BTCS Inc.: Form 10-Q for the period ended Sep 30, 2024

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.

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:

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.

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:

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Fair Market Value of Crypto Assets at the End of the Following Calendar Quarters:

Prices of Crypto Assets at the End of the Following Calendar Quarters:*

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

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

Crypto assets earned from staking to third-party validator nodes

Crypto assets earned from Ethereum block building through Builder+

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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

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

Revenue from staking to third-party validator nodes

Revenue from Ethereum block building through Builder+

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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:

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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.

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.

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.

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, 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.

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.

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, 2024. 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, 2024.

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.