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 September 30, 2023 and September 30, 2022, respectively. When we refer to the “2023 Period” and the “2022 Period” we are referring to the nine months ended September 30, 2023 and September 30, 2022, respectively. Company Overview BTCS Inc. is an early entrant in the crypto asset 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. Subject to available capital and the restrictions of certain blockchains 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. We evaluate blockchain networks through various due diligence procedures, including consideration of blockchain quality, reward potential, and technical difficulty of running a validator node. Considerations of the quality of a blockchain include inspection of i) market and on-chain statistics, ii) liquidity, iii) potential blockchain utility, iv) history and milestones, v) growth and development roadmap, vi) use cases, vii) community interest, vii) quality of documentation, viii) decentralization, and ix) any other publicly available information. 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 alternative 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 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 Ethereum (ETH) 8,380 8,454 8,524 7,833 7,748 Cardano (ADA) 262,860 262,860 262,860 263,293 264,751 Kusama (KSM) 6,297 6,493 6,767 6,946 7,246 Tezos (XTZ) 72,578 73,486 74,765 25,375 25,760 Solana (SOL) 7,238 7,371 7,493 7,621 7,752 Polkadot (DOT) 23,905 7,280 7,526 7,882 8,284 Cosmos (ATOM) 91,181 96,318 102,298 243,472 256,784 Polygon (MATIC) 474,207 480,825 486,806 492,965 499,548 Avalanche (AVAX) 14,888 17,178 17,178 17,824 17,824 Algorand (ALGO) 51,201 - - - - Axie Infinity (AXS) 37,402 42,030 46,482 50,955 55,584 Kava (KAVA) 280,293 290,909 304,968 315,362 327,862 Band Protocol (BAND) 992 992 992 992 992 Mina (MINA) 71,297 74,177 79,937 81,377 84,257 Oasis Network (ROSE) 349,661 359,607 2,569,991 2,600,279 2,626,600 Akash (AKT) 103,730 107,405 110,213 113,063 115,735 NEAR Protocol (NEAR) 74,702 75,724 77,389 79,067 Evmos (EVMOS) - - 295,422 322,693 Fair Value of Crypto Assets at Period End Asset 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 Ethereum (ETH) 11,128,675 10,117,237 15,530,133 15,141,859 12,948,491 Cardano (ADA) 114,190 64,786 104,861 75,553 67,259 Kusama (KSM) 265,505 149,981 236,070 175,352 138,166 Tezos (XTZ) 103,210 52,720 83,614 20,452 17,569 Solana (SOL) 240,377 73,426 158,625 144,010 165,849 Polkadot (DOT) 150,964 31,410 47,720 40,763 34,009 Cosmos (ATOM) 1,186,824 900,440 1,144,459 2,261,411 1,859,407 Polygon (MATIC) 368,671 364,714 544,815 325,857 266,400 Avalanche (AVAX) 256,021 187,286 304,341 231,941 164,759 Algorand (ALGO) 18,044 - - - - Axie Infinity (AXS) 470,116 253,943 389,893 302,966 254,967 Kava (KAVA) 423,326 166,752 270,486 305,501 207,289 Band Protocol (BAND) 1,215 1,396 1,857 1,260 1,121 Mina (MINA) 42,085 32,187 62,101 39,579 32,095 Oasis Network (ROSE) 21,330 12,291 156,698 128,686 109,516 Akash (AKT) 26,881 19,938 34,510 63,311 94,686 NEAR Protocol (NEAR) 93,785 150,854 107,088 89,660 Evmos (EVMOS) - - 26,069 24,089 Total 14,817,434 12,522,292 19,221,037 19,391,658 16,475,332 QoQ Change 24 % -15 % 53 % 1 % -15 % YoY Change -51 % -66 % -54 % 63 % 11 % 23 Prices of Crypto Assets at Period End Asset 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 Ethereum (ETH) $ 1,328 $ 1,197 $ 1,822 $ 1,933 $ 1,671 Cardano (ADA) $ 0.43 $ 0.25 $ 0.40 $ 0.29 $ 0.25 Kusama (KSM) $ 42.16 $ 23.10 $ 34.89 $ 25.24 $ 19.07 Tezos (XTZ) $ 1.42 $ 0.72 $ 1.12 $ 0.81 $ 0.68 Solana (SOL) $ 33.21 $ 9.96 $ 21.17 $ 18.90 $ 21.40 Polkadot (DOT) $ 6.32 $ 4.31 $ 6.34 $ 5.17 $ 4.11 Cosmos (ATOM) $ 13.02 $ 9.35 $ 11.19 $ 9.29 $ 7.24 Polygon (MATIC) $ 0.78 $ 0.76 $ 1.12 $ 0.66 $ 0.53 Avalanche (AVAX) $ 17.20 $ 10.90 $ 17.72 $ 13.01 $ 9.24 Algorand (ALGO) $ 0.35 $ 0.17 $ 0.23 $ 0.12 $ 0.10 Axie Infinity (AXS) $ 12.57 $ 6.04 $ 8.39 $ 5.95 $ 4.59 Kava (KAVA) $ 1.51 $ 0.57 $ 0.89 $ 0.97 $ 0.63 Band Protocol (BAND) $ 1.22 $ 1.41 $ 1.87 $ 1.27 $ 1.13 Mina (MINA) $ 0.59 $ 0.43 $ 0.78 $ 0.49 $ 0.38 Oasis Network (ROSE) $ 0.06 $ 0.03 $ 0.06 $ 0.05 $ 0.04 Akash (AKT) $ 0.26 $ 0.19 $ 0.31 $ 0.56 $ 0.82 NEAR Protocol (NEAR) $ 1.26 $ 1.99 $ 1.38 $ 1.13 Evmos (EVMOS) $ - $ - $ 0.09 $ 0.07 * 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. September 30, 2023 December 31, 2022 Book Value Fair Value Book Value Fair Value Ethereum (ETH) 5,081,581 12,948,491 5,708,624 10,117,237 Cardano (ADA) 61,026 67,259 63,178 64,786 Kusama (KSM) 127,522 138,166 142,242 149,981 Tezos (XTZ) 16,270 17,569 51,651 52,720 Solana (SOL) 64,883 165,849 60,012 73,426 Polkadot (DOT) 32,491 34,009 30,859 31,410 Cosmos (ATOM) 1,558,867 1,859,407 568,359 900,440 Polygon (MATIC) 167,358 266,400 161,293 364,714 Avalanche (AVAX) 155,089 164,759 182,964 187,286 Algorand (ALGO) - - - - Axie Infinity (AXS) 227,623 254,967 245,443 253,943 Kava (KAVA) 172,960 207,289 165,426 166,752 Band Protocol (BAND) 874 1,121 982 1,396 Mina (MINA) 30,148 32,095 32,002 32,187 Oasis Network (ROSE) 95,677 109,516 12,045 12,291 Akash (AKT) 21,366 94,686 17,993 19,938 NEAR Protocol (NEAR) 82,466 89,660 92,840 93,785 Evmos (EVMOS) 16,994 24,089 - - Total $ 7,913,195 $ 16,475,332 $ 7,535,913 $ 12,522,292 24 Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 The following tables reflect our operating results for the three and nine months ended September 30, 2023 and 2022: For the Three Months Ended September 30, $ Change % Change 2023 2022 2023 2023 Revenues Validator revenue $ 316,242 $ 344,196 $ (27,954 ) (8 )% Total revenues 316,242 344,196 (27,954 ) (8 )% Cost of revenues Validator expense 83,100 82,203 897 1 % Gross profit 233,142 261,993 (28,851 ) (11 )% Operating expenses: General and administrative $ 283,239 $ 432,956 $ (149,717 ) (35 )% Research and development 148,525 126,857 21,668 17 % Compensation and related expenses 409,960 669,792 (259,832 ) (39 )% Marketing 2,155 8,765 (6,610 ) (75 )% Impairment loss on digital assets 372,441 145,247 227,194 156 % Realized gains on digital asset transactions (58,107 ) (20,126 ) (37,981 ) 189 % Total operating expenses 1,158,213 1,363,491 (205,278 ) (15 )% Other income (expenses): Change in fair value of warrant liabilities 285,000 71,250 213,750 300 % Total other income (expenses) 285,000 71,250 213,750 300 % Net loss $ (640,071 ) $ (1,030,248 ) 390,177 (38 )% For the Nine Months Ended September 30, $ Change % Change 2023 2022 2023 2023 Revenues Validator revenue $ 1,013,503 $ 1,421,560 $ (408,057 ) (29 )% Total revenues 1,013,503 1,421,560 (408,057 ) (29 )% Cost of revenues Validator expense 278,726 313,972 (35,246 ) (11 )% Gross profit 734,777 1,107,588 (372,811 ) (34 )% Operating expenses: General and administrative $ 1,510,637 $ 1,595,296 $ (84,659 ) (5 )% Research and development 531,053 448,579 82,474 18 % Compensation and related expenses 1,450,546 2,731,713 (1,281,167 ) (47 )% Marketing 11,121 74,249 (63,128 ) (85 )% Impairment loss on crypto assets 1,251,950 12,347,472 (11,095,522 ) (90 )% Realized gains on crypto asset transactions (806,137 ) (489,682 ) (316,455 ) 65 % Total operating expenses 3,949,170 16,707,627 (12,758,457 ) (76 )% Other income (expenses): Change in fair value of warrant liabilities 142,500 1,140,000 (997,500 ) (88 )% Distributions to warrant holders - (35,625 ) 35,625 N/A % Total other income (expenses) 142,500 1,104,375 (961,875 ) 87 % Net loss $ (3,071,893 ) $ (14,495,664 ) 11,423,771 (79 )% 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 the first quarter 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 crypto asset 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 General and administrative expenses consist of director compensation, legal and professional fees and other personnel and related costs. The decrease in the 2023 Period was primarily due to a decrease of $0.3 million in investor relation related costs compared to the 2022 Period as the Company focused on cost management and transitioning related efforts in-house from third-party engagements. These decreases were partially offset by a $0.2 million increases in legal service costs during the 2023 Period compared to the 2022 Period, driven primarily by services surrounding the Series V Preferred Distribution and related listing on Upstream Exchange. Research and development expenses increased during the 2023 Period as the Company focused on the beta release of our proprietary StakeSeeker platform in the first quarter 2023, including responding to user feedback and continued planned feature development and incorporation onto the platform. We anticipate research and development costs to remain consistent as we continue to expand on technological solutions in the blockchain sector with a focus on cost management of our third-party development team. Compensation and related expenses decreased during the 2023 Period primarily due non-cash $2.2 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 $0.7 million equity-based compensation during the 2023 Period. We believe our compensation expenses will increase slightly from those reported in the 2023 Period as the Company continues to utilize equity-based compensation incentives as a core part of our compensation strategy. Marketing costs decreased during the 2023 Period as the Company focused on cost reduction efforts. The decrease in operating expenses in the 2023 Period is primarily due to the impairment loss on crypto assets (which we refer to as a “Crypto Asset Impairment”) of $12.3 million during the 2022 Period, compared to only a $1.3 million Crypto Asset Impairment during the 2023 Period. Impairment charges are based on volatility in the crypto asset market and cannot be accurately predicted, but may subject the Company to the possibility of additional impairment charges on its crypto asset holdings. The realized gain on crypto transactions increased during the 2023 Period as the Company sold approximately 968 ETH earned as rewards from our staking operations after liquidity was unlocked in April 2023 as part of Ethereum’s Shanghai upgrade. Other Income (Expenses) The changes in other income for the periods reported were primarily due to the decrease 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 StakeSeeker platform and incurs additional Crypto Asset Impairment losses due to volatility in the crypto asset 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 November 7, 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 September 30, 2023, the Company had approximately $0.8 million of cash and working capital of approximately $8.4 million. We view our crypto assets as long-term holdings and we do not plan to engage in regular trading of crypto assets other than for meeting operational cash needs. 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 November 7, 2023, the Company had approximately $0.6 million of cash and cash equivalents and the fair value of the Company’s liquid crypto assets was approximately $19.3 million. The Company has no outstanding debt. As of November 7, 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 12 months. Cash Flows Cash used in operating activities was approximately $2.6 million during the 2023 Period compared to approximately $129,000 for the 2022 Period. The sale of our remaining bitcoin holdings by the end of 2022 was the primary contributor to the $2.6 million operating cash inflows from the sale of non-productive crypto assets during the 2022 Period compared to $0 in the 2023 Period. We do not anticipate any future material cash inflows from the sale of non-productive assets, as our blockchain infrastructure strategy focuses primarily on acquiring and staking productive proof-of-stake blockchain networks. Additional non-cash adjustments to our operating cash flows consisted of approximately $1.3 million impairment loss on crypto assets (“Crypto Asset Impairment”) during the 2023 Period compared to approximately $12.3 million Crypto Asset Impairment during the 2022 Period. Impairment charges are based on volatility in the crypto asset market and cannot be accurately predicted. This is partially offset by the approximately $2.2 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 approximately $1.1 million equity-based compensation in the 2023 Period. We anticipate similar levels of equity-based compensation in future periods as reported in the 2023 Period. Cash used in investing activities was approximately $186,000 during the 2023 Period compared to approximately $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. We anticipate purchase activity to remain lower and consistent with the levels reported during the 2023 Period as we focus our strategies on technical developments. The 2022 Period included large purchases of productive crypto assets to build on our blockchain infrastructure operations. Cash provided by financing activities was approximately $1.1 million during the 2023 Period compared to approximately $10.5 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 during the 2023 Period. The cash inflows from financing activities during the 2022 Period was partially offset by a one-time return of capital distribution of approximately $631,000 made to record holders as of March 17, 2022. The Company plans to continue to raise proceeds from the sale of Common Stock to fund operations as needed. 27 Off Balance Sheet Transactions As of September 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 StakeSeeker platform, our plans and development of our StakeSeeker platform and the integration of Staking-as-a-Service, increase in the number of tokens we earn, plans to expand our PoS operations, growth opportunities for the Company, consistent purchase activity, 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.