Unaudited
Condensed Consolidated Notes to the Financial Statements
March
31, 2022
Note
1 – Organization and Accounting Policies
ORGANIZATION AND ACCOUNTING POLICIES
CalEthos,
Inc. (the “Company” or “we”) was incorporated on March 20, 2002 under the laws of the State of Nevada.
On
December 20, 2018, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada
to change the Company name from “RealSource Residential, Inc.” to “CalEthos, Inc.”. This amendment became effective
immediately upon filing on December 20, 2018.
As
of December 31, 2021, the primary activity of the Company’s management is to develop and implement a plan to manufacture high-performance
computer systems that are scalable, upgradeable and cost effective for processing cryptocurrencies, tokens and blockchain-based transactions,
and if other opportunities warrant, acquire assets and all or part of other companies operating in the cryptocurrency mining hardware
industry or invest or joint venture with other more established companies already in the industry. The Company will not restrict
its search to any specific business segment of the cryptocurrency mining hardware industry or geographical location and the Company may
participate in a business venture of virtually any kind or nature that is beneficial to the Company and its shareholders.
Amendments
to Certificate of Incorporation
In
October 2021, the Board of Directors authorized an amendment to the Articles of Incorporation of the Company to change the Company’s
name to AIQ Blockchain, Inc. The name change has not yet been effected.
Incorporation
of Korean entity
On
November 5, 2021, AIQ System Inc. (“AIQ”) was incorporated in Seoul, Republic of Korea. AIQ is authorized to issue 3 million
shares of common stock. At the date of incorporation, 10,000 shares
were issued to the Company for 100,000,000 Korean Won,
or approximately $89,000, for 100%
ownership of AIQ.
AIQ
is in the business of (1) developing and manufacturing computer chips and systems, (2) importing and exporting semiconductors
and electronic products, (3) wholesale and retail business of semiconductors and electronic products, and (4) any and all business activities
incidental to the foregoing activities.
Basis
of Presentation
The
accompanying Condensed Consolidated Financial Statements and notes thereto are unaudited. The unaudited interim financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and
pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note
disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The December 31, 2021
condensed balance sheet data was derived from financial statements but does not include all disclosures required by GAAP. These interim
unaudited condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary
for a fair presentation of the financial position, results of operations and cash flows for the interim three-month period ended March
31, 2022 and 2021. The results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected
for the full year ending December 31, 2022 or for any future period.
These
unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements
and the notes thereto for the year ended December 31, 2021, included in the Company’s annual report on Form 10-K filed with the
SEC on March 31, 2022.
Liquidity
and Going Concern
The
Company incurred a net loss of approximately $3,926,000 for the three months ended March 31, 2022 and had an accumulated deficit of approximately
$20,757,000 as of March 31, 2022. The Company has financed its activities principally through debt and equity financing and shareholder
contributions. Management expects to incur additional losses and cash outflows in the foreseeable future in connection with its operating
activities.
The
Company’s condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The
Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals; successful
development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence on outside
sources of financing; risks associated with research and development; dependence on third-party suppliers and collaborators; protection
of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of profitable operations
is dependent on future events, including obtaining adequate financing to fund its operations and generating a level of revenues adequate
to support the Company’s cost structure.
The
Company will need to raise debt or equity financing in the future in order to continue its operations and achieve its growth targets.
However, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms, when and if needed,
or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number
of factors, including market demand for the Company’s products and services, the success of product development efforts, the timing
of receipts for customer deposits, the management of working capital, and the continuation of normal payment terms and conditions for
purchase of goods and services. The Company believes its cash balances and cash flow from operations will not be sufficient to fund its
operations and growth for the next twelve months from the issuance date of these financial statements. If the Company is unable to substantially
increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then the Company will likely need to raise
additional funding from investors or through other avenues to continue as a going concern.
COVID-19
The
continuing COVID-19 global pandemic has caused significant disruption to the economy and financial markets globally, and the full extent
of the potential impacts of COVID-19 are not yet known. Circumstances caused by the COVID-19 pandemic are complex, uncertain and rapidly
evolving. The impact of COVID-19 has not been significant to the Company’s results of operations, financial condition, and liquidity
and capital resources. Although no material impairment or other effects have been identified to date, there is substantial uncertainty
in the nature and degree of its continued effects over time. That uncertainty affects management’s accounting estimates and assumptions,
which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and
information become known. The Company will continue to consider the potential impact of the COVID-19 pandemic on its business operations.
Earnings
Per Share
We
use ASC 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. We compute basic
earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common
shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options
and warrants and stock awards. For periods with a net loss, basic and diluted loss per share is the same, in that any potential common
stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.
Securities
that could potentially dilute loss per share in the future were not included in the computation of diluted loss per share for the three
months ended March 31, 2022 and 2021 because their inclusion would be anti-dilutive. Common share equivalents amounted to 19,011,450
and 2,735,214 as of March 31, 2022 and 2021, respectively.
Recent
Accounting Pronouncements
The
Company’s management reviewed all recently issued accounting standard updates (“ASU’s”) not yet adopted by the
Company and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on the Company’s
condensed consolidated financial condition or the results of its operations.
Note
2 – Intangible and Other Assets
INTANGIBLE AND OTHER ASSETS
On
December 23, 2021, AIQ entered into a Technology Development Agreement (the “Agreement”) with PICOCEL, Co., Ltd. (the “Contractor”
or “PICOCEL”) to develop a Field Programable Gate Array (‘FPGA”) based Bitcoin mining simulation system.
The Agreement was expected to be completed within 6 weeks for a total contract price of 198,000,000
Korean Won (“KRW”) or approximately
$167,000.
On March 17, 2022, the Company and PICOCEL entered into a mutual agreement to cancel and terminate the Agreement. As of the date of the
termination, PICOCEL had completed the first phase of the Agreement upon delivery of the SHA-256 code and FPGA board simulator
resulting to a reclassification of deposits amounting to $38,000
under other assets as of December 31, 2021 to
intangible assets as of March 31, 2022. Additional payments were made to PICOCEL for the three months ended March 31, 2022 amounting
to approximately $36,000.
Total intangible assets amounted to $74,000
as of March 31, 2022.
Note
3 – Accounts Payable and Accrued Expenses
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The
following table summarizes the Company’s accounts payable and accrued expense balances as of the dates indicated:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accounts payable | |
$ | 258,000 | | |
$ | 221,000 | |
Accrued expenses | |
| 92,000 | | |
| 99,000 | |
Accrued interest | |
| 133,000 | | |
| 114,000 | |
Accounts payable and accrued expenses | |
$ | 483,000 | | |
$ | 434,000 | |
Accrued
Interest
The
following table presents the details of accrued interest as of the dates indicated:
SCHEDULE OF ACCRUED INTEREST
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Notes payable | |
$ | 11,000 | | |
$ | 9,000 | |
Convertible promissory notes | |
| 122,000 | | |
| 105,000 | |
Balance, end of the year | |
$ | 133,000 | | |
$ | 114,000 | |
Note
4 – Notes Payable
NOTES PAYABLE
The
table below summarizes the transactions as of the dates indicated:
SCHEDULE OF NOTES PAYABLE
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Balance, beginning of the year | |
$ | 111,000 | | |
$ | 11,000 | |
Additions | |
| – | | |
| 150,000 | |
Payments | |
| (25,000 | ) | |
| (50,000 | ) |
Balance, end of the year | |
$ | 86,000 | | |
$ | 111,000 | |
On
January 11, 2021, the Company issued a promissory note in the principal amount of $15,000.
The interest on this note accrued beginning from the date of issuance, at an interest rate of 8%
per annum. The principal and any accrued interest was 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 included 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 and the accrued interest amounting to $15,000
and $1,000,
respectively, was settled on October 27, 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 accrued at a rate of 10%
per annum. The principal and any accrued interest was to be paid in a single installment on or before February
19, 2022. If the Company failed to pay
the balance of this note in full on the due date or fails to make any payment due within 15 days of the due date, any unpaid principal
was to accrue interest at the rate of 15%
per annum during the default (default interest). Events of default included failure to make any payment including accrued interest
when due, voluntary, or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession
of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount was settled
in full on January 25, 2022.
On
April 5, 2021, the Company issued a promissory note in the principal amount of $9,000.
The interest on the unpaid principal balance accrued at a rate of 8%
per annum. If the Company failed to pay the balance of this note in full on the date or failed to make any payments due
within 15 days of the due date, any unpaid principal was to accrue interest at the rate of 8%
per annum during the default. Events of default include failure to make any payment including accrued interest when due, voluntary, or
involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s
assets or property, or assignment made by the Company for the benefit of creditors. The principal and accrued interest under this note
was settled on September 16, 2021.
On
April 22, 2021, the Company issued a promissory note in the principal amount of $50,000. The interest on the unpaid principal balance
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. If the Company fails to pay the balance of this note in full on the date or fails to make any payments due within 15 days of the
due date, any unpaid principal shall accrue interest at the rate of 15% per annum during the default. Events of default include failure
to make any payment including accrued interest when due, voluntary, or involuntary petition of bankruptcy, appointment of a receiver,
custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for
the benefit of creditors. The principal amount outstanding under this note was $50,000 as of March 31, 2022. Interest accrued as of March
31, 2022 is $3,000.
On
July 1, 2021, the Company issued a promissory note in the principal amount of $25,000. The interest on the unpaid principal balance accrues
at a rate of 10% per annum. The principal and any accrued interest shall be paid in a single installment on or before July 1,2022. If
the Company fails to pay the balance of this note in full on the date or fails to make any payments due within 15 days of the due date,
any unpaid principal shall accrue interest at the rate of 15% per annum during the default (default interest). Events of default include
failure to make any payment including accrued interest when due, voluntary, or involuntary petition of bankruptcy, appointment of a receiver,
custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for
the benefit of creditors. The principal amount outstanding under this note was $25,000 as of March 31, 2022. Interest accrued as of March
31, 2022 is $2,000.
On
July 12, 2021, the Company issued a promissory note in the principal amount of $5,000.
The interest on the unpaid principal balance accrued at a rate of 8%
per annum. The principal and any accrued interest was to be paid in a single installment on or before October
12, 2021. The principal amount of this note was
settled on September 16, 2021.
On
August 10, 2021, the Company issued a promissory note in the principal amount of $7,000. The interest on the unpaid principal balance
accrues at a rate of 8% per annum. The principal and any accrued interest shall be paid in a single installment on or before November
10, 2021.The principal amount of this note was settled on September 16, 2021.
In
August 2021, the Company issued four promissory notes to a single lender in the aggregate principal amount of $14,000.
The interest on the unpaid principal balance of these notes accrued at a rate of 8%
per annum. The principal for each note was to be paid in a single installment during November 2021. If the Company failed
to pay the balance of these notes in full on the date or failed to make any payments due within 15 days of the due date, any unpaid
principal was to accrue interest at the rate of 8%
per annum during the default. Events of default included failure to make any payment including accrued interest when due, voluntary,
or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee, or similar party to take possession of the Company’s
assets or property, or assignment made by the Company for the benefit of creditors. The principal amount outstanding under these notes
was $13,500
as of September 30, 2021. The principal and the
accrued interest aggregating to $14,000
was settled in October 2021.
Interest
expense on notes payable amounted to $2,000 and $1,000 for the three months ended March 31, 2022 and 2021, respectively.
Note
5 – Convertible Promissory Notes
CONVERTIBLE PROMISSORY NOTES
During
the year ended December 31, 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.
The
Company determined that the conversion feature of the Notes would not be an embedded feature to be bifurcated and accounted for as a
derivative in accordance with ASC 815-15 Derivatives and Hedging.
Financing
cost recognized for the amortization of debt discount was approximately $487,000 and $2,000 for the three months ended March 31, 2022
and 2021, respectively.
The
convertible promissory notes consisted of the following as of the dates indicated:
SCHEDULE OF CONVERTIBLE PROMISSORY NOTES
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Principal | |
| | | |
| | |
Balance, beginning of year | |
$ | 4,613,000 | | |
$ | 708,000 | |
Additions | |
| – | | |
| 3,905,000 | |
Balance, end of year | |
| 4,613,000 | | |
| 4,613,000 | |
| |
| | | |
| | |
Discount | |
| | | |
| | |
Balance, beginning of year | |
| 1,526,000 | | |
| 5,000 | |
Additions | |
| – | | |
| 2,045,000 | |
Amortization | |
| (487,000 | ) | |
| (524,000 | ) |
Balance, end of year | |
| 1,039,000 | | |
| 1,526,000 | |
Net carrying amount | |
$ | 3,574,000 | | |
$ | 3,087,000 | |
Effective
interest rate used to amortize the debt discount for the three months ended March 31, 2022 and 2021 ranges from 4.76% to 64.60%. The
unamortized debt discounts will be amortized within one and two years as of March 31, 2022 and 2021, respectively.
Potential
future shares to be issued on conversion of the notes as of the dates indicated are as follows:
SCHEDULE OF POTENTIAL FUTURE SHARES ISSUANCE OF CONVERSION NOTES
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Principal | |
$ | 4,613,000 | | |
$ | 4,613,000 | |
Interest | |
| 122,000 | | |
| 105,000 | |
Total | |
| 4,735,000 | | |
| 4,718,000 | |
Conversion price per share | |
| 1.00 – 1.25 | | |
| 1.00 – 1.25 | |
Potential future share | |
$ | 3,964,842 | | |
$ | 3,947,394 | |
Interest
expense on convertible promissory notes amounted to $18,000 and $14,000 for the three months ended March 31, 2022 and 2021, respectively.
Note
6 – Stockholders Deficit
STOCKHOLDERS DEFICIT
Common
Stock
In
January 2021, the Company’s President and a member of the Board of Directors, resigned as an officer and director of the Company
(“Termination Agreement”). Part of the Termination Agreement stipulated the return of 3,674,330
shares of the Company’s common stock (“Cancelled
Shares”). The Cancelled Shares were returned and cancelled on April 20, 2021.
In
March 2021, the Company’s Chief Executive Officer (“CEO’) agreed to forgive approximately $68,000 due to him, which
was treated as contributed paid in capital.
In
March 2021, the Company’s Chief Financial Officer agreed to reduce the amounts due to him from approximately $128,000
to $30,000.
For the reduction of $98,000,
the Company issued 75,000
shares of common stock. The remaining liability
of $30,000 was
paid in cash.
Restricted
Common Stock Awards
On
August 17, 2021, the Company entered into Restricted Share Award Agreements (the “Award Agreements”) with two consultants
pursuant to which the Company issued to the consultants shares of common stock of the Company in exchange for their future services.
The Awards 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. |
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 December 31, 2021, a total of 11,500,000 shares were issued to the consultants. 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 as of March 31, 2022:
SCHEDULE OF COMPANY RESTRICTED STOCK AWARDS
| |
Shares | | |
Deferred compensation | |
Grant date fair value | |
| 11,500,000 | | |
$ | 22,195,000 | |
Accretion | |
| - | | |
| (7,962,000 | ) |
Balance as of December 31, 2021 | |
| 11,500,000 | | |
$ | 14,233,000 | |
Stock
based compensation expense for the three months ended March 31, 2022 amounted to $3,170,000. Stock based compensation expense for the
year ended December 31, 2021 amounted to $4,792,000.
Issuance
of Stock Options and Warrants
As
of March 31, 2022, a total of 198,000 warrants expired.
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
$38,000 was expensed and accrued during the year ended December 31, 2020 and $14,000 was expensed during the three months ended March
31, 2021.
Note
7 – 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 events:
Technology
Development Agreement
On
April 5, 2022, AIQ entered into a Technology Development Agreement (the “Agreement”) with NNS, Co., Ltd. to develop a FPGA based Bitcoin mining simulation system. The Agreement is expected to be completed within 9 weeks
for a total contract price of 99,000,000 KRW, including 9,000,000 KRW VAT, or approximately $82,000. The payments are scheduled as follows:
SCHEDULE OF PAYMENTS
| |
Amount | |
| |
USD | | |
KRW | |
Within 5 days after signing the contract | |
$ | 41,000 | | |
| 49,500,000 | |
Within 5 days after all conditions are met as stated in “Schedule B – Statement of Work” | |
| 41,000 | | |
| 49,500,000 | |
Total | |
$ | 82,000 | | |
| 99,000,000 | |