Edgemode, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The following discussion and analysis compares our consolidated results of operations for the three months ended March 31, 2022 (the “2022 Quarter”) with those for the three months ended March 31, 2023 (the “2023 Quarter”). Cautionary Note Regarding Forward-Looking Statements This report contains “forward-looking statements”. These statements include, among other things, statements regarding expanding our business and our liquidity as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "will likely result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially and adversely from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, our ability to raise capital to buy crypto mining machines we have commitments to purchase, regulatory issues which effect our business model, and those discussed under the caption "Risk Factors" in our Form 10-K for the year ended December 31, 2022 and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Business Overview We are an early-stage cryptocurrency mining company. We have established partnerships with third party hosting firms and Bitcoin mining facilities for the sole purpose of mining Bitcoin. We require financing to operate the mining of Bitcoin. We ceased Ethereum mining operations in September 2022 when Ethereum switched its consensus protocol to proof of stake. Our mining platform will be operating with the primary intent of accumulating Bitcoin. We require significant financing to maintain our operations and commence Bitcoin mining. During late 2022 and early 2023 we have focused on securing a debt facility. We anticipate our first loan from this facility will be completed in May 2023, although we cannot provide any assurances we will receive any capital under this facility. This debt facility will be used to finance the purchase of BTC mining hardware and hosting contracts which, subject to financing, we anticipate will commence between May 2023 and December 2023. We believe we have a purchase order in place to acquire significant high quality additional machines contingent on our ability to raise the funds to acquire such machines. Subject to receipt of financing, we have secured hosting contracts in the U.S and Egypt for over 540MW of hosting capacity, which will provide us the power supply to operate the 20 Exahash of hardware we have contracted to purchase. There are no assurances we will receive adequate financing. Critical Accounting Policies and Estimates We discuss 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 and impacts, see Note 1 to the unaudited condensed consolidated financial statements. 15 Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022 Results of operations We had no revenues for the 2023 Quarter compared to $271,119 for the 2022 Quarter. The reason for the decrease was that we ceased Ethereum mining operations in September 2022 when Ethereum switched its consensus protocol to proof of stake. We had no cost of revenues for the 2023 Quarter compared to $423,770 for the 2022 Quarter. The reason for the decrease was that we ceased Ethereum mining operations in September 2022 when Ethereum switched its consensus protocol to proof of stake. Our operating expenses for the 2023 Quarter was $1,705,525 compared to $23,429,000, for the 2022 Quarter, a decrease of 93%. In the 2023 Quarter, the Company incurred stock-based compensation expense of $1,236,487 compared to $22,385,917 for the 2022 Quarter. The stock based compensation for both quarters was primarily related to vesting of the fair value of stock options. Our other expenses for the 2023 Quarter was $72,486 compared to $44,840 for the 2022 Quarter. The reason for the increase was a result of the prepayment penalty on the redemption of the Preferred B shares. We expect that our operating expenses will increase as we continue to develop our new mining operations and we devote additional resources toward our new technologies and business opportunities, promoting that growth, most notably reflected in anticipated increases in general overhead, salaries for personnel and technical resources, as well as increased costs associated with our SEC reporting obligations. However, as set forth elsewhere in this report, our ability to continue to develop our business and achieve our operational goals is dependent upon our ability to raise significant additional working capital. As the availability of this capital is unknown, we are unable to quantify at this time the expected increases in operating expenses in future periods. Liquidity and Capital Resources As of March 31, 2023 and May 15, 2023, the Company had approximately $14,000 and $110,000 of cash, respectively. Our liquidity was primarily derived from debt and equity investments from accredited investors and also from selling the crypto that we mined through September 2022. See “Subsequent Events” below. To grow the business and help fund operations for the next 12 months, the Company is seeking to raise $50 million in equity capital through private placements. We can provide no assurances that any such financings will be successful, nor will they be on terms acceptable to the Company. If we fail to raise sufficient additional funds, we will be required to significantly scale back our plan of operations. On January 25, 2023, we redeemed our outstanding Series B Preferred shares and paid to the holder a total of $270,549 which included the stated value of $212,500, $6,190 in accrued dividends and the early redemption premium of $51,859. The Company has terminated the agreements for approximately $1.6 million of debt for equipment that the Company was using for mining and returned the equipment to the vendor to settle the outstanding liabilities. The Company is making no further payments against the potential balance. No confirmation has been received from 2CRSI and as such the balance remains outstanding on the Company’s balance sheet in the accompanying financial statements. Additionally, we have a significant amount funds committed to the purchase of new Bitcoin miners. We can provide no assurance that we will have the ability to meet these payment requirements or that we will be successful raising capital to meet our working capital requirements. 16 Subsequent Events April 20, 2023 Promissory Notes Effective April 20, 2023, we entered into a securities purchase agreement with an accredited investor, pursuant to which the Company sold the investor an unsecured promissory note in the principal amount of $60,760. The promissory note carries a one-time interest charge of 13% which was applied on the issuance date to the principal (22% upon the occurrence of an event of default) and has a maturity date of March 10, 2024. The promissory note included an original issue discount of $6,510 and transaction expenses of $4,250. We received gross proceeds of $54,250 in consideration of issuance of the promissory note. The promissory note requires that the Company make monthly payments for accrued interest and outstanding principal, which shall be paid in 9 payments each in the amount of $7,628.67 for total repayment to the investor of $68,658. The first payment is due May 15, 2023, with 8 subsequent payments each month thereafter. The Company has right to accelerate payments or prepay in full at any time with no prepayment penalty. The investor may in its option, at any time following an event of default, as defined in the promissory note, convert all or any part of the outstanding and unpaid amount of the promissory note into fully paid and non-assessable shares of common stock at a conversion price per share equal to 71% of the lowest closing bid price of the Company’s common stock during the 20 trading days prior to the date of conversion. In addition, effective April 20, 2023, we entered into a securities purchase agreement with the investor, pursuant to which the Company sold the investor an unsecured convertible promissory note in the principal amount of $56,962. The maturity date of the convertible note is April 11, 2024. The convertible note shall bear interest at a rate of 8% per annum (22% upon the occurrence of an event of default), which interest shall not be payable until the convertible note becomes payable, whether at the maturity date or upon acceleration or by prepayment, as described below. The convertible note included an original issue discount of $2,712 and transaction expenses of $4,250. We received gross proceeds of $54,250 in consideration of issuance of the convertible note. The investor has the option to convert all or any amount of the principal face amount of the convertible note, beginning on the date which is 180 days following the date of the convertible note and ending on the later of: (i) the Maturity Date and (ii) the date of payment of the Default Amount (as defined below), each in respect of the remaining outstanding amount of the convertible note, to convert all or any part of the outstanding and unpaid amount of the convertible note into common stock at the then-applicable conversion price. The conversion price for the convertible note is equal to 65% of the average of the lowest 3 closing bid prices for the common stock during the 15 trading day period prior to the conversion date. Upon the occurrence and during the continuation of certain events of default, the convertible note will become immediately due and payable and the Company will pay the investor in full satisfaction of its obligations in the convertible note an amount equal to 150% of an amount equal to the then outstanding principal amount of the convertible note plus any interest accrued upon such event of default or prior events of default. The convertible note may be prepaid until 180 days from the issuance date. If the convertible note is prepaid within 60 days of the issuance date, then the prepayment premium shall be 115% of the face amount plus any accrued interest, if prepaid after 60 days from the issuance date, but less than but less than 180 days from the issuance date, then the prepayment premium shall be 120% of the face amount plus any accrued interest. April 25, 2023 Promissory Notes On April 25, 2023, we entered into a securities purchase agreement with an accredited investor, pursuant to which the Company sold the investor an unsecured promissory note in the principal amount of $60,000. The Company received gross proceeds of $60,000 in consideration of issuance of the promissory note. In addition, on April 26, 2023, we entered into a promissory note purchase agreement with another investor, pursuant to which the Company sold the investor an unsecured convertible promissory note in the principal amount of $57,502. The Company received gross proceeds of $57,502 in consideration of issuance of the promissory note. The promissory notes bear interest at a rate of 10% and have a maturity date of May 25, 2023 and May 26, 2023, respectively. The promissory notes are convertible into common shares of the Company beginning on the 6-month anniversary if not repaid by the maturity date. The promissory notes have a prepayment percentage of 130% for the period beginning on the issuance date and ending on the maturity date. The investors may in their option, at any time following the 180-day anniversary from the issuance date, as defined in the promissory notes, convert all or any part of the outstanding and unpaid amount of the promissory notes into fully paid and non-assessable shares of common stock. If the promissory notes are not repaid on or prior to the maturity date, the conversion price will be $0.20 or 50% of the preceding five day VWAP on the six month anniversary, which is lower, subject to a floor conversion price of $0.01 per share. Furthermore, the notes contain a “most favored nation” provision that allows each investor to claim any preferable terms from any future securities, excluding certain exempt issuances. 17 Summary of cash flows March 31, 2023 March 31, 2022 Net cash (used) in operating activities $ 281,586 $ (1,109,921 ) Net cash provided by investing activities $ 2,598 $ 399,140 Net cash provided by financing activities $ (270,549 ) $ 822,865 During the 2023 Quarter and 2022 Quarter, our sources and uses of cash were as follows: Operating Activities During the 2023 Quarter, cash provided by operating activities of $281,586 primarily resulted from the refund of prepaid hosting services, offset by the net loss of $1,788,011 and stock-based compensation of $1,236,487. During the 2022 Quarter, cash used in operating activities of $1,109,921 primarily resulted from its net loss of $23,626,491, offset by stock-based compensation of $22,385,917 and loss on cryptocurrency transactions of $124,529. Investing Activities Cash provided by investing activities in the 2023 Quarter of $2,598 resulted from the sale of cryptocurrency assets . Cash provided by investing activities in the 2022 Quarter of $399,140 resulted from the $743,513 cash acquired from the reverse merger acquisition and the proceeds of $26,603 from sale of cryptocurrency assets, offset by the purchase of equipment of $370,976. Financing Activities In the 2023 Quarter, cash used in financing activities of $270,549 consisted of the repayment of Series B preferred shares. In the 2022 Quarter, cash used in financing activities of $822,865 consisted of $663,864 in net proceeds from the issuance of common shares, $380,000 in proceeds from the issuance of notes payable, offset by payments on equipment notes payable of $220,999. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.