UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File No. 000-50331

CalEthos, Inc.

(Exact name of registrant as specified in its charter)

(714) 352-5315

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No[  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.[  ]

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes [X] No [  ]

As of October 30, 2019 the registrant had 16,634,951May 31, 2021, there were 12,960,621 outstanding shares of the registrant’s common stock, outstanding.par value $0.001 per share.

CalEthos, Inc.

Quarterly Report on Form 10-Q

Three and Nine Months Ended September 30, 20192020

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, may address or relate to future events and expectations and as such constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our business, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things:

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors.

Particularly in light of our current status as a shell company, there can be no assurance that the forward-looking statements contained herein will in fact occur. Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

CalEthos, Inc.

Nine Months Ended September 30, 20192020

Index to the Financial Statements

CalEthos, Inc.

CalEthos, Inc.

Condensed Balance Sheets

See accompanying notes to the unaudited condensed financial statements.

CalEthos, Inc.

CalEthos, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

See accompanying notes to the unaudited condensed financial statements.

CalEthos, Inc.

CalEthos, Inc.

Condensed StatementStatements of Stockholders’ Deficit

(Unaudited)

For the Three and Nine Months Ended September 30, 20192020

For the Three and Nine Months Ended September 30, 20182019

See accompanying notes to the financial statements.

CalEthos, Inc.

CalEthos, Inc.

Condensed Statements of Cash Flows

For the Nine Months Ended September 30,

(Unaudited)

See accompanying notes to the unaudited condensed financial statements.

CalEthos, Inc.

September 30, 20192020

Condensed Notes to the Financial Statements

(Unaudited)

Note 1 – Organization and Accounting Policies

CalEthos, Inc. (the “Company”) (fka RealSource Residential, Inc.) was incorporated on March 20, 2002 under the laws of the State of Nevada. Since the second quarter of 2016, the Company has been a “shell” company, as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.

Change in Control

On May 16, 2018, certain majority stockholders of the Company, including certain former directors and officers of the Company, entered into a stock purchase agreement dated May 16, 2018 (the “Control Purchase Agreement”) with RealSource Acquisition Group, LLC, a Utah limited liability company (“RealSource Acquisition”), whereby RealSource Acquisition agreed to purchase an aggregate of 11,006,356 shares (440,256 shares after giving effect to the Reverse Stock Split (the “Control Shares”) of the Company’s issued and outstanding shares of common stock for an aggregate purchase price of $180,000. Immediately prior to the closing under the Control Purchase Agreement on September 12, 2018 (the “Closing Date”), RealSource Acquisition assigned its rights under the Control Purchase Agreement to M1 Advisors, LLC, a Delaware limited liability company (“M1 Advisors”), pursuant to a purchase agreement and assignment and assumption of contract rights dated as of August 28, 2018 between RealSource Acquisition and M1 Advisors. M1 Advisors paid RealSource Acquisition $80,000 as consideration for such assignment.

Effective on the Closing Date, and in accordance with the amended and restated bylaws of the Company and the requirements of the Control Purchase Agreement, (a) each of Michael S. Anderson, Nathan W. Hanks and V. Kelly Randall resigned as directors of the Company, (b) Michael Campbell, the sole member of M1 Advisors, and Piers Cooper were elected to the Company’s board of directors, and (c) Mr. Hanks also resigned as president and chief executive officer of the Company, Mr. Randall also resigned as chief operating office and chief financial officer of the Company, Mr. Campbell was appointed the chief executive officer of the Company and Piers Cooper was appointed president of the Company.

On the Closing Date, the Company entered into a series A preferred stock purchase agreement dated as of the Closing Date (the “Preferred Purchase Agreement”) with M1 Advisors, which is an entity controlled by Michael Campbell, the Company’s chief executive officer and a director of the Company at such time, Piers Cooper, the Company’s president and a director of the Company at such time, the members of RealSource Acquisition, and the other investors who were signatories thereto (collectively, the Purchasers”). Pursuant to the Preferred Purchase Agreement, the Company sold to the Purchasers an aggregate of 15,600,544 shares of the Company’s series A preferred stock, which has since been re-designated as Founder preferred stock (“Founder Preferred Stock”), for an aggregate purchase price of $16,000, or $0.001 per share. Of the Founder Preferred Stock purchased, 9,320,414 shares were purchased by M1 Advisors, 4,674,330 shares were purchased by Mr. Cooper and an aggregate of 1,195,000 shares were purchased by the members of RealSource Acquisition or their assigns.

Immediately following the above transactions, an aggregate of 15,600,544 shares of Founder Preferred Stock and 630,207 shares of common stock was issued and outstanding. At such time, the shares of Founder Preferred Stock and common stock owned by M1 Advisors represented approximately 60.14% of the issued and outstanding shares of capital stock of the Company on a fully-diluted basis and the shares of Founder Preferred Stock owned by Mr. Cooper represented approximately 28.80% of the issued and outstanding shares of capital stock of the Company on a fully-diluted basis. The shares of Founder Preferred Stock acquired by M1 Advisors were purchased with funds that M1 Advisors borrowed from another entity controlled by Mr. Campbell.

On December 20, 2018, all outstanding shares of Founder Preferred Stock was converted in to shares of the Company’s common stock on a one-for-one basis pursuant to the terms of the Founder Preferred Stock.

Business Activity

Following the change in control, as described above, the board of directors determined to establish the Company in the rapidly-growing cannabis industry, initially in the State of California. The primary activity of the Company’s management is to seek and investigate various opportunities in the California cannabis industry, and if such investigation warrants, acquire assets and create a business around them, acquire part or all of an operating cannabis business or invest in a joint venture with other more established companies already in the cannabis industry. The Company will not restrict its search to any specific business, segment of the cannabis industry or geographical location and the Company may participate in a business venture of virtually any kind or nature that the board of directors believe is beneficial to the Company and its shareholders.

Financial Statement Presentation

The accompanying unaudited condensed financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 20192020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.2020. The balance sheet as of December 31, 20182019 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2018.2019. The notes to the unaudited condensed financial statements are presented on a going concern basis unless otherwise noted.

Basis of Presentation

The accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern. The Company has no established operations. The Company incurred a net loss of approximately $1,216,000$665,000 for the nine months ended September 30, 20192020 and had an accumulated deficit of approximately $9,043,000$9,991,000 as of September 30, 2019.2020. The Company has financed its activities principally through debt and equity financing and shareholder contributions. Management expects to incur additional losses and cash outflows in the foreseeable future in connection with its operating activities.

The Company’s condensed financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals; successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence on outside sources of financing; risks associated with research and development; dependence on third-party suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of profitable operations is dependent on future events, including obtaining adequate financing to fund its operations and generating a level of revenues adequate to support the Company’s cost structure.

The Company will need to raise debt or equity financing in the future in order to continue its operations and achieve its growth targets. However, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms, when and if needed, or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including market demand for the Company’s products and services, the success of product development efforts, the timing of receipts for customer deposits, the management of working capital, and the continuation of normal payment terms and conditions for purchase of goods and services. The Company believes its cash balances and cash flow from operations will not be sufficient to fund its operations and growth for the next twelve months from the issuance date of these financial statements. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then the Company will likely need to raise additional funding from investors or through other avenues to continue as a going concern.

Debt Discounts

The Company accounts for debt discounts originating in connection with conversion features that remain embedded in the related notes in accordance with ASC 470-20,Debt with Conversion and Other Options. These costs are classified on the consolidated balance sheet as a direct deduction from the debt liability. The Company amortizes these costs over the term of its debt agreements as interest expense-debt discount in the consolidated statement of operations.

WarrantsEarnings Per Share

In connection with financing arrangements,We use ASC 260, “Earnings Per Share” for calculating the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemablebasic and diluted earnings (loss) per share. We compute basic earnings (loss) per share by dividing net income (loss) by the holder and are classified as equity awards. The Company measures the fair valueweighted average number of the awards using the Black-Scholes option pricing model as of the measurement date.

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 costcommon shares outstanding. Diluted earnings (loss) per share is measured at the grant datecomputed based on the valueweighted average number of shares of common stock plus the awardeffect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and is recognized overwarrants and stock awards. For periods with a net loss, basic and diluted loss per share are the service period, which is usuallysame, in that any potential common stock equivalents would have the vesting period. This guidance establishes standards foreffect of being anti-dilutive in the computation of net loss per share.

There were 1,778,214 common share equivalents at September 30, 2020 and 1,089,000 common share equivalents at September 30, 2019. For the three months ended September 30, 2020 and 2019, these potential shares were excluded from the shares used to calculate diluted. These securities were not included in the computation of diluted net earnings per share as their effect would have been antidilutive.

Recent Accounting Pronouncements

Changes to accounting for transactionsprinciples are established by the Financial Accounting Standards Board’s (“FASB”) in which an entity exchanges it equity instruments for goodsthe form of Accounting Standards Update (“ASU”) to the FASB’s Codification. We consider the applicability and impact of all ASUs on our financial position, results of operations, cash flows, or services. It also addresses transactionspresentation thereof. The Company reviewed all recently issued pronouncements in which an entity incurs liabilities in exchange for goods or services that are based2021, but not yet effective, and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on the fair valueCompany’s financial condition or the results of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.its operations.

We useNote 2 – Accounts Payable and Accrued Liabilities

The following table summarizes the fair value method for equity instruments granted to non-employeesCompany’s accounts payable and use the Black-Scholes model for measuring the fair value of options. The stock based fair value compensation is determinedaccrued expense balances as of the date of the grant (measurement date) and is recognized over the vesting periods.indicated:

Note 3 – Promissory Note

Recently Adopted Pronouncements

Leases

The Company adopted Accounting Standards Update (ASU) No. 2016-02,Leases on January 1, 2019 usingDuring the modified retrospective method. For its operating leases in excess of 12 months,period ended September 30, 2020, the Company recognizesissued a right-of-use assetpromissory note for $11,000 (“Promissory Note”). The total proceeds were $10,000, due to approximately $1,000 for an original issue discount. The Promissory Note is non-interest bearing with the principal due and a lease liabilitypayable in August 2020. Any amount of unpaid principal on its balance sheet. The lease liability is determined as the present valuedate of future lease payments using an estimatedmaturity will accrue interest at rate of interest that10% per annum (default interest). The original issue discount was amortized over the term of the Promissory Note, which was one month. As of September 30, 2020, the Promissory note was in default, so the Company would pay to borrow equivalent funds on a collateralized basis at the adoption date for the existing lease and at lease commencement date for new leases. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent, and lease incentives, as applicable. The lease term at the commencement date is determined by considering whether renewal options and termination options are reasonably assuredaccrued approximately $200 of exercise. The Company has no long-term leases and such adoption had no impact.default interest.

Note 24 – Convertible Promissory Notes

In February, March and June 2019,During the period ended September 30, 2020, the Company issued convertible promissory notes infor the amountstotal amount of $110,000, $132,000 and $110,000, respectively$33,000 (the “Notes”). The total proceeds were approximately $320,000,$30,000, due to approximately $32,000$3,000 for an original issue discount. The Notes are non-interest bearing with the principal due and payable starting in February 2020July 2021 and June 2020.August 2021. Any amount of unpaid principal on the date of maturity will accrue interest at rate of 10% per annum (default interest). The principal amount and all accrued interest are convertible into shares of the Company’s common stock, as of the date of issuance, at a rate of $1.00 per share (“Conversion Rate”). The conversion rate is adjustable if, at any time when any principal amount of the Notes remains unpaid or unconverted, the Company issues or sells any shares of the Company’s common stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith), which is less than the Conversion Rate in effect on the date of such issuance (or deemed issuance) of such shares of common stock (a “Dilutive Issuance”). Immediately upon a Dilutive Issuance, the Conversion Rate will be reduced to the amount of the consideration per share received by the Company in such Dilutive Issuance. Events of default include failure to issue conversion shares, the occurrence of a breach or default under any other agreement, instrument or document involving any indebtedness for borrowed money of more than $100,000 in the aggregate, bankruptcy filing, application for the appointment of a custodian, trustee or receiver, insolvency, the Company’s common stock delisted, or dissolution, winding up, or termination of the business of the Company.

In connection with the issuance of the Notes, the Company issued to the purchasers of the Notes stock purchase warrants (the “Warrants”) to purchase an aggregate of 176,00011,000 shares of the Company’s common stock for a purchase price of $1.00$1.50 per share, subject to adjustments.

In accordance with ASC 470 -Debt,, the Company has allocated the cash proceeds amounts of the Notes among the Notes, the warrants and the conversion feature. The relative fair value of the warrants issued totaled approximately $151,000$2,000 and of the beneficial conversion totaled approximately $169,000,$0, which amounts are being amortized and expensed over the term of the Notes. For the three and nine months endedAs of September 30, 2019,2020, the amortization expense was approximately $88,000 and $176,000, respectively.$185,000.

The Company determined that the conversion feature of the Notes would not be an embedded feature to be bifurcated and accounted for as a derivative in accordance with ASC 818-15,Derivatives and Hedging.

As of September 30, 2020 and December 31, 2019, the convertible promissory notes consisted of the following:

The discounts of $176,000, as of September 30, 2019, will be amortizedInterest expense on default convertible notes amounting to $27,000 and expensed over the remaining contractual life of the convertible promissory notes. The amortization expense will be approximately $98,000 and $78,000$0 for the remaining three months of 2019 and for the year ending December 31, 2020, respectively.

Note 3 – Stockholders’ Deficit

Issuance of Series A Preferred Stock

In January 2019, the Company issued and sold an aggregate of 50,000 shares of Series A Preferred Stock for an aggregate purchase price of $69,000, or $1.38 per share.

Issuance of Stock Options

The Company entered into three separate consulting agreements with provisions for the issuance of options under the Company’s 2019 Stock Options Plan to purchase 685,000, 250,000 and 15,000 shares of the Company’s common stock. The Options will have a life of three years from the vesting date and an exercise price of $0.001 per share with the following vesting terms:

Option to purchase 685,000 shares

Option to purchase 250,000

Option to purchase 15,000 shares

The options to be granted to the consultants will be performance-based awards to be vested once the individuals are considered to be employees of the Company. Each of the consultants has the option to become a full-time employee when the Company has received a minimum of $5,000,000 in debt or equity financing for the Company’s operations (the “Financing”). This is the time that the Company would begin to operate and use the services of the three option holders. Until the Financing occurs, the Company will be in the predevelopment stage of its intended business model.

An option to purchase 385,000 shares of the Company’s common stock was granted and vested on April 1, 2019. For the three and nine months ended September 30, 2019, the compensation expense, classified as professional fees in the statement of operations, was $577,000, which was calculated using the Black-Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance: volatility of 324%, fair value of common stock $1.50, term of option 3 years, risk free rate of 2.29%2020 and dividend rate of $0.2019.

Note 45 – Subsequent Events

The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The Managementmanagement of the Company determined that there are the following transactions:reportable non-adjusting events:

In October and November of 2019,Subsequent to September 30, 2020, the Company issued twoone (1) additional Note for total cash proceeds of $10,000.

On January 5, 2021, Piers Cooper (“Mr. Cooper”), our President and a member of our Board of Directors, resigned as an officer and director of our company (“Termination Agreement”). As part of the Termination Agreement, Mr. Cooper’s agreed to return 3,674,330 shares of the Company’s common stock (“Cancelled Shares”). The Cancelled shares were to be returned within thirty days of Mr. Cooper’s execution of the Termination Agreement, which was January 5, 2021. The Cancelled Shares were returned and cancelled on April 19, 2021.

In January 2021, the Company issued a promissory note for cash amounting to $15,000 with 8% annual interest per year and a maturity date of March 31, 2022. Interest will be computed starting January 11, 2021 and payable at maturity date together with the principal amount. In the event of default, the interest rate of the note shall increase to 10% per annum and computed on the basis of the actual number of days elapsed and a 365-day year.

In February 2021, the Company issued a promissory note for cash amounting to $25,000 with 10% annual interest per year and a maturity date of February 19, 2022. The principal and accrued interest is payable in a single installment on or before the maturity date. In the event of default, the interest rate of the note shall increase to 15% per annum and computed on the basis of the actual number of days elapsed and a 365-day or 366-day year.

In March 2021, the Company issued a convertible promissory notes,note in the amount of $55,000 (the “Note”). The total proceeds were approximately $50,000, due to approximately $5,000 for an original issue discount. The Note is non-interest bearing with the same termsprincipal due and payable starting in March 2022. Any amount of unpaid principal on the date of maturity will accrue interest at rate of 10% per annum (default interest). The principal amount and all accrued interest are convertible into shares of the Company’s common stock, as definedof the date of issuance, at a rate of $1.00 per share (“Conversion Rate”). The conversion rate is adjustable if, at any time when any principal amount of the Notes remains unpaid or unconverted, the Company issues or sells any shares of the Company’s common stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances inNote 2 – Convertible Promissory connection therewith), which is less than the Conversion Rate in effect on the date of such issuance (or deemed issuance) of such shares of common stock (a “Dilutive Issuance”). Immediately upon a Dilutive Issuance, the Conversion Rate will be reduced to the amount of the consideration per share received by the Company in such Dilutive Issuance. Events of default include failure to issue conversion shares, the occurrence of a breach or default under any other agreement, any money judgment, writ or similar process entered or filed against the Company or any of its property or other assets for more than $100,000, bankruptcy filing, application for the appointment of a custodian, trustee or receiver, insolvency, the Company’s common stock delisted, or dissolution, winding up, or termination of the business of the Company. In connection with the issuance of the Notes, the Company issued to the purchasers of the Notes stock purchase warrants (the “Warrants”) to purchase an aggregate of 27,500 shares of the Company’s common stock for a purchase price of $1.50 per share, subject to adjustments.

In February 2021, the Company signed a new consulting agreement that granted one of its shareholders an option to purchase 750,000 shares of the Company’s common stock at $0.001 per share for the consultancy work provided from August 2020 to February 2021. The options were fully vested on the date of issuance.

In March 2021, the CEO agreed to forgive approximately $68,000 due to him.

In March 2021, the CFO agree to reduce amount due to him from approximately $127,000 to $30,000. For the reduction of $97,000, the Company will issue 75,000 shares of common stock. The remaining liability of $30,000 will be paid in cash.

In April 2021, the amountsCompany issued a promissory note for cash amounting to $8,550 with 0% annual interest per year if paid at a maturity date of $100,000July 5, 2021. In the event of default, the interest rate of the note shall increase to 8% per annum and $40,000, respectively.computed on the basis of the actual number of days elapsed and a 365-day or 366-day year.

In April 2021, an option holder exercised two options for 385,000 and 750,000 shares of the Company's common stock at an exercise price of $0.001 for both options. The shares for the options have yet to be issued. 

In April 2021, the Company issued a promissory note for cash amounting to $50,000 with 10% annual interest per year and a maturity date of April 22, 2022. The principal and accrued interest is payable in a single installment on or before the maturity date. In the event of default, the interest rate of the note shall increase to 15% per annum and computed on the basis of the actual number of days elapsed and a 365-day or 366-day year.

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, 2018.2019.

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, our management has not yet determined our corporate structure and the initial business in which we plan to engage, and we are still in the process of refining and finalizing the course of action needed to implement our proposed new business operations. As a result, management has not determined our actual short-term or long-term cash requirements, which management expects to be substantial.

We will require substantial financing to commence meaningful business operations and to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product 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.

Until we finalize our plans and raise capital to execute our business plan, our operations will be minimal, so our operating expenses will be similarly limited. Our pre-operational expenses have been and will continue to be funded by private placements of our debt and equity securities and loans from our majority shareholder.

Critical Accounting Policies

Our financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (US GAAP). Our fiscal year ends December 31.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses for the reporting periods. On an ongoing basis, we evaluate such estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ (perhaps significantly) from these estimates under different assumptions or conditions.

While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. Our significant accounting policies are as follows:

Debt Discounts

The Company accounts for debt discounts originating in connection with conversion features that remain embedded in the related notes in accordance with ASC 470-20,Debt with Conversion and Other Options. These costs are classified on the consolidated balance sheet as a direct deduction from the debt liability. The Company amortizes these costs over the term of its debt agreements as interest expense-debt discount in the consolidated statement of operations.

Warrants

In connection with financing arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date.

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 Black-Scholes 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.

Results of Operations

Revenues

We had no revenues for the three and nine months ended September 30, 20192020 and 2018.2019.

Expenses

Operating expenses for the three and nine months ended September 30, 20192020 were $78,000 and $315,000, respectively, compared to $130,000 and $1,040,000 respectively, compared to $41,000 and $53,000 for the three and nine months ended September 30, 2018,2019, respectively. The expenses in 20192020 primarily included audit, filing, legal and transfer agent fees and consulting fees paid to outside third parties, including a one time expense of $577,000 for stock options issued to a consultant.parties.

Net loss

Net loss for the nine months ended September 30, 2020 and 2019 was $665,000 and 2018 was $1,216,000, and $53,000, respectively, consisting primarily of filing fees, transfer agent costs, and legal and accounting expenses.expenses, financing costs and loss on extinguishment of series A preferred stock.

Liquidity and Capital Resources

Our financial position as of September 30, 20192020 and December 31, 20182019 were as follows:

Working Capital

At September 30, 2019,2020, we had cash of approximately $97,000$0 and prepaid expenses of approximately $2,000. Working capital deficit increased by approximately $252,000$672,000 from December 31, 20182019 to September 30, 2019.2020. The change in our working capital deficit was primarily due to an increasedecrease in cash and cash equivalents of $97,000 and an$173,000 used in operations, increase in accounts payable of $145,000$169,000 and increase in convertible promissory notes netfrom conversion of $176,000. The cash balance was due primarily to the issuance of our series A convertible preferred stock for total proceedsapproximately $147,000 and issuance of approximately $69,000 and the sale ofadditional convertible promissory notes for net proceedswith principal amount of approximately $320,000. The increase in cash was offset by our cash used in operations of approximately $304,000 and an increase in our accounts payable and accrued expense of approximately $145,000.$55,000.

Cash Flows

Our net cash used in operating activities was $173,000 and $304,000 and $7,000 for nine monthnine-month period ended September 30, 20192020 and 2018,2019, respectively, resulting from operating expenses.

The increase in net cash from financing activity of $389,000$50,000 was due to the sale and issuance of our convertible promissory notes in the principal amount of $320,000 and our series A convertible preferred stock for gross proceeds of $69,000.$55,000.

Plan of Operations and Cash Requirements

Following the Change of Control Transactions, as described above, our board of directors determined to establish our company in the rapidly-growing legal cannabis industry. As of the filing of this Report, our new management has not yet determined our corporate structure and the initial business in which we plan to engage, and we are still in the process of refining and finalizing the course of action needed to implement our proposed new business operations. As a result, management has not determined our actual short-term or long-term cash requirements, which management expects to be substantial.

We will require substantial financing to commence meaningful business operations and to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product 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.

Until we finalize our plans and raise capital to execute our business plan, our operations will be minimal, so our operating expenses will be similarly limited. Our pre-operational expenses have been and will continue to be funded by private placements of our debt and equity securities or by loans from our majority shareholder.

Off-Balance Sheet Arrangements

As of September 30, 2019,2020, 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.

We are a smaller reporting company and therefore are not required to provide the information for this item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer (our “Certifying Officers”), conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

Based on their evaluation, the Certifying Officers concluded that, as of September 30, 2019,2020, our disclosure controls and procedures were not effective.

The material weakness related to internal control over financial reporting that was identified at September 30, 20192020 was that we did not have sufficient personnel staffing in our accounting and financial reporting department. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements.

This control deficiency could result in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis. However, our management believes that the material weakness identified does not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weakness had any effect on the accuracy of our financial statements included as part of this Quarterly Report.

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking action and implementing additional enhancements or improvements, as necessary and as funds allow.

Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Internal Controls

Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

PART II- OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

We are a small reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information under this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

OID NOTES - $10,000 on July 7, 2020, $10,000 on July 15, 2020 and $10,000 on August 27, 2020.

LOAN – PROMISSORY NOTE $10,000 ON 7/9/2020

On July 7, 2020 we borrowed $10,000 and issued an OID Promissory Note with principal amount of $11,000 and payable on or before August 7, 2020. Such note bears interest of 10% per month from maturity date until the same is paid.

On October 3, 2019July 15, 2020 and November 1, 2019,August 27, 2020, we sold OID Convertible Promissory Notes in the principal amounts of $110,000$11,000 and $44,000,$11,000, respectively, for purchase prices of $100,000$10,000 and 40,000,10,000, respectively, Suchsuch promissory notes bear interest at the rate of 10% per annum only if not paid at maturity on February 28, 2020,July 15, 2021 and August 27, 2021, and convert into shares of our common stock, par value $0.001 per share, at the option of the holders at a conversion price of $1.00 per share, subject to adjustment for issuances of common stock below the conversion price and for stock splits, stock combinations and the like. In connection with the issuance of such promissory notes, we issued to the purchasers on October 3, 2019July 15, 2020 and November 1, 2019August 31, 2020 for no additional consideration warrants to purchase 55,00011,000,000 and 22,00011,000 shares of our common stock for a purchase price of $1.50 per share, subject to adjustment for stock splits, stock combinations and the like, that expire on February 28, 2022.July 15, 2023 and August 31, 2023. If such warrants are exercised for cash, the holders will receive a new three-year warrant to purchase the number of shares of common stock purchased upon such exercise at a purchase price of $1.50 per share, subject to adjustment for stock splits, stock combinations and the like.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.