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 June 30, 2022 (the “2022 Quarter”) with those for the three months ended June 30, 2023 (the “2023 Quarter”). Additionally, the six months ending June 30, 2023 and the six months ending June 30, 2022 are referred to as the “2023 Period” and “2022 Period” respectively. 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 affect 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 entered into agreements 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 cannot provide any assurances we will receive any capital under a debt facility. Any debt financing will be used to finance the purchase of BTC mining hardware and hosting contracts which, subject to financing, we anticipate will commence between October 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 Canada 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. 17 Recent Accounting Pronouncements For information on recent accounting pronouncements and impacts, see Note 1 to the unaudited condensed consolidated financial statements. Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022 Results of operations We had no revenues for the 2023 Quarter compared to $165,118 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 $382,908 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 $422,247 compared to $3,565,885, for the 2022 Quarter, a decrease of 88%. In the 2023 Quarter, the Company incurred stock-based compensation expense of $0 compared to $1,878,264 for the 2022 Quarter. The stock based compensation for the 2022 Quarter was related to vesting of the fair value of stock options. Our other income for the 2023 Quarter was $484,887 compared to other expense of $34,987 for the 2022 Quarter. In the 2023 quarter we received $500,000 related to a refund on an equipment purchase order that was impaired during a previous period. Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022 Results of operations We had no revenues for the 2023 period compared to $436,237 for the 2022 Period. 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 Period compared to $806,678 for the 2022 Period. 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 Period was $2,130,375 compared to $26,994,885, for the 2022 Period, a decrease of 92%. In the 2023 period, the Company incurred stock-based compensation expense of $1,236,487 compared to $24,264,181 for the 2022 Period. The stock based compensation for the 2023 Period related to the difference in fair value on the amendment to outstanding options while the 2022 Period was related to vesting of the fair value of stock options. Our other income for the 2023 Period was $414,999 compared to other expense of $79,827 for the 2022 Period. In the 2023 quarter we received $500,000 related to a refund on an equipment purchase order that was impaired during a previous period. 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. 18 Liquidity and Capital Resources As of June 30, 2023 and August 14, 2023, the Company had approximately $297,000 and $170,000 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 $75 million in debt facility. Because we have been in the process of seeking to complete a debt facility for over 12 months, we can provide no assurances that any such debt financings will be successful. If we fail to close on a debt facility or raise sufficient additional funds from other sources, we will be required to significantly scale back our plan of operations. As of August 14, 2023, we have a total of $1,544,876 of debt outstanding that is due within 12 months. 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. Subsequent Events On August 4, 2023, the Company entered into a securities purchase agreement with 1800 Diagonal Lending, LLC, an accredited investor, pursuant to which the Company sold the investor an unsecured original issue discount promissory note in the principal amount of $71,450 (the “August Promissory Note”). The Company received net proceeds of $60,000 in consideration of issuance of the August Promissory Note. The August Promissory Note bears interest at a rate of 13% and has a maturity date of May 15, 2024. The August Promissory Note is convertible into common shares of the Company at any time following an event of default. The conversion price shall be 71% of the lowest trading price of the Company’s common stock during the 20 trading days prior to the conversion date. The outstanding principal and accrued interest shall be paid in nine monthly payments of $8,971. The August Promissory Note provides for standard and customary events of default such as failing to timely make payments under the August Promissory Note when due, the failure of the Company to timely comply with the Securities Exchange Act of 1934 reporting requirements and the failure to maintain a listing on the OTC Markets. The August Promissory Note also contains customary covenants. At no time may the August Promissory Note be converted into shares of the Company’s common stock if such conversion would result in the investor, or its affiliates owning an aggregate of more than 4.99% of the then outstanding shares of the Company’s common stock. Summary of cash flows June 30, 2023 June 30, 2022 Net cash provided by (used in) operating activities $ 400,994 $ (1,824,305 ) Net cash provided by investing activities $ 20,000 $ 943,423 Net cash provided by (used in) financing activities $ (124,051 ) $ 860,712 During the 2023 Period and 2022 Period, our sources and uses of cash were as follows: Operating Activities During the 2023 Period, cash provided by operating activities of $400,994 primarily resulted from the refund of prepaid hosting services, offset by the net loss of $1,728,966 and stock-based compensation of $1,236,487. 19 During the 2022 Period, cash used in operating activities of $1,824,305 primarily resulted from its net loss of $27,445,153, offset by stock-based compensation of $24,264,181 and loss on cryptocurrency transactions of $157,913. Investing Activities Cash provided by investing activities in the 2023 Period of $20,000 resulted from the sale of cryptocurrency assets. Cash provided by investing activities in the 2022 Period of $943,423 resulted from the $743,513 cash acquired from the reverse merger acquisition and the proceeds of $510,886 from sale of cryptocurrency assets, offset by the purchase of equipment of $370,976. Financing Activities In the 2023 Period, cash used in financing activities of $124,051 consisted of the repayment of Series B preferred shares, offset by proceeds from convertible notes payable of $160,000. In the 2022 Period, cash provided by financing activities of $860,712 consisted of $688,864 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 $208,152. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.