Notes
to Unaudited Condensed Consolidated Financial Statements
March
31, 2023
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.
The
Company is implementing its plan to build a clean-energy-powered, modular data center operation using the latest energy-efficient immersion,
liquid and conventional cooling technologies and provide wholesale colocation services to enterprise IT and hyperscale customers. In
addition, the Company may acquire assets and all or part of other companies operating in the high-density computing industry or to invest
or joint venture with other more-established companies already in the industry that would add value to the Company’s business strategy.
In
July 2022, due to the declining state of the bitcoin mining industry and the market for its planned products, the Company’s board
of directors resolved to discontinue the development in South Korea of the Company’s 5 nanometer ASIC chip and containerized, immersion-cooled
bitcoin mining computer system and to focus exclusively on developing the clean-energy-powered data center segment of its business strategy.
The Company has suspended operations of its South Korean subsidiary and will decide in the next twelve months whether to use it to develop
other products or dissolve it.
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.
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 March 31, 2023,
condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required
by GAAP. These interim unaudited condensed consolidated financial statements, in the opinion of management, reflect all normal recurring
adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim three-months
ended March 31, 2023 and 2022. The results for the three months ended March 31, 2023 are not necessarily indicative of the results to
be expected for the full year ending December 31, 2023 or for any future period.
These
unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial
statements and the notes thereto for the year ended December 31, 2022, included in the Company’s annual report on Form 10-K filed
with the SEC on April 17, 2023.
Liquidity
and Going Concern
The
Company incurred net loss of approximately $199,000
for the three months ended March 31, 2023 and had an accumulated deficit of approximately $14,849,000
as of March 31, 2023. 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. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for one
year from the issuance of these condensed consolidated financial statements.
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. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern
COVID-19
The
continuing COVID-19 global pandemic has caused significant disruption to the economy and financial markets globally, and the full extent
of the potential impacts of COVID-19 are not yet known. Circumstances caused by the COVID-19 pandemic are complex, uncertain and rapidly
evolving. The impact of COVID-19 has not been significant to the Company’s results of operations, financial condition, and liquidity
and capital resources. Although no material impairment or other effects have been identified to date, there is substantial uncertainty
in the nature and degree of its continued effects over time. That uncertainty affects management’s accounting estimates and assumptions,
which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and
information become known. The Company will continue to consider the potential impact of the COVID-19 pandemic on its business operations.
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.
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, 2023 and 2022 because their inclusion would be anti-dilutive. Common stock equivalents amounted to 7,510,448 and
19,011,450 as of March 31, 2023 and 2022, 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 – Other Assets
OTHER
ASSETS
On
March 30, 2023, the Company signed an option agreement to acquire 80
acres of commercially zoned land in Imperial County, California (the “Option”) for $3,360,000
(“Purchase Price”). The Option expires in September
2024. The Company paid a non-refundable deposit of $84,000
on the signing of the Option, which has been recognized as other assets in the condensed consolidated balance sheet. The Company is
required to deposit an additional $84,000
into an escrow (“Escrow Funds”) within 10 days after the execution of the agreement. As of the issuance of these interim condensed consolidated financial statements, the escrow had not been set up.
Once the escrow is set up, the Company will deposit the $84,000. If the Company does not exercise
the Option by September 2024, the Escrow funds will be returned to the Company.
The
Purchase Price is payable with a cash payment of $1,680,000 and the issuance of 840,000 shares of the Company’s common stock (the
“Purchase Shares”). At the closing of the purchase (“Closing Date”), if the stock is trading at a value less
than $1.00 per share, the Company is required to issue a promissory note in the amount of $840,000, payable on the third anniversary
of the closing date, with an interest rate equal to the Secured Overnight Financing Rate plus 2.0%.
If
the Purchase Shares are issued at the Closing Date, the Company has agreed to repurchase the Shares (the “Put Option”) under
specific circumstances. However, the Put Option
expires if the Company’s common stock trades above $2.00 per share for 120 consecutive days. If the Company’s common stock
trades below $2.00 per for 10 consecutive days, the Holder has the option for the Company to repurchase the Purchase Shares for $2.00
per share.
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:
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Accounts payable | |
$ | 186,000 | | |
$ | 186,000 | |
Accrued expenses | |
| 35,000 | | |
| 28,000 | |
Accrued interest | |
| 442,000 | | |
| 326,000 | |
Accounts payable and accrued expenses | |
$ | 663,000 | | |
$ | 540,000 | |
Accrued
Interest
The
following table presents the details of accrued interest:
SCHEDULE
OF ACCRUED INTEREST
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Notes payable | |
$ | 19,000 | | |
$ | 17,000 | |
Convertible promissory notes | |
| 423,000 | | |
| 309,000 | |
Balance, end of the year | |
$ | 442,000 | | |
$ | 326,000 | |
Note
4 – Notes Payable
NOTES PAYABLE
The
table below summarizes the transactions:
SCHEDULE
OF NOTES PAYABLE
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Balance, beginning of the year | |
$ | 61,000 | | |
$ | 111,000 | |
Additions | |
| - | | |
| - | |
Payments | |
| - | | |
| (50,000 | ) |
Balance, end of the year | |
$ | 61,000 | | |
$ | 61,000 | |
On
July 7, 2020, the Company issued a promissory note in the principal amount of $11,000. The note is noninterest bearing. The principal
was due 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 $11,000 as of March 31, 2023. The note
principal and interest are past due, therefore in default. Interest accrued as of March 31, 2023 was $3,000.
On
April 22, 2021, the Company issued a promissory note in the principal amount of $50,000. The interest on the unpaid principal balance
accrued at a rate of 10% per annum. The principal and any accrued interest were to 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, 2023. The note principal and
interest are past due, therefore in default. Interest accrued, including default interest, as of March 31, 2023 was $12,000.
Interest
expense on notes payable amounted to $2,000 and $2,000 for the three months ended March 31, 2023 and 2022, respectively.
Note
5 – Convertible Promissory Notes
CONVERTIBLE
PROMISSORY NOTES
During the years ended December 2020 and 2019, the Company issued convertible promissory notes for approximately
$708,000. As of March 31, 2023, the accrued and unpaid interest was approximately $193,000.
In
2021, the Company issued two convertible promissory notes of $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). Interest accrued as of March 31, 2023 is $230,000.
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. The note principal and interest are past due,
therefore in default.
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 nil, 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 nil and approximately $487,000 for the three months ended March 31, 2023 and
2022, respectively.
The
convertible promissory notes consisted of the following:
SCHEDULE
OF CONVERTIBLE PROMISSORY NOTES
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Principal | |
| | | |
| | |
Balance, beginning of year | |
$ | 4,613,000 | | |
$ | 4,613,000 | |
Additions | |
| - | | |
| - | |
Balance, end of period | |
| 4,613,000 | | |
| 4,613,000 | |
| |
| | | |
| | |
Discount | |
| | | |
| | |
Balance, beginning of year | |
| - | | |
| 1,526,000 | |
Additions | |
| - | | |
| - | |
Amortization | |
| - | | |
| (1,526,000 | ) |
Balance, end of period | |
| - | | |
| - | |
Net carrying amount | |
$ | 4,613,000 | | |
$ | 4,613,000 | |
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, | |
| |
2023 | | |
2022 | |
Principal | |
$ | 4,613,000 | | |
$ | 4,613,000 | |
Interest | |
| 423,000 | | |
| 309,000 | |
Total | |
| 5,036,000 | | |
| 4,922,000 | |
Conversion price per share | |
| 1.00 – 1.25 | | |
| 1.00 – 1.25 | |
Potential future share | |
| 4,220,448 | | |
| 4,125,699 | |
The
default interest expense for the convertible promissory notes amounted to $114,000 and $18,000 for the three months ended March 31, 2023
and 2022, respectively.
Note
6 – Commitments and contingencies
COMMITMENTS
AND CONTINGENCIES
Litigation
From
time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business.
In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not
currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have
a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation
be resolved unfavorably.
Note
7 – Equity
EQUITY
Warrants
Expired
During the three months ended
March 31, 2023, a total of 73,304 warrants expired, leaving a remaining outstanding balance of 1,695,000 warrants as of March 31, 2023,
with a weighted average exercise price of $1.46 and average remaining life of 0.75 years.
Note
8 – 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 there are no reportable events except for the following.
Cancellation
of Restricted Stock Awards
On
April 10, 2023, the Company completed the required paperwork for our transfer agent to cancel 10,000,000 shares of restricted stock that
was previously issued to its former Chief Technology Officer.