Note
1 – Organization and Accounting Policies
CalEthos,
Inc. (the “Company”) (fka RealSource Residential, Inc.) was incorporated on March 20, 2002 under the laws of the State
of Nevada. Since the second quarter of 2016, the Company has been a “shell” company, as defined in Rule 12b-2 under
the Exchange Act.
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 11,006,356 shares (440,256 shares after giving effect to the Reverse Stock Split (see Note 3) (the “Control
Shares”) of the Company’s issued and outstanding shares of common stock for an aggregate purchase price of $180,000.
Immediately prior to the closing under the Control Purchase Agreement on September 12, 2018 (the “Closing Date”),
RealSource Acquisition assigned its rights under the Control Purchase Agreement to M1 Advisors, LLC, a Delaware limited liability
company (“M1 Advisors”), pursuant to a purchase agreement and assignment and assumption of contract rights dated as
of August 28, 2018 between RealSource Acquisition and M1 Advisors. M1 Advisors paid RealSource Acquisition $80,000 as consideration
for such assignment.
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
office 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 15,600,544 shares of the Company’s
series A preferred stock, which has since been re-designated as Founder preferred stock (“Founder Preferred Stock”),
for an aggregate purchase price of $16,000, or $0.001 per share. Of the Founder Preferred Stock purchased, 9,320,414 shares were
purchased by M1 Advisors, 4,674,330 shares were purchased by Mr. Cooper and an aggregate of 1,195,000 shares were purchased by
the members of RealSource Acquisition or their assigns.
Immediately
following the above transactions, an aggregate of 15,600,544 shares of Founder Preferred Stock and 630,207 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 60.14% 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 28.80% 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.
Business
Activity
Following
the change in control, as described above, the board of directors determined to establish the Company in the rapidly-growing cannabis
industry, initially in the State of California. The primary activity of the Company’s management is to seek and investigate
various opportunities in the California cannabis industry, and if such investigation warrants, acquire assets and create a business
around them, acquire part or all of an operating cannabis business or invest in a joint venture with other more established companies
already in the cannabis industry. The Company will not restrict its search to any specific business, segment of the cannabis industry
or geographical location and the Company may participate in a business venture of virtually any kind or nature that the board
of directors believe is beneficial to the Company and its shareholders.
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 six months ended June
30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. The
balance sheet as of December 31, 2018 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, 2018. The notes to the
unaudited condensed financial statements are presented on a going concern basis unless otherwise noted.
Basis
of Presentation
The
accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern. The
Company has no established operations. The Company incurred a net loss of approximately $998,000 for the six months ended June
30, 2019 and had an accumulated deficit of approximately $8,825,000 as of June 30, 2019. The Company has financed its activities
principally through debt and equity financing and shareholder contributions. Management expects to incur additional losses and
cash outflows in the foreseeable future in connection with its operating activities.
The
Company’s condensed 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 consolidated balance
sheet as a direct deduction from the debt liability. The Company amortizes these costs over the term of its debt agreements as
interest expense-debt discount in the consolidated statement of operations.
Recently
Adopted Pronouncements
Leases
The
Company adopted Accounting Standards Update (ASU) No. 2016-02,
Leases
on January 1, 2019 using the modified retrospective
method. For its operating leases in excess of 12 months, the Company recognizes a right-of-use asset and a lease liability on
its balance sheet. The lease liability is determined as the present value of future lease payments using an estimated rate of
interest that the Company would pay to borrow equivalent funds on a collateralized basis at the adoption date for the existing
lease and at lease commencement date for new leases. The right-of-use asset is based on the liability adjusted for any prepaid
or deferred rent, and lease incentives, as applicable. The lease term at the commencement date is determined by considering whether
renewal options and termination options are reasonably assured of exercise. The Company has no long-term leases and such adoption
had no impact.
Note
2 – Convertible Promissory Notes
In
February, March and June 2019, the Company issued convertible promissory notes in the amounts of $110,000, $132,000 and $110,000,
respectively (the “Notes”). The total proceeds were approximately $320,000, due to approximately $32,000 for an original
issue discount. The Notes are non-interest bearing with the principal due and payable in February 2020 and June 2020. Any amount
of unpaid principal on the date of maturity will accrue interest at rate of 10% per annum (default interest). The principal amount
and all accrued interest are convertible into shares of the Company’s common stock, as of the date of issuance, at a rate
of $1.00 per share (“Conversion Rate”). The conversion rate is adjustable if, at any time when any principal amount
of the Notes remains unpaid or unconverted, the Company issues or sells any shares of the Company’s common stock for no
consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts
or allowances in connection therewith), which is less than the Conversion Rate in effect on the date of such issuance (or deemed
issuance) of such shares of common stock (a “Dilutive Issuance”). Immediately upon a Dilutive Issuance, the Conversion
Rate will be reduced to the amount of the consideration per share received by the Company in such Dilutive Issuance. Events of
default include failure to issue conversion shares, the occurrence of a breach or default under any other agreement, instrument
or document involving any indebtedness for borrowed money of more than $100,000 in the aggregate, bankruptcy filing, application
for the appointment of a custodian, trustee or receiver, insolvency, the Company’s common stock delisted, or dissolution,
winding up, or termination of the business of the Company.
In
connection with the issuance of the Notes, the Company issued to the purchasers of the Notes stock purchase warrants to purchase
an aggregate of 176,000 shares of the Company’s common stock for a purchase price of $1.00 per share, subject to adjustments.
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 totaled approximately $151,000 and of
the beneficial conversion totaled approximately $169,000, which amounts are being amortized and expensed over the term of the
Notes. For the three and six months ended June 30, 2019, the amortization expense was approximately $67,000 and $88,000, respectively.
The
Company determined that the conversion feature of the Notes would not be an embedded feature to be bifurcated and accounted for
as a derivative in accordance with ASC 818-15
Derivatives and Hedging
.
As
of June 30, 2019, convertible promissory notes consisted of the following:
|
Principal
Amount
|
|
$
|
352,000
|
|
|
Original
issue discount
|
|
|
(24,000
|
)
|
|
Warrant
discount
|
|
|
(114,000
|
)
|
|
Conversion
feature discount
|
|
|
(126,000
|
)
|
|
Net
balance
|
|
$
|
88,000
|
|
The
discounts of approximately $264,000 will be amortized and expensed over the remaining contractual life of the convertible promissory
notes. The amortization expense will be approximately $187,000 and 77,000 for the remaining six months of 2019 and for the year
ending December 31, 2020, respectively.
Note
3 – Stockholders’ Deficit
Issuance
of Series A Preferred Stock
In
January 2018, the Company issued and sold an aggregate of 50,000 shares of Series A Preferred Stock for an aggregate purchase
price of $69,000, or $1.38 per share.
Issuance
of Stock Options
The
Company entered into three separate consulting agreements with provisions for the issuance of options under the
Company’s 2019 Stock Options Plan to purchase 685,000, 250,000 and 15,000 shares of the Company’s common
stock. The Options have a life of three years from the vesting date and an exercise price of $0.001 per share
with the following vesting terms:
Option
to purchase 685,000 shares
|
|
i.
|
385,000
shares vest upon the signing of the consulting agreement; and
|
|
|
ii.
|
300,000
shares vest on the first anniversary of the date on which the consultant serves as the Vice President of Capital Markets
of the Company as a full-time employee.
|
Option
to purchase 250,000
|
|
i.
|
50,000
shares vest upon the completion of the Company’s first Retail Showcase Store;
|
|
|
ii.
|
100,000
shares vest on the first anniversary date on which the consultant serves as the Vice President of Retail Store Development
of the Company as full-time employee; and
|
|
|
iii.
|
100,000
shares to vest 1/12
th
per month thereafter.
|
Option to purchase 15,000 shares
|
|
i.
|
15,000 shares to vest upon
the completion of the Company’s first Retail Showcase Store.
|
The
options granted to the consultants are considered to be performance based awards to be vested once the individuals
are considered to be employees of the Company. Each of the consultants has the option to become a full-time employee
when the Company has received a minimum of $5,000,000 in debt or equity financing for the Company’s operations (the “Financing”).
This is the time that the Company would begin to operate and use the Holders services. Until the Financing occurs, the
Company will be in the predevelopment stage of its intended business model.
Of
the options awarded,
385,000 stock option was granted and vested
on April 1, 2019. For the three and six months ended June 30, 2019, the compensation expense, classified as professional fees
in the statement of operations, was $577,000, which was calculated using the Black-Scholes fair value option-pricing model
with key input variables provided by management, as of the date of issuance: volatility of 324%, fair value of common stock $1.50,
term of option 3 years, risk free rate of 2.29% and dividend rate of $0.
Note
4 – 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 that there were no reportable subsequent
events to be disclosed, except those already disclosed above.