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 | |
| ☐ | 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.
(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 ☒ 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 ☒ 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
As of November 15, 2021,August 12, 2022, there were 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, 2021
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.
PART I-I - FINANCIAL INFORMATION
Item 1.1: Financial Statements.Statements
CalEthos, Inc.
Condensed Balance Sheets
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 3,377,000 | $ | - | ||||
| Prepaid expenses | - | 2,000 | ||||||
| Total Current Assets | 3,377,000 | 2,000 | ||||||
| Total Assets | $ | 3,377,000 | $ | 2,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| 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 | 3,297,000 | 1,325,000 | ||||||
| Total Liabilities | 3,297,000 | 1,325,000 | ||||||
| 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 | 12,951,000 | 8,744,000 | ||||||
| Stock subscription receivable | (2,000 | ) | (2,000 | ) | ||||
| Accumulated deficit | (12,895,000 | ) | (10,082,000 | ) | ||||
| Total Stockholders’ Equity (Deficit) | 80,000 | (1,323,000 | ) | |||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | 3,377,000 | $ | 2,000 | ||||
See accompanying notes to the unaudited condensed financial statements.
CalEthos, Inc.
For the Six Months Ended June 30, 2022
Index to the Condensed Consolidated Financial Statements
| -ii- |
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.
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.
| -iii- |
CalEthos, Inc.
Condensed Consolidated Balance Sheets
As of June 30, 2022 | As of December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 2,401,000 | $ | 3,047,000 | ||||
| Prepaid expenses | 3,000 | 7,000 | ||||||
| Total current assets | 2,404,000 | 3,054,000 | ||||||
| Other assets | – | 38,000 | ||||||
| Total assets | $ | 2,404,000 | $ | 3,092,000 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 425,000 | $ | 434,000 | ||||
| Notes payable | 86,000 | 111,000 | ||||||
| Convertible promissory notes, net | 4,158,000 | 3,087,000 | ||||||
| Total liabilities | 4,669,000 | 3,632,000 | ||||||
| Commitments and contingencies (Note 6) | – | – | ||||||
| Stockholders’ 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; shares issued and outstanding | 26,000 | 26,000 | ||||||
| Additional paid-in capital | 22,645,000 | 16,269,000 | ||||||
| Other comprehensive loss | (3,000 | ) | (2,000 | ) | ||||
| Stock subscription receivable | (2,000 | ) | (2,000 | ) | ||||
| Accumulated deficit | (24,931,000 | ) | (16,831,000 | ) | ||||
| Total stockholders’ deficit | (2,265,000 | ) | (540,000 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 2,404,000 | $ | 3,092,000 | ||||
See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
| 1 |
CalEthos, Inc.
Unaudited Condensed Consolidated Statements of Operations
(Unaudited)
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | ||||||||
| Operating expenses | ||||||||||||||||
| Professional fees | 177,000 | 72,000 | 422,000 | 131,000 | ||||||||||||
| Stock based compensation | 3,206,000 | 561,000 | 6,376,000 | 575,000 | ||||||||||||
| General and administrative expenses | 31,000 | 3,000 | 35,000 | 5,000 | ||||||||||||
| Impairment loss | 154,000 | - | 154,000 | - | ||||||||||||
| Total operating expenses | 3,568,000 | 636,000 | 6,987,000 | 711,000 | ||||||||||||
| Loss from operations | (3,568,000 | ) | (636,000 | ) | (6,987,000 | ) | (711,000 | ) | ||||||||
| Other expenses | ||||||||||||||||
| Financing costs | (606,000 | ) | (22,000 | ) | (1,113,000 | ) | (39,000 | ) | ||||||||
| Total other expenses | (606,000 | ) | (22,000 | ) | (1,113,000 | ) | (39,000 | ) | ||||||||
| Loss before provision for income taxes | (4,174,000 | ) | (658,000 | ) | (8,100,000 | ) | (750,000 | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss | (4,174,000 | ) | (658,000 | ) | (8,100,000 | ) | (750,000 | ) | ||||||||
| Other comprehensive (loss) income | 2,000 | - | (1,000 | ) | - | |||||||||||
| Comprehensive loss | $ | (4,172,000 | ) | $ | (658,000 | ) | $ | (8,101,000 | ) | $ | (750,000 | ) | ||||
| Net loss per share | $ | (0.16 | ) | $ | (0.04 | ) | $ | (0.31 | ) | $ | (0.04 | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and diluted | 25,995,621 | 17,468,785 | 25,995,621 | 17,052,285 | ||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | ||||||||
| Operating Expenses | ||||||||||||||||
| Professional fees | 1,863,000 | 74,000 | 2,569,000 | 266,000 | ||||||||||||
| General and administrative expenses | 13,000 | 4,000 | 18,000 | 49,000 | ||||||||||||
| Operating expenses | 1,876,000 | 78,000 | 2,587,000 | 315,000 | ||||||||||||
| Loss from operations | (1,876,000 | ) | (78,000 | ) | (2,587,000 | ) | (315,000 | ) | ||||||||
| Other Expenses | ||||||||||||||||
| Financing cost | (187,000 | ) | (15,000 | ) | (226,000 | ) | (212,000 | ) | ||||||||
| Loss on extinguishment of series A convertible preferred stock | - | - | - | (138,000 | ) | |||||||||||
| Total other expenses | (187,000 | ) | (15,000 | ) | (226,000 | ) | (350,000 | ) | ||||||||
| Loss before provision for income taxes | (2,063,000 | ) | (93,000 | ) | (2,813,000 | ) | (665,000 | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss | $ | (2,063,000 | ) | $ | (93,000 | ) | $ | (2,813,000 | ) | $ | (665,000 | ) | ||||
| Net loss per share | $ | (0.12 | ) | $ | (0.01 | ) | $ | (0.16 | ) | $ | (0.04 | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and diluted | 17,602,886 | 16,634,951 | 17,282,889 | 16,634,951 | ||||||||||||
See accompanying notes to the unaudited condensed financial statements.these Unaudited Condensed Consolidated Financial Statements.
| 2 |
CalEthos, Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)Deficit
(Unaudited)For the Three and Six Months Ended June 30, 2022
| Shares | Loss | Shares | Amount | Shares | Amount | Capital | Receivable | Loss | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
| Series A | ||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Additional | Stock | Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-In | Subscription | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Loss | Shares | Amount | Shares | Amount | Capital | Receivable | Loss | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | – | $ | – | – | $ | – | 25,995,621 | $ | 26,000 | $ | 16,269,000 | $ | (2,000 | ) | $ | (2,000 | ) | $ | (16,831,000 | ) | $ | (540,000 | ) | |||||||||||||||||||||
| Stock based compensation on restricted stock awards | – | – | – | – | – | – | 3,170,000 | – | – | – | 3,170,000 | |||||||||||||||||||||||||||||||||
| Foreign currency translation loss | – | – | – | – | – | – | – | – | (3,000 | ) | – | (3,000 | ) | |||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | (3,926,000 | ) | (3,926,000 | ) | |||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | – | $ | – | – | $ | – | 25,995,621 | $ | 26,000 | $ | 19,439,000 | $ | (2,000 | ) | $ | (5,000 | ) | $ | (20,757,000 | ) | $ | (1,299,000 | ) | |||||||||||||||||||||
| Stock based compensation on restricted stock awards | – | – | – | – | – | – | 3,206,000 | – | – | – | 3,206,000 | |||||||||||||||||||||||||||||||||
| Foreign currency translation income | – | – | – | – | – | – | – | – | 2,000 | – | 2,000 | |||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | (4,174,000 | ) | (4,174,000 | ) | |||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | – | $ | – | – | $ | 25,995,621 | $ | 26,000 | $ | 22,645,000 | $ | (2,000 | ) | $ | (3,000 | ) | $ | (24,931,000 | ) | $ | (2,265,000 | ) | ||||||||||||||||||||||
For the Three and NineSix Months Ended SeptemberJune 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 | |||||||||||||||||||||
| Series A | ||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Additional | Stock | Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-In | Subscription | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Receivable | Loss | 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 | |||||||||||||||||||||||||||||||||
| Stock options issued for services | – | – | – | – | – | – | 52,000 | – | – | – | 52,000 | |||||||||||||||||||||||||||||||||
| Stocks issued from debt forgiveness | – | – | – | – | 75,000 | – | 98,000 | – | – | – | 98,000 | |||||||||||||||||||||||||||||||||
| Additional capital from debt forgiveness | – | – | – | – | – | – | 68,000 | – | – | – | 68,000 | |||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||
| Stock issued on exercise for 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 | ) | ||||||||||||||||||||||
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’ Equity | ||||||||||||||||||||||||||||||||||
| 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 | ) | ||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||
| Debt premium on issuance of convertible promissory notes for conversion of series A convertible preferred stock | - | - | - | - | - | - | 58,000 | - | - | 58,000 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (476,000 | ) | (476,000 | ) | ||||||||||||||||||||||||||||
| Balance March 31, 2020 | - | - | - | - | 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 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (96,000 | ) | (96,000 | ) | ||||||||||||||||||||||||||||
| Balance June 30, 2020 | - | - | - | - | 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 note | - | - | - | - | - | - | 1,000 | - | - | 1,000 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (93,000 | ) | (93,000 | ) | ||||||||||||||||||||||||||||
| Balance September 30, 2020 | - | $ | - | - | $ | - | 16,634,951 | $ | 17,000 | $ | 8,743,000 | $ | (2,000 | ) | $ | (9,991,000 | ) | $ | (1,233,000 | ) | ||||||||||||||||||||
See accompanying notes to the unaudited condensed financial statements.these Unaudited Condensed Consolidated Financial Statements.
| 3 |
CalEthos, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
For the NineSix Months Ended SeptemberJune 30,
(Unaudited)
| 1 | 2 | |||||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| Cash flows from operating activities | ||||||||||||||||
| Net loss | $ | (2,813,000 | ) | $ | (665,000 | ) | $ | (8,100,000 | ) | $ | (750,000 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||||||||
| Impairment of intangible and other assets | 154,000 | - | ||||||||||||||
| Amortization of convertible promissory note discounts | 172,000 | 186,000 | 1,071,000 | 7,000 | ||||||||||||
| 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 | - | ||||||||||||||
| Fair value of equity based compensation | 6,376,000 | 575,000 | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Prepaid expenses | 2,000 | - | (6,000 | ) | 2,000 | |||||||||||
| Accounts payable and accrued expenses | 18,000 | 169,000 | (8,000 | ) | 23,000 | |||||||||||
| Net cash used in operating activities | (301,000 | ) | (172,000 | ) | (513,000 | ) | (143,000 | ) | ||||||||
| Cash flows from investing activity | ||||||||||||||||
| Other assets | (107,000 | ) | - | |||||||||||||
| Net cash used in investing activity | (107,000 | ) | - | |||||||||||||
| Cash flows from financing activities | ||||||||||||||||
| Proceeds from the issuance of convertible promissory notes | 3,550,000 | 39,000 | - | 50,000 | ||||||||||||
| Proceeds from the issuance of notes payable | 128,000 | 10,000 | - | 99,000 | ||||||||||||
| Net cash provided by financing activities | 3,678,000 | 49,000 | ||||||||||||||
| Proceeds from the exercise of warrants | - | 2,000 | ||||||||||||||
| Repayment of notes payable | (25,000 | ) | - | |||||||||||||
| Net cash provided by (used in) financing activities | (25,000 | ) | 151,000 | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (1,000 | ) | - | |||||||||||||
| Net increase (decrease) in cash | 3,377,000 | (123,000 | ) | (646,000 | ) | 8,000 | ||||||||||
| Cash and cash equivalents, beginning of period | - | 123,000 | ||||||||||||||
| Cash and cash equivalents, end of period | $ | 3,377,000 | $ | - | ||||||||||||
| Cash, beginning of period | 3,047,000 | - | ||||||||||||||
| Cash, end of period | $ | 2,401,000 | $ | 8,000 | ||||||||||||
| 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 | $ | - | $ | - | $ | 3,000 | ||||||||
| Original issue discount issued with convertible promissory notes | $ | 355,000 | $ | - | ||||||||||||
| Accrued equity compensation granted | $ | 38,000 | $ | - | $ | - | $ | 38,000 | ||||||||
| Common stock issued from forgiven debt | $ | 98,000 | $ | - | $ | - | $ | 98,000 | ||||||||
| Additional capital from forgiven debt | $ | 68,000 | $ | - | $ | - | $ | 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.these Unaudited Condensed Consolidated Financial Statements.
| 4 |
CalEthos, Inc.
September 30, 2021
Unaudited Condensed Notes to the Unaudited CondensedConsolidated Financial Statements
June 30, 2022
Note 1 – Organization Andand Accounting Policies
ORGANIZATION AND ACCOUNTING POLICIES
CalEthos, Inc. (the “Company” or “we”) was incorporated on March 20, 2002 under the laws of the State of Nevada. During
As of June 30, 2022, the period commencing inCompany’s principal business had been the second quarterdevelopment of, 2016 with a plan to September 15, 2021, on which date the Company raised $3,500,000 from the sale of convertible promissory notes,the Company was a “shell” company, as defined in Rule 12b-2 under the Exchange Act. Upon the consummation of 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 systemsystems that isare scalable, upgradeable and cost effective for processing cryptocurrencies, tokens and blockchain-based transactions. The Company had also been developing a plan to build a clean-energy-powered, containerized, immersion-cooled data center that the Company would use for crypto-currency mining and to provide data center colocation services to other mining and enterprise customers. In addition, if other opportunities warranted, the Company planned to acquire assets and all or part of other companies operating in the high-density computing industry or to invest or joint venture with other more-established companies already in the industry that would add value to the Company’s business strategy.
ChangeIn July 2022, due to the declining state of the bitcoin mining industry and market, the Company’s board of directors resolved to discontinue the development in ControlSouth Korea of the Company’s 5 nanometer ASIC chip and containerized, immersion-cooled bitcoin mining computer system and to focus exclusively on developing the clean-energy-powered data center segment of its business strategy.
Amendments to Certificate of Incorporation
In October 2021, the Board of Directors authorized an amendment to the Articles of Incorporation of the Company to change the Company’s name to AIQ Blockchain, Inc. The name change has not yet been effected, and on July 2022, FINRA was notified that CalEthos was no longer changing its name or symbol and that the application was being withdrawn.
Incorporation of Korean entity
On May 16, 2018, certain majority stockholdersNovember 5, 2021, AIQ System Inc. (“AIQ”) was incorporated in Seoul, Republic 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 agreedKorea. AIQ is authorized to purchase an aggregate ofissue shares ( shares after giving effect to the Reverse Stock Split (the “Control Shares”) of the Company’s issued and outstandingmillion shares of common stock for an aggregate purchase pricestock. At the date of $incorporation, . Immediately prior shares were issued 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 assumptionCompany for Korean Won or approximately $89,000 for 100% ownership 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.AIQ.
Effective onAIQ is in the Closing Date,business of (1) developing and in accordance with the amendedmanufacturing computer chips and restated bylawssystem, (2) importing and exporting semiconductors and electronic products, (3) wholesale and retail business of the Companysemiconductors and the requirements of the Control Purchase Agreement, (a) each of Michael S. Anderson, Nathan W. Hankselectronic products, and V. Kelly Randall resigned as directors of the Company, (b) Michael Campbell, the sole member of M1 Advisors,(4) any and Piers Cooper were electedall business activities incidental 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 officer 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.foregoing activities.
On the Closing Date, the Company entered into a series A preferred stock purchase agreement dated asBasis 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, or $ 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 % 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 % 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.
Financial Statement Presentation
The accompanying Condensed Consolidated Financial Statements and notes thereto are unaudited. The unaudited condensedinterim financial statements have been prepared in conformityaccordance with accounting principles generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and withpursuant to the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. Pursuant to these rules and regulations certainof the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in the Company’s annual 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. InThe June 30, 2022 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These interim unaudited condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring items) consideredadjustments necessary for a fair presentation have been included. Operatingof the financial position, results of operations and cash flows for the interim six-months period ended June 30, 2022 and 2021. The results for the three and ninesix months ended SeptemberJune 30, 20212022 are not necessarily indicative of the results that mayto be expected for the full year ending December 31, 2021. The balance sheet as of December 31, 2020 has been derived from2022 or for any future period.
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and 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, 2020. The notes to2021, included in the unaudited condensed financial statements are presentedCompany’s annual report on a going concern basis unless otherwise noted.Form 10-K filed with the SEC on March 31, 2022.
| 5 |
Basis of PresentationLiquidity and Going Concern
The accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern. During the quarter ended September 30, 2021, the Company commenced operation in its current line of business. The Company incurred a net loss of approximately $2,813,0008,100,000 for the ninesix months ended SeptemberJune 30, 20212022 and had an accumulated deficit of approximately $12,895,000 24,931,000as of SeptemberJune 30, 2021.2022. 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 consolidated 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 DiscountsCOVID-19
The Company accounts for debt discounts originating in connection with conversion features that remain embeddedcontinuing COVID-19 global pandemic has caused significant disruption to the economy and financial markets globally, and the full extent of the potential impacts of COVID-19 are not yet known. Circumstances caused by the COVID-19 pandemic are complex, uncertain and rapidly evolving. The impact of COVID-19 has not been significant to the Company’s results of operations, financial condition, and liquidity and capital resources. Although no material impairment or other effects have been identified to date, there is substantial uncertainty in the related notesnature and degree of its continued effects over time. That uncertainty affects management’s accounting estimates and assumptions, which could result in accordance with ASC 470-20, Debt with Conversiongreater variability in a variety of areas that depend on these estimates and Other Options. These costs are classified on the balance sheetassumptions as a direct deduction from the debt liability.additional events and information become known. The Company amortizes these costs overwill continue to consider the termpotential impact of the COVID-19 pandemic on its debt agreements as financing cost in the statements ofbusiness operations.
The Company usesWe use ASC 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. The Company computesWe compute 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 is 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.
ThereSecurities that could potentially dilute loss per share in the future were commonnot included in the computation of diluted loss per share for the six months ended June 30, 2022 and 2021 because their inclusion would be anti-dilutive. Common share equivalents at Septemberamounted to and as of June 30, 2022 and 2021, and common share equivalents at September 30, 2020. For the nine months ended September 30, 2021 and 2020, these potential shares were excluded from the shares used to calculate diluted net earnings per share as their effect would have been antidilutive.respectively.
| 6 |
Recent Accounting Pronouncements
The Company’s management reviewed all recently issued accounting standard updates (“ASU’s”) not yet adopted by the Company and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on the Company’s condensed consolidated financial condition or the results of its operations.
Note 2 – Intangible and Other Assets
INTANGIBLE AND OTHER ASSETS
On December 23, 2021, AIQ entered into a Technology Development Agreement (the “Agreement”) with PICOCEL, Co., Ltd. (the “Contractor” or “PICOCEL”) to develop a FPGA based Bitcoin mining simulation system. The Agreement is expected to be completed within 6 weeks for a total contract price of 198,000,000 Korean Won (“KRW”) or approximately $167,000. Total payments made to PICOCEL as of June 30, 2022 amounted to approximately $69,000. On March 17, 2022, the Company and PICOCEL entered into a mutual agreement to cancel and terminate the Agreement. As of the date of the termination, PICOCEL has completed the first phase of the Agreement upon delivery of the SHA-256 code and FPGA board simulator resulting in a reclassification of deposits amounting to $69,000 under other assets to intangible assets as of June 30, 2022.
On April 5, 2022, AIQ entered into a Technology Development Agreement (the “Agreement”) with NNS, Co., Ltd. (the “Contractor” or “NNS”) to develop a FPGA based Bitcoin mining simulation system. The Agreement is expected to be completed within 9 weeks for a total contract price of 99,000,000 KRW, including 9,000,000 KRW VAT, or approximately $82,000. The payments are scheduled as follows:
SCHEDULE OF PAYMENTS
| Amount | ||||||||
| USD | KRW | |||||||
| Within 5 days after signing the contract | $ | 41,000 | 49,500,000 | |||||
| Within 5 days after all conditions are met as stated in “Schedule B – Statement of Work” | 41,000 | 49,500,000 | ||||||
| Total | $ | 82,000 | 99,000,000 | |||||
Payment of 90,000,000 KRW or approximately $69,000 was made to NNS as of June 30, 2022 which is presented as other assets in the condensed consolidated balance sheet.
Impairment
During the six months ended June 30, 2022, the Bitcoin market was in a constant decline, and since the ASIC chip being developed by AIQ was planned to be used for Bitcoin mining machines, management believes that there is an impairment indicator as of June 30, 2022. Management plans to discontinue the operations of AIQ subsequent to June 30, 2022 and no more future cash flows are expected from AIQ. See Note 8 – Subsequent Events for more details.
Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If the carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the asset’ (or asset group), typically a discounted cashflow analysis, and an impairment charge is recorded for the excess of carrying value over fair value.
As of June 30, 2022, intangibles and other assets were fully impaired. Impairment loss amounted to $154,000, inclusive of a $12,000 impairment of prepaid VAT related to the services provided by PICOCEL and NNS.
The table below summarizes the impairment loss for the six months ended June 30, 2022:
SCHEDULE OF IMPAIRMENT LOSS
| Amount | VAT | Total | ||||||||||
| PICOCEL | $ | 69,000 | $ | 5,000 | $ | 74,000 | ||||||
| NNS | 69,000 | 5,000 | 74,000 | |||||||||
| Total | 138,000 | 10,000 | 148,000 | |||||||||
| Foreign exchange loss | 4,000 | 2,000 | 6,000 | |||||||||
| Impairment loss | $ | 142,000 | $ | 12,000 | $ | 154,000 | ||||||
Note 3 – Accounts Payable and Accrued Expenses
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table summarizes the Company’s accounts payable and accrued expense balances as of the datedates indicated:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| September 30, 2021 | December 31, 2020 | |||||||
| Trade payables | $ | 270,000 | $ | 316,000 | ||||
| Accrued liabilities | 58,000 | 255,000 | ||||||
| Interest payable | 95,000 | 40,000 | ||||||
| Accounts payable and accrued expenses | $ | 423,000 | $ | 611,000 | ||||
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | 267,000 | $ | 221,000 | ||||
| Accrued expenses | 1,000 | 99,000 | ||||||
| Accrued interest | 157,000 | 114,000 | ||||||
| Accounts payable and accrued expenses | $ | 425,000 | $ | 434,000 | ||||
Note 2 – Convertible Promissory Notes CONVERTIBLE PROMISSORY NOTESAccrued Interest
The following table presents the details of accrued interest as of the dates indicated:
SCHEDULE OF ACCRUED INTEREST
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Notes payable | $ | 15,000 | $ | 9,000 | ||||
| Convertible promissory notes | 142,000 | 105,000 | ||||||
| Balance, end of the year | $ | 157,000 | $ | 114,000 | ||||
Note 4 – Notes Payable
NOTES PAYABLE
The table below summarizes the transactions as of the dates indicated:
SCHEDULE OF NOTES PAYABLE
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Balance, beginning of the year | $ | 111,000 | $ | 11,000 | ||||
| Additions | – | 150,000 | ||||||
| Payments | (25,000 | ) | (50,000 | ) | ||||
| Balance, end of the year | $ | 86,000 | $ | 111,000 | ||||
| 7 |
On July 7, 2020, the Company issued a promissory note in the principal amount of $11,000. The note is noninterest bearing. The principal is due on or before March 11, 2022. During any event of default under the period endednote, 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 $11,000 as of June 30, 2022. Interest accrued as of June 30, 2022 is $2,000.
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 and the accrued interest amounting to $15,000 and $1,000, respectively, was settled on October 27, 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. If 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 was settled in full on January 25, 2022.
On April 5, 2021, the Company issued a promissory note in the principal amount of $9,000. The interest on the unpaid principal balance accrues at a rate of 8% per annum. If 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 and accrued interest under this note was settled 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. If 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 June 30, 2022. Interest accrued as of June 30, 2022 is $7,000.
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. If 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 June 30, 2022. Interest accrued as of June 30, 2022 is $2,000.
On July 12, 2021, the Company issued a promissory note in the principal amount of $5,000. The interest on the unpaid principal balance accrues at a rate of 8% per annum. The principal and any accrued interest shall be paid in a single installment on or before October 12, 2021. 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 interest on the unpaid principal balance accrues at a rate of 8% per annum. The principal and any accrued interest shall be paid in a single installment on or before November 10, 2021.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 $14,000. The interest on the unpaid principal balance of these notes accrues at a rate of 8% per annum. The principal for each note shall be paid in a single installment during November 2021. If 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. The principal and the accrued interest aggregating to $14,000 was settled in October 2021.
Interest expense on notes payable amounted to $6,000 and $3,000 for the six months ended June 30, 2022 and 2021, respectively.
| 8 |
Note 5 – Convertible Promissory Notes
CONVERTIBLE PROMISSORY NOTES
In 2021, the Company issued two convertible promissory notes amounting to $55,000and $3,850,000(the (the “Notes”), respectively. The total aggregate proceeds were $3,550,000due to a $355,000aggregate original issue discount. The Notes are non-interest bearing with the principal due and payable on March 1, 2022 and August 31, 2022, respectively. Any amount of unpaid principal on the date of maturity will accrue interest at rate of 10% per annum (default interest). Interest accrued as of June 30, 2022 is $2,000. 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 $1.00and $1.25per share (“Conversion Rate”), respectively. 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, 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.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 1,567,500 shares of the Company’s common stock for a purchase price of $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 $3,004,000 based on a -year term, volatility of % to %, a risk-free equivalent yield of % to %, and stock price ranging from $ to $.
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 $1,690,000and 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.
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 818-15,815-15 Derivatives and Hedging.
Financing cost recognized for the amortization of debt discount was approximately $1,071,000 and $7,000 for the six months ended June 30, 2022 and 2021, respectively.
The convertible promissory notes consisted of the following as of the datedates indicated:
SCHEDULE OF CONVERTIBLE PROMISSORY NOTES
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Principal | ||||||||
| Balance, beginning of year | $ | 4,613,000 | $ | 708,000 | ||||
| Additions | – | 3,905,000 | ||||||
| Balance, end of year | 4,613,000 | 4,613,000 | ||||||
| Discount | ||||||||
| Balance, beginning of year | 1,526,000 | 5,000 | ||||||
| Additions | – | 2,045,000 | ||||||
| Amortization | (1,071,000 | ) | (524,000 | ) | ||||
| Balance, end of year | 455,000 | 1,526,000 | ||||||
| Net carrying amount | $ | 4,158,000 | $ | 3,087,000 | ||||
| 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 | ||||
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Effective interest rate used to amortize the debt discount for the six months ended June 30, 2022 and 2021 ranges from 4.76% to 64.60%. The unamortized debt discounts will be amortized within one-yearone year as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
SCHEDULE OF POTENTIAL FUTURE SHARES ISSUANCE OF CONVERSION NOTES
| June 30, | December 31, | |||||||||||||||
| September 30, 2021 | December 31, 2020 | 2022 | 2021 | |||||||||||||
| Principal | $ | 4,613,000 | $ | 708,000 | $ | 4,613,000 | $ | 4,613,000 | ||||||||
| Interest | 87,000 | 39,000 | 142,000 | 105,000 | ||||||||||||
| Total | 4,700,000 | 747,000 | 4,755,000 | 4,718,000 | ||||||||||||
| Conversion price per share | – | 1.00 – 1.25 | 1.00 – 1.25 | |||||||||||||
| Potential future share | 3,930,000 | 747,000 | 3,984,307 | 3,947,394 | ||||||||||||
Interest expense on default convertible promissory notes amounted to $17,00037,000 and $48,00030,000 for the three months and ninesix months ended SeptemberJune 30, 2021, respectively,2022 and $13,000 and $27,000 for the three months and nine months ended September 30, 2020,2021, respectively.
Note 36 – Notes Payable Commitments and contingencies
NOTES PAYABLECOMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably, except as follows.
On January 11, 2021, the Company issued3, 2022, a promissory notecomplaint was filed against our company in the principal amountSuperior Court of $15,000. The interest on this note shall accrue, beginning from the dateCalifornia, County of issuance, at an interest rate of 8% per annum. The principalLos Angeles titled Michael Sekula v. CalEthos Inc, Michael Campbell 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 includeDoes 1-25 (Case No. 22STCV00121) for, among other matters, failure to pay principal or interest, breachwages, fraud and other wage-related claims. In the complaint, the plaintiff claims he worked under a consulting agreement as Vice President of covenants, breachBrand Management of representationsour company and warranties, borrower’s assignmentwas to be paid $4,000 per month and to receive an option to purchase shares of substantial part of its property or business, any money judgment, writ, or similar process shall be entered or filed againstour common stock that was to vest quarterly over the borrower or any subsidiaryterm of the borroweragreement. In the complaint, the plaintiff alleges that, on or anyaround March 27, 2020, we ceased paying the plaintiff despite the plaintiff’s continuing efforts on behalf of its properties or other assets for more thanour company and that we agreed to continue to accrue his monthly retainer amount until such time that we received at least $100,000, bankruptcy, liquidation in funding. Plaintiff further alleges that he continued to work for our company for 38 additional weeks in reliance on our promise of business,payment. The plaintiff claims that our refusal to make the promised payments amounts to violations of the California labor laws and cessationseeks damages in excess of operations. The principal amount outstanding under this note was $15,000450,000 as of September 30, 2021..
On February 19, 2021,June 9, 2022, a Settlement Agreement and Mutual Release was reached by the parties whereby as full consideration for the plaintiff’s execution of and compliance with the agreement and plaintiff’s release of all claims against the defendants, the Company issuedagreed to pay a promissory note in the principalgross settlement amount of $25,00090,000. The interestSuch payment was made 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.
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.June 23, 2022.
On April 22, 2021, the Company issued a promissory note in the principal amount of $Note 7 – 50,000Stockholders Deficit. 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.
STOCKHOLDERS DEFICIT
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.
Note 4 – Stockholders’ Equity (Deficit) STOCKHOLDERS' EQUITY (DEFICIT)
Common stockStock
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 $ 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 Company’s Chief Executive Officer (“CEO’) agreed to forgive approximately $68,000due to him, which was treated as contributed paid in capital.
In March 2021, the Company’s Chief Financial Officer agreed to reduce the amounts due to him from approximately $128,000to $30,000. For the reduction of $98,000, the Company will issue shares of common stock. The remaining liability of $30,000will be paid in cash.
In May 2021, the Company signed a letter of understanding that granted one of its shareholders an option to purchase shares of the Company’s common stock at $ per share for the 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 issuance. The fair value of the options was approximately $, as of grant date, which was expensed during the nine months ended September 30, 2021.Restricted Common Stock Awards
In May 2021, an option holder exercised three options for , and shares of the Company’s common stock at an exercise price of $for 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 granted restricted 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 Award 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 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.
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As of SeptemberJune 30, 2021,2022, a total of and shares were issued to each of the consultant, respectively.consultants. 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.
SCHEDULE OF COMPANY RESTRICTED STOCK AWARDS
| Shares | Deferred compensation | Shares | Deferred compensation | |||||||||||||
| Grant date fair value | 11,500,000 | $ | 22,195,000 | 11,500,000 | $ | 22,195,000 | ||||||||||
| Accretion | - | (1,550,000 | ) | - | (11,168,000 | ) | ||||||||||
| Balance as of September 30, 2021 | 11,500,000 | $ | 20,645,000 | |||||||||||||
| Balance as of June 30, 2022 | 11,500,000 | $ | 11,027,000 | |||||||||||||
Issuance of Warrants
On September 15, 2021,Stock based compensation expense for the Company issued warrantsthree and six months ended June 30, 2022 amounted to purchase $ shares ofand $, respectively. Stock based compensation expense for the Company’s common stock. For the periodthree and six months ended SeptemberJune 30, 2021 the compensation expense, classified as professional fees in the statement of operations, wasamounted to $ and $, 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 %, fair value of common stock $, estimated life of years, risk free rate of % and dividend rate of $.respectively.
Warrants Expired
As of June 30, 2022, a total of warrants expired.
Note 58 – Subsequent Events
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:
In October 2021,On July 25, 2022, the Board of Directors authorized an amendment to the Articles of Incorporation of the Company resolved to changediscontinue the development of the Company’s name5 nanometer ASIC chip and bitcoin mining machines, to close its South Korean subsidiary, AIQ Systems, Inc., and to pursue other opportunities to provide solutions for the high-density computing industry, including the development of AIQ Blockchain, Inc. The name change has not yet been effected.a clean-energy-powered, containerized, immersion-cooled data center.
In October 2021,On July 27, 2022, the Company sent Hyuncheol (Peter) Kim, the Company’s Chief Technology Officer, a letter notifying him that the Company’s Board of Directors approvedhad resolved to discontinue the Company’s 5 nanometer ASIC chip and adoptedbitcoin mining machine project and that his consulting agreement will terminate at the 2021 Equity Incentive Plan (the “Equity Incentive Plan”). The Plan reserved for issuance up to end of August 2022. Restricted shares of Company’s common stock for awards to directors, employees and consultants ofissued in connection with the Company.consulting agreement will also be cancelled.
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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, 2020.2021.
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 our plan to continue our focus on building a large-scale, clean-energy powered, containerized, immersion-cooled data center operation that will provide wholesale colocation services to high-density computing, enterprise customers. While it was originally part of our strategy to build such a facility for our own utilization with the current intentionbitcoin mining systems that we planned to manufacture and use for our own bitcoin mining operations, going forward, our operating plan is to focus only on developing and building clean-energy powered, containerized, immersion-cooled data centers for enterprise customers. To this end, we are currently negotiating the acquisition of up to 1,000 acres of land in Southern California on which we plan to initially build a 100-megawatt (MW) clean-energy powered, containerized, immersion-cooled data center. Our strategy is to have the data center operations powered by a direct off-grid connection to 100% clean-energy sources and a substation for connectivity to the local utility’s electrical grid for back-up and to use for transmitting any excess electricity to other potential clean-energy customers.
Once our negotiations for land and power purchase agreements are completed, we intend to complete a land use plan and environmental impact report that will be submitted to authorities for approval and for permits to start construction. We expect, based on all related factors, that a submittable plan, which will include civil engineering, data center and infrastructure design, a construction schedule, and preliminary environmental reports, will take approximately six months to complete. Once submitted to the appropriate governmental departments and agencies for approval, it is expected that it could take another 12 months or more before we receive the required permits for construction, and that the construction could take another 6 months or more to complete depending on supply chain issues at the time for data center, electrical and communication connectivity components of the board of directors for our companydata center build.
As we move through the development process to developbuild a clean-energy powered, containerized, immersion-cooled data center, we will continue to refine and manufacture a next generation high-performance computer system that is scalable, upgradeable, and cost effective for processing cryptocurrencies, tokens and blockchain-based transactions. We are infinalize the process of refining and finalizing the coursecourses of action needed to implement our proposed new business plan and operations. As a result, management has not fully determined our actual short-term or long-term cashcapital requirements, which management expects to be substantial.
WeIt is anticipated that we will incur significant expenses in the implementation of our business plan as described herein, and that we will require substantial financing to commence meaningful business operationscomplete the development of a submittable land use plan and to achieve our goals, and athe construction of the planned data center operations. A failure to obtain this necessary capital when neededrequired on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development plans, any commercialization efforts orand any other operations. We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs. In addition, even if we are able to obtain sufficient funding to commence our business operations, we may need to pursue additional financing in the future to make expenditures and/or investments to support the growth of our business andbusiness. In addition, we may require additional capital to pursue our business objectives and respond to new competitive pressures, pay extraordinary expenses or fund our growth, including through acquisitions. Additional funds,funding, however, may not be available when we need themrequired 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 is required, our ability to commence and grow our proposed business operations, to continue to grow and support our business and to respond to business challenges could be significantly limited.
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, whichWe currently 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, given we had only limited operations as of September 30, 2021.capital with which to pay these anticipated expenses. To fund our business plan going forward, we intend to raise funds from investors by issuing common stock, preferred stock and/or debt securities.
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Results of Operations
The table summarizes the results of operations for the three and six months ended June 30:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | ||||||||
| Operating expenses | ||||||||||||||||
| Professional fees | 177,000 | 72,000 | 422,000 | 131,000 | ||||||||||||
| Stock based compensation | 3,206,000 | 561,000 | 6,376,000 | 575,000 | ||||||||||||
| General and administrative expenses | 31,000 | 3,000 | 35,000 | 5,000 | ||||||||||||
| Impairment loss | 154,000 | - | 154,000 | - | ||||||||||||
| Total operating expenses | 3,568,000 | 636,000 | 6,987,000 | 711,000 | ||||||||||||
| Loss from operations | (3,568,000 | ) | (636,000 | ) | (6, 987,000 | ) | (711,000 | ) | ||||||||
| Other expenses | ||||||||||||||||
| Financing costs | (606,000 | ) | (22,000 | ) | (1,113,000 | ) | (39,000 | ) | ||||||||
| Total other expenses | (606,000 | ) | (22,000 | ) | (1,113,000 | ) | (39,000 | ) | ||||||||
| Loss before provision for income taxes | (4,174,000 | ) | (658,000 | ) | (8,100,000 | ) | (750,000 | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss | $ | (4,174,000 | ) | $ | (658,000 | ) | $ | (8,100,000 | ) | $ | (750,000 | ) | ||||
Revenues
WeThe Company had no revenues for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020.2021.
Expenses
Operating expenses for the three and ninesix months ended SeptemberJune 30, 20212022 were $1,876,000 and $2,587,000, respectively,$6,987,000, compared to $78,000 and $315,000$711,000 for the three and ninesix months ended SeptemberJune 30, 2020, respectively.2021. The increase of $2,272,000 for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020$6,276,000 or 883% pertains primarily pertained to (1) the accretion of stock-based compensation related to the Restricted Stock Awardsrestricted stock awards issued two consultants totaling to $1,550,000$6,376,000 in relation to their services;services (2) vested warrants amounting to $561,000; and (3) other expenses such as filing,accretion of $90,000 for settling a legal and transfer agent fees and consulting fees paid to outside third parties in 2021.
Net loss
Net loss for the nine months ended September 30, 2021 and 2020 was $2,813,000 and $665,000, respectively, consisting primarily of the expenses for the accretions of the stock based compensation, filing fees, transfer agent costs, legal, consulting and accounting fees, and financing costs.case.
Liquidity and Capital Resources
OurThe Company’s financial position as of SeptemberJune 30, 20212022 and December 31, 20202021 were as follows:
Working CapitalDeficit
| September 30, 2021 | December 31, 2020 | |||||||
| Current Assets | $ | 3,377,000 | $ | 2,000 | ||||
| Current Liabilities | 3,297,000 | 1,325,000 | ||||||
| Working Capital (Deficit) | $ | 80,000 | $ | (1,323,000 | ) | |||
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Current assets | $ | 2,404,000 | $ | 3,054,000 | ||||
| Current liabilities | 4,669,000 | 3,632,000 | ||||||
| Working deficit | $ | (2,265,000 | ) | $ | (578,000 | ) | ||
At SeptemberJune 30, 2021, we2022, the Company had cash of approximately $3,377,000. Working capital deficit improved by approximately $1,403,000 from December 31, 2020 to September 30, 2021 to reflect a positive working capital balance. The change in our working capital was primarily due to increase in cash$2,401,000 and cash equivalents used in operations of approximately $3,377,000, decrease in prepaid expenses of approximately $2,000, decrease in our accounts payable and accrued liabilities of$3,000. Working deficit increased by approximately $18,000, increase in convertible promissory notes$1,687,000 from new issuances with total proceeds of $3,550,000, and issuance of additional convertible promissory notes in the aggregate principal amount of $128,000.December 31, 2021 to June 30, 2022.
Cash Flows
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash from Operating Activities | $ | (301,000 | ) | $ | (172,000 | ) | ||
| Net cash from Investing Activities | - | - | ||||||
| Net cash from Financing Activities | 3,678,000 | 49,000 | ||||||
| Increase (decrease) in Cash during the Period | 3,377,000 | (123,000 | ) | |||||
| Cash, Beginning of Period | - | 123,000 | ||||||
| Cash, End of Period | $ | 3,377,000 | $ | - | ||||
Our net cash used in operating activities was $301,000 and $172,000 for the nine-month period ended September 30, 2021 and 2020, respectively, resulting from operating expenses.
The increase in net cash from financing activity of $3,678,000 was primarily due to the sale and issuance of our convertible promissory notes in the principal amount of $3,550,000.
Plan of Operations and Cash Requirements
It is the current intention of the board of directors for our company 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 management is 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.
| For the Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (513,000 | ) | $ | (143,000 | ) | ||
| Net cash used in investing activities | (107,000 | ) | - | |||||
| Net cash provided by (used in) financing activities | (25,000 | ) | 151,000 | |||||
| Effect of exchange rate changes | (1,000 | ) | - | |||||
| Increase (decrease) in Cash during the Period | (646,000 | ) | 8,000 | |||||
| Cash, Beginning of Period | 3,047,000 | - | ||||||
| Cash, End of Period | $ | 2,401,000 | $ | 8,000 | ||||
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Cash flows used in operating activities
Until we finalize our
Net cash used in operating activities increased by $370,000 or 259% during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 due to (1) stock based compensation expense, (2) amortization of convertible promissory note discounts and, (3) impairment loss.
Cash flows used in investing activity
Net cash used in investing activity increased by $107,000 or 100% during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 due to payments for design and development work for the Company’s ASIC chip which was discontinued subsequent to June 30, 2022.
Cash flows used in financing activities
The Company had net cash used in financing activities during the six months ended June 30, 2022 due to $25,000 repayment of notes payable. Conversely, it had net cash provided by financing activities during the six months ended June 30, 2021 mainly due to proceeds from convertible promissory notes and notes payable amounting to $50,000 and $99,000, respectively.
Capital Requirements
The Company estimates that it will require up to $2 million of its current cash for expenses and operating costs to complete the development of a comprehensive plan for its planned clean-energy powered, containerized, immersion-cooled data center operation. Once the plans andare approved for construction by the requisite authorities, the Company estimates the initial phase of its planned data center operation will cost approximately $52 million to build.
Past the plan development phase, the Company will need to raise capital in order to executebuild its planned operations and achieve its growth targets, which the company plans to raise from investors by issuing common stock, preferred stock and/or debt securities. However, there can be no assurance that such financings will be available in sufficient amounts and on acceptable terms when it’s needed. 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 but not limited to the condition of the capital market, investor interest in our business plan, demand for the Company’s services by enterprise customers, the timing of approvals from authorities to start construction, the management of working capital, and reasonable payment terms and conditions for purchase of goods and services we will need to build our operations will be developmental, sodata center operation.
Critical Accounting Policies
The preparation of condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying disclosures of our operating expenses will be similarly limited. Our operational expensescompany. Although these estimates are based on management’s knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary from the formation date. All material intercompany transactions and balances have been and will continue to be funded by private placementseliminated in consolidation.
Foreign Currency Translation
The financial statements of our foreign subsidiary, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders’ equity (deficit). Gains or losses from foreign currency transactions are recognized in the consolidated statements of operations.
Debt and Debt Discounts
In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company first allocates the cash proceeds of the notes between the notes and the warrants on a relative fair value basis, secondly, proceeds are then allocated to the conversion feature.
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. 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 financing cost in the consolidated statement of operations.
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 securitiesinstruments 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 loans from our majority shareholder.the issuance of those equity instruments.
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We use the fair value method for equity instruments granted to non-employees and use the BSM 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.
Recent Accounting Pronouncements
The Company’s management reviewed all recently issued accounting standard updates (“ASU’s”) not yet adopted by the Company and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on the Company’s condensed consolidated financial condition or the results of its operations.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2021,2022, 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 Aboutabout Market Risk.Risk
We are aNot required under Regulation S-K for smaller reporting company and therefore are not required to provide the information for this item.companies.
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 SeptemberJune 30, 2021,2022, our disclosure controls and procedures were not effective.
The material weakness related to internal control over financial reporting that was identified at SeptemberJune 30, 20212022 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 SeptemberJune 30, 20212022 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-II - OTHER INFORMATION
Item 1. Legal Proceedings.Proceedings
None.The pending legal proceedings as discussed in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2021 were settled during the six months ended June 30, 2022. See Note 6 of the notes to the unaudited financial statements included in this report for a description of those proceedings and the resolution thereof.
Item 1A. Risk Factors.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.Proceeds
Sales of Unregistered Securities
There have been no sales of unregistered securities within the period covered by this report that would be required to be disclosed pursuant to Item 701 of Regulation S-K.
Repurchases of Shares or of Company Equity Securities
None.
Item 3. DefaultsDefault Upon Senior Securities.Securities
None.None
Item 4. Mine Safety Disclosures.
None.Not applicable.
Item 5. Other Information.Information
None.None
Item 6. Exhibits.Exhibits
The following documents are filed as a part of this report or incorporated herein by reference:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, hereuntothereunto 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: | Chief Financial Officer | ||
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