Madison Technologies Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following discussion of our financial condition, changes in financial condition and results of operations for the three and nine months ended September 30, 2022 should be read in conjunction with our unaudited condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2021. Forward Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about DLT Resolutions’ industry, management’s beliefs, and certain assumptions made by management. Forward-looking statements include our expectations regarding product, services, and maintenance revenue, annual savings associated with the organizational changes effected in prior years, and short- and long-term cash needs. In some cases, words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates,” variations of these words, and similar expressions are intended to identify forward-looking statements. In addition, statements about the potential effects of the COVID-19 pandemic on the Company’s businesses, results of operations and financial condition may constitute forward-looking statements. The statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any forward-looking statements. Risks and uncertainties of our business include those set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on August 26, 2022, under “Item 1A. Risk Factors” as well as additional risks described in this Form 10-Q. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K . GENERAL Madison Technologies Inc. (“ Madison ”) is a Nevada corporation that was incorporated on June 15, 1998. We, through our wholly-owned subsidiary, Sovryn Holdings, Inc. (“Sovryn”) acquired three un-affiliated Class A/LPTV TV. Each licensed TV station can broadcast between 10 and 12 channels over-the-air, 24 hours per day/7 days per week. We generated revenue by leasing channels to third parties on KNLA/KNET, a Class A television station in Los Angeles, KVVV, a low power television station in Houston and KYMU-LD, a low power television station in Seattle. Form 10-Q – Q2 Madison Technologies Inc. Page 30 RESULTS OF OPERATIONS Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities. Three months ended September 30, 2022 and 2021 Revenues Net Revenues increased to $485,497 for the three months ended September 30, 2022 from $464,028 for the three months ended September 30, 2021. The increase resulted from the acquisition of the KYMU television station in September 2021 and operated throughout the three months ended September 30, 2022. We anticipate 2022 Net Revenues will increase compared to 2021 Net Revenues as a result a full year of operating the television stations acquired during 2021 and the launch of BLOCKCHAIN.TV in 2022. Amortization Amortization increased to $80,993 for the three months ended September 30, 2022 from ($57,437) for the three months ended September 30, 2021. The increase in amortization expense resulted from the reduction in the estimated fair values of amortizable tangible and intangible television station assets as determined by an independent valuation in 2021, which also resulted in a one-time retroactive reduction in amortization expense recognized in the three months ended September 30, 2021. Selling, general and administrative fees Selling, general and administrative fees increased to $272,533 for the three months ended September 30, 2022 from $198,567 for the three months ended September 30, 2021. The increase was primarily the result of increase personnel expenses we incurred in three months ended September 30, 2022 as we added personnel for the launch of BLOCKCHAIN.TV and to perform administrative duties that had been outsourced and incurred professional fees. Television operations Television operation expenses are $85,800 and $74,889 for the three months ended September 30, 2022 and 2021. The expenses are direct costs of operating the television stations we acquired in 2021. Professional Fees Professional fees decreased to $416,019 for the three months ended September 30, 2022 from $741,296 for the three months ended September 30, 2021. The decrease was primarily the result of an increase in the legal and accounting expense associated with the 2021 acquisitions of television stations, the financing associated with those acquisitions, management fees and, the expense associated with regulatory filings for the SEC, including the Form S1 Registration in 2021. Form 10-Q – Q2 Madison Technologies Inc. Page 31 Interest Expense Interest expense decreased to $1,520,742 for the three months ended September 30, 2022 from $1,927,580 for the three months ended September 30, 2021. The decrease resulted from the costs of financings associated with the acquisitions of television stations and development of BLOCKCHAIN.TV that had amortization periods that expired prior to the three months ended September 30, 2022. Discontinued Operations Our income from discontinued operations was $0 and $32,722 for the three months ended September 30, 2022 and 2021, respectively. On November 15, 2021, we sold our subsidiary, CZJ License Inc. and designated its operations as discontinued. The previous year’s assets, liabilities and expenses have been similarly classified for comparative purposes. Net Loss Net Loss decreased to $1,880,556 for the three months ended September 30, 2022, from $2,405,292 for the three months ended September 30, 2021. The decrease was primarily the result of $406,838 decrease in interest expense for debt instruments we issued in 2021 and the $325,277 decrease in professional fees. Net Loss on a basic and diluted basis of $0.001 per share for the three months ended September 30, 2022, based on 1,599,095,027 weighted average shares outstanding, as compared to a Net Loss of $0.096 per share for the three months ended September 30, 2021, based on 24,972,565 weighted average shares outstanding. The increase in weighted average shares outstanding relates primarily to issuances of 192,073,017 shares to the Investors on October 11, 2021 in connection with the $16,500,000 Notes we sold, the 1,091,388,889 shares we issued on October 11, 2021 to Preferred Series E-1 holders in pursuant to an Exchange Agreement and the 255,555,556 shares we issued on November 2, 2021 in exchange for 4,600 shares of our Series G Preferred Stock. Nine months ended September 30, 2022 and 2021 Revenues Net Revenues increased to $1,431,762 for the nine months ended September 30, 2022 from $760,053 for the nine months ended September 30, 2021. The increase resulted from the acquisitions of television stations in 2021 and the revenues generated by the lease agreements held by those stations. We anticipate 2022 Net Revenues will increase compared to 2021 Net Revenues as a result a full year of operating the television stations acquired during 2021 and the launch of BLOCKCHAIN.TV in 2022. Amortization Amortization increased to $242,481 for the nine months ended September 30, 2022 from $177,006 for the nine months ended September 30, 2021. The increase in amortization expense resulted from having the amortizable tangible and intangible television station assets for the entire nine-month period in 2022 as compared to 2021 when the assets were acquired at different times during the 2021 nine-month period. Selling, general and administrative fees Selling, general and administrative fees decreased to $753,378 for the nine months ended September 30, 2022 from $433,025 for the nine months ended September 30, 2021. The increase was primarily the result of increase personnel expenses we incurred in nine months ended September 30, 2022 as we added personnel for the launch of BLOCKCHAIN.TV and to perform administrative duties that had been outsourced and incurred professional fees. Form 10-Q – Q2 Madison Technologies Inc. Page 32 Television operations Television operation expenses are $257,483 and $178,869 for the nine months ended September 30, 2022 and 2021. The expenses are direct costs of operating the television stations we acquired in 2021. The increase in expense resulted from operating the television station assets for the entire nine-month period in 2022 as compared to 2021 when the assets were acquired at different times during the 2021 nine-month period. Professional Fees Professional Fees increased to $2,556,767 for the nine months ended September 30, 2022 from $1,745,592 for the nine months ended September 30, 2021. The increase was primarily the result of an increase in professional engaged to assist with development of our business and preparations for the launch of BLOCKCHAIN.TV in 2022. In 2021, professional fees were primarily legal and accounting expenses associated with the acquisitions of television stations, the financing associated with those acquisitions, management fees and, the expense associated with regulatory filings for the SEC, including the Form S1 Registration. Loss on asset disposals Our loss on asset disposals was $52,668 and $17,417 for the nine months ended September 30, 2022 and 2021. Our initial objective was to create one the largest, most comprehensive, state of the art OTA content distribution platforms to capitalize on the changing media and distribution landscape and on the growing OTA viewership in the U.S. We are exploring more capital efficient and technology centric alternatives to its planned station acquisition distribution platform. While there is no guarantee that it will be successful with this alternative approach, we have determined that it will postpone further capital expenditures on acquisitions and as a result, the planned acquisitions have been terminated and future acquisition plans have been put on hold while we evaluate this alternative approach. As a result, we recognized a $52,668 of loss from disposition of OTA assets. Interest Expense Interest expense increased to $4,547,497 for the nine months ended September 30, 2022 from $3,129,983 for the nine months ended September 30, 2022. The $1,417,514 increase resulted from having a higher amount of outstanding financings associated with the acquisition of television stations and development of BLOCKCHAIN.TV and having the $16,500,000 Notes outstanding for the entire nine-month period in 2022. Discontinued Operations Our loss from discontinued operations was $0 and $40,323 for the nine months ended September 31, 2022 and 2021, respectively. On November 15, 2021, we sold our subsidiary, CZJ License Inc. and designated its operations as discontinued. The previous year’s assets, liabilities and expenses have been similarly classified for comparative purposes. Net Loss Net Loss increased to $6,949,431 for the nine months ended September 30, 2022 from $4,961,892 for the nine months ended September 30, 2021. The increase was primarily the result of the $1,417,514 increase in interest expense and $806,175 increase in professional fees. Net Loss on a basic and diluted basis of $0.004 per share for the nine months ended September 30, 2022, based on 1,599,095,027 weighted average shares outstanding, as compared to a Net Loss of $0.203 per share for the nine months ended September 30, 2021, based on 24,439,598 weighted average shares outstanding. The increase in weighted average shares outstanding relates primarily to issuances of 192,073,017 shares to the Investors on October 11, 2021 in connection with the $16,500,000 Notes we sold, the 1,091,388,889 shares we issued on October 11, 2021 to Preferred Series E-1 holders in pursuant to an Exchange Agreement and the 255,555,556 shares we issued on November 2, 2021 in exchange for 4,600 shares of our Series G Preferred Stock. Form 10-Q – Q2 Madison Technologies Inc. Page 33 Liquidity and Capital Resources Cash and Working Capital As at September 30, 2022, we had $8,804 in cash and a $9,866,871 working capital deficit, compared to cash of $55,656 and working capital deficit of $4,373,271 as at December 31, 2021. We will require additional capital to meet our long-term operating requirements. We have not yet made the $0.4 million interest payments on the Notes held by Arena Partners LC that were due on April 1, 2022 and July 1, 2022, and as a result, under the Note terms, the interest rate is 20.0% per annum. We are currently in discussions with Arena Capital LP, on a plan of forbearance; however, there is no assurance that we will be successful in completion of a plan, which may disrupt our operations and result in a restructuring of obligations. We expect to raise additional capital through the sale of equity and/or debt securities; however, there is no assurance that we will be successful at raising additional capital in the future. If our plans are not achieved and/or if significant unanticipated events occur, we may have to further modify our business plan, which may require us to raise additional capital. As of September 30, 2022, our principal source of liquidity was our cash, which totaled $22,543. Historically, our principal sources of cash have included proceeds from the sale of common stock and preferred stock and related party loans. Our principal uses of cash have included cash used in operations, to make acquisitions and to pay interest on our Notes. We expect that the principal uses of cash in the future will be for continuing operations associated with rolling out the business plan and for interest payments. Net Cash Used in Operating Activities We used cash of $1,342,369 in operating activities during nine months ended September 30, 2022 compared to cash used of $4,182,398 in operating activities during the previous year’s nine-month period. The increase was primarily the result of increase in expenses associated with the build out and roll out of our business plan. Net Cash Used in Investing Activities We used cash of $156,483 in investing activities during the nine months ended September 30, 2022 compared to cash used of $14,462,531 in investing activities during the previous year’s nine-month period. The decrease was the result of the 2021 purchases of the television station assets that did not recur in 2022. Net Cash Provided by Financing Activities Net cash flows provided by financing activities of $1,452,000 for the nine months ended September 30, 2022 were from the proceeds of subordinated notes payable and Warrants that we sold to investors, compared to $20,830,000 of cash provided by financing activities during the previous fiscal year that we generated from the Arena financing in February 2021 and sales of subscriptions to purchase our Common Stock. Form 10-Q – Q2 Madison Technologies Inc. Page 34 Off-balance Sheet Arrangements We have no off-balance sheet arrangements including arrangements that would affect its liquidity, capital resources, market risk support and credit risk support or other benefits. Going Concern The independent auditors’ reports accompanying our December 31, 2021 and 2020 financial statements contain an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared assuming that we will continue as a going concern, which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business. Future Financings Management anticipates continuing to rely on equity sales of our Common Stock in order to continue to fund our business operations. Issuances of additional Common Stock will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our Common Stock or arrange for debt or other financing to fund our planned activities. Material Commitments for Capital Expenditures We had no contingencies or long-term commitments at September 30, 2022. Tabular Disclosure of Contractual Obligations We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item. Critical Accounting Policies We follow certain significant accounting policies when preparing our consolidated financial statements. A complete summary of these policies is included in Note 1 of Notes to Consolidated Financial Statements. Certain of the policies require management to make significant and subjective estimates or assumptions that may deviate from actual results. In particular, management makes estimates regarding the useful life of long-lived assets related to depreciation and amortization expense, estimates regarding fair value of our reporting units and future cash flows with respect to assessing potential impairment of both long-lived assets and goodwill and estimates of expense related to our debt and equity instruments. Each of these estimates is discussed in greater detail in the following discussion. Long-Lived Assets, Depreciation and Amortization Expense and Valuation We review the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset, or related asset group, may not be recoverable from estimated future undiscounted cash flows. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. In 2021, we recognized that we would not complete the acquisition of the TV station assets of W27EB and KPHE TV and we wrote off $1,150,000 in deposits paid to sellers of those assets. In the nine months ended September 30, 2022, we wrote off an additional $52,668 in TV station assets. Goodwill Valuation Management performed the annual goodwill and indefinite-lived intangible assets impairment assessments as of December 31, 2021 and concluded that our goodwill for the Sovryn acquisition was impaired as of that date. Goodwill and indefinite lived assets are tested annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. We follow a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If impairment is indicated, then the fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value of its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill is measured as the excess of its carrying value over its implied fair value. Derivative Liabilities We have certain financial instruments that are derivatives or contain embedded derivatives. We evaluate all of our financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with us, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on extinguishment. Form 10-Q – Q2 Madison Technologies Inc. Page 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.