21Shares Ethereum ETF 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This information should be read in conjunction with the financial statements and notes included in Item 1 of Part I of this Form 10-Q. This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and such forward-looking statements involve risks and uncertainties. All statements (other than statements of historical fact) included in this Form 10-Q that address activities, events or developments that may occur in the future, the Trust’s operations, the Sponsor’s plans and references to the Trust’s future success and other similar matters are forward-looking statements. Words such as “could,” “would,” “may,” “expect,” “intend,” “estimate,” “predict,” and variations on such words or negatives thereof, and similar expressions that reflect our current views with respect to future events and Trust performance, are intended to identify such forward-looking statements. These forward-looking statements are only predictions, subject to risks and uncertainties that are difficult to predict and many of which are outside of our control, and actual results could differ materially from those discussed. Forward-looking statements involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed therein. We express our estimates, expectations, beliefs, and projections in good faith and believe them to have a reasonable basis. However, we make no assurances that management’s estimates, expectations, beliefs, or projections will be achieved or accomplished. These forward-looking statements are based on assumptions about many important factors that could cause actual results to differ materially from those in the forward-looking statements. We do not intend to update any forward-looking statements even if new information becomes available or other events occur in the future, except as required by the federal securities laws. Organization and Trust Overview The Trust is a Delaware statutory trust, formed on September 5, 2023, pursuant to the DSTA. The Trust operates pursuant to the Trust Agreement. The Trust is not registered as an investment company under the 1940 Act, and is not a commodity pool for purposes of the Commodity Exchange Act. The Trust is managed and controlled by the Sponsor. The Sponsor is a limited liability company formed in the state of Delaware on June 16, 2021, and is a wholly owned subsidiary of 21co Holdings Limited. The ultimate parent company of 21co Holdings Limited is FalconX. The Sponsor is not subject to regulation by the Commodity Futures Trading Commission as a commodity pool operator with respect to the Trust, or a commodity trading advisor with respect to the Trust. The Trust is an exchange-traded fund that issues common shares of beneficial interest representing fractional undivided beneficial interests in its net assets that trade on the Exchange. The Shares are listed for trading on the Exchange under the ticker symbol “TETH”. The Trust’s investment objective is to seek to track the performance of ether, as measured by the performance of the Pricing Benchmark, adjusted for the Trust’s expenses and other liabilities, and to reflect rewards from staking a portion of the Trust’s ether, to the extent the Sponsor in its sole discretion determines that the Trust may do so without undue legal or regulatory risk, such as, without limitation, the risk of jeopardizing the Trust’s ability to qualify as a grantor trust for U.S. Federal income tax purposes. CF Benchmarks Ltd. is the Pricing Benchmark Provider. The Pricing Benchmark is designed to reflect the performance of ether in U.S. dollars. In seeking to achieve its investment objective, the Trust holds ether at its Custodians and the Administrator values the Shares daily based on the Pricing Benchmark. The Trust is a passive investment vehicle and is not a leveraged product. The Sponsor does not actively manage the ether held by the Trust. On June 30, 2026, the Sponsor provided notice to the Pricing Benchmark Provider of the termination, effective August 31, 2026, of the licensing agreement between the Sponsor and the Pricing Benchmark Provider relating to the use of the Pricing Benchmark. The Sponsor intends to enter into a licensing agreement with FTSE on or about August 24, 2026, whereby FTSE will provide each of the Sponsor, the Trust, and their affiliates a non-exclusive, non-transferable, non-sub-licensable, worldwide license to access, view and use FTSE index data to develop, create, calculate, settle, maintain or support and market the Trust. Accordingly, the change in pricing benchmark provider is not expected to have a material impact on the Trust's net asset value, the fair value measurement of the Trust's ether, or the Trust's results of operations, and does not represent a change in accounting principle. The change will be applied prospectively from the date the successor benchmark becomes effective. The Trust issues Shares only in Creation Baskets of 10,000 or multiples thereof. Creation Baskets are issued and redeemed in exchange for cash or in-kind for ether. Individual Shares will not be redeemed by the Trust but are listed and traded on the Exchange under the ticker symbol “TETH”. The Trust issues Shares in Creation Baskets on a continuous basis at the applicable NAV per Share on the creation order date. 17 The Trust pays the unitary Sponsor fee of 0.21% of the Trust’s ether holdings (the “Sponsor Fee”). The Sponsor Fee is paid by the Trust to the Sponsor as compensation for services performed under the Trust Agreement. The Sponsor agreed to waive the entire Sponsor Fee for (i) a six-month period which commenced on July 23, 2024 (the day the Trust’s Shares were initially listed on the Exchange), or (ii) the first $500 million of Trust assets, whichever came first. The six-month waiver period ended on January 23, 2025, at which time the Sponsor began collecting the Sponsor Fee. On October 8, 2025, the Sponsor agreed to voluntarily waive the Sponsor Fee for a period of one year beginning on October 9, 2025 and ending on October 8, 2026. Except for during periods during which the Sponsor Fee is being waived, the Sponsor Fee accrues daily and is payable in ether weekly in arrears. The Administrator calculates the Sponsor Fee on a daily basis by applying an annualized rate to the Trust’s total ether holdings, and the amount of ether payable in respect of each daily accrual is determined by reference to the Pricing Benchmark. In consideration for the Sponsor’s facilitation of staking, the Trust also pays 25% of the staking rewards generated by the Trust’s Staking Activities to the Sponsor (“Staking Fee”) and retains the remainder. The Staking Fee is accrued in ether and is payable in ether weekly in arrears. The Trust is an “emerging growth company” as that term is used in the Securities Act, and, as such, the Trust may elect to comply with certain reduced public company reporting requirements. Calculation of NAV and NAV per Share The NAV of the Trust is used by the Trust in its day-to-day operations to measure the net value of the Trust’s assets. The NAV is calculated on each day other than a day when the Exchange is closed for regular trading (a “Business Day”) and is equal to the aggregate value of the Trust’s assets less its liabilities based on the Pricing Benchmark price. In determining the NAV of the Trust on any Business Day, the Administrator calculates the price of the ether held by the Trust as of 4:00 p.m. ET on such day. The Administrator also calculates the “NAV per Share” of the Trust, which equals the NAV of the Trust divided by the number of outstanding Shares. In addition to calculating NAV and NAV per Share, for purposes of the Trust’s financial statements, the Trust determines the net asset value of the Trust determined on a GAAP basis (the “Principal Market NAV”) and net asset value of the Trust per Share determined on a GAAP basis (the “Principal Market NAV per Share”) on each valuation date for such financial statements. The determination of the Principal Market NAV and Principal Market NAV per Share is identical to the calculation of NAV and NAV per Share, respectively, except that the value of ether is determined using the fair value of ether based on the price in the ether market that the Trust considers its “principal market” as of 4:00 p.m. ET on the valuation date, rather than using the Pricing Benchmark. NAV and NAV per Share are not measures calculated in accordance with GAAP and are not intended as substitutes for Principal Market NAV and Principal Market NAV per Share, respectively. Staking The Trust’s staking model aims to maximize the portion of the Trust’s ether available for staking while controlling for liquidity and redemption risks. The model determines an optimal utilization rate by balancing expected yield against potential costs (including borrowing costs during redemptions, assuming we have access to suitable credit). The Staking Services Providers exercise no discretion as to the amount of the Trust’s ether to be staked or the timing of the Trust’s staking activities. While the Trust may stake a maximum of 100% of its ether holdings, the amount of ether that remains unstaked is determined based on the Trust’s utilization rate analysis, and accordingly may vary from time to time. Based on utilization rate analysis applied to historical data, the Trust generally intends to stake between 40% and 70% of the ether it holds, although the amount of ether that is staked may be lesser or greater from time to time. The precise percentage to be staked is based on the estimated liquidity needs of the Trust and other factors, as determined by the Sponsor. 18 The rewards owed or paid to the Staking Services Provider reduces the amount of staking rewards that are generated from the Trust’s staking activities that are available in the assets of the Trust. Each Staking Services Provider that generates staking rewards is entitled to compensation determined as a portion of the Staking Rewards, which is generally determined by a low single-digit percentage of the overall rewards amount (the “Staking Provider Consideration”). The portion of the consideration paid to the Sponsor for arranging for the staking of the Trust’s ether (the “Staking Fee”) is comprised of an aggregate of 25% of the Staking Rewards. Of the Staking Fee, the Sponsor pays the Staking Provider Consideration. The Trust receives and retains the remainder of the Staking Rewards. The Trust intends to pay cash distributions at least quarterly to Shareholders to distribute staking rewards earned by the Trust. The amount of any distribution, if any, will depend on the staking rewards actually earned by the Trust during each quarter and cannot be predicted with certainty. The amount of staking rewards earned will vary based on factors including, but not limited to, the amount of ether held by the Trust, the percentage of the Trust’s ether that is staked, network staking participation rates, protocol reward rates on the Ethereum network, and network conditions. Accordingly, there can be no assurance as to the amount of distributions that will be paid in any quarter, and it is possible that no distributions will be paid in a given quarter if insufficient staking rewards are earned. Critical Accounting Estimates The financial statements and accompanying notes are prepared in accordance with GAAP. The preparation of these financial statements relies on estimates and assumptions that impact the Trust’s financial position and results of operations. These estimates and assumptions affect the Trust’s application of accounting policies. Below is a summary of accounting policies on cash and investment valuation. There were no material estimates involving a significant level of estimation uncertainty that had or are reasonably likely to have had a material impact on the Trust’s financial condition used in the preparation of the financial statements. In addition, please refer to Note 2 to the Financial Statements included in this report for further discussion of the Trust’s accounting policies. Cash Cash includes non-interest bearing, non-restricted cash maintained with one financial institution that does not exceed U.S. federally insured limits. Investment Valuation The Trust’s policy is to value investments held at fair value. The Trust follows the provisions of ASC 820, Fair Value Measurements (“ASC 820”). ASC 820 provides guidance for determining fair value and requires increased disclosure regarding the inputs to valuation techniques used to measure fair value. ASC 820 determines fair value to be the price that would be received for ether in a current sale, which assumes an exit price resulting from an orderly transaction between market participants on the measurement date. ASC 820-10 requires the assumption that ether is sold in its principal market to market participants (or in the absence of a principal market, the most advantageous market). The Trust utilizes an exchange traded price from the Trust’s principal market for ether as of 4:00 p.m. ET on the Trust’s financial statement measurement date. 19 Results of Operations For the Three Months Ended June 30, 2026 The Trust’s NAV decreased from $18,191,793 on March 31, 2026 to $12,916,751 on June 30, 2026, a 29.00% decrease. The decrease resulted primarily from a 24.66% decrease in the price of ether, which fell from $2,094.53 on March 31, 2026 to $1,578.01 on June 30, 2026. The decrease was further amplified by a net decrease in outstanding Shares, which fell from 1,740,000 on March 31, 2026 to 1,640,000 on June 30, 2026, as a result of 2,070,000 Shares (207 Creation Baskets) being created and 2,170,000 Shares (217 Creation Baskets) being redeemed during the quarter. The Trust had 86.42% of its ether holdings staked as of June 30, 2026, with an average of 31.64% staked on a daily basis during the quarter. Net decrease in net assets resulting from operations for the three months ended June 30, 2026 was $(4,079,548), resulting from a net change in unrealized depreciation on investment in ether of $(445,355), a net realized loss of $(3,646,146) from ether sold for redemptions, and a net realized loss of $(8,844) from ether sold for income distributions, partially offset by net investment income of $20,797. Net investment income comprised Staking Rewards of $27,730, less the Staking Fee of $6,933. The Sponsor Fee of $9,657 was fully waived during the three month period pursuant to the Sponsor’s one-year fee waiver effective October 9, 2025. In addition to net assets resulting from operations, the Trust paid a total staking income distributions of $15,524 ($0.009466 per Share on June 29, 2026) to Shareholders during the quarter. Except for the Staking Fee, the Trust had no other net expenses during the three months ended June 30, 2026. For the Three Months Ended June 30, 2025 The Trust’s NAV increased from $8,403,421 on March 31, 2025 to $23,002,554 on June 30, 2025. The increase in the Trust’s NAV resulted primarily from an increase in the price of ether of 37.68% (from $1,827.55 per ether on March 31, 2025 to $2,516.24 per ether on June 30, 2025) and a net increase of 910,000 in the number of shares outstanding from March 31, 2025 to June 30, 2025. Net increase in net assets resulting from operations for the three months ended June 30, 2025 was $6,457,692. This was the result of a change in unrealized appreciation on investment in ether of $6,469,118, a net realized loss of $(1,843) on the sale of ether for purposes of distributing to the Sponsor as the Sponsor Fee. The Trust’s expenses for the quarter were $9,583, relating to the Sponsor Fees. For the Six Months Ended June 30, 2026 The Trust’s NAV decreased from $31,298,450 on December 31, 2025 to $12,916,751 on June 30, 2026, a 58.73% decrease. The decrease resulted primarily from a 46.89% decrease in the price of ether, which fell from $2,971.02 on December 31, 2025 to $1,578.01 on June 30, 2026. The decrease was further amplified by a net decrease in outstanding Shares, which fell from 2,110,000 on December 31, 2025 to 1,640,000 on June 30, 2026, as a result of 3,760,000 Shares (376 Creation Baskets) being created and 4,230,000 Shares (423 Creation Baskets) being redeemed during the six month period. The Trust had 86.42% of its ether staked as of June 30, 2026, with an average of 27.32% staked on a daily basis during the six month period. Net decrease in net assets resulting from operations for the six months ended June 30, 2026 was $(12,073,301), resulting from a net realized loss of $(12,768,869) from ether sold for redemptions and a net realized loss of $(21,254) from ether sold for income distributions, partially offset by a net change in unrealized appreciation on investment in ether of $649,292 and net investment income of $67,530. Net investment income comprised Staking Rewards of $90,018, less the Staking Fee of $22,488. The Sponsor Fee of $21,782 was fully waived during the six-month period pursuant to the Sponsor’s one-year fee waiver effective October 9, 2025. In addition to net assets resulting from operations, the Trust paid a total staking income distributions of $57,129 ($0.010378 per Share on January 8, 2026, $0.012530 per Share on March 30, 2026, and $0.009466 per Share on June 29, 2026) to Shareholders during the six month period. Except for the Staking Fee, the Trust had no other net expenses during the six months ended June 30, 2026. For the Six Months Ended June 30, 2025 The Trust’s NAV increased from $16,869,879 on December 31, 2024 to $23,002,554 on June 30, 2025. The increase in the Trust’s NAV resulted primarily from a net increase of 820,000 in the number shares outstanding from December 31, 2024 to June 30, 2025. Net decrease in net assets resulting from operations for the six months ended June 30, 2025 was $3,403,318. This was the result of a change in unrealized appreciation on investment in ether of $88,594, a net realized loss of $(320) on the sale of ethers for purposes of distributing to the Sponsor as the Sponsor Fee, and net realized loss on investment in ether sold for redemptions of $(3,476,102). The Trust expenses for the six month period were $15,490, relating to the Sponsor Fees. 20 Liquidity and Capital Resources The Trust is not aware of any trends, demands, commitments, events, or uncertainties that are reasonably likely to result in material changes to its liquidity needs. The Trust’s only ordinary recurring expenses are the Sponsor Fee and the Staking Fee. The Sponsor agreed to waive the entire Sponsor Fee for (i) a six-month period which commenced on July 23, 2024 (the day the Trust’s Shares were initially listed on the Exchange), or (ii) the first $500 million of Trust assets, whichever came first. The six-month waiver period ended on January 23, 2025, at which time the Sponsor began collecting the Sponsor Fee. On October 8, 2025, the Sponsor agreed to voluntarily waive the Sponsor Fee for a period of one year beginning on October 9, 2025 and ending on October 8, 2026. In exchange for the Sponsor Fee, the Sponsor has agreed to assume the ordinary fees and expenses incurred by the Trust, including but not limited to the following: fees charged by the Administrator, the Custodians, the Transfer Agent and the Trustee, the Marketing Fee, the Exchange’s listing fees, typical maintenance and transaction fees of the Depository Trust Company (“DTC”), SEC registration fees, printing and mailing costs, website fees, tax reporting fees, audit fees, license fees and expenses, up to $100,000 per annum in ordinary legal fees and expenses. The Sponsor bears expenses in connection with the Trust’s organization and initial offering costs. The Sponsor is not required to pay any extraordinary or non-routine expenses. Extraordinary expenses are fees and expenses which are unexpected or unusual in nature, such as legal claims and liabilities and litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and expenses also include material expenses which are not currently anticipated obligations of the Trust. The Trust will be responsible for the payment of such expenses to the extent any such expenses are incurred. Routine operational, administrative, and other ordinary expenses are not deemed extraordinary expenses. The Trust will sell ether on an as-needed basis to pay the Sponsor Fee and Staking Fee. Off-Balance Sheet Arrangements The Trust does not have any off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures about Market Risks The Trust is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information otherwise required under this item.