BTCS Inc. 10-Q

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of financial condition and results of operations should be read in conjunction with our historical financial statements and the notes to those statements that appear elsewhere in this report. Certain statements in the discussion contain forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those discussed in the Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2022. When we refer to the “2023 Quarter” and the “2022 Quarter” we are referring to the three months ended March 31, 2023 and March 31, 2022 quarters, respectively. Company Overview BTCS Inc. is an early entrant in the cryptocurrency market and a publicly-traded U.S. company focused on blockchain infrastructure and staking. The Company specializes in operating validator nodes on various Delegated proof-of-stake (“DPoS”) and proof-of-stake (“PoS”) based blockchain networks and stakes the native crypto assets on the validator nodes it operates to earn rewards in connection with the validation of transactions occurring on those blockchain networks. BTCS plans to expand its PoS operations to secure other disruptive blockchain protocols that allow for delegating, which presents a significant growth opportunity for the company. BTCS’s business model is focused on Staking-as-a-Service (StaaS), allowing 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, the company receives a percentage of token holders’ staking rewards generated as a validator node fee, for our ministerial role in hosting the validator node. This creates an opportunity for scalable revenue and business growth with limited additional costs. The company’s StaaS strategy provides a more accessible and cost-effective way for crypto asset holders to participate in blockchain networks’ consensus mechanisms, promoting the growth and adoption of blockchain technology. The company’s internally-developed dashboard, StakeSeeker, is a non-custodial platform that allows users to learn how to earn staking rewards through direct participation in blockchain consensus algorithms and analyze their crypto portfolios across exchanges and wallets through a comprehensive crypto dashboard and education center. 22 The table below describes BTCS’s quarterly crypto asset holdings as of the 2022 Quarter through the 2023 Quarter. Crypto Assets Held at Period End Asset 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 Bitcoin (BTC) 90 - - - - Ethereum (ETH) 8,196 8,283 8,380 8,454 8,524 Cardano (ADA) 257,757 260,555 262,860 262,860 262,860 Kusama (KSM) 5,278 5,550 6,297 6,493 6,767 Tezos (XTZ) 70,453 71,369 72,578 73,486 74,765 Solana (SOL) 7,043 7,136 7,238 7,371 7,493 Polkadot (DOT) 38,816 39,986 23,905 7,280 7,526 Terra (LUNA) 3,621 - - - - Cosmos (ATOM) 80,474 86,613 91,181 96,318 102,298 Polygon (MATIC) 454,486 466,022 474,207 480,825 486,806 Avalanche (AVAX) 14,273 14,594 14,888 17,178 17,178 Algorand (ALGO) 51,197 51,201 51,201 - - Axie Infinity (AXS) 22,322 31,763 37,402 42,030 46,482 Kava (KAVA) 183,966 264,917 280,293 290,909 304,968 Band Protocol (BAND) 992 992 992 Mina (MINA) 71,297 74,177 79,937 Oasis Network (ROSE) 349,661 359,607 2,569,991 Akash (AKT) 103,730 107,405 110,213 NEAR Protocol (NEAR) 74,702 75,724 Fair Value of Crypto Assets at Period End Asset 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 Bitcoin (BTC) $ 4,098,481 $ - $ - $ - $ - Ethereum (ETH)* 26,894,723 8,840,595 11,128,675 10,117,237 15,530,133 Cardano (ADA) 294,320 119,555 114,190 64,786 104,861 Kusama (KSM) 992,851 267,583 265,505 149,981 236,070 Tezos (XTZ) 262,023 101,102 103,210 52,720 83,614 Solana (SOL) 863,854 239,700 240,377 73,426 158,625 Polkadot (DOT) 826,875 281,496 150,964 31,410 47,720 Terra (LUNA) 373,005 - - - - Cosmos (ATOM) 2,325,374 651,909 1,186,824 900,440 1,144,459 Polygon (MATIC) 735,034 222,466 368,671 364,714 544,815 Avalanche (AVAX) 1,383,403 247,059 256,021 187,286 304,341 Algorand (ALGO) 47,492 16,115 18,044 - - Axie Infinity (AXS) 1,416,264 461,649 470,116 253,943 389,893 Kava (KAVA) 828,742 468,634 423,326 166,752 270,486 Band Protocol (BAND) 1,215 1,396 1,857 Mina (MINA) 42,085 32,187 62,101 Oasis Network (ROSE) 21,330 12,291 156,698 Akash (AKT) 26,881 19,938 34,510 NEAR Protocol (NEAR) 93,785 150,854 Total 41,342,441 11,917,864 14,817,434 12,522,292 19,221,037 QoQ Change 13 % -71 % 24 % -15 % 53 % YoY Change 105 % -45 % -51 % -66 % -54 % 23 Prices of Crypto Assets at Period End Asset 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 Bitcoin (BTC) $ 45,539 $ 19,785 $ 19,432 $ 16,547 $ 28,478 Ethereum (ETH) 3,282 1,067 1,328 1,197 1,822 Cardano (ADA) 1.14 0.46 0.43 0.25 0.40 Kusama (KSM) 188 48.21 42.16 23.10 34.89 Tezos (XTZ) 3.72 1.42 1.42 0.72 1.12 Solana (SOL) 123 33.59 33.21 9.96 21.17 Polkadot (DOT) 21.30 7.04 6.32 4.31 6.34 Terra (LUNA) 103 - - - - Cosmos (ATOM) 28.90 7.53 13.02 9.35 11.19 Polygon (MATIC) 1.62 0.48 0.78 0.76 1.12 Avalanche (AVAX) 96.92 16.93 17.20 10.90 17.72 Algorand (ALGO) 0.93 0.31 0.35 0.17 0.23 Axie Infinity (AXS) 63.45 14.53 12.57 6.04 8.39 Kava (KAVA) 4.50 1.77 1.51 0.57 0.89 Band Protocol (BAND) 1.22 1.41 1.87 Mina (MINA) 0.59 0.43 0.78 Oasis Network (ROSE) 0.06 0.03 0.06 Akash (AKT) 0.26 0.19 0.31 NEAR Protocol (NEAR) 1.26 1.99 * The prices have been rounded to the nearest whole dollar for prices above $100 The following table presents the Fair Value of Crypto Assets held compared to the GAAP Book Value reported on the Company’s balance sheet. March 31, 2023 December 31, 2022 Book Value Fair Value Book Value Fair Value Ethereum (ETH) $ 5,817,449 $ 15,530,133 $ 5,708,624 $ 10,117,237 Cardano (ADA) 63,178 104,861 63,178 64,786 Kusama (KSM) 148,883 236,070 142,242 149,981 Tezos (XTZ) 52,853 83,614 51,651 52,720 Solana (SOL) 62,006 158,625 60,012 73,426 Polkadot (DOT) 32,168 47,720 30,859 31,410 Terra (LUNA) - - - - Cosmos (ATOM) 630,782 1,144,459 568,359 900,440 Polygon (MATIC) 167,117 544,815 161,293 364,714 Avalanche (AVAX) 182,964 304,341 182,964 187,286 Algorand (ALGO) - - - - Axie Infinity (AXS) 277,651 389,893 245,443 253,943 Kava (KAVA) 161,459 270,486 165,426 166,752 Band Protocol (BAND) 982 1,857 982 1,396 Mina (MINA) 34,267 62,101 32,002 32,187 Oasis Network (ROSE) 110,927 156,698 12,045 12,291 Akash (AKT) 18,765 34,510 17,993 19,938 NEAR Protocol (NEAR) 94,370 150,854 92,840 93,785 Total $ 7,855,821 $ 19,221,037 $ 7,535,913 $ 12,522,292 24 Results of Operations for the Three Months Ended March 31, 2023 and 2022 The following tables reflect our operating results for the three months ended March 31, 2023 and 2022: For the Three Months Ended March 31, $ Change % Change 2023 2022 2023 2023 Revenues Validator revenue $ 311,508 $ 563,015 $ (251,507 ) (45 )% Total revenues 311,508 563,015 (251,507 ) (45 )% Cost of revenues Validator expense 82,014 137,869 (55,855 ) (41 )% Gross profit 229,494 425,146 (195,652 ) (46 )% Operating expenses: General and administrative $ 609,829 $ 650,289 $ (40,460 ) (6 )% Research and development 201,625 136,718 64,907 47 % Compensation and related expenses 462,090 1,423,896 (961,806 ) (68 )% Marketing 6,243 41,793 (35,550 ) (85 )% Impairment loss on crypto assets/currencies 94,907 3,307,428 (3,212,521 ) (97 )% Realized gains on crypto asset/currency transactions (16,831 ) (71,110 ) 54,279 76 % Total operating expenses 1,357,863 5,489,014 (4,131,151 ) (75 )% Other income (expenses): Change in fair value of warrant liabilities (285,000 ) (641,250 ) 356,250 (56 )% Distributions to warrant holders - (35,625 ) 35,625 N/A % Total other income (expenses) (285,000 ) (676,875 ) 391,875 58 % Net loss $ (1,413,369 ) $ (5,740,743 ) $ 4,327,374 (75 )% 25 Validator Revenue The decrease in revenue during the 2023 Quarter as compared to the 2022 Quarter is primarily due to a drop in the fair value of our crypto assets earned as rewards for staking since the market’s highs in Q1 of 2022. Although we believe the number of tokens we earn from staking and revenue recognized will increase as we continue to expand our blockchain infrastructure efforts, we recognize that volatility in the cryptocurrency markets may impact the market prices of the crypto assets we earn from staking. Cost of Revenues The decrease in cost of revenues is due to efficiencies realized in our blockchain infrastructure validating operating costs, including streamlining of web service hosting fees and reduction of services provided by vendors. We believe our cost of revenues will increase as we continue to ramp up our business. However, we believe gross margin will improve as we add scale to our blockchain infrastructure operations and reduce costs as a result of increased operational efficiencies, leading to improved gross profits. Operating Expenses The decrease in operating expenses in the 2023 Quarter is primarily due to the $3.3 million impairment loss on crypto assets (which we refer to as a “Crypto Asset Impairment”) during the 2022 Quarter, compared to only a $95,000 Crypto Asset Impairment during the 2023 Quarter. In addition, the decrease is also due to the non-cash $1.3 million equity-based contingent bonuses granted to employees and our non-employee directors during the 2022 Quarter for the achievement of performance milestones compared to only $271,000 equity-based compensation during the 2023 Quarter. We believe operating expenses will increase as the Company continues to utilize equity-based compensation incentives as a core part of our compensation strategy. Additionally, volatility in the cryptocurrency markets will subject the Company to the possibility of additional impairment charges on its crypto asset holdings. Other Income (Expenses) The changes in other income for the years reported was primarily due to the increase in the fair value of warrant liabilities. This non-cash expense is driven by the value of our stock price at the end of each quarter, which we cannot predict. Net loss The decrease in our net loss for the 2023 Quarter was primarily due to the decrease in operating expenses and changes in other income (expenses) as discussed above. We believe that our net loss may increase as the Company incurs increased costs related to the development of its Digital Asset Platform and incurs additional Crypto Asset Impairment losses due to volatility in the cryptocurrency markets. 26 Liquidity and Capital Resources ATM Financing On September 14, 2021, the Company entered into an At-The-Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC, as agent (“H.C. Wainwright”), pursuant to which the Company may offer and sell, from time-to-time through H.C. Wainwright, shares of the Company’s Common Stock having an aggregate offering price of up to $98,767,500. From the period September 14, 2021 through May 10, 2023, the Company sold a total of 2,970,839 shares of Common Stock under the ATM Agreement for aggregate total gross proceeds of approximately $15,040,000 at an average selling price of $5.06 per share, resulting in net proceeds of approximately $14,562,000 after deducting commissions and other transaction costs. Liquidit y The Company’s financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. As of March 31, 2023, the Company had approximately $1.4 million of cash. We view our crypto assets as long-term holdings and we do not plan to engage in regular trading of crypto assets. Further certain of our staked crypto assets may be locked up depending on the specific blockchain protocol and we may be unable to unstake them in a timely manner in order to liquidate to the extended desired. During times of instability in the market of crypto assets, we may not be able to sell our crypto assets at reasonable prices or at all. As a result, our crypto assets may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. As of May 10, 2023, the Company had approximately $1.1 million of cash and the fair value of the Company’s liquid crypto assets was approximately $18.9 million, which includes $14.6 million of staked Ethereum considered to be liquid after the successful Shanghai upgrade on Ethereum’s network in April 2023. The Company has no outstanding debt. As of May 10, 2023, the Company also has approximately $6.4 million available under the ATM Agreement over the next twelve months under the Form S-3 baby shelf rules, although, the amount that we may raise under the Form S-3 may increase or decrease based upon our stock price. The Company believes that the existing cash and liquid crypto assets held by us, in addition to the funds available to the Company from the issuance of additional stock through the ATM Agreement, provide sufficient liquidity to meet working capital requirements, anticipated capital expenditures and contractual obligations for at least the next twelve months. Cash Flows Cash used in operating activities was approximately $1.1 million during the 2023 Quarter compared to $1.1 million for the 2022 Quarter. Cash used in investing activities was $86,000 during the 2023 Quarter compared to $8.2 million for the 2022 Quarter. Net cash outflow for investing activities was used primarily for the purchase of crypto assets for our blockchain infrastructure operations. Cash provided by financing activities was $509,000 during the 2023 Quarter compared to $10.1 million for the 2022 Quarter. The cash inflows from financing activities were entirely from proceeds from the Common Stock sold pursuant to the ATM Agreement. The Company has plans to continue to raise proceeds from the sale of Common Stock to fund operations as needed. 27 Off Balance Sheet Transactions As of March 31, 2023, there were no off-balance sheet arrangements and we were 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 3 to the Unaudited Condensed Financial Statements. 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, expected increase in our revenues and gross margins 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 that could cause actual results to differ materially from those in the forward-looking statements include the rewards and costs associated with staking or validating transactions on blockchains, regulatory issues related to our business model, a drop in the price of our crypto assets, significant decrease in the value of our crypto assets and rewards, loss or theft of the private withdrawal keys resulting in the complete loss of crypto assets and reward, and others which are contained in our filings with the SEC, including our Form 10-K for the year ended December 31, 2022. 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 3 Quantitative and Qualitative Disclosures About Market Risk Not applicable.