TerraVolt Holdings, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation. The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Annual Report. Our audited financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles. Plan of Operations It is the intention of our board of directors for our company to pursue the development of the 80 acres of land in Imperial County, California that we recently put under an exclusive option agreement and develop it for a large-scale, 100% geothermal/solar-powered, certifiable clean energy, data center operation that will utilize immersion and liquid cooled and conventional energy efficient data center systems and provide colocation services to enterprise IT customers. To implement our plan, we have optioned the land and hired an experienced data center builder and operator and we are now in the process of acquiring the other principal ingredients needed for our data center operation – clean energy and fiber connectivity. To this end, over the next couple of months, we plan to finish negotiations with local geothermal and solar power producers to deliver clean energy for our operation, and to complete agreements with multiple communication providers for access to their close-by long-haul and dark fiber communication networks for connectivity. We are also in the process of developing partnerships with leading-edge containerized and modular immersion and liquid cooled data center system providers whose systems we will offer for rent to our customers. We believe that, when construction of our data center is complete, the principal differentiators of our data center operations in the marketplace are expected to be that we are powered by 100% certified clean energy and that we provide leading-edge immersion and liquid cooled energy-efficient data center systems that will support the ever-increasing power and cooling needs of high-performance enterprise IT computer systems. It is anticipated that we will incur expenses in the implementation of the business plan described herein, and such expenses will require substantial financing to complete the development of the property for a data center operation and to achieve our goals. The failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our development plans, any commercialization efforts or 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 and 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 funds, however, may not be available when we need them 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 we require it, our ability to commence our proposed business operations, to continue to grow and 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. 8 Results of Operations for the years ended December 31, 2023 and 2022 The following summary should be read in conjunction with our audited financial statements for the years ended December 31, 2023 and 2022. For the years ended December31, 2023 2022 Revenues $ - $ - Operating Expenses Professional fees 344,000 667,000 Equity-based compensation (gain) 3,032,000 (4,791,000 ) Payroll and related cost 51,000 - Impairment loss - 154,000 General and administrative 38,000 52,000 Total operating expenses (income) 3,465,000 (3,918,000 ) (Loss) income from operations (3,465,000 ) 3,918,000 Financing costs (252,000 ) (1,744,000 ) Gain on settlement of payable 23,000 - Loss on extinguishment of debt (986,000 ) Interest income 50,000 7,000 Total other expense (1,165,000 ) (1,737,000 ) Net (loss) income $ (4,630,000 ) $ 2,181,000 Revenue For the years ended December 31, 2023 and 2022, we had no revenues. Operating Expenses Professional fees Our professional fees decreased from $667,000 for the year ended December 31, 2022 to $344,000 for the year ended December 31, 2023, representing a decrease of approximately $323,000. Our professional fees of $344,000 is net of data center capitalized cost of approximately $80,000. Therefore, the actual professional fees incurred for the year ended December 31, 2023, was approximately $424,000, a decrease of approximately $243,000. The decrease of approximately $243,000 was attributable to a $141,000 reduction in the use of outside contractors, a $110,000 reduction in legal fees, and a $17,000 reduction in the overhead cost of our South Korean subsidiary, for a total of $268,000. These reductions were offset by an approximate $21,000 increase in audit fees and a $4,000 increase in other expenses for a total of $25,000. Equity-based compensation (gain) Our equity-based compensation for the year ended December 31, 2023 is attributable to the stock options and warrants issued to our officers, directors and consultants during the year ended December 31, 2023 for a total expense of $3,032,000. Information with respect to such equity-based compensation is set forth in Note 7 to our audited financial statements for the year ended December 31, 2023 included elsewhere in this Report. Our equity-based gain in the year ended December 31, 2022 was attributable to equity-based compensation expense of approximately $6,377,000, which was offset by forfeitures of equity-based compensation of approximately $11,168,000. Impairment loss Our impairment loss of $154,000 in the year ended December 31, 2022 was due to the impairment of intangibles and other assets as a result of the suspension of our South Korean subsidiary’s operations. 9 General and administrative expenses Our general and administrative expenses decreased from $52,000 in the year ended December 31, 2022 to $38,000 in the year ended December 31, 2023, representing a decrease of approximately $14,000. Payroll and related expenses For the year ended December 31, 2022, we did not have employees. Our first employee, our Chief Operating Officer, was hired in March of 2023. The total payroll-related cost for this employee was approximately $226,000 for the year ended December 31, 2023, of which approximately $175,000 was capitalized as data center cost. Financing costs Our financing cost for the year ended December 31, 2023, represented interest expense of approximately $252,000. The total interest expense for the year ended December 31, 2023 was approximately $448,000, of which approximately $196,000 was capitalized as data center development cost. Our financing cost for the year ended December 31, 2022 represented interest expense of $218,000 and debt discount amortization of $1,526,000, of which full amortized during the year ended December 31, 2022. The increase in interest expense of $230,000 for the year ended December 31, 2023 was attributed to certain convertible promissory notes going into default during the year ended December 31, 2023. Gain on settlement of payable During the year ended December 31, 2023, we entered into an agreement with a vendor to reduce the payable by approximately $23,000. Loss on extinguishment of debt In December 2023, we requested the holders of our outstanding convertible promissory notes to convert such promissory notes into shares of our common stock. The book value of the promissory notes and accrued interest was approximately $4,906,000, and the fair value of the common stock was approximately $5,771,000, resulting in a loss on settlement of approximately $865,000. Also, the holder of a $50,000 promissory note agreed to convert the principal and accrued interest of $67,000 into shares of our common stock with a fair value of $188,000, resulting in a loss on settlement of approximately $121,000. Liquidity and Capital Resources Our financial position as of December 31 in each of the years indicated was as follows: Working Capital As of December 31, 2023 2022 Current assets $ 318,000 $ 2,071,000 Current liabilities (1,022,000 ) (5,214,000 ) Working deficit $ (704,000 ) $ (3,143,000 ) Our working capital decreased from a $3,143,000 deficit as of December 31, 2022 to a deficit of $704,000 as of December 31, 2023 for a total change of $2,439,000. The decline in our working capital was due to (i) a decrease in the book basis of our convertible promissory notes, for the December 2023 conversion and (ii) the decrease in our cash and cash equivalents, which was used for the data center development. 10 Cash Flows For the years ended December 31, 2023 2022 Net cash used in operating activities $ (35,000 ) $ (820,000 ) Net cash used in investing activities (1,730,000 ) (105,000 ) Net cash provided by financing activities - (50,000 ) Effect of exchange rate changes 6,000 (5,000 ) Change in cash during the period (1,759,000 ) (980,000 ) Cash, beginning of period 2,067,000 3,047,000 Cash, end of period $ 308,000 $ 2,067,000 Cash flows from operations Cash used in operating activities decreased to approximately $35,000 in 2023 from approximately $820,000 in 2022, which was predominantly related to the reduction in our expenditures for filing fees, legal fees, transfer agent fees and consulting fees paid during the year. Cash flow from investing Our cash used for investing activities was approximately $1,730,000 for the year ended December 31, 2023. The primary use of cash was for expenditures for the development of our data center. Cash flows from financing For the year ended December 31, 2023, we had no financing activities. Liquidity and Material Cash Requirements Convertible Promissory Notes As of December 31, 2023, we had approximately $456,000 outstanding related to our convertible promissory notes and accrued interest. In February 2024, the total of $456,000 was converted into shares of our common stock. Cash Requirements It is anticipated that we will incur expenses in the implementation of the business plan described above, and such expenses will require substantial financing to complete the development of the property for a data center operation and to achieve our goals. The failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our development plans, any commercialization efforts or 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 and 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 funds, however, may not be available when we need them 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 we require it, our ability to commence our proposed business operations, to continue to grow and 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 Going Concern The audited financial statements included in this Report have been prepared on a going concern basis, which implies that our company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business. We are presently in the development stage and, apart from our cash balances, have only limited assets. Our company has not generated revenues in the last two fiscal years, has never paid any dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of our company as a going concern is dependent upon: (i) continued financial support from our shareholders; (ii) the ability of our company to continue raising necessary debt or equity financing to achieve its operating objectives; and (iii) our ability to acquire assets and establish a business or merge or otherwise acquire business opportunities. Our independent auditors included an explanatory paragraph in their report on our financial statements for the year ended December 31, 2023 regarding concerns about our ability to continue as a going concern. In addition, our financial statements contain further note disclosures in this regard. The implementation of our business plan is dependent upon our ability to continue raising sufficient new capital from equity or debt markets in order to fund our on-going operating losses and real estate acquisition activities. The issuance of additional equity securities could result in a significant dilution in the equity interests of our current stockholders. Application of Critical Accounting Policies The preparation of 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 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. Principles of Consolidation The consolidated financial statements include the accounts of our company and our 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 any warrants on a relative fair value basis. 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 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 and comprehensive loss. 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. 12 Recent Accounting Pronouncements Our management reviewed all recently-issued accounting standard updates (“ASU’s”) not yet adopted by our company and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on our consolidated financial condition or the results of our operations. Off-Balance Sheet Arrangements We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial position, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information. Item 8. Financial Statements and Supplementary Data. Our financial statements and notes thereto and the reports of RBSM LLP, our independent registered public accounting firm, are set forth on pages F-1 through F-17 of this Report. Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure. Not Applicable