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 May 11,November 3, 2022, there were outstanding shares of the registrant’s common stock, par value $0.001 per share.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1:Financial Statements
CalEthos, Inc.
For the ThreeNine Months Ended March 31,September 30, 2022
Index to the Condensed Consolidated Financial Statements
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 March 31, 2022 | As of December 31, 2021 | As of September 30, 2022 | As of December 31, 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 2,749,000 | $ | 3,047,000 | $ | 2,249,000 | $ | 3,047,000 | ||||||||
| Prepaid expenses | 21,000 | 7,000 | ||||||||||||||
| Prepaid and other current expenses | 1,000 | 7,000 | ||||||||||||||
| Total current assets | 2,770,000 | 3,054,000 | $ | 2,250,000 | $ | 3,054,000 | ||||||||||
| Intangible assets | 74,000 | – | ||||||||||||||
| Other assets | – | 38,000 | - | 38,000 | ||||||||||||
| Total assets | $ | 2,844,000 | $ | 3,092,000 | 2,250,000 | 3,092,000 | ||||||||||
| Liabilities and Stockholders’ Deficit | ||||||||||||||||
| Liabilities and stockholders’ deficit | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 483,000 | $ | 434,000 | $ | 464,000 | $ | 434,000 | ||||||||
| Convertible promissory notes, net | 4,613,000 | 3,087,000 | ||||||||||||||
| Notes payable | 86,000 | 111,000 | 86,000 | 111,000 | ||||||||||||
| Convertible promissory notes, net | 3,574,000 | 3,087,000 | ||||||||||||||
| Total liabilities | 4,143,000 | 3,632,000 | ||||||||||||||
| Total current liabilities | 5,163,000 | 3,632,000 | ||||||||||||||
| 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 | – | – | ||||||||||||||
| Common stock, par value $, shares authorized; shares issued and outstanding | 26,000 | 26,000 | ||||||||||||||
| 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 | 15,000 | 26,000 | ||||||||||||||
| Additional paid-in capital | 19,439,000 | 16,269,000 | 11,488,000 | 16,269,000 | ||||||||||||
| Other comprehensive loss | (5,000 | ) | (2,000 | ) | 17,000 | (2,000 | ) | |||||||||
| Stock subscription receivable | (2,000 | ) | (2,000 | ) | (2,000 | ) | (2,000 | ) | ||||||||
| Accumulated deficit | (20,757,000 | ) | (16,831,000 | ) | (14,431,000 | ) | (16,831,000 | ) | ||||||||
| Total stockholders’ deficit | (1,299,000 | ) | (540,000 | ) | (2,913,000 | ) | (540,000 | ) | ||||||||
| Total liabilities and stockholders’ deficit | $ | 2,844,000 | $ | 3,092,000 | $ | 2,250,000 | $ | 3,092,000 | ||||||||
See accompanying notes to these 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 | ||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | ||||||||
| Operating Expenses | ||||||||||||||||
| Professional fees | 136,000 | 118,000 | 558,000 | 824,000 | ||||||||||||
| Restricted stock grants | (11,168,000 | ) | 1,745,000 | (4,791,000 | ) | 1,745,000 | ||||||||||
| General and administrative expenses | 24,000 | 13,000 | 59,000 | 18,000 | ||||||||||||
| Impairment loss | - | - | 154,000 | - | ||||||||||||
| Operating (income) expenses | (11,008,000 | ) | 1,876,000 | (4,020,000 | ) | 2,587,000 | ||||||||||
| Income(loss) from operations | 11,008,000 | (1,876,000 | ) | 4,020,000 | (2,587,000 | ) | ||||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 1,000 | - | 1,000 | - | ||||||||||||
| Financing costs | (509,000 | ) | (187,000 | ) | (1,622,000 | ) | (226,000 | ) | ||||||||
| Total other expense | (508,000 | ) | (187,000 | ) | (1,621,000 | ) | (226,000 | ) | ||||||||
| Income (loss) before provision for income taxes | 10,500,000 | (2,063,000 | ) | 2,399,000 | (2,813,000 | ) | ||||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net income (loss) | $ | 10,500,000 | $ | (2,063,000 | ) | $ | 2,399,000 | $ | (2,813,000 | ) | ||||||
| Net income (loss) per share - basic | $ | 0.74 | $ | (0.12 | ) | $ | 0.10 | $ | (0.16 | ) | ||||||
| Net income (loss) per share - diluted | $ | 0.56 | $ | (0.12 | ) | $ | 0.08 | $ | (0.16 | ) | ||||||
| Weighted average common shares outstanding - Basic | 14,176,349 | 17,602,886 | 24,769,518 | 17,282,889 | ||||||||||||
| Weighted average common shares outstanding - diluted | 18,953,625 | 17,602,886 | 29,546,794 | 17,282,889 | ||||||||||||
| Comprehensive loss: | ||||||||||||||||
| Net income (loss) | $ | 10,500,000 | $ | (2,063,000 | ) | $ | 2,399,000 | $ | (2,813,000 | ) | ||||||
| Foreign currency translation adjustment | 20,000 | - | 19,000 | - | ||||||||||||
| Comprehensive income (loss) | $ | 10,520,000 | $ | (2,063,000 | ) | 2,418,000 | $ | (2,813,000 | ) | |||||||
See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
| 2 |
CalEthos, Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit
For the ThreeNine Months Ended March 31,September 30, 2022
| Shares | Loss | Shares | Amount | Shares | Amount | Capital | Receivable | Loss | Deficit | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivable | Loss | Deficit | Deficit | Series A convertible preferred stock | Preferred Stock | Common Stock | Additional Paid-in | Stock Subscription | Other Comprehensive | Accumulated | Total Stockholders Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Convertible Preferred Stock | Common Stock | Additional Paid-In | Stock Subscription | Other Comprehensive | Accumulated | Total Stockholders’ | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Receivable | Income (Loss) | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | ) | - | $ | - | - | $ | - | 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 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants | - | - | - | - | - | - | 3,170,000 | - | - | - | 3,170,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forgein currency translation income (loss) | - | - | - | - | - | - | - | - | (3,000 | ) | - | (3,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (3,926,000 | ) | (3,926,000 | ) | - | - | - | - | - | - | - | - | - | (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 | ) | - | - | - | - | 25,995,621 | 26,000 | 19,439,000 | (2,000 | ) | (5,000 | ) | (20,757,000 | ) | (1,299,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants | - | - | - | - | - | - | 3,206,000 | 3,206,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forgein currency translation income (loss) | - | - | - | - | - | - | - | - | 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 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of stock-based compensation | (11,500,000 | ) | (11,000 | ) | (11,157,000 | ) | (11,168,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forgein currency translation income (loss) | - | - | - | - | - | - | - | - | 20,000 | 20,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | 10,500,000 | 10,500,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, Sep 30, 2022 | - | $ | - | - | $ | - | 14,495,621 | $ | 15,000 | $ | 11,488,000 | $ | (2,000 | ) | $ | 17,000 | $ | (14,431,000 | ) | $ | (2,913,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the ThreeNine Months Ended March 31,September 30, 2021
| Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Shares | Common Stock | Additional Paid-in | Stock Subscription | Accumulated | Total Stockholders | Series A convertible preferred stock | Preferred Stock | Common Stock | Additional Paid-in | Stock Subscription | Other Comprehensive | Accumulated | Total Stockholders Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Deficit | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Receivable | Income (Loss) | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2021 | - | $ | - | 16,634,951 | $ | 17,000 | $ | 8,744,000 | $ | (2,000 | ) | $ | (10,082,000 | ) | $ | (1,323,000 | ) | - | $ | - | - | $ | - | 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 | - | - | - | - | - | - | 3,000 | - | - | - | 3,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options issued for services | - | - | - | - | 52,000 | - | - | 52,000 | - | - | - | - | - | - | 52,000 | - | - | - | 52,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stocks issued from debt forgiveness | - | - | 75,000 | - | 98,000 | - | - | 98,000 | - | - | - | - | 75,000 | - | 98,000 | - | - | - | 98,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional capital from debt forgiveness | - | - | - | - | 68,000 | - | - | 68,000 | - | - | - | - | - | - | 68,000 | - | - | 68,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | (92,000 | ) | (92,000 | ) | - | - | - | - | - | - | - | - | - | (92,000 | ) | (92,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | - | $ | - | 16,709,951 | $ | 17,000 | $ | 8,965,000 | $ | (2,000 | ) | $ | (10,174,000 | ) | $ | (1,194,000 | ) | - | - | - | - | 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 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stocks returned | - | - | - | - | (3,674,330 | ) | (4,000 | ) | 4,000 | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options issued for services | - | - | - | - | 561,000 | - | - | 561,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock 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 notes | - | - | 1,687,000 | - | - | 1,687,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | 195,000 | - | 195,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock grants | 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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to these 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 | ||||
| 1 | 2 | |||||||
| For the nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | 2,399,000 | $ | (2,813,000 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Impairment | 154,000 | - | ||||||
| Amortization of convertible promissory note discounts | 1,526,000 | 172,000 | ||||||
| Fair value of equity-based compensation | - | 770,000 | ||||||
| Forfeiture of restricted stock grants | (11,168,000 | ) | - | |||||
| Accretion of compensation cost for restricted stock awards | 6,377,000 | 1,550,000 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Prepaid expenses and other current assets | 6,000 | 2,000 | ||||||
| Accounts payable and accrued expenses | 32,000 | 18,000 | ||||||
| Net Cash Used in Operating Activities | (674,000 | ) | (301,000 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Other assets | (106,000 | ) | - | |||||
| Net Cash Used in Investing Activities | (106,000 | ) | - | |||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from the issuance of convertible promissory notes | - | 3,550,000 | ||||||
| Proceeds from the issuance of notes payable | - | 128,000 | ||||||
| Repayments of Notes | (25,000 | ) | - | |||||
| Net Cash (Used in) Provided by Financing Activities | (25,000 | ) | 3,678,000 | |||||
| Effect of exchange rate changes on cash and cash equivalents | 7,000 | - | ||||||
| Net increase (decrease) in Cash | (798,000 | ) | 3,377,000 | |||||
| Cash, Beginning of Period | 3,047,000 | - | ||||||
| Cash, End of Period | $ | 2,249,000 | $ | 3,377,000 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Non-cash investing and financing activities | ||||||||
| Relative fair value of warrants issued with convertible promissory notes | $ | $ | 3,000 | |||||
| Accrued equity compensation granted | $ | - | $ | 38,000 | ||||
| Common stock issued from forgiven debt | $ | - | $ | 98,000 | ||||
| Additional capital from forgiven debt | $ | - | $ | 68,000 | ||||
See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
| 4 |
CalEthos, Inc.
Notes to Unaudited Condensed Consolidated Notes to the Financial Statements
March 31,September 30, 2022
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, containerized, immersion-cooled data center that provides wholesale colocation data center 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.industry that would add value to the Company’s business strategy.
In July 2022, due to the declining state of the bitcoin mining industry and market for its planned products, the Company’s board of directors resolved to 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 Company has suspended operations of its South Korean subsidiary and will not restrict its searchdecide in the next twelve months whether to any specific business segment of the cryptocurrency mining hardware industryuse it to develop other products or geographical location and the Company may participate in a business venture of virtually any kind or nature that is beneficial to the Company and its shareholders.dissolve it.
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.effected, and on July 2022, FINRA was notified that the Company was no longer changing its name or symbol and that the application was being withdrawn.
Incorporation of Korean entity
On November 5, 2021, AIQ System Inc. (“AIQ”) was incorporated in Seoul, Republic of Korea. AIQ is authorized to issue million shares of common stock. At the date of incorporation, shares were issued to the Company for Korean Won or approximately $89,000, for 100% 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 December 31, 2021September 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 normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim three-monthnine-months period ended March 31,September 30, 2022 and 2021. The results for the threenine months ended March 31,September 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 or for any future period.
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with ourthe Company’s audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2021, included in the Company’s annual report on Form 10-K filed with the SEC on March 31, 2022.
| 5 |
Liquidity and Going Concern
The Company incurred a net lossincome of approximately $3,926,0002,399,000 for the threenine months ended March 31,September 30, 2022, of which $4,791,000 was attributable to a non cash transaction for the reversal of compensation for restricted stock units, and had an accumulated deficit of approximately $20,757,00014,431,000 as of March 31,September 30, 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.
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.
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.
We use ASC 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. We 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.
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, 2022 and 2021 because their inclusion would be anti-dilutive. Common share equivalents amounted to and as of March 31, 2022 and 2021, 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”)FPGA based Bitcoin mining simulation system. The Agreement was expected to be completed within 6 weeks for a total contract price of 198,000,000Korean Won (“KRW”) or approximately $167,000. Total payments made to PICOCEL as of September 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 had completed the first phase of the Agreement upon delivery of the SHA-256 code and FPGA board simulator resultingsimulator.
On April 5, 2022, AIQ entered into a Technology Development Agreement (the “Agreement”) with NNS, Co., Ltd. (the “Contractor” or “NNS”) to develop a reclassificationFPGA based Bitcoin mining simulation system. The Agreement was expected to be completed within 9 weeks for a total contract price of deposits amounting99,000,000 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 September 30, 2022 which was expensed and included in in the condensed consolidated statement of operations.
38,000
Impairment
under
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.
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 September 30, 2022, intangibles and other assets as of December 31, 2021 to intangible assets as of March 31, 2022. Additional payments were made to PICOCEL for the three months ended March 31, 2022 amounting to approximately $36,000. Total intangible assetsfully impaired. Impairment loss amounted to $74,000154,000, 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 nine months ended September 30, 2022:
SCHEDULE OF IMPAIRMENT LOSSas of March 31, 2022.
| 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 dates indicated:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| March 31, | December 31, | September 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Accounts payable | $ | 258,000 | $ | 221,000 | $ | 251,000 | $ | 221,000 | ||||||||
| Accrued expenses | 92,000 | 99,000 | 2,000 | 99,000 | ||||||||||||
| Accrued interest | 133,000 | 114,000 | 211,000 | 114,000 | ||||||||||||
| Accounts payable and accrued expenses | $ | 483,000 | $ | 434,000 | $ | 464,000 | $ | 434,000 | ||||||||
Accrued Interest
The following table presents the details of accrued interest as of the dates indicated:
SCHEDULE OF ACCRUED INTEREST
| March 31, | December 31, | September 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Notes payable | $ | 11,000 | $ | 9,000 | $ | 18,000 | $ | 9,000 | ||||||||
| Convertible promissory notes | 122,000 | 105,000 | 193,000 | 105,000 | ||||||||||||
| Balance, end of the year | $ | 133,000 | $ | 114,000 | $ | 211,000 | $ | 114,000 | ||||||||
Note 4 – Notes Payable
NOTES PAYABLE
The table below summarizes the transactions as of the dates indicated:
SCHEDULE OF NOTES PAYABLE
| March 31, | December 31, | September 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Balance, beginning of the year | $ | 111,000 | $ | 11,000 | $ | 111,000 | $ | 11,000 | ||||||||
| Additions | – | 150,000 | – | 150,000 | ||||||||||||
| Payments | (25,000 | ) | (50,000 | ) | (25,000 | ) | (50,000 | ) | ||||||||
| Balance, end of the year | $ | 86,000 | $ | 111,000 | $ | 86,000 | $ | 111,000 | ||||||||
| 7 |
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 10% 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 amount outstanding under this note was $11,000 as of September 30, 2022. The note principal and interest are past due, therefore in default. For the nine months ended September 30, 2022 the Company has accrued interest amounting toapproximately $15,000 2,000and $1,000, respectively, was settled on October 27, 2021. of default interest.
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 failedfails 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 toshall accrue interest at the rate of 15% per annum during the default (default interest). Events of default includedinclude 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 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 accruesaccrued at a rate of 10% per annum. The principal and any accrued interest shallwas 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 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 March 31,September 30, 2022. The note principal and interest are past due, therefore in default. Interest accrued, including default interest, as of March 31,September 30, 2022 is $3,0008,000.
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 shallwas to be paid in a single installment on or before July 1,20221, 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 March 31,September 30, 2022. The note principal and interest are past due, therefore in default. Interest accrued, as of March 31, 2022 is $2,000.
On July 12, 2021, the Company issued a promissory note in the principal amount of $5,000. Theincluding default 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 to2022 is $14,000 3,000was settled in October 2021..
Interest expense on notes payable amounted to $2,0003,000 and $1,0009,000 for the three and nine months ended March 31,September 30, 2022, respectively, and $4,000 and $8,000 for the three and nine months ended September 30, 2021, respectively.
| 8 |
Note 5 – Convertible Promissory Notes
CONVERTIBLE PROMISSORY NOTES
During the year ended December 31,In 2021, the Company issued two convertible promissory notes amounting to $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 10% per annum (default interest). Interest accrued as of September 30, 2022 is $35,000. 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 $1.25 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.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 -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 $1,690,000 and the beneficial conversion amounted to $0, 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.
Financing cost recognized for the amortization of debt discount was approximately $487,0001,526,000 and $2,000170,000 for the threenine months ended March 31,September 30, 2022 and 2021, respectively.
The convertible promissory notes consisted of the following as of the dates indicated:
SCHEDULE OF CONVERTIBLE PROMISSORY NOTES
| March 31, | December 31, | September 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Principal | ||||||||||||||||
| Balance, beginning of year | $ | 4,613,000 | $ | 708,000 | $ | 4,613,000 | $ | 708,000 | ||||||||
| Additions | – | 3,905,000 | – | 3,905,000 | ||||||||||||
| Balance, end of year | 4,613,000 | 4,613,000 | ||||||||||||||
| Balance, end of period | 4,613,000 | 4,613,000 | ||||||||||||||
| Discount | ||||||||||||||||
| Balance, beginning of year | 1,526,000 | 5,000 | 1,526,000 | 5,000 | ||||||||||||
| Additions | – | 2,045,000 | – | 2,045,000 | ||||||||||||
| Amortization | (487,000 | ) | (524,000 | ) | (1,526,000 | ) | (524,000 | ) | ||||||||
| Balance, end of year | 1,039,000 | 1,526,000 | ||||||||||||||
| Balance, end of period | - | 1,526,000 | ||||||||||||||
| Net carrying amount | $ | 3,574,000 | $ | 3,087,000 | $ | 4,613,000 | $ | 3,087,000 | ||||||||
| 9 |
Effective interest rate used to amortize the debt discount for the threenine months ended March 31,September 30, 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.
SCHEDULE OF POTENTIAL FUTURE SHARES ISSUANCE OF CONVERSION NOTES
| March 31, | December 31, | September 30, | December 31, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Principal | $ | 4,613,000 | $ | 4,613,000 | $ | 4,613,000 | $ | 4,613,000 | ||||||||
| Interest | 122,000 | 105,000 | 193,000 | 105,000 | ||||||||||||
| Total | 4,735,000 | 4,718,000 | 4,806,000 | 4,718,000 | ||||||||||||
| 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 | 4,028,844 | 3,947,394 | ||||||||||
InterestThe default interest expense onfor the convertible promissory notes amounted to $18,00088,000 and $14,00048,000 for the threenine months ended March 31,September 30, 2022 and 2021, respectively.
Note 6 – Commitments and contingencies
COMMITMENTS 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 3, 2022, a complaint was filed against our company in the Superior Court of California, County of Los Angeles titled Michael Sekula v. CalEthos Inc, Michael Campbell and Does 1-25 (Case No. 22STCV00121) for, among other matters, failure to pay wages, fraud and other wage-related claims. In the complaint, the plaintiff claimed he worked under a consulting agreement as Vice President of Brand Management of our company and was to be paid $4,000 per month and to receive an option to purchase shares of our common stock that was to vest quarterly over the term of the agreement. In the complaint, the plaintiff alleged that, on or around March 27, 2020, the Company ceased paying the plaintiff despite the plaintiff’s continuing efforts on behalf of our company and that the Company agreed to continue to accrue his monthly retainer amount until such time that the Company received at least $100,000 in funding. Plaintiff further alleged that he continued to work for our company for 38 additional weeks in reliance on our promise of payment. The plaintiff claimed that our refusal to make the promised payments amounts to violations of the California labor laws and seeks damages in excess of $450,000.
On 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 agreed to pay a gross settlement amount of $90,000. Such payment was made on June 23, 2022.
Note 67 – Stockholders Deficit
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 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 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 havehad an initial term of one year, which shallwas to be automatically renewed on a year-to-year basis unless either party givesgave 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. |
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 requiresrequired the Company to estimate the service period over which the compensation cost willwould be recognized. Management hashad estimated that the first two development phases willwould be completed within 15 months and the Foundry Mask willwould be completed within 6 months for a total of 21 months service period. Compensation cost willwas to be recognized ratably over 21 months and in the same manner had the Company paid in cash. The estimated service period willwould be adjusted for changes in actual and expected completion dates. Any such change willwas to be recognized prospectively, and the remaining deferred compensation willwas to be recognized over the remaining service period.
| 10 |
As of December 31, 2021, a total ofThe Company issued restricted stock grants totaling shares were issued to Hyuncheol (Peter) Kim, the consultants.Company’s former Chief Technology Officer, and to a M1 Advisors LLC, a company owned by the Company’s chief executive officer. 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.
On July 27, 2022, the Company sent Hyuncheol (Peter) Kim, the Company’s former Chief Technology Officer, a letter notifying him that the Company’s Board of Directors had resolved to discontinue the Company’s 5 nanometer ASIC chip and bitcoin mining machine project and that his consulting agreement will terminate at the end of August 2022. The restricted stock grant issued in connection with the consulting agreement will also be cancelled.
Also, at the end of August 2022, the Company cancelled the restricted stock grant issued to M1 Advisors LLC.
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 | - | (7,962,000 | ) | - | (11,168,000 | ) | ||||||||||
| Balance as of December 31, 2021 | 11,500,000 | $ | 14,233,000 | |||||||||||||
| Forfeiture | (11,500,000 | ) | (11,027,000 | ) | ||||||||||||
| Balance as of September 30, 2022 | - | $ | - | |||||||||||||
3,170,000SCHEDULE OF RESTRICTED STOCK GRANT COMPENSATION EXPENSE. Stock based compensation expense for the year ended December 31, 2021 amounted to $
| Three months ended | Nine months ended | |||||||
| September 30, 2022 | September 30, 2022 | |||||||
| 2022 Accretion expense | $ | - | $ | 6,377,000 | ||||
| Reversal of 2021 accretion expense | (4,791,000 | ) | (4,791,000 | ) | ||||
| Reversal of 2022 accretion expense | (6,377,000 | ) | (6,377,000 | ) | ||||
| Restricted stock grant compensation | $ | (11,168,000 | ) | $ | (4,791,000 | ) | ||
4,792,000.
Issuance of Stock Options and Warrants Expired
As of March 31,September 30, 2022, a total of warrants expired.
EARNINGS (LOSS) PER SHARE
SCHEDULE OF EARNINGS PER SHARE BASIC AND DILUTED
| Numerator | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| For the three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| Numerator | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Net income (loss) | $ | 10,500,000 | $ | (2,063,000 | ) | $ | 2,399,000 | $ | (2,813,000 | ) | ||||||
| Effect of dilutive instruments | ||||||||||||||||
| Convertible notes interest expense | 51,000 | - | 88,000 | - | ||||||||||||
| Numerator for diluted EPS | 10,551,000 | (2,063,000 | ) | 2,487,000 | (2,813,000 | ) | ||||||||||
| Denominator | ||||||||||||||||
| Denominator - for basic EPS | 14,176,349 | 17,602,886 | 24,769,518 | 17,282,889 | ||||||||||||
| Effect of dilutive instruments | ||||||||||||||||
| Warrants | 748,432 | - | 748,432 | - | ||||||||||||
| Convertible notes | 4,028,844 | - | 4,028,844 | - | ||||||||||||
| Dilutive potential common shares | 4,777,276 | - | 4,777,276 | - | ||||||||||||
| Denominator for diluted EPS | 18,953,625 | 17,602,886 | 29,546,794 | 17,282,889 | ||||||||||||
| Basic EPS | $ | 0.74 | $ | (0.12 | ) | $ | 0.10 | $ | (0.16 | ) | ||||||
| Diluted EPS | $ | 0.56 | $ | (0.12 | ) | $ | 0.08 | $ | (0.16 | ) | ||||||
Securities that granted onecould potentially dilute loss per share in the future were not included in the computation of its shareholders an option to purchase shares of the Company’s common stock at $diluted loss per share for the consultancy work provided from August 2020three and nine months ended September 30, 2021 because their inclusion would be anti-dilutive. Common share equivalents amounted to February 2021. The options were fully vested on the date for warrants, for convertible notes and for restricted stock units for total 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 and $ was expensed duringSeptember 30, 2021. For the three and nine months ended March 31, 2021.September 30, 2022, the Company had dilutive securities.
Note 79 – 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 followingthere are no reportable events:events.
Technology Development Agreement
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 | |||||
| 11 |
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.
This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with the Securities and Exchange Commission. See “Cautionary Note Regarding Forward Looking Statements.”
Plan of Operations
As of the filing of this Report, it is the intentionour 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 the board of directorsour strategy to build such a facility for our company to develop and manufacture high-performance computerown utilization with the bitcoin mining systems that are scalable, upgradeable,we planned to manufacture and cost effectiveuse 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-cooledour own bitcoin mining system. Currently,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 implement this plan, we intend to complete the first phasepurchase of ASIC chip development80 acres of land and to negotiate a Power Purchase Agreement with the local utility company for up to 100 megawatts of clean energy from local geothermal power plants and solar farms and to evaluate various paths for accessing close-by fiber networks.
Once the land acquisition is closed, we intend to 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 systemsland use plan that will be alteredsubmitted to accommodateauthorities 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 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 distribution and cooling specifications we require to meet our system performance and energy consumption goals.communication connectivity components of the data center build.
As we move through the chip anddevelopment process to build a clean-energy powered, containerized, immersion-cooled bitcoin mining system development process,data center, 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.
| 12 |
Results of Operations
The table summarizes the results of operations for the three and six months ended March 31:June 30:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Professional fees | 3,415,000 | 73,000 | 136,000 | 118,000 | 588,000 | 824,000 | ||||||||||||||||||
| Stock based compensation | (11,168,000 | ) | 1,745,000 | (4,791,000 | ) | 1,745,000 | ||||||||||||||||||
| General and administrative expenses | 4,000 | 2,000 | 24,000 | 13,000 | 59,000 | 18,000 | ||||||||||||||||||
| Operating expenses | 3,419,000 | 75,000 | ||||||||||||||||||||||
| Loss from operations | (3,419,000 | ) | (75,000 | ) | ||||||||||||||||||||
| Impairment loss | - | - | 154,000 | - | ||||||||||||||||||||
| Total operating (income)expenses | (11,008,000 | ) | 1,876,000 | (4,020,000 | ) | 2,587,000 | ||||||||||||||||||
| Income (loss) from operations | 11,008,000 | (1,876,000 | ) | 4,020,000 | (2,587,000 | ) | ||||||||||||||||||
| Other expenses | ||||||||||||||||||||||||
| Financing cost | (507,000 | ) | (17,000 | ) | ||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Interest income | 1,000 | - | 1,000 | - | ||||||||||||||||||||
| Financing costs | (509,000 | ) | (187,000 | ) | (1,622,000 | ) | (226,000 | ) | ||||||||||||||||
| Total other expenses | (508,000 | ) | (187,000 | ) | (1,621,000 | ) | (226,000 | ) | ||||||||||||||||
| (507,000 | ) | (17,000 | ) | |||||||||||||||||||||
| Loss before provision for income taxes | (3,926,000 | ) | (92,000 | ) | ||||||||||||||||||||
| Income (loss) before provision for income taxes | 10,500,000 | (2,063,000 | ) | 2,399,000 | (2,813,000 | ) | ||||||||||||||||||
| Provision for income taxes | - | - | - | - | - | - | ||||||||||||||||||
| Net loss | $ | (3,926,000 | ) | $ | (92,000 | ) | ||||||||||||||||||
| Net income (loss) | $ | 10,500,000 | $ | (2,063,000 | ) | $ | 2,399,000 | $ | (2,813,000 | ) | ||||||||||||||
Revenues
The Company had no revenues for the threenine months ended March 31,September 30, 2022 and 2021.
Expenses
Operating expenses(income) expense for the threenine months ended March 31,September 30, 2022 were $3,419,000,was $4,020,000, compared to $75,000$(2,587,000) for the threenine months ended March 31,September 30, 2021. The increase of $3,344,000 or 4,459% pertained$6,607,000, in operating income, pertains primarily to (1) the accretionreversal of $4,791,000 of stock-based compensation expense, for the year ended December 31, 2021, related to the forfeiture of the stock-based awards. Since the Company discontinued the development in South Korea of the Company’s 5 nanometer ASIC chip and containerized, immersion-cooled bitcoin mining computer system, management determine that performance-based service would not be achievable. Also, the stock-based compensation for the nine months ended September 31, 2022 was nil, because of the reversal of unvested restricted stock awards, issuedwhich was forfeited, compared to consultants totalling to $3,170,000 in relation to their services and (2) accretionthe stock based compensation expense of $1,745,000 for the nine months ended September 31, 2021. The expense of $90,000 for settling a legal case.case for the nine months ended September 30, 2022.
Liquidity and Capital Resources
The Company’s financial position as of March 31,September 30, 2022 and December 31, 2021 were as follows:
Working Deficit
| March 31, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Current assets | $ | 2,770,000 | $ | 3,054,000 | $ | 2,250,000 | $ | 3,054,000 | ||||||||
| Current liabilities | 4,143,000 | 3,632,000 | 5,163,000 | 3,632,000 | ||||||||||||
| Working deficit | $ | (1,373,000 | ) | $ | (578,000 | ) | $ | (2,913,000 | ) | $ | (578,000 | ) | ||||
At March 31,September 30, 2022, the Company had cash of approximately $2,749,000$2,249,000 and prepaid expenses of approximately $21,000. Working$1,000. The working deficit increased by approximately $705,000$2,335,000 from December 31, 2021 to March 31,September 30, 2022. The increase in the working capital deficit was due primarily to the decrease in cash of $798,000 and the increase in convertible promissory of approximately $1,526,000.
At September 30, 2022, the Company had outstanding promissory notes and accrued interest in the aggregate amount of $104,000 and outstanding convertible notes and accrued interest in aggregate amount of $4,806,000, all of which were past due and all of which were in default. See Notes 4 and 5 to the accompanying unaudited financial statements of the Company.
Cash Flows
| For the Three Months Ended March 31, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net cash used in operating activities | $ | (234,000 | ) | $ | (79,000 | ) | $ | (674,000 | ) | $ | (301,000 | ) | ||||
| Net cash used in investing activities | (37,000 | ) | - | (106,000 | ) | - | ||||||||||
| Net cash provided by (used in) financing activities | (25,000 | ) | 90,000 | (25,000 | ) | 3,678,000 | ||||||||||
| Effect of exchange rate changes | (2,000 | ) | - | 7,000 | - | |||||||||||
| Increase (decrease) in Cash during the Period | (298,000 | ) | 11,000 | (798,000 | ) | 3,377,000 | ||||||||||
| Cash, Beginning of Period | 3,047,000 | - | 3,047,000 | - | ||||||||||||
| Cash, End of Period | $ | 2,749,000 | $ | 11,000 | $ | 2,249,000 | $ | 3,377,000 | ||||||||
| 13 |
Cash flows used in operating activities
Net cash used in operating activities increased by $155,000 or 196%$373,000 during the threenine months ended March 31,September 30, 2022 as compared to the threenine months ended March 31,September 30, 2021 due to (1) paymentan increase 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 $403,000.
Cash flows used in investing activitiesactivity
Net cash used in investing activitiesactivity increased by $37,000 or 100%$106,000 during the threenine months ended March 31,September 30, 2022 as compared to the threenine months ended March 31,September 30, 2021 due to payments for design and development work for the Company’s ASIC chip.chip which was discontinued in the third quarter of 2022.
Cash flows used in financing activities
NetThe Company had net cash used in financing activities increased to $25,000 during the threenine months ended March 31,September 30, 2022 due to $25,000 repayment of notes payable. NetConversely, it had net cash provided by investingfinancing activities increased to $90,000 during the threenine months ended March 31,September 30, 2021 mainly due to proceeds from convertible promissory notes and notes payable amounting to $50,000$3,550,000 and $40,000,$128,000, 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 are approved for construction by the requisite authorities, the Company estimates the initial phase of its planned data center operation will cost between $60 to 75 million to build.
Past the plan development phase, the Company will need to raise capital in order to build 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 data 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 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 Company and its 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 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 and comprehensive loss.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 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.
| 14 |
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 March 31,September 30, 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 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,September 30, 2022, our disclosure controls and procedures were not effective.
The material weakness related to internal control over financial reporting that was identified at March 31,September 30, 2022 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 March 31,September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Internal Controls
Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in any of theThe pending legal proceedings as discussed in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2021.2021 were settled during the nine months ended September 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
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
None
At September 30, 2022, the Company had outstanding promissory notes and accrued interest in the aggregate amount of $104,000 and outstanding convertible notes and accrued interest in aggregate amount of $4,806,000, all of which were past due and all of which were in default. See Notes 4 and 5 to the accompanying unaudited financial statements of the Company.
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:
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: | 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 | ||