UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission file number: 001-40792

BTCS Inc.

(Exact name of registrant as specified in its charter)

Nevada

90-1096644

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

9466 Georgia Avenue #124, Silver Spring, MD		20910
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (202) 430-6576

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001

BTCS

The Nasdaq Stock Market

(The Nasdaq Capital Market)

Securities registered under Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 8, 2022, there were 13,077,390 shares of common stock, par value $0.001, issued and outstanding.

BTCS INC.

TABLE OF CONTENTS

		Page

PART I - FINANCIAL INFORMATION

ITEM 1	Financial Statements	4

	Condensed Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021	4

	Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	5

	Condensed Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	6

	Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)	7

	Notes to the Unaudited Condensed Financial Statements	8-19

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	28

ITEM 4	Controls and Procedures	28

PART II - OTHER INFORMATION

ITEM 1	Legal Proceedings	29

ITEM 1A	Risk Factors	29

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	29

ITEM 3	Defaults Upon Senior Securities	29

ITEM 4	Mine Safety Disclosures	29

ITEM 5	Other Information	29

ITEM 6	Exhibits	29

	Signature	30

BTCS INC.

As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “we,” “us,” “our,” the “Company,” the “Registrant,” and “BTCS Inc.,” mean BTCS Inc. and its consolidated subsidiaries, unless otherwise indicated.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, including our liquidity, our belief that our revenues will increase, our blockchain infrastructure efforts will form the core growth for our Digital Asset Platform, our plans and development of our Digital Asset Platform and the integration of Staking-as-a-Service, our Digital Asset treasury strategy, our belief regarding blockchain, plans to expand the proof-of-stake (“PoS”) operations and other future business plans. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “may,” “potential,” “continues,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the rewards and costs associated with staking or validating transactions on blockchains, regulatory issues related to our business model, a drop in the price of our Digital Assets, significant decrease in the value of our digital assets and rewards, loss or theft of the private withdrawal keys resulting in the complete loss of digital assets and reward, and others which are contained in our filings with the SEC, including our Form 10-K for the year ended December 31, 2021. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

PART I - FINANCIAL INFORMATION

ITEM 1 Financial Statements

BTCS Inc.

Balance Sheets

	September 30,			December 31,
	2022			2021
	(Unaudited)
Assets:
Current assets:
Cash	$	2,888,998		$	1,400,867
Digital assets/currencies		36,561			3,117,360
Staked digital assets/currencies		2,586,575			623,754
Prepaid expense		207,078			324,551
Total current assets		5,719,212			5,466,532

Other assets:
Property and equipment, net		12,330			9,783
Staked digital assets/currencies - long term		5,600,122			8,625,678
Total other assets		5,612,452			8,635,461

Total Assets	$	11,331,664		$	14,101,993

Liabilities and Stockholders’ Equity:
Accounts payable and accrued expense	$	104,631		$	138,716
Accrued compensation		212,571			7,334
Warrant liabilities		712,500			1,852,500
Total current liabilities		1,029,702			1,998,550

Stockholders’ equity:
Common stock, 97,500,000 shares authorized at $0.001 par value, 13,053,712 and 10,528,212 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		13,055			10,529
Additional paid in capital		160,374,041			147,682,384
Accumulated deficit		(150,085,134	)		(135,589,470	)
Total stockholders’ equity		10,301,962			12,103,443

Total Liabilities and Stockholders’ Equity	$	11,331,664		$	14,101,993

The accompanying notes are an integral part of these unaudited condensed financial statements.

BTCS Inc.

Statements of Operations

(Unaudited)

	2022			2021			2022			2021
	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021

Revenues
Validator revenue (net of fees)	$	344,196		$	323,376		$	1,421,560		$	776,399
Total revenues		344,196			323,376			1,421,560			776,399

Cost of revenues
Validator expense		82,203			71,690			313,972			145,935
Gross profit		261,993			251,686			1,107,588			630,464

Operating expenses:
General and administrative	$	432,956		$	282,558		$	1,595,296		$	1,149,506
Research and development		126,857			273,909			448,579			602,178
Compensation and related expenses		669,792			4,747,106			2,731,713			13,788,556
Marketing		8,765			7,559			74,249			10,345
Impairment loss on digital assets/currencies		145,247			208,647			12,347,472			3,777,785
Realized gains on digital asset/currency transactions		(20,126	)		-			(489,682	)		(3,054,418	)
Total operating expenses		1,363,491			5,519,779			16,707,627			16,273,952

Other income (expenses):
Interest expense		-			(58,521	)		-			(172,603	)
Amortization on debt discount		-			(581,973	)		-			(1,716,744	)
Change in fair value of warrant liabilities		71,250			2,066,250			1,140,000			2,066,250
Distributions to warrant holders		-			-			(35,625	)		-
Total other income (expenses)		71,250			1,425,756			1,104,375			176,903

Net loss	$	(1,030,248	)	$	(3,842,337	)	$	(14,495,664	)	$	(15,466,585	)
Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock		-			(13,188	)		-			(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	$	(1,030,248	)	$	(3,855,525	)	$	(14,495,664	)	$	(20,533,009	)

Net loss per share attributable to common stockholders, basic and diluted	$	(0.08	)	$	(0.59	)	$	(1.15	)	$	(3.63	)

Weighted average number of common shares outstanding, basic and diluted		12,952,645			6,518,645			12,616,805			5,660,966

The accompanying notes are an integral part of these unaudited condensed financial statements.

BTCS Inc.

Statements of Changes in Stockholders’ Equity

(Unaudited)

For the Nine Months Ended September 30, 2022

							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
Issuance of common stock, net of offering cost / At-the-market offering				2,148,658		2,149		11,092,983			-			11,095,132
Stock-based compensation				376,842		377		2,233,231			-			2,233,608
Dividend distributions				-		-		(634,557	)		-			(634,557	)
Net loss	-	-		-		-		-			(14,495,664	)		(14,495,664	)
Balance September 30, 2022	-	-		13,053,712	$	13,055	$	160,374,041		$	(150,085,134	)	$	10,301,962

For the Nine Months Ended September 30, 2021

	Shares			Amount			Shares			Amount			Shares		Amount		Capital			Deficit			Equity
	Series C-1 Convertible						Series C-2 Convertible										Additional
	Preferred Stock						Preferred Stock						Common Stock				Paid-in			Accumulated			Total Stockholders’
	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		-			-			-			-			41,290		41		219,705			-			219,746
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		13,892,542			-			13,892,884
Stock-based compensation in connection with issuance of Series C-2 convertible preferred stock		-			-			-			179,277			-		-		-			-			179,277
Net loss		-			-			-			-			-		-		-			(15,466,585	)		(15,466,585	)
Balance September 30, 2021		-		$	-			-		$	-			10,102,711	$	10,103	$	143,472,733		$	(135,006,472	)	$	8,476,364

For the Three Months Ended September 30, 2022

							Additional					Total
			Common Stock				Paid-in		Accumulated			Stockholders’
			Shares		Amount		Capital		Deficit			Equity
Balance June 30, 2022	-	-		12,703,794	$	12,705	$	159,432,894	$	(149,054,886	)	$	10,390,713
Issuance of common stock, net of offering cost / At-the-market offering				318,070		318		490,374		-			490,692
Stock-based compensation				31,848		32		450,773		-			450,805
Dividend distributions				-		-		-		-			-
Net loss	-	-		-		-		-		(1,030,248	)		(1,030,248	)
Balance September 30, 2022	-	-		13,053,712	$	13,055	$	160,374,041	$	(150,085,134	)	$	10,301,962

For the Three Months Ended September 30, 2021

	Shares		Amount		Shares			Amount			Shares		Amount		Capital			Deficit			Equity (Deficit)
	Series C-1 Convertible				Series C-2 Convertible										Additional						Total
	Preferred Stock				Preferred Stock						Common Stock				Paid-in			Accumulated			Stockholders’
	Shares		Amount		Shares			Amount			Shares		Amount		Capital			Deficit			Equity
Balance June 30, 2021		-	$	-		1,100,000		$	6,203,101			5,712,215	$	5,712	$	137,959,473		$	(131,164,135	)	$	13,004,151
Common stock issued including equity commitment fee, net		-		-		-			-			32,963		33		199,839			-			199,872
Issuance of common stock, net of offering cost / At-the-market offering		-		-		-			-			41,290		41		219,705			-			219,746
Warrant liabilities value related to Issuance of common stock						-			-			-		-		(5,771,250	)		-			(5,771,250	)
Conversion of Series C-2 Convertible Preferred stock						(1,100,000	)		(6,216,289	)		4,011,766		4,012		6,212,277			-			-
Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock		-		-		-			13,188			-		-		(13,188	)		-			-
Fractional shares adjusted for reverse split									-			14,477		15		(15	)		-			-
Stock-based compensation		-		-		-			-			290,000		290		4,665,892			-			4,666,182
Net loss		-		-		-			-			-		-		-			(3,842,337	)		(3,842,337	)
Balance September 30, 2021		-	$	-		-		$	-			10,102,711	$	10,103	$	143,472,733		$	(135,006,472	)	$	8,476,364

The accompanying notes are an integral part of these unaudited condensed financial statements.

BTCS Inc.

Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

	2022			2021
	For the Nine Months Ended
	September 30,
	2022			2021

Net Cash flows used from operating activities:
Net loss	$	(14,495,664	)	$	(15,466,585	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		2,862			443
Amortization on debt discount		-			1,716,744
Stock-based compensation		2,233,608			13,892,884
Stock-based compensation in connection with issuance of Series C-2 convertible preferred stock		-			179,277
Validator revenue		(1,421,560	)		(776,399	)
Blockchain network fees (non-cash)		1,321			-
Change in fair value of warrant liabilities		(1,140,000	)		(2,066,250	)
Purchase of non-productive digital assets/currencies		-			(5,761,550	)
Sale of non-productive digital assets/currencies		2,547,322			4,274,491
Realized gain on digital assets/currencies transactions		(489,682	)		(3,054,418	)
Impairment loss on digital assets/currencies		12,347,472			3,777,785
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		117,473			(440,514	)
Accounts payable and accrued expenses		(37,842	)		168,546
Accrued compensation		205,237			(348,875	)
Net cash used in operating activities		(129,453	)		(3,904,421	)

Net cash used in investing activities:
Purchase of productive digital assets/currencies for validating		(9,274,055	)		(9,462,279	)
Sale of productive digital assets/currencies		432,716			-
Purchase of property and equipment		(5,408	)		(4,543	)
Net cash used in investing activities		(8,846,747	)		(9,466,822	)

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		11,095,132			219,746
Payment to convertible notes principle		-			(1,092,712	)
Net cash provided by financing activities		10,464,331			13,506,039

Net increase in cash		1,488,131			134,796
Cash, beginning of period		1,400,867			524,135
Cash, end of period	$	2,888,998		$	658,931

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

The accompanying notes are an integral part of these unaudited condensed financial statements.

BTCS Inc.

Notes to Unaudited Condensed Financial Statements

Note 1 - Business Organization and Nature of Operations

BTCS Inc. (formerly Bitcoin Shop, Inc.), a Nevada corporation (the “Company”) was incorporated in 2008. In February 2014, the Company entered the business of hosting an online e-commerce marketplace where consumers could purchase merchandise using Digital Assets, including Bitcoin. The Company is currently focused on blockchain and digital currency ecosystems. In late 2014 we shifted our focus towards our transaction verification service business, also known as Bitcoin mining, though in mid-2016 we ceased our mining operation at our North Carolina facility due to capital constraints. In January 2015, the Company began a rebranding campaign using its BTCS.com domain to better reflect its broadened strategy. The Company released a new website which included broader information on its strategy.

The Company’s blockchain infrastructure operations focuses on securing next-generation blockchains and operating validator nodes on various proof of stake-based blockchain networks, earning rewards of additional Digital Assets by authenticating and validating transactions on the networks. The Company is in the late stages of developing a Digital Asset Platform that would enable users to aggregate their Digital Asset portfolio holdings from multiple exchanges and wallets into a single platform to view and analyze performance, risk metrics, and potential tax implications. The internally developed platform utilizes Digital Asset exchange APIs to read user data and does not allow for the trading of assets. We also are developing an integrated proprietary Staking-as-a-Service feature on the Digital Asset Platform that would enable users to participate in asset leveraging through securing blockchain protocols and to stake and delegating supported cryptocurrencies to BTCS operated validator nodes through a non-custodial platform.

The market is rapidly evolving and there can be no assurances that we will be competitive with industry participants that have or may have greater resources than us.

Amendment to Articles of Incorporation

On 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 accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying unaudited condensed financial statements do not include all of the information and notes required by GAAP for annual financial statements, but in the opinion of the Company’s management, reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results for the three and nine months ended September 30, 2022 are not necessarily indicative of results for the full year ended December 31, 2022. The unaudited condensed financial statements and notes should be read in conjunction with the financial statements and notes for the year ended December 31, 2021.

Note 3 - Summary of Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2021 Annual Report.

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 two financial institutions in checking accounts and money market accounts. The Company considers all highly liquid investments with original maturities of nine months or less when purchased to be cash and cash equivalents. As of September 30, 2022 and December 31, 2021, the Company had approximately $2.9 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 September 30, 2022 and December 31, 2021, the Company had approximately $2.5 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 Digital Asset validating nodes as well as by staking Digital Assets with staking pools on nodes run by third-party operators (either directly or through 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 staking pool operator receives (less digital asset transaction fees payable to the pool 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 by a third-party staking pool is based on the proportion of cryptocurrency the Company staked to the staking pool node to the total cryptocurrency staked by all pool participants validating blockchain transactions.

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 awards - 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 at the time of receipt. The satisfaction of the performance obligation for transaction verification services occurs at a point in time when confirmation is received from the network indicating that the validation is complete, and the awards are available for transfer. At that point, revenue is recognized.

Cost of revenue

The Company’s cost of revenue consists primarily of direct production costs related to the operations of 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.

Digital Assets Translations and Remeasurements

The Company accounts for its Digital 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.

Digital 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 Digital Assets are initially recorded at fair value upon receipt (or “carrying value”). The fair value of Digital Assets is determined using the average U.S. dollar spot price of the related Digital Asset. On a quarterly basis, Digital 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 Digital Assets at any time during the period, as determined using the lowest U.S. dollar spot price of the related Digital Asset subsequent to its acquisition. The Digital Assets can only be marked down when impaired and not marked up when their value increases.

Such impairment in the value of Digital Assets are recorded as a component of costs and expenses in our statements of operations. The Company recorded impairment losses related to Digital Assets of approximately $12.3 million and $3.8 million during the nine months ended September 30, 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 Digital Assets are included in other income (expense) in the statements of operations. The Company recorded realized gains (losses) on Digital Assets of approximately $490,000 and $3.1 million during the nine months ended September 30, 2022 and 2021, respectively.

The presentation of purchases and sales of Digital Assets on the Statement of Cash Flows is determined by the nature of the Digital Assets, which can be characterized as productive (i.e. purchased for purposes of staking) or non-productive. The purchase of non-productive Digital Assets and currencies are included as an operating activity, whereas the purchase of productive Digital Assets and currencies are included as investing activities in accordance with ASC 230-10-20 Investing activities. Productive Digital Assets that are staked with a lock-up period of less than 12 months are presented on the Balance Sheet as current assets. Staked Digital Assets with remaining lock-up periods of greater than 12 months are presented as long-term other assets on the Balance Sheet.

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 Digital Asset exchanges and digital wallets as well as providing a non-custodial delegation process to earn staking rewards on Digital 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.

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-S

SEC Form 10-Q filed by BTCS Inc.