Virtual Insights Conference featuring BTCS. My name is John Roy. I cover technology here at Water Tower Research, and I am very pleased today to have Charles Allen. He's the CEO. Welcome, Charles. How you doing, man?
Good. Thanks for having me.
Before proceeding, I should note that BTCS's safe harbor statements are available on their website. As always, investor questions are encouraged. Please enter them into the chat box, and we will address them as soon as possible, most likely in the management series report that will follow. Those wishing to request a meeting with BTCS can do so through the conference portal. All right. With that, let's get to the questions. Charles, for those that don't really know it, how does BTCS differentiate your dual operational model, considering that you're now running core blockchain infrastructure and looking at higher margin DeFi kind of operations?
I think the question, if we're looking at how we differentiate ourselves versus other public crypto companies, I think it's like night and day. We have an operating business that is kicking off very high margin, high growth. With the way we access capital, if we can borrow at a low rate and deploy that with a very high hurdle rate, it puts us in a solid position.
Where we really like to be is, yes, we're directionally long ETH, but if we can outperform ETH in terms of what it may do in terms of a return on an annual basis with gross profit, it's a much better place to be, especially if we can do that in a way that acts like a shock absorber to the price of ETH. So that if ETH goes down, we're still doing well, if ETH sits where it is, and that's kind of been the focus of our efforts under the Imperium business model versus NodeOps and Builder+.
Now, speaking of Imperium, you recently announced that you were going to go on to Base. That's the Layer 2 stuff. I think it's Coinbase is the one driving that, right? Now, what really advantages are you looking for by going on to the Layer 2 kind of Base stuff?
Well, so our business isn't static, right? That's what I like to kind of tell investors. If you look at an ETF or a dApp, they're just going to buy a crypto, hold it, maybe they'll add some leverage. We actually have an operating business, and so because of that, we're able to generate higher revenue, high margin, high growth is what you're seeing, in Q2. And by moving to Base, it gives us another basically chain, an Layer 2 on Ethereum. .
It's frankly relatively easy to account for because it's an L2 on ETH, and we can drive additional revenue, and gross profit from doing that. And we're looking at other chains and strategies so that we can continue to expand the business, and that's really where we want to go, is how do we make this thing hyper scalable so that we can deliver strong fundamental performance so that investors can see how we're really differentiated from our peers.
Right. When you look at your kind of balance between protocol borrowings and debt repayments and other capital allocation approaches, what is the kind of logic behind how you do that? Because certainly that's going to be important long term.
Yeah, I think we're still the only U.S. public company that is using DeFi as a funding mechanism for its business, which is kind of crazy given we're approaching the end of 2026. What that allows us to do is access very cheap, low cost of capital debt, and it's near instant, right? There's no lawyers, there's no underwriters, there's no paperwork, there's no signatures. If you look at our last K, we basically said, "This is ordinary course of business where we're going to lever up and lever down as needed." What that allows us to do is to basically access that facility as part of ordinary operations where we can lever up if we think we can grow revenue. So we're able to actively manage our risk, while looking to maximize our profit.
I don't think you can do that if you did a traditional convert, like you're at least a month or at least a week in negotiation, from kind of term sheet to closing, and you just can't do that. You can't say, "Well, let me repay you a little bit, and if the market changes or we have another opportunity, we're going to shift things around." Because it's all on-chain, it allows us, in the future to even consider things like full automation, right? It really expands our capital stack to be able to drive value to shareholders, to be able to access very cheap capital, instantly repay it, and be able to deploy it in strategies that are working or turn that off on an instant. So it's really a balance of actively managing risk in near real time and trying to maximize profit by using that.
Yeah. I've seen a lot of very nice business models that when you reduce friction, you can really lever up and do some things that you really just couldn't do before, essentially.
Yeah.
Now, the proof is in the numbers, which your numbers, okay, let's just talk about them. You got 61% gross margin last quarter. There was a lot of volatility in the crypto market. How does that really work? It's kind of like supporting what you're saying, but kind of walk us through the color of that.
Yeah, I think just taking a step back, if you look at what our goal was for 2025 and say, "We're going to grow revenue." The market should reward that, and it was low margin revenue with Builder+, and we're like, if we get to a certain size and scale as a block builder, the margins should go up. But it was always going to be in a lower margin business. What we've flipped at the beginning of this year, I think it was in January, we started having these discussions with the board and said, "Look, let's move the goalpost." I don't like moving the goalpost in terms of targets and goals for the team. Said, "Look, given the market conditions, we need to focus on gross profit." We were always going to do that.
We were thinking 2027 we'll move from let's grow revenue, then we'll work on margin, and we decided to do that in 2026. What that resulted in was a shift in our focus and a shift in the business model towards Imperium. As you said, it's showing up in the numbers, right? Q1 we did $1 million in gross profit. I don't even talk about revenue anymore. It's irrelevant now, right? We're focused on gross profit. We came out at the beginning of the year and said, "We're going to do $6 million." The target is $6 million, obviously no guarantees. It's not guidance, it's tied to management KPIs. Q1, we did $1 million. That's okay.
Q2, we did $1.5 million, and then we came out in a press release and said, "We expect to achieve the $6 million target." Obviously, we wouldn't have come out and said that had we not had some visibility onto where we are today. With that said, I'm pretty excited about where we are. It'll be really great to get Q3 numbers out when the period ends, and we'll see what happens with Q4. The performance has been great. The market conditions have been supportive of our operations. The proof will be in the pudding with the numbers, and I think we're going to deliver.
Yeah, no, definitely. As I've told, I've been doing tech for many, many decades, and it's kind of like, look, you can tell a great story, but unless it shows up in the numbers, eventually it's kind of a moot point. It's got to show up in the numbers somewhere. Let's talk about what you did last month. You raised, what, $10 million? You're looking, that's going to go mostly towards Imperium?
Yep.
How did that happen?
Well, what we really looked at is, and we did a lot of analysis on this, is we increased our loan-to-value ratio that the board would sign off on for borrowing on chain. I think we were at about 40%, and we said, "Hey, let's bump that to 50%." The reason we really did that is that $10 million was deployed in Imperium. As you noticed in our press release, we went from $8 million deployed at the end of Q2 to $36 million currently. That was part of that growth that fed that.
What it allows us to do, and this is why we're comfortable doing that, is it's not like we're saying, "Hey, we're going to post our Ethereum as collateral, borrow against it, and then buy more Ethereum so that if the price of Ethereum drops, we're even more exposed." Yes, we get the upside if Ethereum runs because we're levered, but once we've gone into the LP provisioning, it really adds a shock absorber to the price of Ethereum. So if Ethereum goes down, it's bad, and we can pull out immediately from those positions, unlike staking, and repay that debt.
So we can actively manage that risk, and it does buffer the upside as well, right? We get capped and moved into stablecoins if the price goes up. But that's a high-class problem, and given we're directionally long based on how well we're doing, it outweighs itself substantially, and it accounts for the risk. So right now, we're at that 50% threshold that the boards approve, and it's something that we constantly evaluate, and it's great to be able to actively manage that debt and the risk profile to maximize our profit.
Right. Well, speaking of the risk profile, the SEC and the CFTC recently came out with some frameworks about DeFi, et c, after the procedural vote, essentially it didn't go very far in the Senate, which, like we talked about earlier, it could be an upside. So can you give us your thoughts on what they did and how that impacts you guys?
Yeah. So basically, the CLARITY Act failed in the Senate. I think that the only sticking point at the end was the ethics provision for political officials. I think the interest on stablecoin component had been pretty much agreed to between traditional finance and the larger crypto companies in the crypto industry. So it's not really a bad thing in the sense that there were some compromises in the act. It would've been nice to have it in law, but the reality is, with the current SEC and CFTC that we have, bam, we've got regulations.
I think the big thing is, at least from the SEC side, is now you can have tokenized equities, which is really interesting. Something we tokenized our equities on Ethereum, it was just three, four years ago, and the SEC basically said, "You can't raise any capital as long as you do this on this platform," right? Now they're embracing it, which is amazing. I think the pipes of finance are getting rewritten. I think it's definitely going to benefit our business in a few ways, right? Regulatory clarity, more money flowing in can drive the price of underlying assets we hold and make more activity on chain, and that's where we really generate fees, if there's more trading, more volume. Secondarily, there may be opportunities with more tokenized assets that we can expand our business into.
So it's something we're looking at, and it's obviously very new. We're just a day old on the SEC coming out with rules. So yeah, I think it's great, and I think it's going to be durable, right? The reason I say that is if you have traditional finance and the crypto companies building under this new set of guidelines by the SEC and the Commodity Futures Trading Commission, like the cat's out of the bag. Crypto's been here 10 years. People are going to build to this standard, and I think anyone that's in politics is going to get absolutely crucified if they try to change this stuff years down the road from lobbying against. It'll be hard lobbying against anyone that's not supportive of new technology. So I think we got what we wanted, right?
We got permission to go build, and it's going to be really hard to take that away because the American people, I don't think, are going to stand for it, and I don't think industry's going to stand for it. You've seen what Coinbase has done with Stand With Crypto, and if large financial institutions start building based on these rules, they're going to be lobbying as well, and that completely eliminates the bipartisan effect. So I think anyone that pushes hard against this is going to find themselves on an island and pretty much unelectable. So, I'm optimistic that we'll get rules at some point that are law versus with SEC rules.
Yeah. It'll just basically confirm what's already in place to a certain extent once they put it in place.
I don't think we're turning back the clock.
No, definitely not on that. It's a win. Did you feel like you got a whole lot of, let's call it governance burden on you guys with these yet, or you feel like you're okay?
I don't think we've had a lot of burden for the last two years from a regulatory standpoint. Looking at my time running BTCS, I think the first 10 years was just a fight against the government, a fight to keep a bank account open. For the last two years, we've been able to build a business without having to worry about getting hit with unfounded claims of being a registered investment advisor or issuer tokens or you name it, they would throw whatever against the wall and see what would stick.
The result of that, I kind of look like we got a clean slate two years ago, and if you look at what the business has done in the last couple of years, we've grown the balance sheet, we've grown the revenue. Now we're focused on gross profit. We're really delivering and building within the crypto economy to make a really viable and exciting business.
Yeah. Now, taking a broader look at the market dynamics around the Ethereum infrastructure, I was curious, what is on your balance sheet to really help protect against price drops? Obviously, at the beginning of the year there was some volatility. You seem to have moved well through that. What gives you confidence that you will still be able to have, let's call them backstops or whatever you choose to call them in terms of-
Yeah. So I think one of the big changes is, obviously we are directionally long ETH. We are believers in the blockchain. Our ETH position has been reduced. When the market came down, we had to take protective action to make sure it could have gone worse, we didn't know. We don't have a crystal ball. So we kind of took our lumps and moved on. But the change from $8 million in Imperium to $36 million, which really works as that shock absorber, is a solid protection. Obviously, at the fear and greed index, you look at where things are, it's a much better place. You add on top of that, and I think this is the most important, is the biggest beneficiary of the tokenization.
There are no assets tokenized on Bitcoin's blockchain. I think it was 60% or $1 trillion of real-world assets are tokenized on Ethereum's blockchain. Yes, there's others like Avalanche and Solana, but most institutions are building on Ethereum. That's where the development is. I think that where we are with guidance from the SEC, the rules from the SEC coming out yesterday, CFTC being on board, institutions being interested, I'd say we are hopefully at the bottom, or have bottomed out. We'll see. Again can set things in different directions, but I think it's a pretty good spot compared to where we were cycle, right? If you look at crypto cycles in a four year, and we've been public 12 years and haven't gone out of business.
So that's saying something about being able to manage volatile markets, and our net balance is still, if you look information, we are trading on a fully diluted basis, assuming we pay off the convert and it doesn't convert. We are kind of around or floating around the net asset value of the company. Yes, we have a little bit more exposure on the downside than some of our peers, but we've got a really strong operating business, and we have the shock absorber of Imperium. So I think we are pretty well situated to take downturns.
Excellent. So maybe as one final question to kind of end us off, what are investors really missing about your story and your company and where it's headed?
Look, we have a complex story. The challenge with that is it's great when you say, "Hey, we're in the blockchain space." People say, "Well, what do you do?" It's like, "Well, we're a NodeOps operator, we're a block builder, and we're providing liquidity to DeFi protocols." People are like, "I have no idea." Our goal is to try to bridge that gap with just let's look at the financials, right? Let's look at revenue, let's look at gross profit, let's focus there. We tend to trying investors to have them not focus on some things, such as, like EBITDA is a weird one because that kind of ordinary income, it takes into account the fluctuations of the underlying tokens we have.
So yes, we're directionally on ETH, but it doesn't really show what we're doing. Cash flow from operations is always a weird statement to look at because our revenue is primarily, even if it's in stables, which it's not cash. So we could be making a lot of money in stables as fees, but that doesn't count. So that's the biggest challenge is trying to explain our story, why it's compelling, why it's more exciting than some of the other options in the public markets.
And financials that are, the Financial Accounting Standards Board hasn't really caught up with in terms of how should these be presented so it makes sense to the average investor? Because I think very little of our financial statements actually make sense, because of the weird accounting rules. If we go to IFRS, that'd be great, right? We could just report on the economic realities of the business and people would be like, "Oh, that makes sense, I understand, but-
Right.
... we're not.
Do you think the accounting board is looking at making some updates, you hope?
Yeah. We've been on the forefront of probably everything in the public markets in crypto, right? We were there when we had to hold the crypto at the lowest price it's ever been since your purchase date, and it was so misleading. We had, I don't know, this is going back like five, six years.
There was no market -to -market?
No, there's no market -to -market. We had like $2 million of Bitcoin and Ethereum on our balance sheet, and it was, I don't know, ballpark, it was worth like $10 million if we sold it tomorrow. But unless we sold it just looked like we had $2 million and we took all these losses. An investor looking at the company, it's completely misleading. Then they went and changed the rules. It was like five years before they were like, "Yeah, this is a little bit misleading." There's a highly liquid asset you could sell instantaneously, and you're carrying it at a low value. Our Imperium, the assets we hold there are going to be marked to the lowest price, because the accounting was, it's technically they consider it like an NFT, right?
But it's not like a monkey smoking a cigar that's selling for something. It's the right to those underlying assets that we deployed. It's interesting, right? Back to your original question, we just have a challenging business model to explain. I think getting out in front of investors and say, "Okay, look, the proof's going to be in the pudding. Let's start looking at revenue, gross profit, where we're going versus our size, how that compares to our peers." If we deliver, hopefully the value will come.
Yeah. Maybe they should have a class and the MBA guys can learn how to value companies appropriately.
Yeah. Well, it's just the accounting hasn't caught up.
Yeah. Listen, Charles, I really appreciate you spending the time with me today, and I really do see a lot of obviously upside for you guys going forward. Investors, I want to thank you all for tuning in. If you want more materials on BTCS, they are available at our website. That's www.watertowerresearch.com. If you'd like to submit additional questions or arrange for a meeting with management, please use the conference portal. Our next WTR Virtual Insights Conference session will begin shortly. Please stay with us.