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)
(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.
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, 2021, there were outstanding shares of the registrant’s common stock, par value $0.001 per share.
CalEthos, Inc.
Quarterly Report on Form 10-Q
Three and Nine Months Ended September 30, 2021
TABLE OF CONTENTS
| -i- |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, may address or relate to future events and expectations and, as such, constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our business, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things:
| ● | our ability to implement our current stated business plans; | |
| ● | our ability to retain key members of our management team; | |
| ● | our future financing or acquisition plans and our ability to consummate any such transactions on favorable terms if at all; | |
| ● | our anticipated needs for working capital; and | |
| ● | our ability to establish a market for our common stock and operate as a public company. |
Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors.
Particularly in light of our current status as a shell company, there can be no assurance that the forward-looking statements contained herein will in fact occur. Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
| -ii- |
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements.
CalEthos, Inc.
Condensed Balance Sheets
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid expenses | - | |||||||
| Total Current Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Convertible promissory notes, net of discounts | ||||||||
| Notes payable, net | ||||||||
| Total Current Liabilities | ||||||||
| Total Liabilities | ||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Series A convertible preferred stock, par value $, shares authorized; shares issued and outstanding | - | - | ||||||
| Preferred stock, par value $, shares authorized; shares issued and outstanding | - | - | ||||||
| Common stock par value $, shares authorized; and shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Stock subscription receivable | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
See accompanying notes to the unaudited condensed financial statements.
| 1 |
CalEthos, Inc.
Condensed Statements of Operations
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Professional fees | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Expenses | ||||||||||||||||
| Financing cost | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on extinguishment of series A convertible preferred stock | - | - | - | ( | ) | |||||||||||
| ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See accompanying notes to the unaudited condensed financial statements.
| 2 |
CalEthos, Inc.
Condensed Statements of Changes in Stockholders’ Equity (Deficit)
(Unaudited)
For the Three and Nine Months Ended September 30, 2021
| Series A Convertible Preferred | Preferred Stock | Common Stock | Additional Paid-In | Stock Subscription | Accumulated | Total
Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | receivable | Deficit | (Deficit) | |||||||||||||||||||||||||||||||
| Balance January 1, 2021 | $ | - | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory note | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock options issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stocks issued from debt forgiveness | - | - | ||||||||||||||||||||||||||||||||||||||
| Additional capital from debt forgiven | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance March 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Stocks returned | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock options issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stocks issued on exercise of warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance June 30, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory note | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Restricted common stock awards issued for compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
For the Three and Nine Months Ended September 30, 2020
| Series A Convertible Preferred | Preferred Stock | Common Stock | Additional Paid-In | Stock Subscription | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | receivable | Deficit | (Deficit) | |||||||||||||||||||||||||||||||
| Balance January 1, 2020 | $ | - | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Conversion of series A convertible preferred stock to convertible promissory notes | ( | ) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Fair value of warrants issued with the conversion of series A convertible preferred stock | - | - | - | |||||||||||||||||||||||||||||||||||||
| Debt premium on issuance of convertible promissory notes for conversion of series A convertible preferred stock | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance March 31, 2020 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory notes | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance June 30, 2020 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory note | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed financial statements.
| 3 |
CalEthos, Inc.
Condensed Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Amortization of convertible promissory note discounts | ||||||||
| Loss on extinguishment of convertible preferred stock | - | |||||||
| Fair value of warrants issued for extinguishment of preferred stock | - | |||||||
| Fair value of equity-based compensation | - | |||||||
| Accretion of compensation cost for restricted stock awards | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | - | |||||||
| Accounts payable and accrued expenses | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from the issuance of convertible promissory notes | ||||||||
| Proceeds from the issuance of notes payable | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | - | |||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Original issue discount issued with convertible promissory notes | $ | $ | ||||||
| Accrued equity compensation granted | $ | $ | ||||||
| Common stock issued from forgiven debt | $ | $ | ||||||
| Additional capital from forgiven debt | $ | $ | ||||||
| Conversion of series A preferred stock to convertible promissory notes | $ | $ | ||||||
| Fair value of warrants issued with the conversion of series A convertible preferred stock | $ | $ | ||||||
| Debt premium on issuance of convertible promissory notes for conversion of series A convertible preferred stock | $ | $ | ||||||
| Discount from issuance of convertible notes | $ | $ | ||||||
See accompanying notes to the unaudited condensed financial statements.
| 4 |
CalEthos, Inc.
September 30, 2021
Notes to the Unaudited Condensed Financial Statements
Note 1 – Organization And Accounting Policies
CalEthos,
Inc. (the “Company”) was incorporated on March 20, 2002 under the laws of the State of Nevada. During the period commencing
in the second quarter of 2016 to
September 15, 2021, on which date the Company raised $
Change in Control
On
May 16, 2018, certain majority stockholders of the Company, including certain former directors and officers of the Company, entered into
a stock purchase agreement dated May 16, 2018 (the “Control Purchase Agreement”) with RealSource Acquisition Group, LLC,
a Utah limited liability company (“RealSource Acquisition”), whereby RealSource Acquisition agreed to purchase an aggregate
of shares ( shares after giving effect to the Reverse Stock Split (the “Control Shares”) of the Company’s
issued and outstanding shares of common stock for an aggregate purchase price of $
Effective on the Closing Date, and in accordance with the amended and restated bylaws of the Company and the requirements of the Control Purchase Agreement, (a) each of Michael S. Anderson, Nathan W. Hanks and V. Kelly Randall resigned as directors of the Company, (b) Michael Campbell, the sole member of M1 Advisors, and Piers Cooper were elected to the Company’s board of directors, and (c) Mr. Hanks also resigned as president and chief executive officer of the Company, Mr. Randall also resigned as chief operating officer and chief financial officer of the Company, Mr. Campbell was appointed the chief executive officer of the Company and Piers Cooper was appointed president of the Company.
On
the Closing Date, the Company entered into a series A preferred stock purchase agreement dated as of the Closing Date (the “Preferred
Purchase Agreement”) with M1 Advisors, which is an entity controlled by Michael Campbell, the Company’s chief executive officer
and a director of the Company at such time, Piers Cooper, the Company’s president and a director of the Company at such time, the
members of RealSource Acquisition, and the other investors who were signatories thereto (collectively, the Purchasers”). Pursuant
to the Preferred Purchase Agreement, the Company sold to the Purchasers an aggregate of shares of the Company’s series
A preferred stock, which has since been re-designated as Founder preferred stock (“Founder Preferred Stock”), for an aggregate
purchase price of $
Immediately following the above transactions, an aggregate of shares of Founder Preferred Stock and shares of common stock was issued and outstanding. At such time, the shares of Founder Preferred Stock and common stock owned by M1 Advisors represented approximately % of the issued and outstanding shares of capital stock of the Company on a fully-diluted basis and the shares of Founder Preferred Stock owned by Mr. Cooper represented approximately % of the issued and outstanding shares of capital stock of the Company on a fully-diluted basis. The shares of Founder Preferred Stock acquired by M1 Advisors were purchased with funds that M1 Advisors borrowed from another entity controlled by Mr. Campbell.
On December 20, 2018, all outstanding shares of Founder Preferred Stock was converted in to shares of the Company’s common stock on a one-for-one basis pursuant to the terms of the Founder Preferred Stock.
Financial Statement Presentation
The accompanying unaudited condensed financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The balance sheet as of December 31, 2020 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2020. The notes to the unaudited condensed financial statements are presented on a going concern basis unless otherwise noted.
| 5 |
Basis of Presentation
The
accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern. During
the quarter ended September 30, 2021, the Company commenced operation in its current line of business. The Company incurred
a net loss of approximately $
The Company’s condensed financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals; successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence on outside sources of financing; risks associated with research and development; dependence on third-party suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of profitable operations is dependent on future events, including obtaining adequate financing to fund its operations and generating a level of revenues adequate to support the Company’s cost structure.
The Company will need to raise debt or equity financing in the future in order to continue its operations and achieve its growth targets. However, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms, when and if needed, or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including market demand for the Company’s products and services, the success of product development efforts, the timing of receipts for customer deposits, the management of working capital, and the continuation of normal payment terms and conditions for purchase of goods and services. The Company believes its cash balances and cash flow from operations will not be sufficient to fund its operations and growth for the next twelve months from the issuance date of these financial statements. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then the Company will likely need to raise additional funding from investors or through other avenues to continue as a going concern.
Debt Discounts
The Company accounts for debt discounts originating in connection with conversion features that remain embedded in the related notes in accordance with ASC 470-20, Debt with Conversion and Other Options. These costs are classified on the 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 statements of 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.
There were common share equivalents at September 30, 2021 and common share equivalents at September 30, 2020. For the nine months ended September 30, 2021 and 2020, these potential shares were excluded from the shares used to calculate diluted net earnings per share as their effect would have been antidilutive.
| 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 financial condition or the results of its operations.
Note 2 – Accounts Payable and Accrued Expenses
The following table summarizes the Company’s accounts payable and accrued expense balances as of the date indicated:
| September 30, 2021 | December 31, 2020 | |||||||
| Trade payables | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Interest payable | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
Note 2 – Convertible Promissory Notes
During
the period ended September 30, 2021, the Company issued two convertible promissory notes amounting to $
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
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 $
| 7 |
The Company determined that the conversion feature of the Notes would not be an embedded feature to be bifurcated and accounted for as a derivative in accordance with ASC 818-15, Derivatives and Hedging.
The convertible promissory notes consisted of the following as of the date indicated:
| September 30, 2021 | December 31, 2020 | |||||||
| 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 unamortized debt discounts will be amortized within one-year as of September 30, 2021 and December 31, 2020, respectively.
| September 30, 2021 | December 31, 2020 | |||||||
| Principal | $ | $ | ||||||
| Interest | ||||||||
| Total | ||||||||
| Conversion price per share | – | |||||||
| Potential future share | ||||||||
Interest
expense on default convertible promissory notes amounted to $
Note 3 – Notes Payable
On
January 11, 2021, the Company issued a promissory note in the principal amount of $
On
February 19, 2021, the Company issued a promissory note in the principal amount of $
| 8 |
On
April 5, 2021, 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 $
On July
1, 2021, the Company issued a promissory note in the principal amount of $
On
July 12, 2021, the Company issued a promissory note in the principal amount of $
On
August 10, 2021, the Company issued a promissory note in the principal amount of $
In
August 2021, the Company issued four promissory notes, to a single lender, in the aggregate principal amount of $
Interest
expense on notes payable amounted to $
| 9 |
Note 4 – Stockholders’ Equity (Deficit)
Common stock
In January 2021, the Company’s President and a member of the Board of Directors, resigned as an officer and director of the Company (“Termination Agreement”). Part of the Termination Agreement stipulates the return of shares of the Company’s common stock (“Cancelled Shares”). The Cancelled Shares were returned and cancelled on April 20, 2021.
In February 2021, the Company signed a new consulting agreement that granted one of its shareholders an option to purchase shares of the Company’s common stock at $ per share for the consultancy work provided from August 2020 to February 2021. The options were fully vested on the date of issuance. The fair value of the options was approximately $, as of the grant date, of which approximately $ was expensed and accrued during the year ended December 31, 2020. The remaining fair value of approximately $ was expensed during the nine months ended September 30, 2021.
In
March 2021, the Company’s Chief Executive Officer (“CEO’) agreed to forgive approximately $
In
March 2021, the Company’s Chief Financial Officer agreed to reduce the amounts due to him from approximately $
In May 2021, the Company signed a letter of understanding that granted one of its shareholders an option to purchase shares of the Company’s common stock at $ per share for the consultancy work provided during the Company’s restructuring phase from February 17, 2021 through April 30, 2021. The options were fully vested on the date of issuance. The fair value of the options was approximately $, as of grant date, which was expensed during the nine months ended September 30, 2021.
In
May 2021, an option holder exercised three options for ,
and shares of the Company’s common stock at
an exercise price of $for each option, for total proceeds of approximately
$
Restricted common stock awards
On August 17, 2021, the Company entered into Restricted Share Award Agreements (the “Award Agreements”) with two consultants pursuant to which the Company issued to the consultants shares of common stock of the Company in exchange for their future services. The Awards have an initial term of one year, which shall be automatically renewed on a year-to-year basis unless either party gives a written notice of termination. The two consultants who entered into these agreements include:
| 1) | A consultant who was granted restricted share awards. | |
| 2) | An entity, which is owned by the Company’s CEO and majority shareholder, was granted restricted share awards. |
As indicated in the Awards Agreement, fifty percent (50%) of the shares shall vest upon the completion of the first two development phases of a 5 nanometer ASIC chip that includes the “FPGA Simulation” and “Tape Out”, and the remaining fifty (50%) of the shares shall vest upon the completion of the next phases of the chip development that include the completion of the Foundry Mask for production in the semiconductor foundry, initial production run of chips and the completion of a bitcoin mining system ready for sale to customers. Should the Company not raise sufficient capital to complete the Foundry Mask within 6 months of completing the first two development phases, then of the shares shall be considered vested.
The Company’s management has accounted for the Award Grants as restricted stock compensation in accordance with ASC 718 – Stock Compensation (“ASC 718”). ASC 718 requires the Company to estimate the service period over which the compensation cost will be recognized. Management has estimated that the first two development phases will be completed within 15 months and the Foundry Mask will be completed within 6 months for a total of 21 months service period. Compensation cost will be recognized ratably over 21 months and in the same manner had the Company paid in cash. The estimated service period will be adjusted for changes in actual and expected completion dates. Any such change will be recognized prospectively, and the remaining deferred compensation will be recognized over the remaining service period.
As
of September 30, 2021, a total of and shares were issued to each of the
consultant, respectively. The value was $per
share on the date of issuance (“Grant Date”) for an aggregate fair value of $
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.
| 10 |
| Shares | Deferred compensation | |||||||
| Grant date fair value | $ | |||||||
| Accretion | ( | ) | ||||||
| Balance as of September 30, 2021 | $ | |||||||
Issuance of Warrants
On
September 15, 2021, the Company issued warrants to purchase
Note 5 – Subsequent Events
The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The management of the Company determined the following reportable non-adjusting events:
In October 2021, the Board of Directors authorized an amendment to the Articles of Incorporation of the Company to change the Company’s name of AIQ Blockchain, Inc. The name change has not yet been effected.
In October 2021, Board of Directors approved and adopted the 2021 Equity Incentive Plan (the “Equity Incentive Plan”). The Plan reserved for issuance up to shares of Company’s common stock for awards to directors, employees and consultants of the Company.
| 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, 2020.
This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with the Securities and Exchange Commission. See “Cautionary Note Regarding Forward Looking Statements.”
Plan of Operations
As of the filing of this Report, it is the current intention of the board of directors for our company to develop and manufacture a next generation high-performance computer system that is scalable, upgradeable, and cost effective for processing cryptocurrencies, tokens and blockchain-based transactions. We are in the process of refining and finalizing the course of action needed to implement our proposed new business operations. As a result, management has not determined our actual short-term or long-term cash requirements, which management expects to be substantial.
We will require substantial financing to commence meaningful business operations and to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development plans, any commercialization efforts or other operations. We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs. In addition, even if we are able to obtain sufficient funding to commence our business operations, we may need to pursue additional financing in the future to make expenditures and/or investments to support the growth of our business and may require additional capital to pursue our business objectives and respond to new competitive pressures, pay extraordinary expenses or fund our growth, including through acquisitions. Additional funds, however, may not be available when we need them on terms that are acceptable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to commence our proposed business operations, to continue to grow and support our business and to respond to business challenges could be significantly limited.
Critical Accounting Policies
Our financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (US GAAP). Our fiscal year ends December 31.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses for the reporting periods. On an ongoing basis, we evaluate such estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ (perhaps significantly) from these estimates under different assumptions or conditions.
While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. Our management believes that we do not have any significant accounting policies, given we had only limited operations as of September 30, 2021.
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Results of Operations
Revenues
We had no revenues for the three and nine months ended September 30, 2021 and 2020.
Expenses
Operating expenses for the three and nine months ended September 30, 2021 were $1,876,000 and $2,587,000, respectively, compared to $78,000 and $315,000 for the three and nine months ended September 30, 2020, respectively. The increase of $2,272,000 for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 primarily pertained to (1) the accretion of stock-based compensation related to the Restricted Stock Awards issued two consultants totaling to $1,550,000 in relation to their services; (2) vested warrants amounting to $561,000; and (3) other expenses such as filing, legal and transfer agent fees and consulting fees paid to outside third parties in 2021.
Net loss
Net loss for the nine months ended September 30, 2021 and 2020 was $2,813,000 and $665,000, respectively, consisting primarily of the expenses for the accretions of the stock based compensation, filing fees, transfer agent costs, legal, consulting and accounting fees, and financing costs.
Liquidity and Capital Resources
Our financial position as of September 30, 2021 and December 31, 2020 were as follows:
Working Capital
| September 30, 2021 | December 31, 2020 | |||||||
| Current Assets | $ | 3,377,000 | $ | 2,000 | ||||
| Current Liabilities | 3,297,000 | 1,325,000 | ||||||
| Working Capital (Deficit) | $ | 80,000 | $ | (1,323,000 | ) | |||
At September 30, 2021, we had cash of approximately $3,377,000. Working capital deficit improved by approximately $1,403,000 from December 31, 2020 to September 30, 2021 to reflect a positive working capital balance. The change in our working capital was primarily due to increase in cash and cash equivalents used in operations of approximately $3,377,000, decrease in prepaid expenses of approximately $2,000, decrease in our accounts payable and accrued liabilities of approximately $18,000, increase in convertible promissory notes from new issuances with total proceeds of $3,550,000, and issuance of additional convertible promissory notes in the aggregate principal amount of $128,000.
Cash Flows
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash from Operating Activities | $ | (301,000 | ) | $ | (172,000 | ) | ||
| Net cash from Investing Activities | - | - | ||||||
| Net cash from Financing Activities | 3,678,000 | 49,000 | ||||||
| Increase (decrease) in Cash during the Period | 3,377,000 | (123,000 | ) | |||||
| Cash, Beginning of Period | - | 123,000 | ||||||
| Cash, End of Period | $ | 3,377,000 | $ | - | ||||
Our net cash used in operating activities was $301,000 and $172,000 for the nine-month period ended September 30, 2021 and 2020, respectively, resulting from operating expenses.
The increase in net cash from financing activity of $3,678,000 was primarily due to the sale and issuance of our convertible promissory notes in the principal amount of $3,550,000.
Plan of Operations and Cash Requirements
It is the current intention of the board of directors for our company to develop and manufacture next generation high-performance computer systems that are scalable, upgradable, and cost effective for processing cryptocurrencies, crypto-tokens, and other blockchain-based transactions. As of the filing of this Report, our management is still in the process of refining and finalizing the course of action needed to implement our proposed new business operations. As a result, management has not determined our actual short-term or long-term cash requirements, which management expects to be substantial.
We will require substantial financing to commence meaningful business operations and to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development plans, any commercialization efforts or other operations. We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs. In addition, even if we are able to obtain sufficient funding to commence our business operations, we may need to pursue additional financing in the future to make expenditures and/or investments to support the growth of our business and may require additional capital to pursue our business objectives and respond to new competitive pressures, pay extraordinary expenses or fund our growth, including through acquisitions. Additional funds, however, may not be available when we need them on terms that are acceptable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to commence our proposed business operations, to continue to grow and support our business and to respond to business challenges could be significantly limited.
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Until we finalize our plans and raise capital to execute our business plan, our operations will be developmental, so our operating expenses will be similarly limited. Our operational expenses have been and will continue to be funded by private placements of our debt and equity securities or by loans from our majority shareholder.
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company and therefore are not required to provide the information for this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer (our “Certifying Officers”), conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.
Based on their evaluation, the Certifying Officers concluded that, as of September 30, 2021, our disclosure controls and procedures were not effective.
The material weakness related to internal control over financial reporting that was identified at September 30, 2021 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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Internal Controls
Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
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PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
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.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| * | XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: November 15, 2021 | CalEthos, Inc. | |
| By: | /s/ Michael Campbell | |
| Name: | Michael Campbell | |
| Title: | Chief Executive Officer | |
| By: | /s/ Dean S Skupen | |
| Name: | Dean S Skupen | |
| Title: | Chief Financial Officer | |
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