GEDC 10-Q
TerraVolt Holdings, Inc. (GEDC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(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.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
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.
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).
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 |
| ☒ | 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 ☐
As of November 15, 2023, there were outstanding shares of the registrant’s common stock, par value $0.001 per share.
TABLE OF CONTENTS
| i |
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
CalEthos, Inc.
For the Nine Months Ended September 30, 2023
Index to the Condensed Consolidated Financial Statements
| ii |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, may address or relate to future events and expectations and, as such, constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our business, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things:
| ● | our ability to implement our current stated business plans; | |
| ● | our ability to retain key members of our management team; | |
| ● | our future financing or acquisition plans and our ability to consummate any such transactions on favorable terms if at all; | |
| ● | our anticipated needs for working capital; and | |
| ● | our ability to establish a market for our common stock and operate as a public company. |
Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors.
Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
| iii |
CalEthos, Inc.
Condensed Consolidated Balance Sheets
As of September 30, 2023 | As of December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Data center costs | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Convertible promissory notes, net | ||||||||
| Notes payable | ||||||||
| Total current liabilities | ||||||||
| 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; and shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Other comprehensive income | ||||||||
| Stock subscription receivable | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to these unaudited condensed consolidated financial statements.
| 1 |
CalEthos, Inc.
Unaudited Condensed Consolidated Statements of Operations
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenues | $ | $ | $ | $ | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Restricted stock grants | ( | ) | ( | ) | ||||||||||||
| General and administrative expenses | ||||||||||||||||
| Impairment loss | ||||||||||||||||
| Operating (income) expenses | ( | ) | ||||||||||||||
| (Loss)Income from operations | ( | ) | ( | ) | ||||||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Gain on settlement of accounts payable | ||||||||||||||||
| Financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) Income before provision for income taxes | ( | ) | ( | ) | ||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net income (loss) per share - basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net income (loss) per share - diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average common shares outstanding - Basic | ||||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||
| Comprehensive loss: | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Foreign currency translation adjustment | ||||||||||||||||
| Comprehensive (Loss) Income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
| 2 |
CalEthos, Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit
For the Three and Nine Months Ended September 30, 2023 and 2022
| 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 (Loss) | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
| Foreign currency translation income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance March 31, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Fair value of equity-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Cancellation of shares | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
| Fair value of equity-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance, September 30,2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
| Equity-based compensation on restricted stock awards | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Equity-based compensation on restricted stock awards | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Forfeiture of stock-based compensation | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation income (loss) | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Balance, September 30,2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
See accompanying notes to these unaudited condensed consolidated financial statements.
| 3 |
CalEthos, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Impairment | ||||||||
| Amortization of convertible promissory note discounts | ||||||||
| Forfeiture of restricted stock awards | ( | ) | ||||||
| Equity-based compensation | ||||||||
| Gain on settlement of accounts payable | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Data center costs | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Repayments of Notes | ( | ) | ||||||
| Net Cash Used in Financing Activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ||||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Interest capitalized as data center cost | $ | $ | ||||||
| Stock based compensation capitalized as data center cost | $ | $ | ||||||
See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
| 4 |
CalEthos, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2023
Note 1 – Organization and Accounting Policies
CalEthos, Inc. (the “Company” or “we”) was incorporated on March 20, 2002 under the laws of the State of Nevada.
The Company is implementing its plan to build a clean-energy-powered data center operation using the latest energy-efficient building materials and cooling technologies and to provide wholesale colocation services to enterprise IT and hyperscale customers. In addition, the Company may acquire assets and all or part of other companies operating in the high-density computing industry or invest in or joint venture with other more-established companies already in the industry that would add value to the Company’s business strategy.
As of July 2022, the Company’s board of directors resolved to focus exclusively on developing a clean-energy-powered data center.
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
$
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, 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 nine-month periods ended September 30, 2023 and 2022. The results for the nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023 or for any future period.
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2022, included in the Company’s annual report on Form 10-K filed with the SEC on April 17, 2023.
Liquidity and Going Concern
The
Company incurred a net loss of approximately $
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 services; the 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 the Company’s operations and generating a level of revenues adequate to support the Company’s cost structure.
| 5 |
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 the development of the Company’s data center campus development, approvals for construction permits, construction times, delivery of critical equipment, market demand for the Company’s wholesale colocation data center services, the timing of customer commitments for data center space, the management of working capital, and payment terms and conditions for purchase of the Company’s 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 raise additional funding from investors or through other avenues, it may not be able 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.
The Company uses ASC 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. The 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 and nine months ended September 30, 2023 and 2022 because their inclusion would be anti-dilutive. Common share equivalents amounted to as of September 30, 2023.
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 – Data Center Costs
On
March 30, 2023, the Company signed an option agreement to acquire
| 6 |
The
Purchase Price is payable with a cash payment of $
If the Purchase Shares are issued at the Closing Date, the Company has agreed to repurchase the Purchase Shares (the “Put Option”) under specific circumstances.
As
of September 30, 2023, the Company has incurred costs of approximately $
On
June 23, 2023, the Company signed a contract with HDR Engineering, Inc. to provide site assessment and feasibility to connect critical
resources for data center operations and develop a shovel-ready development plan for the Company’s initial 80-acre site. The Company
completed this development phase in October 2023 with an estimated cost of approximately $
Note 3 – Accounts Payable and Accrued Expenses
The following table summarizes the Company’s accounts payable and accrued expense balances as of the dates indicated:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued interest | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
Accrued Interest
The following table presents the details of accrued interest as of the dates indicated:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Notes payable | $ | $ | ||||||
| Convertible promissory notes | ||||||||
| Balance, end of period | $ | $ | ||||||
Note 4 – Notes Payable
The table below summarizes the transactions as of the dates indicated:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Balance, beginning of the year | $ | $ | ||||||
| Additions | ||||||||
| Payments | ||||||||
| Balance, end of the year | $ | $ | ||||||
| 7 |
On
July 7, 2020, the Company issued a promissory note in the principal amount of $
On
April 22, 2021, the Company issued a promissory note in the principal amount of $
Interest
expense on these notes payable amounted to $
Note 5 – Convertible Promissory Notes
Convertible promissory notes consisted of the following as of the dates indicated:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Principal | ||||||||
| Balance, beginning of year | $ | $ | ||||||
| Additions | ||||||||
| Balance, end of year | ||||||||
| Discount | ||||||||
| Balance, beginning of year | ||||||||
| Additions | ||||||||
| Amortization | ( | ) | ||||||
| Balance, end of year | ||||||||
| Net carrying amount | $ | $ | ||||||
The
effective interest rate used to amortize the debt discount for the nine months ended September 30, 2023 and 2022 ranged from
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Principal | $ | $ | ||||||
| Interest | ||||||||
| Total | ||||||||
| Conversion price per share | ||||||||
| Potential future share | ||||||||
Interest
expense on default convertible promissory notes amounted to $
| 8 |
Note 6 – 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. 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.
Employment Agreement
In
June 2023, the Company executed an employment agreement (“Employment Agreement”) to employ an individual to be the Company’s
President and Chief Operating Officer (“Executive”). As compensation for services rendered, the Executive will be paid a
base salary of $
The Employment Agreement also provides for certain severance benefits upon termination by the Company without “cause” or by the Executive for good reason. In the event of a termination by the Company without cause or by the Executive for good reason after the first full year of employment, the Executive would be entitled to (i) continued payment of the base salary for the lesser of six months or the remaining term of the Employment Agreement, subject to the Executive signing a timely and effective separation agreement containing a release of all claims against the Company and other customary terms; provided, however, that if such termination is between the 91st day and the end of the first year of employment, the Executive will be entitled to a pro-rata portion of such payment.
Note 7 – Stockholders Deficit
Stock options
As part of the Employment Agreement, as defined in Note 6 – Commitments and Contingencies, the executive was granted an incentive stock option (“Incentive Option”) and a non-qualified stock option (“Non-Qual Option”) (collectively “Stock Options”) to purchase and , respectively, shares of the Company’s common stock for $ per share. The Stock Options are exercisable for a period of seven years from the date of grant, which was June 19, 2023 (“Grant Date”).
The
Incentive Option shall vest and become exercisable as follows: (i) options to purchase up to shares of Common Stock shall vest
and become exercisable on the first anniversary of the Grant Date; (ii) options to purchase up to shares of Common Stock shall
vest and become exercisable on the second anniversary of the Grant Date; and (iii) options to purchase up to shares of Common
Stock shall vest and become exercisable on the third anniversary of the Grant Date; provided that the Optionee is an employee in good
standing with the Company on such applicable vesting date. The Incentive Option Grant Date fair value of $ was calculated using
the Black Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance: volatility
of %, the fair value of common stock $, estimated life of years, risk-free rate of % and dividend rate of $. For the nine
months ended September 30, 2023, approximately $
| 9 |
The Non-Qual Option shall vest and become exercisable as follows:
| (1) | shares on each of the first two anniversaries of the Grant Date and shares on the third anniversary of the Grant Date, provided that the Optionee is an employee or Board member in good standing with the Company on such applicable vesting date. | |
| (2) | the remaining shares based on the Company completing the following milestones: |
| a. | shares upon completion of the initial site development plan and Data Center design, and submission of a complete set of plans to Imperial County Planning and Development Department for approvals and permits. | |
| b. | shares upon the Company receiving permits necessary to start construction of the data center site and facilities (including but not limited to power substation, water delivery, pumping, storage and on-site distribution systems, fiber conduit lines and communications systems, and on-site roads, water, power and communications grid, warehousing, offices, administration, support and security buildings, perimeter walls and security systems). | |
| c. | shares upon the completion of construction of a complete data center facility and receipt of an occupancy permit for such facility, either for a Data Center facility to be built as a “build to suit” building for a hyperscale company or as a wholesale colocation building for enterprise IT customers. | |
| d. | shares upon signing a build-to-suit contract or one or more contracts being signed for 50% or more of a constructed and operational wholesale colocation facility’s capacity. |
The Company’s management has accounted for the Non-Qual Option 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 development phase (a) will be completed by March 31, 2024, the second development phase (b) by September 30, 2024, the third development phase (c) by March 31, 2025 and the fourth development phase by September 30, 2025. The estimated service period will be adjusted for actual and expected completion date changes. Any such change will be recognized prospectively, and the remaining deferred compensation will be recognized over the remaining service period.
The Non-Qual Option Grant Date fair value of $ was calculated using the Black Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance: volatility range of % to %, the fair value of common stock $, estimated life range of years to years, risk-free rate range of % to % and dividend rate of $. For the three months ended September 30, 2023, the Company recorded compensation expenses of approximately $.
As of September 30, 2023, the Company had stock options outstanding, of which all were unvested, with weighted average remaining life, strike price and grant date fair value of years, $ and $, respectively, and intrinsic value of nil.
Warrants
During
the nine months ending September 30, 2023, warrants expired. As of September 30, 2023, the remaining outstanding balance of warrants
was
Note 8 – 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.
| 10 |
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, 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, data center operation using the latest energy-efficient cooling technologies and to provide wholesale colocation services to enterprise IT and hyperscale customers. To implement this plan, we have optioned 80 acres of land for the initial phase of development and contracted HDR Engineering, Inc., a data center architect and engineering firm (“HDR”), to provide master planning services that include site feasibility and a shovel-ready site development plan. In addition, we 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 contracting a network engineering firm to evaluate and engineer various paths to run conduit for accessing close-by internet fiber networks.
On June 23, 2023, we engaged HDR to complete a feasibility study and site development master 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 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 to start construction, and that the construction could take another six to twelve months to complete depending on supply chain issues at the time for data center, electrical and communication connectivity components of the data center build.
As we move through the development process to build a clean-energy powered data center operation, we will continue to refine and finalize the courses 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 our business plan as described herein, and that we will require substantial financing to complete the development and construction of the planned data center operation. A failure to obtain this necessary capital when required on acceptable terms, or at all, could force us to delay, limit, reduce, or terminate our development plans, any commercialization efforts and 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. 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 funding, however, may not be available when required 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 it is required, our ability to commence and grow our proposed business operations, to 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.
| 11 |
Results of Operations
The table summarizes the results of operations for the three and nine months ended September 30:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | ||||||||
| Operating expenses | ||||||||||||||||
| Professional fees | 48,000 | 136,000 | 234,000 | 558,000 | ||||||||||||
| Equity-based compensation | 31,000 | (11,168,000 | ) | 55,000 | (4,791,000 | ) | ||||||||||
| General and administrative expenses | 13,000 | 24,000 | 54,000 | 59,000 | ||||||||||||
| Impairment loss | - | - | - | 154,000 | ||||||||||||
| Total operating (income) expenses | 92,000 | (11,008,000 | ) | 343,000 | (4,020,000 | ) | ||||||||||
| Income (loss) from operations | (92,000 | ) | 11,008,000 | (343,000 | ) | 4,020,000 | ||||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 14,000 | 1,000 | 45,000 | 1,000 | ||||||||||||
| Gain on settlement of debt | - | - | 23,000 | - | ||||||||||||
| Financing costs | (20,000 | ) | (509,000 | ) | (239,000 | ) | (1,622,000 | ) | ||||||||
| Total other expenses | (6,000 | ) | (508,000 | ) | (171,000 | ) | (1,621,000 | ) | ||||||||
| Income (loss) before provision for income taxes | (98,000 | ) | 10,500,000 | (514,000 | ) | 2,399,000 | ||||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net income (loss) | $ | (98,000 | ) | $ | 10,500,000 | $ | (514,000 | ) | $ | 2,399,000 | ||||||
Revenues
We had no revenues for the three and nine months ended September 30, 2023 and 2022.
Operating Expenses for the three months ended September 30, 2023 and 2022
Professional fees decreased to approximately $48,000 for the three months ended September 30, 2023, as compared to $136,000 for the three months ended September 30, 2022. As the Company has shifted its operating activity toward developing the data center professional fees have either decreased or have been capitalized as development cost.
Equity-based compensation increased to approximately $31,000 for the three months ended September 30, 2023, as compared to $(11,168,000) for the three months ended September 30, 2022. During the three months ended September 30, 2022, We had a cancelation of an equity-based compensation agreement for 10,000,000 shares of our common stock. Therefore, we had a reversal of approximately $11,168,000 of previously expensed equity-based compensation. The equity-based compensation of $31,000 related to the issuance of an employment agreement during the second quarter of 2023.
General and administrative expenses decreased to approximately $13,000 for the three months ended September 30, 2023, as compared to $24,000 for the three months ended September 30, 2022. The decrease was attributable to the capitalization of out-of-pocket expenses related to the development of the data center.
Operating Expenses for the six months ended September 30, 2023 and 2022
Professional fees decreased to approximately $234,000 for the six months ended September 30, 2023, as compared to $558,000 for the six months ended September 30, 2022. As we have shifted our operating activity toward developing the data center professional fees have either decreased or have been capitalized as development cost.
Equity-based compensation increased to approximately $55,000 for the six months ended September 30, 2023, as compared to $(4,791,000) for the six months ended September 30, 2022. During the six months ended September 30, 2022, we had a cancelation of an equity-based compensation agreement for 10,000,000 shares of our common stock. Therefore, we had a reversal of approximately $11,168,000 of previously expensed equity-based compensation. The equity-based compensation of $55,000 related to the issuance of an employment agreement during the second quarter of 2023.
General and administrative expenses decreased to approximately $54,000 for the six months ended September 30, 2023, as compared to $59,000 for the six months ended September 30, 2022. The decrease was attributable to the capitalization of out-of-pocket expenses related to the development of the data center.
Liquidity and Capital Resources
Our financial position as of September 30, 2023 and December 31, 2022 was as follows:
Working Capital Deficit
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Current assets | $ | 1,190,000 | $ | 2,071,000 | ||||
| Current liabilities | 6,052,000 | 5,214,000 | ||||||
| Working capital deficit | $ | (4,862,000 | ) | $ | (3,143,000 | ) | ||
Our working capital deficit increased by $1,719,000 as of September 30, 2023 from $3,143,000 as of December 31, 2022. The increase was due to the use of cash of approximately $233,000 for operating expenses and approximately $661,000 for data center development costs, and the increase in our accounts payable and accrued expense of approximately $838,000.
| 12 |
Cash Flows
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (233,000 | ) | $ | (674,000 | ) | ||
| Net cash used in investing activities | (661,000 | ) | (106,000 | ) | ||||
| Net cash used in financing activities | - | (25,000 | ) | |||||
| Effect of exchange rate changes | 5,000 | 7,000 | ||||||
| Increase (decrease) in Cash during the Period | (889,000 | ) | (798,000 | ) | ||||
| Cash, Beginning of Period | 2,067,000 | 3,047,000 | ||||||
| Cash, End of Period | $ | 1,178,000 | $ | 2,249,000 | ||||
Cash flows used in operating activities
Net cash used in operating activities decreased by $441,000 during the nine months ended September 30, 2023 from $674,000 for nine months ended September 30, 2022. The decrease resulted from the reduction in our operating expense related to professional fees and general administrative expenses during the nine months ended September 30, 2023.
Cash flows used in investing activities
Net cash used in investing activity increased by $555,000 during the nine months ended September 30, 2023 from $106,000 for the nine months ended September 30, 2022. The increase resulted from the expenditures during the nine months ended September 30, 2023 for the development activities for our data center project.
Cash flows used in financing activities
Net cash used in financing activities decreased by $25,000 during the nine months ended September 30, 2023 as compared to $25,000 for the nine months ended September 30, 2022. The decrease resulted from our not making any repayments of our outstanding notes payable.
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 the requisite authorities, we estimate the initial phase of our planned data center operation will cost between $60 to $75 million to build.
Past the plan development phase, we will need to raise capital in order to build our planned operations and achieve our growth targets, which we plan to raise from investors 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 on 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 the 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 reasonable payment terms and conditions for the purchase of the 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.
| 13 |
Principles of Consolidation
The consolidated financial statements include the accounts of our 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, we first allocate 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.
We 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. We amortize these costs over the term of our debt agreements as financing cost in the consolidated statement of operations.
Stock-Based Compensation
We account for our stock-based compensation under ASC 718, “Compensation – Stock Compensation” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
We use the fair value method for equity instruments granted to non-employees and use the 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
Our management reviewed all recently issued accounting standard updates (“ASU’s”) not yet adopted by us and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on our condensed consolidated financial condition or the results of our operations.
Off-Balance Sheet Arrangements
As of September 30, 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.
| 14 |
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer (our “Certifying Officers”), conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.
Based on their evaluation, the Certifying Officers concluded that, as of September 30, 2023, our disclosure controls and procedures were not effective.
The material weakness related to internal control over financial reporting that was identified at September 30, 2023 was that we did not have sufficient personnel staffing in our accounting and financial reporting department. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements.
This control deficiency could result in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis. However, our management believes that the material weakness identified does not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weakness had any effect on the accuracy of our financial statements included as part of this Quarterly Report.
We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking action and implementing additional enhancements or improvements, as necessary and as funds allow.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 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.
| 15 |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We know of no material active or pending legal proceeding against our company, nor are we involved as a plaintiff in any 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 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
As of September 30, 2023, we had notes payable of $61,000, convertible promissory notes payable of $4,613,000 and accrued interest of $675,000, 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:
| 16 |
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: November 14, 2023 | 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 | |
| 17 |