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 March 31, 20222023
  
☐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 May 11, 2022,15, 2023, there were 25,995,62114,495,621 outstanding shares of the registrant’s common stock, par value $0.001 per share.

 

 

 

 

 

TABLE OF CONTENTS

 

  PAGE
Cautionary Note Regarding Forward Looking Statementsiii
PART IFINANCIAL INFORMATION 
Item 1.Financial Statements (Unaudited)(unaudited) 
 Condensed Consolidated Balance Sheets as of March 31, 20222023 (unaudited) and December 31, 202120221
 Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 20222023 and 2021 (unaudited).20222
 Unaudited Condensed Consolidated Statements of Changes in Stockholders’ EquityDeficit for the three months ended March 31, 20222023 and 2021 (unaudited).20223
 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 20222023 and 2021 (unaudited).20224
 Notes to the Interim Unaudited Condensed Consolidated Financial Statements5
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1210
Item 3.Quantitative and Qualitative Disclosures about Market Risk1514
Item 4.Controls and Procedures1415
   
PART IIOTHER INFORMATION 
Item 1.Legal Proceedings1715
Item 1A.Risk Factors1517
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds1517
Item 3.Default Upon Senior Securities1517
Item 4.Mine Safety Disclosures1517
Item 5.Other Information1517
Item 6.Exhibits1517
 Signatures1816

i-i-

PART I - FINANCIAL INFORMATION

 

Item 1:Financial Statements

 

CalEthos, Inc.

For the Three Months Ended March 31, 20222023

 

Index to the Condensed Consolidated Financial Statements

 

ContentsPage (s)
  
Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited)2023 (unaudited) and December 31, 202120221
  
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 20222023 and 202120222
  
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 20222023 and 202120223
  
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 20222023 and 202120224
  
Notes to the Unaudited Condensed Consolidated Notes to the Financial Statements5

 

ii-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 ability to close on the real estate property we have optioned and to obtain the necessary regulatory approvals required for the construction and build-out of our planned data center operation;
●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 March 31, 2022   As of December 31, 2021  As of
March 31,
2023		  As of
December 31,
2022		 
 (Unaudited)    (Unaudited)    
Assets                
Current assets                
Cash and cash equivalents $2,749,000  $3,047,000  $1,913,000  $2,067,000 
Prepaid expenses  21,000   7,000 
Prepaid and other current assets  -   4,000 
Total current assets  2,770,000   3,054,000   1,913,000   2,071,000 
                
Intangible assets  74,000   – 
Other assets  –   38,000   84,000   - 
Total assets $2,844,000  $3,092,000  $1,997,000  $2,071,000 
                
Liabilities and Stockholders’ Deficit        
Liabilities and stockholders’ deficit        
Current liabilities                
Accounts payable and accrued expenses $483,000  $434,000  $663,000  $540,000 
Convertible promissory notes, net  4,613,000   4,613,000 
Notes payable  86,000   111,000   61,000   61,000 
Convertible promissory notes, net  3,574,000   3,087,000 
Total liabilities  4,143,000   3,632,000 
Total current liabilities  5,337,000   5,214,000 
                
Stockholders’ deficit                
Series A convertible preferred stock, par value $0.001, 3,600,000 shares authorized; 0 shares issued and outstanding  –   – 
Preferred stock, par value $0.001, 100,000,000 shares authorized; 0 shares issued and outstanding  –   – 
Common stock, par value $0.001, 100,000,000 shares authorized; 25,995,621 shares issued and outstanding  26,000   26,000 
Series A convertible preferred stock, par value $0.001, 3,600,000 shares authorized; no shares issued and outstanding  -   - 
Preferred stock, par value $0.001, 100,000,000 shares authorized; no shares issued and outstanding  -   - 
Preferred stock, value  -   - 
Common stock par value $0.001: 100,000,000 shares authorized; 24,495,621 and 24,495,621 shares issued and outstanding  24,000   24,000 
Additional paid-in capital  19,439,000   16,269,000   11,480,000   11,480,000 
Other comprehensive loss  (5,000)  (2,000)
Other comprehensive income  7,000   5,000 
Stock subscription receivable  (2,000)  (2,000)  (2,000)  (2,000)
Accumulated deficit  (20,757,000)  (16,831,000)  (14,849,000)  (14,650,000)
Total stockholders’ deficit  (1,299,000)  (540,000)  (3,340,000)  (3,143,000)
        
Total liabilities and stockholders’ deficit $2,844,000  $3,092,000  $1,997,000  $2,071,000 

 

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.unaudited condensed consolidated financial statements.

 

1

CalEthos, Inc.

Unaudited Condensed Consolidated Statements of Operations

For the Three Months Ended March 31,

  2022  2021 
       
Revenues $-  $- 
Operating expenses        
Professional fees  3,415,000   73,000 
General and administrative expenses  4,000   2,000 
Operating expenses  3,419,000   75,000 
Loss from operations  (3,419,000)  (75,000)
         
Other expenses        
Financing cost  (507,000)  (17,000)
Total other expenses  (507,000)  (17,000)
         
Loss before provision for income taxes  (3,926,000)  (92,000)
Provision for income taxes  -   - 
Net loss  (3,926,000)  (92,000)
Other comprehensive income (loss)  (3,000)  - 
Comprehensive loss $(3,929,000) $(92,000)
Net loss per share $(0.15) $(0.01)
Weighted average number of shares outstanding - basic and diluted  25,995,621   16,709,951 

  2023  2022 
       
Revenues $-  $- 
         
Operating expenses        
Professional fees  89,000   3,415,000 
General and administrative expenses  8,000   4,000 
Total operating expenses  97,000   3,419,000 
         
Loss from operations  (97,000)  (3,419,000)
         
Other income (expenses)        
Interest income  14,000   - 
Financing costs  (116,000)  (507,000)
Total other expenses  (102,000)  (507,000)
         
Loss before provision for income taxes  (199,000)  (3,926,000)
Provision for income taxes  -   - 
         
Net loss $(199,000) $(3,926,000)
         
Net loss per share, basic and diluted $(0.01) $(0.15)
         
Weighted average common shares outstanding – basic and diluted  24,495,621   25,995,621 
         
Comprehensive income (loss):        
Net loss $(199,000) $(3,926,000)
Foreign currency translation adjustment  2,000   (3,000)
Comprehensive loss $(197,000) $(3,929,000)

 

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.unaudited condensed consolidated financial statements.

 

2

CalEthos, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Deficit

For the Three Months Ended March 31, 20222023

 

  Shares   Amount  Shares   Amount   Capital   Receivable   Loss   Deficit   Deficit 
  

Series A Convertible

Preferred Stock

  Common Stock  Additional Paid-In  Stock Subscription  Other Comprehensive  Accumulated  

Total

Stockholders’

 
  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)
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Receivable  Income  Deficit  Deficit 
  Series A convertible preferred stock  Preferred Stock  Common Stock  Additional Paid-in  Stock Subscription  Other Comprehensive   Accumulated  Total Stockholders’ 
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Receivable  Income  Deficit  Deficit 
                                  
Balance, January 1, 2023  -  $-   -  $-   24,495,621  $24,000  $11,480,000  $(2,000) $5,000  $(14,650,000) $(3,143,000)
Foreign currency translation income  -   -   -   -   -   -   -   -   2,000   -   2,000 
Net loss  -   -   -   -   -   -   -   -   -   (199,000)  (199,000)
Balance, March 31, 2023  -  $-   -  $-   24,495,621  $24,000  $11,480,000  $(2,000) $7,000  $(14,849,000) $(3,340,000)

For the Three Months Ended March 31, 20212022

 

  Shares   Amount  Shares   Amount   Capital   Receivable   Deficit   Deficit 
  Series A
Preferred
Shares		  Common Stock  Additional Paid-in  Stock Subscription  Accumulated  Total Stockholders 
  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)
Balance  -  $-   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 notes  -   -   -   -   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)
Balance  -  $-   16,709,951  $17,000  $8,965,000  $(2,000) $(10,174,000) $(1,194,000)
  Series A convertible preferred stock  Preferred Stock  Common Stock  Additional Paid-in  Stock Subscription  Other Comprehensive   Accumulated  Total Stockholders’ 
  Shares  Amount  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)
Restricted stock grants  -   -   -   -   -   -   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)

 

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.unaudited condensed consolidated financial statements.

 

3

CalEthos, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31,

 

   2022   2021 
       
Cash flows from operating activities        
Net loss $(3,926,000) $(92,000)
Adjustments to reconcile net loss to net cash used in operating activities        
Amortization of convertible promissory note discounts  487,000   3,000 
Stock based compensation  3,170,000   15,000 
Changes in operating assets and liabilities:        
Prepaid expenses  (14,000)  - 
Accounts payable and accrued expenses  49,000   (5,000)
Net cash used in operating activities  (234,000)  (79,000)
         
Cash flows from investing activities        
Intangible assets  (37,000)  - 
Net cash used in investing activities  (37,000)  - 
         
Cash flows from financing activities        
Proceeds from the issuance of convertible promissory notes  -   50,000 
Proceeds from the issuance of notes payable  -   40,000 
Payment of notes payable  (25,000)  - 
Net cash provided by (used in) financing activities  (25,000)  90,000 
         
Effect of exchange rate changes on cash and cash equivalents  (2,000)  - 
         
Net increase (decrease) in cash  (298,000)  11,000 
Cash, beginning of period  3,047,000   - 
Cash, end of period $2,749,000  $11,000 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $-  $- 
Cash paid for income taxes $-  $- 
         
Non-Cash investing and financing activities        
Reclassification of other assets to intangible assets $38,000  $- 
Relative fair value of warrants issued with convertible promissory notes $-  $3,000 
Accrued equity compensation granted $-  $38,000 
Common stock issued from forgiven debt $-  $98,000 
Additional capital from forgiven debt $-  $68,000 
  2023  2022 
Cash Flows From Operating Activities        
Net loss $(199,000) $(3,926,000)
Adjustments to reconcile net loss to net cash used in operating activities:        
Amortization of convertible promissory note discounts  -   487,000 
Fair value of equity-based compensation  -   3,170,000 
Changes in operating assets and liabilities        
Prepaid expenses and other current assets  4,000   (14,000)
Accounts payable and accrued expenses  124,000   49,000 
Net Cash Used in Operating Activities  (71,000)  (234,000)
         
Cash Flows From Investing Activities        
Other assets  (84,000)  (37,000)
Net Cash Used in Investing Activities  (84,000)  (37,000)
         
Cash Flows From Financing Activities        
Repayments of notes payable  -   (25,000)
Net Cash Used in Financing Activities  -   (25,000)
         
Effect of exchange rate changes on cash and cash equivalents  1,000   (2,000)
Net decrease in Cash  (154,000)  (298,000)
Cash, Beginning of Period  2,067,000   3,047,000 
Cash, End of Period $1,913,000  $2,749,000 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $-  $- 
Cash paid for income taxes $-  $- 
         
Non-cash investing and financing activities:        
Reclassification of other assets to intangible assets $-  $38,000 

 

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.unaudited condensed consolidated financial statements.

 

4

CalEthos, Inc.

Notes to Unaudited Condensed Consolidated Notes to the Financial Statements

March 31, 20222023

 

Note 1 – Organization and 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.

 

On December 20, 2018, we filedThe Company is implementing its plan to build a Certificate of Amendmentclean-energy-powered, modular data center operation using the latest energy-efficient immersion, liquid and conventional cooling technologies and provide wholesale colocation services to our Articles of Incorporation with the Secretary of State of the State of Nevada to changeenterprise IT and hyperscale customers. In addition, the Company name from “RealSource Residential, Inc.” to “CalEthos, Inc.”. This amendment became effective immediately upon filing on December 20, 2018.

As of December 31, 2021, the primary activity of the Company’s management is to develop and implement a plan to manufacture high-performance computer systems that are scalable, upgradeable and cost effective for processing cryptocurrencies, tokens and blockchain-based transactions, and if other opportunities warrant,may acquire assets and all or part of other companies operating in the cryptocurrency mining hardwarehigh-density computing industry or to invest or joint venture with other more establishedmore-established companies already in the industry. The Company will not restrict its search to any specific business segment of the cryptocurrency mining hardware industry or geographical location and the Company may participate in a business venture of virtually any kind or nature that is beneficialwould add value to the Company and its shareholders.

Amendments to Certificate of IncorporationCompany’s business strategy.

 

In October 2021, the Board of Directors authorized an amendmentJuly 2022, due to the Articles of Incorporationdeclining state of the Company to changebitcoin mining industry and the market for its planned products, the Company’s nameboard of directors resolved to AIQ Blockchain, Inc.discontinue the development in South 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. The name changeCompany has not yet been effected.suspended operations of its South Korean subsidiary and will decide in the next twelve months whether to use it to develop other products or dissolve it.

 

Incorporation of Korean entity

 

On November 5, 2021, AIQ System Inc. (“AIQ”) was incorporated in Seoul, Republic of Korea. AIQ is authorized to issue 3million shares of common stock. At the date of incorporation, 10,000shares were issued to the Company for 100,000,000Korean Won, or approximately $89,000, for 100100%% ownership of AIQ.

 

AIQ is in the business of (1) developing and manufacturing computer chips and systems, (2) importing and exporting semiconductors and electronic products, (3) wholesale and retail business of semiconductors and electronic products, and (4) any and all business activities incidental to the foregoing activities.

Basis of Presentation

 

The accompanying Condensed Consolidated Financial Statements and notes thereto are unaudited. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The DecemberMarch 31, 20212023, 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 normal recurring adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim three-month periodthree-months ended March 31, 20222023 and 2021.2022. The results for the three months ended March 31, 20222023 are not necessarily indicative of the results to be expected for the full year ending December 31, 20222023 or for any future period.

 

These unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements should be read in conjunction with ourthe Company’s audited Consolidated Financial Statementsconsolidated financial statements and the notes thereto for the year ended December 31, 2021,2022, included in the Company’s annual report on Form 10-K filed with the SEC on March 31, 2022.April 17, 2023.

5

Liquidity and Going Concern

 

The Company incurred a net loss of approximately $3,926,000199,000 for the three months ended March 31, 20222023 and had an accumulated deficit of approximately $20,757,00014,849,000 as of March 31, 2022.2023. 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. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of these condensed consolidated financial statements.

 

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. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern

 

COVID-19

 

The continuing 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 nature and degree of its continued effects over time. That uncertainty affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information become known. The Company will continue to consider the potential impact of the COVID-19 pandemic on its business operations.

 

Earnings Per Share

 

We useThe Company uses ASC 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. We computeThe Company computes basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share 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.

 

Securities that could potentially dilute loss per share in the future were not included in the computation of diluted loss per share for the three months ended March 31, 20222023 and 20212022 because their inclusion would be anti-dilutive. Common sharestock equivalents amounted to 19,011,4507,510,448 and 2,735,21419,011,450 as of March 31, 20222023 and 2021,2022, 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 Field Programable Gate Array (‘FPGA”) based Bitcoin mining simulation system. The Agreement was expected to be completed within 6 weeks for a total contract price of 198,000,000 Korean Won (“KRW”) or approximately $167,000. On March 17, 2022,30, 2023, the Company and PICOCEL entered into a mutualsigned an option agreement to cancel and terminateacquire 80 acres of commercially zoned land in Imperial County, California (the “Option”) for $3,360,000 (“Purchase Price”). The Option expires in September 2024. The Company paid a non-refundable deposit of $84,000 on the Agreement.signing of the Option, which has been recognized as other assets in the condensed consolidated balance sheet. The Company is required to deposit an additional $84,000 into an escrow (“Escrow Funds”) within 10 days after the execution of the agreement. As of the dateissuance of these interim condensed consolidated financial statements, the escrow had not been set up. Once the escrow is set up, the Company will deposit the $84,000. If the Company does not exercise the Option by September 2024, the Escrow funds will be returned to the Company.

The Purchase Price is payable with a cash payment of $1,680,000 and the issuance of 840,000 shares of the termination, PICOCEL had completedCompany’s common stock (the “Purchase Shares”). At the first phaseclosing of the Agreement upon deliverypurchase (“Closing Date”), if the stock is trading at a value less than $1.00 per share, the Company is required to issue a promissory note in the amount of $840,000, payable on the third anniversary of the SHA-256 code and FPGA board simulator resultingclosing date, with an interest rate equal to a reclassification of deposits amountingthe Secured Overnight Financing Rate plus 2.0%.

If the Purchase Shares are issued at the Closing Date, the Company has agreed to $38,000repurchase the Shares (the “Put Option”) under other assets as of December 31, 2021 to intangible assets as of March 31, 2022. Additional payments were made to PICOCELspecific circumstances. However, the Put Option expires if the Company’s common stock trades above $2.00 per share for 120 consecutive days. If the Company’s common stock trades below $2.00 per for 10 consecutive days, the Holder has the option for the three months ended March 31, 2022 amountingCompany to approximately $36,000repurchase the Purchase Shares for $2.00 per share. Total intangible assets amounted to $74,000as of March 31, 2022.

 

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 dates indicated:balances:

 

SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 March 31, December 31,  March 31, December 31, 
 2022  2021  2023  2022 
Accounts payable $258,000  $221,000  $186,000  $186,000 
Accrued expenses  92,000   99,000   35,000   28,000 
Accrued interest  133,000   114,000   442,000   326,000 
Accounts payable and accrued expenses $483,000  $434,000  $663,000  $540,000 

 

Accrued Interest

 

The following table presents the details of accrued interest as of the dates indicated:interest:

 

SCHEDULE OF ACCRUED INTEREST

 March 31, December 31,  March 31, December 31, 
 2022  2021  2023  2022 
Notes payable $11,000  $9,000  $19,000  $17,000 
Convertible promissory notes  122,000   105,000   423,000   309,000 
Balance, end of the year $133,000  $114,000  $442,000  $326,000 

 

7

Note 4 – Notes Payable

NOTES PAYABLE

The table below summarizes the transactions as of the dates indicated:transactions:

 

SCHEDULE OF NOTES PAYABLE

 March 31, December 31,  March 31, December 31, 
 2022  2021  2023  2022 
Balance, beginning of the year $111,000  $11,000  $61,000  $111,000 
Additions  –   150,000   -   - 
Payments  (25,000)  (50,000)  -   (50,000)
Balance, end of the year $86,000  $111,000  $61,000  $61,000 

 

On January 11, 2021,July 7, 2020, the Company issued a promissory note in the principal amount of $15,00011,000. The interest on this note accrued beginning from the date of issuance, at an interest rate of 8% per annum.is noninterest bearing. The principal and any accrued interest was payabledue on or before March 11, 2022.2022. During any event of default under the note, the interest rate shall increase to 1010%% per annum. Events of default includedinclude 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.

7

On February 19, 2021, the Company issued a promissory note in the principal amount of $25,000. The interest on the unpaid principal balance accrued at a rate of 10% per annum. The principal and any accrued interest was to be paid in a single installment on or before February 19, 2022. If the Company failed 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 was to accrue interest at the rate of 15% per annum during the default (default interest). Events of default included 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 accrued at a rate of 8% per annum. If the Company failed to pay the balance of this note in full on the date or failed to make any payments due within 15 days of the due date, any unpaid principal was to 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 interestoutstanding under this note was settled on September 16, 2021.$11,000 as of March 31, 2023. The note principal and interest are past due, therefore in default. Interest accrued as of March 31, 2023 was $3,000.

 

On April 22, 2021, the Company issued a promissory note in the principal amount of $50,000. The interest on the unpaid principal balance accruesaccrued at a rate of 1010%% per annum. The principal and any accrued interest shallwere to 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 1515%% 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 March 31, 2022.2023. The note principal and interest are past due, therefore in default. Interest accrued, including default interest, as of March 31, 2022 is $3,000.

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 note2023 was $25,000 as of March 31, 2022. Interest accrued as of March 31, 2022 is $2,00012,000.

On July 12, 2021, the Company issued a promissory note in the principal amount of $5,000. The interest on the unpaid principal balance accrued at a rate of 8% per annum. The principal and any accrued interest was to 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 accrued at a rate of 8% per annum. The principal for each note was to be paid in a single installment during November 2021. If the Company failed to pay the balance of these notes in full on the date or failed to make any payments due within 15 days of the due date, any unpaid principal was to accrue interest at the rate of 8% per annum during the default. Events of default included 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 $2,000 and $1,0002,000 for the three months ended March 31, 20222023 and 2021,2022, respectively.

8

Note 5 – Convertible Promissory Notes

CONVERTIBLE PROMISSORY NOTES

During the yearyears ended December 2020 and 2019, the Company issued convertible promissory notes for approximately $708,000. As of March 31, 2023, the accrued and unpaid interest was approximately $193,000.

In 2021, the Company issued two convertible promissory notes amounting toof $55,000 and $3,850,000 (the “Notes”), respectively. The total aggregate proceeds were $3,550,000 due to a $355,000 aggregate 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 1010%% per annum (default interest). Interest accrued as of March 31, 2023 is $230,000. 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 $1.00 and $1.25 per 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. The note principal and interest are past due, therefore in default.

 

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 3-year term, volatility of 404.91% to 405.93%, a risk-free equivalent yield of 0.27% to 0.42%, and stock price ranging from $0.10 to $1.95.

 

In accordance with ASC 470 - Debt, the Company has allocated the cash proceeds amounts of the Notes among the Notes, the Warrants, and the conversion feature. The relative fair value of the Warrants issued amounted to approximately $1,690,000 and the beneficial conversion amounted to $0,nil, which amounts are being amortized and expensed over the term of the Notes.

 

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 815-15 Derivatives and Hedging.

 

8

Financing cost recognized for the amortization of debt discount was nil and approximately $487,000 and $2,000 for the three months ended March 31, 20222023 and 2021,2022, respectively.

 

The convertible promissory notes consisted of the following as of the dates indicated:following:

 

SCHEDULE OF CONVERTIBLE PROMISSORY NOTES

  March 31,  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  (487,000)  (524,000)
Balance, end of year  1,039,000   1,526,000 
Net carrying amount $3,574,000  $3,087,000 

9

Effective interest rate used to amortize the debt discount for the three months ended March 31, 2022 and 2021 ranges from 4.76% to 64.60%. The unamortized debt discounts will be amortized within one and two years as of March 31, 2022 and 2021, respectively.

  March 31,  December 31, 
  2023  2022 
Principal        
Balance, beginning of year $4,613,000  $4,613,000 
Additions  -   - 
Balance, end of period  4,613,000   4,613,000 
         
Discount        
Balance, beginning of year  -   1,526,000 
Additions  -   - 
Amortization  -   (1,526,000)
Balance, end of period  -   - 
Net carrying amount $4,613,000  $4,613,000 

 

Potential future shares to be issued on conversion of the notes as of the dates indicated are as follows:

 

SCHEDULE OF POTENTIAL FUTURE SHARES ISSUANCE OF CONVERSION NOTES

 March 31, December 31,  March 31, December 31, 
 2022  2021  2023  2022 
Principal $4,613,000  $4,613,000  $4,613,000  $4,613,000 
Interest  122,000   105,000   423,000   309,000 
Total  4,735,000   4,718,000   5,036,000   4,922,000 
Conversion price per share  1.00 – 1.25   1.00 – 1.25   1.00 – 1.25   1.00 – 1.25 
Potential future share $3,964,842  $3,947,394   4,220,448   4,125,699 

 

InterestThe default interest expense onfor the convertible promissory notes amounted to $18,000114,000 and $14,00018,000 for the three months ended March 31, 2023 and 2022, respectively.

Note 6 – Commitments and 2021, respectively.contingencies

 

Note 6 – Stockholders DeficitCOMMITMENTS AND CONTINGENCIES

STOCKHOLDERS DEFICIT

Common Stock

In January 2021, the Company’s President and a member of the Board of Directors, resigned as an officer and director of the Company (“Termination Agreement”). Part of the Termination Agreement stipulated the return of 3,674,330 shares of the Company’s common stock (“Cancelled Shares”). The Cancelled Shares were returned and cancelled on April 20, 2021.

In March 2021, the Company’s Chief Executive Officer (“CEO’) agreed to forgive approximately $68,000 due 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 $128,000 to $30,000. For the reduction of $98,000, the Company issued 75,000 shares of common stock. The remaining liability of $30,000was paid in cash.

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 10,000,000 restricted share awards.
2)An entity, which is owned by the Company’s CEO and majority shareholder, was granted 1,500,000 restricted share awards.

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.

10

As of December 31, 2021, a total of 11,500,000 shares were issued to the consultants. The value was $1.93 per share on the date of issuance (“Grant Date”) for an aggregate fair value of $22,195,000Litigation

 

The stock-based award compensation was recorded as an increase in deferred compensation expense, common stock,From time to time, the Company may become subject to legal proceedings, claims and additional paid-in capitallitigation 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 books at the time of the grant.business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

 

The table below summarizes the transactions related to the Company restricted stock awards as of March 31, 2022:Note 7 – Equity

EQUITY

Warrants Expired

 SCHEDULE OF COMPANY RESTRICTED STOCK AWARDS

  Shares  Deferred compensation 
Grant date fair value  11,500,000  $22,195,000 
Accretion  -   (7,962,000)
Balance as of December 31, 2021  11,500,000  $14,233,000 

Stock based compensation expense forDuring the three months ended March 31, 2022 amounted to $3,170,000. Stock based compensation expense for the year ended December 31, 2021 amounted to $4,792,000.

Issuance2023, a total of Stock Options and Warrants73,304

warrants expired, leaving a remaining outstanding balance of 1,695,000

As warrants as of March 31, 2022,2023, with a totalweighted average exercise price of $198,0001.46 warrants expired.

In February 2021, the Company signed a new consulting agreement that granted oneand average remaining life of its shareholders an option to purchase 0750,000.75 shares of the Company’s common stock at $0.001 per share for the consultancy work provided from August 2020 to February 2021. The options were fully vested on the date of issuance. The fair value of the options was approximately $52,000, as of the grant date, of which approximately $38,000 was expensed and accrued during the year ended December 31, 2020 and $14,000 was expensed during the three months ended March 31, 2021.years.

 

Note 78 – 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 there are no reportable events except for the following reportable events:following.

Cancellation of Restricted Stock Awards

 

On April 10, 2023, the Company completed the required paperwork for our transfer agent to cancel 10,000,000 shares of restricted stock that was previously issued to its former Chief Technology Development AgreementOfficer.

On April 5, 2022, AIQ entered into a Technology Development Agreement (the “Agreement”) with NNS, Co., Ltd. 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 

119

 

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, 2021.2022.

 

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, modular data center operation using the intentionlatest energy-efficient immersion, liquid and conventional cooling technologies and provide wholesale colocation services to enterprise IT and hyperscale customers. While it was originally part of our strategy to build such a facility for our own utilization with the bitcoin 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 data centers for enterprise IT and hyperscale customers. To implement this plan, we have optioned 80 acres of land for the initial phase of development and are having on-going discussions and negotiations to acquire clean energy from the local power utility and nearby geothermal power plants and solar farms and evaluating various paths to run conduit for accessing close-by fiber networks.

We intend to engage a Data Center Architect and Engineering firm to complete a feasibility study and site development plan. Once the plan is developed, we will submit plans 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 and construction schedule will take approximately three to six months to complete. Once submitted to the appropriate governmental departments and agencies for approval, it is expected that it could take another three months or more before we receive the required permits for construction, and that the construction could take another six 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 company to develop and manufacture high-performance computer systems that are scalable, upgradeable, and cost effective for processing cryptocurrencies, tokens and blockchain-based transactions. In November 2021, we established AIQ Systems, a subsidiary company in South Korea, and contracted an engineering design team to start the development of an ASIC chip, which we plan to incorporate into an industrial-grade immersion-cooled bitcoin mining system. Currently, the first phase of ASIC chip development is complete, we are now waiting for the release by one of the qualified semiconductor foundries of a low-voltage design kit that will allow us to move to the next phase of chip development. In parallel to chip development, we have been working with a number of vendors that can supply immersion-cooled systems that will be altered to accommodate the electrical distribution and cooling specifications we require to meet our system performance and energy consumption goals.data center build.

 

As we move through the chip and immersion-cooled bitcoin mining system development process to build a clean-energy powered data center operation, we will continue to refine and finalize the coursecourses of action needed to implement our business plan and operations. As a result, management has not fully determined our actual short-term or long-term capital requirements, which management expects to be substantial.

 

It is anticipated that we will incur significant expenses in the implementation of theour business plan as described herein, and such expensesthat we will require substantial financing to complete the development and construction of our ASIC chip and immersion-cooled bitcoin mining system and to achieve our goals, and athe planned data center operation. 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.

 

We currently have only limited 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.

 

1210

Results of Operations

The table summarizes the results of operations for the three months ended March 31:

 2022  2021  2023  2022 
          
Revenues $-  $-  $-  $- 
Operating expenses                
Professional fees  3,415,000   73,000   89,000   3,415,000 
General and administrative expenses  4,000   2,000   8,000   4,000 
Operating expenses  3,419,000   75,000   97,000   3,419,000 
Loss from operations  (3,419,000)  (75,000)  (97,000)  (3,419,000)
                
Other expenses        
Financing cost  (507,000)  (17,000)
  (507,000)  (17,000)
Other income (expenses)        
Interest income  14,000   - 
Financing costs  (116,000)  (507,000)
Total other expenses  (102,000)  (507,000)
                
Loss before provision for income taxes  (3,926,000)  (92,000)  (199,000)  (3,926,000)
Provision for income taxes  -   -   -   - 
Net loss $(3,926,000) $(92,000) $(199,000) $(3,926,000)

Revenues

 

The CompanyWe had no revenues for the three months ended March 31, 20222023 and 2021.2022.

 

Expenses

 

OperatingOur operating expenses were $97,000 and $3,419,000 for the three months ended March 31, 2023 and March 31, 2022, respectively. The decrease of $3,322,000 was due to no stock-based compensation for the three months ended March 31, 2023 because of the forfeiture of the stock-based awards. Stock based compensation expense for the three months ended March 31, 2022 were $3,419,000, compared to $75,000was $3,170,000.

Other income (expense)

Our other income and expenses is comprised of interest income of approximately $14,000 from the short-term investment of our cash balance, and financing cost of approximately $116,000 for the three months ended March 31, 2021. The increase of $3,344,000 or 4,459% pertained primarily to (1) the accretion of stock-based compensation related to the restricted stock awards issued to consultants totalling to $3,170,000 in relation to their servicesinterest incurred with our notes payable and (2) accretion of $90,000 for settling a legal case.convertible promissory notes.

 

Liquidity and Capital Resources

 

The Company’sOur financial position as of March 31, 20222023 and December 31, 20212022 were as follows:

 

Working Deficit

 

 March 31, 2022  December 31, 2021  

March 31,

2023

  December 31,
2022		 
 (Unaudited)    (Unaudited)   
Current assets $2,770,000  $3,054,000  $1,913,000  $2,071,000 
Current liabilities  4,143,000   3,632,000   5,337,000   5,214,000 
Working deficit $(1,373,000) $(578,000) $(3,424,000) $(3,143,000)

 

At March 31, 2022, the Company2023, we had cash of approximately $2,749,000 and prepaid expenses of approximately $21,000. Working$1,913,000. The working deficit increased by approximately $705,000$281,000 from December 31, 20212022 to March 31, 2022.2023. The increase in the working capital deficit was due primarily to the decrease in cash of $154,000 and the increase in accounts payable and accrued expenses of approximately $123,000.

At March 31, 2023, we had outstanding promissory notes and accrued interest in the aggregate amount of $80,000 and outstanding convertible notes and accrued interest in the aggregate amount of $5,036,000, which were past due and all of which were in default. See Notes 4 and 5 to the accompanying unaudited condensed consolidated financial statements.

 

Cash Flows

 

 For the Three Months Ended
March 31,		  For the Three Months Ended
March 31,		 
 2022  2021  2023  2022 
          
Net cash used in operating activities $(234,000) $(79,000) $(71,000) $(234,000)
Net cash used in investing activities  (37,000)  -   (84,000)  (37,000)
Net cash provided by (used in) financing activities  (25,000)  90,000 
Net cash used in financing activities  -   (25,000)
Effect of exchange rate changes  (2,000)  -   1,000   (2,000)
Increase (decrease) in Cash during the Period  (298,000)  11,000 
Net decrease in Cash during the Period  (154,000)  (298,000)
Cash, Beginning of Period  3,047,000   -   2,067,000   3,047,000 
Cash, End of Period $2,749,000  $11,000  $1,913,000  $2,749,000 

 

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Cash flows used in operating activities

 

Net cash used in operating activities increaseddecreased by $155,000 or 196%$163,000 during the three months ended March 31, 20222023 as compared to the three months ended March 31, 20212022 due to (1) paymenta decrease in cash expense of consulting fees and other operating expenses, (2) payment for prepaid expenses and (3) payment of accounts payable and accrued expenses.approximately $155,000.

 

Cash flows used in investing activities

 

Net cash used in investing activities increased bywas $84,000 during the three months ended March 31, 2023 compared to $37,000 or 100%for the three months ended March 31, 2022. The cash used during the three months ended March 31, 2023 was the deposit for the land purchase option. The cash used during the three months ended March 31, 2022 as compared towas the three months ended March 31, 2021 due to paymentspayment for design and development work for our proposed ASIC chip, which was discontinued in the Company’s ASIC chip.third quarter of 2022.

 

Cash flows used in financing activities

 

Net cash used in financing activities increasedwas nil during the three months ended March 31, 2023 as compared to $25,000 duringfor the three months ended March 31, 2022 due to repayment of notes payable. Net cash provided

Capital Requirements

We estimate that we will require up to $2 million for expenses and operating costs to complete the development of a comprehensive plan for our planned clean-energy powered, containerized, immersion-cooled data center operation. Once the plans are approved for construction by investing activities increasedthe requisite authorities, the Company estimates the initial phase of our planned data center operation will cost between $60 to $90,000 during$75 million to build.

Past the three months ended March 31, 2021 dueplan development phase, we will need to proceedsraise capital in order to build its planned operations and achieve its growth targets, which the company plans to raise from convertible promissory notesinvestors by issuing common stock, preferred stock and/or debt securities. However, there can be no assurance that such financing will be available in sufficient amounts and notes payable amountingon acceptable terms when it is needed. The precise amount and timing of our funding needs cannot be determined accurately at this time, and will depend on a number of factors, including but not limited to $50,000the condition of the capital market, investor interest in our business plan, demand for our services by enterprise customers, the timing of approvals from authorities to start construction, the management of working capital, and $40,000, respectively.reasonable payment terms and conditions for the purchase of the goods and services we will need to build our data center operation.

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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 company. 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 Companyour company and its wholly ownedour wholly-owned subsidiary from the formation date. All material intercompany transactions and balances have been eliminated 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 Companywe first allocatesallocated the cash proceeds of the notes between the notes and the warrants on a relative fair value basis, secondly,basis. Secondly, proceeds are then allocated to the conversion feature.

 

The Company accountsWe account 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 CompanyWe amortizes these costs over the term of its debt agreements as financing cost in the consolidated statement of operations and comprehensive loss.operations.

 

Stock-Based Compensation

 

We account for our stock-based compensation under ASC 718, “Compensation – Stock Compensation” using the fair value basedvalue-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

 

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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.

 

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Recent Accounting Pronouncements

 

The Company’sOur management reviewed all recently issued accounting standard updates (“ASU’s”) not yet adopted by the Companyus and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on the Company’sour condensed consolidated financial condition or the results of its operations.

Off-Balance Sheet Arrangements

 

As of March 31, 2022,2023, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

Not required under Regulation S-K for smaller reporting 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 March 31, 2022,2023, our disclosure controls and procedures were not effective.

 

The material weakness related to internal control over financial reporting that was identified atas of March 31, 20222023 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.

 

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Changes in internal control over financial reporting.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 20222023 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.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have beenWe know of no material developmentsactive or pending legal proceeding against our company, nor are we involved as a plaintiff in any of the legal proceedings discussed in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2021.material proceeding or pending litigation.

Item 1A. Risk Factors

 

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

 

Item 2. Unregistered Securities Sales of Equity Securities and Use of 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. Default Upon Senior Securities

 

NoneAs of March 31, 2023, we had outstanding promissory notes and accrued interest in the aggregate amount of $80,000 and outstanding convertible notes and accrued interest in aggregate amount of $5,036,000, all of which were past due and all of which were in default. See Notes 4 and 5 to our accompanying unaudited condensed consolidated financial statements.

Item 4. Mine Safety Disclosures.

 

Not applicable.

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

The following documents are filed as a part of this report or incorporated herein by reference:

 

Exhibit
Number		 Description
31.1 Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certifications of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certifications of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS Inline XBRL Instance Document.
   
101.SCH Inline XBRL Taxonomy Extension Schema Document.
   
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.
   
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.
   
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.
   
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.
   
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURES

 

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

 

Date: May 16, 202215, 2023CalEthos, 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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