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, 2023. When we refer to the “2024 Quarter” and the “2023 Quarter” we are referring to the three months ended September 30, 2024 and September 30, 2023, respectively. When we refer to the “2024 Period” and the “2023 Period” we are referring to the nine months ended September 30, 2024 and September 30, 2023, respectively. Company Overview BTCS Inc. is a Nasdaq-listed U.S.-based blockchain technology company focused on blockchain infrastructure, with its primary operations currently centered on the Ethereum network. Our core focus is on driving scalable growth through a diverse range of blockchain-focused technological solutions, emphasizing Ethereum infrastructure, including block-building and validator node operations. Blockchain Infrastructure BTCS’s core business centers on its blockchain infrastructure, which supports the validation of transactions and security of multiple proof-of-stake (PoS) and delegated proof-of-stake (dPoS) blockchain networks. The Company manages a network of cloud-based validator nodes, which play a key role in network consensus by performing transaction validation (“attestation”) activities and proposing new blocks. Through these activities, BTCS earns native token rewards by staking its own crypto assets on validator nodes operated by BTCS and third parties. Our evaluation of blockchain networks involves comprehensive due diligence procedures, including assessments of blockchain quality, reward potential, and the technical challenges associated with running validator nodes. Criteria for assessing blockchain quality encompass factors such as 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. Ethereum Block Building – Builder+ A central focus of BTCS’s current operations is its Ethereum block-building initiative, branded as Builder+, launched in 2024. Through Builder+ we purchase block space and leverage advanced algorithmic processes to construct blocks for on-chain validation. The goal of Builder+ is to maximize gas fee revenue by optimizing the contents and structure of each block. The Company aims to maximize the value of gas fees earned by increasing the number of blocks we purchase while minimizing the payments to validators required for purchasing block space. Builder+ is now a central driver of BTCS’s growth strategy, reflecting the Company’s emphasis on scalable and efficient revenue generation through advanced blockchain technology. While Builder+ currently operates within the Ethereum ecosystem, it has been designed to adapt to a broader blockchain landscape, allowing for potential expansion to other networks in the future. This flexibility aligns with BTCS’s strategic vision to maintain a robust blockchain infrastructure that is not limited to any single network, even as Ethereum remains a primary area of focus. 28 Staking-as-a-Service BTCS’s non-custodial Staking-as-a-Service (“StaaS”) business model allows for crypto asset holders to earn token 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 a crypto asset 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. A StaaS provider maintains a ministerial role in validating transactions on a given dPoS network on behalf of its Delegators by (1) using open-source software to stake the relevant crypto assets; (2) monitoring and maintaining the nodes it is operating to ensure the computers remain online to validate transactions; and (3) verifying transactions on the network when required. As a non-custodial StaaS provider, we do not hold or take possession of any Delegator funds, crypto assets, or crypto asset rewards at any point during the staking or delegation process. Delegation does not involve the transfer of crypto asset ownership to a Validator. During the process of staking, delegated crypto assets remain in the Delegator’s digital wallets. The blockchain network calculates rewards earned, which are then distributed directly to the Delegator’s wallet. The blockchain network does not distribute any of the Delegator’s earned crypto rewards to BTCS. At no point does the Validator gain access, control, or custody of the original staked crypto assets or the earned crypto rewards through staking to its node. Therefore, the Company does not have any exposure to the custodial risks that a crypto exchange would have related to excessive redemptions or withdrawals of crypto assets, suspension of redemptions, or withdrawals. Further, we do not issue or hold crypto assets on behalf of third parties and have no exposure to the risks an exchange would have with respect to loans, rehypothecation, or margin. The following table details the blockchain networks on which BTCS operates nodes that support third-party delegations as part of our staking-as-a-service operations, including the amount of third-party crypto assets delegated to our non-custodial validator nodes, as of September 30, 2024: Blockchain Network Validator Fee Percentage % Delegated Crypto Assets (Native Tokens) Delegated Crypto Assets ($USD) Cosmos 5 % 101,000 ATOM $ 475,103 Akash 5 % 174,000 AKT $ 480,689 Oasis 0 % 3,052,000 ROSE $ 261,782 Kava 5 % 28,000 KAVA $ 9,963 Avalanche 5 % 1,000 AVAX $ 30,393 Total $ 1,257,930 Supporting Platforms: ChainQ and StakeSeeker To complement our core blockchain infrastructure, we have developed crypto-focused technology solutions aimed at increasing accessibility and transparency within the blockchain ecosystem. These solutions include “ChainQ”, an AI-powered blockchain data and analytics platform currently in beta, and “StakeSeeker”, a portfolio monitoring tool designed for cryptocurrency holders. ChainQ simplifies the process of accessing and analyzing blockchain data, enabling deeper insights into on-chain activity. Through comprehensive indexing of public blockchain data from our Blockchain Infrastructure operations, ChainQ is intended to provide an intuitive and straightforward platform for users to access on-chain data. 29 StakeSeeker is a personal finance software and education center with a comprehensive crypto dashboard providing tools for crypto asset holders to connect, monitor, track, and analyze their crypto portfolios across exchanges and wallets in a single analytics platform. StakeSeeker does not provide or facilitate direct, crypto asset delegation or transaction execution on our platform. The StakeSeeker platform is currently free-to-use for registered users and is not currently generating revenue. The Company is not a broker-dealer or an investment advisor and does not provide any such related services. Both the ChainQ and StakeSeeker platforms contribute to the overall value BTCS offers within the blockchain space, supporting its infrastructure operations and expanding user engagement and awareness. Strategic Outlook Looking forward, BTCS remains committed to enhancing its blockchain infrastructure capabilities, with a strong emphasis on its Ethereum block-building operations. The Company is poised to leverage its expertise in validator node management and block-building optimization as it seeks scalable opportunities within the rapidly evolving blockchain ecosystem. While Ethereum is currently the primary network for BTCS’s operations, the Company may expand its infrastructure to accommodate additional blockchain networks. BTCS is dedicated to remaining at the forefront of blockchain innovation and staying adaptable to opportunities across the broader blockchain ecosystem. This strategic agility positions BTCS to navigate the evolving blockchain landscape while maximizing its impact. Crypto Assets The tables below detail BTCS’s quarterly crypto asset holdings as of the end of each quarter beginning with the 2023 Quarter and ending the 2024 Quarter. Crypto Assets Held at the End of the Following Calendar Quarters: Asset 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Ethereum (ETH) 7,748 7,815 7,868 7,935 7,978 Cardano (ADA) 264,751 265,254 266,543 268,582 270,264 Kusama (KSM) 7,246 7,313 7,796 8,074 8,362 Tezos (XTZ) 25,760 26,174 26,492 26,845 27,440 Solana (SOL) 7,752 7,845 7,964 6,821 6,936 Polkadot (DOT) 8,284 8,650 9,010 9,386 9,784 Cosmos (ATOM) 256,784 270,098 281,264 293,886 307,489 Polygon (POL fka MATIC) 499,548 506,010 512,241 518,554 525,405 Avalanche (AVAX) 17,824 17,842 17,842 18,510 18,510 Axie Infinity (AXS) 55,584 60,552 65,932 71,704 77,500 Kava (KAVA) 327,862 345,394 351,685 358,318 365,364 Band Protocol (BAND) 992 992 992 992 992 Mina (MINA) 84,257 90,017 92,897 95,777 96,497 Oasis Network (ROSE) 2,626,600 2,647,629 2,663,766 - - Akash (AKT) 115,735 119,071 123,646 129,891 136,042 NEAR Protocol (NEAR) 79,067 80,267 80,981 82,867 84,748 Evmos (EVMOS) 322,693 345,777 357,203 364,037 367,358 Rocket Pool (RPL) - - - - 584 30 Fair Market Value of Crypto Assets at the End of the Following Calendar Quarters: Asset 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Ethereum (ETH) 12,948,491 17,829,264 28,700,380 27,235,107 20,767,299 Cardano (ADA) 67,259 157,615 173,350 105,270 100,930 Kusama (KSM) 138,166 329,353 377,395 191,929 167,245 Tezos (XTZ) 17,569 26,379 37,118 21,296 19,309 Solana (SOL) 165,849 796,327 1,613,543 999,138 1,058,786 Polkadot (DOT) 34,009 70,879 86,858 58,218 43,406 Cosmos (ATOM) 1,859,407 2,860,870 3,455,299 1,975,032 1,452,240 Polygon (POL fka MATIC) 266,400 491,138 514,187 290,027 208,271 Avalanche (AVAX) 164,759 687,713 964,888 542,525 513,465 Axie Infinity (AXS) 254,967 535,546 726,572 434,956 390,911 Kava (KAVA) 207,289 301,429 374,932 158,376 131,275 Band Protocol (BAND) 1,121 2,174 2,223 1,221 1,216 Mina (MINA) 32,095 122,007 115,192 51,720 53,749 Oasis Network (ROSE) 109,516 363,571 366,108 - - Akash (AKT) 94,686 291,574 592,956 466,154 376,836 NEAR Protocol (NEAR) 89,660 293,204 591,162 438,780 448,572 Evmos (EVMOS) 24,089 43,886 28,612 11,249 7,310 Rocket Pool (RPL) - - - - 6,702 Total 16,475,332 25,202,929 38,720,775 32,980,998 25,747,522 QoQ Change -15 % 53 % 54 % -15 % -22 % YoY Change 11 % 101 % 101 % 70 % 56 % Prices of Crypto Assets at the End of the Following Calendar Quarters:* Asset 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Ethereum (ETH) $ 1,671 $ 2,281 $ 3,648 $ 3,432 $ 2,603 Cardano (ADA) 0.25 0.59 0.65 0.39 0.37 Kusama (KSM) 19.07 45.04 48.41 23.77 20.00 Tezos (XTZ) 0.68 1.01 1.40 0.79 0.70 Solana (SOL) 21.40 101.51 202.60 146.48 152.66 Polkadot (DOT) 4.11 8.19 9.64 6.20 4.44 Cosmos (ATOM) 7.24 10.59 12.28 6.72 4.72 Polygon (POL fka MATIC) 0.53 0.97 1.00 0.56 0.40 Avalanche (AVAX) 9.24 38.54 54.08 29.31 27.74 Axie Infinity (AXS) 4.59 8.84 11.02 6.07 5.04 Kava (KAVA) 0.63 0.87 1.07 0.44 0.36 Band Protocol (BAND) 1.13 2.19 2.24 1.23 1.23 Mina (MINA) 0.38 1.36 1.24 0.54 0.56 Oasis Network (ROSE) 0.04 0.14 0.14 0.10 0.08 Akash (AKT) 0.82 2.45 4.80 3.59 2.77 NEAR Protocol (NEAR) 1.13 3.65 7.30 5.30 5.29 Evmos (EVMOS) 0.07 0.13 0.08 0.03 0.02 Rocket Pool (RPL) - - - - 11.47 * The prices have been rounded to the nearest whole dollar for prices above $100 31 Crypto Asset Rewards The tables below detail BTCS’s quarterly crypto assets earned during each of the following quarters: Crypto assets earned from BTCS validator nodes Asset 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Ethereum (ETH) 85 67 65 72 65 Cosmos (ATOM) 13,312 13,314 11,166 12,565 13,603 Akash (AKT) 2,671 3,337 4,575 6,246 6,151 Kava (KAVA) 12,500 17,532 6,292 6,632 7,046 Mina (MINA) 2,880 5,760 2,880 2,880 720 Oasis Network (ROSE) 26,321 21,029 16,137 10,431 - Kusama (KSM) 300 67 10 279 288 Avalanche (AVAX) - 18 - 668 - NEAR Protocol (NEAR) 1,606 1,200 714 - - Evmos (EVMOS) 27,271 30,084 - - - Tezos (XTZ) 385 414 - - - Crypto assets earned from staking to third-party validator nodes Asset 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Axie Infinity (AXS) 4,629 4,967 5,381 5,772 5,796 Solana (SOL) 131 93 119 139 97 Polygon (POL fka MATIC) 6,276 6,462 6,230 6,314 6,851 Polkadot (DOT) 402 366 360 376 398 Evmos (EVMOS) - - 11,426 6,834 3,321 Cardano (ADA) 1,458 503 1,289 2,039 1,683 Tezos (XTZ) - - 318 354 594 NEAR Protocol (NEAR) - - - 1,886 1,881 Crypto assets earned from Ethereum block building through Builder+ Asset 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Ethereum (ETH) 11 23 152 32 Fair Market Value of Crypto Asset Rewards Earned Recognized as Revenue The following table summarizes the revenues earned from the Company’s operations by revenue segment during the following calendar quarters: Revenue by Segment 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Total revenue from BTCS blockchain infrastructure operations $ 283,654 $ 280,516 $ 343,911 $ 407,287 $ 276,393 Total revenue from staking to third-party validator nodes 32,588 45,609 74,442 78,053 58,261 Total revenue from Ethereum block building through Builder+ - - 33,033 75,852 404,503 Total revenue $ 316,242 $ 326,125 $ 451,386 $ 561,192 $ 739,157 The tables below detail the fair market value of BTCS’s quarterly crypto assets earned as revenue in each respective segment during the following calendar quarters: Revenue from BTCS validator nodes Asset 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Ethereum (ETH) $ 151,699 $ 131,903 $ 188,078 $ 241,588 $ 180,487 Cosmos (ATOM) 106,982 116,726 121,074 104,580 69,534 Akash (AKT) 2,263 5,341 18,746 26,740 17,763 Kava (KAVA) 9,523 13,033 5,252 4,305 2,508 Mina (MINA) 1,234 4,818 3,646 2,439 319 Oasis Network (ROSE) 1,183 1,688 2,218 1,036 - Kusama (KSM) 6,416 1,193 475 8,108 5,782 Avalanche (AVAX) - 714 - 18,491 - NEAR Protocol (NEAR) 2,050 1,834 4,422 - - Evmos (EVMOS) 2,016 2,929 - - - Tezos (XTZ) 288 337 - - - Total revenue from BTCS validator nodes $ 283,654 $ 280,516 $ 343,911 $ 407,287 $ 276,393 Revenue from staking to third-party validator nodes Asset 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Axie Infinity (AXS) $ 23,755 $ 34,595 $ 48,322 $ 36,379 $ 29,236 Solana (SOL) 2,860 3,620 15,372 21,353 14,414 Polygon (POL fka MATIC) 3,676 5,143 5,731 3,758 2,716 Polkadot (DOT) 1,898 1,999 2,957 2,619 1,980 Evmos (EVMOS) - - 940 269 66 Cardano (ADA) 399 252 753 837 628 Tezos (XTZ) - - 367 338 419 NEAR Protocol (NEAR) - - - 12,500 8,802 Total revenue from staking to third-party validator nodes $ 32,588 $ 45,609 $ 74,442 $ 78,053 $ 58,261 Revenue from Ethereum block building through Builder+ Asset 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 Ethereum (ETH) $ 33,033 $ 75,852 $ 404,503 Total revenue from Ethereum block building through Builder+ $ - $ - $ 33,033 $ 75,852 $ 404,503 33 Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 The following tables reflect our operating results for the three and nine months ended September 30, 2024 and 2023: For the Three Months Ended September 30, $ Change % Change 2024 2023 2024 2024 Revenues Blockchain infrastructure revenues (net of fees) $ 739,157 $ 316,242 $ 422,915 134 % Total revenues 739,157 316,242 422,915 134 % Cost of revenues Blockchain infrastructure costs 543,308 83,100 460,208 554 % Gross profit 195,849 233,142 (37,293 ) (16 )% Operating expenses: General and administrative $ 586,926 $ 283,239 $ 303,687 107 % Research and development 213,332 148,525 64,807 44 % Compensation and related expenses 942,860 409,960 532,900 130 % Marketing 55,611 2,155 53,456 2,481 % Realized (gains) losses on crypto asset transactions 121,964 43,791 78,173 179 % Total operating expenses 1,920,693 887,670 1,033,023 116 % Other income (expenses): Change in unrealized appreciation (depreciation) on crypto assets (7,396,380 ) (2,914,029 ) (4,482,351 ) 154 % Change in fair value of warrant liabilities 53,437 285,000 (231,563 ) (81 )% Other income 28,000 - 28,000 100 % Total other income (expenses) (7,314,943 ) (2,629,029 ) (4,685,914 ) 178 % Net income (loss) $ (9,039,787 ) $ (3,283,557 ) (5,756,230 ) (175 )% For the Nine Months Ended September 30, $ Change % Change 2024 2023 2024 2024 Revenues Validator revenue $ 1,751,735 $ 1,013,503 $ 738,232 73 % Total revenues 1,751,735 1,013,503 738,232 73 % Cost of revenues Validator expense 872,781 278,726 594,055 213 % Gross profit 878,954 734,777 144,177 20 % Operating expenses: General and administrative $ 1,613,481 $ 1,510,637 $ 102,844 7 % Research and development 523,658 531,053 (7,395 ) (1 )% Compensation and related expenses 2,274,130 1,450,546 823,584 57 % Marketing 141,690 11,121 130,569 1,174 % Realized gains on crypto asset transactions (176,050 ) 604,270 (780,320 ) (129 )% Total operating expenses 4,376,909 4,107,627 269,282 7 % Other income (expenses): Change in unrealized appreciation (depreciation) on crypto assets (237,052 ) 3,734,213 (3,971,265 ) (106 )% Change in fair value of warrant liabilities 195,937 142,500 53,437 37 % Other income 28,000 - 28,000 100 % Total other income (expenses) (13,115 ) 3,876,713 (3,889,828 ) (100 )% Net loss $ (3,511,070 ) $ 503,863 (4,014,933 ) (797 )% 34 Revenues The increase in revenue during the 2024 Quarter and 2024 Period as compared to the 2023 Quarter and 2023 Period is primarily due to the increase in the block rewards earned from our Ethereum block-building activities during the 2024 Quarter and 2024 Period. The increase is also partially due to the increase in fair value of our crypto assets earned as rewards for staking as the market prices of crypto assets continued to be elevated during 2024 Period compared to 2023 Period. Although we believe the number of block rewards and 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. As detailed above, in the 2024 Quarter, the Company earned approximately 217 ETH from its Builder+ and Validator operations. During the period from October 1, 2024 to November 12, 2024, the Company has earned approximately 541 ETH from its Builder+ and Validator operations. As such, the Company expects its revenue to significantly increase in the fourth quarter. During this time period, our associated costs of revenues have also increased at a larger percentage than our revenue growth, resulting in lower gross margins. Cost of Revenues The increase in the cost of revenues during the 2024 Period as compared to the 2023 Period is due to the increase in Validator Payments made to purchase block space as part of our Ethereum block-building activities during the 2024 Quarter and Period. These additional costs are partially offset by the 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, particularly our strategy to increase the number and value of block production, requiring additional purchases of block space from Validators. Summary of Accounting Principle Change in Ethereum Block Building Revenues and Costs During the second Quarter of 2024, the Company implemented a change in accounting principle related to the presentation of revenues and costs associated with our Ethereum bloc- building operations. This change, made under ASC 606, now presents gas fees earned as gross revenue and Validator Payments as cost of revenues, rather than netting them against each other. This correction, applied retrospectively, better reflects the economic substance of our transactions and provides enhanced transparency. The change does not impact gross profit, net income, or balance sheet items, but it does result in increased reported revenues and costs for the three months ended March 31, 2024. Operating Expenses General and administrative expenses consist of director compensation, legal and professional fees and other personnel and related costs. The increase in the 2024 Period was primarily due to an increase of approximately $200,000 in proxy service fees related to our 2024 annual meeting as well as a decrease of approximately $140,000 in legal fees and related administrative costs from the 2023 Period, driven primarily by services surrounding the Series V Preferred Distribution and related listing on Upstream Exchange incurred during the first half of 2023. We are uncertain as to whether our future legal expenses related to the SEC’s current investigation of the Company will have a material impact on our operating expenses during the remainder of 2024, or thereafter. Additionally, we incurred higher accounting fees related to our audits and Form S-3 registration during the 2024 Period, which is partially offset by other reduced costs resulting from cost cutting measures for other professional fees during the 2024 Period. Research and development expenses decreased slightly during the 2024 Period from the 2023 Period as the Company shifted efforts dedicated to the beta release of our proprietary StakeSeeker platform in the 2023 Period to focus on the launch of Builder+ operations as well as the further development of ChainQ, which launched in July 2024. 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. 35 Compensation and related expenses increased during the 2024 Period resulting from the addition of employee headcount during the 2024 Quarter as well as larger accruals for estimated performance bonuses for 2024. We believe our compensation expenses will increase from those reported in the 2024 Period as the Company continues to utilize non-cash equity-based compensation incentives as a core part of our compensation strategy and anticipate additional accruals for 2024 performance-based bonus incentives in future reporting periods and may bring on additional staff. Marketing costs increased during the 2024 Period as the Company incurred costs associated with the purchase of transaction traffic to bolster Ethereum block production as part of the ramp up of Builder+ operations. The Company may have additional expenditures for transaction traffic in order to further increase Ethereum block-building activities. The realized losses on crypto asset transactions increased during the 2024 Period as the Company sold certain crypto assets from our blockchain infrastructure operations in order to fund operating activities. The Company may realize additional gains (losses) in the future resulting from the sale of crypto assets to meet operational and cash needs. Other Income (Expenses) The changes in other income for the 2024 Quarter and 2024 Period were primarily attributed to the recognition of the change in unrealized appreciation on crypto assets resulting from the increase in the fair market value of the Company’s crypto assets during the 2024 Period compared to the 2023 Period and the decrease in the fair market value of the Company’s crypto assets during the 2024 Quarter. Changes in the unrealized appreciation or depreciation of crypto assets are directly influenced by the volatility in crypto markets, which can be challenging for management to predict. Furthermore, the changes in other income for the 2024 Quarter was partially driven by the decrease in the fair value of warrant liabilities throughout the period. This non-cash expense is influenced by the value of our stock price at the end of each quarter, a factor that we cannot predict. Net income (loss) The decrease in net income for the 2024 Period compared to the 2023 Period is primarily attributable to larger increases in fair value of our crypto assets during the 2024 Period compared to the 2023 Period. The decrease in net loss for the 2024 Quarter compared to the 2023 Quarter is primarily attributable to the decline of crypto market prices during the 2024 Quarter, resulting in decreased values of our crypto assets and reporting of unrealized depreciation in the 2024 Quarter. We acknowledge that our net income (loss) may exhibit significant fluctuations due to the volatility in the crypto asset markets, impacting changes in the fair value of crypto assets during future reporting periods. 36 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 (assuming an effective registration statement on Form S-3), 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 September 14, 2021 through November 12, 2024, the Company sold a total of 5,260,536 shares of Common Stock under the ATM Agreement for aggregate total gross proceeds of approximately $19, 176 ,000 at an average selling price of $3.65 per share, resulting in net proceeds of approximately $18,548,000 after deducting commissions and other transaction costs. As a result of the SEC’s baby shelf requirements, the Company is currently limited in its sales of Common Stock under the ATM Agreement to one-third of its public float during the 12 calendar months immediately prior to the sale. As of the filing date of this Form 10-Q, the Company would be limited in its sales under the ATM Agreement to approximately $$2,618,000 of shares. After the expiration of the Company’s prior Form S-3, the Company filed a new Form S-3, which became effective October 4, 2024. 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, 2024, the Company had approximately $254,000 of cash and working capital of approximately $25,090,000. As of November 12, 2024, the Company had approximately $1,466,000 of cash and cash equivalents and the fair market value of the Company’s liquid crypto assets was approximately $31,548,000. The Company has no outstanding debt. The Company believes that the existing cash and liquid crypto assets held by us provide sufficient liquidity to meet working capital requirements, anticipated capital expenditures and contractual obligations for at least the next 12 months. Certain of our staked crypto assets may be locked up for varying durations, depending on the specific blockchain protocol, and we may be unable to unstake them in a timely manner in order to liquidate to the extent desired. Lock-up periods for our staked crypto assets range from several hours to nine months. 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. Cash Flows Cash used in operating activities was approximately $2,388,000 during the 2024 Period compared to approximately $2,693,000 for the 2023 Period. The largest recurring non-cash adjustments to our operating cash flows consisted of approximately $1,888,000 in stock-based compensation as well as approximately $1,752,000 of revenue earned in native token crypto assets. Cash provided by investing activities was approximately $531,000 during the 2024 Period compared to cash used in investing activities of approximately $186,000 for the 2023 Period. Net cash inflows from investing activities resulted from the sale of crypto assets. We anticipate similar levels of crypto assets sales in future quarters to fund operating activities. Cash provided by financing activities was approximately $653,000 during the 2024 Period compared to approximately $1,114,000 for the 2023 Period. The cash inflows from financing activities were entirely from proceeds of Common Stock sold pursuant to the ATM Agreement. The Company plans to continue to raise proceeds from the sale of Common Stock to fund operations as needed. 37 Off Balance Sheet Transactions As of September 30, 2024, 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, 2023, 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 business, including but not limited to Builder+, StakeSeeker, and ChainQ, plans to expand our PoS operations, growth opportunities for the Company, 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 and successfully building blocks on Ethereum’s blockchain, 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, 2023. 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. 38 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk Not applicable.