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 and the Prospectus Supplement dated September 14, 2021. Overview BTCS is 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 next-generation blockchains by actively validating transactions. We are then rewarded with digital assets, while this process is similar to bitcoin mining the consensus mechanism is different. Now we are building on the foundation of our pre-established infrastructure with the development of a digital asset data analytics dashboard. The first feature of the dashboard, which is an open beta, allows users to evaluate their digital asset portfolios from multiple exchanges on a single platform. We also are developing and plan to integrate into the platform a staking-as-a-service feature that, once launched, will allow users to participate in asset leveraging through securing blockchain protocols. Blockchain Infrastructure Blockchain infrastructure solutions can broadly be defined as earning a reward for securing a blockchain by 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, typically through pools running nodes, validates 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 PoW and is by far the largest and most secure PoW blockchain. PoS miners, often referred to as validators in PoS systems, actively operate nodes and validate transactions. Validators are required to stake holdings of a digital currency to participate in the consensus algorithm and are rewarded in tokens for aligning behavior with the rules of the algorithm. Bad behavior can be penalized by “slashing” the validator’s holdings and/or rewards. Validators can also be removed from the network for breaking the rules. Ill-intentioned behavior among validators is discouraged, allowing for the blockchain to be properly maintained and secured. Compared to PoW, PoS blockchains require less energy. Depending on the PoS blockchain protocol, native token holders have the opportunity to leverage their asset holdings by either delegating their rights to a validator (“Delegating”), staking their token holdings in a staking pool (“Staking”), or running their own validator (“Pooling”). With Delegating, token holders indirectly participate by maintaining control of their private keys and delegating their tokens to an existing validator. Therefore, delegating is more akin to assigning voting rights of stock to another person or entity via a power of attorney. With Pooling, an operator and token holder combine tokens in order to improve the constituents’ collective odds of validating new blocks, and typically the operator takes custody of token holders funds i.e. private keys. If chosen for validation, the group is rewarded in tokens. With both Delegating and Pooling, the validator operators earn a fee for providing the technical capabilities of running a node 24/7 that requires regular, active maintenance and industry expertise. The Company built its foundation on securing PoS blockchains. Apart from Bitcoin and Ethereum, all of the Company’s digital asset holdings are in tokens secured by PoS or similar consensus mechanisms that allow for Delegating and asset leveraging. The Company is currently actively operating validator nodes on Ethereum’s beacon chain, Cardano, Tezos, Avalanche, and Cosmos. Building on that base, the Company plans to expand its PoS operations to secure other disruptive blockchain protocols. The Company’s plan is that this blockchain infrastructure will form the core for the growth of its platform. The Company utilizes cloud infrastructure to operate and run its validator nodes and does not maintain its own physical assets, but may add this infrastructure in the future. The Company is not currently securing PoW blockchains, such as Bitcoin’s blockchain, but may in the future. The Company currently holds the following digital assets which are core to its blockchain infrastructure efforts. The table also includes bitcoin which is not core to our infrastructure operations. 22 Digital Assets Held at Period End Digital Assets Asset 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 Bitcoin (BTC) 14.9 20.6 20.6 54.3 63.6 66.9 90.0 90.0 90.0 Ethereum (ETH) 584.7 985.0 985.0 2,304.6 2,554.7 2,674.2 7,732.5 7,878.6 7,992.4 Cardano (ADA) 257,757.4 257,757.4 Kusama (KSM) 123.4 374.2 Tezos (XTZ) 14,965.6 24,171.9 Solana (SOL) 4,787.5 Polkadot (DOT) 8,032.1 Terra (Luna) 3,584.2 Cosmos (Atom) 3,072.4 Polygon (Matic) 67,114.1 Avalanche (Avax) 2,024.7 Algorand (Algo) 50,583.9 Fair Market Value of Digital Assets at Period End Fair Market Value of Digital Assets Asset 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 Bitcoin (BTC) $ 123,733 $ 148,406 $ 132,831 $ 496,027 $ 686,580 $ 1,962,572 $ 5,302,695 $ 3,153,675 $ 3,941,180 Ethereum (ETH)* $ 105,175 $ 127,662 $ 131,582 $ 521,552 $ 919,748 $ 1,976,126 $ 14,833,709 $ 17,920,148 $ 23,990,541 Cardano (ADA) $ 356,600 $ 545,028 Kusama (KSM) $ 26,501 $ 123,957 Tezos (XTZ) $ 45,495 $ 146,914 Solana (SOL) $ 675,373 Polkadot (DOT) $ 229,558 Terra (Luna) $ 138,351 Cosmos (Atom) $ 111,252 Polygon (Matic) $ 75,644 Avalanche (Avax) $ 135,191 Algorand (Algo) $ 82,381 Total $ 228,908 $ 276,068 $ 264,413 $ 1,017,579 $ 1,606,328 $ 3,938,698 $ 20,136,404 $ 21,502,420 $ 30,195,370 QoQ Change 21 % -4 % 285 % 58 % 145 % 411 % 7 % 40 % YoY Change 1,327 % 7,516 % 2,013 % 1,780 % * Approximately 9 ETH is not staked on Ethereum 2.0’s Beacon Chain. As of November 4, 2021 the fair market value of our digital assets was approximately $45.7 million. Digital Asset Platform The Company is also developing a proprietary digital asset data analytics dashboard aimed at allowing users to evaluate their crypto portfolio holdings across multiple exchanges and chains on a single platform. The internally-developed dashboard utilizes digital asset exchange APIs to read user data and does not allow for the trading of assets. In addition to portfolio monitoring, we are also working to integrate a full suite of other features including decentralized exchanges, wallets, risk metrics and potentially a way for users to calculate end-of year-reports for tax purposes. We believe that increasing the number of features we offer may create a sticky user experience across multiple, interrelated products. Additionally, the Company is currently developing and plans to integrate into the platform a proprietary staking-as-a-service feature aimed at allowing users to delegate their tokens on next-generation PoS blockchains to Company operated validator nodes. Digital Asset Treasury Strategy The Company employs a digital asset treasury strategy with a primary focus on disruptive protocol layer assets such as Bitcoin which are not able to be staked (i.e. non-productive). They are distinct from digital assets used as the foundation for our blockchain infrastructure operations previously discussed. The Company’s digital asset treasury holding is comprised of 90 bitcoins as set forth above. The Company is not limiting its assets to a single type of digital asset and may hold a variety of digital assets. The Company will carefully review its purchases of digital securities to avoid violating the 1940 Act and seek to reduce potential liabilities under the federal securities laws. The market is rapidly evolving and there can be no assurances that we will be competitive with industry participants that have or may have greater resources than us. 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. 23 We calculate Adjusted EBITDA as net income (loss), adjusted to exclude, depreciation and amortization, interest expense, change in fair value of warrant liabilities, 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: Nine Months Ended September 30, 2021 2020 Net income (loss) $ (15,466,585 ) $ (1,795,897 ) Adjusted to exclude the following: Depreciation and amortization 1,716,744 16,606 Interest expense 172,603 204,882 Change in fair value of warrant liabilities (2,066,250 ) - Stock-based compensation 13,744,967 - Impairment of intangible digital assets 3,777,785 162,254 Adjusted EBITDA 1,879,264 (1,412,155 ) Results of Operations for the Three Months Ended September 30, 2021 and 2020 The following table reflects our operating results for the three months ended September 30, 2021 and 2020: Three Months Ended September 30, 2021 2020 Revenues Validator revenue $ 323,376 $ - Total revenues 323,376 - Cost of revenues Validator expense 71,690 - Gross profit 251,686 - Operating expenses: General and administrative $ 282,558 $ 650,049 Research and development 273,909 - Compensation and related expenses 4,747,106 228,540 Marketing 7,559 1,365 Total operating expenses 5,311,132 879,954 Other (expenses) income: Interest expense (58,521 ) (96,068 ) Amortization on debt discount (581,973 ) - Change in fair value of warrant liabilities 2,066,250 - Impairment loss on digital assets/currencies (208,647 ) (29,302 ) Total other income (expenses) 1,217,109 (125,370 ) Net loss $ (3,842,337 ) $ (1,005,324 ) Deemed dividends related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock (13,188 ) - Net loss attributable to common stockholders $ (3,855,525 ) $ (1,005,324 ) 24 Revenue Revenue for the three months ended September 30, 2021 and 2020 were approximately $0.3 million and $0, respectively. The increase is from our blockchain infrastructure solutions validating revenue. Cost of Revenues Cost of revenues for the three months ended September 30, 2021 and 2020 were approximately $72,000 and $0, respectively. The increase is from our blockchain infrastructure validating 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 three months ended September 30, 2021 and 2020 were approximately $5.3 million and $0.9 million, respectively. The increase is primarily due to the issuance of 1.2 million options and issuance of 290,000 RSUs, which vested in September, rendering $4.7 million in stock-based compensation expense during the three months ended September 30, 2021. Other Income (Expenses) Other income (expenses) for the three months ended September 30, 2021 and 2020 was approximately $1.2 million and $(0.1) million, respectively. The decrease in other expenses is primarily due to a $2.0 million change in the fair value of warrant liabilities, partially offset by $0.6 million increase in amortization of debt discount on our convertible notes and $0.2 million increase in impairment loss on digital assets/currencies. Net loss Net loss for the three months ended September 30, 2021 and 2020 was approximately $3.8 million and $1.0 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 $13,000 and $0 related to amortization of beneficial conversion feature of Series C-2 convertible preferred stock for the three months ended September 30, 2021 and 2020, respectively. Digital Asset Rewards Fair Market Value The fair market value as of September 30, 2021 of earned digital assets rewards for operating validator nodes for the three months ended September 30, 2021 was $343,725. 25 Results of Operations for the Nine Months Ended September 30, 2021 and 2020 The following table reflects our operating results for the nine months ended September 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 Revenues Validator revenue $ 776,399 $ - Total revenues 776,399 - Cost of revenues Validator expense 145,935 - Gross profit 630,464 - Operating expenses: General and administrative $ 1,149,506 $ 935,118 Research and development 602,178 - Compensation and related expenses 13,788,556 469,935 Marketing 10,345 5,420 Total operating expenses 15,550,585 1,410,473 Other (expenses) income: Interest expense (172,603 ) (204,882 ) Amortization on debt discount (1,716,744 ) (16,606 ) Change in fair value of warrant liabilities 2,066,250 - Impairment loss on digital assets/currencies (3,777,785 ) (162,254 ) Realized gains (loss) on digital asset/currency transactions 3,054,418 (1,682 ) Total other expenses (546,464 ) (385,424 ) Net loss $ (15,466,585 ) $ (1,795,897 ) 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 $ (20,533,009 ) $ (1,795,897 ) Revenue Revenue for the nine months ended September 30, 2021 and 2020 were approximately $0.8 million and $0, respectively. The increase is from our blockchain infrastructure validating revenue. Cost of Revenues Cost of revenues for the nine months ended September 30, 2021 and 2020 were approximately $146,000 and $0, respectively. The increase is from our blockchain infrastructure validating 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 nine months ended September 30, 2021 and 2020 were approximately $15.6 million and $1.4 million, respectively. The increase is primarily due to the issuance of 1.2 million options, 0.7 million of which vested during the nine months ended September 30, 2021, and issuance of 340,782 RSUs, 290,000 of which vested during the nine months ended September 30, 2021, rendering $13.3 million in stock-based compensation expense. 26 Other Expenses Other expenses for the nine months ended September 30, 2021 and 2020 was approximately $0.5 million and $0.4 million, respectively. The increase in other expenses is primarily due to a $3.8 million impairment loss on digital assets/currencies and $1.7 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 nine months ended September 30, 2021 and 2020 was approximately $15.5 million and $1.8 million, respectively. The increase is primarily due to increase of operating expenses, as mentioned above. Net loss attributable to common stockholders We incurred approximately $46,000 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 nine months ended September 30, 2021 and 2020, respectively. Digital Asset Rewards Fair Market Value The fair market value as of September 30, 2021 of earned digital assets rewards for operating validator nodes for the nine months ended September 30, 2021 was $906,339. Liquidity and Capital Resources Net Cash from Operating Activities For the nine months ended September 30, 2021, net cash used in operating activities was $3.9 million, which was primarily driven by a $15.5 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 $3.8 million impairment loss on digital currencies, and $13.9 million in stock-based compensation. Net cash used in operating activities was approximately $1.7 million for the nine months ended September 30, 2020. Net cash used in operating activities for the nine months ended September 30, 2020 was primarily driven by a $1.8 million net loss and $0.8 million purchase of digital currencies, and partially offset by an impairment loss on digital currencies of $0.2 million. Net Cash from Investing Activities For the nine months ended September 30, 2021, net cash used in investing activities was $9.5 million, which stemmed from the $9.5 million purchase of productive digital assets/currencies for our blockchain infrastructure validator operations. For the nine months ended September 30, 2020, there were no investing activities. Net Cash from Financing Activities For the nine months ended September 30, 2021, net cash provided by financing activities was approximately $13.5 million, which was primarily driven by approximately $3.0 million in aggregate proceeds from common stock sold under our Equity Line Purchase Agreement, $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, $1.1 million in proceeds from the issuance of Series C-2 convertible preferred stock, and $0.2 million in proceeds from common stock sold pursuant to the ATM Agreement. For the nine months ended September 30, 2020, net cash provided by financing activities was approximately $1.9 million, which was primarily driven by approximately $1.4 million in aggregate proceeds from common stock sold under our Equity Line Purchase Agreement, and the issuance of a $500,000 short term convertible note payable in April 2020. 27 Liquidity As of November 4, 2021, the Company had approximately $1.4 million of cash, approximately $97 million available under the ATM Agreement, and the fair market value of the Company’s liquid digital assets was approximately $8.8 million. On September 30, 2021, we had current assets of $4.3 million, long term assets of $8.8 million, and current liabilities of $4.7 million; working capital amounted to $(0.4) million. During the nine months ended September 30, 2021, the Company received net proceeds of approximately $14.6 million from the issuance of: Series C-2 convertible preferred stock, a convertible note, common stock and warrants issued pursuant to the Purchase agreement, common stock issued pursuant to the Equity Line Purchase Agreement, the cash exercise of warrants, and the proceeds from the common stock sold pursuant to the ATM Agreement. On September 30, 2021, the fair market value of the Company’s liquid digital assets was approximately $6.2 million. 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.