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 June 30, 2023 and June 30, 2022 quarters, respectively. When we refer to the “2023 Period” and the “2022 Period” we are referring to the six months ended June 30, 2023 and June 30, 2022, 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 2023 Q2 Bitcoin (BTC) 90 - - - - - Ethereum (ETH) 8,196 8,283 8,380 8,454 8,524 7,833 Cardano (ADA) 257,757 260,555 262,860 262,860 262,860 263,293 Kusama (KSM) 5,278 5,550 6,297 6,493 6,767 6,946 Tezos (XTZ) 70,453 71,369 72,578 73,486 74,765 25,375 Solana (SOL) 7,043 7,136 7,238 7,371 7,493 7,621 Polkadot (DOT) 38,816 39,986 23,905 7,280 7,526 7,882 Terra (LUNA) 3,621 - - - - - Cosmos (ATOM) 80,474 86,613 91,181 96,318 102,298 243,472 Polygon (MATIC) 454,486 466,022 474,207 480,825 486,806 492,965 Avalanche (AVAX) 14,273 14,594 14,888 17,178 17,178 17,824 Algorand (ALGO) 51,197 51,201 51,201 - - - Axie Infinity (AXS) 22,322 31,763 37,402 42,030 46,482 50,955 Kava (KAVA) 183,966 264,917 280,293 290,909 304,968 315,362 Band Protocol (BAND) 992 992 992 992 Mina (MINA) 71,297 74,177 79,937 81,377 Oasis Network (ROSE) 349,661 359,607 2,569,991 2,600,279 Akash (AKT) 103,730 107,405 110,213 113,063 NEAR Protocol (NEAR) 74,702 75,724 77,389 Evmos (EVMOS) - - 295,422 Fair Value of Crypto Assets at Period End Asset 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 Bitcoin (BTC) 4,098,481 - - - - - Ethereum (ETH) 26,894,723 8,840,595 11,128,675 10,117,237 15,530,133 15,141,859 Cardano (ADA) 294,320 119,555 114,190 64,786 104,861 75,553 Kusama (KSM) 992,851 267,583 265,505 149,981 236,070 175,352 Tezos (XTZ) 262,023 101,102 103,210 52,720 83,614 20,452 Solana (SOL) 863,854 239,700 240,377 73,426 158,625 144,010 Polkadot (DOT) 826,875 281,496 150,964 31,410 47,720 40,763 Terra (LUNA) 373,005 - - - - - Cosmos (ATOM) 2,325,374 651,909 1,186,824 900,440 1,144,459 2,261,411 Polygon (MATIC) 735,034 222,466 368,671 364,714 544,815 325,857 Avalanche (AVAX) 1,383,403 247,059 256,021 187,286 304,341 231,941 Algorand (ALGO) 47,492 16,115 18,044 - - - Axie Infinity (AXS) 1,416,264 461,649 470,116 253,943 389,893 302,966 Kava (KAVA) 828,742 468,634 423,326 166,752 270,486 305,501 Band Protocol (BAND) 1,215 1,396 1,857 1,260 Mina (MINA) 42,085 32,187 62,101 39,579 Oasis Network (ROSE) 21,330 12,291 156,698 128,686 Akash (AKT) 26,881 19,938 34,510 63,311 NEAR Protocol (NEAR) 93,785 150,854 107,088 Evmos (EVMOS) - - 26,069 Total 41,342,441 11,917,863 14,817,434 12,522,292 19,221,037 19,391,658 QoQ Change 13 % -71 % 24 % -15 % 53 % 1 % YoY Change 105 % -45 % -51 % -66 % -54 % 63 % 23 Prices of Crypto Assets at Period End Asset 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 Bitcoin (BTC) $ 45,539 $ 19,785 $ 19,432 $ 16,547 $ 28,478 $ 30,477 Ethereum (ETH) $ 3,282 $ 1,067 $ 1,328 $ 1,197 $ 1,822 $ 1,933 Cardano (ADA) $ 1.14 $ 0.46 $ 0.43 $ 0.25 $ 0.40 $ 0.29 Kusama (KSM) $ 188 $ 48 $ 42 $ 23 $ 35 $ 25 Tezos (XTZ) $ 3.72 $ 1.42 $ 1.42 $ 0.72 $ 1.12 $ 0.81 Solana (SOL) $ 123 $ 33.59 $ 33.21 $ 9.96 $ 21.17 $ 18.90 Polkadot (DOT) $ 21.30 $ 7.04 $ 6.32 $ 4.31 $ 6.34 $ 5.17 Terra (LUNA) $ 103 $ - $ - $ - $ - $ - Cosmos (ATOM) $ 28.90 $ 7.53 $ 13.02 $ 9.35 $ 11.19 $ 9.29 Polygon (MATIC) $ 1.62 $ 0.48 $ 0.78 $ 0.76 $ 1.12 $ 0.66 Avalanche (AVAX) $ 96.92 $ 16.93 $ 17.20 $ 10.90 $ 17.72 $ 13.01 Algorand (ALGO) $ 0.93 $ 0.31 $ 0.35 $ 0.17 $ 0.23 $ 0.12 Axie Infinity (AXS) $ 63.45 $ 14.53 $ 12.57 $ 6.04 $ 8.39 $ 5.95 Kava (KAVA) $ 4.50 $ 1.77 $ 1.51 $ 0.57 $ 0.89 $ 0.97 Band Protocol (BAND) $ 1.22 $ 1.41 $ 1.87 $ 1.27 Mina (MINA) $ 0.59 $ 0.43 $ 0.78 $ 0.49 Oasis Network (ROSE) $ 0.06 $ 0.03 $ 0.06 $ 0.05 Akash (AKT) $ 0.26 $ 0.19 $ 0.31 $ 0.56 NEAR Protocol (NEAR) $ 1.26 $ 1.99 $ 1.38 * 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. June 30, 2023 December 31, 2022 Book Value Fair Value Book Value Fair Value Bitcoin (BTC) $ - $ - $ - $ - Ethereum (ETH) 5,176,274 15,141,859 5,708,624 10,117,237 Cardano (ADA) 60,686 75,553 63,178 64,786 Kusama (KSM) 140,203 175,352 142,242 149,981 Tezos (XTZ) 17,533 20,452 51,651 52,720 Solana (SOL) 62,569 144,010 60,012 73,426 Polkadot (DOT) 33,442 40,763 30,859 31,410 Terra (LUNA) - - - - Cosmos (ATOM) 1,665,976 2,261,411 568,359 900,440 Polygon (MATIC) 165,870 325,857 161,293 364,714 Avalanche (AVAX) 187,050 231,941 182,964 187,286 Algorand (ALGO) - - - - Axie Infinity (AXS) 236,126 302,966 245,443 253,943 Kava (KAVA) 167,948 305,501 165,426 166,752 Band Protocol (BAND) 948 1,260 982 1,396 Mina (MINA) 30,562 39,579 32,002 32,187 Oasis Network (ROSE) 105,908 128,686 12,045 12,291 Akash (AKT) 19,573 63,311 17,993 19,938 NEAR Protocol (NEAR) 89,480 107,088 92,840 93,785 Evmos (EVMOS) 25,888 26,069 - - Total $ 8,186,036 $ 19,391,658 $ 7,535,913 $ 12,522,292 24 Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022 The following tables reflect our operating results for the three and six months ended June 30, 2023 and 2022: For the Three Months Ended June 30, $ Change % Change 2023 2022 2023 2023 Revenues Validator revenue $ 385,753 $ 514,349 $ (128,596 ) (25 )% Total revenues 385,753 514,349 (128,596 ) (25 )% Cost of revenues Validator expense 113,612 93,900 19,712 21 % Gross profit 272,141 420,449 (148,308 ) (35 )% Operating expenses: General and administrative $ 617,569 $ 512,051 $ 105,518 21 % Research and development 180,903 185,004 (4,101 ) (2 )% Compensation and related expenses 578,496 638,025 (59,529 ) (9 )% Marketing 2,723 23,691 (20,968 ) (89 )% Impairment loss on digital assets/currencies 784,602 8,894,797 (8,110,195 ) (91 )% Realized gains on digital asset/currency transactions (731,199 ) (398,446 ) (332,753 ) N/A % Total operating expenses 1,433,094 9,855,122 (8,422,028 ) (85 )% Other income (expenses): Change in fair value of warrant liabilities 142,500 1,710,000 (1,567,500 ) (92 )% Distributions to warrant holders - - - N/A % Total other income (expenses) 142,500 1,710,000 (1,567,500 ) 92 % Net loss $ (1,018,453 ) $ (7,724,673 ) 6,706,220 (87 )% For the Six Months Ended June 30, $ Change % Change 2023 2022 2023 2023 Revenues Validator revenue $ 697,261 $ 1,077,364 $ (380,103 ) (35 )% Total revenues 697,261 1,077,364 (380,103 ) (35 )% Cost of revenues Validator expense 195,626 231,769 (36,143 ) (16 )% Gross profit 501,635 845,595 (343,960 ) (41 )% Operating expenses: General and administrative $ 1,227,398 $ 1,162,340 $ 65,058 6 % Research and development 382,528 321,722 60,806 19 % Compensation and related expenses 1,040,586 2,061,921 (1,021,335 ) (50 )% Marketing 8,966 65,484 (56,518 ) (86 )% Impairment loss on crypto assets/currencies 879,509 12,202,225 (11,322,716 ) (93 )% Realized gains on crypto asset/currency transactions (748,030 ) (469,556 ) (278,474 ) (59 )% Total operating expenses 2,790,957 15,344,136 (12,553,179 ) (82 )% Other income (expenses): Change in fair value of warrant liabilities (142,500 ) 1,068,750 (1,211,250 ) (113 )% Distributions to warrant holders - (35,625 ) 35,625 N/A % Total other income (expenses) (142,500 ) 1,033,125 (1,175,625 ) 114 % Net loss $ (2,431,822 ) $ (13,465,416 ) 11,033,594 (82 )% 25 Validator Revenue The decrease in revenue during the 2023 Period as compared to the 2022 Period 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 during the 2023 Period as compared to the 2022 Period 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 Period is primarily due to the $12.2 million impairment loss on crypto assets (which we refer to as a “Crypto Asset Impairment”) during the 2022 Period, compared to only a $0.9 million Crypto Asset Impairment during the 2023 Period. In addition, the decrease is also due to the non-cash $1.7 million equity-based contingent bonuses granted to employees and our non-employee directors during the 2022 Period for the achievement of performance milestones compared to only $0.5 million equity-based compensation during the 2023 Period. 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 periods reported were 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 Period 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 August 9, 2023, the Company sold a total of 3,442,181 shares of Common Stock under the ATM Agreement for aggregate total gross proceeds of approximately $15,626,000 at an average selling price of $4.54 per share, resulting in net proceeds of approximately $15,122,000 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 June 30, 2023, the Company had approximately $0.9 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 August 9, 2023, the Company had approximately $0.8 million of cash and the fair value of the Company’s liquid crypto assets was approximately $18.7 million. The Company has no outstanding debt. As of August 9, 2023, the Company also has approximately $5.8 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 $2.0 million during the 2023 Period compared to $0.7 million for the 2022 Period. Cash used in investing activities was $84,000 during the 2023 Period compared to $8.8 million for the 2022 Period. 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 $0.9 million during the 2023 Period compared to $10.0 million for the 2022 Period. 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 June 30, 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. Critical Accounting Policies and Estimates We discussed the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report. 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.