BTCS Inc. 10-K

ITEM 1. BUSINESS BTCS Inc. (“BTCS” or the “Company”) is an early entrant in the crypto asset (also referred to “cryptocurrencies”, “crypto”, or “tokens”) market and one of the first U.S. publicly-traded companies with a primary focus on blockchain infrastructure and staking. Through our blockchain-infrastructure operations, we secure and operate validator nodes on disruptive next-generation blockchain networks that power Web3, earning native token rewards by staking our proof-of-stake crypto assets. Our Digital Asset Platform, StakeSeeker, is designed to empower users to better understand and grow their crypto holdings with innovative portfolio analytics and a non-custodial process to earn staking rewards through the direct participation in blockchain consensus algorithms. BLOCKCHAIN INFRASTRUCTURE OVERVIEW The primary objective of blockchain infrastructure operations is to secure blockchains by validating transactions and earning rewards for doing so. Two main consensus mechanisms are currently used to secure blockchains: proof-of-work (“PoW”) and proof-of-stake (“PoS”). PoW is a consensus mechanism that requires nodes to dedicate computational resources to validate transactions on a blockchain. In PoW, miners use energy-consuming computers to do “work,” and they are rewarded with crypto assets for validating transactions on the blockchain. The reward is comprised of transaction fees and crypto assets. Bitcoin is an example of a PoW blockchain, and it is the largest and most secure PoW blockchain. PoS is a consensus mechanism that requires validator nodes (or “nodes”) to dedicate financial resources, such as staking holdings of a crypto asset, to participate in the consensus algorithm. Validators, the equivalent of miners in PoW networks, operate nodes and validate transactions on the blockchain. Validators are rewarded in crypto assets 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 network rules. Ill-intentioned behavior among validators is discouraged, allowing for the blockchain to be properly maintained and secured. PoS blockchains consume over 99% less energy than PoW blockchains, according to the Ethereum Foundation. Delegated proof-of-stake (“DPoS”) is a PoS variant blockchain consensus mechanism where token holders can participate in a blockchain network by either running their own validator node (“Validator”) or delegating their holdings to existing validator nodes and earning rewards for securing the network (“Delegation”, “Delegating” or “Staking”). Delegation is a non-custodial process that allows token holders (“Delegators”) to maintain control of their private keys and revoke their delegation at any time (subject to the rules of a particular blockchain). There is no transfer of ownership, often referred to as “private keys” of Delegator’s crypto assets as part of the Delegation process. Delegation provides a method for token holders to designate to a validator node operator the ministerial task of running a validator node while still participating in the network consensus mechanism and earning rewards. The crypto asset reward is determined by the blockchain networks consensus algorithm, can change over time, and varies from blockchain to blockchain. A Validator broadcasts to the network its fee, typically as a percent of the crypto asset reward, which is publicly available. Both the reward paid to the Delegator and the fee paid to the Validator are distributed by the blockchain network. The Validator never takes possession of either the Delegators staked crypto assets or crypto asset rewards. OUR BUSINESS BTCS is committed to operating blockchain infrastructure as a Validator that is secure, efficient, and scalable. We specialize in operating validator nodes on various DPoS and PoS-based blockchain networks, including Ethereum, Cosmos, Kava, Tezos, Avalanche, Kusama, Mina, Akash, Cardano, Oasis, and NEAR Protocol. The Company stakes the crypto assets native to these blockchains on the validator nodes it operates to earn rewards in connection with the validation of transactions occurring on those blockchain networks. BTCS’s blockchain infrastructure operations form the core growth for its Digital Asset Platform, StakeSeeker. BTCS utilizes cloud infrastructure to operate and run its validator nodes and does not operate a data center or own physical assets such as servers. BTCS plans to expand its PoS operations to secure other disruptive blockchain protocols that allow for Delegating. Staking-as-a-service (“StaaS”) is a central component of BTCS’s strategy. StaaS allows crypto asset holders to earn rewards by participating in network consensus mechanisms through Staking and Delegating their crypto assets to Company-operated validator nodes. As a non-custodial Validator operator, BTCS receives a percentage of token holders’ staking rewards generated as a validator node fee, creating the opportunity for potential scalable revenue and business growth with limited additional costs. In January 2023, the Company launched a beta version of StakeSeeker, its proprietary Digital Asset Platform. StakeSeeker is a comprehensive crypto dashboard and education center for crypto asset holders to learn how to earn crypto rewards by Staking through its non-custodial Stake Hub and evaluate their crypto portfolios across exchanges and wallets in a single analytics platform. The internally-developed dashboard utilizes application programming interfaces (APIs) to read user data from digital wallets and crypto exchanges and does not allow for the trading of crypto assets. The delegation process central to DPoS blockchains and our StaaS strategy revolves around the non-custodial nature of these networks. The blockchain network calculates rewards earned, which are then distributed directly to the Delegator’s wallet. At no point does the Validator take custody of the staked crypto assets or rewards earned through Staking. Therefore, BTCS does not obtain custody or facilitate transfers of any third-party assets in its role as a Validator or StaaS provider. The self-custody of crypto assets by Delegators is a critical aspect of our non-custodial staking model. Recent headlines of bankruptcies, fraud, risk management failures, and misappropriation of customer assets in the crypto industry have raised concerns about the security of custodial exchanges and similar platforms. BTCS ensures that substantially all of its crypto assets are held in secure digital wallets, with less than 0.1% of its crypto assets on crypto exchanges. Our exposure to companies such as FTX, Blockfi, and Celsius is limited to the negative impact these platforms had on the value of our assets in the crypto markets. StakeSeeker’s Stake Hub is central to BTCS’s growth strategy, allowing users to Delegate their crypto assets to the Company’s validator nodes. The growth of both StakeSeeker’s user base as well as the number and size of staked crypto assets by Delegators to Company-run validator nodes is critical to BTCS’s strategy and success. The Company believes that StaaS provides a more accessible and cost-effective way for crypto asset holders to participate in blockchain network consensus mechanisms, thereby promoting the growth and adoption of blockchain technology. Details of the Company’s crypto asset held can be found under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 3 INDUSTRY AND MARKET OVERVIEW (CRYPTO ASSET AND BLOCKCHAIN TECHNOLOGIES) Blockchain and Cryptocurrencies 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. Crypto 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 their potential 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. Most blockchain network infrastructures are 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 cryptocurrency exchanges. Cryptocurrency prices are quoted on various exchanges and fluctuate with extreme volatility. 4 We believe certain cryptocurrencies 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. Businesses, including the Company, seeking to develop upon, adopt, transact or rely upon blockchain technologies and cryptocurrencies operate within an untested and evolving environment. As with any new and emerging technology, there are potentially significant risks, not only related to the businesses’ opportunities the Company pursues, but also to the sector and industry as a whole, as well as the entirety of the concept behind blockchain and cryptocurrency as value. Business Profile and Risks The decision to pursue blockchain and crypto asset businesses exposes the Company to risks associated with a new and untested strategic direction. The prices of crypto assets have experienced substantial volatility, which may reflect “bubble” type volatility, meaning that high or low prices may have little or no merit, are 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. 5 Government Oversight Blockchain networks are a relatively new technological innovation and the regulatory schemes to which crypto assets and their blockchain networks are or may be subject, including both the interpretation and applicability of existing laws and regulations and the potential establishment of new laws and regulations, have not been fully explored or developed. Recent actions taken by the SEC, including enforcement actions brought against crypto asset companies with a focus on custodial staking, as are more particularly described under certain “Risk Factors”, demonstrate the SEC’s position that many, if not most, crypto assets may be securities and therefore reflect the reality that we will likely face increased government regulation and oversight as our industry and government treatment of the crypto assets on which our operations are based continue to evolve. These developments follow the SEC’s July 25, 2017 DAO Report, wherein its Chairman expressed concerns about the “Wild West” nature of the cryptocurrency market. More recently, the SEC Enforcement Division has taken action against crypto asset focused enterprises, and if the interpretations of federal securities laws are further expanded to apply to the Company, it would adversely affect the Company’s future acquisition of crypto assets by limiting the amount of crypto asset securities (“Digital Securities”) it may acquire, potentially limiting or precluding the use of its staking-as-a-service platform, and creating increased compliance and legal costs. In addition, each state has its own securities laws and regulations with varying provisions and effect, any of which may require us to alter or reduce our current or planned operations in the future. We continue to monitor legislative matters related to our industry. Because of the foregoing or other regulatory developments, in the future before we acquire or transact in crypto 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. Further, while we believe our operations and platform are meaningfully different than Kraken’s custodial staking platform that was subject to SEC enforcement proceedings in early 2023, that development or future positions the SEC may take, including potentially against us and our business, may demonstrate a differing view and require us to adjust, reduce, limit or even cease some or all of our operations or business plans. 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. Gary Gensler, the current SEC Chairman, has continued to voice his concerns about and continued intention to regulate crypto assets, referring to decentralized finance, or DeFi, platforms that focus on crypto assets as well as the crypto assets themselves, and concluding by stating that the SEC would “continue to take our authorities as far as they go.” There has not been any definitive guidance provided as of the date of this Report, however a number of regulatory proceedings and enforcement actions have been brought against crypto assets developers and their proponents. The Company intends to acquire additional crypto assets and to continue to develop and expand upon its Digital Asset Platform to enable it to offer a wider range of functions and availability for use with a greater variety of crypto assets. The Company currently owns and plans to expand its crypto asset holdings, both through staking its existing crypto asset holdings on PoS blockchain networks and potentially through other means. In order to avoid being classified as an inadvertent investment company under the 1940 Act, we actively focus, in consultation with legal counsel, on ensuring that our ownership of assets that are not considered securities under the Act always exceed 60% of our total assets, excluding cash items. By doing so, we can avoid being subject to the regulatory requirements and oversight that apply to investment companies. The ownership of crypto 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. On the other hand, because transactions in crypto assets often provide a reasonable degree of anonymity, they are susceptible to misuse for criminal activities, such as money laundering. This misuse, or the perception of such misuse (even if untrue), could lead to greater regulatory oversight of crypto platforms and operations such as ours, and there is the possibility that regulators could close crypto platforms or other crypto asset-related technology and infrastructure with little or no notice or opportunity for challenge, and prevent users of custodial platforms from accessing or retrieving crypto assets held on or connected to such platforms or infrastructure. For example, lawmakers and regulators have in recent years expressed views that government oversight is needed, including with a view to curtailing the use of crypto asset use for malign and illegal activities. Many PoW crypto 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 crypto assets, including Bitcoin, illegal based on concerns of high energy consumption. In the U.S., in March 2022 President Biden issued Executive Order 14067 on Ensuring the Responsible Development of Digital Assets , which prioritized the responsible development of crypto assets in a manner which includes reducing negative climate impacts and environmental pollution. While our focus is currently on PoS blockchain networks which use significantly lower amounts of energy when compared to PoW, future regulations may arise in response to these concerns that could apply to us and the cryptocurrency industry as a whole. Given the growing interest by regulators and other stakeholders, we anticipate that legislation and regulation of crypto assets is forthcoming in the future. Given the above developments, both our current and planned operations, and the cryptocurrency industry in general, continue to be subject to expanding, complex and uncertain government oversight. See “Risk Factors” beginning on page 17 and “Business” beginning on page 3 for more information. As both the regulatory landscape develops and journalistic familiarity with crypto assets increases, mainstream media’s understanding of them and the regulation thereof may improve. Regulation of crypto assets varies from country to country as well as within countries. An increase in the regulation of crypto assets may affect our proposed business by increasing compliance costs or prohibiting certain or all of our proposed activities. 6 COMPETITION The Company’s current and future competition for our Digital Asset Platform is centered on the following areas: ● Exchange based companies which offer custodial and/or non-custodial staking solutions. These exchanges have more robust customer bases to attract integrated staking services and may have more resources to enhance either their custodial or non-custodial efforts in the future; ● Other crypto asset focused companies and node operators, such as Blockdaemon, Allnodes, Everstake, Staked (acquired by Kraken), Figment, P2P, Foundry, and Stakefish, that offer non-custodial crypto asset staking and run validator nodes; ● Other mobile applications, websites, niche aggregation sites, which offer similar analytic services, such as CoinTracker, Koinly, CoinLedger and Rotki; ● Providers of mobile applications and websites, that offer secure storage solutions for crypto assets; ● Existing financial service firms and data analytics firms serving traditional asset markets that choose to offer data analytic solutions for crypto assets; and ● Cryptocurrency focused companies that offer exchange, payment processing, and financial services for crypto 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 crypto 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 operation of validator nodes as part of our blockchain infrastructure, and our brand. We rely on, and expect to continue to rely on, a combination of trademark, domain name, and trade secret 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 - StakeSeeker Staking-as-a-service is a central component of BTCS’s strategy. StaaS allows crypto asset holders to earn rewards by participating in network consensus mechanisms through Staking and Delegating their cryptocurrencies to Company-operated validator nodes. As a non-custodial Validator operator, BTCS receives a percentage of token holders’ staking rewards generated as a validator node fee, creating the opportunity for potential scalable revenue and business growth with limited additional costs. The staking rewards are paid directly by the network to the token holder’s digital wallet and BTCS never takes custody of any staked tokens or earned rewards. In January 2023, the Company launched the beta of StakeSeeker, BTCS’s proprietary Digital Asset Platform. StakeSeeker is a comprehensive crypto dashboard and education center for crypto asset holders to learn how to earn crypto rewards by Staking through its non-custodial Stake Hub and evaluate their crypto portfolios across exchanges and wallets in a single analytics platform. Our internally-developed dashboard utilizes APIs to read user data from digital wallets and crypto exchanges and does not allow for the trading of assets. StakeSeeker’s Stake Hub is central to BTCS’s growth strategy. The growth of both StakeSeeker’s user base as well as the amount of staked cryptocurrencies by Delegators to Company-run validator nodes are critical to BTCS’s growth strategy and success. The Company believes that StaaS provides a more accessible and cost-effective way for crypto asset holders to directly participate in blockchain networks’ consensus mechanisms while maintaining custody of both their staked crypto assets and crypto rewards, thereby promoting the growth and adoption of blockchain technology. 7 HUMAN CAPITAL / EMPLOYEES As of December 31, 2022, we had 5 full-time employees, all of whom work full-time, none of which are covered by a collective bargaining agreement. We hire consultants on an as-needed basis. We are a remote-first Company. We believe that allowing our employees to work in the location that best suits them provides us access to a large talent pool and a sustained advantage in hiring and retaining employees and consultants in the United States and worldwide. Human capital management is critical to our ongoing business success, which requires investing in our people. Our aim is to create a highly engaged and motivated workforce where employees are inspired by leadership, engaged in purpose-driven, meaningful work, and have opportunities for growth and development. We are committed to creating and maintaining a work environment in which employees are treated with respect and dignity. We value our diverse employees, and provide career and professional development opportunities that foster the success of our Company. We are committed to the principles of equal employment and complying with all federal, state, and local laws providing equal employment opportunities, and all other employment laws and regulations. It is our intent to maintain a work environment that is free of harassment, discrimination, or retaliation because of age (40 and older), race, color, national origin, ancestry, religion, sex, sexual orientation (including transgender status, gender identity or expression), pregnancy (including childbirth, lactation, and related medical conditions), physical or mental disability, genetic information (including testing and characteristics), veteran status, uniformed servicemember status, or any other status protected by federal, state, or local laws. We are dedicated to the fulfillment of this policy in regard to all aspects of employment, including but not limited to recruiting, hiring, placement, transfer, training, promotion, rates of pay, and other compensation, termination, and all other terms, conditions, and privileges of employment. Our Compensation Committee is also actively involved in reviewing and approving executive compensation, and succession plans so that we have leadership in place with the requisite skills and experience to deliver results the right way. We offer fair, competitive compensation and benefits appropriate for a company of our size that supports our employees. While we do not offer health benefits, we do offer 401(k) plans with 100% matching of employees’ contributions subject to IRS limitations. CAPITALIZATION The following table details the Company’s capitalization as of March 28, 2023. Class of Security Shares of Common Stock as Converted Common Stock Issued and Outstanding 13,766,321 Restricted Stock Units Issued (Not Vested) 1,631,399 Options to purchase Common Stock (weighted average exercise price of $2.12) 1,170,000 Warrants to purchase Common Stock (weighted average exercise price of $11.50) 712,500 Total Shares Diluted 17,280,220 The table above describes the shares of Common Stock which are outstanding and/or are issuable under outstanding securities. 8 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 Platform and the integration of Staking-as-a-Service, 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 1B. UNRESOLVED STAFF COMMENTS None. 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