BTCS Inc. 10-Q

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations. Certain statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. Factors that could cause or contribute to these differences include those discussed in the Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2020 and our Prospectus filed with the SEC on February 16, 2021. Overview We are an early entrant in the digital asset market and one of the first U.S. publicly traded companies to focus on digital assets and blockchain technologies. Through our blockchain infrastructure operations we secure disruptive blockchains by actively processing and validating blockchain transactions and are rewarded with digital assets. We are also developing a digital asset data analytics platform which allows users to consolidate crypto trades from multiple exchanges on a single platform. Digital assets are core to our corporate treasury strategy with a primary focus on disruptive non-security protocol layer assets. Blockchain Infrastructure Blockchain infrastructure solutions can broadly be defined as earning a reward for securing a blockchain by processing and validating transactions on that blockchain. There are currently two main consensus mechanisms used to secure blockchains: i), proof-of-work (“PoW”), in which nodes dedicate computational resources, and ii) proof-of-stake (“PoS”), in which nodes dedicate financial resources. The intention behind both PoW and PoS is to make it practically infeasible for any single malicious actor to have enough computational power or ownership stake to successfully attack the blockchain. In the case of PoW, a miner does “work” using energy consuming computers and is rewarded for this “work” with digital assets. The miner, through nodes, is validating transactions on the blockchain, essentially converting electricity and computing power into a digital currency reward comprised of transaction fees and newly-minted digital assets. Bitcoin is an example of this and is by far the largest and most secure PoW blockchain. With regards to PoS, miners actively operate nodes and validate transactions and are required to stake their holdings of a digital currency to participate in the consensus algorithm such that bad behavior can be penalized by “slashing” the miners holdings and/or rewards. PoS requires less energy/electricity to be consumed and can give cryptocurrency holders who actively operate nodes and validate transactions a reward in the native cryptocurrency, provided that they “stake” their holdings. Miners who break the rules or fail to do the required “work” can be penalized by “slashing” their rewards or staked digital assets; thus, ill-intentioned behavior among miners is discouraged, allowing for the blockchain to be properly maintained and secured. PoS blockchains employ an environmentally-friendly technology used to process and validate digital asset transactions. Ethereum 2.0, Polkadot and Cardano are examples of PoS blockchains. The Company actively operates 240 nodes on the Ethereum Beacon Chain, and has deployed its own Cardano pool. The Company plans to expand its PoS operations to secure other disruptive blockchain protocols. The Company is not currently securing PoW blockchains, such as Bitcoin’s blockchain, but may in the future. The Company is developing a proprietary staking-as-a-service platform to allow users to stake and delegate supported cryptocurrencies through a non-custodial platform. Digital Asset Data Analytics Platform We are also developing a proprietary digital asset data analytics platform aimed at enabling users to aggregate their portfolio holdings from multiple exchanges and wallets into a single platform to view and analyze performance, risk metrics, and potential tax implications. The internally developed platform utilizes digital asset exchange APIs to read user data and does not allow for the trading of assets. As a result of the pandemic, we have experienced delays in the development of the platform, however, on April 1, 2021 we engaged an information technology service provider to assist with the further development and acceleration of the platform. 18 Digital Asset Treasury Strategy The Company employs a digital asset treasury strategy with a primary focus on disruptive non-security protocol layer assets such as Bitcoin and Ethereum. The Company receives digital assets from its blockchain infrastructure solutions business and acquires digital assets through open market purchases. The Company is not limiting its assets to a single type of digital asset and may hold a variety of digital assets. The Company will carefully review its purchases of digital securities to avoid violating the 1940 Act and seek to reduce potential liabilities under the federal securities laws. The following tables reflect our digital assets held and their fair market values at period end: Digital Assets Held at Period End Asset 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 Bitcoin (BTC) 14.9 20.6 20.6 54.3 63.6 66.9 90.0 90.0 QoQ Change 38 % 0 % 163 % 17 % 5 % 34 % 0 % Ethereum (ETH) 584.7 985.0 985.0 2,304.6 2,554.7 2,674.2 7,732.5 7,878.6 * QoQ Change 68 % 0 % 134 % 11 % 5 % 189 % 2 % Cardano (ADA) 257,757.4 QoQ Change NA Kusama (KSM) 123.4 QoQ Change NA Tezos (XTZ) 14,965.6 QoQ Change NA Fair Market Value of Digital Assets at Period End Asset 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 Bitcoin (BTC) $ 123,733 $ 148,406 $ 132,831 $ 496,027 $ 686,580 $ 1,962,572 $ 5,302,695 $ 3,153,675 QoQ Change 20 % -10 % 273 % 38 % 186 % 170 % -41 % YoY Change 1,222 % 3,892 % 536 % Ethereum (ETH) $ 105,175 $ 127,662 $ 131,582 $ 521,552 $ 919,748 $ 1,976,126 $ 14,833,709 $ 17,920,148 QoQ Change 21 % 3 % 296 % 76 % 115 % 651 % 21 % YoY Change 1,448 % 11,173 % 3,336 % Cardano (ADA) $ 356,600 QoQ Change NA YoY Change NA Kusama (KSM) $ 26,501 QoQ Change NA YoY Change NA Tezos (XTZ) $ 45,495 QoQ Change NA YoY Change NA Total $ 228,908 $ 276,068 $ 264,413 $ 1,017,579 $ 1,606,328 $ 3,938,698 $ 20,136,404 $ 21,502,419 QoQ Change 21 % -4 % 285 % 58 % 145 % 411 % 7 % YoY Change 1,327 % 7,516 % 2,013 % * Approximately 9 ETH is not staked on Ethereum 2.0’s Beacon Chain. As of August 5, 2021 the fair market value of our digital assets was $26.5 million. 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. 19 Non-GAAP financial measure In addition to our results determined in accordance with GAAP, we believe Adjusted EBITDA, a non-GAAP measure, is useful in evaluating our operating performance. We believe that Adjusted EBITDA may be helpful to investors because it provides consistency and comparability with past financial performance and the economic realities of our business specifically, but not limited to, the accounting for digital assets. However, Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Among other non-cash and non-recurring items, Adjusted EBITDA excludes stock-based compensation expense (including stock-based compensation issued to service providers), which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy. In addition, other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business. We calculate Adjusted EBITDA as net income (loss), adjusted to exclude, depreciation and amortization, interest expense, stock-based compensation expense (including stock-based compensation issued to service providers), and impairment of intangible digital assets. The following table provides a reconciliation of net income (loss) to Adjusted EBITDA: Six Months Ended June 30, 2021 2020 Net income (loss) $ (11,624,248 ) $ (790,573 ) Adjusted to exclude the following: Depreciation and amortization 1,134,771 - Interest expense 114,082 125,420 Stock-based compensation 9,003,786 - Impairment of intangible digital assets 3,569,138 132,952 Adjusted EBITDA 2,197,528 (532,201 ) 20 Results of Operations for the Three Months Ended June 30, 2021 and 2020 The following table reflects our operating results for the three months ended June 30, 2021 and 2020: Three Months Ended June 30, 2021 2020 Revenues Staking revenue $ 380,499 $ - Total revenues 380,499 - Cost of revenues Staking expenses 59,249 - Gross profit 321,250 - Operating expenses: General and administrative $ 312,967 $ 160,841 Research and development 245,336 - Compensation and related expenses 1,703,771 95,095 Marketing 1,365 1,365 Total operating expenses 2,263,439 257,301 Other (expenses) income: Interest expense (59,835 ) (102,792 ) Amortization on debt discount (572,675 ) - Impairment loss on digital assets/currencies (2,267,374 ) (58,527 ) Realized gains (loss) on digital asset/currency transactions - (1,682 ) Total other expenses (2,899,884 ) (163,001 ) Net loss $ (4,842,073 ) $ (420,302 ) Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock (16,177 ) - Deemed dividends related to recognition of downround adjustment to conversion amount for Series C-2 convertible preferred stock (198,663 ) - Net loss attributable to common stockholders $ (5,056,913 ) $ (420,302 ) Net loss per share attributable to common stockholders, basic and diluted $ (0.09 ) $ (0.02 ) Weighted average number of common shares outstanding, basic and diluted 56,673,599 27,151,776 Revenue Revenue for the three months ended June 30, 2021 and 2020 were approximately $0.4 million and $0, respectively. The increase is from our blockchain infrastructure solutions staking revenue. Cost of Revenues Cost of revenues for the three months ended June 30, 2021 and 2020 were approximately $59,000 and $0, respectively. The increase is from our blockchain infrastructure staking operating costs, including, web service hosting fees, and cash and stock-based compensation related to services provided by vendor. 21 Operating Expenses Operating expenses for the three months ended June 30, 2021 and 2020 were approximately $2.3 million and $0.3 million, respectively. The increase is primarily due to the issuance of 12 million options, rendering $1.6 million in stock-based compensation expense during the three months ended June 30, 2021. Other Expenses Other expenses for the three months ended June 30, 2021 and 2020 was approximately $2.9 million and $0.2 million, respectively. The increase in other expenses is primarily due to a $2.3 million impairment loss on digital assets/currencies and $0.6 million amortization of debt discount and interest expense on our convertible notes. Net loss Net loss for the three months ended June 30, 2021 and 2020 was approximately $4.8 million and $0.4 million, respectively. The increase is primarily due to an increase of operating expenses, as discussed above. Net loss attributable to common stockholders We incurred approximately $16,000 and $0 related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock, and $0.2 million and $0 of deemed dividends related to recognition of anti-dilution adjustment to conversion amount for Series C-2 convertible preferred stock for the three months ended June 30, 2021 and 2020, respectively. Results of Operations for the Six Months Ended June 30, 2021 and 2020 The following table reflects our operating results for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 Revenues Staking revenue $ 453,023 $ - Total revenues 453,023 - Cost of revenues Staking expenses 74,245 - Gross profit 378,778 - Operating expenses: General and administrative $ 866,948 $ 285,069 Research and development 328,269 - Compensation and related expenses 9,041,450 241,395 Marketing 2,786 4,055 Total operating expenses 10,239,453 530,519 Other (expenses) income: Interest expense (114,082 ) (108,814 ) Amortization on debt discount (1,134,771 ) (16,606 ) Impairment loss on digital assets/currencies (3,569,138 ) (132,952 ) Realized gains (loss) on digital asset/currency transactions 3,054,418 (1,682 ) Total other expenses (1,763,573 ) (260,054 ) Net loss $ (11,624,248 ) $ (790,573 ) Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock (32,353 ) - Deemed dividends related to recognition of downround adjustment to conversion amount for Series C-2 convertible preferred stock (5,020,883 ) - Net loss attributable to common stockholders $ (16,677,484 ) $ (790,573 ) Net loss per share attributable to common stockholders, basic and diluted $ (0.32 ) $ (0.03 ) Weighted average number of common shares outstanding, basic and diluted 52,251,479 25,078,068 Revenue Revenue for the six months ended June 30, 2021 and 2020 were approximately $0.5 million and $0, respectively. The increase is from our blockchain infrastructure solutions staking revenue. Cost of Revenues Cost of revenues for the six months ended June 30, 2021 and 2020 were approximately $74,000 and $0, respectively. The increase is from our blockchain infrastructure staking operating costs, including, web service hosting fees, and cash and stock-based compensation related to services provided by vendor. Operating Expenses Operating expenses for the six months ended June 30, 2021 and 2020 were approximately $10.2 million and $0.5 million, respectively. The increase is primarily due to the issuance of 12 million options, 7.2 million of which have vested during the six months ended June 30, 2021, rendering $8.7 million in stock-based compensation expense. 22 Other Expenses Other expenses for the six months ended June 30, 2021 and 2020 was approximately $1.8 million and $0.3 million, respectively. The increase in other expenses is primarily due to a $3.6 million impairment loss on digital assets/currencies and $1.1 million amortization of debt discount and interest expense on our convertible notes, partially offset by $3.1 million in realized gains on digital assets/currency transactions. Net loss Net loss for the six months ended June 30, 2021 and 2020 was approximately $11.6 million and $0.8 million, respectively. The increase is primarily due to increase of operating expenses, as mentioned above. Net loss attributable to common stockholders We incurred approximately $32,000 and $0 related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock, and $5.0 million and $0 of deemed dividends related to recognition of anti-dilution adjustment to conversion amount for Series C-2 convertible preferred stock for the six months ended June 30, 2021 and 2020, respectively. Liquidity and Capital Resources Net Cash from Operating Activities For the six months ended June 30, 2021, net cash used in operating activities was $3.3 million, which was primarily driven by a $11.6 million net loss and $5.8 million purchase of non-productive digital currencies, a $3.1 million realized gain on non-productive digital assets/currencies transaction; this was partially offset by the sale of non-productive digital assets/currencies of $4.3 million, a $3.6 million impairment loss on digital currencies, and $9.2 million in stock-based compensation. Net cash used in operating activities was approximately $1.1 million for the six months ended June 30, 2020. Net cash used in operating activities for the six months ended June 30, 2020 was primarily driven by a $790,573 net loss and $608,000 purchase of digital currencies, and partially offset by an impairment loss on digital currencies of $132,952. Net Cash from Investing Activities For the six months ended June 30, 2021, net cash used in investing activities was $8.5 million, which stemmed from the $8.5 million purchase of productive digital assets/currencies for staking. For the six months ended June 30, 2020, there were no investing activities. Net Cash from Financing Activities For the six months ended June 30, 2021, net cash provided by financing activities was approximately $14.2 million, which was primarily driven by approximately $2.8 million in aggregate proceeds from the issuance of 2,887,776 shares of common stock under our Equity Line, $1.0 million proceeds from the issuance of convertible notes, $8.9 million in net proceeds from the issuance of common stock and warrants for cash, $0.4 million from the cash exercise of Series C Warrants, and $1.1 million in proceeds from the issuance of Series C-2 convertible preferred stock. Net cash provided by financing activities was approximately $1.1 million for the six months ended June 30, 2020. During the six months ended June 30, 2020, Company issued 6,956,002 shares of common stock (including 32,588 pro-rata commitment shares) under the Purchase Agreement with Cavalry resulting in aggregate proceeds of approximately $556,000. In addition, the Company entered into a $500,000 short term convertible note payable in April 2020. The convertible note bears interest at 12% per annum. 23 Liquidity As of August 5, 2021, the Company had approximately $2.7 million of cash. On June 30, 2021, we had current assets of $6.2 million, long term assets of $8.3 million, and current liabilities of $1.4 million; working capital amounted to $4.8 million. During the six months ended June 30, 2021, the Company received net proceeds of approximately $14.2 million from the issuance of a convertible note, common stock, warrants, and Series C-2 convertible preferred stock. As such, the Company has adequate cash to fund operations for at least the next twelve months. Off Balance Sheet Transactions We are not a party to any off-balance sheet transactions. We have no guarantees or obligations other than those which arise out of normal business operations. RECENT ACCOUNTING PRONOUNCEMENTS For information on recent accounting pronouncements, see Note 4 to the Unaudited Condensed Financial Statements. ITEM 3 Quantitative and Qualitative Disclosures About Market Risk Not applicable.