Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with, and is qualified in its entirety by reference to, our unaudited financial statements and related notes included elsewhere in this Quarterly Report, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under “Part II, Item 1A. Risk Factors” in this Quarterly Report and under “Risk Factors” and “Forward-Looking Statements” or the other sections of the Trust’s Information Statement.
Trust Overview
The Trust is a passive entity that is managed and administered by the Sponsor and does not have any officers, directors or employees. The Trust holds ZEC and, from time to time on a periodic basis, issues Creation Baskets in exchange for deposits of ZEC. As a passive investment vehicle, the Trust’s investment objective is for the value of the Shares (based on ZEC per Share) to reflect the value of ZEC held by the Trust, determined by reference to the Index Price, less the Trust’s expenses and other liabilities. To date, the Trust has not met its investment objective and the Shares quoted on OTCQX have not reflected the value of ZEC held by the Trust, less the Trust’s expenses and other liabilities, but instead have traded at both premiums and discounts to such value, which at times have been substantial. The Trust is not managed like a business corporation or an active investment vehicle.
Critical Accounting Policies and Estimates
Investment Transactions and Revenue Recognition
The Trust considers investment transactions to be the receipt of ZEC for Share creations and the delivery of ZEC for Share redemptions or for payment of expenses in ZEC. At this time, the Trust is not accepting redemption requests from shareholders. The Trust records its investment transactions on a trade date basis and changes in fair value are reflected as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using the specific identification method. Realized gains and losses are recognized in connection with transactions including settling obligations for the Sponsor’s Fee in ZEC.
Principal Market and Fair Value Determination
To determine which market is the Trust’s principal market (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Trust’s NAV, the Trust follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820-10, which outlines the application of fair value accounting. ASC 820-10 determines fair value to be the price that would be received for ZEC in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Trust to assume that ZEC is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.
The Trust only receives ZEC from the Authorized Participant and does not itself transact on any Digital Asset Markets. Therefore, the Trust looks to the Authorized Participant when assessing entity-specific and market-based volume and level of activity for Digital Asset Markets. The Authorized Participant transacts in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets, each as defined in the FASB ASC Master Glossary. The Authorized Participant, as a related party of the Sponsor, provides information about the Digital Asset Markets on which it transacts to the Trust. In determining which of the eligible Digital Asset Markets is the Trust’s principal market, the Trust reviews these criteria in the following order:
•First, the Trust reviews a list of Digital Asset Markets and excludes any Digital Asset Markets that are non-accessible to the Trust and the Authorized Participant(s). The Trust or the Authorized Participant does not have access to Digital Asset Exchanges that do not have a BitLicense and has access only to non-Digital Asset Exchange Markets that the Authorized Participant reasonably believes are operating in compliance with applicable law, including federal and state licensing requirements, based upon information and assurances provided to it by each market.
•Second, the Trust sorts the remaining Digital Asset Markets from high to low by entity-specific and market-based volume and activity of ZEC traded on each Digital Asset Market in the trailing twelve months.
•Third, the Trust then reviews intra-day pricing fluctuations and the degree of variances in price on Digital Asset Markets to identify any material notable variances that may impact the volume or price information of a particular Digital Asset Market.
•Fourth, the Trust then selects a Digital Asset Market as its principal market based on the highest market volume, activity and price stability in comparison to the other Digital Asset Markets on the list. Based on information reasonably available to the Trust, Exchange Markets have the greatest volume and level of activity for the asset. The Trust therefore looks to accessible Exchange Markets as opposed to the Brokered Market, Dealer Market and Principal-to-Principal Markets to determine its
15
principal market. As a result of the aforementioned analysis, an Exchange Market has been selected as the Trust’s principal market.
The Trust determines its principal market (or in the absence of a principal market the most advantageous market) annually and conducts a quarterly analysis to determine (i) if there have been recent changes to each Digital Asset Market’s trading volume and level of activity in the trailing twelve months, (ii) if any Digital Asset Markets have developed that the Trust has access to, or (iii) if recent changes to each Digital Asset Market’s price stability have occurred that would materially impact the selection of the principal market and necessitate a change in the Trust’s determination of its principal market.
The cost basis of the investment in ZEC recorded by the Trust for financial reporting purposes is the fair value of ZEC at the time of transfer. The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors.
Investment Company Considerations
The Trust is an investment company for GAAP purposes and follows accounting and reporting guidance in accordance with the FASB ASC Topic 946, Financial Services – Investment Companies. The Trust uses fair value as its method of accounting for ZEC in accordance with its classification as an investment company for accounting purposes. The Trust is not a registered investment company under the Investment Company Act of 1940. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material.
Review of Financial Results (unaudited)
Financial Highlights for the Three and Six Months Ended June 30, 2022 and 2021
(All amounts in the following table and the subsequent paragraphs, except Share, per Share, ZEC and price of ZEC amounts, are in thousands)
|
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|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net realized and unrealized (loss) gain on investment in Zcash |
|
$ |
(42,745 |
) |
|
$ |
(9,003 |
) |
|
$ |
(30,331 |
) |
|
$ |
16,301 |
|
Net (decrease) increase in net assets resulting from operations |
|
$ |
(42,979 |
) |
|
$ |
(9,395 |
) |
|
$ |
(30,842 |
) |
|
$ |
15,693 |
|
Net assets |
|
$ |
17,879 |
|
|
$ |
41,574 |
|
|
$ |
17,879 |
|
|
$ |
41,574 |
|
Net realized and unrealized loss on investment in ZEC for the three months ended June 30, 2022 was ($42,745) which includes a realized loss of ($75) on the transfer of ZEC to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in ZEC of ($42,670). Net realized and unrealized loss on investment in ZEC for the period was driven by ZEC price depreciation from $179.99 per ZEC as of March 31, 2022 to $53.21 per ZEC as of June 30, 2022. Net decrease in net assets resulting from operations was ($42,979) for the three months ended June 30, 2022, which consisted of the net realized and unrealized loss on investment in ZEC, plus the Sponsor’s Fee of $234. Net assets decreased to $17,879 at June 30, 2022, a 71% decrease for the three-month period. The decrease in net assets resulted from the aforementioned ZEC price depreciation and the withdrawal of approximately 2,101 ZEC to pay the foregoing Sponsor’s Fee.
Net realized and unrealized loss on investment in ZEC for the three months ended June 30, 2021 was ($9,003) which includes a realized gain of $90 on the transfer of ZEC to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in ZEC of ($9,093). Net realized and unrealized loss on investment in ZEC for the period was driven by ZEC price depreciation from $154.38 per ZEC as of March 31, 2021 to $126.89 per ZEC as of June 30, 2021. Net decrease in net assets resulting from operations was ($9,395) for the three months ended June 30, 2021, which consisted of the net realized and unrealized loss on investment in ZEC, plus the Sponsor’s Fee of $392. Net assets decreased to $41,574 at June 30, 2021, a 18% decrease for the three-month period. The decrease in net assets resulted from the aforementioned ZEC price depreciation and the withdrawal of approximately 2,039 ZEC with to pay the foregoing Sponsor’s Fee, partially offset by the contribution of approximately 2,697 ZEC with a value of $489 to the Trust in connection with Share creations during the period.
Net realized and unrealized loss on investment in ZEC for the six months ended June 30, 2022 was ($30,331) which includes a realized loss of ($105) on the transfer of ZEC to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in ZEC of ($30,226). Net realized and unrealized loss on investment in ZEC for the period was driven by ZEC price depreciation from $143.21 per ZEC as of December 31, 2021 to $53.21 per ZEC as of June 30, 2022. Net decrease in net assets resulting from operations was
16
($30,842) for the six months ended June 30, 2022, which consisted of the net realized and unrealized loss on investment in ZEC, plus the Sponsor’s Fee of $511. Net assets decreased to $17,879 at June 30, 2022, a 63% decrease for the six-month period. The decrease in net assets resulted from the aforementioned ZEC price depreciation and the withdrawal of approximately 4,191 ZEC to pay the foregoing Sponsor’s Fee.
Net realized and unrealized gain on investment in ZEC for the six months ended June 30, 2021 was $16,301 which includes a realized gain of $33 on the transfer of ZEC to pay the Sponsor’s Fee and net change in unrealized appreciation on investment in ZEC of $16,268. Net realized and unrealized gain on investment in ZEC for the period was driven by ZEC price appreciation from $62.99 per ZEC as of December 31, 2020 to $126.89 per ZEC as of June 30, 2021. Net increase in net assets resulting from operations was $15,693 for the six months ended June 30, 2021, which consisted of the net realized and unrealized gain on investment in ZEC, less the Sponsor’s Fee of $608. Net assets increased to $41,574 at June 30, 2021, a 206% increase for the six-month period. The increase in net assets resulted from the aforementioned ZEC price appreciation and the contribution of approximately 115,873 ZEC with a value of $12,300 to the Trust in connection with Share creations during the period, partially offset by the withdrawal of approximately 3,838 ZEC to pay the foregoing Sponsor’s Fee.
Cash Resources and Liquidity
The Trust has not had a cash balance at any time since inception. When selling ZEC, Incidental Rights and/or IR Virtual Currency in the Digital Asset Market to pay Additional Trust Expenses, the Sponsor endeavors to sell the exact number of ZEC, Incidental Rights and/or IR Virtual Currency needed to pay expenses in order to minimize the Trust’s holdings of assets other than ZEC. As a consequence, the Sponsor expects that the Trust will not record any cash flow from its operations and that its cash balance will be zero at the end of each reporting period. Furthermore, the Trust is not a party to any off-balance sheet arrangements.
In exchange for the Sponsor’s Fee, the Sponsor has agreed to assume most of the expenses incurred by the Trust. As a result, the only ordinary expense of the Trust during the periods covered by this Quarterly Report was the Sponsor’s Fee. The Trust is not aware of any trends, demands, conditions or events that are reasonably likely to result in material changes to its liquidity needs.
Selected Operating Data
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
|
|
2021 |
|
Zcash: |
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|
|
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|
|
|
|
|
|
|
|
Opening balance |
|
|
338,117 |
|
|
|
326,983 |
|
|
|
340,207 |
|
|
|
215,606 |
|
Creations |
|
|
- |
|
|
|
2,697 |
|
|
|
- |
|
|
|
115,873 |
|
Sponsor's Fee, related party |
|
|
(2,101 |
) |
|
|
(2,039 |
) |
|
|
(4,191 |
) |
|
|
(3,838 |
) |
Closing balance |
|
|
336,016 |
|
|
|
327,641 |
|
|
|
336,016 |
|
|
|
327,641 |
|
Accrued but unpaid Sponsor's Fee, related party |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net closing balance |
|
|
336,016 |
|
|
|
327,641 |
|
|
|
336,016 |
|
|
|
327,641 |
|
Number of Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance |
|
|
3,777,700 |
|
|
|
3,563,100 |
|
|
|
3,777,700 |
|
|
|
2,335,000 |
|
Creations |
|
|
- |
|
|
|
29,500 |
|
|
|
- |
|
|
|
1,257,600 |
|
Closing balance |
|
|
3,777,700 |
|
|
|
3,592,600 |
|
|
|
3,777,700 |
|
|
|
3,592,600 |
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|
As of June 30, |
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|
2022 |
|
|
2021 |
|
Price of ZEC on principal market (1) |
|
$ |
53.21 |
|
|
$ |
126.89 |
|
NAV per Share (2) |
|
$ |
4.73 |
|
|
$ |
11.57 |
|
Index Price |
|
$ |
53.08 |
|
|
$ |
126.86 |
|
Digital Asset Holdings per Share (3) |
|
$ |
4.72 |
|
|
$ |
11.57 |
|
(1)The Trust performed an assessment of the principal market at June 30, 2022 and 2021, and identified the principal market as Coinbase Pro.
(2)As of June 30, 2022 and 2021 the NAV per Share was calculated using the fair value of ZEC based on the price provided by Coinbase Pro, the Digital Asset Exchange that the Trust currently considers its principal market, as of 4:00 p.m., New York time, on the valuation date.
(3)The Trust’s Digital Asset Holdings per Share is derived from the Index Price as represented by the Index as of 4:00 p.m., New York time, on the valuation date. The Trust’s Digital Asset Holdings per Share is calculated using a non-GAAP methodology where the price is derived from multiple Digital Asset Exchanges. See “Overview of Zcash—ZEC Value—The Index and the Index Price” in the Information Statement for a description of the Index and the Index Price. The Digital Asset Exchanges included
17
in the Index as of June 30, 2022 and 2021 were Coinbase Pro, Binance.US and Kraken. See “Valuation of ZEC and Determination of Digital Asset Holdings” in the Trust’s Information Statement for a description of the Trust’s Digital Asset Holdings per Share.
For accounting purposes, the Trust reflects creations and the ZEC receivable with respect to such creations on the date of receipt of a notification of a creation but does not issue Shares until the requisite number of ZEC is received. At this time, the Trust is not accepting redemption requests from shareholders. Subject to receipt of regulatory approval from the SEC and approval by the Sponsor in its sole discretion, the Trust may in the future operate a redemption program. The Trust currently has no intention of seeking regulatory approval to operate an ongoing redemption program.
As of June 30, 2022, the Trust had a net closing balance with a value of $17,835,704, based on the Index Price (non-GAAP methodology). As of June 30, 2022, the Trust had a total market value of $17,879,386, based on the principal market (Coinbase Pro).
As of June 30, 2021, the Trust had a net closing balance with a total value of $41,564,569, based on the Index Price (non-GAAP methodology). As of June 30, 2021, the Trust had a total market value of $41,574,398, based on the principal market (Coinbase Pro).
Historical Digital Asset Holdings and ZEC Prices
As movements in the price of ZEC will directly affect the price of the Shares, investors should understand recent movements in the price of ZEC. Investors, however, should also be aware that past movements in the ZEC price are not indicators of future movements. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties around the world.
The following chart illustrates the movement in the Trust’s Digital Asset Holdings per Share versus the Index Price and the Trust’s NAV per Share from October 24, 2017 to June 30, 2022.
The following table illustrates the movements in the Index Price from the beginning of the Trust’s operations on October 24, 2017 to June 30, 2022. Since the beginning of the Trust’s operations, the Index Price has ranged from $23.70 to $687.00, with the straight average being $131.15 through June 30, 2022. The Sponsor has not observed a material difference between the Index Price and average prices from the constituent Digital Asset Exchanges individually or as a group.
18
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High |
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Low |
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Period |
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Average |
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Index Price |
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Date |
|
Index Price |
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Date |
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End of period |
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Last business day |
|
October 24, 2017 (the first Creation Basket of the Trust) to June 30, 2018 |
|
$ |
331.30 |
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$ |
687.00 |
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|
1/9/2018 |
|
$ |
156.64 |
|
|
6/29/2018 |
|
$ |
168.03 |
|
|
$ |
156.64 |
|
Twelve months ended June 30, 2019 |
|
$ |
95.71 |
|
|
$ |
226.89 |
|
|
7/26/2018 |
|
$ |
45.75 |
|
|
2/6/2019 |
|
$ |
106.42 |
|
|
$ |
112.76 |
|
Twelve months ended June 30, 2020 |
|
$ |
47.12 |
|
|
$ |
106.17 |
|
|
7/8/2019 |
|
$ |
23.70 |
|
|
3/16/2020 |
|
$ |
51.72 |
|
|
$ |
51.72 |
|
Twelve months ended June 30, 2021 |
|
$ |
110.58 |
|
|
$ |
365.90 |
|
|
5/12/2021 |
|
$ |
50.82 |
|
|
7/2/2020 |
|
$ |
126.86 |
|
|
$ |
126.86 |
|
Twelve months ended June 30, 2022 |
|
$ |
134.32 |
|
|
$ |
295.19 |
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|
11/25/2021 |
|
$ |
53.08 |
|
|
6/30/2022 |
|
$ |
53.08 |
|
|
$ |
53.08 |
|
October 24, 2017 (the first Creation Basket of the Trust) to June 30, 2022 |
|
$ |
131.15 |
|
|
$ |
687.00 |
|
|
1/9/2018 |
|
$ |
23.70 |
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|
3/16/2020 |
|
$ |
53.08 |
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|
$ |
53.08 |
|
The following table illustrates the movements in the Digital Asset Market price of ZEC, as reported on the Trust’s principal market, from the beginning of the Trust’s operations on October 24, 2017 to June 30, 2022. Since the beginning of the Trust’s operations, the price of ZEC has ranged from $23.59 to $742.55, with the straight average being $131.45 through June 30, 2022.
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High |
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Low |
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Period |
|
Average |
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|
Digital Asset Market Price |
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|
Date |
|
Digital Asset Market Price |
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|
Date |
|
End of period |
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|
Last business day |
|
October 24, 2017 (the first Creation Basket of the Trust) to June 30, 2018 |
|
$ |
333.09 |
|
|
$ |
742.55 |
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|
1/7/2018 |
|
$ |
156.46 |
|
|
6/29/2018 |
|
$ |
168.01 |
|
|
$ |
156.46 |
|
Twelve months ended June 30, 2019 |
|
$ |
95.80 |
|
|
$ |
227.11 |
|
|
7/26/2018 |
|
$ |
45.80 |
|
|
2/6/2019 |
|
$ |
107.16 |
|
|
$ |
112.85 |
|
Twelve months ended June 30, 2020 |
|
$ |
47.17 |
|
|
$ |
106.12 |
|
|
7/8/2019 |
|
$ |
23.59 |
|
|
3/16/2020 |
|
$ |
51.80 |
|
|
$ |
51.80 |
|
Twelve months ended June 30, 2021 |
|
$ |
110.60 |
|
|
$ |
365.90 |
|
|
5/12/2021 |
|
$ |
50.84 |
|
|
7/2/2020 |
|
$ |
126.89 |
|
|
$ |
126.89 |
|
Twelve months ended June 30, 2022 |
|
$ |
134.34 |
|
|
$ |
296.04 |
|
|
11/25/2021 |
|
$ |
53.21 |
|
|
6/30/2022 |
|
$ |
53.21 |
|
|
$ |
53.21 |
|
October 24, 2017 (the first Creation Basket of the Trust) to June 30, 2022 |
|
$ |
131.45 |
|
|
$ |
742.55 |
|
|
1/7/2018 |
|
$ |
23.59 |
|
|
3/16/2020 |
|
$ |
53.21 |
|
|
$ |
53.21 |
|
The following chart sets out the historical closing prices for the Shares as reported by OTCQX and the Trust’s Digital Asset Holdings per Share.
ZCSH Premium/(Discount): ZCSH Share Price vs. Digital Asset Holdings per Share ($)
19
The following chart sets out the historical premium and discount for the Shares as reported by OTCQX and the Trust’s Digital Asset Holdings per Share.
ZCSH Premium/(Discount): ZCSH Share Price vs. Digital Asset Holdings per Share (%)
20