THE FOLLOWING PRESENTATION OF OUR PLAN OF OPERATION OF SHOULD BE READ IN
CONJUNCTION WITH THE AUDITED FINANCIAL STATEMENTS AND OTHER FINANCIAL
INFORMATION INCLUDED HEREIN.
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.
Madison Technologies Inc. Form 10-K - 2021 Page 26
Year ended December 31, 2021 and December 31, 2020
Revenues
Net Revenues increased to $1,243,655 for the year ended December 31, 2021 from
$1,374 for the year ended December 31, 2020. The increase resulted from the
acquisitions of television stations in 2021 and the $1,243,655 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 $105,450 for the year ended December 31, 2021 from $0
for the year ended December 31, 2020. The increase resulted from the Sovryn
acquisitions in 2021 of television stations that have amortizable tangible and
intangible assets.
Selling, general and administrative fees
Selling, general and administrative fees increased to $350,770 for the year
ended December 31, 2021 from $29,600 for the year ended December 31, 2020. The
increase was primarily the result of selling and overhead expenses for our
television stations that we started operating in 2021 following their
acquisitions.
Television operations
Television operation expenses are $266,644 and $0 for the years ended December
31, 2021 and 2020. The expenses are direct costs of operating the television
stations we acquired in 2021.
Professional Fees
Professional Fees increased to $1,850,041 for the year ended December 31, 2021
from $89,144 for the year ended December 31, 2020. The increase was primarily
the result of an increase in the legal and accounting expense associated with
the acquisitions of television stations, the financing associated with those
acquisitions and, the expense associated with regulatory filings for the SEC,
including the Form S1 Registration.
Goodwill impairment loss
Our goodwill impairment loss was $4,224,962 and $0 for the years ended December
31, 2021 and 2020. Due to a sustained decline in the market capitalization of
our Common Stock during the fourth quarter of 2021, we performed an interim
goodwill impairment test. Management considered that, along with other possible
factors affecting the assessment of our operations for the purposes of
performing a goodwill impairment assessment, including management assumptions
about expected future revenue forecasts and discount rates, changes in the
overall economy, trends in the stock price, estimated control premium, other
operating conditions, and the effect of changes in estimates and assumptions
that could materially affect the determination of fair value and goodwill. As a
result of the significant decline in the current market capitalization despite
any of the other positive factors contemplated and relatively little change in
our ongoing business operations, the outcome of this goodwill impairment test
resulted in a charge for the impairment of goodwill of $4,224,962 recorded in
the consolidated financial statements for the year ended December 31, 2021.
Madison Technologies Inc. Form 10-K - 2021 Page 27
Loss on asset disposals
Our loss on asset disposals was $1,737,147 and $0 for the years ended December
31, 2021 and 2020. 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 of W27EB-Chicago,
KPHE-Phoenix, KVSD-San Diego, WANN-Atlanta and KDTL-St. Louis stations have been
terminated and future acquisition plans have been put on hold while we evaluate
this alternative approach. As a result, we recognized $1,737,147 of losses from
disposition of OTA assets.
Interest Expense
Interest expense increased to $5,553,121 for the year ended December 31, 2021
from $237,417 for the year ended December 31, 2020. The increase resulted from
financing associated with the acquisition of television stations.
Loss on Debt Extinguishment
Our loss on debt extinguishment was $5,553,121 for the year ended December 31,
2021 as compared to $0 for the year ended December 31, 2020. The increase was
the result of non-cash charges we recognized when we amended the stock price
conversion terms of our Notes held the Investors and by extinguishing notes
payable by issuing shares of our Series D Preferred Stock.
Gain from derivative that is not designated in a hedging relationship
Our gain from derivative that is note designated in a hedging relationship was
$10,065,713 and $0 for the years ended December 31, 2021 and 2020.
Discontinued Operations
Our loss from discontinued operations was $479,117 and $390,376 for the years
ended December 31, 2021 and 2020, respectively. On November 15, 2021, we sold
our subsidiary, CZJ License Inc., for $250,000 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 $14,262,579 for the year ended December 31, 2021 from
$910,163 for the year ended December 31, 2020. The increase was primarily the
result of $5,553,141 of interest expense for debt instruments we issued in 2021,
a $4,224,962 goodwill impairment loss, and $1,737,147 in losses from asset
disposals, Net Loss on a basic and diluted basis of $.040 per share for the year
ended December 31, 2021, based on 352,843,639 weighted average shares
outstanding, as compared to a Net Loss of $0.047 per share for the year ended
December 31, 2020, based on 19,453,890 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 into 255,555,556 shares we issued on November 2, 2021 in exchange for shares
of our Preferred Series Stock.
Madison Technologies Inc. Form 10-K - 2021 Page 28
Liquidity and Capital Resources
Cash and Working Capital
As at December 31, 2021, we had $55,656 in cash and a $4,373,271 working capital
deficit, compared to cash of $9,491 and working capital deficit of $533,548 as
at December 31, 2020.
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 December
31, 2021, our principal source of liquidity was our cash, which totaled $55,656.
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 $6,203,200 in operating activities during fiscal 2021 compared
to cash used of $489,325 in operating activities during the previous fiscal
year. 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 $14,715,635 in investing activities during fiscal 2021 compared
to cash used of $10,000 in investing activities during the previous fiscal year.
The increase was the result of acquisitions and expenses associated with
KNLA/KNET, KVVV, KYMU television stations, deposits associated with signed
purchase agreements and loans made to Top Dog Productions Inc.
Net Cash Provided (Used in) by Financing Activities
Net cash flows provided by financing activities of $20,965,000 for fiscal 2021,
were from the proceeds of the Arena financing in February 2021 and Share
subscriptions received but not issued for our Series G preferred stock and
proceeds from subordinated loans, compared to $507,450 of cash provided by
financing activities during the previous fiscal year.
Madison Technologies Inc. Form 10-K - 2021 Page 29
Purchase of Significant Equipment
We do not intend to purchase any significant equipment during the next twelve
months.
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.
Material Commitments for Capital Expenditures
We had no contingencies or long-term commitments at December 31, 2021.
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.
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.
Madison Technologies Inc. Form 10-K - 2021 Page 30
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.
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.
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