UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission
file number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
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Securities registered under Section 12(b) of the Act:
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| Title of each class | Name of each exchange on which registered |
Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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by checkmark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
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Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
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The
aggregate market value of the voting and non-voting common stock, other than shares held by persons who may be deemed affiliates of the
registrant, as of June 30, 2022, the last day of the registrant’s most recently completed second fiscal quarter, was $
As of April 13, 2023 there were outstanding shares of the registrant’s common stock, par value $0.001 per share.
CalEthos, Inc.
Annual Report on Form 10-K
For the Fiscal-Year Ended December 31, 2022
TABLE OF CONTENTS
| i |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are “forward-looking statements”. Forward-looking statements can be identified by the use of forward-looking terminology, such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “seek”, “estimate”, “project”, “could”, “may” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader of the forward-looking statements that any such statements that are contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products and other factors, some of which are described in this report and some of which are discussed in our other filings with the Securities and Exchange Commission. These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
Important factors to consider in evaluating any forward-looking statements include:
| ● | our ability to finance and complete the design and construction of our proposed data center operation; |
| ● | our ability to implement our business plan; |
| ● | our ability to attract key personnel; |
| ● | our ability to operate profitably; |
| ● | our ability to efficiently and effectively finance our operations; |
| ● | inability to achieve future sales levels or other operating results; |
| ● | inability to raise additional financing for working capital; |
| ● | inability to efficiently manage our operations; |
| ● | the inability of management to effectively implement our strategies and business plans; |
| ● | the unavailability of funds for capital expenditures and/or general working capital; |
| ● | the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain; |
| ● | deterioration in general or regional economic conditions; |
| ● | changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate; |
| ● | adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations; |
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.
Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. If, as now, we are considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.
Throughout this report, unless otherwise designated, the terms “we,” “us,” “our,” “the Company” and “our company” refer to CalEthos, Inc., a Nevada corporation. All amounts are in U.S. Dollars, unless otherwise indicated.
| ii |
Item 1. Business.
Corporate History and Recent Developments
We were incorporated pursuant to the laws of the State of Nevada on March 20, 2002 under the name Integrated Brand Solutions Inc., and on February 6, 2006, we changed our name to Upstream Biosciences Inc. From 2006 to December 2009, our company operated as a biotechnology company, and from 2010 until May 2013, our company had no operating business.
On May 24, 2013, our then majority stockholders sold their interests in our company to RealSource Acquisition Group, LLC, a Utah limited liability company, and Chesterfield Faring Ltd., a New York corporation, and on July 11, 2013, we changed our corporate name to RealSource Residential, Inc. Our initial business strategy in 2013 was to engage in various real estate related businesses. However, in 2016 we disposed of all of our real estate and other assets and continued operations as a public “shell” company.
On September 12, 2018, M1 Advisors, LLC, a Delaware limited liability company controlled by Michael Campbell, our current Chief Executive Officer and a director of our company (“M1 Advisors”), acquired a controlling interest in our company, and 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 (i) change our corporate name from “RealSource Residential, Inc.” to “CalEthos, Inc.” and (ii) to increased our authorized shares of common stock from 4,000,000 shares to 100,000,000 shares. This amendment became effective immediately upon filing on December 20, 2018.
Our intention in acquiring the public company was to use it as a financing and acquisition vehicle for building a chain of large-format cannabis retail superstores to serve the needs of the rapidly-growing Southern California market. Over the subsequent two-year period, management assembled a number of acquisitions for retail licenses, store leases and display agreements with numerous cannabis brands as part of executing its business plan. However, once the COVID 19 pandemic lockdowns hit in early 2020 and Federal legalization of cannabis did not materialize after the 2020 elections, funding for cannabis-related businesses became less available and by the end of 2020, we concluded it would be better to pursue other business opportunities for our public company. After months of research, we determined there was a sizable opportunity to develop and manufacture high-performance computer systems for the cryptocurrency mining industry. In March 2021, we created a new business plan to develop a five nanometer ASIC chip and bitcoin mining computer system in South Korea utilizing Samsung technology and foundry capacity.
In August 2021, we hired an experienced chief technology officer from the chip industry to lead our product development and in September 2021, we closed a convertible debt financing of $3.5 million to fund the initial phase of product development. In connection with such capital raise, our board of directors determined that we are no longer a shell company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
On November 5, 2021, we incorporated AIQ System Inc. (“AIQ”), as a wholly-owned subsidiary in Seoul, Republic of Korea to support our product development efforts and to manage all of our computer chip and system development teams and activities. During the subsequent eight months ended June 30, 2022, the bitcoin market went into decline, and we decided to abandon our chip and system development efforts and to discontinue the operations of AIQ as of July 1, 2022.
During the development of our computer chip and system in Korea, we had also developed a plan to build a large-scale, clean-energy powered, containerized, immersion-cooled data center operation in Southern California to support the use of the systems we were developing for our company and for others. After the bitcoin market bottomed out in June 2022, we determined that we could develop a profitable business by offering data center colocation services to a larger customer base of enterprise companies.
As of July 1, 2022, we commenced our current operating plan to focus solely on the development and construction of clean-energy powered data centers that will utilize immersion and liquid-cooled and conventional energy efficient systems and will provide clean-energy-powered colocation services to large enterprise information technology (IT) customers.
To this end and to implement our going-forward plan, on March 28, 2023 we hired Joel Stone. a senior data center executive with 24 years of data center experience, as our President and Chief Operating Officer, and on March 30, 2023, we completed negotiations and signed an option agreement to acquire 80 acres of commercially-zoned land in Imperial County, California that is surrounded by nearby geothermal power plants and solar farms. We are currently in the process of negotiating with various power producers in the area to provide us with clean energy and with communication companies for access to their close-by long-haul and dark fiber networks.
With an experienced data center executive on board and the property under contract, we intend to complete a land use plan that will be submitted for approval to local authorities and to apply for permits to start construction. We expect, based on all related factors, that a submittable plan, which will include data center and infrastructure design, will take between four to six months to complete. Once submitted for approvals and permits, it is expected that it could take another three to six months or more before we receive the required permits for construction, and that the construction could take another six to eight months or more to complete depending on supply chain issues at the time for data center, electrical and communication connectivity components of the data center build. The foregoing time estimates are preliminary and are subject to change. In addition, there can be no assurance that our use plan will receive all required regulatory approvals or that we will be issued the required approvals or permits necessary to complete construction of the data center we intend to build.
As we move through the development process to build a clean-energy powered data center for enterprise IT customers, we will continue to refine and finalize the courses of action needed to implement our business plan and operations. As a result, management has not fully determined our actual short-term or long-term capital requirements, which management expects to be substantial.
| 1 |
Plan of Operations
As of the filing of this Report, we have hired Joel Stone as our President and Chief Operating Officer and signed an option agreement to acquire land for our planned large-scale, 100% geothermal/solar-powered, clean energy, data center operation.
To complete the initial phase of our planned data center, we are now negotiating agreements for clean energy and fiber connectivity. Over the next couple of months, we plan to finish negotiations with the local geothermal and solar power producers to deliver the clean energy we require to power our data center and to complete agreements with multiple communication providers for access to their close-by long-haul and dark fiber communication networks for data center connectivity.
We believe that the significant experience of our new President and Chief Operating Officer in both building and operating data centers and his industry relationships will be instrumental in helping us acquire the required third-party resources and assets and the management team and staff necessary to execute our business plan. In addition to acquiring the principal components (experienced personnel, land, clean energy, and fiber connectivity) for our data center plan, we are also in the process of developing partnerships with leading-edge containerized and modular designed immersion and liquid cooled data center system providers, whose systems we will offer for rent to our customers. We believe that, when construction of our data center is complete, the principal differentiators of our data center operation in the marketplace are expected to be – we are powered by 100% certified clean energy, and we provide leading-edge immersion and liquid cooled data center systems that will support the ever-increasing power and cooling needs of high-performance enterprise IT computer systems.
In the colocation segment of the data center industry, the customer typically leases the building/shell or data hall/suite level rather than the smaller scale of retail colocation (racks/cages/cabinets). Projects generally involve heavily-customized builds, although many operators in this segment are moving toward a mix of build-to-suit and turnkey offerings. Customers of colocation are typically hyperscale content and media/entertainment providers, scale-oriented cloud service providers, hosting and IT managed services providers, and telecommunications companies.
Currently, due to the ever-growing amounts of digital data being created on social media, and from internet streaming, gaming and overall internet use, and the need for digital data to be readily available for consumption on the internet, and because of the migration of software and computer applications to the cloud and their use, we believe there is a severe shortage of data center space in the global market. In some of the principal U.S. markets, there are wait times of up to a five-years for additional capacity. The need for new data center space is expected to continue growing at a high rate for the foreseeable future based on following recent industry reports:
Data Center Market - The market size is estimated to grow by $615.96 billion from 2021 to 2026, growing at a compound annual growth rate (CAGR) of 21.98% according to Technavio’s February 2022 market report.
Green Data Centers - The U.S. Green Data Center Market Size was valued at $13.79 billion in 2022 and is expected to reach $24.20 billion by 2028, growing at a CAGR of 9.82% during 2022 to 2028 according to Arizton’s March 2023 industry report.
Data Center as a Services (DCaaS) - The global data center as a service market size was valued at $52.7 billion in 2021 and is expected to expand at a CAGR of 26.2% from 2022 to 2030 according to Grand View Research’s January 2022 - Data Center As A Service Market Size & Growth Report.
We believe the Imperial County, California site we have optioned is a unique location in that it will provide us with a rare opportunity to acquire commercially-zoned land on which we can combine nearby direct clean geothermal/solar energy with a 24/7 data center operation.
We also believe 100% clean-energy-powered data centers are an important element in the ability of the U.S. to meet its carbon neutral climate goals and for enterprise IT companies to meet their shareholder and customer commitments to have an ESG-compliant, clean digital footprint before 2030.
We are developing our business model to compete in the colocation segment of the data center services industry, which is focused on providing the processing, networking, and storage of data. With the move to treat data as an asset, the data services market is expected to experience significant growth over the next decade. Industry automation and digital businesses are expanding, and these businesses are expected to require huge amounts of data for their businesses. North America is the most advanced region globally and data center services are in high demand.
| 2 |
Competition
The competition in the data center industry is primarily driven by the increasing presence of small and large-scale service providers globally. The key participants in the data center colocation market are Digital Realty Trust, Equinix, CenturyLink, CyrusOne and China Telecom Corporation Limited, among many others. Business ventures throughout the world are progressively competing for market share by providing services to arrange information, store data, and benefit from cloud services. This move, together with the increasing demand of businesses to store increasing amounts of media and other information, represents gigantic development in the market for cloud services.
The data center services market is segmented by service (infrastructure, cloud and hosting, networks, consulting, and virtualization), data-center (Tier 1, Tier 2, Tier 3, and Tier 4), end-user industry (BFSI, Healthcare, Retail, Manufacturing, and IT and Telecom), deployment mode (On-premise and Cloud), and geography.
As a new entrant into the data center marketplace, we will compete against larger, more established and better capitalized companies that today control the majority of market share. We believe our principal advantages will be our location, which provides us with access to an abundance of reasonably-priced local geothermal and solar energy to power a 24/7 data center operation, the various immersion and liquid cooled data center racking systems we will offer as a colocation service and our proximity to the Southern California market and the multitudes of companies utilizing high-performance computing that want close-by data center space.
Intellectual Property
Our intellectual property will consist of data center designs and systems for supporting containerized, immersion and liquid cooled data center systems that we will deploy for colocation services to enterprise IT customers. We intend to rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as contractual protections, to protect our proprietary service offerings and data center management systems. However, as of the date of this Report, we do not have any patents or registered trademarks.
We cannot provide any assurance that our proprietary rights with respect to our data center designs, systems or services will be viable or have value in the future since the validity, enforceability and type of protection of proprietary rights in these industries are uncertain and continuingly evolving.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our design, systems and services or to obtain and use information that we regard as proprietary. Policing unauthorized use of our designs and services is difficult, and while we are unable to determine the extent to which piracy of our designs, systems and services will exist, intellectual piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States, and effective copyright, trademark, trade secret and patent protection may not be available in those jurisdictions. Our means of protecting our proprietary rights may not be adequate to protect us from the infringement or misappropriation of such rights by others.
Further, in recent years, there has been significant litigation in the United States involving patents and other intellectual property rights in the data center design, systems and service offerings and Internet-related data management industries. We can become subject to intellectual property infringement claims as the number of our competitors grows and our services overlap with competitive offerings. These claims, even if not meritorious, could be expensive to defend and could divert management’s attention from operating our business. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial award of damages and to develop non-infringing design, systems and service offerings, obtain a license or cease providing the services that contain the infringing intellectual property. We may be unable to develop non-infringing data center design, systems and service offerings or obtain a license on commercially reasonable terms, if at all.
Employees
We currently have one employee, Joel Stone our President and Chief Operating Officer and our other officers and directors are serving our company as consultants and independent contractors.
| 3 |
Item 1A. Risk Factors.
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We do not own any real property. Our executive office is located at 11753 Willard Avenue, Tustin, California 92782, in the office of Michael Campbell, our Chief Executive Officer. We are not charged rent for the use of this space. We believe our existing facilities are sufficient for our current operations.
Item 3. Legal Proceedings.
We know of no material active or pending legal proceeding against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation.
Item 4. Mine Safety Disclosures.
Not Applicable.
| 4 |
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities.
Our common stock is listed for quotation on the OTC Pink Market under the trading symbol “BUUZ.”. Trading in our common stock in the over-the-counter market has been limited and the quotations set forth below are not necessarily indicative of actual market values. The following table sets forth, for the periods indicated, the high and low closing prices for each quarter within the last two fiscal years ended December 31, 2022 as reported by the quotation service operated by the OTC Markets Group. All quotations for the OTC Pink Market reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| Quarter Ended | High | Low | ||||||
| December 31, 2022 | $ | 2.46 | $ | 1.06 | ||||
| September 30, 2022 | 2.50 | 1.80 | ||||||
| June 30, 2022 | 2.80 | 1.70 | ||||||
| March 31, 2022 | 2.95 | 1.96 | ||||||
| December 31, 2021 | 4.25 | 1.97 | ||||||
| September 30, 2021 | 2.70 | 1.92 | ||||||
| June 30, 2021 | 3.30 | 0.40 | ||||||
| March 31, 2021 | 1.00 | 0.03 | ||||||
On April 13, 2023, the closing price for our common stock on the OTC Pink Market as reported by the quotation service operated by the OTC Markets Group was $0.74.
Transfer Agent
Nevada Agency and Transfer Company is the registrar and transfer agent for our common shares. Their address is 50 West Liberty, Suite 880 Reno, Nevada, 89501 Telephone: 775-322-0626, Facsimile: 775-322-5623.
Holders of Our Common Stock
As of April 13, 2023, there were 56 registered holders of record of our common stock. As of such date, 14,495,621 shares of common stock were issued and outstanding. The number of our shareholders of record excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.
Dividend Policy
We have not declared or paid any cash dividends since inception. Although there are no restrictions that limit our ability to pay dividends on our common shares, we do not intend to pay dividends for the foreseeable future.
Item 6. Selected Financial Data.
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Annual Report.
Our audited financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.
| 5 |
Plan of Operations
It is the intention of our board of directors for our company to pursue the development of the 80 acres of land in Imperial County, California that we recently put under an exclusive option agreement and develop it for a large-scale, 100% geothermal/solar-powered, certifiable clean energy, data center operation that will utilize immersion and liquid cooled and conventional energy efficient data center systems and provide colocation services to enterprise IT customers.
To implement our plan, we have optioned the land and hired an experienced data center builder and operator and we are now in the process of acquiring the other principal ingredients needed for our data center operation – clean energy and fiber connectivity. To this end, over the next couple of months, we plan to finish negotiations with local geothermal and solar power producers to deliver clean energy for our operation, and to complete agreements with multiple communication providers for access to their close-by long-haul and dark fiber communication networks for connectivity.
We are also in the process of developing partnerships with leading-edge containerized and modular immersion and liquid cooled data center system providers whose systems we will offer for rent to our customers. We believe that, when construction of our data center is complete, the principal differentiators of our data center operations in the marketplace are expected to be that we are powered by 100% certified clean energy and that we provide leading-edge immersion and liquid cooled energy-efficient data center systems that will support the ever-increasing power and cooling needs of high-performance enterprise IT computer systems.
It is anticipated that we will incur expenses in the implementation of the business plan described herein, and such expenses will require substantial financing to complete the development of the property for a data center operation and to achieve our goals. The failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our development plans, any commercialization efforts or other operations. We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs. In addition, even if we are able to obtain sufficient funding to commence our business operations, we may need to pursue additional financing in the future to make expenditures and/or investments to support the growth of our business and may require additional capital to pursue our business objectives and respond to new competitive pressures, pay extraordinary expenses or fund our growth, including through acquisitions. Additional funds, however, may not be available when we need them on terms that are acceptable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to commence our proposed business operations, to continue to grow and support our business and to respond to business challenges could be significantly limited.
We currently have only limited capital with which to pay these anticipated expenses. To fund our business plan going forward, we intend to raise funds from investors by issuing common stock, preferred stock and/or debt securities.
Results of Operations for the years ended December 31, 2022 and 2021
The following summary should be read in conjunction with our audited financial statements for the years ended December 31, 2022 and 2021.
| For the years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | - | $ | - | ||||
| Operating Expenses | ||||||||
| Professional fees | 667,000 | 1,033,000 | ||||||
| Restricted stock grants | (4,791,000 | ) | 5,062,000 | |||||
| Impairment loss | 154,000 | - | ||||||
| General and administrative | 52,000 | 57,000 | ||||||
| Total operating (income) expenses | (3,918,000 | ) | 6,152,000 | |||||
| Income (loss) from operations | 3,918,000 | (6,152,000 | ) | |||||
| Financing costs | (1,744,000 | ) | (597,000 | ) | ||||
| Interest income | 7,000 | - | ||||||
| Net income (loss) | $ | (2,181,000 | ) | $ | (6,749,000 | ) | ||
| 6 |
Revenue
For the years ended December 31, 2022 and 2021, we had no revenues.
Operating Expenses
Professional fees
Our professional fees decreased from $1,033,000 in the year ended December 31, 2021 to $667,000 in the year ended December 31, 2022, which represented a decrease of approximately $366,000. The decrease was attributable to a reduction in the use of outside professional services.
Restricted stock grant expense (gain)
Our restricted stock grant expense (gain) decreased from an expense of $5,062,000 in the year ended December 31, 2021 to a gain of $(4,791,000) in the year ended December 31, 2022, which represented a decrease of $9,853,000 brought about by the cancellation of the stock grants made in 2021.
Impairment loss
Our impairment loss increased from nil in the year ended December 31, 2021 to $154,000 in the year ended December 31, 2022, which represented an increase of approximately $154,000 due to the impairment of intangibles and other assets as a result of the suspension of our South Korean subsidiary’s operations.
General and administrative expenses
Our general and administrative expenses decreased from $57,000 in the year ended December 31, 2021 to $51,000 in the year ended December 31, 2022, which represented a decrease of approximately $6,000.
Financing Costs
Our financing cost increased from $597,000 in the year ended December 31, 2021 to $1,744,000 in the year ended December 31, 2022, which represented an increase of $1,147,000. Financing costs increased due to the amortization of debt issuance costs.
Liquidity and Capital Resources
Our financial position as of December 31 in each of the years indicated was as follows:
Working Capital
| As of December 31, | ||||||||
| 2022 | 2021 | |||||||
| Current assets | $ | 2,071,000 | $ | 3,054,000 | ||||
| Current liabilities | (5,214,000 | ) | (3,632,000 | ) | ||||
| Working deficit | $ | (3,143,000 | ) | $ | (578,000 | ) | ||
Our working capital decreased from a $578,000 deficit as of December 31, 2021 to a deficit of $3,143,000 as of December 31, 2022 for a total change of $2,565,000. The decline in our working capital was due to (i) an increase in a book basis of our convertible promissory notes book basis increasing due to the amortization of debt issuance discounts and (ii) the decrease in our cash and cash equivalents.
Cash Flows
| For the years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (820,000 | ) | $ | (565,000 | ) | ||
| Net cash used in investing activities | (105,000 | ) | (38,000 | ) | ||||
| Net cash provided by financing activities | (50,000 | ) | 3,652,000 | |||||
| Effect of exchange rate changes | (5,000 | ) | (2,000 | ) | ||||
| Change in cash during the period | (980,000 | ) | 3,047,000 | |||||
| Cash, beginning of period | 3,047,000 | - | ||||||
| Cash, end of period | $ | 2,067,000 | $ | 3,047,000 | ||||
| 7 |
Cash flows from operations
Cash used in operating activities decreased to approximately $255,000 in 2022 from approximately $382,000 in 2021, which was predominantly related to the reduction in our expenditures for filing fees, legal fees, transfer agent fees and consulting fees paid during the year.
Cash flow from investing
We made payments of $105,000 in 2022 and $38,000 in 2021 to an engineering and design firm for the design and development work for our planned ASIC chip development.
Cash flows from financing
We made payments of $50,000 to reduce notes payable in 2022 and 2021. Additionally, in 2021, we received $3,592,000 and $150,000 in proceeds from the issuance of convertible debentures and notes payable, respectively.
Going Concern
The audited financial statements included in this Report have been prepared on a going concern basis, which implies that our company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business. We are presently in the development stage and, apart from our cash balances, have only limited assets. Our company has not generated revenues in the last two fiscal years, has never paid any dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of our company as a going concern is dependent upon: (i) continued financial support from our shareholders; (ii) the ability of our company to continue raising necessary debt or equity financing to achieve its operating objectives; and (iii) our ability to acquire assets and establish a business or merge or otherwise acquire business opportunities.
Our independent auditors included an explanatory paragraph in their report on our financial statements for the year ended December 31, 2022 regarding concerns about our ability to continue as a going concern. In addition, our financial statements contain further note disclosures in this regard. The implementation of our business plan is dependent upon our ability to continue raising sufficient new capital from equity or debt markets in order to fund our on-going operating losses and real estate acquisition activities. The issuance of additional equity securities could result in a significant dilution in the equity interests of our current stockholders.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures of our company. Although these estimates are based on management’s knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary from the formation date. All material intercompany transactions and balances have been eliminated in consolidation.
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Foreign Currency Translation
The financial statements of our foreign subsidiary, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders’ equity (deficit). Gains or losses from foreign currency transactions are recognized in the consolidated statements of operations.
Debt and Debt Discounts
In accordance with ASC 470-20, Debt with Conversion and Other Options, we first allocate the cash proceeds of the notes between the notes and any warrants on a relative fair value basis. Proceeds are then allocated to the conversion feature.
We account for debt discounts originating in connection with conversion features that remain embedded in the related notes in accordance with ASC 470-20. These costs are classified on the balance sheet as a direct deduction from the debt liability. We amortize these costs over the term of our debt agreements as financing cost in the consolidated statement of operations and comprehensive loss.
Stock-Based Compensation
We account for our stock-based compensation under ASC 718, “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
We use the fair value method for equity instruments granted to non-employees and use the BSM model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant (measurement date) and is recognized over the vesting periods.
Recent Accounting Pronouncements
Our management reviewed all recently-issued accounting standard updates (“ASU’s”) not yet adopted by our 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 consolidated financial condition or the results of -our operations.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial position, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Item 8. Financial Statements and Supplementary Data.
Our financial statements and notes thereto and the reports of RBSM LLP, our independent registered public accounting firm, are set forth on pages F-1 through F-18 of this Report.
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Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.
Not Applicable
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act, our principal executive officer and principal financial officer evaluated our company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, these officers concluded that as of the end of the period covered by this Annual Report on Form 10-K, these disclosure controls and procedures were not effective.
The conclusion that our disclosure controls and procedures were not effective was due to the presence of material weaknesses in internal control over financial reporting as identified below under the heading “Management’s Report on Internal Control Over Financial Reporting.” Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdown can occur because of simple error or mistake.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) for our company. Our internal control over financial reporting is designed to provide reasonable assurance, not absolute assurance, regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the design and operation of our internal control over financial reporting as of December 31, 2022 based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, our management concluded our internal control over financial reporting was not effective as at December 31, 2022 due to the following material weaknesses which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines; (iii) inadequate security and restricted access to computer systems including insufficient disaster recovery plans; and
(iv) no written whistle-blower policy.
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We plan to take steps to enhance and improve the design of our internal controls over financial reporting when our company has sufficient staff to allocate responsibilities. During the period covered by this Report, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes once our financial resources will support the required staffing level: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; (ii) adopt sufficient written policies and procedures for accounting and financial reporting and a whistle-blower policy; and (iii) implement sufficient security and restricted access measures regarding our computer systems and implement a disaster recovery plan. The remediation efforts set out in (i) and (iii) are largely dependent upon our company securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely effected in a material manner.
This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Report.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Changes In Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting during the year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
Our directors and executive officers, their ages and their positions held with our company are as follows:
| Name | Age | Position(s) Held with the Company | ||
| Michael Campbell | 67 | Chairman of the Board and Chief Executive Officer | ||
| Joel D, Stone | 53 |
President and Chief Operations Officer | ||
| Dean S. Skupen | 62 | Chief Financial Officer | ||
| Steven Shum | 53 | Director | ||
| Sean Fontenot | 40 | Director |
There are no arrangements between our directors and any other person pursuant to which our directors were nominated or elected for their positions. There are no family relationships among our directors or officers.
The following biographical information regarding our directors and executive officers.
Michael Campbell. Mr. Campbell became our Chief Executive Officer on September 12, 2018. For the past 20 years, Mr. Campbell has been the managing director of M1 Advisors LLC, a business advisory and consulting firm that has engineered, orchestrated and provided support and services to numerous private-to-public transitions, debt and equity financings and hyper- organic-growth and consolidation strategies in a wide range of industries. In addition, from December 2011 to February 2017, Mr. Campbell was the Chief Executive Officer and a director of NXChain, Inc., a publicly-traded start-up shell company in the cryptocurrency business that was a successor to AgriVest Americas Inc., a publicly-traded start-up shell company that sought to acquire cattle ranches in Brazil for conversion to soybean farms. Mr. Campbell spent the first 20 years of his career in the high-tech industry creating and operating various companies that included a computer retailing operation, data-storage peripheral company with three computer disk-drive manufacturing companies through joint ventures with the Russian, Chinese and Spanish governments, a specialized call-center company for telco broadband provisioning and an online broadband services ordering and order aggregation company with the Regional Bell Operating Companies.
Joel D. Stone. Mr. Stone became our President and Chief Operating Officer on March 28, 2023. Mr. Stone has 24 years of broad-based operations, engineering, construction, integration, transformation, and technical leadership in the data center infrastructure, sourcing, and telecommunications industries. Prior to joining our company, Mr. Stone led the Global Site Sourcing teams for Meta Platforms that supported the data center infrastructure teams from 2019 to 2022. Prior to 2019, Mr. Stone served as Senior Vice President and Chief Operating Officer of RagingWire Data Centers, an NTT communications company, where he was responsible for critical facilities engineering, design, construction, and data center operations from 2016-2018. Prior to RagingWire, Mr. Stone served as Vice President of Global Data Center Operations for CenturyLink Communications, responsible for 58 data centers around the world and a global team of 600+ people from 2011to 2016. Prior to CenturyLink, Mr. Stone was Group Operations Director at Global Switch in London, one of the largest wholesale data center providers in Europe and Asia. Mr. Stone spent nine years at Microsoft where he was responsible for all North America data center operations. Earlier in his career, Mr. Stone built-out two state-of-the-art data centers in Silicon Valley (Santa Clara) for Cable & Wireless Communications.
Dean S. Skupen. Mr. Skupen became our Chief Financial Officer on September 12, 2018. Mr. Skupen is a business advisor who has provided various financial accounting services to, or acted as the Interim Chief Financial Officer for, a number of public companies since 2010. Prior to that, he was a Partner at Stonefield Josephson, Inc. (now Marcum, LLP), an accounting firm with five offices throughout California where he provided auditing and consulting services to public companies and to privately-held entrepreneurial companies transitioning to public ownership in diverse industries. Mr. Skupen graduated from the University of Southern California with a Bachelor of Science degree in Accounting. In addition, he is licensed as a Certified Public Accountant in the State of California.
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Steven M. Shum. Mr. Shum has been Chief Executive Officer of INVO Bioscience (NASDAQ: INVO) since October 2019 and a member of the board of directors of INVO Bioscience since October 2017. Prior to INVO Bioscience, Mr. Shun served as Chief Financial Officer of Eastside Distilling (NASDAQ: EAST) from October 2015 to November 2019. Prior to joining Eastside, Mr. Shum was an employee and a member of the board of directors of XZERES Corp. (OTCQB:XPWR), a global renewable energy company, from October 2008 until April 2015, where he served in various officer roles, including Chief Operating Officer from September 2014 until April 2015, Chief Financial Officer, Principal Accounting Officer and Secretary from April 2010 until September 2014 (under former name, Cascade Wind Corp) and Chief Executive Officer and President from October 2008 to August 2010. Mr. Shum also serves as the managing principal of Core Fund Management, LP and the Fund Manager of Core Fund, LP. He was a founder of Revere Data LLC (now part of Factset Research Systems, Inc.) and served as its Executive Vice President for four years, heading up the product development efforts and contributing to operations, business development, and sales. He spent six years as an investment research analyst and portfolio manager of D.N.B. Capital Management, Inc. His previous employers include Red Chip Review and Laughlin Group of Companies. He earned a B.S. in Finance and a B.S. in General Management from Portland State University in 1992.
Sean Fontenot. Mr. Fontenot has spent 20 years as a self-employed IT and network specialist and in 2017 became an executive producer of independent films. Mr. Fontenot is a technology enthusiast and film producer that manages a 5013c foundation dedicated to (i) educating the public on the history of video, arcade, and computer gaming - including the technical aspects and the impact of games on society; (ii) fostering public interest in software development and gaming hardware to enable technological growth and inspire the next generation of developers, and (iii) developing public space for action sports’ recreation - including mentoring youths and building programs designed to help bridge the gender gap in various action sports categories as well as underserved community members.
Our chief executive officer, Mr. Campbell, currently serves as a consultant to our company. Mr. Stone, our President and Chief Operating Officer, is currently our only employee and devotes the majority of his time to advancing the company’s mission and executing our business plan. Management intends to spend as much time as is necessary to exercise its fiduciary duties as officers and directors of our company.
Involvement in Certain Legal Proceedings
None of our directors and executive officers have been involved in any of the following events during the past ten years:
| 1. | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
| 2. | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
| 3. | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; |
| 4. | being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, where the judgment has not been reversed, suspended, or vacated; |
| 5. | being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any federal or state securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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Director Independence
Our board of directors has reviewed the composition of our board of directors and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that each of Steven Shum and Sean Fontenot is an “independent director” as defined under Rule 5605(a)(2) of the Nasdaq Marketplace Rules. In making such determinations, our board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining independence, including the beneficial ownership of our capital stock by each non-employee director.
Board Committees
We do not have a standing Audit Committee. We do not believe that the lack of an Audit Committee has had or will have any adverse effect on our financial statements, based upon current operations; however, our board of directors will consider establishing an Audit Committee of independent directors as the number of directors increases. Until such time, our board of directors will perform the duties of an Audit Committee including delegating an auditor firm and interacting with them.
We do not have a standing Compensation Committee. Presently, our executive officers, who constitute our only employees, do not take salary or other benefits from our company. As we continue to develop our data center and commence selling colocation services, we expect to increase the size of our board to include independent directors who will approve the compensation arrangements with our executive officers.
We also do not have a Nominating Committee as we have not adopted any procedures by which security holders may recommend nominees to our board of directors.
Code of Ethics
Effective March 28, 2022, our Board of Directors adopted an amended Code of Business Conduct and Ethics that applies to, among other persons, members of our board of directors, our company’s officers, contractors, consultants and advisors. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to our company at the address on the cover of this Annual Report.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, and without conducting any independent investigation of our own we believe that during the fiscal year ended December 31, 2022, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with.
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Item 11. Executive Compensation.
The following table sets forth all compensation awarded to, earned by or paid to the executive officers of our company during the years ended December 31, 2022 and 2021. No compensation was paid to any other executive officer of our company during such periods.
SUMMARY COMPENSATION TABLE
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||
| Michael Campbell | 2022 | - | - | $ | - | - | - | - | $ | 200,000 | $ | 200,000 | (2) | |||||||||||||||||||||||
| Chief Executive officer (1) | 2021 | - | - | 2,895,000 | (1) | - | - | - | 200,064 | (2) | 3,095,064 | (2) | ||||||||||||||||||||||||
| Hyuncheol Peter Kim | 2022 | - | - | - | - | - | - | 140,000 | 140,000 | (3) | ||||||||||||||||||||||||||
| Chief Technology Officer | 2021 | - | - | 19,300,000 | (1) | - | - | - | 66,664 | (3) | 19,366,664 | (3) | ||||||||||||||||||||||||
| Dean S. Skupen | 2022 | - | - | - | - | - | - | 60,000 | (4) | 60,000 | (4) | |||||||||||||||||||||||||
| Chief Financial Officer | 2021 | - | - | $ | 75,000 | - | - | - | $ | 30,000 | $ | 105,000 | ||||||||||||||||||||||||
| (1) | Represents a restricted stock share award that was to vest upon the completion of the multiple phases of our previous chip development business plan. In August 2022, we abandoned the chip development business plan and Mr, Campbell and Mr. Kim’s consulting agreements were terminated and the associated restricted stock share awards were cancelled. | |
| (2) | Represents amounts earned by Mr. Campbell under his consulting agreement. | |
(3) |
Represents amounts earned by Mr. Kim under his consulting agreement. Mr. Kim terminated his consulting engagement in August of 2022. | |
| (4) | Represents amounts earned by Mr. Skupen under his consulting agreement. |
Consulting Agreements
Between August 17, 2021 and August 31, 2022, we had consulting agreements in place with M1 Advisors LLC, a limited liability company controlled by Michael Campbell, our Chief Executive Officer (“M1 Advisors”), and Hyuncheol Kim, pursuant to which M1 Advisors agreed to continue to provide consulting services to our company and to cause Mr. Campbell to serve as our Chief Executive Officer, and Mr. Kim agreed to provide consulting services and to serve as our Chief Technology Officer. In addition, pursuant to such consulting agreements, M1 Advisors was granted a restricted stock award of 1,500,000 shares of common stock and Mr. Kim was granted a restricted stock award of 10,000,000 shares of common stock. In August 2022, we terminated the chip development business plan and terminated the consulting agreements with M1 Advisors and Mr. Kim and canceled related restricted stock awards.
We are currently structuring a new consulting agreement with M1 Advisors to continue providing consulting services and for Mr. Campbell to continue serving as our Chief Executive Officer. |
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On October 20, 2018, we entered into a consulting agreement with DSS Consulting Corporation, a corporation controlled by Dean Skupen, our Chief Financial Officer (“DSS Consulting”), pursuant to which DSS Consulting agreed to continue to provide consulting services to our company and to cause Mr. Skupen to serve as our Chief Financial Officer. The agreement with DSS Consulting will continue until terminated by either party. Pursuant to such agreement, DSS Consulting was issued 250,000 shares of common stock in March 2019 and DSS Consulting will be paid a monthly consulting fee in the amount of $5,000.
Each of our consulting agreements contains customary confidentiality restrictions and work-product provisions, as well as customary non-competition covenants and non-solicitation covenants with respect to our employees, consultants and customers.
Equity Compensation Plan Information
The following table provides information as of December 31, 2022, regarding our compensation plans under which equity securities are authorized for issuance:
| Plan category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
| 2021 Equity compensation plan approved by security holders | — | — | 2,500,000 | |||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | — | $ | — | 2,500,000 | ||||||||
2021 Equity Incentive Plan
On October 4, 2021, we adopted our 2021 Equity Incentive Plan (the “Equity Plan”) to provide an additional means to attract, motivate, retain and reward selected employees and other eligible persons. Our stockholders also approved the Equity Plan on October 4, 2021. Employees, officers, directors and consultants that provide services to us or one of our subsidiaries were eligible to receive awards under the Equity Plan. Awards under the Equity Plan are issuable in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards.
As of December 31, 2022, no equity grants had been made under the Equity Plan, and 2,500,000 shares authorized under the Equity Plan remained available for award purposes.
Purpose. The purpose of the Equity Plan is to further and promote the interests of our company and its stockholders by enabling us to attract, retain and motivate employees, directors and consultants, or those who will become employees, directors or consultants, and to align the interests of those individuals with the interests of our stockholders.
Administration. The Equity Plan will be administered by an independent compensation committee appointed by the Board (the “Compensation Committee”), which will have general administrative authority for the Equity Plan. In the event that the Board has not appointed the Compensation Committee, then the Board shall have all the powers of the Compensation Committee under the Equity Plan. The Compensation Committee may delegate certain limited authority to one or more of our senior executive officers to grant awards to employees who are not subject to Section 16 of the Exchange Act. Additionally, the Compensation Committee may designate persons other than members of the Compensation Committee to carry out the day-to-day ministerial administration of the Equity Plan (other than with regard to the selection for participation in the Equity Plan and/or the granting of any awards to participants) under such conditions and limitations as prescribed by the Compensation Committee (the appropriate acting body, be it the Compensation Committee, the Board, or an executive officer within his or her delegated authority, is referred to herein as the “Administrator”). The Administrator’s determinations under the Equity Plan need not be uniform and may be made selectively among the Equity Plan’s participants, whether or not such participants are similarly situated.
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The Administrator has broad authority under the Equity Plan with respect to award grants including, without limitation, the authority to:
| ● | select the Equity Plan’s participants; | |
| ● | make awards in such amounts and form as the Administrator shall determine; | |
| ● | impose such restrictions, terms and conditions upon such awards as the Administrator shall deem appropriate; and | |
| ● | correct any technical defect(s) or technical omission(s), or reconciling any technical inconsistency(ies), in the Equity Plan and/or any award agreement. |
Eligibility. Persons eligible to receive awards under the Equity Plan include employees, directors and consultants, or those who will become employees, directors or consultants, of our company and/or its subsidiaries. Notwithstanding the above, incentive stock options may only be granted under the Equity Plan to our employees.
Authorized Shares. The maximum number of shares of common stock that may be initially issued or transferred pursuant to awards under the Equity Plan shall not exceed 2,500,000 shares, all of which may be issued as any type of award permitted under the Equity Plan, including, but not limited to, incentive stock options.
Types of Awards. The Equity Plan authorizes awards of stock options and restricted shares of common stock.
A stock option is the right to purchase shares of common stock at a future date at a specified price per share (the “Exercise Price”). The per share Exercise Price of an option generally may not be less than the fair market value of a share of common stock on the date of grant. The maximum term of an option is ten years from the date of grant. An option may either be an incentive stock option or a nonqualified stock option. Incentive stock option benefits are taxed differently from nonqualified stock options, as described under “Federal Income Tax Consequences of Awards Under the Plan” below. Incentive stock options are also subject to more restrictive terms and are limited in amount by the U.S. Internal Revenue Code (the “Code”) and the Equity Plan. Incentive stock options may only be granted to employees of our company or a subsidiary.
Restricted shares are shares of common stock granted to Equity Plan participants, subject to such restrictions, terms and conditions, if any, as the Administrator deems appropriate, including, without limitation, (a) restrictions on the sale, assignment, transfer, hypothecation or other disposition of such shares, (b) the requirement that the participant deposit such shares with our company while such shares are subject to such restrictions, and (c) the requirement that such shares be forfeited upon termination of employment or service with our company for any reason or for specified reasons within a specified period of time or for other reasons (including, without limitation, the failure to achieve designated performance goals). Upon satisfaction or lapse of the applicable restrictions, terms, and conditions, subject to applicable securities laws, the participant will receive shares of common stock in exchange for such restricted shares.
Dividend Equivalents; Deferrals. The Administrator may provide for the deferred payment of awards and may determine the other terms applicable to deferrals. The Administrator may provide that awards under the Equity Plan earn dividends or dividend equivalents based on the amount of dividends paid on outstanding shares of common stock.
Assumption and Termination of Awards. Generally, and subject to limited exceptions set forth in the Equity Plan, if we dissolve or undergo certain corporate transactions such as a merger, business combination, or other reorganization, or a sale of substantially all of its assets, all awards then-outstanding under the Equity Plan will become fully vested or paid, as applicable, and will terminate or be terminated in such circumstances, unless the Administrator provides for the assumption, substitution or other continuation of the award. The Administrator also has the discretion to establish other change in control provisions with respect to awards granted under the Equity Plan. For example, the Administrator could provide for the acceleration of vesting or payment of an award in connection with a corporate event that is not described above and provide that any such acceleration shall be automatic upon the occurrence of any such event.
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Clawback. We may cancel any award under the Equity Plan, require reimbursement from a participant, and effect any other right of recoupment of equity or other compensation provided under the Equity Plan in accordance with any clawback policies adopted by us.
Transfer Restrictions. Subject to certain exceptions contained in the Equity Plan, awards under the Equity Plan generally are not transferable by the recipient other than by will or the laws of descent and distribution and are generally exercisable, during the recipient’s lifetime, only by the recipient. Any amounts payable or shares issuable pursuant to an award generally will be paid only to the recipient or the recipient’s beneficiary or representative. The Administrator has discretion, however, to establish written conditions and procedures for the transfer of awards to other persons or entities, provided that such transfers comply with applicable federal and state securities laws.
Adjustments. As is customary in incentive plans of this nature, each share limit and the number and kind of shares available under the Equity Plan and any outstanding awards, as well as the exercise or purchase prices of awards, and performance targets under certain types of performance-based awards, are subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, stock splits, stock dividends, or other similar events that change the number or kind of shares outstanding, and extraordinary dividends or distributions of property to the stockholders.
No Limit on Other Authority. The Equity Plan does not limit the authority of the Board or any committee to grant awards or authorize any other compensation, with or without reference to the our common stock, under any other plan or authority.
Termination of or Changes to the Equity Plan. The Board may amend or terminate the Equity Plan at any time and in any manner. Stockholder approval for an amendment will be required only to the extent then required by applicable law or any applicable listing agency or required under Sections 422 or 424 of the Code to preserve the intended tax consequences of the plan. For example, stockholder approval will be required for any amendment that proposes to increase the maximum number of shares that may be delivered with respect to awards granted under the Equity Plan (adjustments as a result of stock splits or similar events will not, however, be considered an amendment requiring stockholder approval). Unless terminated earlier by the Board, the authority to grant new awards under the Equity Plan will terminate on October 4, 2031. Outstanding awards, as well as the Administrator’s authority with respect thereto, generally will continue following the expiration or termination of the Equity Plan. Generally speaking, outstanding awards may be amended by the Administrator (except for a repricing), but the consent of the award holder is required if the amendment (or any Equity Plan amendment) materially and adversely affects the holder.
Federal Income Tax Consequences of Awards under the Plan.
The U.S. federal income tax consequences of the Equity Plan under current federal law, which is subject to change, are summarized in the following discussion of the general tax principles applicable to the Equity Plan. This summary is not intended to be exhaustive and, among other considerations, does not describe the deferred compensation provisions of Section 409A of the Code to the extent an award is subject to and does not satisfy those rules, nor does it describe certain elections under the Code (such as an election under Code Section 83(b)), alternative minimum tax, or state, local, or international tax consequences.
With respect to nonqualified stock options, we are generally entitled to deduct, and the participant recognizes taxable income in an amount equal to the difference between the option exercise price and the fair market value of the shares at the time of exercise. With respect to incentive stock options, we are generally not entitled to a deduction nor does the participant recognize income at the time of exercise, although the participant may be subject to the U.S. federal alternative minimum tax. Upon a disposition of shares acquired by exercise of an incentive stock option before the end of the applicable incentive stock option holding periods, the participant generally must recognize ordinary income equal to the lesser of (i) the fair market value of the shares at the date of exercise minus the exercise price or (ii) the amount realized upon the disposition of the incentive stock option shares minus the exercise price. Otherwise, a participant’s disposition of shares acquired upon the exercise of an option (including an incentive stock option for which the incentive stock option holding periods are met) generally will result in only capital gain or loss.
| 18 |
With respect to restricted shares, we are generally entitled to deduct and the participant recognizes taxable income in an amount equal to the excess of the fair market value over the price paid (if any) only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant).
If an award is accelerated under the Equity Plan in connection with a “change in control” (as this term is used under the Code), we may not be permitted to deduct the portion of the compensation attributable to the acceleration (“parachute payments”) if it exceeds certain threshold limits under the Code (and certain related excise taxes may be triggered).
We have the authority and the right to deduct or withhold, or require a participant to remit to us, an amount sufficient to satisfy any income, payroll, and other taxes (including, without limitation, pursuant to the Federal Insurance Contributions Act and the Federal Unemployment Tax Act) to the extent required by law to be withheld with respect to any taxable event concerning a participant arising as a result of an award under the Equity Plan.
Outstanding Equity Awards At Annual Period End
As of December 31, 2022, there were no awards outstanding.
Aggregated Option Exercises
There were no options exercised by any officer or director of our company during the year ended December 31, 2022.
Directors Compensation
No director compensation was paid during the years ended December 31, 2022 and 2021 in the form of cash expenses, stock awards, option awards, non-equity incentive plan compensation, pension value and nonqualified deferred compensation earnings or any other type of compensation. We do not currently pay any cash fees to our directors, nor do we pay directors’ expenses in attending board meetings.
Employment Agreements
We are not presently a party to any employment agreements.
| 19 |
Pension and Retirement Plans
Currently, we do not offer any annuity, pension or retirement benefits to be paid to any of our officers, directors or employees, in the event of retirement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of April 13, 2023, the names, addresses and number of shares of common stock beneficially owned by (i) all persons known to our management to be beneficial owners of more than 5% of the outstanding shares of our common stock, (ii) each director of our company, (iii) each named Executive Officer and (iv) all executive officers and directors of our company as a group (except as indicated, each beneficial owner listed exercises sole voting power and sole dispositive power over the shares beneficially owned):
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class(1) | ||||||
| M1 Advisors LLC(2) | 8,954,199 | 61.77 | % | |||||
| (Michael Campbell)(2) | 8,954,199 | 61.77 | % | |||||
| Joel Stone | - | 0.00 | % | |||||
| Dean Skupen(3) | 325,000 | 2.24 | % | |||||
| Steven Shum | 4,655 | 0.03 | % | |||||
| Sean Fontenot(4) | 4,620,000 | 24.17 | % | |||||
| All executive officers and directors as a group | ||||||||
| (5 persons) | 13,903,854 | 95.92 | % | |||||
| 5% Stockholders: | ||||||||
| David Unsworth (5) | 1,435,000 | 9.90 | % | |||||
| The Cooper Family Living Trust Dtd 7/20/98 (6) | 1,079,000 | 7.44 | % | |||||
| (1) | As of April 13, 2023, there were 14,495,621 shares of common stock outstanding. Except as indicated in the footnotes to this table, we believe that all persons named in the table have sole voting and investment power with respect to all common stock shown as beneficially owned by them. In accordance with the rules of the Securities and Exchange Commission (the “Commission”), a person or entity is deemed to be the beneficial owner of common stock that can be acquired by such person or entity within sixty (60) days upon the exercise of options or warrants or other rights to acquire common stock. Each beneficial owner’s percentage ownership is determined by assuming that options and warrants that are held by such person (but not those held by any other person) and which are exercisable within sixty (60) days have been exercised. The inclusion herein of such shares listed as beneficially owned does not constitute an admission of beneficial ownership. |
| (2) | Represents shares of common stock owned of record by M1 Advisors LLC, a company controlled by Michael Campbell. The address of Michael Campbell and M1 Advisors LLC is 11753 Willard Avenue, Tustin, CA 92782. Mr. Campbell has sole voting and investment power over the shares held by M1 Advisors LLC. |
| (3) | Represents shares of common stock owned of record by DSS Consulting Corporation, a company controlled by Dean Skupen. DSS Consulting Corporation’s address is 2945 Townsgate Road, Suite 200, West Lake Village CA 91361. Mr. Skupen has sole voting and investment power over the shares held by DSS Consulting Corporation. |
| (4) | Represents 3,080,000 shares of common stock issuable upon the conversion of a convertible note, and 1,540,000 shares of common stock issuable upon the exercise of warrants, owned of record by Nanosha Investments, LLC, a company controlled by Sean Fontenot. The address of Nanosha Investments, LLC is 1202 Walnut Avenue, Long Beach, CA 90813. Mr. Fontenot has sole voting and investment power over the securities held by Nanosha Investments, LLC. |
| (5) | David Unsworth’s address is 246 Bayview Avenue, Belvedere CA 94920. |
| (6) | Piers and Sally Cooper are the trustees of The Cooper Family Living Trust Dated 7/20/98. The address of the trust is 452 Lakeview Way, Emerald Hills, CA 94062. |
| 20 |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
To the best of our knowledge, except as set forth below, during the last fiscal year, there were no material transactions, or series of similar transactions, or any currently proposed transactions, or series of similar transactions, to which we were or are to be a party, in which the amount involved exceeds $120,000 or one percent of the average total assets at year end for each of the last two fiscal years, and in which any director or executive officer, or any security holder who is known by us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest.
Item 14. Principal Accountant Fees And Services.
Audit Fees
The aggregate fees billed for professional services rendered by RBSM LLP, our principal accountants for the years ended December 31, 2022 and 2021, for the audit of financial statements, quarterly reviews of our interim financial statements and services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements for these periods were as follows:
| For the Years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Audit Fees and Audit Related Fees | $ | 28,000 | $ | 50,000 | ||||
| Tax Fees | — | — | ||||||
| All Other Fees | — | — | ||||||
| Total | $ | 28,000 | $ | 50,000 | ||||
In the above table, “audit fees” are fees billed by our company’s external auditor for services provided in auditing our company’s financial statements for the periods indicated above. “Audit-related fees” are fees not included in audit fees that are billed by the auditor for assurance and related services, including quarterly reviews, that are reasonably related to the performance of the audit of our company’s financial statements. “Tax fees” are fees billed by the auditor for professional services rendered for tax compliance, tax advice and tax planning. “All other fees” are fees billed by the auditor for products and services not included in the foregoing categories.
Our board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by our board of directors either before or after the respective services were rendered.
| 21 |
PART IV
Item.15. Exhibits, Financial Statement Schedules.
| 22 |
| 23 |
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 17 day of April 2023.
| CalEthos, Inc. | ||
| By: | /s/ Michael Campbell | |
| Name: | Michael Campbell | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Michael Campbell | Chief Executive Officer and Director | Date: April 17, 2023 | ||
| Michael Campbell | (Principal Executive Officer) | |||
| /s/ Dean S. Skupen | Chief Financial Officer | Date: April 17, 2023 | ||
| Dean S. Skupen | (Principal Accounting Officer) | |||
| /s/ Sean Fontenot | Director | Date: April 17, 2023 | ||
| Sean Fontenot | (Director) | |||
| /s/ Steven Shum | Director | Date: April 17, 2023 | ||
| Steven Shum | (Director) |
| 24 |
CalEthos, Inc.
For the Years Ended December 31, 2022 and 2021
Index to the Consolidated Financial Statements
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CalEthos, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CalEthos Inc., (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, stockholders’ deficit and cash flows for each of the two year period ended December 31, 2022, and the related notes and schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the accompanying consolidated financial statements, although the Company has net income it is primarily attributable to non-cash reversal of compensation for restricted stock units, has generated negative cash flows from operating activities, has an accumulated deficit and has stated that substantial doubt exists about Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.
We determined that there are no critical audit matters.
/s/
We have served as the Company’s auditor since 2018.
April 17, 2023
| F-2 |
CalEthos, Inc.
Consolidated Balance Sheets
As of December 31,
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid and other current expenses | ||||||||
| Total current assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Convertible promissory notes, net | ||||||||
| Notes payable | ||||||||
| Total current liabilities | ||||||||
| Commitments and contingencies (Note 7) | ||||||||
| Stockholders’ deficit | ||||||||
| Series A convertible preferred stock, par value $, shares authorized; shares issued and outstanding | ||||||||
| Preferred stock, par value $, shares authorized; shares issued and outstanding | ||||||||
| Common stock, par value $, shares authorized; and shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Other comprehensive income (loss) | ( | ) | ||||||
| Stock subscription receivable | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
| F-3 |
CalEthos, Inc.
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31,
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Operating expenses | ||||||||
| Professional fees | ||||||||
| Restricted stock grants | ( | ) | ||||||
| General and administrative expenses | ||||||||
| Impairment loss | ||||||||
| Total operating (income) expenses | ( | ) | ||||||
| Income (loss) from operations | ( | ) | ||||||
| Other income (expenses) | ||||||||
| Interest income | ||||||||
| Financing costs | ( | ) | ( | ) | ||||
| Total other expenses | ( | ) | ( | ) | ||||
| Income (loss) before provision for income taxes | ( | ) | ||||||
| Provision for income taxes | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net income (loss) per share, basic | $ | $ | ( | ) | ||||
| Net income (loss) per share, diluted | $ | $ | ( | ) | ||||
| Weighted average common shares outstanding – basic | ||||||||
| Weighted average common shares outstanding – diluted | ||||||||
| Comprehensive income (loss): | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Change in foreign currency translation | ( | ) | ||||||
| Comprehensive income (loss) | $ | $ | ( | ) | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
| F-4 |
CalEthos, Inc.
Consolidated Statements of Changes in Stockholders’ Deficit
For the Years Ended December 31, 2022 and 2021
Series A Convertible Preferred Stock | Common Stock | Additional Paid-In | Stock Subscription | Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivable | Income (Loss) | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory note | - | - | ||||||||||||||||||||||||||||||||||
| Stock options issued for services | - | - | ||||||||||||||||||||||||||||||||||
| Stock issued for debt forgiveness | - | |||||||||||||||||||||||||||||||||||
| Stock issued for accrued compensation | - | - | ||||||||||||||||||||||||||||||||||
| Stocks returned | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Stock issued on exercise of options | - | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||
| Restricted common stock awards issued for compensation | - | |||||||||||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | ( | ) | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Forfeiture of stock-based compensation | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign currency translation income | - | - | ||||||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
| F-5 |
CalEthos, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31,
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Impairment | ||||||||
| Amortization of convertible promissory note discounts | ||||||||
| Fair value of equity-based compensation | ||||||||
| Forfeiture of restricted stock grants | ( | ) | ||||||
| Accretion of compensation cost for restricted stock awards | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Other assets | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from the issuance of convertible promissory notes | ||||||||
| Proceeds from the issuance of notes payable | ||||||||
| Repayments of notes payable | ( | ) | ( | ) | ||||
| Proceeds from the exercise of options | ||||||||
| Net Cash (Used in) Provided by Financing Activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||
| Net (decrease) increase in Cash | ( | ) | ||||||
| Cash, Beginning of Period | ||||||||
| Cash, End of Period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Relative fair value of warrants issued with convertible promissory notes | $ | $ | ||||||
| Common stock issued for accrued compensation | $ | $ | ||||||
| Common stock issued from forgiven debt | $ | $ | ||||||
| Original issue discount recorded on convertible promissory notes | $ | $ | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
| F-6 |
CalEthos, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
Note 1 - 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 immersion and liquid cooled data center that provides colocation data center services to enterprise IT 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 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.
Incorporation of Korean entity
On
November 5, 2021, AIQ System Inc. (“AIQ”) was incorporated in Seoul, Republic of Korea. AIQ is authorized to issue million
shares of common stock. At the date of incorporation, shares were issued to the Company for
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary from the formation date. All material intercompany transactions and balances have been eliminated in consolidation.
Going Concern and Liquidity
The
Company incurred net income of approximately $
The Company’s 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.
| F-7 |
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.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.
Foreign Currency Translation
The financial statements of foreign subsidiaries, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders’ equity (deficit). Gains or losses from foreign currency transactions are recognized in the consolidated statements of operations.
Fair Value Measurement
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As of and for the year ended December 31, 2022, the Company had no assets or liabilities that require fair value measurement.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Cash and cash equivalents are recorded at cost, which approximates its fair value. The Company maintains its cash and cash equivalents
in banks insured by the Federal Deposit Insurance Corporation (“FDIC”) in accounts that at times may be in excess of the
federally insured limit of $
Prepaid Expense
Prepaid expenses are assets held by the Company, which are expected to be realized and consumed within twelve months after the reporting period.
Other Assets
Other assets consist of long-term advances paid for chip and processor design and development.
| F-8 |
Related Parties
The Company follows Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) section 850-10 for the identification of related parties and disclosure of related party transactions.
Pursuant to ASC section 850-10-20 the related parties include (a.) affiliates of the Company (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); (b.) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option of ASC section 825–10–15, to be accounted for by the equity method by the investing entity; (c.) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d.) principal owners of the Company; (e.) management of the Company; (f.) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g.) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a.) the nature of the relationship(s) involved; (b.) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c.) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d.) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Commitments and Contingencies
The Company follows ASC section 450-20 to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
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 consolidated statement of operations and comprehensive loss.
Warrant Liability
In connection with financing arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes Merton (“BSM”) option pricing model as of the measurement date.
| F-9 |
We account for our stock-based compensation under ASC 718, “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
We use the fair value method for equity instruments granted to non-employees and use the BSM model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant (measurement date) and is recognized over the vesting periods.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, deferred tax assets and liabilities are computed based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rate. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.
The Company accounts for income taxes using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence.
The Company has adopted guidance related to the accounting for uncertainty in income taxes which prescribes rules for recognition, measurement and classification in the financial statements of tax positions taken or expected to be taken in a tax return. The guidance prescribes a two-step approach which involves evaluating whether a tax position will be more likely than not (greater than 50 percent likelihood) sustained upon examination based on the technical merits of the position. The second step requires that any tax position that meets the more likely than not recognition threshold be measured and recognized in the financial statements at the largest amount of benefit that is a greater than 50 percent likelihood of being realized upon settlement.
The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The Company is not currently under examination by any taxing authority nor has the Company been notified of a pending examination. The statute of limitations for which the Company is generally no longer subject to federal or state income tax examinations by tax authorities is for years before 2013.
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.
| 2022 | 2021 | |||||||
| Restricted stock awards | ||||||||
| Convertible promissory notes and accrued interest | ||||||||
| Series A warrants issued with convertible promissory notes | ||||||||
| Series B warrants to be issued upon exercise of Series A warrants | ||||||||
| Warrants issued for services | ||||||||
| Total potential future shares | ||||||||
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.
| F-10 |
Note 2 – Related Party Transactions
The
Company incurred approximately $
Note 3 – 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 FPGA based Bitcoin mining simulation system. The Agreement was expected to be completed within
6 weeks for a total contract price of
On
April 5, 2022, AIQ entered into a Technology Development Agreement (the “Agreement”) with NNS, Co., Ltd. (the “Contractor”
or “NNS”) to develop a FPGA based Bitcoin mining simulation system. The Agreement was expected to be completed within 9 weeks
for a total contract price of
| Amount | ||||||||
| USD | KRW | |||||||
| Within 5 days after signing the contract | $ | |||||||
| Within 5 days after all conditions are met as stated in “Schedule B – Statement of Work” | ||||||||
| Total | $ | |||||||
Payment
of
Impairment
During the six months ended June 30, 2022, the Bitcoin market was in a constant decline, and since the ASIC chip being developed by AIQ was planned to be used for Bitcoin mining machines, management believes that there is an impairment indicator. In August 2022, management discontinued the operations of AIQ.
Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If the carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the asset’ (or asset group), typically a discounted cashflow analysis, and an impairment charge is recorded for the excess of carrying value over fair value.
As
of December 31, 2022, intangibles and other assets were fully impaired. Impairment loss amounted to $
The table below summarizes the impairment loss for the year ended December 31, 2022:
| Amount | VAT | Total | ||||||||||
| PICOCEL | $ | $ | $ | |||||||||
| NNS | ||||||||||||
| Total | ||||||||||||
| Foreign exchange loss | ||||||||||||
| Impairment loss | $ | $ | $ | |||||||||
| F-11 |
Note 4 – Accounts Payable and Accrued Expenses
The following table summarizes the Company’s accounts payable and accrued expense balances as of December 31:
| 2022 | 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued interest | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
Accrued Interest
The following table presents the details of accrued interest as of December 31:
| 2022 | 2021 | |||||||
| Notes payable | $ | $ | ||||||
| Convertible promissory notes | ||||||||
| Balance, end of the year | $ | $ | ||||||
Note 5 – Notes Payable
The table below summarizes the transactions as of December 31:
| 2022 | 2021 | |||||||
| Balance, beginning of the year | $ | $ | ||||||
| Additions | ||||||||
| Payments | ( | ) | ( | ) | ||||
| Balance, end of the year | $ | $ | ||||||
On
July 7, 2020, the Company issued a promissory note in the principal amount of $
On
February 19, 2021, the Company issued a promissory note in the principal amount of $
On
April 22, 2021, the Company issued a promissory note in the principal amount of $
| F-12 |
On
July 1, 2021, the Company issued a promissory note in the principal amount of $
Interest
expense on notes payable amounted to $
Note 6 – Convertible Promissory Notes
In
2021, the Company issued two convertible promissory notes amounting to $
In
connection with the issuance of the Notes, the Company issued to the purchasers of the Notes stock purchase warrants (the “Warrants”)
to purchase an aggregate of
In
accordance with ASC 470 - Debt, the Company has allocated the cash proceeds amounts of the Notes among the Notes, the Warrants and the
conversion feature. The relative fair value of the Warrants issued amounted to approximately $
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 $
The convertible promissory notes consisted of the following as of December 31:
| 2022 | 2021 | |||||||
| Principal | ||||||||
| Balance, beginning of year | $ | $ | ||||||
| Additions | ||||||||
| Balance, end of year | ||||||||
| Discount | ||||||||
| Balance, beginning of year | ||||||||
| Additions | ||||||||
| Amortization | ( | ) | ( | ) | ||||
| Balance, end of year | ||||||||
| Net carrying amount | $ | $ | ||||||
Effective
interest rate used to amortize the debt discount for the years ended December 31, 2022 and 2021 ranges from
| F-13 |
| 2022 | 2021 | |||||||
| Principal | $ | $ | ||||||
| Interest | ||||||||
| Total | ||||||||
| Conversion price per share | ||||||||
| Potential future shares | ||||||||
The
default interest expense for the convertible promissory notes amounted to $
Note 7 – 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, except as follows.
On
January 3, 2022, a complaint was filed against our company in the Superior Court of California, County of Los Angeles titled Michael
Sekula v. CalEthos Inc, Michael Campbell and Does 1-25 (Case No. 22STCV00121) for, among other matters, failure to pay wages, fraud
and other wage-related claims.
On
June 9, 2022, a Settlement Agreement and Mutual Release was reached by the parties in the above mentioned complaint whereby as full
consideration for the plaintiff’s execution of and compliance with the agreement and plaintiff’s release of all claims
against the defendants, the Company agreed to pay a gross settlement amount of $
Note 8 – Equity
Shares Authorized
The Company is authorized to issue shares of which shares shall be preferred stock, par value $ per share, and shares shall be common stock, par value $ per share.
Preferred Stock
Series A Convertible Preferred Stock
The
Series A Convertible Preferred Stock (“Series A”) is convertible into shares of the Company’s common stock at the rate
of $ per share, subject to adjustments based on the Company’s future sales of financial instruments at a value less than $
per share. The holders of the Series A have the right to convert any time after the date of issuance. With the issuance of the convertible
promissory notes, as explained in Note 5 above, the Series A’s conversion rate adjusted to $
The
Series A is mandatorily convertible upon (i) the closing of the sale of shares of the Company’s common stock to the public in an
underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting
in at least $
| F-14 |
On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series A shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Articles of Incorporation, holders of Series A shall vote together with the holders of common stock as a single class.
From and after the date of the issuance of any shares of Series A, a cumulative dividend on each outstanding share of Series A Preferred Stock shall accrue at a rate per annum equal to ten percent of the Series A original issue price. Accrued dividends on the Series A shall be paid in shares of the Company’s common stock, such shares to be valued for such purpose at the applicable series A conversion price.
On
February 11, 2020, the Company converted shares of Series A into a Convertible Promissory Notes in the principal amount approximately
$
Common Stock
In January 2021, the Company’s President and a member of the Board of Directors, resigned as an officer and director of the Company (“Termination Agreement”). Part of the Termination Agreement stipulates the return of shares of the Company’s common stock (“Cancelled Shares”). The Cancelled Shares were returned and cancelled on April 20, 2021.
In
March 2021, the Company’s Chief Executive Officer (“CEO’) agreed to forgive approximately $
In
March 2021, the Company’s Chief Financial Officer agreed to reduce the amounts due to him from approximately $
In
September 2021, the Company entered into a release agreement with one of its consultants. As part of the separation payment, the Company
issued shares valued at $
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 had an initial term of one year, which was to be automatically renewed on a year-to-year basis unless either party gave a written notice of termination. The two consultants who entered into these agreements include:
| 1) | A consultant who was granted restricted share awards. | |
| 2) | An entity, which is owned by the Company’s CEO and majority shareholder, was granted restricted share awards. |
The Company’s management accounted for the Award Grants as restricted stock compensation in accordance with ASC 718 – Stock Compensation (“ASC 718”). ASC 718 required the Company to estimate the service period over which the compensation cost would be recognized. Management had estimated that the first two development phases would be completed within 15 months and the Foundry Mask would be completed within 6 months for a total of 21 months service period. Compensation cost was to be recognized ratably over 21 months and in the same manner had the Company paid in cash. The estimated service period would be adjusted for changes in actual and expected completion dates. Any such change was to be recognized prospectively, and the remaining deferred compensation was to be recognized over the remaining service period.
The
Company issued restricted stock grants totaling
shares (“Grant Shares”) to Hyuncheol (Peter) Kim (“CTO”), the Company’s former Chief Technology Officer, and
to a M1 Advisors LLC, a company owned by the Company’s chief executive officer. The value was $
per share on the date of issuance (“Grant Date”) for an aggregate fair value of $
The stock-based award compensation was recorded as an increase in deferred compensation expense, common stock, and additional paid-in capital in the Company’s books at the time of the grant.
On July 27, 2022, the Company sent the CTO, a letter notifying him that the Company’s Board of Directors had resolved to discontinue the Company’s 5 nanometer ASIC chip and bitcoin mining machine project and that his consulting agreement was to terminate at the end of August 2022. The Grant Shares issued in connection with his consulting agreement were canceled. As of the issuance date of these consolidated financial statements, the CTO had not executed the documentation required for the Company to cancel the Grant Shares; therefore, the Grant Shares are still legally outstanding, so the number of Grant Shares has not been removed from the total shares issued and outstanding. Since it is probable that the Grant Shares will not be earned, the Company has reversed the expense recognized for the fair value of the Grant Shares.
| F-15 |
Also, at the end of August 2022, the Company canceled the restricted stock grant issued to M1 Advisors LLC.
| Shares | Deferred compensation | |||||||
| Grant date fair value | $ | |||||||
| Accretion | ( | ) | ||||||
| Canceled | ( | ) | ( | ) | ||||
| Balance as of December 31, 2022 | $ | |||||||
| 2022 Accretion expense | $ | |||
| Reversal of 2021 accretion expense | ( | ) | ||
| Reversal of 2022 accretion expense | ( | ) | ||
| Restricted stock grant compensation | $ | ( | ) |
Issuance of Stock Options and Warrants
In February 2021, the Company signed a new consulting agreement that granted one of its shareholders an option to purchase shares of the Company’s common stock at $ per share for the consultancy work provided from August 2020 to February 2021. The options were fully vested on the date of issuance. The fair value of the options was approximately $, as of the grant date, of which approximately $ was expensed and accrued during the year ended December 31, 2020 and $ was expensed for the year ended December 31, 2021.
In May 2021, the Company signed a letter of understanding that granted one of its shareholders an option to purchase shares of the Company’s common stock at $ per share for the consultancy work provided during the Company’s restructuring phase from February 17, 2021 through April 30, 2021. The options were fully vested on the date of issuance. The fair value of the options was approximately $, as of grant date, which was expensed during the year ended December 31, 2021.
In
May 2021, an option holder exercised three options for , and shares of the Company’s common stock at an
exercise price of $
Number of Stock Option Shares | Exercise Price Range Per Share | Weighted Average Exercise Price | Relative Fair Value | Aggregate Intrinsic Value | ||||||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Granted | ||||||||||||||||||||
| Forfeited | ||||||||||||||||||||
| Exercised | ( | ) | ||||||||||||||||||
| Expired | ||||||||||||||||||||
| Balance, December 31, 2021 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Forfeited | ||||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Expired | ||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ||||||||||||||||
| Vested and exercisable, December 31, 2022 | $ | $ | $ | $ | ||||||||||||||||
| Unvested, December 31, 2022 | $ | $ | $ | $ | ||||||||||||||||
On
September 15, 2021, the Company issued warrants to purchase
| F-16 |
The table below summarizes the Company’s warrant activities for the years ended December 31, 2022 and 2021 (all share and per share data reflects the reverse stock split):
Number of Shares | Weighted Average Strike Price/Share | Weighted Average Remaining Contractual Term (Years) | Weighted Average Grant Date Fair Value/Share | Aggregate Intrinsic Value | ||||||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | |||||||||||||||||
| Granted | ||||||||||||||||||||
| Forfeited | – | |||||||||||||||||||
| Exercised | – | |||||||||||||||||||
| Expired | – | |||||||||||||||||||
| Balance, December 31, 2021 | ||||||||||||||||||||
| Vested and exercisable, December 31, 2021 | ||||||||||||||||||||
| Unvested, December 31, 2021 | – | |||||||||||||||||||
| Balance, January 1, 2022 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Forfeited | – | |||||||||||||||||||
| Exercised | – | |||||||||||||||||||
| Expired | ( | ) | ||||||||||||||||||
| Balance, December 31, 2022 | ||||||||||||||||||||
| Vested and exercisable, December 31, 2022 | ||||||||||||||||||||
| Unvested, December 31, 2022 | $ | – | $ | $ | ||||||||||||||||
The following table sets forth the weighted-average assumptions used to estimate the fair value of warrants granted for the year ended December 31:
| 2022 | 2021 | |||||||
| Expected life (in years) | ||||||||
| Risk-free interest rate | – | % | ||||||
| Expected volatility | – | % | ||||||
| Dividend yield | – | % | ||||||
| Stock price | $ – | |||||||
| F-17 |
| Numerator | 2022 | 2021 | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Effect of dilutive instruments | ||||||||
| Convertible notes interest expense | ||||||||
| Numerator for diluted EPS | ( | ) | ||||||
| Denominator | ||||||||
| Denominator - for basic EPS | ||||||||
| Effect of dilutive instruments | ||||||||
| Warrants | ||||||||
| Restricted stock awards | ||||||||
| Convertible notes | ||||||||
| Dilutive potential common shares | ||||||||
| Denominator for diluted EPS | ||||||||
| Basic EPS | $ | $ | ( | ) | ||||
| Diluted EPS | $ | $ | ( | ) | ||||
Securities that could potentially dilute loss per share in the future were not included in the computation of diluted loss per share for the year ended December 31, 2021 because their inclusion would be anti-dilutive. Common share equivalents amounted to for warrants, for convertible notes and for restricted stock units for total of as of December 31, 2021. For the year ended December 31, 2022, the Company had dilutive securities.
Note 10 – Deferred Tax Assets and Income Tax Provision
Deferred Tax Assets
At
December 31, 2022, the Company had net operating loss (“NOL”) carry forwards for Federal income tax purposes of $
Deferred
tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred
tax assets because of the uncertainty regarding its realization. The valuation allowance (decreased) increased by approximately $(
Components of deferred tax assets are as follows as of December 31:
| 2022 | 2021 | |||||||
| Net deferred tax assets – Non-current: | ||||||||
| Intangible assets | $ | $ | ||||||
| Impairment loss | ||||||||
| Interest expense limitations | ||||||||
| Stock-based compensation | ||||||||
| Expected income tax benefit from NOL carry-forwards | ||||||||
| Less valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net of valuation allowance | $ | $ | ||||||
| F-18 |
Income Tax Provision in the Statements of Operations
A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows for the years ended December 31:
| 2022 | 2021 | |||||||
| Federal statutory income tax rate | % | % | ||||||
| Change in valuation allowance on net operating loss carry-forwards | ( | ) | ( | ) | ||||
| Effective income tax rate | % | % | ||||||
Note 11 – 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:
Purchase of Land for Building a Data Center
On
March 30, 2023, the Company signed an option agreement to acquire
The
Purchase Price is payable with a cash payment of $
If the Purchase Shares are issued at the Closing Date, the Company has agreed to repurchase the Shares (the “Put Option”). The Put Option period ends on the one-year anniversary after a six-month holding period. However, if the Company’s common stock trades above $ per share for 120 consecutive days, the Put Option expires. If the Company’s common stock trades below $ per for 10 consecutive days, the Holder has the option for the Company to repurchase the Purchase Shares for $ per share. o
Employment Agreement
On
March 27, 2023, executed an offer of employment to hire an individual as the Company’s president and chief operating officer. The
effective date of employment was March 28, 2023. The salary is $
Cancellation of Restricted Stock Awards
On April 10, 2023, we completed the required paperwork for our transfer agent to cancel shares of restricted stock that was previously issued to Mr. Kim as our former CTO.
| F-19 |
Exhibit 4.10
DESCRIPTION OF THE COMPANY’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
DESCRIPTION OF CAPITAL STOCK
The following description of our common stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to the complete text of our Articles of Incorporation, as amended (the “Articles of Incorporation”), and our Bylaws (the “Bylaws”), each of which are incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part. We encourage you to read our Articles of Incorporation, our Bylaws and the applicable provisions of the Nevada Revised Statutes (“NRS”) for additional information.
Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.0001 per share (our “common stock”), and 100,000,000 shares of preferred stock, par value $0.001 per share (our “preferred stock”).
As of March 31, 2023, 14,495,621 shares of common stock and no shares of preferred stock were issued and outstanding.
Common Stock
General
The following summary of certain provisions of our common stock does not purport to be complete. This description is summarized from, and is qualified in its entirety by reference to, our articles of incorporation and our bylaws, to which you should refer and both of which are incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part. The summary below is also qualified by provisions of applicable law, including Chapters 78 and 92A of the Nevada Revised Statutes (the “NRS”), as applicable to corporations.
Voting, Dividend and Other Rights. Each outstanding share of common stock entitles the holder to one vote on all matters presented to the shareholders for a vote. Holders of shares of common stock have no cumulative voting, pre-emptive, subscription or conversion rights. All shares of common stock to be issued pursuant to this registration statement will be duly authorized, fully paid and non-assessable. Our board of directors determines if and when distributions may be paid out of legally available funds to the holders. To date, we have not declared any dividends with respect to our common stock. Our declaration of any cash dividends in the future will depend on our board of directors’ determination as to whether, in light of our earnings, financial position, cash requirements and other relevant factors existing at the time, it appears advisable to do so. We do not anticipate paying cash dividends on the common stock in the foreseeable future.
Rights Upon Liquidation. Upon liquidation, subject to the right of any holders of the preferred stock to receive preferential distributions, each outstanding share of common stock may participate pro rata in the assets remaining after payment of, or adequate provision for, all our known debts and liabilities.
Majority Voting. The holders of a majority of the outstanding shares of common stock constitute a quorum at any meeting of the shareholders. A plurality of the votes cast at a meeting of shareholders elects our directors. The common stock does not have cumulative voting rights. Therefore, the holders of a majority of the outstanding shares of common stock can elect all of our directors. In general, a majority of the votes cast at a meeting of shareholders must authorize shareholder actions other than the election of directors. Most amendments to our articles of incorporation require the vote of the holders of a majority of all outstanding voting shares.
All issued and outstanding shares of common stock are fully paid and nonassessable. Shares of our common stock that may be offered, from time to time, under this prospectus will be fully paid and nonassessable.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Nevada Agency and Transfer Company. The address of Nevada Agency and Transfer Company is 50 West Liberty Street, Suite 880, Reno, NV 89501 and its telephone number is (775) 322-0626.
Market for Common Stock
Our common stock is listed for quotation on the OTC Pink Market under the symbol “BUZZ.”
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Michael Campbell, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of CalEthos, Inc. (the “Registrant”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 17, 2023 | /s/ Michael Campbell |
| Michael Campbell | |
Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Dean S. Skupen, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of CalEthos, Inc. (the “Registrant”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 17, 2023 | /s/ Dean S. Skupen |
| Dean S. Skupen | |
Chief
Financial Officer | |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CalEthos, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022 (the “Report”), I, Michael Campbell, Chief Executive Officer of the Company, and I, Dean S. Skupen, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: April 17, 2023 | /s/ Michael Campbell |
| Michael Campbell | |
Chief Executive Officer | |
| (Principal Executive Officer) |
| Date: April 17, 2023 | /s/ Dean S. Skupen |
| Dean S. Skupen | |
Chief Financial Officer | |
| (Principal Financial Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed from within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Consolidated Balance Sheets (Parenthetical) - $ / shares |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Preferred stock, par value | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 100,000,000 | 100,000,000 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 100,000,000 | 100,000,000 |
| Common stock, shares issued | 24,495,621 | 25,995,621 |
| Common stock, shares outstanding | 24,495,621 | 25,995,621 |
| Series A Convertible Preferred Stock [Member] | ||
| Preferred stock, par value | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 3,600,000 | 3,600,000 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
ORGANIZATION AND ACCOUNTING POLICIES |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ORGANIZATION AND ACCOUNTING POLICIES | Note 1 - 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 immersion and liquid cooled data center that provides colocation data center services to enterprise IT 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 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.
Incorporation of Korean entity
On November 5, 2021, AIQ System Inc. (“AIQ”) was incorporated in Seoul, Republic of Korea. AIQ is authorized to issue million shares of common stock. At the date of incorporation, 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary from the formation date. All material intercompany transactions and balances have been eliminated in consolidation.
Going Concern and Liquidity
The Company incurred net income of approximately $2,181,000 for the year ended December 31, 2022, of which $4,791,000 was attributable to a noncash transaction for the reversal of compensation for restricted stock units, and had an accumulated deficit of approximately $14,650,000 as of December 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 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.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.
Foreign Currency Translation
The financial statements of foreign subsidiaries, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders’ equity (deficit). Gains or losses from foreign currency transactions are recognized in the consolidated statements of operations.
Fair Value Measurement
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Other inputs that are directly or indirectly observable in the marketplace. Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As of and for the year ended December 31, 2022, the Company had no assets or liabilities that require fair value measurement.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates its fair value. The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (“FDIC”) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. As of December 31, 2022 and 2021, the Company had $1,817,000 and $2,797,000 in excess of the federal insurance limit, respectively.
Prepaid Expense
Prepaid expenses are assets held by the Company, which are expected to be realized and consumed within twelve months after the reporting period.
Other Assets
Other assets consist of long-term advances paid for chip and processor design and development.
Related Parties
The Company follows Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) section 850-10 for the identification of related parties and disclosure of related party transactions.
Pursuant to ASC section 850-10-20 the related parties include (a.) affiliates of the Company (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); (b.) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option of ASC section 825–10–15, to be accounted for by the equity method by the investing entity; (c.) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d.) principal owners of the Company; (e.) management of the Company; (f.) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g.) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a.) the nature of the relationship(s) involved; (b.) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c.) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d.) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Commitments and Contingencies
The Company follows ASC section 450-20 to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
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 consolidated statement of operations and comprehensive loss.
Warrant Liability
In connection with financing arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes Merton (“BSM”) option pricing model as of the measurement date.
We account for our stock-based compensation under ASC 718, “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
We use the fair value method for equity instruments granted to non-employees and use the BSM model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant (measurement date) and is recognized over the vesting periods.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, deferred tax assets and liabilities are computed based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rate. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.
The Company accounts for income taxes using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence.
The Company has adopted guidance related to the accounting for uncertainty in income taxes which prescribes rules for recognition, measurement and classification in the financial statements of tax positions taken or expected to be taken in a tax return. The guidance prescribes a two-step approach which involves evaluating whether a tax position will be more likely than not (greater than 50 percent likelihood) sustained upon examination based on the technical merits of the position. The second step requires that any tax position that meets the more likely than not recognition threshold be measured and recognized in the financial statements at the largest amount of benefit that is a greater than 50 percent likelihood of being realized upon settlement.
The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The Company is not currently under examination by any taxing authority nor has the Company been notified of a pending examination. The statute of limitations for which the Company is generally no longer subject to federal or state income tax examinations by tax authorities is for years before 2013.
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.
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.
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RELATED PARTY TRANSACTIONS |
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| Related Party Transactions [Abstract] | |
| RELATED PARTY TRANSACTIONS | Note 2 – Related Party Transactions
The Company incurred approximately $200,000 and $199,000 for years ended December 31, 2022 and 2021, and paid approximately $200,000 and $202,000, respectively, to M1 Advisors for the services of the Company’s CEO and miscellaneous operating expenses.
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INTANGIBLE AND OTHER ASSETS |
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| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INTANGIBLE AND OTHER ASSETS | Note 3 – 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 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. Total payments made to PICOCEL as of December 31, 2022 amounted to approximately $69,000. 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.
On April 5, 2022, AIQ entered into a Technology Development Agreement (the “Agreement”) with NNS, Co., Ltd. (the “Contractor” or “NNS”) to develop a FPGA based Bitcoin mining simulation system. The Agreement was 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:
Payment of 90,000,000 KRW or approximately $69,000 was made to NNS as of December 31, 2022, which was expensed and included in the consolidated statement of operations.
Impairment
During the six months ended June 30, 2022, the Bitcoin market was in a constant decline, and since the ASIC chip being developed by AIQ was planned to be used for Bitcoin mining machines, management believes that there is an impairment indicator. In August 2022, management discontinued the operations of AIQ.
Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If the carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the asset’ (or asset group), typically a discounted cashflow analysis, and an impairment charge is recorded for the excess of carrying value over fair value.
As of December 31, 2022, intangibles and other assets were fully impaired. Impairment loss amounted to $154,000, inclusive of a $12,000 impairment of prepaid VAT related to the services provided by PICOCEL and NNS.
The table below summarizes the impairment loss for the year ended December 31, 2022:
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ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
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| ACCOUNTS PAYABLE AND ACCRUED EXPENSES | Note 4 – Accounts Payable and Accrued Expenses
The following table summarizes the Company’s accounts payable and accrued expense balances as of December 31:
Accrued Interest
The following table presents the details of accrued interest as of December 31:
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NOTES PAYABLE |
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| NOTES PAYABLE | Note 5 – Notes Payable
The table below summarizes the transactions as of December 31:
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 August 7, 2020. 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 December 31, 2022. The note principal and interest are past due, therefore in default. For the year ended December 31, 2022, the Company has accrued approximately $3,000 of default interest.
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 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 was settled in full on January 25, 2022.
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 was 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 December 31, 2022. The note principal and interest are past due, therefore in default. Interest accrued, including default interest, as of December 31, 2022 is $10,000.
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 were to 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 was settled in full on November 29, 2022.
Interest expense on notes payable amounted to $14,000 and $8,000 for the years ended December 31, 2022 and 2021, respectively.
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CONVERTIBLE PROMISSORY NOTES |
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| CONVERTIBLE PROMISSORY NOTES | Note 6 – Convertible Promissory Notes
In 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). Interest accrued as of December 31, 2022 is $133,000. 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 $ based on a -year term, volatility of % to %, a risk-free equivalent yield of % to %, and stock price ranging from $ to $.
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 $1,526,000 and $524,000 for the years ended December 31, 2022 and 2021, respectively.
The convertible promissory notes consisted of the following as of December 31:
Effective interest rate used to amortize the debt discount for the years ended December 31, 2022 and 2021 ranges from 4.76% to 64.60%.
The default interest expense for the convertible promissory notes amounted to $204,000 and $65,000 for the year ended December 31, 2022, and 2021, respectively.
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COMMITMENTS AND CONTINGENCIES |
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| Commitments and Contingencies Disclosure [Abstract] | |
| COMMITMENTS AND CONTINGENCIES | Note 7 – 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, except as follows.
On January 3, 2022, a complaint was filed against our company in the Superior Court of California, County of Los Angeles titled Michael Sekula v. CalEthos Inc, Michael Campbell and Does 1-25 (Case No. 22STCV00121) for, among other matters, failure to pay wages, fraud and other wage-related claims. In the complaint, the plaintiff claimed he worked under a consulting agreement as Vice President of Brand Management of our company and was to be paid $4,000 per month and to receive an option to purchase shares of our common stock that was to vest quarterly over the term of the agreement. In the complaint, the plaintiff alleged that, on or around March 27, 2020, the Company ceased paying the plaintiff despite the plaintiff’s continuing efforts on behalf of our company and that the Company agreed to continue to accrue his monthly retainer amount until such time that the Company received at least $100,000 in funding. Plaintiff further alleged that he continued to work for our company for 38 additional weeks in reliance on our promise of payment. The plaintiff claimed that our refusal to make the promised payments amounts to violations of the California labor laws and seeks damages in excess of $450,000.
On June 9, 2022, a Settlement Agreement and Mutual Release was reached by the parties in the above mentioned complaint whereby as full consideration for the plaintiff’s execution of and compliance with the agreement and plaintiff’s release of all claims against the defendants, the Company agreed to pay a gross settlement amount of $90,000. Such payment was made on June 23, 2022.
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EQUITY |
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| EQUITY | Note 8 – Equity
Shares Authorized
The Company is authorized to issue shares of which shares shall be preferred stock, par value $ per share, and shares shall be common stock, par value $ per share.
Preferred Stock
Series A Convertible Preferred Stock
The Series A Convertible Preferred Stock (“Series A”) is convertible into shares of the Company’s common stock at the rate of $ per share, subject to adjustments based on the Company’s future sales of financial instruments at a value less than $ per share. The holders of the Series A have the right to convert any time after the date of issuance. With the issuance of the convertible promissory notes, as explained in Note 5 above, the Series A’s conversion rate adjusted to $1.00 per share. In accordance with ASC 470, the Company has calculated the effect of the conversion rate adjustment, which was approximately $36,000. The conversion rate adjustment has been treated as a deemed dividend, which has been presented in the Statement of Changes in Stockholders’ Deficit.
The Series A is mandatorily convertible upon (i) the closing of the sale of shares of the Company’s common stock to the public in an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $10,000,000 of gross proceeds to the Company, (ii) the close of business on the sixtieth consecutive day on which the closing price of the Company’s common stock on the OTC Markets is at least $2.80 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, stock combination or other similar recapitalization with respect to the common stock, or (iii) the affirmative vote of the holders of at least 66⅔% of the outstanding shares of Series A, given at a meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders all outstanding shares of Series A shall automatically be converted into shares of the Company’s common stock, at the then effective conversion rate.
On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series A shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Articles of Incorporation, holders of Series A shall vote together with the holders of common stock as a single class.
From and after the date of the issuance of any shares of Series A, a cumulative dividend on each outstanding share of Series A Preferred Stock shall accrue at a rate per annum equal to ten percent of the Series A original issue price. Accrued dividends on the Series A shall be paid in shares of the Company’s common stock, such shares to be valued for such purpose at the applicable series A conversion price.
On February 11, 2020, the Company converted shares of Series A into a Convertible Promissory Notes in the principal amount approximately $147,000.
Common Stock
In January 2021, the Company’s President and a member of the Board of Directors, resigned as an officer and director of the Company (“Termination Agreement”). Part of the Termination Agreement stipulates the return of shares of the Company’s common stock (“Cancelled Shares”). The Cancelled Shares were returned and cancelled on April 20, 2021.
In 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 shares of common stock. The remaining liability of $30,000 will be paid in cash.
In September 2021, the Company entered into a release agreement with one of its consultants. As part of the separation payment, the Company issued shares valued at $76,000 and paid $20,000 cash in October 2021.
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 had an initial term of one year, which was to be automatically renewed on a year-to-year basis unless either party gave a written notice of termination. The two consultants who entered into these agreements include:
The Company’s management accounted for the Award Grants as restricted stock compensation in accordance with ASC 718 – Stock Compensation (“ASC 718”). ASC 718 required the Company to estimate the service period over which the compensation cost would be recognized. Management had estimated that the first two development phases would be completed within 15 months and the Foundry Mask would be completed within 6 months for a total of 21 months service period. Compensation cost was to be recognized ratably over 21 months and in the same manner had the Company paid in cash. The estimated service period would be adjusted for changes in actual and expected completion dates. Any such change was to be recognized prospectively, and the remaining deferred compensation was to be recognized over the remaining service period.
The Company issued restricted stock grants totaling shares (“Grant Shares”) to Hyuncheol (Peter) Kim (“CTO”), the Company’s former Chief Technology Officer, and to a M1 Advisors LLC, a company owned by the Company’s chief executive officer. The value was $ 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.
On July 27, 2022, the Company sent the CTO, a letter notifying him that the Company’s Board of Directors had resolved to discontinue the Company’s 5 nanometer ASIC chip and bitcoin mining machine project and that his consulting agreement was to terminate at the end of August 2022. The Grant Shares issued in connection with his consulting agreement were canceled. As of the issuance date of these consolidated financial statements, the CTO had not executed the documentation required for the Company to cancel the Grant Shares; therefore, the Grant Shares are still legally outstanding, so the number of Grant Shares has not been removed from the total shares issued and outstanding. Since it is probable that the Grant Shares will not be earned, the Company has reversed the expense recognized for the fair value of the Grant Shares.
Also, at the end of August 2022, the Company canceled the restricted stock grant issued to M1 Advisors LLC.
Issuance of Stock Options and Warrants
In February 2021, the Company signed a new consulting agreement that granted one of its shareholders an option to purchase shares of the Company’s common stock at $ per share for the consultancy work provided from August 2020 to February 2021. The options were fully vested on the date of issuance. The fair value of the options was approximately $, as of the grant date, of which approximately $ was expensed and accrued during the year ended December 31, 2020 and $ was expensed for the year ended December 31, 2021.
In May 2021, the Company signed a letter of understanding that granted one of its shareholders an option to purchase shares of the Company’s common stock at $ per share for the consultancy work provided during the Company’s restructuring phase from February 17, 2021 through April 30, 2021. The options were fully vested on the date of issuance. The fair value of the options was approximately $, as of grant date, which was expensed during the year ended December 31, 2021.
In May 2021, an option holder exercised three options for , and shares of the Company’s common stock at an exercise price of $0.001 for each option, for total proceeds of approximately $2,000.
On September 15, 2021, the Company issued warrants to purchase 100,000 shares of the Company’s common stock. For the year ended December 31, 2021, the compensation expense, classified as professional fees in the consolidated statement of operations and comprehensive loss, was $, 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 %, fair value of common stock $, estimated life of years, risk free rate of % and dividend rate of $.
The table below summarizes the Company’s warrant activities for the years ended December 31, 2022 and 2021 (all share and per share data reflects the reverse stock split):
The following table sets forth the weighted-average assumptions used to estimate the fair value of warrants granted for the year ended December 31:
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EARNINGS (LOSS) PER SHARE |
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| EARNINGS (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 year ended December 31, 2021 because their inclusion would be anti-dilutive. Common share equivalents amounted to for warrants, for convertible notes and for restricted stock units for total of as of December 31, 2021. For the year ended December 31, 2022, the Company had dilutive securities.
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DEFERRED TAX ASSETS AND INCOME TAX PROVISION |
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| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DEFERRED TAX ASSETS AND INCOME TAX PROVISION | Note 10 – Deferred Tax Assets and Income Tax Provision
Deferred Tax Assets
At December 31, 2022, the Company had net operating loss (“NOL”) carry forwards for Federal income tax purposes of $3,070,000 that may be offset against future taxable income. No tax benefit has been reported with respect to these net operating loss carry-forwards in the accompanying financial statements because the Company believes that the realization of the Company’s net deferred tax assets of approximately $1,708,000 was not considered more likely than not and accordingly, the potential tax benefits of the net operating loss carry-forwards are fully offset by a full valuation allowance. Federal NOL’s have an indefinite carryover period and state NOL’s begin to expire in 2037 if not utilized by then.
Deferred tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred tax assets because of the uncertainty regarding its realization. The valuation allowance (decreased) increased by approximately $(782,000) and $2,191,000 for the reporting periods ended December 31, 2022 and 2021, respectively.
Components of deferred tax assets are as follows as of December 31:
Income Tax Provision in the Statements of Operations
A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows for the years ended December 31:
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SUBSEQUENT EVENTS |
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Dec. 31, 2022 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | Note 11 – 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:
Purchase of Land for Building a Data Center
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. The Company is required to deposit an additional $84,000 into an escrow (“Escrow Funds”). 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 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 $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”). The Put Option period ends on the one-year anniversary after a six-month holding period. However, if the Company’s common stock trades above $ per share for 120 consecutive days, the Put Option expires. If the Company’s common stock trades below $ per for 10 consecutive days, the Holder has the option for the Company to repurchase the Purchase Shares for $ per share. o
Employment Agreement
On March 27, 2023, executed an offer of employment to hire an individual as the Company’s president and chief operating officer. The effective date of employment was March 28, 2023. The salary is $250,000 per year, with an increase to $300,000 annually, immediately once permits have been granted to start construction of the data center, and an increase to $350,000 annually, upon the data center being operational and contracted for 25% of the planned 100MW colocation capacity. Also, the individual is eligible for a cash annual bonus and2,000,000 shares that will be provided in an employee option or a restricted stock award, if certain milestones are accomplished. The stock grant will be included in a pending employment agreement that is planned to be completed between the Company and employee with the next couple of weeks.
Cancellation of Restricted Stock Awards
On April 10, 2023, we completed the required paperwork for our transfer agent to cancel shares of restricted stock that was previously issued to Mr. Kim as our former CTO. |
ORGANIZATION AND ACCOUNTING POLICIES (Policies) |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incorporation of Korean entity | Incorporation of Korean entity
On November 5, 2021, AIQ System Inc. (“AIQ”) was incorporated in Seoul, Republic of Korea. AIQ is authorized to issue million shares of common stock. At the date of incorporation, shares were issued to the Company for 100,000,000 Korean Won or approximately $89,000 for 100% ownership of AIQ.
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| Basis of Presentation | Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
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| Principles of Consolidation | Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary from the formation date. All material intercompany transactions and balances have been eliminated in consolidation.
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| Going Concern and Liquidity | Going Concern and Liquidity
The Company incurred net income of approximately $2,181,000 for the year ended December 31, 2022, of which $4,791,000 was attributable to a noncash transaction for the reversal of compensation for restricted stock units, and had an accumulated deficit of approximately $14,650,000 as of December 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 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.
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| COVID-19 | 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.
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| Use of Estimates | Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.
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| Foreign Currency Translation | Foreign Currency Translation
The financial statements of foreign subsidiaries, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders’ equity (deficit). Gains or losses from foreign currency transactions are recognized in the consolidated statements of operations.
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| Fair Value Measurement | Fair Value Measurement
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Other inputs that are directly or indirectly observable in the marketplace. Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As of and for the year ended December 31, 2022, the Company had no assets or liabilities that require fair value measurement.
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| Cash and Cash Equivalents | Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates its fair value. The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (“FDIC”) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. As of December 31, 2022 and 2021, the Company had $1,817,000 and $2,797,000 in excess of the federal insurance limit, respectively.
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| Prepaid Expense | Prepaid Expense
Prepaid expenses are assets held by the Company, which are expected to be realized and consumed within twelve months after the reporting period.
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| Other Assets | Other Assets
Other assets consist of long-term advances paid for chip and processor design and development.
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| Related Parties | Related Parties
The Company follows Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) section 850-10 for the identification of related parties and disclosure of related party transactions.
Pursuant to ASC section 850-10-20 the related parties include (a.) affiliates of the Company (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); (b.) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option of ASC section 825–10–15, to be accounted for by the equity method by the investing entity; (c.) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d.) principal owners of the Company; (e.) management of the Company; (f.) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g.) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a.) the nature of the relationship(s) involved; (b.) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c.) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d.) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
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| Commitments and Contingencies | Commitments and Contingencies
The Company follows ASC section 450-20 to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
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| Debt Discounts | 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 consolidated statement of operations and comprehensive loss.
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| Warrant Liability | Warrant Liability
In connection with financing arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes Merton (“BSM”) option pricing model as of the measurement date.
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| Stock-Based Compensation |
We account for our stock-based compensation under ASC 718, “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
We use the fair value method for equity instruments granted to non-employees and use the BSM model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant (measurement date) and is recognized over the vesting periods.
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| Income Taxes | Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, deferred tax assets and liabilities are computed based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rate. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.
The Company accounts for income taxes using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence.
The Company has adopted guidance related to the accounting for uncertainty in income taxes which prescribes rules for recognition, measurement and classification in the financial statements of tax positions taken or expected to be taken in a tax return. The guidance prescribes a two-step approach which involves evaluating whether a tax position will be more likely than not (greater than 50 percent likelihood) sustained upon examination based on the technical merits of the position. The second step requires that any tax position that meets the more likely than not recognition threshold be measured and recognized in the financial statements at the largest amount of benefit that is a greater than 50 percent likelihood of being realized upon settlement.
The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The Company is not currently under examination by any taxing authority nor has the Company been notified of a pending examination. The statute of limitations for which the Company is generally no longer subject to federal or state income tax examinations by tax authorities is for years before 2013.
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| 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.
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| Recent Accounting Pronouncements | 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. |
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ORGANIZATION AND ACCOUNTING POLICIES (Tables) |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF INCOME AND LOSS PER SHARE ANTI-DILUTIVE |
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INTANGIBLE AND OTHER ASSETS (Tables) |
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| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF PAYMENTS |
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| SCHEDULE OF IMPAIRMENT LOSS | The table below summarizes the impairment loss for the year ended December 31, 2022:
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ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Tables) |
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| SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES | The following table summarizes the Company’s accounts payable and accrued expense balances as of December 31:
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| SCHEDULE OF ACCRUED INTEREST | The following table presents the details of accrued interest as of December 31:
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NOTES PAYABLE (Tables) |
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| SCHEDULE OF NOTES PAYABLE | The table below summarizes the transactions as of December 31:
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CONVERTIBLE PROMISSORY NOTES (Tables) |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF CONVERTIBLE PROMISSORY NOTES | The convertible promissory notes consisted of the following as of December 31:
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| SCHEDULE OF POTENTIAL FUTURE SHARES ISSUANCE OF CONVERSION NOTES |
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EQUITY (Tables) |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF COMPANY RESTRICTED STOCK AWARDS |
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| SCHEDULE OF RESTRICTED STOCK GRANT COMPENSATION EXPENSE |
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| SCHEDULE OF STOCK OPTION ACTIVITIES |
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| SCHEDULE OF WARRANTS ACTIVITY | The table below summarizes the Company’s warrant activities for the years ended December 31, 2022 and 2021 (all share and per share data reflects the reverse stock split):
|
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| SCHEDULE OF FAIR VALUE OF WARRANTS | The following table sets forth the weighted-average assumptions used to estimate the fair value of warrants granted for the year ended December 31:
|
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EARNINGS (LOSS) PER SHARE (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF EARNINGS PER SHARE BASIC AND DILUTED |
|
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DEFERRED TAX ASSETS AND INCOME TAX PROVISION (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF COMPONENTS OF DEFERRED TAX ASSETS | Components of deferred tax assets are as follows as of December 31:
|
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| SCHEDULE OF RECONCILIATION OF INCOME TAX | A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows for the years ended December 31:
|
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ORGANIZATION AND ACCOUNTING POLICIES (Details Narrative) |
12 Months Ended | |||
|---|---|---|---|---|
|
Nov. 05, 2021
USD ($)
shares
|
Nov. 05, 2021
KRW (₩)
shares
|
Dec. 31, 2022
USD ($)
shares
|
Dec. 31, 2021
USD ($)
shares
|
|
| Common stock shares authorized | shares | 100,000,000 | 100,000,000 | ||
| Issuance of common stock, value | ||||
| Net income (loss) | $ 2,181,000 | (6,749,000) | ||
| Restricted stock grants | 4,791,000 | (5,062,000) | ||
| Accumulated deficit | 14,650,000 | 16,831,000 | ||
| Cash, FDIC Insured Amount | 250,000 | |||
| Prepaid Insurance | $ 1,817,000 | $ 2,797,000 | ||
| AIQ System Inc [Member] | ||||
| Ownership percentage | 100.00% | 100.00% | ||
| AIQ System Inc [Member] | ||||
| Common stock shares authorized | shares | 3,000,000 | 3,000,000 | ||
| Issuance of common stock, shares | shares | 10,000 | 10,000 | ||
| Issuance of common stock, value | $ 89,000 | ₩ 100,000,000 | ||
RELATED PARTY TRANSACTIONS (Details Narrative) - M1 Advisors [Member] - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Related Party Transaction [Line Items] | ||
| Proceeds from related party | $ 200,000 | $ 199,000 |
| Payment to related party | $ 200,000 | $ 202,000 |
SCHEDULE OF PAYMENTS (Details) - Apr. 05, 2022 |
USD ($) |
KRW (₩) |
|---|---|---|
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||
| Total | $ 82,000 | ₩ 99,000,000 |
| Within 5 days after signing the contract [Member] | ||
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||
| Total | 41,000 | 49,500,000 |
| Within 5 days after all conditions are met as stated in “Schedule B - Statement of Work” [Member] | ||
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||
| Total | $ 41,000 | ₩ 49,500,000 |
SCHEDULE OF IMPAIRMENT LOSS (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2022
USD ($)
| |
| Finite-Lived Intangible Assets [Line Items] | |
| Total | $ 148,000 |
| Foreign exchange loss | 6,000 |
| Impairment loss | 154,000 |
| Amount [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Total | 138,000 |
| Foreign exchange loss | 4,000 |
| Impairment loss | 142,000 |
| Value Added Tax [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Total | 10,000 |
| Foreign exchange loss | 2,000 |
| Impairment loss | 12,000 |
| PICOCEL [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Total | 74,000 |
| PICOCEL [Member] | Amount [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Total | 69,000 |
| PICOCEL [Member] | Value Added Tax [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Total | 5,000 |
| NNS [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Total | 74,000 |
| NNS [Member] | Amount [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Total | 69,000 |
| NNS [Member] | Value Added Tax [Member] | |
| Finite-Lived Intangible Assets [Line Items] | |
| Total | $ 5,000 |
INTANGIBLE AND OTHER ASSETS (Details Narrative) |
12 Months Ended | |||||
|---|---|---|---|---|---|---|
|
Dec. 31, 2022
USD ($)
|
Dec. 31, 2022
KRW (₩)
|
Apr. 05, 2022
USD ($)
|
Apr. 05, 2022
KRW (₩)
|
Dec. 23, 2021
USD ($)
|
Dec. 23, 2021
KRW (₩)
|
|
| Finite-Lived Intangible Assets [Line Items] | ||||||
| Contract price | $ 82,000 | ₩ 99,000,000 | ||||
| Impairment loss | $ 154,000 | |||||
| Value Added Tax [Member] | ||||||
| Finite-Lived Intangible Assets [Line Items] | ||||||
| Impairment loss | 12,000 | |||||
| AIQ [Member] | ||||||
| Finite-Lived Intangible Assets [Line Items] | ||||||
| Contract price | $ 82,000 | 99,000,000 | ||||
| Value added tax | ₩ | ₩ 9,000,000 | |||||
| Technology Development Agreement [Member] | PICOCEL, Co., Ltd. [Member] | ||||||
| Finite-Lived Intangible Assets [Line Items] | ||||||
| Contract price | $ 167,000 | ₩ 198,000,000 | ||||
| Payment to related party | 69,000 | |||||
| Technology Development Agreement [Member] | NNS Co Ltd [Member] | ||||||
| Finite-Lived Intangible Assets [Line Items] | ||||||
| Payment to related party | $ 69,000 | ₩ 90,000,000 | ||||
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Payables and Accruals [Abstract] | ||
| Accounts payable | $ 186,000 | $ 221,000 |
| Accrued expenses | 28,000 | 99,000 |
| Accrued interest | 326,000 | 114,000 |
| Accounts payable and accrued expenses | $ 540,000 | $ 434,000 |
SCHEDULE OF ACCRUED INTEREST (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Payables and Accruals [Abstract] | ||
| Notes payable | $ 17,000 | $ 9,000 |
| Convertible promissory notes | 309,000 | 105,000 |
| Balance, end of the year | $ 326,000 | $ 114,000 |
SCHEDULE OF NOTES PAYABLE (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Notes Payable | ||
| Balance, beginning of the year | $ 111,000 | $ 11,000 |
| Additions | 150,000 | |
| Payments | (50,000) | (50,000) |
| Balance, end of the year | $ 61,000 | $ 111,000 |
SCHEDULE OF CONVERTIBLE PROMISSORY NOTES (Details) - Convertible Notes Payable [Member] - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Short-Term Debt [Line Items] | ||
| Balance, beginning of year | $ 4,613,000 | $ 708,000 |
| Additions | 3,905,000 | |
| Balance, end of year | 4,613,000 | 4,613,000 |
| Balance, beginning of year | 1,526,000 | 5,000 |
| Additions | 2,045,000 | |
| Amortization | (1,526,000) | (524,000) |
| Balance, end of year | 1,526,000 | |
| Net carrying amount | $ 4,613,000 | $ 3,087,000 |
SCHEDULE OF POTENTIAL FUTURE SHARES ISSUANCE OF CONVERSION NOTES (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Debt Instrument [Line Items] | ||
| Principal | $ 4,613,000 | $ 4,613,000 |
| Interest | 309,000 | 105,000 |
| Total | $ 4,922,000 | $ 4,718,000 |
| Potential future shares | 4,125,699 | 3,947,394 |
| Minimum [Member] | ||
| Debt Instrument [Line Items] | ||
| Conversion price per share | $ 1.00 | $ 1.00 |
| Maximum [Member] | ||
| Debt Instrument [Line Items] | ||
| Conversion price per share | $ 1.25 | $ 1.25 |
COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($) |
Jan. 03, 2022 |
Jun. 09, 2022 |
|---|---|---|
| Commitments and Contingencies Disclosure [Abstract] | ||
| Litigation description | In the complaint, the plaintiff claimed he worked under a consulting agreement as Vice President of Brand Management of our company and was to be paid $4,000 per month and to receive an option to purchase 50,000 shares of our common stock that was to vest quarterly over the term of the agreement. In the complaint, the plaintiff alleged that, on or around March 27, 2020, the Company ceased paying the plaintiff despite the plaintiff’s continuing efforts on behalf of our company and that the Company agreed to continue to accrue his monthly retainer amount until such time that the Company received at least $100,000 in funding. Plaintiff further alleged that he continued to work for our company for 38 additional weeks in reliance on our promise of payment. The plaintiff claimed that our refusal to make the promised payments amounts to violations of the California labor laws and seeks damages in excess of $450,000 | |
| Payments for rent | $ 4,000 | |
| Option to purchase shares vested | 50,000 | |
| Funds received | $ 100,000 | |
| Damages value | $ 450,000 | |
| Gross settlement amount | $ 90,000 |
SCHEDULE OF COMPANY RESTRICTED STOCK AWARDS (Details) - Restricted Stock [Member] |
Dec. 31, 2022
USD ($)
shares
|
|---|---|
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |
| Grant date fair value, shares | shares | 11,500,000 |
| Deferred compensation grant date fair value | $ | $ 22,195,000 |
| Accretion, shares | shares | |
| Deferred compensation accretion | $ | $ (11,168,000) |
| Canceled, shares | shares | (1,500,000) |
| Deferred compensation canceled | $ | $ (11,027,000) |
| Shares, balance | shares | 10,000,000 |
| Deferred compensation | $ |
SCHEDULE OF RESTRICTED STOCK GRANT COMPENSATION EXPENSE (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2022
USD ($)
| |
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |
| Restricted stock grant compensation | $ (4,791,000) |
| Two Thousand Twenty Two Accretion Expense [Member] | |
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |
| Restricted stock grant compensation | 6,377,000 |
| Reversal Two Thousand Twenty One Accretion Expense [Member] | |
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |
| Restricted stock grant compensation | (4,791,000) |
| Reversal Two Thousand Twenty Two Accretion Expense [Member] | |
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |
| Restricted stock grant compensation | $ (6,377,000) |
SCHEDULE OF EARNINGS PER SHARE BASIC AND DILUTED (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Earnings Per Share [Abstract] | ||
| Net income (loss) | $ 2,181,000 | $ (6,749,000) |
| Effect of dilutive instruments | ||
| Convertible notes interest expense | 204,000 | |
| Numerator for diluted EPS | $ 2,385,000 | $ (6,749,000) |
| Denominator | ||
| Denominator - for basic EPS | 14,495,621 | 19,482,261 |
| Effect of dilutive instruments | ||
| Warrants | 721,006 | |
| Restricted stock awards | 10,000,000 | |
| Convertible notes | 4,125,699 | |
| Dilutive potential common shares | 14,846,705 | |
| Denominator for diluted EPS | 29,342,327 | 19,482,261 |
| Basic EPS | $ 0.15 | $ (0.35) |
| Diluted EPS | $ 0.08 | $ (0.35) |
EARNINGS (LOSS) PER SHARE (Details Narrative) - shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Dilutive securities | 7,562,307 | 19,390,002 |
| Warrant [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Dilutive securities | 3,942,608 | |
| Convertible Notes [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Dilutive securities | 3,947,394 | |
| Restricted Stock Units [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Dilutive securities | 11,500,000 | |
| Common Stock [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Dilutive securities | 14,846,705 | 19,390,002 |
SCHEDULE OF COMPONENTS OF DEFERRED TAX ASSETS (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Income Tax Disclosure [Abstract] | ||
| Intangible assets | $ 1,000 | |
| Impairment loss | 38,000 | |
| Interest expense limitations | 802,000 | |
| Stock-based compensation | 9,000 | 1,488,000 |
| Expected income tax benefit from NOL carry-forwards | 859,000 | 1,002,000 |
| Less valuation allowance | (1,709,000) | (2,490,000) |
| Deferred tax assets, net of valuation allowance |
SCHEDULE OF RECONCILIATION OF INCOME TAX (Details) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Income Tax Disclosure [Abstract] | ||
| Federal statutory income tax rate | 21.00% | 21.00% |
| Change in valuation allowance on net operating loss carry-forwards | (21.00%) | (21.00%) |
| Effective income tax rate | 0.00% | 0.00% |
DEFERRED TAX ASSETS AND INCOME TAX PROVISION (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Income Tax Disclosure [Abstract] | ||
| Net operating loss deferred tax | $ 3,070,000 | |
| Deferred tax assets net | 1,708,000 | |
| Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount | $ (782,000) | $ 2,191,000 |