UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended September 30, | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from __________ to __________ |
Commission File No. 000-50331
CalEthos, Inc.Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 98-0371433 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
|
11753 Willard Avenue Tustin, California | 92782 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(714)352-5315
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
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.
| Large accelerated filer | Accelerated filer | ||
| Non-accelerated filer | Smaller reporting company | ||
| Emerging growth company |
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 May 31,November 15, 2021, there were 12,960,621 outstanding shares of the registrant’s common stock, par value $0.001 per share.
CalEthos, Inc.
Quarterly Report on Form 10-Q
Three and Nine Months Ended September 30, 20202021
TABLE OF CONTENTS
| -i- |
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:
| ● | our ability to implement our current stated business plans; | |
| ● | our ability to retain key members of our management team; | |
| ● | our future financing or acquisition plans and our ability to consummate any such transactions on favorable terms if at all; | |
| ● | our anticipated needs for working capital; and | |
| ● | our ability to establish a market for our common stock and operate as a public company. |
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.
| -ii- |
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements.
CalEthos, Inc.
Nine Months Ended September 30, 2020
Index to the Financial Statements
CalEthos, Inc.
| September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| ASSETS | ||||||||||||||||
| CURRENT ASSETS: | ||||||||||||||||
| Cash and cash equivalents | $ | − | $ | 123,000 | $ | 3,377,000 | $ | - | ||||||||
| Prepaid expenses | 2,000 | 2,000 | - | 2,000 | ||||||||||||
| Total Current Assets | 2,000 | 125,000 | 3,377,000 | 2,000 | ||||||||||||
| Total Assets | $ | 2,000 | $ | 125,000 | $ | 3,377,000 | $ | 2,000 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
| CURRENT LIABILITIES: | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | 532,000 | $ | 363,000 | ||||||||||||
| Promissory note, net | 11,000 | - | ||||||||||||||
| Convertible promissory notes, net | 692,000 | 323,000 | ||||||||||||||
| Accounts payable and accrued expenses | $ | 423,000 | $ | 611,000 | ||||||||||||
| Convertible promissory notes, net of discounts | 2,735,000 | 703,000 | ||||||||||||||
| Notes payable, net | 139,000 | 11,000 | ||||||||||||||
| Total Current Liabilities | 1,235,000 | 686,000 | 3,297,000 | 1,325,000 | ||||||||||||
| Total Liabilities | 1,235,000 | 686,000 | 3,297,000 | 1,325,000 | ||||||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||||||||||
| Series A convertible preferred stock, par value $0.001, 3,600,000 shares authorized, 85,975 issued and outstanding as of December 31, 2019 (liquidation value of $119,000) | − | − | ||||||||||||||
| Preferred stock, par value $0.001: 100,000,000 shares authorized; no shares issued and outstanding | − | − | ||||||||||||||
| Common stock par value $0.001: 100,000,000 shares authorized; 16,634,951 shares issued and outstanding | 17,000 | 17,000 | ||||||||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
| Series A convertible preferred stock, par value $, shares authorized; shares issued and outstanding | - | - | ||||||||||||||
| Preferred stock, par value $, shares authorized; shares issued and outstanding | - | - | ||||||||||||||
| Preferred stock, value | ||||||||||||||||
| Common stock par value $, shares authorized; and shares issued and outstanding | 26,000 | 17,000 | ||||||||||||||
| Additional paid-in capital | 8,743,000 | 8,750,000 | 12,951,000 | 8,744,000 | ||||||||||||
| Stock subscription receivable | (2,000 | ) | (2,000 | ) | (2,000 | ) | (2,000 | ) | ||||||||
| Accumulated deficit | (9,991,000 | ) | (9,326,000 | ) | (12,895,000 | ) | (10,082,000 | ) | ||||||||
| Total Stockholders’ Deficit | (1,233,000 | ) | (561,000 | ) | ||||||||||||
| Total Stockholders’ Equity (Deficit) | 80,000 | (1,323,000 | ) | |||||||||||||
| Total Liabilities and Stockholders’ Deficit | $ | 2,000 | $ | 125,000 | ||||||||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | 3,377,000 | $ | 2,000 | ||||||||||||
See accompanying notes to the unaudited condensed financial statements.
| 1 |
CalEthos, Inc.
Condensed Statements of Operations and Comprehensive Loss
(Unaudited)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Revenues | $ | − | $ | − | $ | − | $ | − | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||||||||||
| Professional fees | 74,000 | 130,000 | 266,000 | 1,024,000 | 1,863,000 | 74,000 | 2,569,000 | 266,000 | ||||||||||||||||||||||||
| General and administrative expenses | 4,000 | − | 49,000 | 16,000 | 13,000 | 4,000 | 18,000 | 49,000 | ||||||||||||||||||||||||
| Operating expenses | 78,000 | 130,000 | 315,000 | 1,040,000 | 1,876,000 | 78,000 | 2,587,000 | 315,000 | ||||||||||||||||||||||||
| Loss from operations | (78,000 | ) | (130,000 | ) | (315,000 | ) | (1,040,000 | ) | (1,876,000 | ) | (78,000 | ) | (2,587,000 | ) | (315,000 | ) | ||||||||||||||||
| Other expenses | ||||||||||||||||||||||||||||||||
| Other Expenses | ||||||||||||||||||||||||||||||||
| Financing cost | (15,000 | ) | (88,000 | ) | (212,000 | ) | (176,000 | ) | (187,000 | ) | (15,000 | ) | (226,000 | ) | (212,000 | ) | ||||||||||||||||
| Loss on extinguishment of series A convertible preferred stock | − | − | (138,000 | ) | − | - | - | - | (138,000 | ) | ||||||||||||||||||||||
| (15,000 | ) | (88,000 | ) | (350,000 | ) | (176,000 | ) | |||||||||||||||||||||||||
| Total other expenses | (187,000 | ) | (15,000 | ) | (226,000 | ) | (350,000 | ) | ||||||||||||||||||||||||
| Loss before provision for income taxes | (93,000 | ) | (218,000 | ) | (665,000 | ) | (1,216,000 | ) | (2,063,000 | ) | (93,000 | ) | (2,813,000 | ) | (665,000 | ) | ||||||||||||||||
| Provision for income taxes | − | − | − | − | - | - | - | - | ||||||||||||||||||||||||
| Net loss | (93,000 | ) | (218,000 | ) | (665,000 | ) | (1,216,000 | ) | $ | (2,063,000 | ) | $ | (93,000 | ) | $ | (2,813,000 | ) | $ | (665,000 | ) | ||||||||||||
| Other comprehensive income (loss) | − | − | − | − | ||||||||||||||||||||||||||||
| Comprehensive loss | $ | (93,000 | ) | $ | (218,000 | ) | $ | (665,000 | ) | $ | (1,216,000 | ) | ||||||||||||||||||||
| Net loss per share | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.07 | ) | $ | (0.12 | ) | $ | (0.01 | ) | $ | (0.16 | ) | $ | (0.04 | ) | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
| Basic and diluted | 16,634,951 | 16,634,951 | 16,634,951 | 16,634,951 | 17,602,886 | 16,634,951 | 17,282,889 | 16,634,951 | ||||||||||||||||||||||||
See accompanying notes to the unaudited condensed financial statements.
| 2 |
CalEthos, Inc.
Condensed Statements of Changes in Stockholders’ DeficitEquity (Deficit)
(Unaudited)
For the Three and Nine Months Ended September 30, 2021
| Series A Convertible Preferred | Preferred Stock | Common Stock | Additional Paid-In | Stock Subscription | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | receivable | Deficit | (Deficit) | |||||||||||||||||||||||||||||||
| Balance January 1, 2021 | - | $ | - | - | $ | - | 16,634,951 | $ | 17,000 | $ | 8,744,000 | $ | (2,000 | ) | $ | (10,082,000 | ) | $ | (1,323,000 | ) | ||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory note | - | - | - | - | - | - | 3,000 | - | - | 3,000 | ||||||||||||||||||||||||||||||
| Stocks returned | ||||||||||||||||||||||||||||||||||||||||
| Stocks returned, shares | ||||||||||||||||||||||||||||||||||||||||
| Stock options issued for services | - | - | - | - | - | - | 52,000 | - | - | 52,000 | ||||||||||||||||||||||||||||||
| Stocks issued from debt forgiveness | - | - | - | - | 75,000 | - | 98,000 | - | - | 98,000 | ||||||||||||||||||||||||||||||
| Additional capital from debt forgiven | - | - | - | - | - | - | 68,000 | - | - | 68,000 | ||||||||||||||||||||||||||||||
| Stocks issued on exercise of warrants | ||||||||||||||||||||||||||||||||||||||||
| Stocks issued on exercise of warrants, shares | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Restricted common stock awards issued for compensation | ||||||||||||||||||||||||||||||||||||||||
| Restricted common stock awards issued for compensation, shares | ||||||||||||||||||||||||||||||||||||||||
| Conversion of series A convertible preferred stock to convertible promissory notes | ||||||||||||||||||||||||||||||||||||||||
| Conversion of series A convertible preferred stock to convertible promissory notes, shares | ||||||||||||||||||||||||||||||||||||||||
| Fair value of warrants issued with the conversion of series A convertible preferred stock | ||||||||||||||||||||||||||||||||||||||||
| Debt premium on issuance of convertible promissory notes for conversion of series A convertible preferred stock | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (92,000 | ) | (92,000 | ) | ||||||||||||||||||||||||||||
| Balance March 31, 2021 | - | - | - | - | 16,709,951 | 17,000 | 8,965,000 | (2,000 | ) | (10,174,000 | ) | (1,194,000 | ) | |||||||||||||||||||||||||||
| Stocks returned | - | - | - | - | (3,674,330 | ) | (4,000 | ) | 4,000 | - | - | - | ||||||||||||||||||||||||||||
| Stock options issued for services | - | - | - | - | - | - | 561,000 | - | - | 561,000 | ||||||||||||||||||||||||||||||
| Stocks issued on exercise of warrants | - | - | - | - | 1,435,000 | 2,000 | - | - | - | 2,000 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (658,000 | ) | (658,000 | ) | ||||||||||||||||||||||||||||
| Balance June 30, 2021 | - | - | - | - | 14,470,621 | 15,000 | 9,530,000 | (2,000 | ) | (10,832,000 | ) | (1,289,000 | ) | |||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory note | - | - | - | - | - | - | 1,687,000 | - | - | 1,687,000 | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 195,000 | - | - | 195,000 | ||||||||||||||||||||||||||||||
| Restricted common stock awards issued for compensation | - | - | - | - | 11,500,000 | 11,000 | 1,539,000 | - | - | 1,550,000 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (2,063,000 | ) | (2,063,000 | ) | ||||||||||||||||||||||||||||
| Balance September 30, 2021 | - | $ | - | - | $ | - | 25,970,621 | $ | 26,000 | $ | 12,951,000 | $ | (2,000 | ) | $ | (12,895,000 | ) | $ | 80,000 | |||||||||||||||||||||
For the Three and Nine Months Ended September 30, 2020
| Series A Convertible Preferred | Preferred Stock | Common Stock | Additional Paid-In | Stock Subscription | Accumulated | Total Stockholders’ | Series A Convertible Preferred | Preferred Stock | Common Stock | Additional Paid-In | Stock Subscription | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | receivable | Deficit | Deficit | Shares | Amount | Shares | Amount | Shares | Amount | Capital | receivable | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance January 1, 2020 | 85,975 | $ | − | − | $ | − | 16,634,951 | $ | 17,000 | $ | 8,750,000 | $ | (2,000 | ) | $ | (9,326,000 | ) | $ | (561,000 | ) | 85,975- | $ | - | - | $ | - | 16,634,951 | $ | 17,000 | $ | 8,750,000 | $ | (2,000 | ) | $ | (9,326,000 | ) | $ | (561,000 | ) | ||||||||||||||||||||||||||||||||||||||||
| Conversion of series A convertible preferred Stock to convertible promissory notes | (85,975 | ) | − | − | − | − | − | (119,000 | ) | − | − | (119,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of series A convertible preferred stock to convertible promissory notes | (85,975 | ) | - | - | - | - | - | (119,000 | ) | - | - | (119,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of warrants issued with the conversion of series A convertible preferred stock | − | − | − | − | − | − | 52,000 | − | − | 52,000 | - | - | - | - | - | - | 52,000 | - | - | 52,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt premium on issuance of convertible promissory notes for conversion of series A convertible preferred stock | − | − | − | − | − | − | 58,000 | − | − | 58,000 | - | - | - | - | - | - | 58,000 | - | - | 58,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | − | − | − | − | − | − | − | − | (476,000 | ) | (476,000 | ) | - | - | - | - | - | - | - | - | (476,000 | ) | (476,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2020 | − | − | − | − | 16,634,951 | 17,000 | 8,741,000 | (2,000 | ) | (9,802,000 | ) | (1,046,000 | ) | - | - | - | - | 16,634,951 | 17,000 | 8,741,000 | (2,000 | ) | (9,802,000 | ) | (1,046,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory notes | − | − | − | − | − | − | 1,000 | − | − | 1,000 | - | - | - | - | - | - | 1,000 | - | - | 1,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | − | − | − | − | − | − | − | − | (96,000 | ) | (96,000 | ) | - | - | - | - | - | - | - | - | (96,000 | ) | (96,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2020 | − | − | − | − | 16,634,951 | 17,000 | 8,742,000 | (2,000 | ) | (9,898,000 | ) | (1,141,000 | ) | - | - | - | - | 16,634,951 | 17,000 | 8,742,000 | (2,000 | ) | (9,898,000 | ) | (1,141,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory notes | − | − | − | − | − | − | 1,000 | − | 1,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory note | - | - | - | - | - | - | 1,000 | - | - | 1,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | − | − | − | − | − | − | − | (93,000 | ) | (93,000 | ) | - | - | - | - | - | - | - | - | (93,000 | ) | (93,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | − | $ | − | − | $ | − | 16,634,951 | $ | 17,000 | $ | 8,743,000 | $ | (2,000 | ) | $ | (9,991,000 | ) | $ | (1,233,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance September 30, 2020 | - | $ | - | - | $ | - | 16,634,951 | $ | 17,000 | $ | 8,743,000 | $ | (2,000 | ) | $ | (9,991,000 | ) | $ | (1,233,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the Three and Nine Months Ended September 30, 2019
| Series A Convertible Preferred | Preferred Stock | Common Stock | Additional Paid-In | Stock Subscription | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | receivable | Deficit | Deficit | |||||||||||||||||||||||||||||||
| Balance January 1, 2019 | 35,975 | $ | − | − | $ | − | 16,634,951 | $ | 17,000 | $ | 7,660,000 | $ | − | $ | (7,827,000 | ) | $ | (150,000 | ) | |||||||||||||||||||||
| Proceeds for the sale of Series A Convertible Preferred Stock | 50,000 | − | − | − | − | − | 69,000 | − | − | 69,000 | ||||||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory notes | − | − | − | − | − | − | 102,000 | − | − | 102,000 | ||||||||||||||||||||||||||||||
| Beneficial conversion feature associated with convertible promissory notes | − | − | − | − | − | − | 118,000 | − | − | 118,000 | ||||||||||||||||||||||||||||||
| Net loss | − | − | − | − | − | − | − | − | (181,000 | ) | (181,000 | ) | ||||||||||||||||||||||||||||
| Balance March 31, 2020 | 85,975 | − | − | − | 16,634,951 | 17,000 | 7,949,000 | − | (8,008,000 | ) | (42,000 | ) | ||||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory notes | − | − | − | − | − | − | 49,000 | − | − | 49,000 | ||||||||||||||||||||||||||||||
| Beneficial conversion feature associated with convertible promissory notes | − | − | − | − | − | − | 51,000 | − | − | 51,000 | ||||||||||||||||||||||||||||||
| Stock options issued for services | − | − | − | − | − | − | 577,000 | − | − | 577,000 | ||||||||||||||||||||||||||||||
| Net loss | − | − | − | − | − | − | − | − | (817,000 | ) | (817,000 | ) | ||||||||||||||||||||||||||||
| Balance June 30, 2019 | 85,975 | − | − | − | 16,634,951 | 17,000 | 8,626,000 | − | (8,825,000 | ) | (182,000 | ) | ||||||||||||||||||||||||||||
| Stock subscription | − | − | − | − | − | − | − | (2,000 | ) | − | (2,000 | ) | ||||||||||||||||||||||||||||
| Net loss | − | − | − | − | − | − | − | − | (218,000 | ) | (218,000 | ) | ||||||||||||||||||||||||||||
| Balance September 30, 2019 | 85,975 | $ | − | − | $ | − | 16,634,951 | $ | 17,000 | $ | 8,626,000 | $ | (2,000 | ) | $ | (9,043,000 | ) | $ | (402,000 | ) | ||||||||||||||||||||
See accompanying notes to the financial statements.
CalEthos, Inc.
Condensed Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
| 2020 | 2019 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (665,000 | ) | $ | (1,216,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Amortization of convertible promissory notes discounts | 186,000 | 176,000 | ||||||
| Loss on extinguishment of convertible preferred stock | 86,000 | − | ||||||
| Fair value of warrants issued for extinguishment of preferred stock | 52,000 | − | ||||||
| Fair value of equity based compensation | − | 577,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts payable and accrued expenses | 169,000 | 159,000 | ||||||
| Net cash used in operating activities | (172,000 | ) | (304,000 | ) | ||||
| Cash flows from investing activities | ||||||||
| Cash held by officer | − | 12,000 | ||||||
| Net cash provided by investing activities | − | 12,000 | ||||||
| Cash flows from financing activities | ||||||||
| Proceeds from the issuance of convertible promissory notes | 39,000 | 320,000 | ||||||
Proceeds from the issuance of promissory note | 10,000 | - | ||||||
| Proceeds from the issuance of series A convertible preferred stock | − | 69,000 | ||||||
| Net cash provided by financing activities | 49,000 | 389,000 | ||||||
| Net increase (decrease) in cash | (123,000 | ) | 97,000 | |||||
| Cash, beginning of period | 123,000 | − | ||||||
| Cash, end of period | $ | − | $ | 97,000 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | − | $ | − | ||||
| Cash paid for income taxes | $ | − | $ | − | ||||
| Non-Cash investing and financing activities | ||||||||
| Conversion of series A preferred stock to convertible promissory notes | $ | 147,000 | $ | − | ||||
| Fair value of warrants issued with the conversion of series A convertible preferred stock | $ | 52,000 | $ | − | ||||
| Debt premium on issuance of convertible promissory notes for conversion of series A convertible preferred stock | $ | 58,000 | $ | − | ||||
| Relative fair value of warrants issued with convertible promissory notes | $ | − | $ | 151,000 | ||||
| Beneficial conversion feature associated with convertible promissory notes | $ | − | $ | 169,000 | ||||
| Stock subscription receivable | $ | − | $ | (2,000 | ) | |||
See accompanying notes to the unaudited condensed financial statements.
| 3 |
CalEthos, Inc.
Condensed Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (2,813,000 | ) | $ | (665,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Amortization of convertible promissory note discounts | 172,000 | 186,000 | ||||||
| Loss on extinguishment of convertible preferred stock | - | 86,000 | ||||||
| Fair value of warrants issued for extinguishment of preferred stock | - | 52,000 | ||||||
| Fair value of equity-based compensation | 770,000 | - | ||||||
| Accretion of compensation cost for restricted stock awards | 1,550,000 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | 2,000 | - | ||||||
| Accounts payable and accrued expenses | 18,000 | 169,000 | ||||||
| Net cash used in operating activities | (301,000 | ) | (172,000 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from the issuance of convertible promissory notes | 3,550,000 | 39,000 | ||||||
| Proceeds from the issuance of notes payable | 128,000 | 10,000 | ||||||
| Net cash provided by financing activities | 3,678,000 | 49,000 | ||||||
| Net increase (decrease) in cash | 3,377,000 | (123,000 | ) | |||||
| Cash and cash equivalents, beginning of period | - | 123,000 | ||||||
| Cash and cash equivalents, end of period | $ | 3,377,000 | $ | - | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Non-cash investing and financing activities | ||||||||
| Relative fair value of warrants issued with convertible promissory notes | $ | 1,690,000 | $ | - | ||||
| Original issue discount issued with convertible promissory notes | $ | 355,000 | $ | - | ||||
| Accrued equity compensation granted | $ | 38,000 | $ | - | ||||
| Common stock issued from forgiven debt | $ | 98,000 | $ | - | ||||
| Additional capital from forgiven debt | $ | 68,000 | $ | - | ||||
| Conversion of series A preferred stock to convertible promissory notes | $ | - | $ | 147,000 | ||||
| Fair value of warrants issued with the conversion of series A convertible preferred stock | $ | - | $ | 52,000 | ||||
| Debt premium on issuance of convertible promissory notes for conversion of series A convertible preferred stock | $ | - | $ | 58,000 | ||||
| Discount from issuance of convertible notes | $ | 355,000 | $ | - | ||||
See accompanying notes to the unaudited condensed financial statements.
| 4 |
CalEthos, Inc.
September 30, 20202021
Condensed Notes to the Unaudited Condensed Financial Statements
(Unaudited)
Note 1 – Organization andAnd Accounting PoliciesORGANIZATION 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. SinceDuring the period commencing in the second quarter of 2016 to September 15, 2021, on which date the Company has beenraised $3,500,000 from the sale of convertible promissory notes,the Company was a “shell” company, as defined in Rule 12b-2 under the Securities Exchange ActAct. Upon the consummation of 1934, as amended.a financing transaction on September 15, 2021, the Company ceased being a shell company. It is the current intention of the board of directors of the Company to develop and manufacture a next generation high-performance computer system that is scalable, upgradeable and cost effective for processing cryptocurrencies, tokens and blockchain-based transactions.
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 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.$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$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 officeofficer 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 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,$16,000, or $0.001$ per share. Of the Founder Preferred Stock purchased, shares were purchased by M1 Advisors, shares were purchased by Mr. Cooper and an aggregate of shares were purchased by the members of RealSource Acquisition or their assigns.
Immediately following the above transactions, an aggregate of shares of Founder Preferred Stock and 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, 20202021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020.2021. The balance sheet as of December 31, 20192020 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, 2019.2020. The notes to the unaudited condensed financial statements are presented on a going concern basis unless otherwise noted.
| 5 |
Basis of Presentation
The accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern. TheDuring the quarter ended September 30, 2021, the Company has no established operations.commenced operation in its current line of business. The Company incurred a net loss of approximately $665,000 $2,813,000for the nine months ended September 30, 20202021 and had an accumulated deficit of approximately $9,991,000 $12,895,000 as of September 30, 2020.2021. 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.In order to fund its proposed business plan, the Company has raised, and expects to continue to raise, funds from investors by issuing common stock, preferred stock and/or debt securities.
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 discountfinancing cost in the consolidated statementstatements of operations.
We useThe Company uses ASC 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. We computeThe Company computes basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share areis the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.
There were 1,778,214 common share equivalents at September 30, 20202021 and 1,089,000 common share equivalents at September 30, 2019.2020. For the threenine months ended September 30, 20202021 and 2019,2020, 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.
| 6 |
Recent Accounting Pronouncements
Changes to accounting principles are established by the Financial Accounting Standards Board’s (“FASB”) in the 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 presentation thereof. The CompanyCompany’s management reviewed all recently issued pronouncements in 2021, butaccounting standard updates (“ASU’s”) not yet effective,adopted by the Company and does not believe the future adoptionadoptions of any such pronouncementsASU’s may be expected to cause a material impact on the Company’s financial condition or the results of its operations.
Note 2 – Accounts Payable and Accrued LiabilitiesExpenses ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table summarizes the Company’s accounts payable and accrued expense balances as of the date indicated:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
| Trade payables | $ | 224,000 | $ | 187,000 | $ | 270,000 | $ | 316,000 | ||||||||
| Accrued liabilities | 281,000 | 176,000 | 58,000 | 255,000 | ||||||||||||
| Interest payable | 27,000 | − | 95,000 | 40,000 | ||||||||||||
| Accounts payable and accrued expenses | $ | 532,000 | $ | 363,000 | $ | 423,000 | $ | 611,000 | ||||||||
Note 2 – Convertible Promissory Notes CONVERTIBLE PROMISSORY NOTES
Note 3 – Promissory Note
During the period ended September 30, 2020,2021, the Company issued atwo convertible promissory note for $11,000 (“Promissory Note”notes amounting to $55,000 and $3,850,000 (the “Notes”)., respectively. The total aggregate proceeds were $10,000, $3,550,000 due to approximately $1,000 for ana $355,000 aggregate original issue discount. The Promissory Note isNotes are non-interest bearing with the principal due and payable inon March 1, 2022 and August 2020.31, 2022, respectively. Any amount of unpaid principal on the date of maturity will accrue interest at rate of 10% 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 accrued approximately $200 of default interest.
Note 4 – Convertible Promissory Notes
During the period ended September 30, 2020, the Company issued convertible promissory notes for the total amount of $33,000 (the “Notes”). The total proceeds were approximately $30,000, due to approximately $3,000 for an original issue discount. The Notes are non-interest bearing with the principal due and payable starting in July 2021 and August 2021. Any amount of unpaid principal on the date of maturity will accrue interest at rate of 10%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 $1.00 and $1.25 per share (“Conversion Rate”)., respectively. The conversion rateConversion 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 11,000 shares of the Company’s common stock for a purchase price of $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 $2,000 and of the beneficial conversion totaled approximately $0, which amounts are being amortized and expensed over the term of the Notes. As of September 30, 2020, the amortization expense was approximately $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:
| September 30, 2020 | December 31, 2019 | |||||||
| Principal amount | $ | 697,000 | $ | 506,000 | ||||
| Original issue discount | (3,000 | ) | (19,000 | ) | ||||
| Warrant discount | (2,000 | ) | (85,000 | ) | ||||
| Conversion feature discount | − | (79,000 | ) | |||||
| Net balance | $ | 692,000 | $ | 323,000 | ||||
Interest expense on default convertible notes amounting to $27,000 and $0 for the nine months ended September 30, 2020 and 2019.
Note 5 – 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 management of the Company determined the following reportable non-adjusting events:
Subsequent to September 30, 2020, the Company issued one (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 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 principal 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 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, 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,$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 27,5001,567,500 shares of the Company’s common stock for a purchase price of $1.50$1.50 to $1.87 per share, subject to adjustments. The Warrants were valued using the Black Scholes option pricing model for a total fair value of $ based on a -year term, volatility of % to %, a risk-free equivalent yield of % to %, and stock price ranging from $ to $1.95.
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 amounted to approximately $1,690,000 and the beneficial conversion amounted to $0, which amounts are being amortized and expensed over the term of the Notes. Amortization expense was approximately $165,000 and $170,000 for the three months and nine months ended September 30, 2021, respectively, and $1,000 and $185,000 for the three months and nine months ended September 30, 2020, respectively.
| 7 |
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.
The convertible promissory notes consisted of the following as of the date indicated:
SCHEDULE OF CONVERTIBLE PROMISSORY NOTES
| September 30, 2021 | December 31, 2020 | |||||||
| Principal | ||||||||
| Balance, beginning of year | $ | 708,000 | $ | 506,000 | ||||
| Additions | 3,905,000 | 202,000 | ||||||
| Balance, end of year | 4,613,000 | 708,000 | ||||||
| Discount | ||||||||
| Balance, beginning of year | 5,000 | 183,000 | ||||||
| Additions | 2,045,000 | 8,000 | ||||||
| Amortization | (172,000 | ) | (186,000 | ) | ||||
| Balance, end of year | 1,878,000 | 5,000 | ||||||
| Net carrying amount | $ | 2,735,000 | $ | 703,000 | ||||
The unamortized debt discounts will be amortized within one-year as of September 30, 2021 and December 31, 2020, respectively.
SCHEDULE OF POTENTIAL FUTURE SHARES ISSUANCE OF CONVERSION NOTES
| September 30, 2021 | December 31, 2020 | |||||||
| Principal | $ | 4,613,000 | $ | 708,000 | ||||
| Interest | 87,000 | 39,000 | ||||||
| Total | 4,700,000 | 747,000 | ||||||
| Conversion price per share | – | |||||||
| Potential future share | 3,930,000 | 747,000 | ||||||
Interest expense on default convertible promissory notes amounted to $17,000 and $48,000 for the three months and nine months ended September 30, 2021, respectively, and $13,000 and $27,000 for the three months and nine months ended September 30, 2020, respectively.
Note 3 – Notes Payable NOTES PAYABLE
On January 11, 2021, the Company issued a promissory note in the principal amount of $15,000. The interest on this note shall accrue, beginning from the date of issuance, at an interest rate of 8% per annum. The principal and any accrued interest are payable on or before March 11, 2022. During any event of default under the note, the interest rate shall increase to 10% per annum. Events of default include failure to pay principal or interest, breach of covenants, breach of representations and warranties, borrower’s assignment of substantial part of its property or business, any money judgment, writ, or similar process shall be entered or filed against the borrower or any subsidiary of the borrower or any of its properties or other assets for more than $100,000, bankruptcy, liquidation of business, and cessation of operations. The principal amount outstanding under this note was $15,000 as of September 30, 2021.
On February 19, 2021, the Company issued a promissory note in the principal amount of $25,000. The interest on the unpaid principal balance accrues at a rate of 10% per annum. The principal and any accrued interest shall be paid in a single installment on or before February 19, 2022. In the event that the Company fails to pay the balance of this note in full on the due date or fails to make any payment due within 15 days of the due date, any unpaid principal shall accrue interest at the rate of 15% per annum during the default (default interest). Events of default include failure to make any payment including accrued interest when due, voluntary or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount outstanding under this note was $25,000 as of September 30, 2021.
| 8 |
On April 5, 2021, the Company issued a promissory note in the principal amount of $8,550. This note is non-interest bearing with the principal due and payable on July 5, 2021. In the event that the Company fails to pay the balance of this note in full on the date or fails to make any payments due within 15 days of the due date, any unpaid principal shall accrue interest at the rate of 8% per annum during the default. Events of default include failure to make any payment including accrued interest when due, voluntary or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount of this note was paid on September 16, 2021.
On April 22, 2021, the Company issued a promissory note in the principal amount of $50,000. The interest on the unpaid principal balance accrues at a rate of 10% per annum. The principal and any accrued interest shall be paid in a single installment on or before April 22, 2022. In the event that the Company fails to pay the balance of this note in full on the date or fails to make any payments due within 15 days of the due date, any unpaid principal shall accrue interest at the rate of 15% per annum during the default. Events of default include failure to make any payment including accrued interest when due, voluntary or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount outstanding under this note was $50,000 as of September 30, 2021.
On July 1, 2021, the Company issued a promissory note in the principal amount of $25,000. The interest on the unpaid principal balance accrues at a rate of 10% per annum. The principal and any accrued interest shall be paid in a single installment on or before July 1,2022. In the event that the Company fails to pay the balance of this note in full on the date or fails to make any payments due within 15 days of the due date, any unpaid principal shall accrue interest at the rate of 15% per annum during the default (default interest). Events of default include failure to make any payment including accrued interest when due, voluntary or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount outstanding under this note was $25,000 as of September 30, 2021.
On July 12, 2021, the Company issued a promissory note in the principal amount of $5,000. The principal amount of this note was settled on September 16, 2021.
On August 10, 2021, the Company issued a promissory note in the principal amount of $7,000. The principal amount of this note was settled on September 16, 2021.
In August 2021, the Company issued four promissory notes, to a single lender, in the aggregate principal amount of $13,500. The principal for each note shall be paid in a single installment during November 2021. In the event that the Company fails to pay the balance of these notes in full on the date or fails to make any payments due within 15 days of the due date, any unpaid principal shall accrue interest at the rate of 8% per annum during the default. Events of default include failure to make any payment including accrued interest when due, voluntary or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount outstanding under these notes was $13,500 as of September 30, 2021.
Interest expense on notes payable amounted to $4,000 and $8,000 for the three months and nine months ended September 30, 2021, respectively, and nil and nil for the three months and nine months ended September 30, 2020, respectively.
| 9 |
Note 4 – Stockholders’ Equity (Deficit) STOCKHOLDERS' EQUITY (DEFICIT)
Common stock
In January 2021, the Company’s President and a member of the Board of Directors, resigned as an officer and director of the Company (“Termination Agreement”). Part of the Termination Agreement stipulates the return of shares of the Company’s common stock (“Cancelled Shares”). The Cancelled Shares were returned and cancelled on April 20, 2021.
In February 2021, the Company signed a new consulting agreement that granted one of its shareholders an option to purchase 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. The fair value of the options was approximately $, as of the grant date, of which approximately $ was expensed and accrued during the year ended December 31, 2020. The remaining fair value of approximately $ was expensed during the nine months ended September 30, 2021.
In March 2021, the CEOCompany’s Chief Executive Officer (“CEO’) agreed to forgive approximately $68,000 $68,000 due to him.him, which was treated as contributed paid in capital.
In March 2021, the CFO agreeCompany’s Chief Financial Officer agreed to reduce amountthe amounts due to him from approximately $127,000 $128,000 to $30,000.$30,000. For the reduction of $97,000,$98,000, the Company will issue shares of common stock. The remaining liability of $30,000 $30,000will be paid in cash.
In AprilMay 2021, the Company issuedsigned a promissory noteletter of understanding that granted one of its shareholders an option to purchase shares of the Company’s common stock at $ per share for cash amounting to $8,550 with 0% annual interest per year if paid at a maturitythe consultancy work provided during the Company’s restructuring phase from February 17, 2021 through April 30, 2021. The options were fully vested on the date of July 5, 2021. In the event of default, the interest rateissuance. The fair value of the note shall increase to 8% per annum and computed onoptions was approximately $, as of grant date, which was expensed during the basis of the actual number of days elapsed and a 365-day or 366-day year.nine months ended September 30, 2021.
In AprilMay 2021, an option holder exercised twothree options for , and 750,000 shares of the Company'sCompany’s common stock at an exercise price of $0.001 $for both options.each option, for total proceeds of approximately $2,000.
Restricted common stock awards
On August 17, 2021, the Company entered into Restricted Share Award Agreements (the “Award Agreements”) with two consultants pursuant to which the Company issued to the consultants shares of common stock of the Company in exchange for their future services. The Awards have an initial term of one year, which shall be automatically renewed on a year-to-year basis unless either party gives a written notice of termination. The two consultants who entered into these agreements include:
| 1) | A consultant who was granted restricted share awards. | |
| 2) | An entity, which is owned by the Company’s CEO and majority shareholder, was grantedrestricted share awards. |
As indicated in the Awards Agreement, fifty percent (50%) of the shares shall vest upon the completion of the first two development phases of a 5 nanometer ASIC chip that includes the “FPGA Simulation” and “Tape Out”, and the remaining fifty (50%) of the shares shall vest upon the completion of the next phases of the chip development that include the completion of the Foundry Mask for production in the semiconductor foundry, initial production run of chips and the completion of a bitcoin mining system ready for sale to customers. Should the Company not raise sufficient capital to complete the Foundry Mask within 6 months of completing the first two development phases, then of the shares shall be considered vested.
The Company’s management has accounted for the options have yetAward Grants as restricted stock compensation in accordance with ASC 718 – Stock Compensation (“ASC 718”). ASC 718 requires the Company to estimate the service period over which the compensation cost will be issued. recognized. Management has estimated that the first two development phases will be completed within 15 months and the Foundry Mask will be completed within 6 months for a total of 21 months service period. Compensation cost will be recognized ratably over 21 months and in the same manner had the Company paid in cash. The estimated service period will be adjusted for changes in actual and expected completion dates. Any such change will be recognized prospectively, and the remaining deferred compensation will be recognized over the remaining service period.
As of September 30, 2021, a total of and shares were issued to each of the consultant, respectively. The value was $per share on the date of issuance (“Grant Date”) for an aggregate fair value of $22,195,000
The stock-based award compensation was recorded as an increase in deferred compensation expense, common stock and additional paid-in capital in the Company’s books at the time of the grant.
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In April
SCHEDULE OF RESTRICTED STOCK AWARDS
| Shares | Deferred compensation | |||||||
| Grant date fair value | 11,500,000 | $ | 22,195,000 | |||||
| Accretion | - | (1,550,000 | ) | |||||
| Balance as of September 30, 2021 | 11,500,000 | $ | 20,645,000 | |||||
Issuance of Warrants
On September 15, 2021, the Company issued a promissory note for cash amountingwarrants to $50,000purchase 100,000 shares of the Company’s common stock. For the period ended September 30, 2021, the compensation expense, classified as professional fees in the statement of operations, was $, which was calculated using the Black Scholes fair value option-pricing model with 10% annual interest per year and a maturitykey input variables provided by management, as of the date of April 22, 2022. The principal and accrued interest is payable in a single installment on or before the maturity date. In the eventissuance: volatility of default, the interest%, fair value of common stock $, estimated life of years, risk free rate of % and dividend rate of $.
Note 5 – Subsequent Events SUBSEQUENT EVENTS
The Company has evaluated all events that occurred after the note shall increasebalance sheet date through the date when the financial statements were issued to 15% per annum and computed on the basisdetermine if they must be reported. The management of the actual numberCompany determined the following reportable non-adjusting events:
In October 2021, the Board of days elapsedDirectors authorized an amendment to the Articles of Incorporation of the Company to change the Company’s name of AIQ Blockchain, Inc. The name change has not yet been effected.
In October 2021, Board of Directors approved and a 365-day or 366-day year.adopted the 2021 Equity Incentive Plan (the “Equity Incentive Plan”). The Plan reserved for issuance up to shares of Company’s common stock for awards to directors, employees and consultants of the Company.
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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, 2019.2020.
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, it is the current intention of the board of directors for our management has not yet determined our corporate structurecompany to develop and the initial business in which we plan to engage,manufacture a next generation high-performance computer system that is scalable, upgradeable, and wecost effective for processing cryptocurrencies, tokens and blockchain-based transactions. 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 management believes that we do not have any significant accounting policies, aregiven we had only limited operations as follows:of September 30, 2021.
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.
Results of Operations
Revenues
We had no revenues for the three and nine months ended September 30, 20202021 and 2019.2020.
Expenses
Operating expenses for the three and nine months ended September 30, 20202021 were $1,876,000 and $2,587,000, respectively, compared to $78,000 and $315,000 respectively, compared to $130,000 and $1,040,000 for the three and nine months ended September 30, 2019,2020, respectively. The expenses inincrease of $2,272,000 for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 primarily included audit,pertained to (1) the accretion of stock-based compensation related to the Restricted Stock Awards issued two consultants totaling to $1,550,000 in relation to their services; (2) vested warrants amounting to $561,000; and (3) other expenses such as filing, legal and transfer agent fees and consulting fees paid to outside third parties.parties in 2021.
Net loss
Net loss for the nine months ended September 30, 2021 and 2020 was $2,813,000 and 2019 was $665,000, and $1,216,000, respectively, consisting primarily of the expenses for the accretions of the stock based compensation, filing fees, transfer agent costs, and legal, consulting and accounting expenses,fees, and financing costs and loss on extinguishment of series A preferred stock.costs.
Liquidity and Capital Resources
Our financial position as of September 30, 20202021 and December 31, 20192020 were as follows:
Working Capital
As of September 30, 2020 | As of December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
| Current Assets | $ | 2,000 | $ | 125,000 | $ | 3,377,000 | $ | 2,000 | ||||||||
| Current Liabilities | 1,235,000 | 686,000 | 3,297,000 | 1,325,000 | ||||||||||||
| Working Capital Deficit | $ | (1,233,000 | ) | $ | (561,000 | ) | ||||||||||
| Working Capital (Deficit) | $ | 80,000 | $ | (1,323,000 | ) | |||||||||||
At September 30, 2020,2021, we had cash of approximately $0 and prepaid expenses of approximately $2,000.$3,377,000. Working capital deficit increasedimproved by approximately $672,000$1,403,000 from December 31, 20192020 to September 30, 2020.2021 to reflect a positive working capital balance. The change in our working capital deficit was primarily due to an decreaseincrease in cash and cash equivalents of $173,000 used in operations increaseof approximately $3,377,000, decrease in prepaid expenses of approximately $2,000, decrease in our accounts payable and accrued liabilities of $169,000 andapproximately $18,000, increase in convertible promissory notes from conversionnew issuances with total proceeds of series A convertible preferred stock approximately $147,000$3,550,000, and issuance of additional convertible promissory notes within the aggregate principal amount of $55,000.$128,000.
Cash Flows
For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Net cash from Operating Activities | $ | (173,000 | ) | $ | (304,000 | ) | $ | (301,000 | ) | $ | (172,000 | ) | ||||
| Net cash from Investing Activities | − | 12,000 | - | - | ||||||||||||
| Net cash from Financing Activities | 50,000 | 389,000 | 3,678,000 | 49,000 | ||||||||||||
| Increase (decrease) in Cash during the Period | (123,000 | ) | 97,000 | 3,377,000 | (123,000 | ) | ||||||||||
| Cash, Beginning of Period | 123,000 | − | - | 123,000 | ||||||||||||
| Cash, End of Period | $ | − | $ | 97,000 | $ | 3,377,000 | $ | - | ||||||||
Our net cash used in operating activities was $173,000$301,000 and $304,000$172,000 for the nine-month period ended September 30, 20202021 and 2019,2020, respectively, resulting from operating expenses.
The increase in net cash from financing activity of $50,000$3,678,000 was primarily due to the sale and issuance of our convertible promissory notes in the principal amount of $55,000.$3,550,000.
Plan of Operations and Cash Requirements
FollowingIt is the Changecurrent intention of Control Transactions, as described above, ourthe board of directors determined to establishfor our company in the rapidly-growing legal cannabis industry.to develop and manufacture next generation high-performance computer systems that are scalable, upgradable, and cost effective for processing cryptocurrencies, crypto-tokens, and other blockchain-based transactions. 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 areis 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.
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Until we finalize our plans and raise capital to execute our business plan, our operations will be minimal,developmental, so our operating expenses will be similarly limited. Our pre-operationaloperational 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, 2020,2021, 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, 2020,2021, our disclosure controls and procedures were not effective.
The material weakness related to internal control over financial reporting that was identified at September 30, 20202021 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, 20202021 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.
None.
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.None.
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 July 15, 2020 and August 27, 2020, we sold OID Convertible Promissory Notes in the principal amounts of $11,000 and $11,000, respectively, for purchase prices of $10,000 and 10,000, respectively, such promissory notes bear interest at the rate of 10% per annum only if not paid at maturity on 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 July 15, 2020 and August 31, 2020 for no additional consideration warrants to purchase 11,000,000 and 11,000 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 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.
None.
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None.
| * | XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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.
| Date: | CalEthos, Inc. | |
| By: | /s/ Michael Campbell | |
| Name: | Michael Campbell | |
| Title: | Chief Executive Officer | |
| By: | /s/ Dean S Skupen | |
| Name: | Dean S Skupen | |
| Title: | ||