BTCS Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our historical financial statements and the notes to those statements that appear elsewhere in this report. Certain statements in the discussion contain forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those discussed in the Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2022. When we refer to the “2023 Quarter” and the “2022 Quarter” we are referring to the three months ended September 30, 2023 and September 30, 2022, respectively. When we refer to the “2023 Period” and the “2022 Period” we are referring to the nine months ended September 30, 2023 and September 30, 2022, respectively.

Company Overview

BTCS Inc. is an early entrant in the crypto asset market and a publicly-traded U.S. company focused on blockchain infrastructure and staking. The Company specializes in operating validator nodes on various Delegated proof-of-stake (“DPoS”) and proof-of-stake (“PoS”) based blockchain networks and stakes the native crypto assets on the validator nodes it operates to earn rewards in connection with the validation of transactions occurring on those blockchain networks. Subject to available capital and the restrictions of certain blockchains BTCS plans to expand its PoS operations to secure other disruptive blockchain protocols that allow for delegating, which presents a significant growth opportunity for the Company. We evaluate blockchain networks through various due diligence procedures, including consideration of blockchain quality, reward potential, and technical difficulty of running a validator node. Considerations of the quality of a blockchain include inspection of i) market and on-chain statistics, ii) liquidity, iii) potential blockchain utility, iv) history and milestones, v) growth and development roadmap, vi) use cases, vii) community interest, vii) quality of documentation, viii) decentralization, and ix) any other publicly available information.

BTCS’s business model is focused on Staking-as-a-Service (“StaaS”), allowing crypto asset holders to earn rewards by participating in network consensus mechanisms through staking and delegating their crypto assets to Company operated validator nodes. As a non-custodial validator operator, the Company receives a percentage of token holders’ staking rewards generated as a validator node fee, for our ministerial role in hosting the validator node. This creates an opportunity for scalable revenue and business growth with limited additional costs. The Company’s StaaS strategy provides a more accessible and cost-effective alternative for crypto asset holders to participate in blockchain networks’ consensus mechanisms, promoting the growth and adoption of blockchain technology. The Company’s internally-developed dashboard, StakeSeeker, is a non-custodial platform that allows users to learn how to earn staking rewards through direct participation in blockchain consensus algorithms and analyze their crypto portfolios across exchanges and wallets through a comprehensive crypto dashboard and education center.

The table below describes BTCS’s quarterly crypto asset holdings as of the 2022 Quarter through the 2023 Quarter.

Crypto Assets Held at Period End

Fair Value of Crypto Assets at Period End

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Prices of Crypto Assets at Period End

* The prices have been rounded to the nearest whole dollar for prices above $100

The following table presents the Fair Value of Crypto Assets held compared to the GAAP Book Value reported on the Company’s balance sheet.

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Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

The following tables reflect our operating results for the three and nine months ended September 30, 2023 and 2022:

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Validator Revenue

The decrease in revenue during the 2023 Period as compared to the 2022 Period is primarily due to a drop in the fair value of our crypto assets earned as rewards for staking since the market’s highs in the first quarter of 2022. Although we believe the number of tokens we earn from staking and revenue recognized will increase as we continue to expand our blockchain infrastructure efforts, we recognize that volatility in the crypto asset markets may impact the market prices of the crypto assets we earn from staking.

Cost of Revenues

The decrease in cost of revenues during the 2023 Period as compared to the 2022 Period is due to efficiencies realized in our blockchain infrastructure validating operating costs, including streamlining of web service hosting fees and reduction of services provided by vendors. We believe our cost of revenues will increase as we continue to ramp up our business. However, we believe gross margin will improve as we add scale to our blockchain infrastructure operations and reduce costs as a result of increased operational efficiencies, leading to improved gross profits.

Operating Expenses

General and administrative expenses consist of director compensation, legal and professional fees and other personnel and related costs. The decrease in the 2023 Period was primarily due to a decrease of $0.3 million in investor relation related costs compared to the 2022 Period as the Company focused on cost management and transitioning related efforts in-house from third-party engagements. These decreases were partially offset by a $0.2 million increases in legal service costs during the 2023 Period compared to the 2022 Period, driven primarily by services surrounding the Series V Preferred Distribution and related listing on Upstream Exchange.

Research and development expenses increased during the 2023 Period as the Company focused on the beta release of our proprietary StakeSeeker platform in the first quarter 2023, including responding to user feedback and continued planned feature development and incorporation onto the platform. We anticipate research and development costs to remain consistent as we continue to expand on technological solutions in the blockchain sector with a focus on cost management of our third-party development team.

Compensation and related expenses decreased during the 2023 Period primarily due non-cash $2.2 million equity-based contingent bonuses granted to employees and our non-employee directors during the 2022 Period for the achievement of performance milestones compared to only $0.7 million equity-based compensation during the 2023 Period. We believe our compensation expenses will increase slightly from those reported in the 2023 Period as the Company continues to utilize equity-based compensation incentives as a core part of our compensation strategy.

Marketing costs decreased during the 2023 Period as the Company focused on cost reduction efforts.

The decrease in operating expenses in the 2023 Period is primarily due to the impairment loss on crypto assets (which we refer to as a “Crypto Asset Impairment”) of $12.3 million during the 2022 Period, compared to only a $1.3 million Crypto Asset Impairment during the 2023 Period. Impairment charges are based on volatility in the crypto asset market and cannot be accurately predicted, but may subject the Company to the possibility of additional impairment charges on its crypto asset holdings.

The realized gain on crypto transactions increased during the 2023 Period as the Company sold approximately 968 ETH earned as rewards from our staking operations after liquidity was unlocked in April 2023 as part of Ethereum’s Shanghai upgrade.

Other Income (Expenses)

The changes in other income for the periods reported were primarily due to the decrease in the fair value of warrant liabilities. This non-cash expense is driven by the value of our stock price at the end of each quarter, which we cannot predict.

Net loss

The decrease in our net loss for the 2023 Period was primarily due to the decrease in operating expenses and changes in other income (expenses) as discussed above. We believe that our net loss may increase as the Company incurs increased costs related to the development of its StakeSeeker platform and incurs additional Crypto Asset Impairment losses due to volatility in the crypto asset markets.

Liquidity and Capital Resources

ATM Financing

On September 14, 2021, the Company entered into an At-The-Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC, as agent (“H.C. Wainwright”), pursuant to which the Company may offer and sell, from time-to-time through H.C. Wainwright, shares of the Company’s Common Stock having an aggregate offering price of up to $98,767,500. From the period September 14, 2021 through November 7, 2023, the Company sold a total of 3,442,181 shares of Common Stock under the ATM Agreement for aggregate total gross proceeds of approximately $15,626,000 at an average selling price of $4.54 per share, resulting in net proceeds of approximately $15,122,000 after deducting commissions and other transaction costs.

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 liquidation of liabilities in the normal course of business.

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. As of September 30, 2023, the Company had approximately $0.8 million of cash and working capital of approximately $8.4 million.

We view our crypto assets as long-term holdings and we do not plan to engage in regular trading of crypto assets other than for meeting operational cash needs. Further certain of our staked crypto assets may be locked up depending on the specific blockchain protocol and we may be unable to unstake them in a timely manner in order to liquidate to the extended desired. During times of instability in the market of crypto assets, we may not be able to sell our crypto assets at reasonable prices or at all. As a result, our crypto assets may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents.

As of November 7, 2023, the Company had approximately $0.6 million of cash and cash equivalents and the fair value of the Company’s liquid crypto assets was approximately $19.3 million. The Company has no outstanding debt. As of November 7, 2023, the Company also has approximately $5.8 million available under the ATM Agreement over the next twelve months under the Form S-3 baby shelf rules, although, the amount that we may raise under the Form S-3 may increase or decrease based upon our stock price. The Company believes that the existing cash and liquid crypto assets held by us, in addition to the funds available to the Company from the issuance of additional stock through the ATM Agreement, provide sufficient liquidity to meet working capital requirements, anticipated capital expenditures and contractual obligations for at least the next 12 months.

Cash Flows

Cash used in operating activities was approximately $2.6 million during the 2023 Period compared to approximately $129,000 for the 2022 Period. The sale of our remaining bitcoin holdings by the end of 2022 was the primary contributor to the $2.6 million operating cash inflows from the sale of non-productive crypto assets during the 2022 Period compared to $0 in the 2023 Period. We do not anticipate any future material cash inflows from the sale of non-productive assets, as our blockchain infrastructure strategy focuses primarily on acquiring and staking productive proof-of-stake blockchain networks. Additional non-cash adjustments to our operating cash flows consisted of approximately $1.3 million impairment loss on crypto assets (“Crypto Asset Impairment”) during the 2023 Period compared to approximately $12.3 million Crypto Asset Impairment during the 2022 Period. Impairment charges are based on volatility in the crypto asset market and cannot be accurately predicted. This is partially offset by the approximately $2.2 million equity-based contingent bonuses granted to employees and our non-employee directors during the 2022 Period for the achievement of performance milestones compared to only approximately $1.1 million equity-based compensation in the 2023 Period. We anticipate similar levels of equity-based compensation in future periods as reported in the 2023 Period.

Cash used in investing activities was approximately $186,000 during the 2023 Period compared to approximately $8.8 million for the 2022 Period. Net cash outflow for investing activities was used primarily for the purchase of crypto assets for our blockchain infrastructure operations. We anticipate purchase activity to remain lower and consistent with the levels reported during the 2023 Period as we focus our strategies on technical developments. The 2022 Period included large purchases of productive crypto assets to build on our blockchain infrastructure operations.

Cash provided by financing activities was approximately $1.1 million during the 2023 Period compared to approximately $10.5 million for the 2022 Period. The cash inflows from financing activities were entirely from proceeds from the Common Stock sold pursuant to the ATM Agreement during the 2023 Period. The cash inflows from financing activities during the 2022 Period was partially offset by a one-time return of capital distribution of approximately $631,000 made to record holders as of March 17, 2022. The Company plans to continue to raise proceeds from the sale of Common Stock to fund operations as needed.

Off Balance Sheet Transactions

As of September 30, 2023, there were no off-balance sheet arrangements and we were not a party to any off-balance sheet transactions. We have no guarantees or obligations other than those which arise out of normal business operations.

Critical Accounting Policies and Estimates

We discussed the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report.

RECENT ACCOUNTING PRONOUNCEMENTS

For information on recent accounting pronouncements, see Note 3 to the Unaudited Condensed Financial Statements.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, including our liquidity, our belief that our blockchain infrastructure efforts will form the core growth for our StakeSeeker platform, our plans and development of our StakeSeeker platform and the integration of Staking-as-a-Service, increase in the number of tokens we earn, plans to expand our PoS operations, growth opportunities for the Company, consistent purchase activity, our belief regarding blockchain, expected increase in our revenues and gross margins and future business plans. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “may,” “potential,” “continues,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the rewards and costs associated with staking or validating transactions on blockchains, regulatory issues related to our business model, a drop in the price of our crypto assets, significant decrease in the value of our crypto assets and rewards, loss or theft of the private withdrawal keys resulting in the complete loss of crypto assets and reward, and others which are contained in our filings with the SEC, including our Form 10-K for the year ended December 31, 2022. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2023. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of September 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.