TerraVolt Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2022. This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with the Securities and Exchange Commission. See “Cautionary Note Regarding Forward Looking Statements.” Plan of Operations As of the filing of this Report, it is our plan to continue our focus on building a large-scale, clean-energy-powered, data center operation using the latest energy-efficient cooling technologies and to provide wholesale colocation services to enterprise IT and hyperscale customers. To implement this plan, we have optioned 80 acres of land for the initial phase of development and contracted HDR Engineering, Inc., a data center architect and engineering firm (“HDR”), to provide master planning services that include site feasibility and a shovel-ready site development plan. In addition, we are having on-going discussions and negotiations to acquire clean energy from the local power utility and nearby geothermal power plants and solar farms and contracting a network engineering firm to evaluate and engineer various paths to run conduit for accessing close-by internet fiber networks. On June 23, 2023, we engaged HDR to complete a feasibility study and site development master plan. Once the plan is developed, we will submit plans to authorities for approval and for permits to start construction. We expect, based on all related factors, that a submittable plan, which will include civil engineering, data center and infrastructure design and construction schedule, will take approximately six months to complete. Once submitted to the appropriate governmental departments and agencies for approval, it is expected that it could take another three months or more before we receive the required permits to start construction, and that the construction could take another six to twelve months to complete depending on supply chain issues at the time for data center, electrical and communication connectivity components of the data center build. As we move through the development process to build a clean-energy powered data center operation, we will continue to refine and finalize the courses of action needed to implement our business plan and operations. As a result, management has not fully determined our actual short-term or long-term capital requirements, which management expects to be substantial. It is anticipated that we will incur significant expenses in the implementation of our business plan as described herein, and that we will require substantial financing to complete the development and construction of the planned data center operation. A failure to obtain this necessary capital when required on acceptable terms, or at all, could force us to delay, limit, reduce, or terminate our development plans, any commercialization efforts and any other operations. We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs. In addition, even if we are able to obtain sufficient funding to commence our business operations, we may need to pursue additional financing in the future to make expenditures and/or investments to support the growth of our business. In addition, we may require additional capital to pursue our business objectives and respond to new competitive pressures, pay extraordinary expenses or fund our growth, including through acquisitions. Additional funding, however, may not be available when required on terms that are acceptable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when it is required, our ability to commence and grow our proposed business operations, to support our business and to respond to business challenges could be significantly limited. We currently have only limited capital with which to pay these anticipated expenses. To fund our business plan going forward, we intend to raise funds from investors by issuing common stock, preferred stock and/or debt securities. 11 Results of Operations The table summarizes the results of operations for the three and nine months ended September 30: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Revenues $ - $ - $ - $ - Operating expenses Professional fees 48,000 136,000 234,000 558,000 Equity-based compensation 31,000 (11,168,000 ) 55,000 (4,791,000 ) General and administrative expenses 13,000 24,000 54,000 59,000 Impairment loss - - - 154,000 Total operating (income) expenses 92,000 (11,008,000 ) 343,000 (4,020,000 ) Income (loss) from operations (92,000 ) 11,008,000 (343,000 ) 4,020,000 Other income (expenses) Interest income 14,000 1,000 45,000 1,000 Gain on settlement of debt - - 23,000 - Financing costs (20,000 ) (509,000 ) (239,000 ) (1,622,000 ) Total other expenses (6,000 ) (508,000 ) (171,000 ) (1,621,000 ) Income (loss) before provision for income taxes (98,000 ) 10,500,000 (514,000 ) 2,399,000 Provision for income taxes - - - - Net income (loss) $ (98,000 ) $ 10,500,000 $ (514,000 ) $ 2,399,000 Revenues We had no revenues for the three and nine months ended September 30, 2023 and 2022. Operating Expenses for the three months ended September 30, 2023 and 2022 Professional fees decreased to approximately $48,000 for the three months ended September 30, 2023, as compared to $136,000 for the three months ended September 30, 2022. As the Company has shifted its operating activity toward developing the data center professional fees have either decreased or have been capitalized as development cost. Equity-based compensation increased to approximately $31,000 for the three months ended September 30, 2023, as compared to $(11,168,000) for the three months ended September 30, 2022. During the three months ended September 30, 2022, We had a cancelation of an equity-based compensation agreement for 10,000,000 shares of our common stock. Therefore, we had a reversal of approximately $11,168,000 of previously expensed equity-based compensation. The equity-based compensation of $31,000 related to the issuance of an employment agreement during the second quarter of 2023. General and administrative expenses decreased to approximately $13,000 for the three months ended September 30, 2023, as compared to $24,000 for the three months ended September 30, 2022. The decrease was attributable to the capitalization of out-of-pocket expenses related to the development of the data center. Operating Expenses for the six months ended September 30, 2023 and 2022 Professional fees decreased to approximately $234,000 for the six months ended September 30, 2023, as compared to $558,000 for the six months ended September 30, 2022. As we have shifted our operating activity toward developing the data center professional fees have either decreased or have been capitalized as development cost. Equity-based compensation increased to approximately $55,000 for the six months ended September 30, 2023, as compared to $(4,791,000) for the six months ended September 30, 2022. During the six months ended September 30, 2022, we had a cancelation of an equity-based compensation agreement for 10,000,000 shares of our common stock. Therefore, we had a reversal of approximately $11,168,000 of previously expensed equity-based compensation. The equity-based compensation of $55,000 related to the issuance of an employment agreement during the second quarter of 2023. General and administrative expenses decreased to approximately $54,000 for the six months ended September 30, 2023, as compared to $59,000 for the six months ended September 30, 2022. The decrease was attributable to the capitalization of out-of-pocket expenses related to the development of the data center. Liquidity and Capital Resources Our financial position as of September 30, 2023 and December 31, 2022 was as follows: Working Capital Deficit September 30, 2023 December 31, 2022 (Unaudited) Current assets $ 1,190,000 $ 2,071,000 Current liabilities 6,052,000 5,214,000 Working capital deficit $ (4,862,000 ) $ (3,143,000 ) Our working capital deficit increased by $1,719,000 as of September 30, 2023 from $3,143,000 as of December 31, 2022. The increase was due to the use of cash of approximately $233,000 for operating expenses and approximately $661,000 for data center development costs, and the increase in our accounts payable and accrued expense of approximately $838,000. 12 Cash Flows For the Nine Months Ended September 30, 2023 2022 Net cash used in operating activities $ (233,000 ) $ (674,000 ) Net cash used in investing activities (661,000 ) (106,000 ) Net cash used in financing activities - (25,000 ) Effect of exchange rate changes 5,000 7,000 Increase (decrease) in Cash during the Period (889,000 ) (798,000 ) Cash, Beginning of Period 2,067,000 3,047,000 Cash, End of Period $ 1,178,000 $ 2,249,000 Cash flows used in operating activities Net cash used in operating activities decreased by $441,000 during the nine months ended September 30, 2023 from $674,000 for nine months ended September 30, 2022. The decrease resulted from the reduction in our operating expense related to professional fees and general administrative expenses during the nine months ended September 30, 2023. Cash flows used in investing activities Net cash used in investing activity increased by $555,000 during the nine months ended September 30, 2023 from $106,000 for the nine months ended September 30, 2022. The increase resulted from the expenditures during the nine months ended September 30, 2023 for the development activities for our data center project. Cash flows used in financing activities Net cash used in financing activities decreased by $25,000 during the nine months ended September 30, 2023 as compared to $25,000 for the nine months ended September 30, 2022. The decrease resulted from our not making any repayments of our outstanding notes payable. Capital Requirements We estimate that we will require up to $2 million for expenses and operating costs to complete the development of a comprehensive plan for our planned clean-energy powered, containerized, immersion-cooled data center operation. Once the plans are approved for construction by the requisite authorities, we estimate the initial phase of our planned data center operation will cost between $60 to $75 million to build. Past the plan development phase, we will need to raise capital in order to build our planned operations and achieve our growth targets, which we plan to raise from investors by issuing common stock, preferred stock and/or debt securities. However, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms when it is needed. The precise amount and timing of our funding needs cannot be determined accurately at this time, and will depend on a number of factors, including but not limited to the condition of the capital market, investor interest in our business plan, demand for our services by enterprise customers, the timing of approvals from authorities to start construction, the management of working capital, and reasonable payment terms and conditions for the purchase of the goods and services we will need to build our data center operation. Critical Accounting Policies The preparation of condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying disclosures of our company. Although these estimates are based on management’s knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates. 13 Principles of Consolidation The consolidated financial statements include the accounts of our company and its wholly-owned subsidiary from the formation date. All material intercompany transactions and balances have been eliminated in consolidation. Foreign Currency Translation The financial statements of our foreign subsidiary, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders’ equity (deficit). Gains or losses from foreign currency transactions are recognized in the consolidated statements of operations. Debt and Debt Discounts In accordance with ASC 470-20, Debt with Conversion and Other Options , we first allocate the cash proceeds of the notes between the notes and the warrants on a relative fair value basis. Secondly, proceeds are then allocated to the conversion feature. We account for debt discounts originating in connection with conversion features that remain embedded in the related notes in accordance with ASC 470-20. These costs are classified on the consolidated balance sheet as a direct deduction from the debt liability. We amortize these costs over the term of our debt agreements as financing cost in the consolidated statement of operations. Stock-Based Compensation We account for our stock-based compensation under ASC 718, “ Compensation – Stock Compensation ” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. We use the fair value method for equity instruments granted to non-employees and use the BSM model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant (measurement date) and is recognized over the vesting periods. Recent Accounting Pronouncements Our management reviewed all recently issued accounting standard updates (“ASU’s”) not yet adopted by us and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on our condensed consolidated financial condition or the results of our operations. Off-Balance Sheet Arrangements As of September 30, 2023, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not required under Regulation S-K for smaller reporting companies. 14