BTCS Inc. 10-Q

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations. Introduction 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 section contained in our Annual Report on Form 10-K for the year ended December 31, 2025. When we refer to the “2026 Quarter” and the “2025 Quarter” we are referring to the three months ended March 31, 2026 and March 31, 2025, respectively. Company Overview Executive Overview BTCS Inc. is a blockchain technology company focused on revenue generation through blockchain infrastructure and decentralized finance (“DeFi”) activities, primarily on the Ethereum network. During 2025, the Company continued to execute a strategic repositioning toward Ethereum-native operations to generate scalable recurring revenue and drive sustainable growth and long-term shareholder value. The Company’s business model is centered on participating directly in core components of the Ethereum ecosystem, including validator node operations as a validator (“Validator”), block-building activities as a block builder (“Builder”), and DeFi asset deployment. While BTCS holds significant Ethereum (“ETH”) assets, they are primarily maintained as operating assets that support the Company’s revenue-generating activities, infrastructure participation, and DeFi activities, including deployment into lending protocols and liquidity arrangements. Growth of Blockchain Infrastructure Operations Blockchain infrastructure activities, consisting primarily of validator node operations (NodeOps) and block building (Builder+), represent a core driver of the Company’s revenues. Validator operations provide recurring ETH-denominated revenues through protocol-defined incentives and rewards, while Builder+ has emerged as a higher-growth, technology-driven revenue opportunity. Builder+ participates in Ethereum’s transaction execution ecosystem by constructing and submitting optimized transaction blocks. During 2025, the Company continued to scale Builder+ operations by expanding private order flow integrations, enhancing infrastructure efficiency, and increasing participation across Ethereum blockspace markets. As a result, block building became an increasingly significant contributor to the Company’s revenue mix, reflecting both increased transaction activity and improved execution performance. Management believes that block building represents a scalable opportunity, driven by technology, infrastructure optimization, and access to transaction flow rather than asset lock-up requirements. Decentralized Finance Operations through Imperium BTCS conducts DeFi activities through its Imperium operating segment, which is designed to deploy digital assets into decentralized protocols as a liquidity provider and market participant. Imperium enables the Company to allocate assets across DeFi protocols that facilitate decentralized lending, borrowing, and liquidity pool participation. Through these activities, the Company earns variable digital asset rewards and transaction-based fees that depend on protocol utilization, capital deployment, and prevailing market conditions. In contrast to traditional staking, which is subject to protocol-defined reward structures and lock-up mechanics, DeFi participation allows for more dynamic capital allocation, including the use of overcollateralized borrowing arrangements and liquidity pool strategies. 42 During 2025, the Company’s DeFi activities were primarily focused on decentralized lending and borrowing arrangements. In 2026, the Company expanded these activities to include participation in liquidity pools, further diversifying its DeFi revenue streams and capital deployment strategies. These activities are closely integrated with the Company’s digital asset holdings, particularly ETH, which is deployed as collateral and liquidity to support both revenue generation. Management believes that DeFi activities represent a core and expanding component of the Company’s operations and provide opportunities to enhance capital flexibility and complement the Company’s blockchain infrastructure operations. BTCS plans to continue expanding asset deployments into DeFi protocols and pursue additional integrations to broaden its on-chain activities, subject to market conditions, available capital, regulatory developments, and risk management considerations. Capital Strategy A central element of BTCS’s operating model is its integrated capital strategy, which combines decentralized finance mechanisms with traditional capital markets activities. This framework includes the use of tools such as at-the-market equity (“ATM”) offerings, structured convertible notes, and ETH-backed DeFi borrowing to fund operations, scale infrastructure, and deploy digital assets. DeFi borrowing arrangements, which are typically overcollateralized, enable the Company to access liquidity by pledging digital assets as collateral while maintaining exposure to the underlying digital assets. Borrowed funds, generally denominated in stablecoins, may be used to support operations, manage liquidity, or redeploy capital into blockchain infrastructure and DeFi activities, including decentralized lending and liquidity pool participation. This approach allows the Company to actively manage its capital structure and allocate resources across its operating activities based on market conditions, expected returns, and liquidity requirements. The Company continuously evaluates these strategies to balance capital deployment, liquidity, and risk management considerations. Outlook BTCS entered 2026 with a strategic focus on decentralized finance activities under Imperium. Management expects continued expansion of Imperium to drive scalable revenue generation and gross profit growth, while ongoing development of blockchain infrastructure operations, including Builder+, is expected to support the Company’s broader strategy. The Company’s performance will depend on a range of factors, including activity levels on the Ethereum network, transaction flow within block-building markets, and utilization of DeFi protocols. BTCS expects to continue allocating assets dynamically across validator operations, block building, and DeFi strategies based on market conditions, liquidity needs, and operational considerations. The following sections of Management’s Discussion and Analysis provide additional detail regarding the Company’s digital asset and treasury management practices, known trends and uncertainties, results of operations, and liquidity and capital resources. Use of Digital Assets in our Operations Digital Asset Holdings Overview As part of its operating model, the Company holds and deploys digital assets across blockchain infrastructure and decentralized finance (DeFi) activities. These digital assets are reflected in the Company’s financial statements in different line items based on their nature and accounting treatment, including digital assets measured at fair value and intangible digital assets associated with liquidity pool positions. 43 The following table presents a summary of the Company’s digital asset token holdings as of March 31, 2026, including (i) digital assets held directly and measured at fair value, (ii) digital assets underlying liquidity pool positions, and (iii) stablecoins held. This table is intended to provide a consolidated view of the Company’s digital asset exposure and is supplemental to the disclosures included in the accompanying financial statements. Token quantities are presented to illustrate the Company’s exposure to underlying digital assets across its operations. As of March 31, 2026 Asset Digital Assets Held at Fair Value (Tokens) Digital Assets Underlying Liquidity Pool Positions (Tokens) Stablecoins Held (Tokens) Total Digital Asset Holdings (Tokens) Ethereum (ETH) 55,064 2,543 - 57,607 BNB Chain (BNB) 167 - - 167 Rocket Pool (RPL) 651 - - 651 USD Coin (USDC) - 4,153,920 442,374 4,596,294 Tether (USDT) - 2,202,929 85,562 2,288,491 Aave GHO (GHO) - - 6,423 6,423 Total Carrying Value $ 115,955,855 $ 11,358,006 $ 534,359 $ 127,848,220 Total Fair Value $ 115,955,855 $ 11,707,245 $ 534,359 $ 128,197,459 (1) Carrying value for liquidity pool positions reflects cost less impairment, while fair value represents the estimated market value of the underlying assets. Amounts presented for digital assets and stablecoins reflect token units held as of March 31, 2026. Total carrying value and total fair value are presented in U.S. dollars. Digital assets held at fair value primarily consist of ETH and other protocol tokens that are actively deployed in validator operations, block-building activities, and DeFi lending arrangements. Digital assets underlying liquidity pool positions represent the Company’s proportional interest in pooled assets within decentralized exchanges and are accounted for as intangible assets. Stablecoins are held for liquidity management and deployment into DeFi strategies. The Company’s digital asset holdings may fluctuate based on market prices, capital deployment decisions, and participation in blockchain infrastructure and DeFi activities. Capital Allocation and Treasury Strategy ETH held by the Company is actively deployed across its business lines, including validator node operations, block building, and DeFi activities conducted through the Imperium operating segment. Management evaluates how digital assets are deployed among these activities based on expected revenue, profit margin, growth prospects, liquidity requirements, risk considerations, and prevailing market conditions. The Company’s treasury management strategy is designed to balance revenue and profit, liquidity, and risk management. BTCS seeks to maintain sufficient liquidity to support ongoing operations while deploying digital assets, including through DeFi lending and liquidity pool participation, to support scalable revenue generation. 44 The Company does not maintain a fixed allocation policy for digital assets across staking, block building, or DeFi activities. Instead, allocation decisions are made dynamically in response to market conditions, protocol economics, and the Company’s capital requirements. In certain circumstances, the Company may convert digital assets to cash to fund operations or manage liquidity. Conversely, the Company may deploy cash or stablecoins into digital assets to support infrastructure operations or DeFi participation. Operational and Risk Considerations The Company’s digital asset balances may fluctuate period over period due to operational activity, redeployments, protocol participation, borrowing activity, and market price movements. These fluctuations are a function of the Company’s operating strategy and may materially impact reported financial results. The Company’s digital asset and treasury management activities expose it to risks including digital asset price volatility, protocol changes, smart contract vulnerabilities, and liquidity constraints, including collateral liquidation risk in overcollateralized borrowing arrangements. Management seeks to mitigate these risks through diversification of deployments, active monitoring of protocol performance, conservative leverage practices, and disciplined capital allocation. Management believes that the active deployment of digital assets across blockchain infrastructure and DeFi activities is a core differentiator of the Company’s operating model and expects digital assets to remain central to the Company’s treasury strategy and overall business performance. Known Trends, Market Conditions, and Uncertainties BTCS operates in blockchain infrastructure and DeFi markets that are characterized by rapid technological change, evolving market structures, and significant variability in economic outcomes. The Company’s operating results and financial condition are influenced by a number of interrelated trends, market conditions, and uncertainties. Digital Asset Market Volatility The market prices of digital assets, particularly ETH, are subject to significant volatility driven by macroeconomic conditions, investor sentiment, regulatory developments, technological changes, and activity within decentralized ecosystems. Because ETH is a core operating asset for the Company, fluctuations in its market price may significantly affect the value of the Company’s digital asset holdings, reported results, and liquidity. Changes in ETH prices may impact period-to-period financial results independent of underlying operating performance. Blockchain Network and Protocol Dynamics The Company’s infrastructure and DeFi activities depend on the continued operation and adoption of the Ethereum network and related protocols. Changes to network protocols, including updates to transaction fee structures, validator economics, or block-building dynamics, may affect the profitability and scalability of the Company’s operations. In addition, transaction volumes, network congestion, and user activity levels influence execution-layer rewards, block-building opportunities, and validator returns, and may vary significantly over time. Block Building Market Conditions Builder+ performance is influenced by access to transaction flow, infrastructure efficiency, latency, and competition among block builders. As transaction execution markets evolve, competitive dynamics and margins may fluctuate. 45 DeFi Revenue Variability Revenues generated through Imperium’s DeFi activities are inherently variable and depend on protocol utilization, fee rates, liquidity conditions, and market demand for decentralized financial services, including both lending and liquidity pool participation. These factors may fluctuate as capital flows into or out of protocols and as market conditions change. DeFi participation also exposes the Company to risks such as smart contract vulnerabilities, governance changes, and liquidity constraints, which may impact returns or result in losses. The occurrence of any such events could have a material adverse effect on the Company’s financial condition and results of operations. Regulatory Environment The regulatory environment for digital assets and blockchain-based activities continues to evolve in the United States and internationally. Changes in laws, regulations, or regulatory interpretations could affect the Company’s operations, access to capital, and compliance obligations. Implications for Operating Performance The Company seeks to manage these dynamics through disciplined capital allocation, active deployment of digital assets, and ongoing evaluation of market conditions. However, the impact of these factors on future operating results and financial condition may be material. Results of Operations for the Three Months Ended March 31, 2026 and 2025 The following table reflects our operating results for the three months ended March 31, 2026 and 2025: For the Three Months Ended March 31, Change Change 2026 2025 $ % Revenues Blockchain infrastructure revenues $ 1,135,351 $ 1,688,935 $ (553,584 ) (33 )% DeFi revenues 1,012,026 - 1,012,026 100 % Total revenues 2,147,377 1,688,935 458,442 27 % Cost of revenues Blockchain infrastructure costs 1,123,990 1,568,659 (444,669 ) (28 )% DeFi costs 9,075 - 9,075 100 % Total cost of revenues 1,133,065 1,568,659 (435,594 ) (28 )% Gross profit 1,014,312 120,276 894,036 743 % Operating expenses: Professional fees 293,114 282,759 $ 10,355 4 % General and administrative 245,595 275,629 (30,034 ) (11 )% Research and development 80,444 209,251 (128,807 ) (62 )% Compensation and related expenses 2,794,732 688,202 2,106,530 306 % Marketing 27,844 245,172 (217,328 ) (89 )% Impairment loss on intangible digital assets 209,921 - 209,921 100 % Realized losses on digital asset transactions 29,293,946 1,382,288 27,911,658 2,019 % Unrealized loss on digital assets 35,685,176 14,530,822 21,154,354 146 % Total operating expenses 68,630,772 17,614,123 51,016,649 290 % Other income (expenses): Interest expense (1,547,859 ) - (1,547,859 ) 100 % Change in fair value of warrant liabilities - 225,150 (225,150 ) (100 )% Total other income (expenses) (1,547,859 ) 225,150 (1,773,009 ) (787 )% Net loss $ (69,164,319 ) $ (17,268,697 ) $ (51,895,622 ) 301 % 46 Revenues Total revenues for the 2026 Quarter increased compared to the 2025 Quarter, primarily due to the addition of DeFi revenues generated through the Company’s Imperium operations. Blockchain infrastructure revenues decreased compared to the prior period, primarily due to variability in block-building activity and execution-layer rewards, which are influenced by transaction flow, validator participation, and network conditions. Staking rewards under NodeOps also decreased, primarily reflecting the redeployment of digital assets from staking to DeFi activities during the 2026 Quarter. DeFi revenues accounted for approximately 47% of total revenues for the 2026 Quarter and reflect the Company’s expanded participation in decentralized finance activities, including decentralized lending (approximately 25% of revenues) and liquidity pool strategies (approximately 22% of revenues), which were not present in the 2025 Quarter. Revenues may fluctuate period over period due to changes in digital asset prices, network activity, and protocol utilization, as revenue is measured based on the fair value of digital assets received at the time earned. Cost of Revenues Cost of revenues for the 2026 Quarter decreased compared to the 2025 Quarter, primarily due to lower validator payments (“Validator Payments”) associated with block-building activities and improved infrastructure efficiencies. Cost of revenues continues to be primarily driven by validator payments required to secure block inclusion, as well as infrastructure and hosting costs associated with blockchain operations. DeFi-related costs were minimal during the 2026 Quarter. Gross margins improved compared to the prior period due to the increased contribution of DeFi revenues, which currently have relatively low associated direct costs. Gross margins may fluctuate in future periods based on validator economics, execution-layer reward dynamics related to block-building activities, and changes in DeFi activity levels. Operating Expenses Professional fees Professional fees for the 2026 Quarter increased compared to the 2025 Quarter, primarily due to higher legal and accounting costs, including an increase in audit fees. The increase reflects higher accounting costs associated with audit and reporting requirements, as well as increased legal expenses related to the Company’s ongoing operations. Professional fees may fluctuate in future periods based on the level of legal activity, regulatory requirements, investor relations opportunities and financial reporting needs. 47 General and Administrative Expenses General and administrative expenses for the 2026 Quarter decreased compared to the 2025 Quarter, primarily due to continued discipline in overall administrative spending. General and administrative expenses may fluctuate in future periods based on operational growth, regulatory requirements, and overall business activity. Research and Development Expenses Research and development expenses for the 2026 Quarter decreased compared to the 2025 Quarter, primarily due to the completion and wind-down of development activities related to ChainQ in 2025 and the transition of certain Builder+ initiatives from development into routine, revenue-generating operations. During the 2026 Quarter, research and development activities were more limited and consisted primarily of feasibility assessments, testing, and evaluation of blockchain infrastructure enhancements and decentralized finance initiatives, resulting in lower overall R&D spending compared to the prior year. Research and development expenses may fluctuate in future periods based on the scope and timing of infrastructure enhancements and exploratory initiatives. Compensation and Related Expenses Compensation and related expenses for the 2026 Quarter increased compared to the 2025 Quarter, primarily due to equity-based compensation expense related to amortization of unvested employee stock options and restricted stock units issued during the 2026 Quarter. The Company continues to utilize equity-based compensation as a key component of its total rewards strategy to align employee incentives with long-term shareholder value. Total compensation costs may fluctuate based on headcount changes, the timing of performance-based accruals, and the issuance or forfeiture of equity awards. Marketing Costs Marketing expenses for the 2026 Quarter decreased compared to the 2025 Quarter, primarily reflecting a reduction in marketing and promotional activities during the period. The timing and level of marketing expenditures may vary in future periods based on the Company’s strategic initiatives and market conditions. Impairment loss on intangible digital assets For the 2026 Quarter, the Company recorded an impairment loss on intangible digital assets, including non-fungible tokens (“NFTs”) and tokenized liquidity pool positions. The impairment reflects declines in the estimated fair value of these assets, including changes in the value of underlying digital assets for liquidity pool positions, below their carrying value during the period. These impairment losses are non-cash in nature. Impairment losses on liquidity pool positions may arise due to changes in the fair value of underlying digital assets, market conditions, and liquidity factors associated with decentralized finance protocols. The Company will continue to evaluate these assets for impairment in future periods. Realized Gains and Losses on Digital Assets Transactions Realized losses on digital assets transactions for the 2026 Quarter increased compared to the 2025 Quarter, primarily due to (i) sales of ETH to manage collateral levels and repay borrowings under DeFi arrangements and (ii) the derecognition of ETH upon deposit into liquidity pool positions. Sales of ETH were executed at prices below their original cost basis as part of the Company’s active management of collateral levels and health factors associated with DeFi borrowing arrangements. In addition, deposits of ETH into liquidity pools are accounted for as nonmonetary exchanges that result in the derecognition of the underlying ETH and recognition of a liquidity pool position. To the extent the fair value of ETH at the time of deposit is below its carrying value, a realized loss is recognized. These transactions are part of the Company’s normal operating activities within its DeFi and liquidity management strategies. Future realized gains or losses will depend on digital asset price movements, the timing of asset sales, and the level of activity in DeFi borrowing and liquidity pool strategies. Unrealized Gains and Losses on Digital Assets The Company recognized significant unrealized losses in the fair value of its digital asset holdings for the 2026 Quarter compared to the 2025 Quarter. The change was primarily driven by declines in the market prices of Ethereum and other digital assets held and deployed in the Company’s operations during the period, reflecting the inherent volatility of digital asset markets. These fair value adjustments are non-cash in nature but may continue to materially affect the reported fair value of digital assets and impact reported operating results due to the volatility of digital asset markets in future periods. 48 Overall Operating Expense Trend Total operating expenses for the 2026 Quarter increased compared to the 2025 Quarter, primarily driven by realized and unrealized losses on digital assets and higher compensation expense during the period. Operating expenses for the current quarter also included unrealized losses on digital assets, reflecting changes in the fair value of ETH and other digital assets held and deployed in the Company’s operations. Operating expenses may fluctuate significantly from period to period due to changes in digital asset prices, non-cash compensation expense, and the level of infrastructure and DeFi activity required to support the Company’s operating strategy. Other Income (Expenses) Interest Expense Interest expense for the 2026 Quarter increased compared to the 2025 Quarter, primarily due to interest accrued on decentralized borrowings through DeFi lending arrangements, as well as interest and amortization expense related to the Company’s May 2025 and July 2025 Senior Secured Convertible Notes (the “Notes”). This includes both cash interest paid and the amortization of debt discount over the term of the Notes. Interest expense related to the Notes is expected to remain relatively consistent over their term due to the ongoing amortization of the associated debt discount. Interest expense associated with DeFi borrowings may fluctuate in future periods based on changes in outstanding balances and borrowing activity. Change in Fair Value of Warrant Liabilities The Company did not recognize any gain or loss related to the change in the fair value of warrant liabilities during 2026 Quarter, as the outstanding warrants expired in the current period and are no longer subject to remeasurement. In 2025 Quarter, the Company recognized a non-cash gain of approximately $225,000 related to the change in the fair value of warrant liabilities. The prior period gain was primarily attributable to movements in the Company’s stock price and related volatility. As there are no remaining warrant liabilities, the Company does not expect to recognize further gains or losses related to this item in future periods. Overall Other Income (Expense) Impact Total other income (expenses) reflected net expense for the 2026 Quarter and net income for the 2025 Quarter. The net expense for the 2026 Quarter was primarily driven by interest expense incurred in connection with DeFi borrowings and outstanding convertible notes. In the comparable 2025 Quarter, total other income was primarily attributable to a non-cash gain related to the change in the fair value of warrant liabilities. 49 Net Loss Net loss for the 2026 Quarter increased compared to the 2025 Quarter primarily due to unrealized losses on the fair value of the Company’s digital asset holdings resulting from declines in digital asset market prices during the quarter, as well as realized losses on digital asset transactions, including sales of ETH to manage collateral levels in DeFi borrowing arrangements and the derecognition of ETH upon deposit into liquidity pool positions. These items were primarily non-cash in nature, except for realized losses associated with asset sales. Net loss was also affected by higher interest expense related to DeFi borrowings and convertible notes. These impacts were partially offset by increased revenues from DeFi activities. The Company’s results of operations may continue to fluctuate materially from period to period due to digital asset price volatility, financing activities, and changes in fair value measurements of digital assets. 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, shares of its common stock through H.C. Wainwright, subject to the availability of an effective registration statement on Form S-3. The initial ATM sales were conducted under a $100 million shelf registration statement that became effective in September 2021. On October 4, 2024, a new Form S-3 registration statement became effective, increasing the total amount of securities that may be offered and sold under the Company’s shelf registration to $250 million. As of the date of this report, there was approximately $103.4 million available for sale under this Form S-3 registration statement. On July 22, 2025, the Company entered into an amendment to its engagement with H.C. Wainwright in connection with a new Form S-3 registration statement filed on July 23, 2025, to register up to $2 billion of securities for future issuance (the “New Registration Statement”). The New Registration Statement was approved by the SEC and declared effective on August 1, 2025. As of the date of this report, the Company had not sold any securities under the New Registration Statement. From September 14, 2021 through May 14, 2026, the Company sold a total of 32,762,523 shares of common stock under the ATM Agreement for aggregate total gross proceeds of approximately $163.6 million at an average selling price of $4.99 per share, resulting in net proceeds of approximately $158.5 million after deducting commissions and other transaction costs. Share Repurchase Program On September 4, 2025, the Board authorized a share repurchase program permitting the Company to repurchase up to $50 million of its common stock over a three-year period. Repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934 and applicable state law. We have engaged H.C. Wainwright & Co., LLC as the sole broker to implement the program. The program does not obligate the Company to repurchase any specific number of shares and may be modified, suspended, or discontinued at any time. From September 11, 2025 through May 14, 2026, the Company repurchased and retired 888,677 shares of our common stock for an aggregate purchase price of approximately $4.0 million. The repurchases were funded from available cash on hand and are presented as a financing cash outflow in our statement of cash flows. All repurchased shares were immediately retired and are no longer considered issued or outstanding. As of May 14, 2026, approximately $46.0 million remained available for repurchases under the authorization. The Company expects that any future repurchases will be subject to our liquidity position, prevailing market conditions, and other capital allocation priorities, including funding of operations and strategic initiatives. 50 DeFi Borrowing From January 1, 2025 through May 11, 2026, the Company borrowed an aggregate of approximately $123.5 million in stablecoins, primarily USDT and GHO, through Aave, a DeFi lending protocol, using ETH as collateral, and repaid approximately $79.7 million during the same period. These borrowings included transactions executed in connection with on-chain debt refinancing activities. As of May 11, 2026, the Company had approximately $44.3 million in outstanding DeFi borrowings, inclusive of accrued interest, collateralized by approximately 50,128 ETH with an aggregate fair value of $117.3 million, based on the closing price of $2,339 per ETH on that date. Because these borrowings are overcollateralized, declines in the market price of ETH could require the Company to post additional collateral or repay a portion of the borrowings to maintain required collateralization levels under the Aave protocol. Management monitors the collateral value and associated loan health factors on an ongoing basis and may add collateral or reduce borrowings in response to significant market movements. Borrowings through Aave accrue interest at variable rates determined by Aave’s on-chain smart contracts, which adjust dynamically based on protocol liquidity and market utilization. ETH collateral posted to Aave simultaneously accrues variable interest at rates that fluctuate based on the same market factors. These rates are determined algorithmically by the protocol based on market conditions and are publicly available through on-chain protocol data. As a result, the Company’s net cost of capital may vary depending on prevailing protocol-level conditions. The Company has no control over these rate adjustments and is subject to the risk of significant rate increases. As of May 11, 2026, the Company had outstanding borrowings denominated in USDT and GHO, with variable borrowing rates on the Aave protocol applicable to those borrowings of approximately 3.94% and 3.82% per annum, respectively. Borrowings through DeFi protocols are subject to risks not present in traditional financing arrangements, including collateral liquidation risk, protocol governance changes, smart contract vulnerabilities, manipulation risk, market volatility affecting collateral values, and the absence of traditional legal recourse or bankruptcy protections. Management actively monitors collateralization ratios and protocol conditions and may reduce or repay borrowings in response to market movements or changes in risk tolerance. As of May 11, 2026, the Company has not experienced any full or partial liquidation events related to its DeFi borrowings, but remains subject to such risks under adverse market conditions. Convertible Notes Payable In May 2025, the Company completed a private placement of Senior Secured Convertible Notes in the aggregate principal amount of approximately $7.8 million, for net cash proceeds of approximately $7.3 million. In connection with the offering, the Company also issued approximately 1.9 million five-year warrants, exercisable at $2.75 per share. The notes mature on May 13, 2027, bear interest at a rate of 6% per annum, and are convertible into shares of common stock at a conversion price of $5.85 per share. In July 2025, the Company completed an additional private placement of Senior Secured Convertible Notes in the aggregate principal amount of approximately $10.1 million, for net cash proceeds of approximately $9.5 million. In connection with the offering, the Company issued approximately 879,000 five-year warrants, exercisable at $8.00 per share. The notes mature on July 21, 2027, bear interest at 6% per annum, and are convertible into shares of common stock at a conversion price of $13.00 per share. The Company used the proceeds from both offerings primarily to accelerate the accumulation of ETH, expand operational capacity, and support the continued expansion of its blockchain infrastructure operations. The notes from the May and July 2025 offerings are secured by all of the Company’s assets as collateral, except for Ethereum deposited as collateral for USDT borrowings on Aave and certain other exclusions. Dividends and Capital Distributions During the 2026 Quarter, the Company utilized digital asset distributions as part of its capital allocation strategy. The Board authorized a one-time loyalty payment of $0.35 per share, payable solely in ETH, to eligible holders of common stock who satisfied specified opt-in and share-holding requirements. The loyalty payment was designed to reward long-term stockholders and was settled in February 2026 through the distribution of ETH. Because the loyalty payment was settled in digital assets, it did not require the use of incremental cash resources at the time of payment, although it reduced the Company’s digital asset holdings available for operational use and revenue-generating activities. 51 As of March 31, 2026, the Company did not have any recorded dividend payables or other obligations related to these distributions. The Company does not currently anticipate declaring regular cash or digital asset dividends, and the declaration of future dividends or other capital distributions, if any, will depend on the Company’s financial condition, results of operations, liquidity position, capital requirements, and other factors considered by the Board. Liquidity 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 settlement 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. At March 31, 2026, the Company had approximately $0.3 million of cash and cash equivalents and working capital of approximately $84.1 million. As of May 11, 2026, the Company had approximately $141.5 million of cash, stablecoins, and liquid digital assets (primarily ETH). Because the Company’s liquidity position includes digital assets and DeFi-related balances that are subject to market volatility, protocol-based reward accruals, and borrowing activity, such balances may fluctuate materially over short periods and may differ from balances as of the filing date. As of May 11, 2026, the Company had total debt obligations of approximately $62.1 million, consisting of approximately $44.3 million under its lending arrangement with Aave Protocol and approximately $17.9 million of convertible notes payable. The Company’s DeFi borrowing balances and related collateral values may fluctuate based on borrowing activity, accrued interest, and changes in digital asset market prices. The Company believes that its existing cash and digital assets, together with the proceeds from recent convertible note financings and access to capital through its ATM Agreement, as well as its ability to manage liquidity through DeFi borrowing arrangements, provide sufficient liquidity to meet working capital requirements, anticipated capital expenditures, strategic initiatives, and contractual obligations for at least the next twelve months from the filing date of this report. This assessment is based on current market conditions, regulatory environment, and management’s operational plans, all of which remain subject to change. Certain digital assets may be subject to protocol-defined unstaking or withdrawal periods, which could limit the Company’s ability to rapidly convert those assets to cash. As of May 11, 2026, unstaking periods for the Company’s staked digital assets generally ranged from several hours to thirty days, though such periods may change based on protocol upgrades or network conditions. Market volatility, network congestion, or regulatory developments could further restrict liquidity or adversely affect realized prices. Cash Flows Cash Flows from Operating Activities Cash used in operating activities was approximately $1.7 million for the 2026 Quarter, compared to approximately $1.9 million for the 2025 Quarter. The decrease primarily reflects improved operating efficiency during the period, including Imperium DeFi operations, partially offset by the impact of stablecoin flows associated with liquidity pool deployments and other DeFi-related transactions. Operating cash flows are significantly influenced by non-cash items associated with the Company’s blockchain operating model, particularly digital asset-denominated revenues, Validator Payments, and fair value adjustments of digital assets. Although revenues are earned in digital assets, these assets are typically retained to support staking, block-building, and DeFi activities rather than immediately converted into cash, which may cause operating cash flows to differ significantly from reported revenues. 52 Significant non-cash adjustments impacting operating cash flows included: ● Digital asset-denominated revenues of approximately $2.1 million earned from blockchain infrastructure and DeFi activities, which increased net income but did not result in operating cash inflows. ● Blockchain-based payments, including Builder Validator Payments, of approximately $1.1 million paid in native digital assets to third-parties and external validators as part of Builder+ block-building activities. ● Realized losses on digital asset transactions of approximately $29.3 million, primarily from (i) sales of ETH to manage DeFi borrowing positions and (ii) the derecognition of ETH upon deposit into liquidity pool positions. ● Unrealized losses from the fair value measurement of digital assets, primarily ETH, of approximately $35.7 million. ● Stock-based compensation expense of approximately $1.7 million, primarily reflecting the issuance and ongoing amortization of equity-based awards to employees, including performance-based grants. ● Amortization of debt discount and issuance costs of approximately $0.8 million related to the outstanding convertible notes. ● DeFi interest expense of approximately $0.5 million paid in digital assets. As Builder+ and Imperium operations continue to scale, non-cash adjustments, including digital asset-denominated revenues, Validator Payments, and fair value changes in digital assets, are expected to continue to have a significant impact on reported operating cash flows. Operating cash flows may also be influenced by stablecoin flows and capital deployment associated with DeFi activities, including liquidity pool participation and borrowing arrangements. The magnitude and direction of these effects will depend on market conditions, protocol activity, and the timing of digital asset transactions. Cash Flows from Investing Activities Net cash provided by investing activities was approximately $18.2 million during the 2026 Quarter, compared to net cash used in investing activities of approximately $34 thousand in the 2025 Quarter. The 2026 activity primarily reflects the sale of approximately $18.2 million of digital assets, primarily ETH, to support liquidity management and capital deployment into DeFi and blockchain infrastructure activities. Cash Flows from Financing Activities Net cash used by financing activities was approximately $17.7 million during the 2026 Quarter, compared to net cash provided by financing activities of approximately $0.2 million in the 2025 Quarter. Financing outflows during the 2026 Quarter were primarily driven by: ● Net repayments of DeFi borrowing principal of approximately $17.7 million in stablecoins via Aave. We anticipate future financing activity may include additional DeFi borrowings and capital raised through the ATM program or through other financing instruments, as we continue to scale blockchain infrastructure and DeFi operations, enhance liquidity, and support ongoing capital deployment across blockchain infrastructure and DeFi activities. Off Balance Sheet Transactions As of March 31, 2026, 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 that arise out of normal business operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates, judgments, and assumptions that affect the reported amounts and disclosures. Our critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended December 31, 2025, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates.” 53 There have been no material changes to our critical accounting policies during the three months ended March 31, 2026. However, the application of these policies continues to involve significant judgment, particularly with respect to (i) the fair value measurement of digital assets, (ii) the classification and liquidity of digital assets deployed in staking and DeFi arrangements, (iii) revenue recognition from blockchain infrastructure and DeFi activities, and (iv) the evaluation of risks associated with collateralized borrowing arrangements. Given the inherent volatility of digital asset markets and the evolving nature of blockchain-based activities, actual results could differ materially from our estimates and assumptions. RECENT ACCOUNTING PRONOUNCEMENTS See Note 3 - Summary of Significant Accounting Policies to the unaudited condensed financial statements for a discussion of recent accounting standards and pronouncements. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding our liquidity, our growth strategy, our ability to generate scalable and efficient revenue, anticipated increases in our revenues and gross margins, our capital allocation and treasury management strategies, the expected performance of our blockchain infrastructure and DeFi operations and our 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, including potential classification of digital assets as securities and changing regulatory frameworks; significant volatility in the market prices of digital assets, particularly Ethereum, which serves as both a core operating asset and collateral for our borrowings and which can experience rapid and substantial price fluctuations; failure to maintain required collateralization levels under DeFi borrowing arrangements, which could result in automatic liquidation of assets; competition in blockchain infrastructure markets, including from other validators, block builders, and DeFi platforms, which may reduce our revenues, market share, or access to transaction flow; risks related to the loss, theft, or compromise of private withdrawal keys, digital wallets, or infrastructure systems, which could result in the complete and unrecoverable loss of digital assets; risks associated with DeFi lending protocols, including smart contract vulnerabilities, coding errors, protocol exploits, oracle manipulation, lack of traditional regulatory protections, and the absence of recourse in the event of loss; collateral liquidation risk in DeFi borrowing arrangements, including the potential for automatic liquidation by protocol smart contracts without prior notice if our health factor or collateralization ratio falls below protocol-defined thresholds; cybersecurity risks, including potential breaches, hacking incidents, or system failures affecting our operations or the protocols in which we participate; and other risks and uncertainties described in our filings with the SEC, including our Form 10-K for the year ended December 31, 2025. 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 or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable law. You should not place undue reliance on forward-looking statements, which reflect our management’s views only as of the date of this report. 54 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk Not applicable.