TerraVolt Holdings, Inc. 10-Q

Item 1: Financial Statements CalEthos, Inc. For the Six Months Ended June 30, 2022 Index to the Condensed Consolidated Financial Statements Contents Page (s) Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021 1 Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 2 Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2022 and 2021 3 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 4 Unaudited Condensed Notes to the Consolidated Financial Statements 5 - ii - CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, may address or relate to future events and expectations and, as such, constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our business, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things: ● our ability to implement our current stated business plans; ● our ability to retain key members of our management team; ● our future financing or acquisition plans and our ability to consummate any such transactions on favorable terms if at all ; ● our anticipated needs for working capital; and ● our ability to establish a market for our common stock and operate as a public company. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. - iii - CalEthos, Inc. Condensed Consolidated Balance Sheets As of June 30, 2022 As of December 31, 2021 (Unaudited) Assets Current assets Cash and cash equivalents $ 2,401,000 $ 3,047,000 Prepaid expenses 3,000 7,000 Total current assets 2,404,000 3,054,000 Other assets – 38,000 Total assets $ 2,404,000 $ 3,092,000 Liabilities and Stockholders’ Deficit Current liabilities Accounts payable and accrued expenses $ 425,000 $ 434,000 Notes payable 86,000 111,000 Convertible promissory notes, net 4,158,000 3,087,000 Total liabilities 4,669,000 3,632,000 Commitments and contingencies (Note 6) – – Stockholders’ deficit Series A convertible preferred stock, par value $ 0.001 , 3,600,000 shares authorized; no shares issued and outstanding – – Preferred stock, par value $ 0.001 , 100,000,000 shares authorized; no shares issued and outstanding – – Preferred stock, value – – Common stock, par value $ 0.001 , 100,000,000 shares authorized; 25,995,621 shares issued and outstanding 26,000 26,000 Additional paid-in capital 22,645,000 16,269,000 Other comprehensive loss ( 3,000 ) ( 2,000 ) Stock subscription receivable ( 2,000 ) ( 2,000 ) Accumulated deficit ( 24,931,000 ) ( 16,831,000 ) Total stockholders’ deficit ( 2,265,000 ) ( 540,000 ) Total liabilities and stockholders’ deficit $ 2,404,000 $ 3,092,000 See accompanying notes to these Unaudited Condensed Consolidated Financial Statements. 1 CalEthos, Inc. Unaudited Condensed Consolidated Statements of Operations 2022 2021 2022 2021 For the Three Months Ended June 30, For the Six Months Ended June 30, 2022 2021 2022 2021 Revenues $ - $ - $ - $ - Operating expenses Professional fees 177,000 72,000 422,000 131,000 Stock based compensation 3,206,000 561,000 6,376,000 575,000 General and administrative expenses 31,000 3,000 35,000 5,000 Impairment loss 154,000 - 154,000 - Total operating expenses 3,568,000 636,000 6,987,000 711,000 Loss from operations ( 3,568,000 ) ( 636,000 ) ( 6,987,000 ) ( 711,000 ) Other expenses Financing costs ( 606,000 ) ( 22,000 ) ( 1,113,000 ) ( 39,000 ) Total other expenses ( 606,000 ) ( 22,000 ) ( 1,113,000 ) ( 39,000 ) Loss before provision for income taxes ( 4,174,000 ) ( 658,000 ) ( 8,100,000 ) ( 750,000 ) Provision for income taxes - - - - Net loss ( 4,174,000 ) ( 658,000 ) ( 8,100,000 ) ( 750,000 ) Other comprehensive (loss) income 2,000 - ( 1,000 ) - Comprehensive loss $ ( 4,172,000 ) $ ( 658,000 ) $ ( 8,101,000 ) $ ( 750,000 ) Net loss per share $ ( 0.16 ) $ ( 0.04 ) $ ( 0.31 ) $ ( 0.04 ) Weighted average common shares outstanding: Basic and diluted 25,995,621 17,468,785 25,995,621 17,052,285 See accompanying notes to these Unaudited Condensed Consolidated Financial Statements. 2 CalEthos, Inc. Unaudited Condensed Consolidated Statements of Stockholders’ Deficit For the Three and Six Months Ended June 30, 2022 Shares Loss Shares Amount Shares Amount Capital Receivable Loss Deficit Deficit Series A Convertible Additional Stock Other Total Preferred Stock Preferred Stock Common Stock Paid-In Subscription Comprehensive Accumulated Stockholders’ Shares Loss Shares Amount Shares Amount Capital Receivable Loss Deficit Deficit Balance, January 1, 2022 – $ – – $ – 25,995,621 $ 26,000 $ 16,269,000 $ ( 2,000 ) $ ( 2,000 ) $ ( 16,831,000 ) $ ( 540,000 ) Stock based compensation on restricted stock awards – – – – – – 3,170,000 – – – 3,170,000 Foreign currency translation loss – – – – – – – – ( 3,000 ) – ( 3,000 ) Net loss – – – – – – – – – ( 3,926,000 ) ( 3,926,000 ) Balance, March 31, 2022 – $ – – $ – 25,995,621 $ 26,000 $ 19,439,000 $ ( 2,000 ) $ ( 5,000 ) $ ( 20,757,000 ) $ ( 1,299,000 ) Stock based compensation on restricted stock awards – – – – – – 3,206,000 – – – 3,206,000 Foreign currency translation income – – – – – – – – 2,000 – 2,000 Net loss – – – – – – – – – ( 4,174,000 ) ( 4,174,000 ) Balance, June 30, 2022 – $ – – $ 25,995,621 $ 26,000 $ 22,645,000 $ ( 2,000 ) $ ( 3,000 ) $ ( 24,931,000 ) $ ( 2,265,000 ) For the Three and Six Months Ended June 30, 2021 Series A Convertible Additional Stock Other Total Preferred Stock Preferred Stock Common Stock Paid-In Subscription Comprehensive Accumulated Stockholders’ Shares Amount Shares Amount Shares Amount Capital Receivable Loss Deficit Deficit Balance, January 1, 2021 – $ – – $ – 16,634,951 $ 17,000 $ 8,744,000 $ ( 2,000 ) $ – $ ( 10,082,000 ) $ ( 1,323,000 ) Relative fair value of warrants issued with convertible promissory note – – – – – – 3,000 – – – 3,000 Stock options issued for services – – – – – – 52,000 – – – 52,000 Stocks issued from debt forgiveness – – – – 75,000 – 98,000 – – – 98,000 Additional capital from debt forgiveness – – – – – – 68,000 – – – 68,000 Net loss – – – – – – – – – ( 92,000 ) ( 92,000 ) Balance, March 31, 2021 – $ – – $ – 16,709,951 $ 17,000 $ 8,965,000 $ ( 2,000 ) $ – $ ( 10,174,000 ) $ ( 1,194,000 ) Stocks returned – – – – ( 3,674,330 ) ( 4,000 ) 4,000 – – – – Stock options issued for services – – – – – – 561,000 – – – 561,000 Stock issued on exercise for warrants – – – – 1,435,000 2,000 – – – – 2,000 Net loss – – – – – – – – – ( 658,000 ) ( 658,000 ) Balance, June 30, 2021 – $ – – $ – 14,470,621 $ 15,000 $ 9,530,000 $ ( 2,000 ) $ – $ ( 10,832,000 ) $ ( 1,289,000 ) See accompanying notes to these Unaudited Condensed Consolidated Financial Statements. 3 CalEthos, Inc. Unaudited Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1 2 2022 2021 Cash flows from operating activities Net loss $ ( 8,100,000 ) $ ( 750,000 ) Adjustments to reconcile net loss to net cash used in operating activities Impairment of intangible and other assets 154,000 - Amortization of convertible promissory note discounts 1,071,000 7,000 Fair value of equity based compensation 6,376,000 575,000 Changes in operating assets and liabilities: Prepaid expenses ( 6,000 ) 2,000 Accounts payable and accrued expenses ( 8,000 ) 23,000 Net cash used in operating activities ( 513,000 ) ( 143,000 ) Cash flows from investing activity Other assets ( 107,000 ) - Net cash used in investing activity ( 107,000 ) - Cash flows from financing activities Proceeds from the issuance of convertible promissory notes - 50,000 Proceeds from the issuance of notes payable - 99,000 Proceeds from the exercise of warrants - 2,000 Repayment of notes payable ( 25,000 ) - Net cash provided by (used in) financing activities ( 25,000 ) 151,000 Effect of exchange rate changes on cash and cash equivalents ( 1,000 ) - Net increase (decrease) in cash ( 646,000 ) 8,000 Cash, beginning of period 3,047,000 - Cash, end of period $ 2,401,000 $ 8,000 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 $ - $ 3,000 Accrued equity compensation granted $ - $ 38,000 Common stock issued from forgiven debt $ - $ 98,000 Additional capital from forgiven debt $ - $ 68,000 See accompanying notes to these Unaudited Condensed Consolidated Financial Statements. 4 CalEthos, Inc. Unaudited Condensed Notes to the Consolidated Financial Statements June 30, 2022 Note 1 – Organization and Accounting Policies ORGANIZATION AND ACCOUNTING POLICIES CalEthos, Inc. (the “Company” or “we”) was incorporated on March 20, 2002 under the laws of the State of Nevada. As of June 30, 2022, the Company’s principal business had been the development of, with a plan to manufacture, high-performance computer systems that are scalable, upgradeable and cost effective for processing cryptocurrencies, tokens and blockchain-based transactions. The Company had also been developing a plan to build a clean-energy-powered, containerized, immersion-cooled data center that the Company would use for crypto-currency mining and to provide data center colocation services to other mining and enterprise customers. In addition, if other opportunities warranted, the Company planned to 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, 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. Amendments to Certificate of Incorporation In October 2021, the Board of Directors authorized an amendment to the Articles of Incorporation of the Company to change the Company’s name to AIQ Blockchain, Inc. The name change has not yet been effected, and on July 2022, FINRA was notified that CalEthos was no longer changing its name or symbol and that the application was being withdrawn. Incorporation of Korean entity On November 5, 2021, AIQ System Inc. (“AIQ”) was incorporated in Seoul, Republic of Korea. AIQ is authorized to issue 3 million shares of common stock. At the date of incorporation, 10,000 shares were issued to the Company for 100,000,000 Korean Won or approximately $ 89,000 for 100 % ownership of AIQ. AIQ is in the business of (1) developing and manufacturing computer chips and system, (2) importing and exporting semiconductors and electronic products, (3) wholesale and retail business of semiconductors and electronic products, and (4) any and all business activities incidental to the foregoing activities. Basis of Presentation The accompanying Condensed Consolidated Financial Statements and notes thereto are unaudited. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The June 30, 2022 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These interim unaudited condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim six-months period ended June 30, 2022 and 2021. The results for the six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 or for any future period. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2021, included in the Company’s annual report on Form 10-K filed with the SEC on March 31, 2022. 5 Liquidity and Going Concern The Company incurred a net loss of approximately $ 8,100,000 for the six months ended June 30, 2022 and had an accumulated deficit of approximately $ 24,931,000 as of June 30, 2022. The Company has financed its activities principally through debt and equity financing and shareholder contributions. Management expects to incur additional losses and cash outflows in the foreseeable future in connection with its operating activities. The Company’s condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals; successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence on outside sources of financing; risks associated with research and development; dependence on third-party suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of profitable operations is dependent on future events, including obtaining adequate financing to fund its operations and generating a level of revenues adequate to support the Company’s cost structure. The Company will need to raise debt or equity financing in the future in order to continue its operations and achieve its growth targets. However, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms, when and if needed, or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including market demand for the Company’s products and services, the success of product development efforts, the timing of receipts for customer deposits, the management of working capital, and the continuation of normal payment terms and conditions for purchase of goods and services. The Company believes its cash balances and cash flow from operations will not be sufficient to fund its operations and growth for the next twelve months from the issuance date of these financial statements. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then the Company will likely need to raise additional funding from investors or through other avenues to continue as a going concern. COVID-19 The continuing COVID-19 global pandemic has caused significant disruption to the economy and financial markets globally, and the full extent of the potential impacts of COVID-19 are not yet known. Circumstances caused by the COVID-19 pandemic are complex, uncertain and rapidly evolving. The impact of COVID-19 has not been significant to the Company’s results of operations, financial condition, and liquidity and capital resources. Although no material impairment or other effects have been identified to date, there is substantial uncertainty in the nature and degree of its continued effects over time. That uncertainty affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information become known. The Company will continue to consider the potential impact of the COVID-19 pandemic on its business operations. Earnings Per Share We use ASC 260, “ Earnings Per Share ” for calculating the basic and diluted earnings (loss) per share. We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share is the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share. Securities that could potentially dilute loss per share in the future were not included in the computation of diluted loss per share for the six months ended June 30, 2022 and 2021 because their inclusion would be anti-dilutive. Common share equivalents amounted to 18,920,915 and 1,525,214 as of June 30, 2022 and 2021, respectively. 6 Recent Accounting Pronouncements The Company’s management reviewed all recently issued accounting standard updates (“ASU’s”) not yet adopted by the Company and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on the Company’s condensed consolidated financial condition or the results of its operations. Note 2 – Intangible and Other Assets INTANGIBLE AND OTHER ASSETS On December 23, 2021, AIQ entered into a Technology Development Agreement (the “Agreement”) with PICOCEL, Co., Ltd. (the “Contractor” or “PICOCEL”) to develop a FPGA based Bitcoin mining simulation system. The Agreement is 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 June 30, 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 has completed the first phase of the Agreement upon delivery of the SHA-256 code and FPGA board simulator resulting in a reclassification of deposits amounting to $ 69,000 under other assets to intangible assets as of June 30, 2022. 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 is expected to be completed within 9 weeks for a total contract price of 99,000,000 KRW, including 9,000,000 KRW VAT, or approximately $ 82,000 . The payments are scheduled as follows: SCHEDULE OF PAYMENTS Amount USD KRW Within 5 days after signing the contract $ 41,000 49,500,000 Within 5 days after all conditions are met as stated in “Schedule B – Statement of Work” 41,000 49,500,000 Total $ 82,000 99,000,000 Payment of 90,000,000 KRW or approximately $ 69,000 was made to NNS as of June 30, 2022 which is presented as other assets in the condensed consolidated balance sheet. 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 as of June 30, 2022. Management plans to discontinue the operations of AIQ subsequent to June 30, 2022 and no more future cash flows are expected from AIQ. See Note 8 – Subsequent Events for more details. 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 June 30, 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 six months ended June 30, 2022: SCHEDULE OF IMPAIRMENT LOSS Amount VAT Total PICOCEL $ 69,000 $ 5,000 $ 74,000 NNS 69,000 5,000 74,000 Total 138,000 10,000 148,000 Foreign exchange loss 4,000 2,000 6,000 Impairment loss $ 142,000 $ 12,000 $ 154,000 Note 3 – Accounts Payable and Accrued Expenses ACCOUNTS PAYABLE AND ACCRUED EXPENSES The following table summarizes the Company’s accounts payable and accrued expense balances as of the dates indicated: SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES June 30, December 31, 2022 2021 Accounts payable $ 267,000 $ 221,000 Accrued expenses 1,000 99,000 Accrued interest 157,000 114,000 Accounts payable and accrued expenses $ 425,000 $ 434,000 Accrued Interest The following table presents the details of accrued interest as of the dates indicated: SCHEDULE OF ACCRUED INTEREST June 30, December 31, 2022 2021 Notes payable $ 15,000 $ 9,000 Convertible promissory notes 142,000 105,000 Balance, end of the year $ 157,000 $ 114,000 Note 4 – Notes Payable NOTES PAYABLE The table below summarizes the transactions as of the dates indicated: SCHEDULE OF NOTES PAYABLE June 30, December 31, 2022 2021 Balance, beginning of the year $ 111,000 $ 11,000 Additions – 150,000 Payments ( 25,000 ) ( 50,000 ) Balance, end of the year $ 86,000 $ 111,000 7 On July 7, 2020, the Company issued a promissory note in the principal amount of $ 11,000 . The note is noninterest bearing. The principal is due on or before March 11, 2022. During any event of default under the note, the interest rate shall increase to 10 % per annum. Events of default include failure to pay principal or interest, breach of covenants, breach of representations and warranties, borrower’s assignment of substantial part of its property or business, any money judgment, writ, or similar process shall be entered or filed against the borrower or any subsidiary of the borrower or any of its properties or other assets for more than $ 100,000 , bankruptcy, liquidation of business, and cessation of operations. The principal amount outstanding under this note was $ 11,000 as of June 30, 2022. Interest accrued as of June 30, 2022 is $ 2,000 . On January 11, 2021, the Company issued a promissory note in the principal amount of $ 15,000 . The interest on this note shall accrue beginning from the date of issuance, at an interest rate of 8 % per annum. The principal and any accrued interest are payable on or before March 11, 2022 . During any event of default under the note, the interest rate shall increase to 10 % per annum. Events of default include failure to pay principal or interest, breach of covenants, breach of representations and warranties, borrower’s assignment of substantial part of its property or business, any money judgment, writ, or similar process shall be entered or filed against the borrower or any subsidiary of the borrower or any of its properties or other assets for more than $ 100,000 , bankruptcy, liquidation of business, and cessation of operations. The principal and the accrued interest amounting to $ 15,000 and $ 1,000 , respectively, was settled on October 27, 2021. On February 19, 2021, the Company issued a promissory note in the principal amount of $ 25,000 . The interest on the unpaid principal balance accrues at a rate of 10 % per annum. The principal and any accrued interest shall be paid in a single installment on or before February 19, 2022 . 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 5, 2021, the Company issued a promissory note in the principal amount of $ 9,000 . The interest on the unpaid principal balance accrues at a rate of 8 % per annum. 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 8 % per annum during the default. Events of default include failure to make any payment including accrued interest when due, voluntary, or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal and accrued interest under this note was settled on September 16, 2021. On April 22, 2021, the Company issued a promissory note in the principal amount of $ 50,000 . The interest on the unpaid principal balance accrues at a rate of 10 % per annum. The principal and any accrued interest shall be paid in a single installment on or before April 22, 2022 . If the Company fails to pay the balance of this note in full on the date or fails to make any payments due within 15 days of the due date, any unpaid principal shall accrue interest at the rate of 15 % per annum during the default. Events of default include failure to make any payment including accrued interest when due, voluntary, or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount outstanding under this note was $ 50,000 as of June 30, 2022. Interest accrued as of June 30, 2022 is $ 7,000 . On July 1, 2021, the Company issued a promissory note in the principal amount of $ 25,000 . The interest on the unpaid principal balance accrues at a rate of 10 % per annum. The principal and any accrued interest shall be paid in a single installment on or before July 1, 2022 . If the Company fails to pay the balance of this note in full on the date or fails to make any payments due within 15 days of the due date, any unpaid principal shall accrue interest at the rate of 15 % per annum during the default (default interest). Events of default include failure to make any payment including accrued interest when due, voluntary, or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee or similar party to take possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount outstanding under this note was $ 25,000 as of June 30, 2022. Interest accrued as of June 30, 2022 is $ 2,000 . On July 12, 2021, the Company issued a promissory note in the principal amount of $ 5,000 . The interest on the unpaid principal balance accrues at a rate of 8 % per annum. The principal and any accrued interest shall be paid in a single installment on or before October 12, 2021 . The principal amount of this note was settled on September 16, 2021. On August 10, 2021, the Company issued a promissory note in the principal amount of $ 7,000 . The interest on the unpaid principal balance accrues at a rate of 8 % per annum. The principal and any accrued interest shall be paid in a single installment on or before November 10, 2021 .The principal amount of this note was settled on September 16, 2021. In August 2021, the Company issued four promissory notes to a single lender in the aggregate principal amount of $ 14,000 . The interest on the unpaid principal balance of these notes accrues at a rate of 8 % per annum. The principal for each note shall be paid in a single installment during November 2021. If the Company fails to pay the balance of these notes in full on the date or fails to make any payments due within 15 days of the due date, any unpaid principal shall accrue interest at the rate of 8 % per annum during the default. Events of default include failure to make any payment including accrued interest when due, voluntary, or involuntary petition of bankruptcy, appointment of a receiver, custodian, trustee, or similar party to take possession of the Company’s assets or property, or assignment made by the Company for the benefit of creditors. The principal amount outstanding under these notes was $ 13,500 as of September 30, 2021. The principal and the accrued interest aggregating to $ 14,000 was settled in October 2021. Interest expense on notes payable amounted to $ 6,000 and $ 3,000 for the six months ended June 30, 2022 and 2021, respectively. 8 Note 5 – Convertible Promissory Notes 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 June 30, 2022 is $ 2,000 . 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 . In connection with the issuance of the Notes, the Company issued to the purchasers of the Notes stock purchase warrants (the “Warrants”) to purchase an aggregate of 1,567,500 shares of the Company’s common stock for a purchase price of $ 1.50 to $ 1.87 per share, subject to adjustments. The Warrants were valued using the Black Scholes option pricing model for a total fair value of $ 3,004,000 based on a 3 -year term, volatility of 404.91 % to 405.93 %, a risk-free equivalent yield of 0.27 % to 0.42 %, and stock price ranging from $ 0.10 to $ 1.95 . In accordance with ASC 470 - Debt, the Company has allocated the cash proceeds amounts of the Notes among the Notes, the Warrants and the conversion feature. The relative fair value of the Warrants issued amounted to approximately $ 1,690,000 and the beneficial conversion amounted to $ 0 , which amounts are being amortized and expensed over the term of the Notes. The Company determined that the conversion feature of the Notes would not be an embedded feature to be bifurcated and accounted for as a derivative in accordance with ASC 815-15 Derivatives and Hedging . Financing cost recognized for the amortization of debt discount was approximately $ 1,071,000 and $ 7,000 for the six months ended June 30, 2022 and 2021, respectively. The convertible promissory notes consisted of the following as of the dates indicated: SCHEDULE OF CONVERTIBLE PROMISSORY NOTES June 30, December 31, 2022 2021 Principal Balance, beginning of year $ 4,613,000 $ 708,000 Additions – 3,905,000 Balance, end of year 4,613,000 4,613,000 Discount Balance, beginning of year 1,526,000 5,000 Additions – 2,045,000 Amortization ( 1,071,000 ) ( 524,000 ) Balance, end of year 455,000 1,526,000 Net carrying amount $ 4,158,000 $ 3,087,000 9 Effective interest rate used to amortize the debt discount for the six months ended June 30, 2022 and 2021 ranges from 4.76 % to 64.60 %. The unamortized debt discounts will be amortized within one year as of June 30, 2022 and 2021, respectively. Potential future shares to be issued on conversion of the notes as of the dates indicated are as follows: SCHEDULE OF POTENTIAL FUTURE SHARES ISSUANCE OF CONVERSION NOTES June 30, December 31, 2022 2021 Principal $ 4,613,000 $ 4,613,000 Interest 142,000 105,000 Total 4,755,000 4,718,000 Conversion price per share 1.00 – 1.25 1.00 – 1.25 Potential future share 3,984,307 3,947,394 Interest expense on default convertible promissory notes amounted to $ 37,000 and $ 30,000 for the six months ended June 30, 2022 and 2021, respectively. Note 6 – Commitments and contingencies COMMITMENTS AND CONTINGENCIES Litigation From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably, 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 claims 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 alleges that, on or around March 27, 2020, we ceased paying the plaintiff despite the plaintiff’s continuing efforts on behalf of our company and that we agreed to continue to accrue his monthly retainer amount until such time that we received at least $ 100,000 in funding. Plaintiff further alleges that he continued to work for our company for 38 additional weeks in reliance on our promise of payment. The plaintiff claims 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 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. Note 7 – Stockholders Deficit STOCKHOLDERS DEFICIT Common Stock In January 2021, the Company’s President and a member of the Board of Directors, resigned as an officer and director of the Company (“Termination Agreement”). Part of the Termination Agreement stipulates the return of 3,674,330 shares of the Company’s common stock (“Cancelled Shares”). The Cancelled Shares were returned and cancelled on April 20, 2021. In March 2021, the Company’s Chief Executive Officer (“CEO’) agreed to forgive approximately $ 68,000 due to him, which was treated as contributed paid in capital. In March 2021, the Company’s Chief Financial Officer agreed to reduce the amounts due to him from approximately $ 128,000 to $ 30,000 . For the reduction of $ 98,000 , the Company will issue 75,000 shares of common stock. The remaining liability of $ 30,000 will be paid in cash. Restricted Common Stock Awards On August 17, 2021, the Company entered into Restricted Share Award Agreements (the “Award Agreements”) with two consultants pursuant to which the Company issued to the consultants shares of common stock of the Company in exchange for their future services. The Awards have an initial term of one year, which shall be automatically renewed on a year-to-year basis unless either party gives a written notice of termination. The two consultants who entered into these agreements include: 1) A consultant who was granted 10,000,000 restricted share awards. 2) An entity, which is owned by the Company’s CEO and majority shareholder, was granted 1,500,000 restricted share awards. The Company’s management has accounted for the Award Grants as restricted stock compensation in accordance with ASC 718 – Stock Compensation (“ASC 718”). ASC 718 requires the Company to estimate the service period over which the compensation cost will be recognized. Management has estimated that the first two development phases will be completed within 15 months and the Foundry Mask will be completed within 6 months for a total of 21 months service period. Compensation cost will be recognized ratably over 21 months and in the same manner had the Company paid in cash. The estimated service period will be adjusted for changes in actual and expected completion dates. Any such change will be recognized prospectively, and the remaining deferred compensation will be recognized over the remaining service period. 10 As of June 30, 2022, a total of 11,500,000 shares were issued to the consultants. The value was $ 1.93 per share on the date of issuance (“Grant Date”) for an aggregate fair value of $ 22,195,000 The stock-based award compensation was recorded as an increase in deferred compensation expense, common stock, and additional paid-in capital in the Company’s books at the time of the grant. The table below summarizes the transactions related to the Company restricted stock awards as of June 30, 2022: SCHEDULE OF COMPANY RESTRICTED STOCK AWARDS Shares Deferred compensation Grant date fair value 11,500,000 $ 22,195,000 Accretion - ( 11,168,000 ) Balance as of June 30, 2022 11,500,000 $ 11,027,000 Stock based compensation expense for the three and six months ended June 30, 2022 amounted to $ 3,206,000 and $ 6,376,000 , respectively. Stock based compensation expense for the three and six months ended June 30, 2021 amounted to $ 561,000 and $ 575,000 , respectively. Warrants Expired As of June 30, 2022, a total of 253,000 warrants expired. Note 8 – Subsequent Events SUBSEQUENT EVENTS The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The management of the Company determined the following reportable events: On July 25, 2022, the Board of Directors of the Company resolved to discontinue the development of the Company’s 5 nanometer ASIC chip and bitcoin mining machines, to close its South Korean subsidiary, AIQ Systems, Inc., and to pursue other opportunities to provide solutions for the high-density computing industry, including the development of a clean-energy-powered, containerized, immersion-cooled data center. On July 27, 2022, the Company sent Hyuncheol (Peter) Kim, the Company’s Chief Technology Officer, 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 will terminate at the end of August 2022. Restricted shares issued in connection with the consulting agreement will also be cancelled. 11