Item 1. Business
ITEM
1. BUSINESS
INTRODUCTION
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 and
operate validator nodes on various proof of stake-based blockchain networks, earning rewards of additional Digital Assets by actively
validating transactions on the networks. 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 Platform. 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.
OUR
BUSINESS
Blockchain
Infrastructure
Blockchain
infrastructure operations 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 impossible for any single malicious actor to have enough computational
power or ownership stake to successfully attack the blockchain.
3
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.
BTCS uses its blockchain infrastructure
to operate validator nodes on various PoS-based blockchain networks. In connection with the validation of transactions occurring
on those blockchain networks, BTCS will stake the Digital Assets native to those blockchains on its validator nodes in
order to earn staking rewards. BTCS may also use its blockchain infrastructure to validate and sign transactions on behalf of customers
that delegate their validation and voting rights to BTCS-operated nodes (referred to as “Staking-as-a-Service”
or “StaaS”).
A
StaaS provider maintains an active role in validating transactions on a given PoS network on behalf of its delegators by (1) arranging
transactions using software to stake the relevant Digital Assets; (2) monitoring the nodes it is operating to ensure they remain
online, ready to validate transactions; and (3) verifying transactions on the network when required to earn rewards.
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, Kusama and Cosmos. The Company has also staked the following tokens Polkadot, Terra, Algorand, and Solana.
Building on that base, the Company plans to expand its PoS operations to secure other disruptive blockchain protocols that also allow
for delegating.
The
Company believes its blockchain infrastructure efforts will form the core growth for its Digital Asset 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.
Details
of the Company’s Digital Assets held can be found under “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
4
Digital
Asset Platform
The
Company is also developing a proprietary Digital Asset 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 exchanges’
application programming interfaces (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.
The
Company is also currently developing and
planning to integrate into the Digital Asset Platform a proprietary Staking-as-a-Service feature aimed at allowing
users to delegate supported cryptocurrencies through a non-custodial platform to BTCS operated validator nodes. Staking allows users
to generate an annual percentage yield (“APY”) on their staked assets whereas validator node operators charge a fee on users’
staked asset rewards earned in addition to earning an APY on staked assets. In turn, the highly scalable nature of both staking Digital
Assets as well as allowing users to stake Digital Assets to earn token rewards is the premise behind BTCS’
Staking-as-a-Service platform.
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.
5
INDUSTRY
AND MARKET OVERVIEW (DIGITAL ASSET AND BLOCKCHAIN TECHNOLOGIES)
Blockchain
and Digital Assets / Cryptocurrencies Generally
Distributed
blockchain technologies utilize a decentralized and encrypted ledger that is designed to offer a secure, efficient, verifiable, and permanent
way of storing records and other information without the need for intermediaries. Digital Assets, which include and are often referred
to as cryptocurrencies, serve multiple purposes. They can serve as a medium of exchange, store of value or unit of account, and provide
non-financial and next generation uses. Blockchain technologies are being evaluated for a multitude of industries due to the belief in
their ability to have a significant impact in many areas of business, finance, information management, and governance.
Cryptocurrencies
are decentralized currencies that enable near instantaneous transfers. Transactions occur via an open source, cryptographic protocol
platform which uses peer-to-peer technology to operate with no central authority. An online network of nodes hosts a public transaction
ledger, known as a blockchain, and each cryptocurrency is associated with a source code that comprises the basis for the cryptographic
and algorithmic protocols governing its blockchain. In a cryptocurrency network, every peer node has its own copy of the blockchain,
which contains records of every historical transaction - effectively containing records of all account balances. Each account is identified
solely by its unique public key (making it effectively anonymous) and is secured with its associated private key (a
password). The combination of private and public cryptographic keys constitutes a secure digital identity in the form of a digital signature,
providing strong control of ownership.
No
single entity owns or operates a network. The infrastructure is collectively maintained by a decentralized public user base. As a network
is decentralized, it does not rely on either governmental authorities or financial institutions to create, transmit or determine the
value of the currency units. Rather, the value is determined by market factors, supply and demand for the units, the prices being set
in transfers by mutual agreement or barter among transacting parties. Since transfers do not require involvement of intermediaries or
third parties, there are currently limited transaction costs in direct peer-to-peer transactions. Units of cryptocurrency can be converted
to fiat currencies, such as the U.S. dollar, at rates determined on various exchanges, such as Cumberland, Coinbase, Paxos, Kraken, Gemini,
Bitstamp, and others. Cryptocurrency prices are quoted on various exchanges and fluctuate with extreme volatility.
6
We
believe certain cryptocurrencies and Digital Assets offer many advantages over traditional, fiat currencies, although many of
these factors also present potential disadvantages and may introduce additional risks, including:
●
acting
as a fraud deterrent, as cryptocurrencies are digital and cannot be counterfeited or reversed arbitrarily by a sender;
●
immediate
settlement;
●
elimination
of counterparty risk;
●
no
trusted intermediary required;
●
lower
fees;
●
identity
theft prevention;
●
accessible
by everyone;
●
transactions
are verified and protected through a confirmation process, which prevents the problem of double spending;
●
decentralized
– no central authority (government or financial institution); and
●
recognized
universally and not bound by government imposed or market exchange rates.
However,
cryptocurrencies may not provide all of the benefits they purport to offer at all or at any time. Bitcoin for example was
first introduced in 2008 and was first introduced as a means of exchange in 2009. Bitcoin is a consensus network that enables a new
payment system and a completely new form of digital money. It is the first decentralized peer-to-peer payment network that is
powered by its users with no central authority or middlemen. From a user perspective, we believe Bitcoin can be viewed as cash for
the Internet. The Bitcoin network shares a public ledger called a “blockchain.” This ledger contains every transaction
ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is
protected by digital signatures corresponding to the sending addresses, allowing users to have full control over sending Bitcoins
from their addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a
reward in Bitcoins for this service. This process is often called “mining” and is a proof-of-work consensus
algorithm.
As
with many new and emerging technologies, there are potentially significant risks. Businesses (including the Company) which are seeking
to develop, promote, adopt, transact or rely upon blockchain technologies and cryptocurrencies have a limited track record and operate
within an untested new environment. These risks are not only related to the businesses the Company pursues, but the sector and industry
as a whole, as well as the entirety of the concept behind blockchain and cryptocurrency as value.
Alternative
Digital Assets and Blockchain Technologies
Bitcoins
are not the only type of Digital Assets founded on math-based algorithms and cryptographic security, although it is considered the most
prominent. Other Digital Assets (commonly referred to as “altcoins”, “coins”, “tokens”, or “protocol
tokens”), have been developed since the Bitcoin Network’s inception. The Bitcoin Network, however, possesses the “first-to-market”
advantage and thus far has captured the majority of the industry’s interest and market share. Ethereum, Cosmos, Avalanche, Solana
and other blockchains for example are designed for non-financial and next generation uses (sometimes referred to as blockchain 2.0
projects). These uses include smart contracts and distributed registers built into or built atop their respective blockchains.
7
Business
Profile and Risks
The
decision to pursue blockchain and Digital Asset businesses exposes the Company to risks associated with a new and untested strategic
direction. The prices of Digital Assets have experienced substantial volatility, which may reflect “bubble” type volatility,
meaning that high or low prices may have little or no merit, may be subject to rapidly changing investor sentiment, and may be influenced
by factors such as technology, regulatory void or changes, fraudulent actors, manipulation, and media reporting. For example, in 2021,
Bitcoin’s low price was $28,723 and its high price was $68,789.
Government
Oversight
Blockchain
networks are a relatively new technological innovation and the regulatory schemes to which Digital Assets and their blockchain
networks may be subject have not been fully explored or developed. Recent actions taken by the SEC in its DAO Report that certain Digital
Assets may be securities and actions taken by the CFTC including its July 24, 2017 order approving the first derivative clearing organization
for digital currency swaps reflects that we may face increased government regulation and oversight. As stated in this report, the SEC’s
July 25, 2017 DAO Report, its Chairman’s remarks and concerns about the “Wild West” nature of the Digital Assets market
and reports that its staff is issuing subpoenas, which would adversely affect the Company’s future acquisition of Digital
Assets by limiting the amount of Digital Securities it may acquire and creating increased compliance and legal costs. In the future before
we acquire or transact in Digital Assets, we may be required to examine how they were originally offered to determine if they
were offered as an investment contract or other type of security. Because of legal uncertainties, careful examination of the results
of our compliance review will be required by experienced securities counsel. Because we must stay under the requirement under Investment
Company Act of 1940 (the “1940 Act”) that no more than 40% of our assets (excluding cash items) constitute investment securities
to avoid being deemed an investment company, we will limit the amount of Digital Securities we acquire. If our compliance procedures
and legal reviews prove to be incorrect, we may incur the likelihood of prohibitive SEC penalties and/or private lawsuit defense costs
and adverse rulings.
Following
the issuance of the DAO Report, promoters sought to evade it by callings coins “utility tokens” even where the developer
retained material future services that affected the profitability and future value of the coins. The SEC quickly stopped one such initial
coin offering, which clearly was intended to send a message. More recently, in August 2021 Gary Gensler, the current SEC Chairman,
voiced his concerns about and continued intention to regulate Digital Assets, referring to decentralized finance, or DeFi, platforms
that focus on Digital Assets as well as the Digital Assets themselves, and concluding by stating that the SEC would “continue to
take our authorities as far as they go.”
The Company intends to acquire
additional Digital Assets. The Company currently owns and plans to expand its Digital Asset holdings, both through staking its existing
Digital Asset holdings on PoS blockchain networks and potentially through other means. In order to avoid being an inadvertent investment
company within the meaning of the 1940 Act, we actively focus on ensuring that our ownership of assets that are not securities
in consultation with legal counsel and that such assets always exceed 60% of our total assets excluding cash items. The
ownership of Digital Assets including digital securities may change based on the definition of a security under the Securities Act of
1933 (the “Securities Act”) and applicable court decisions. The key definition is the term “investment contract”
and what is an investment contract.
In addition to the securities
laws and investment company considerations, as our business model and operations continue to evolve, including our Digital Asset platform
and its functionality, we may become subject to additional laws and regulations. For example, to the extent we collect, analyze, distribute,
or otherwise use data concerning individuals or entities and their holdings and transactions, we may become subject to the ever-growing
number of data privacy and security laws within and without the U.S. which often have far-reaching implications for businesses. In general
these laws require disclosure and preventative measures designed to protect users from unauthorized access or disclosure of their personal
information, and impose fines and sanctions for failure to comply with their requirements.
Many Digital Assets have also
been subject to skepticism due to concerns about the high energy consumption used in mining on blockchain networks. For example, in September 24,
2021, China declared all transactions in and mining of cryptocurrencies, including Bitcoin, illegal based on concerns of high energy
consumption. While our focus is currently on PoS blockchain networks which use relatively lower amounts of energy when compared to PoW,
future regulations may arise in response to these concerns that could apply to us and the Digital Asset industry as a whole.
Given the growing interest
by regulators and other stakeholders, we anticipate that legislation and regulation of cryptocurrencies and other Digital Assets is forthcoming
in the future. In 2021 Congress introduced 35 bills related to cryptocurrencies and blockchain technologies. At the state level in the
U.S., 33 states and Puerto Rico had pending cryptocurrency-related legislation in the 2021 legislative session, and 17 states enacted
legislation or adopted resolutions pertaining to cryptocurrencies in 2021.
Given the above
developments, both our current and planned operations, and the Digital Asset industry in general, continue to be subject to
expanding, complex and uncertain government oversight. See “Risk Factors” beginning on page 16 and
“Business” beginning on page 3 for more information.
As
both the regulatory landscape develops and journalistic familiarity with Digital Assets increases, mainstream media’s understanding
of them and the regulation thereof may improve. Regulation of Digital Assets varies from country to country as well as within countries.
An increase in the regulation of Digital Assets may affect our proposed business by increasing compliance costs or prohibiting certain
or all of our proposed activities.
8
COMPETITION
The
Company’s current and future competition for our Digital Asset Platform and Staking-as-a-Service feature is centered on
the following areas:
● Exchange
based companies, such as Coinbase, Kraken, eToro and Binance, which provide Digital Asset
custodial solutions and staking to users with certain eligible Digital Assets
held on those exchanges. These exchanges have more robust customer bases to attract integrated
staking services and may have more resources to enhance their platforms in the future;
● other
Digital Asset focused companies, such as Blockdaemon, Allnodes, Everstake, Bison Trails
(acquired by Coinbase), Staked (acquired by Kraken), Figment, Foundry, and Stakefish,
that offer non-custodial Digital Asset staking and run validator nodes;
● other
mobile applications, websites, niche aggregation sites, which offer similar analytic services,
such as BNCpro, CoinTracker, Koinly, and Rotki;
● providers
of mobile applications and websites, that offer secure storage solutions for Digital Assets;
● existing
financial service firms and data analytics firms serving traditional asset markets that choose
to offer data analytic solutions for Digital Assets; and
● Digital
Asset
focused companies that offer exchange, payment processing, and financial services for Digital
Assets.
Many
of our current and potential competitors have greater resources, longer histories, more users, and greater brand recognition. They may
devote more resources to technology, infrastructure, marketing and may be able to more rapidly develop their solutions. Other companies
also may enter into business combinations or alliances that strengthen their competitive positions. Our small team and relative lack
of capital is a competitive disadvantage.
ASSETS
The Company’s primary assets
consist of its Digital Assets and cash as well as its human capital and intellectual property noted below.
INTELLECTUAL
PROPERTY AND TRADE SECRETS
Our
business depends in large part on our proprietary technology, particularly with regards to our Digital Asset platform and validator
node operations, and our brand. We rely on, and expect to continue to rely on, a combination of trademark, domain name, and trade secret
and laws, as well as confidentiality and license agreements with our employees, contractors, consultants, and third parties with whom
we have relationships, to establish and protect our brand and intellectual property rights.
GROWTH
STRATEGY
Digital
Asset Platform Development
The Company is currently internally
developing a proprietary Digital Asset Platform 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. Our strategy has three key phases: first develop a robust platform and open it to
public beta testing, second once the platform is open acquire users, and third monetize the platform. Our current focus is on developing
the platform. The first feature of the dashboard, which allows users to evaluate their Digital Asset portfolios from multiple
exchanges on a single platform, is currently in an open beta.
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.
The Company is also currently
developing and plans to integrate into the Digital Asset Platform a proprietary Staking-as-a-Service feature aimed at allowing
users to delegate supported cryptocurrencies through a non-custodial platform to BTCS operated validator nodes. Staking
allows users to generate an annual percentage yield (“APY”) on their staked assets whereas validator node operators charge
a fee on users’ staked asset rewards earned in addition to earning an APY on staked assets. In turn, the highly scalable nature
of both staking Digital Assets as well as allowing users to stake Digital Assets to earn token rewards is the premise behind BTCS’
Staking-as-a-Service platform.
We believe that increasing the
number of features we offer may create a sticky user experience across multiple, interrelated products.
HUMAN CAPITAL RESOURCES
We
currently have four employees and no part time employees. We consider our relations with our employees to be excellent. See
the Risk Factor on page 16 regarding certain of our executive officers.
CAPITALIZATION
The
following table details the Company’s capitalization as of March 9, 2022.
Class of Security
Shares of Common
Stock as Converted
Common Stock Issued and Outstanding
12,549,569
Restricted Stock Units Issued (Not Vested)
1,770,741
Options to purchase Common Stock (weighted average exercise price of $2.14)
1,235,000
Warrants to purchase Common Stock (weighted average exercise price of $14.85)
962,794
Total Shares Diluted
16,518,104
9
The
table above describes the shares of Common Stock which are outstanding and/or are issuable under outstanding securities. The table
above does not include any unvested restricted stock units.
Cautionary
Note Regarding Forward Looking Statements
This
report contains forward-looking statements, including our liquidity, our belief that our blockchain infrastructure efforts will form
the core growth for our Digital Asset Platform, our plans and development of our Digital Asset Dashboard and the integration of Staking-as-a-Service,
our Digital Asset treasury strategy, our belief regarding blockchain, and 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, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained
in the Risk Factors below. 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.
ITEM
1A. RISK FACTORS
Not
applicable to smaller reporting companies. However, our principal risk factors are described under “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM
2. PROPERTIES.
As
of the date of this report, the Company did not have any owned or leased properties.
ITEM
3. LEGAL PROCEEDINGS.
From
time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. We know
of no material, active or pending legal proceedings against us.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
PART
II
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.