. The closing of the Offering occurred on March 4, 2021. The Warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions (as defined in the Warrants) at the Company. At the time of issuance, the Company maintained control of certain fundamental transactions and as such the Warrants were initially classified in equity. As of December 31, 2022, the Company no longer maintained control of certain fundamental transactions as they did not control a majority of shareholder votes. As such, the Company may be required to cash settle the Warrants if a fundamental transaction occurs which is outside the Company’s control. Accordingly, the Warrants are classified as liabilities. The Warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk-free rates, as well as volatility. The Warrants require the issuance of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the balance sheet as a current liability. A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of December 31, 2022 and 2021, is as follows: F- 15 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Summary of Valuation Methodology and Significant Unobservable Inputs Warrant Liabilities December 31, 2022 December 31, 2021 Risk-free rate of interest 3.99 % 1.26 % Expected volatility 152.84 % 162.53 % Expected life (in years) 3.18 4.18 Expected dividend yield - - The risk-free interest rate was based on rates established by the Federal Reserve Bank. For the Warrants, the Company estimates expected volatility giving primary consideration to the historical volatility of its Common Stock. The general expected volatility is based on the standard deviation of the Company’s underlying stock price’s daily logarithmic returns. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not historically paid dividends on its Common Stock and does not expect to pay recurring dividends on its Common Stock in the future. Note 5 - Stockholders’ Equity (Deficit) Preferred Stock Series C-2 Preferred Stock The company is authorized to issue 20,000,000 shares of $ 0.001 par value 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. 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. On January 1, 2021, members of the Company’s management subscribed for 110,000 shares of the Company’s Series C-2 Convertible Preferred Stock (the “Series C-2”), for a total of $ 1,100,000 at $ 10.00 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. F- 16 BTCS Inc. NOTES TO FINANCIAL STATEMENTS 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 was 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. 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 $ 1.70 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. Upon the conversion of Series C-2 into Common Stock on September 14, 2021, the total amortization of the beneficial conversion feature is $ 45,541 and the remaining discount is netted against additional paid in capital. 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 September 30, 2021, over $13 million of capital was raised and the adjustment to the Conversion Amount was fully triggered. The Company recognized the effect of the down-round protection when capital raises occur 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. On September 14, 2021, the Series C-2 was converted into 4,011,766 shares of Common Stock. F- 17 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Common Stock Reverse Stock Split On August 25, 2021, the Company issued approximately 14,500 shares of Common Stock in connection with the 1-for-10 Reverse Split resulting from the rounding up of fractional shares of Common Stock to the whole shares of Common Stock. The financial statements have been retroactively restated to reflect the reverse stock split. Issuance of Shares Pursuant to Equity Line of Credit Purchase Agreement On January 28, 2021, the Company filed a fourth Registration Statement on Form S-1 seeking to register 400,000 shares. The fourth Registration Statement was declared effective by the SEC on February 1, 2021. During the year ended December 31, 2021, the Company sold 321,738 shares (inclusive of approximately 17,590 pro-rata commitment shares) available for sale under the fourth Registration Statement for total proceeds of approximately $ 3,015,000 . Issuance of Shares Pursuant to Registered Direct Offering On March 4, 2021, the Company entered into a securities purchase agreement (the “RD Purchase Agreement”) with institutional investors, pursuant to which the Company sold and issued, in a registered direct offering, 950,000 shares of the Company’s Common Stock, at a purchase price per share of $ 10.00 and immediately exercisable five-year warrants to purchase 712,500 shares of Common Stock at an exercise price of $ 11.50 per share. Gross proceeds from the Offering were $ 9.5 million. Net proceeds were $ 8.9 million after deducting placement agent fees and other offering expenses paid for by the Company. The RD Purchase Agreement contains representations, warranties, indemnifications and other provisions customary for transactions of this nature. Pursuant to the RD 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 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 . At The Market Offering Agreement On September 14, 2021, the Company entered into an At-The-Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC, as agent (“H.C. Wainwright”), pursuant to which the Company may offer and sell, from time-to-time through H.C. Wainwright, shares of the Company’s Common Stock having an aggregate offering price of up to $ 98,767,500 (the “Shares”). The Company will pay H.C. Wainwright a commission rate equal to 3.0 % of the aggregate gross proceeds from each sale of Shares. F- 18 BTCS Inc. NOTES TO FINANCIAL STATEMENTS During the year ended December 31, 2021, the Company sold a total of 466,791 shares of Common Stock under the ATM Agreement for aggregate total gross proceeds of approximately $ 2,979,000 at an average selling price of $ 6.38 per share, resulting in net proceeds of approximately $ 2,832,000 after deducting commissions and other transaction costs. During the year ended December 31, 2022, the Company sold a total of 2,172,336 shares of Common Stock under the ATM Agreement for aggregate total gross proceeds of approximately $ 11,487,000 at an average selling price of $ 5.29 per share, resulting in net proceeds of approximately $ 11,126,000 after deducting commissions and other transaction costs. Issuance of Shares Pursuant to Cash Exercise of Series C Warrants On January 15, 2021, the Company issued 200,000 shares of the Company’s Common Stock to Cavalry upon the exercise of all their Series C warrants and payment of the exercise amount 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 19,609 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 Shares Due to Conversion of Series C-2 Preferred Stock On September 14, 2021, the Series C-2 was converted into 4,011,766 shares of Common Stock. Please refer to the discussion below. Issuance of Restricted Stock to Service Providers During the year ended December 31, 2021, the Company issued to four service providers a total of approximately 52,800 shares of restricted Common Stock, representing a total fair value of $ 0.6 million. During the year ended December 31, 2022, the Company issued to one service provider a total of approximately 12,500 shares of restricted Common Stock, representing a total fair value of $ 59,000 . 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 and amended on June 13, 2022. The Company has reserved 7,000,000 shares of Common Stock for issuance pursuant to the 2021 Plan. F- 19 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Options On January 1, 2021, the Board of Directors of the Company approved the grant of 1.2 million stock options with an exercise price of $ 1.90 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) 480,000 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. On April 1, 2021, the Company granted 35,000 stock options with an exercise price of $ 10.30 to Charles B. Lee and Carol Van Cleef, directors of the Company. Of the stock options: (i) 14,000 options will vest on April 1, 2022 and (ii) the remaining 21,000 options vest based upon the Company’s stock price meeting certain milestones. During the year ended December 31, 2022, the Company granted 50,000 stock options with a weighted average exercise price of $ 1.51 to non-executive employees. The following weighted-average assumptions were used to estimate the fair value of options granted on the deemed grant date during the year ended December 31, 2022 and 2021 for both the Black-Scholes formula and the Monte-Carlo simulation, applicable to 2021 options granted: Summary of Weighted-average Assumptions Used to Estimate Fair Value Year Ended December 31, 2022 2021 Exercise price $ 1.51 $ 2.14 Term (years) 5.00 2.50 - 3.30 Expected stock price volatility 165.8 % 185.9 % Risk-free rate of interest 2.77 % 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 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. F- 20 BTCS Inc. NOTES TO FINANCIAL STATEMENTS A summary of options activity under the Company’s stock option plan for the year ended December 31, 2022 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, 2021 1,235,000 $ 2.14 $ 1,488,000 4.0 Employee options granted 50,000 1.51 - 1.4 Employee options expired ( 100,000 ) 1.90 - - Employee options forfeited ( 35,000 ) 1.50 - - Outstanding as of December 31, 2022 1,150,000 $ 2.15 $ - 3.3 Options vested and exercisable as of December 31, 2022 1,135,000 $ 2.16 $ - 3.3 RSUs On January 1, 2021, the Board of Directors of the Company approved 275,000 restricted stock unit grants under the Company’s 2021 Equity Incentive Plan to Messrs. David Garrity, a former 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 December 31, 2021, all 275,000 restricted stock units vested with a total fair value of approximately $ 2.8 million. 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 and was recorded on the September 14, 2021 vesting date when the listing occurred. On April 1, 2021, the Company granted a total of 15,000 restricted stock units to two non-employee directors of the Company. The restricted stock units vest when the Company lists its Common Stock on a national securities exchange. As of December 31, 2021, all 15,000 restricted stock units vested with a total fair value of approximately $ 0.2 million. 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 and was recorded on the September 14, 2021 vesting date when the listing occurred. On June 28, 2021, the Company granted 50,781 restricted stock units to the Company’s then Chief Financial Officer. The restricted stock units were to vest over a five-year period as follows: 20 % of the 50,781 restricted stock units were to vest on the one-year anniversary of the grant date, and the remaining 80% were to vest monthly over the following four years with vesting occurring on the last day of each respective month. On November 30, 2021, this Chief Financial Officer resigned. The 50,781 restricted stock units granted to this Chief Financial Officer were forfeited accordingly. On December 1, 2021, the Company granted 29,363 restricted stock units to the Company’s current Chief Financial Officer. The restricted stock units are to vest over a five-year period as follows: 20 % of the 29,363 restricted stock units are to vest on the one-year anniversary of the grant date, and the remaining 80% are to vest annually over the following four years with vesting occurring on December 31 st of each respective year. The grant date fair value of restricted stock units was approximately $ 0.2 million. As of December 31, 2022, 5,873 of the restricted stock units vested with a total fair value of approximately $ 35,000 . On February 22, 2022, the Company granted 45,767 restricted stock units to the Company’s Chief Technology Officer. The restricted stock units are to vest over a five-year period as follows: 20 % of the 45,767 restricted stock units are to vest on January 1, 2023, and the remaining 80% are to vest annually over the following four years with vesting occurring on December 31 st of each respective year. The grant date fair value of restricted stock units was approximately $ 0.2 million. F- 21 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Effective January 2, 2022, the Board of Directors of the Company ratified the following arrangements approved by its Compensation Committee: The Board of Directors of the Company ratified grants of RSUs to each independent director. David Garrity, Carol Van Cleef and Charles Lee were each granted 95,544 restricted stock units (the “Board Grants”). The Board Grants vest in four equal installments at the end of each calendar quarter in 2022. As of December 31, 2022, all 95,544 of the restricted stock units vested with a total fair value of approximately $ 0.3 million. The Company’s executive officers were granted RSUs as part of a long-term incentive (“LTI”) plan, with vesting terms set for when the Company’s market capitalization reaches and sustains a market capitalization for 30 consecutive days above four defined market capitalization thresholds of $ 100 million, $ 150 million, $ 200 million and $ 400 million. On December 9, 2022, upon recommendation of the Compensation Committee of the Board of Directors approved an amendment to the LTI plan, whereby the market capitalization threshold targets were lowered to $ 50 million, $ 100 million, $ 150 million, and $ 300 million, effective January 1, 2023. Effective February 22, 2022, upon appointment of Manish Paranjape as Chief Technology Officer of the Company, Mr. Paranjape was also granted RSUs as part of the LTI plan, with consistent vesting terms set for when the Company’s market capitalization above the same four defined market capitalization thresholds. The RSUs granted to each executive employee are as follows: Schedule of Restricted Stock Units Total RSUs Market Cap Vesting Thresholds Officer Name Title Grant Date Granted $ 50 million $ 100 million $ 150 million $ 300 million Charles Allen Chief Executive Officer 1/2/2022 694,444 173,611 173,611 173,611 173,611 Michal Handerhan Chief Operations Officer 1/2/2022 444,444 111,111 111,111 111,111 111,111 Michael Prevoznik Chief Financial Officer 1/2/2022 222,224 55,556 55,556 55,556 55,556 Manish Paranjape Chief Technology Officer 2/22/2022 160,184 40,046 40,046 40,046 40,046 1,521,296 380,324 380,324 380,324 380,324 To the extent any market capitalization targets set forth above for Mr. Prevoznik and Mr. Paranjape are achieved, the RSUs will also be subject to the following five-year vesting schedule: 20 % of the LTI RSUs which have met a market capitalization criteria will vest on the one-year anniversary of the grant date, and the remaining 80 % of the LTI RSUs which have met a market capitalization criteria will vest annually on each subsequent calendar year-end date over the four years following the one year anniversary of the grant date. 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. Stock-based compensation expense for the market-based restricted stock units with explicit service conditions is recognized on a straight-line basis over the longer of the derived service period or the explicit service period, regardless of whether the market condition is satisfied. However, in the event that the explicit service period is not met, previously recognized compensation cost would be reversed. Market-based restricted stock units subject to market-based performance targets require achievement of the performance target as well as a service condition in order for these RSUs to vest. F- 22 BTCS Inc. NOTES TO FINANCIAL STATEMENTS The Company estimates the fair value of market-based RSUs as of the grant date and expected derived term using a Monte Carlo simulation that incorporates pricing inputs covering the period from the grant date through the end of the derived service period. The following weighted-average assumptions were used to estimate the fair value of options granted during the year ended December 31, 2022 and 2021 for the Monte-Carlo simulation: Schedule of Weighted-Average Assumptions Used to Estimate Fair Value Year Ended December 31, 2022 2021 Vesting Hurdle Price $ 19.39 - Term (years) 5.00 - Expected stock price volatility 103.7 % - Risk-free rate of interest 1.32 % - 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 RSUs. 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 RSUs. Expected Term : The Company’s expected term represents the weighted-average period that the Company’s RSUs are expected to be outstanding. The expected term is based on the stipulated 5-year period from the grant date until the market-based criteria are achieved. If the market-based criteria are not achieved within the five-year period from the grant date, the RSUs will not vest and shall expire. Vesting Hurdle Price: The vesting hurdle prices are determined by taking the vesting Market Cap criteria divided by the shares outstanding as of the valuation dates. Effective September 30, 2022, Mr. David Garrity resigned as a director of BTCS, Inc. The Board of Directors of the Company agreed to fully vest Mr. Garrity’s remaining unvested restricted stock units ( 7,962 shares) and pay Mr. Garrity approximately $ 5,600 , which represents the remaining 2022 director fees. On October 1, 2022, the Company granted a total of 7,962 restricted stock units to Melanie Pump, a non-employee director of the Company, which vested on December 31, 2022 with a total fair value of approximately $ 12,000 . A summary of the Company’s restricted stock units granted under the 2021 Plan during the year ended December 31, 2022 are as follows: Summary of Restricted Stock Number of Restricted Stock Units Weighted Average Grant Day Fair Value Nonvested at December 31, 2021 29,363 $ 5.96 Granted 1,670,569 3.28 Vested ( 109,379 ) 2.29 Forfeited - - Nonvested at December 31, 2022 1,590,553 $ 3.39 F- 23 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Stock-based Compensation Stock-based compensation expense is recorded as a part of selling, general and administrative expenses, compensation expenses and cost of revenues. Stock-based compensation expense for the years ended December 31, 2022 and 2021 was as follows: Schedule of Stock-based Compensation Expense 2022 2021 For the Year Ended December 31, 2022 2021 Employee bonus stock awards $ 894,027 $ - Employee stock option awards 97,142 11,932,409 Employee restricted stock unit awards 1,575,475 2,993,146 Non-employee restricted stock awards 225,207 352,640 Series C-2 Allocation - 179,277 Stock-based compensation $ 2,791,851 $ 15,457,472 Stock Purchase Warrants The following is a summary of warrant activity for the years ended December 31, 2022 and 2021: Summary of Warrant Activity Number of Warrants Outstanding as of December 31, 2020 250,323 Issuance of Series C Warrants 200,000 Warrants exercise for cash ( 200,000 ) Issuance of Warrants pursuant to Registered Direct Offering 712,500 Fractional shares adjusted for reverse split ( 29 ) Outstanding as of December 31, 2021 962,794 Expiration of warrants ( 50,294 ) Outstanding as of December 31, 2022 912,500 F- 24 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Note 6 – Executive Compensation Employment Agreements Charles W. Allen – Chief Executive Officer and Director 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 executives. 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, subject to a 4.5 % annual increase each subsequent year to adjust for inflation. All other terms of the Allen Employment Agreement remained unchanged including the Annual Increase. For the year ended December 31, 2022, Mr. Allen’s annual base salary was $ 393,702 . On June 24, 2022, as a part of its cost-cutting measures, Charles Allen agreed to forfeit $ 25,000 of his annual base salary for 2022. The forfeiture in 2022 does not alter or amend current employment agreements, or any calculations based on those agreements. Michal Handerhan – Chief Operating Officer and Director 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 executives. 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, subject to a 4.5 % annual increase each subsequent year to adjust for inflation. All other terms of the Handerhan Employment Agreement remained unchanged including the Annual Increase. On January 19, 2022, the Board of Directors approved a salary increase for Michael Handerhan effective January 1, 2022. For the year ended December 31, 2022 Mr. Handerhan’s annual base salary was $ 275,000 . On June 24, 2022, as a part of its cost-cutting measures, Michal Handerhan agreed to each forfeit $ 25,000 of his annual base salary for 2022. The forfeiture in 2022 does not alter or amend current employment agreements, or any calculations based on those agreements. Michael Prevoznik – Chief Financial Officer On December 1, 2021 we entered into an employment agreement with Michael Prevoznik (the “Prevoznik Employment Agreement”), whereby Mr. Prevoznik agreed to serve as our Chief Financial Officer in consideration for an annual salary of $ 175,000 . Additionally, under the terms of the Prevoznik Employment Agreement, Mr. Prevoznik shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Prevoznik shall be entitled to participate in all benefits plans we provide to our senior executives. We shall reimburse Mr. Prevoznik 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 June 1, 2022, the Board of Directors approved a salary increase for Michael Prevoznik effective June 1, 2022. For the year ended December 31, 2022 Mr. Prevoznik’s annual base salary was $ 225,000 . On December 9, 2022, upon recommendation of the Compensation Committee of the Board of Directors approved a 4.5 % inflationary increase in Mr. Prevoznik’s annual base salary, effective January 1, 2023. Manish Paranjape – Chief Technology Officer On February 22, 2022 we entered into an employment agreement with Manish Paranjape (the “Paranjape Employment Agreement”), whereby Mr. Paranjape agreed to serve as our Chief Technology Officer in consideration for an annual salary of $ 225,000 . Additionally, under the terms of the Paranjape Employment Agreement, Mr. Paranjape shall be eligible for an annual bonus if we meet certain criteria, as established by the Board of Directors. Mr. Paranjape shall be entitled to participate in all benefits plans we provide to our senior executives. We shall reimburse Mr. Paranjape 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 December 9, 2022, upon recommendation of the Compensation Committee of the Board of Directors approved a 4.5 % inflationary increase in Mr. Paranjape’s annual base salary, effective January 1, 2023. F- 25 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 January 2, 2022, Charles Allen, the Company’s Chief Executive Officer, was awarded 173,611 fully-vested shares of Common Stock and Michal Handerhan, the Company’s Chief Operating Officer, was awarded 111,111 fully-vested shares of Common Stock granted under the 2021 Equity Incentive Plan (the “Plan”) as equity bonuses. On May 12, 2022, the Compensation Committee of the Board of Directors of the Company approved a performance based Annual Cash Incentive Plan (“ACIP”) for the Company’s executives for fiscal year 2022 whereby if an executive meets their performance milestones, the executive will receive a bonus in amount up to 48 % to 107 % of the applicable executive’s base salary. On December 9, 2022, upon recommendation of the Compensation Committee, the Board of Directors approved an annual performance payout in the aggregate amount of $ 278,498 , to be paid in stock and cash in the closing price of the Company’s common stock on January 1, 2023 as follows: Schedule of Annual Performance Layout For the Year Ended December 31, 2022 Charles Allen - CEO 104,987 Michal Handerhan - COO 82,500 Michael Prevoznik - CFO 45,000 Manish Paranjape - CTO 46,011 Total Performance Bonuses Earned 278,498 F- 26 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Note 7 – Accrued Compensation As of December 31, 2022 and 2021, the Company had accrued expenses consisting of the following: Schedule of Accrued Compensation December 31, 2022 December 31, 2021 Compensation and related expenses $ 295,935 $ 9,178 Accounts Payable 76,727 51,191 Other - 1,860,177 Accrued Expenses $ 372,662 $ 1,920,547 Accrued compensation and related expenses include approximately $ 284,000 and related to performance bonus accruals as of December 31, 2022 and 2021, respectively. Note 8 – 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. For the years ended December 31, 2022 and 2021, the Company made contributions to the 401(k) Plan of $ 45,000 and $ 39,000 , respectively. Note 9 – Liquidity The Company follows “ Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ”. The Company’s financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the financial statements, the Company has historically incurred a net loss and has an accumulated deficit at December 31, 2022, a net loss and net cash used in operating activities for the reporting period then ended. The Company is implementing its business plan and generating revenue; however, the Company’s cash position and liquid crypto assets are sufficient to support its daily operations over the next twelve months. The Company has sustained recurring losses and negative cash flows from operations. Over the past year, the Company’s growth has been funded through the sale of common stock equity. As of December 31, 2022, the Company had approximately $ 2.1 million of unrestricted cash. However, historically the Company has experienced and may continue to experience negative operating margins and negative cash flows from operations, as well as an ongoing requirement for additional capital investment. The Company expects that it will need to raise additional capital to accomplish its business plan over the next several years. The Company expects to seek to obtain additional funding through debt or equity financing. There can be no assurance as to the availability or terms upon which such financing and capital might be available. F- 27 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Note 10 - Income Taxes The Company had no income tax expense due to operating loss incurred for the years ended December 31, 2022 and 2021. 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, 2022 and 2021 are comprised of the following: Schedule of Deferred Tax Assets and Liabilities 2022 2021 As of December 31, 2022 2021 Deferred tax assets: Federal Net-operating loss carryforward $ 2,776,943 $ 2,287,780 State Net-operating loss carryforward 360,818 Other (Non-Qualified Stock Options) 225,794 209,797 Total Deferred Tax Assets 3,363,555 2,497,578 Valuation allowance ( 3,363,555 ) ( 2,497,578 ) Deferred Tax Asset, Net of Allowance $ - $ - At December 31, 2022, the Company had net operating loss carry forwards for federal and state tax purposes of approximately $ 18.6 million which begins to expire in 2034 . 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 . Accordingly, the amount of NOLs that were generated in the tax year December 31, 2014 in the amount of $ 1,290,156 will expire after December 31, 2034 . The amount of NOLs that were generated in the tax year December 31, 2015 in the amount of $ 1,545,343 will expire after December 31, 2035 . The amount of NOLs that were generated in the tax year December 31, 2016 in the amount of $ 794,762 will expire after December 31, 2036 . The amount of NOLs that were generated in the tax year December 31, 2017 in the amount of $ 1,084,564 will expire after December 31, 2037 . The NOLs generated in the tax years December 31, 2018 and onwards in the amounts of $ 8,508,712 will have an indefinite life per current U.S. federal income tax legislation. 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, 2022 and 2021. The valuation allowance increased by approximately $ 0.9 million as of December 31, 2022. The expected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as follows: Schedule of Income Tax Rate For the years ended December 31, 2022 2021 Statutory Federal Income Tax Rate ( 21.0 )% ( 21.0 )% State Taxes, Net of Federal Tax Benefit ( 6.72 )% ( 6.5 )% Federal tax rate change 0.0 % 0.0 Other 27.72 % 27.5 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, 2022 and 2021. F- 28 BTCS Inc. NOTES TO FINANCIAL STATEMENTS Note 11 - 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. During the period from December 31, 2022 to March 28, 2023, the Company sold a total of 295,306 shares of Common Stock under the ATM Agreement for aggregate total gross proceeds of approximately $ 520,000 at an average selling price of $ 1.76 per share, resulting in net proceeds of approximately $ 501,000 after deducting commissions and other transaction costs. On December 9, 2022, upon recommendation of the Compensation Committee, the Board of Directors of BTCS Inc. approved, effective January 1, 2023, the amendment of unvested RSUs which are subject to monthly time-based vesting such that the time-based vesting conditions will be replaced with calendar year annual vesting, including any pro-rata adjustment which may be required to move from an annual basis to a calendar year annual basis. In addition, the Board of Directors approved the grant of 25,000 RSUs to Mr. Prevoznik and Mr. Paranjape each, which vest annually over a five-year period with the first vesting date being on the one-year anniversary of the execution date of the effective grant date, subject to continued employment on each applicable vesting date. Effective January 19, 2023, The Board of Directors of the Company approved the issuance of $ 50,000 of common stock to each independent director. The shares will be issued in four equal installments ($ 12,500 ) at the end of each calendar quarter beginning March 31st, subject to continued service on each applicable issuance date. The number of shares issuable will be based on the closing price of the Company’s common stock on the last trading day prior to the end of the applicable calendar quarter. The Board also approved the following annual committee chair fees: $ 5,000 for the Audit Committee Chair, 5,000 for the Compensation Committee Chair, and $ 5,000 for the Governance and Nominating Committee (collectively, the “Committee Chair Fees”). The Committee Chair Fees are payable quarterly in four equal installments at the end of each calendar quarter. The annual Board fees remain unchanged at $ 25,000 per independent director, payable quarterly in four equal installments at the end of each calendar quarter. On February 2, 2023, the Company announced that it had created a new Series V Convertible Preferred Stock with plans to distribute the Series V to each shareholder of record as of March 27, 2023 with a payment date of April 14, 2023. On March 23, 2023, the Company announced the delay of the key dates including record and payment dates of the Series V distribution, due to anticipated changes to the structure. The Company is actively working with relevant parties to ensure a smooth process of the distribution moving forward. F- 29