Note
1 – Organization And Accounting Policies 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 $3,500,000
from
the sale of convertible promissory notes, the Company
was a “shell” company, as defined in Rule 12b-2 under the Exchange Act. Upon the consummation of a financing transaction
on September 15, 2021, the Company ceased being a shell company. It is the current intention of the board of directors of the 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.
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 (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 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 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.
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.
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 $2,813,000
for the nine months ended September 30, 2021 and had an accumulated
deficit of approximately $12,895,000
as of September 30, 2021. 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. In order to fund its proposed
business plan, the Company has raised, and expects to continue to raise, funds from investors by issuing common stock, preferred stock
and/or debt securities.
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.
Earnings
Per Share
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 20,055,215
common share equivalents at September 30, 2021 and 1,778,214
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.
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 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The
following table summarizes the Company’s accounts payable and accrued expense balances as of the date indicated:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Trade payables
|
|
$
|
270,000
|
|
|
$
|
316,000
|
|
|
Accrued liabilities
|
|
|
58,000
|
|
|
|
255,000
|
|
|
Interest payable
|
|
|
95,000
|
|
|
|
40,000
|
|
|
Accounts payable and accrued expenses
|
|
$
|
423,000
|
|
|
$
|
611,000
|
|
Note
2 – Convertible Promissory Notes CONVERTIBLE PROMISSORY NOTES
During
the period ended September 30, 2021, the Company issued two convertible promissory notes amounting to $55,000
and $3,850,000
(the “Notes”), respectively. The
total aggregate proceeds were $3,550,000
due to a $355,000
aggregate original issue discount. The Notes
are non-interest bearing with the principal due and payable on March 1, 2022 and August 31, 2022, respectively. Any amount of unpaid
principal on the date of maturity will accrue interest at rate of 10%
per annum (default interest). The principal amount and all accrued interest are convertible into shares of the Company’s common
stock, as of the date of issuance, at a rate of $1.00
and $1.25
per share (“Conversion Rate”), respectively.
The Conversion Rate is adjustable if, at any time when any principal amount of the Notes remains unpaid or unconverted,
the Company issues or sells any shares of the Company’s common stock for no consideration or for a consideration per share (before
deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith), which is less than
the Conversion Rate in effect on the date of such issuance (or deemed issuance) of such shares of common stock (a “Dilutive Issuance”).
Immediately upon a Dilutive Issuance, the Conversion Rate will be reduced to the amount of the consideration per share received by the Company in such
Dilutive Issuance. Events of default include failure to issue conversion shares, the occurrence of a breach or default under any other
agreement, any money judgment, writ or similar process entered or filed against the Company or any of its property or other assets for
more than $100,000, bankruptcy filing, application for the appointment of a custodian, trustee or receiver, insolvency, the Company’s common stock
delisted, or dissolution, winding up, or termination of the business of the Company.
In
connection with the issuance of the Notes, the Company issued to the purchasers of the Notes stock purchase warrants (the “Warrants”)
to purchase an aggregate of 1,567,500 shares of the Company’s common stock for a purchase price of $1.50 to $1.87 per share, subject
to adjustments. The Warrants were valued using the Black Scholes option pricing model for a total fair value of $3,004,000 based on a
3-year term, volatility of 404.91% to 405.93%, a risk-free equivalent yield of 0.27% to 0.42%, and stock price ranging from $0.10 to
$1.95.
In
accordance with ASC 470 - Debt, the Company has allocated the cash proceeds amounts of the Notes among the Notes, the Warrants
and the conversion feature. The relative fair value of the Warrants issued amounted to approximately $1,690,000
and the beneficial conversion amounted to $0,
which amounts are being amortized and expensed over the term of the Notes. Amortization expense was approximately $165,000
and $170,000
for the three months and nine months ended
September 30, 2021, respectively, and $1,000
and $185,000
for the three months and nine months ended September
30, 2020, 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.
The
convertible promissory notes consisted of the following as of the date indicated:
SCHEDULE OF CONVERTIBLE PROMISSORY NOTES
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
708,000
|
|
|
$
|
506,000
|
|
|
Additions
|
|
|
3,905,000
|
|
|
|
202,000
|
|
|
Balance, end of year
|
|
|
4,613,000
|
|
|
|
708,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
5,000
|
|
|
|
183,000
|
|
|
Additions
|
|
|
2,045,000
|
|
|
|
8,000
|
|
|
Amortization
|
|
|
(172,000
|
)
|
|
|
(186,000
|
)
|
|
Balance, end of year
|
|
|
1,878,000
|
|
|
|
5,000
|
|
|
Net carrying amount
|
|
$
|
2,735,000
|
|
|
$
|
703,000
|
|
The
unamortized debt discounts will be amortized within one-year as of September 30, 2021 and December 31, 2020, respectively.
Potential
future shares to be issued on conversion of the notes as of the date indicated are as follows:
SCHEDULE OF POTENTIAL FUTURE SHARES ISSUANCE OF CONVERSION NOTES
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Principal
|
|
$
|
4,613,000
|
|
|
$
|
708,000
|
|
|
Interest
|
|
|
87,000
|
|
|
|
39,000
|
|
|
Total
|
|
|
4,700,000
|
|
|
|
747,000
|
|
|
Conversion price per share
|
|
|
1.00 – 1.25
|
|
|
|
1.00
|
|
|
Potential future share
|
|
|
3,930,000
|
|
|
|
747,000
|
|
Interest
expense on default convertible promissory notes amounted to $17,000 and $48,000 for the three months and nine months ended September
30, 2021, respectively, and $13,000 and $27,000 for the three months and nine months ended September 30, 2020, respectively.
Note
3 – Notes Payable NOTES PAYABLE
On
January 11, 2021, the Company issued a promissory note in the principal amount of $15,000.
The interest on this note shall accrue, beginning from the date of issuance, at an interest rate of 8%
per annum. The principal and any accrued interest are payable on or before March
11, 2022.
During any event of default under the note, the interest rate shall increase to 10%
per annum. Events of default include failure to pay principal or interest, breach of covenants, breach of representations and
warranties, borrower’s assignment of substantial part of its property or business, any money judgment, writ, or similar
process shall be entered or filed against the borrower or any subsidiary of the borrower or any of its properties or other assets
for more than $100,000,
bankruptcy, liquidation of business, and cessation of operations. The principal amount outstanding under this note was
$15,000 as of September 30, 2021.
On
February 19, 2021, the Company issued a promissory note in the principal amount of $25,000.
The interest on the unpaid principal balance accrues at a rate of 10%
per annum. The principal and any accrued interest shall be paid in a single installment on or before February
19, 2022. In the event that the Company fails to pay
the balance of this note in full on the due date or fails to make any payment due within 15 days of the due date, any unpaid principal
shall accrue interest at the rate of 15%
per annum during the default (default interest). Events of default include failure to make any payment including accrued interest when
due, voluntary or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession
of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount outstanding
under this note was $25,000
as of September 30, 2021.
On
April 5, 2021, the Company issued a promissory note in the principal amount of $8,550. This
note is non-interest bearing with the principal due and payable on July
5, 2021. In the event that the Company fails
to pay the balance of this note in full on the date or fails to make any payments due within 15 days of the due date, any
unpaid principal shall accrue interest at the rate of 8%
per annum during the default. Events of default include failure to make any payment including accrued interest when due,
voluntary or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession
of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount of
this note was paid on September 16, 2021.
On
April 22, 2021, the Company issued a promissory note in the principal amount of $50,000. The interest on the unpaid principal balance
accrues at a rate of 10% per annum. The principal and any accrued interest shall be paid in a single installment on or before April 22, 2022. In the event that the Company fails to pay the balance of this note in full on the date or fails to make any payments due within
15 days of the due date, any unpaid principal shall accrue interest at the rate of 15% per annum during the default.
Events of default include failure to make any payment including accrued interest when due, voluntary or involuntary petition of bankruptcy,
appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment
made by the Company for the benefit of creditors. The principal amount outstanding under this note was $50,000 as of September 30, 2021.
On July
1, 2021, the Company issued a promissory note in the principal amount of $25,000. The
interest on the unpaid principal balance accrues at a rate of 10%
per annum. The principal and any accrued interest shall be paid in a single installment on or before July 1,2022. In the event that
the Company fails to pay the balance of this note in full on the date or fails to make any payments due within 15 days of the
due date, any unpaid principal shall accrue interest at the rate of 15%
per annum during the default (default interest). Events of default include failure to make any payment including accrued interest
when due, voluntary or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take
possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The
principal amount outstanding under this note was $25,000
as of September 30, 2021.
On
July 12, 2021, the Company issued a promissory note in the principal amount of $5,000.
The principal amount of this note was settled on September 16, 2021.
On
August 10, 2021, the Company issued a promissory note in the principal amount of $7,000. The principal amount of this note was
settled on September 16, 2021.
In
August 2021, the Company issued four promissory notes, to a single lender, in the aggregate principal amount of $13,500.
The principal for each note shall be paid in a single installment during November 2021.
In the event that the Company fails to pay the balance of these notes in full on the date or fails to make any payments due
within 15 days of the due date, any unpaid principal shall accrue interest at the rate of 8%
per annum during the default. Events of default include failure to make any payment including accrued interest when due,
voluntary or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession
of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount
outstanding under these notes was $13,500 as of September 30, 2021.
Interest
expense on notes payable amounted to $4,000
and $8,000
for the three months and nine months ended September
30, 2021, respectively, and nil
and nil
for the three months and nine months ended September
30, 2020, respectively.
Note
4 – Stockholders’ Equity (Deficit) 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 3,674,330 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 750,000 shares
of the Company’s common stock at $0.001 per share for the consultancy work provided from August 2020 to February 2021. The options
were fully vested on the date of issuance. The fair value of the options was approximately $52,000, as of the grant date, of which approximately
$37,000 was expensed and accrued during the year ended December 31, 2020. The remaining fair value of approximately $15,000 was expensed
during the nine months ended September 30, 2021.
In
March 2021, the Company’s Chief Executive Officer (“CEO’) agreed to forgive approximately $68,000
due to him, which was
treated as contributed paid in capital.
In
March 2021, the Company’s Chief Financial Officer agreed to reduce the amounts due to him from approximately $128,000
to $30,000.
For the reduction of $98,000,
the Company will issue 75,000
shares of common stock. The remaining liability
of $30,000 will
be paid in cash.
In
May 2021, the Company signed a letter of understanding that granted one of its shareholders an option to purchase 300,000 shares of the
Company’s common stock at $0.001 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
$561,000, 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 385,000,
750,000
and 300,000
shares of the Company’s common stock at
an exercise price of $0.001
for each option, for total proceeds of approximately
$2,000.
Restricted
common stock awards
On
August 17, 2021, the Company entered into Restricted Share Award Agreements (the “Award Agreements”) with two
consultants pursuant to which the Company issued to the consultants shares of common stock of the Company in exchange for
their future services. The Awards have an initial term of one year, which shall be automatically renewed on a year-to-year
basis unless either party gives a written notice of termination. The two consultants who entered into these agreements include:
|
|
1)
|
A
consultant who was granted 10,000,000
restricted
share awards.
|
|
|
2)
|
An
entity, which is owned by the Company’s CEO and majority shareholder, was granted
1,500,000
restricted share
awards.
|
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 100% 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 10,000,000
and 1,500,000
shares were issued to each of the
consultant, respectively. The value was $1.93 per
share on the date of issuance (“Grant Date”) for an aggregate fair value of $22,195,000
The
stock-based award compensation was recorded as an increase in deferred compensation expense, common stock and additional paid-in
capital in the Company’s books at the time of the grant.
The
table below summarizes the transactions related to the Company restricted stock awards for the nine months ended September 30, 2021:
SCHEDULE OF RESTRICTED STOCK AWARDS
|
|
|
Shares
|
|
|
Deferred compensation
|
|
|
Grant date fair value
|
|
|
11,500,000
|
|
|
$
|
22,195,000
|
|
|
Accretion
|
|
|
-
|
|
|
|
(1,550,000
|
)
|
|
Balance as of September 30, 2021
|
|
|
11,500,000
|
|
|
$
|
20,645,000
|
|
Issuance
of Warrants
On
September 15, 2021, the Company issued warrants to purchase 100,000 shares of the Company’s common stock. For the period ended
September 30, 2021, the compensation expense, classified as professional fees in the statement of operations, was $195,000, 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 359%, fair value of common stock $1.95, estimated life of 3 years, risk free rate of 0.43% and dividend rate
of $0.
Note
5 – Subsequent Events SUBSEQUENT EVENTS
The
Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued
to determine if they must be reported. The management of the Company determined the 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 2,500,000
shares of Company’s common stock for
awards to directors, employees and consultants of the Company.