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 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 Report. 9 Our audited financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles. We are in the early stages of implementing our plan for the development of a large-scale geothermal-powered data center campus on which we will lease powered building lots and buildings to large enterprise information technology (IT) customers that are creating or addressing the growing demand for AI, Cloud and High-Performance Computing (HPC) digital services. In planning for our initial geothermal-powered data center building lots and building, we are in discussions with several large companies that could lease all or part of the data center campus, with the intention of cultivating long-term strategic relationships with them once they become our customers and providing them with solutions for their data center facilities and IT infrastructure requirements. We initially intend to provide geothermal-powered building lots with flexibility for customers to scale for future growth. As currently contemplated, our offerings will provide clean energy power, flexibility, reliability and security delivered through a tailored, customer-service-focused platform that will be designed to foster long-term relationships. As of the filing of this Report, we have completed Phase I and entered into Phase II of our data center development plans. In the initial phase of our project, we originally signed an option agreement in March 2023 to acquire 80 acres of commercially-zoned land in Imperial County, California. We believed this site would provide us an opportunity to acquire commercially-zoned land on which we could combine nearby direct clean geothermal/solar energy with a 24/7 data center operation. However, in July 2024, we identified and entered into an option agreement to acquire a larger, 315-acre parcel of land that we believe provides us with significant advantages over our prior data center development site, which include: ● Larger, strategically located, industrial-zoned property with acreage for on-site switchyard, substation and additional data center buildings ● Better options for connectivity to high-voltage transmission lines ● Closer proximity to existing and planned geothermal power plants ● Shorter fiber routing distances to internet backbone and communications networks ● Directly on the main north/south transportation corridor (Hwy. 111) and gateway entrance (Sinclair Rd.) to the planned 51,000-acre Lithium Valley development area ● Lower flood risk - outside of the 100- and 500- year flood zones in a FEMA X (Unshaded) area In late July 2024, we terminated our option agreement to acquire the 80-acre parcel in Imperial County, California as we believe the recently-optioned property is better suited for our immediate needs. We believe 100% clean-energy-powered data centers are an important element in the ability of the U.S. to meet its carbon neutral climate goals and for hyperscale and enterprise IT companies to meet their shareholder and customer commitments to have an ESG-compliant, clean digital footprint before 2030. As a result, we believe the availability of nearby clean energy and our ability to produce geothermal power on our site will provide us a significant competitive advantage in the marketplace. In Phase I of our development plan, which we completed in December 2023, we contracted with leading data center advisory firms to complete site, power and connectivity assessments, feasibility studies, engineering plans and project benchmarking. Phase I of our plan included engaging: ● HDR Engineering, Inc. , a global professional services firm specializing in architecture, engineering, environmental and construction services (“HDR Engineering”), to complete a site assessment, project feasibility study, and the initial shovel-ready site development plan for our Imperial County site. ● ZGlobal, Inc. , a power engineering and energy solutions firm (“ZGlobal”), to assess all available power and transmission routes in the immediate area of the site and to develop a plan to access power from close by geothermal and solar producers via Behind-The-Meter, Off-Take and Power Purchase Agreements directly and through agreements with the local grid operator. 10 ● American Dark Fiber, Inc. , a provider of dark fiber connectivity to municipalities, carriers, anchor institutions, content developers, data-center operators, and other sophisticated private network users, to develop a robust fiber-based infrastructure that will provide multiple diverse geographic routes of connectivity to our data center site. ● Linesight , a construction consultancy services firm (“Linesight”), to provide cost benchmarking of initial design concepts, and to assist with desktop pre-qualification of architect-engineering firms and construction managers. During the beginning of 2024, we started Phase II of our data center development plan. Phase II included hiring additional staff and consultants to complete environmental, health and safety and cyber security procedures and to develop a set of data center operating procedures to meet hyperscale customer pre-qualification requirements. During this phase, we also developed requests for proposals (RFPs) and contract packages for contracting an engineering/design firm and general contractor. In addition, we ramped up our operating staff to support the infrastructure and building design processes and the development of building plans and the permit packages. We also undertook and completed utility studies, transmission planning, site layouts and substation designs. We are currently in the process of completing our vertically-integrated, geothermal-powered data center campus land-use plan and zone change with Imperial County Planning and Development. We expect that land use and conditional zone change approvals will be completed by the end of 2025 or during the first quarter of 2026. In parallel, we are completing our plans, timelines and budgets for all required county and state environmental studies and reports, which we expect to have completed and filed for data center campus construction, onsite switchyard and electrical distribution system, and fiber, gas, water and sewer lines that connect to the property by the end of 2025. In addition, we are planning to have the required approvals to start the initial construction of the data center campus and all external utility lines by the end of the second quarter 2026. We are also planning that we can complete and submit all design, planning and environmental reports and studies for the state environmental agencies for our planned onsite geothermal production systems by mid-2026. We are also in the process of completing a master services agreement with a geothermal technology and development company that will provide advanced closed-loop geothermal production technology, sub-surface planning and drilling, above-ground turbine and generator electricity production components and the electrical distribution system design and components. We expect to complete this agreement before the end of June 2025 and have the designs completed for subsurface and surface components before the end of 2025. Based upon the current interest we have received from potential tenants, we expect that we will have agreements signed to lease all or a substantial part of the development by the end of 2025 or early 2026. 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 vertically-integrated, geothermal-powered data center campus. 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. 11 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. Results of Operations for the years ended December 31, 2024 and 2023 The following table summarizes our results of operations for the years ended December 31, 2024 and 2023. Change 2024 2023 Dollar Percentage Revenues $ - $ - $ - - % Operating Expenses Professional fees 386,000 344,000 42,000 12.2 Equity-based compensation 369,000 3,032,000 (2,663,000 ) (87.8 ) General and administrative 49,000 38,000 11,000 28.9 Development cost – abandonment 344,000 - 344,000 100.0 Payroll and related expenses 259,000 51,000 208,000 407.8 Total operating expenses $ 1,407,000 $ 3,465,000 $ (2,058,000 ) (59.4 )% Other (expenses) income Interest income $ 12,000 $ 50,000 $ (38,000 ) (76.0 )% Financing cost (2,410,000 ) (252,000 ) 2,158,000 856.3 Gain on settlement of accounts payable - 23,000 (23,000 ) (100.0 ) Loss on extinguishment of debt – related party (2,317,000 ) - 2,317,000 100 Loss on extinguishment of debt (6,468,000 ) (986,000 ) 5,482,000 556.0 Total other expenses $ (11,183,000 ) $ (1,165,000 ) $ 10,018,000 859.9 % Revenues For the years ended December 31, 2024 and 2023, we had no revenues. Operating Expenses Professional fees Our professional fees increased to $386,000 for the year ended December 31, 2024 from $344,000 for the year ended December 31, 2023. The increase of approximately $42,000 was attributable to a decrease in our consulting fees of approximately $63,000, which was offset by an increase in our other professional fess of approximately $105,000. Equity-based compensation Our equity-based compensation for the year ended December 31, 2024 was approximately $369,000 as compared to $3,032,000 for the year ended December 31, 2023. During the fourth quarter of 2023, we issued warrants and stock options to our directors and officers with a fair value of $2,916,000, which was recognized as an expense upon issuance. Also for the years ended December 31, 2024 and 2023, the Company capitalized equity based compensation of approximately $2,380,000 and $336,000 as data center cost. Development cost – abandonment On July 24, 2024, we terminated our option agreement to acquire 80 acres of commercially-zoned land in Imperial County, California. At such date, we had approximately $344,000 development cost related to that property, which we determined were not usable for our data center campus project. 12 Payroll and related expenses Payroll and related expenses increased to $259,000 for the year ended December 31, 2024, compared to $51,000 for the year ended December 31, 2023. For the year ended December 31, 2023, we had one employee. Our first employee, our Chief Operating Officer, was hired in June 2023, and our second employee, our Vice President of Data Center Development, was hired in February 2024. For the year ended December 31, 2024, our total payroll-related cost for our employees was approximately $1,148,000, of which approximately $889,000 was capitalized as data center development cost. Financing costs Our financing cost for the year ended December 31, 2024 increased to $2,410,000 compared to $252,000 for the year ended December 31, 2023. The 2024 financing cost included $2,355,000 for the amortization of debt discount related to our notes payable. Loss on extinguishment of debt – related party During the year ended December 31, 2024, the Company and the note holder agreed to convert the note payable of $1,000,000 into 500,000 shares of the Company’s common stock with a fair value of $875,000 and exchanged two warrants, previously issued to the note holder, each for 300,000 shares of the Company’s common stock (“Old Warrant”), for a warrant to purchase 2,258,877 shares of the Company’s common stock (“New Warrant’). The loss on extinguishment of $2,317,000 is difference between (i) $1,755,000 for the note payable of $1,000,000 and fair value of Old Warrant of $755,000 and (ii) $4,072,000 the fair value of the common stock of $875,000 and fair value of the New Warrant of $3,197,000. Loss on extinguishment of debt During the years ended December 31, 2024 and 2023, the Company extinguished convertible debentures with the issuance of shares of the Company’s common stock. The fair value of the common stock issued exceeds the carrying amount of the principal and accrued interest by approximately $6,468,000 and $986,000, which was recorded as a loss on extinguishment for the year ended December 31, 2024 and 2023, respectively. Liquidity and Capital Resources Our working capital as of December 31, 2024 and 2023 was as follows. 2024 2023 Current assets $ 296,000 $ 318,000 Current liabilities (514,000 ) (1,022,000 ) Working capital deficit $ (218,000 ) $ (704,000 ) Our working capital deficit decreased from a $704,000 deficit as of December 31, 2023 to a deficit of $218,000 as of December 31, 2024 for a decrease of $486,000. The decrease in our working capital deficit was due to a $22,000 decrease in our cash and cash equivalents, which was offset by a decrease of $167,000 in our accounts payable and accrued expenses and a decrease of $341,000 in convertible promissory notes, net. Cash Flows For the years ended December 31, 2024 2023 Net cash used in operating activities $ (859,000 ) $ (35,000 ) Net cash used in investing activities (1,467,000 ) (1,730,000 ) Net cash provided by financing activities 2,305,000 - Effect of exchange rate changes (1,000 ) 6,000 Change in cash and cash equivalents during the period (22,000 ) (1,759,000 ) Cash and cash equivalents, beginning of period 308,000 2,067,000 Cash and cash equivalents, end of period $ 286,000 $ 308,000 Cash Flows from Operations Cash used in operating activities increased to approximately $859,000 for the year ended December 31, 2024 from approximately $35,000 for the year ended December 31, 2023, which was predominantly related to the increase in our expenditures for filing fees, legal fees, transfer agent fees and consulting fees paid during the period. 13 Cash Flows from Investing Our cash used in investing activities increased to approximately $1,467,000 for the year ended December 31, 2024 from 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 campus. Cash Flows from Financing Our cash provided by financing activities increased to approximately $2,305,000 for the year ended December 31, 2024 from approximately nil for the year ended December 31, 2023. The increase of $2,305,000 was due to the issuance of a promissory note in the principal amount of $1,000,000 and the issuance of convertible debentures in the principal amount of $1,410,000 less $106,000 of cash paid for expenses related to the issuance. Liquidity and Material Cash Requirements Even though we experienced negative cash flows from operations of approximately $859,000 for the year ended December 31, 2024, as a result of our private placement of a promissory note and convertible debentures in the principal amounts of $1,000,000 and $1,410,000, respectively, we had cash and cash equivalents of approximately $286,000 at December 31, 2024. As of December 31, 2024, we had approximately $1,410,000 of convertible debentures with maturity dates on December 31, 2026. It is anticipated that we will incur expenses in the implementation of our 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. 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. We are currently in discussions with several potential funding sources. However, there can be no assurance we will be able to successfully raise additional funds when required, if at all. 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. 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-22 of this Report. Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure. Not Applicable