Item 1. Financial Statements
Item
1: Financial Statements
CalEthos,
Inc.
For
the Nine Months Ended September 30, 2023
Index
to the Condensed Consolidated Financial Statements
Contents
Page
(s)
Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022
1
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022
2
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three and nine months ended September 30, 2023 and 2022
3
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022
4
Notes to the Unaudited Condensed 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
September 30, 2023
As of
December 31, 2022
(Unaudited)
Assets
Current assets
Cash and cash equivalents
$ 1,178,000
$ 2,067,000
Prepaid and other current assets
12,000
4,000
Total current assets
1,190,000
2,071,000
Data center costs
1,429,000
-
Total assets
$ 2,619,000
$ 2,071,000
Liabilities and stockholders’ deficit
Current liabilities
Accounts payable and accrued expenses
$ 1,378,000
$ 540,000
Convertible promissory notes, net
4,613,000
4,613,000
Notes payable
61,000
61,000
Total current liabilities
6,052,000
5,214,000
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; 14,495,621 and 24,495,621 shares issued and outstanding
14,000
24,000
Additional paid-in capital
11,711,000
11,480,000
Other comprehensive income
8,000
5,000
Stock subscription receivable
( 2,000 )
( 2,000 )
Accumulated deficit
( 15,164,000 )
( 14,650,000 )
Total stockholders’ deficit
( 3,433,000 )
( 3,143,000 )
Total liabilities and stockholders’ deficit
$ 2,619,000
$ 2,071,000
See
accompanying notes to these unaudited condensed consolidated financial statements.
1
CalEthos,
Inc.
Unaudited
Condensed Consolidated Statements of Operations
2023
2022
2023
2022
For the three months ended
September 30,
For the nine months ended
September 30,
2023
2022
2023
2022
Revenues
$ -
$ -
$ -
$ -
Operating Expenses
Professional fees
48,000
136,000
234,000
558,000
Restricted stock grants
31,000
( 11,168,000 )
55,000
( 4,791,000 )
General and administrative expenses
13,000
24,000
54,000
59,000
Impairment loss
-
-
-
154,000
Operating (income) expenses
92,000
11,008,000
343,000
( 4,020,000 )
(Loss)Income from operations
( 92,000 )
11,008,000
( 343,000 )
4,020,000
Other income (expenses)
Interest income
14,000
1,000
45,000
1,000
Gain on settlement of accounts payable
-
-
23,000
-
Financing costs
( 20,000 )
( 509,000 )
( 239,000 )
( 1,622,000 )
Total other expense
( 6,000 )
( 508,000 )
( 171,000 )
( 1,621,000 )
(Loss) Income before provision for income taxes
( 98,000 )
10,500,000
( 514,000 )
2,399,000
Provision for income taxes
-
-
-
-
Net (loss) income
$ ( 98,000 )
$ 10,500,000
$ ( 514,000 )
$ 2,399,000
Net income (loss) per share - basic
$ ( 0.01 )
$ 0.74
$ ( 0.04 )
$ 0.10
Net income (loss) per share - diluted
$ ( 0.01 )
$ 0.56
$ ( 0.04 )
$ 0.08
Weighted average common shares outstanding - Basic
14,495,621
14,176,349
14,495,621
24,769,518
Weighted average common shares outstanding - diluted
14,495,621
18,953,625
14,495,621
29,546,794
Comprehensive loss:
Net income (loss)
$ ( 98,000 )
$ 10,500,000
$ ( 514,000 )
$ 2,399,000
Foreign currency translation adjustment
-
20,000
-
19,000
Comprehensive (Loss) Income
$ ( 98,000 )
$ 10,520,000
$ ( 514,000 )
$ 2,418,000
See
accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
2
CalEthos,
Inc.
Unaudited
Condensed Consolidated Statements of Stockholders’ Deficit
For
the Three and Nine Months Ended September 30, 2023 and 2022
Shares
Amount
Shares
Amount
Shares
Amount
Capital
Receivable
Income
(Loss)
Deficit
(Deficit)
Series
A convertible preferred stock
Preferred
Stock
Common
Stock
Additional
Paid-in
Stock
Subscription
Other
Comprehensive
Accumulated
Total
Stockholders’
Shares
Amount
Shares
Amount
Shares
Amount
Capital
Receivable
Income
(Loss)
Deficit
(Deficit)
Balance,
January 1, 2023
-
$ -
-
$ -
24,495,621
$ 24,000
$ 11,480,000
$ ( 2,000 )
$ 5,000
$ ( 14,650,000 )
$ ( 3,143,000 )
Foreign
currency translation income
-
-
-
-
-
-
-
-
2,000
-
2,000
Net
loss
-
-
-
-
-
-
-
-
-
( 199,000 )
( 199,000 )
Balance
March 31, 2023
-
-
-
-
24,495,621
24,000
11,480,000
( 2,000 )
7,000
( 14,849,000 )
( 3,340,000 )
Fair
value of equity-based compensation
-
-
-
-
-
-
24,000
-
-
-
24,000
Cancellation
of shares
-
-
-
-
( 10,000,000 )
( 10,000 )
10,000
-
-
-
-
Foreign
currency translation income
-
-
-
-
-
-
-
-
1,000
-
1,000
Net
loss
-
-
-
-
-
-
-
-
-
( 217,000 )
( 217,000 )
Balance,
June 30, 2023
-
$ -
-
$ -
14,495,621
$ 14,000
$ 11,514,000
$ ( 2,000 )
$ 8,000
$ ( 15,066,000 )
$ ( 3,532,000 )
Fair
value of equity-based compensation
-
-
-
-
-
-
197,000
-
-
-
197,000
Net
loss
-
-
-
-
-
-
-
-
-
( 98,000 )
( 98,000 )
Balance,
September 30,2023
-
$ -
-
$ -
14,495,621
$ 14,000
$ 11,711,000
$ ( 2,000 )
$ 8,000
$ ( 15,164,000 )
$ ( 3,433,000 )
Balance,
January 1, 2022
-
$ -
-
$ -
25,995,621
$ 26,000
$ 16,269,000
$ ( 2,000 )
$ ( 2,000 )
$ ( 16,831,000 )
$ ( 540,000 )
Equity-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 )
Equity-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 )
Forfeiture
of stock-based compensation
-
-
-
-
( 11,500,000 )
( 11,000 )
( 11,157,000 )
-
-
-
( 11,168,000 )
Foreign
currency translation income (loss)
-
-
-
-
-
-
-
-
20,000
-
20,000
Net
income
-
-
-
-
-
-
-
-
-
10,500,000
10,500,000
Net
income (loss)
-
-
-
-
-
-
-
-
-
10,500,000
10,500,000
Balance,
September 30,2022
-
$ -
-
$ -
14,495,621
$ 15,000
$ 11,488,000
$ ( 2,000 )
$ 17,000
$ ( 14,431,000 )
$ ( 2,913,000 )
See
accompanying notes to these unaudited condensed consolidated financial statements.
3
CalEthos,
Inc.
Unaudited
Condensed Consolidated Statements of Cash Flows
For
the Nine Months Ended September 30,
2023
2022
Cash Flows From Operating Activities
Net (loss) income
$ ( 514,000 )
$ 2,399,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Impairment
-
154,000
Amortization of convertible promissory note discounts
-
1,526,000
Forfeiture of restricted stock awards
-
( 11,168,000 )
Equity-based compensation
55,000
6,377,000
Gain on settlement of accounts payable
( 23,000 )
-
Changes in operating assets and liabilities
Prepaid expenses and other current assets
( 8,000 )
6,000
Accounts payable and accrued expenses
450,000
32,000
Net Cash Used in Operating Activities
( 40,000 )
( 674,000 )
Cash Flows From Investing Activities
Data center costs
( 854,000 )
-
Other assets
-
( 106,000 )
Net Cash Used in Investing Activities
( 854,000 )
( 106,000 )
Cash Flows From Financing Activities
Repayments of Notes
-
( 25,000 )
Net Cash Used in Financing Activities
-
( 25,000 )
Effect of exchange rate changes on cash and cash equivalents
5,000
7,000
Net decrease in cash
( 889,000 )
( 798,000 )
Cash, beginning of period
2,067,000
3,047,000
Cash, end of period
$ 1,178,000
$ 2,249,000
Supplemental disclosure of cash flow information:
Cash paid for interest
$ -
$ -
Cash paid for income taxes
$ -
$ -
Non-cash investing and financing activities
Interest capitalized as data center cost
$ 113,000
$ -
Stock based compensation capitalized as data center cost
$ 166,000
$ -
See
accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
4
CalEthos,
Inc.
Notes
to the Unaudited Condensed Consolidated Financial Statements
September
30, 2023
Note
1 – Organization and Accounting Policies
ORGANIZATION
AND ACCOUNTING POLICIES
CalEthos,
Inc. (the “Company” or “we”) was incorporated on March 20, 2002 under the laws of the State of Nevada.
The
Company is implementing its plan to build a clean-energy-powered data center operation using the latest energy-efficient building materials
and cooling technologies and to provide wholesale colocation services to enterprise IT and hyperscale customers. In addition, the Company
may acquire assets and all or part of other companies operating in the high-density computing industry or invest in or joint venture
with other more-established companies already in the industry that would add value to the Company’s business strategy.
As
of July 2022, the Company’s board of directors resolved to focus exclusively on developing a clean-energy-powered data center.
Korean
entity
On
November 5, 2021, AIQ System Inc. (“AIQ”) was incorporated in Seoul, Republic of Korea. AIQ is authorized to issue 3 million
shares of common stock. At the date of incorporation, 10,000 shares were issued to the Company for 100,000,000 Korean Won, or approximately
$ 89,000 , for 100 % ownership of AIQ.
Basis
of Presentation
The
accompanying Condensed Consolidated Financial Statements and notes thereto are unaudited. The unaudited interim financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and
pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note
disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The December 31, 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 nine-month
periods ended September 30, 2023 and 2022. The results for the nine months ended September 30, 2023 are not necessarily indicative of
the results to be expected for the full year ending December 31, 2023 or for any future period.
These
unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial
Statements and the notes thereto for the year ended December 31, 2022, included in the Company’s annual report on Form 10-K filed
with the SEC on April 17, 2023.
Liquidity
and Going Concern
The
Company incurred a net loss of approximately $ 514,000
for the nine months ended September 30, 2023, had an accumulated deficit of approximately $ 15,164,000
as of September 30, 2023 and had no
recurring revenue from operation. The Company has financed its activities principally through debt and equity financing and
shareholder contributions. Management expects to incur additional losses and cash outflows in the foreseeable future in connection
with its operating activities. These conditions raise substantial doubt about the Company’s ability to continue as a going
concern for one year from the issuance of these condensed consolidated financial statements.
The
Company’s condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The
Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals; successful
development, marketing and branding of services; the 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 the Company’s operations and generating a level of revenues adequate
to support the Company’s cost structure.
5
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 the development of the Company’s data center campus development, approvals for
construction permits, construction times, delivery of critical equipment, market demand for the Company’s wholesale colocation
data center services, the timing of customer commitments for data center space, the management of working capital, and payment terms
and conditions for purchase of the Company’s 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 raise additional funding from investors or through other avenues, it may not be able to
continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
COVID-19
The
continuing COVID-19 global pandemic has caused significant disruption to the economy and financial markets globally, and the full extent
of the potential impacts of COVID-19 are not yet known. Circumstances caused by the COVID-19 pandemic are complex, uncertain and rapidly
evolving. The impact of COVID-19 has not been significant to the Company’s results of operations, financial condition, and liquidity
and capital resources. Although no material impairment or other effects have been identified to date, there is substantial uncertainty
in the nature and degree of its continued effects over time. That uncertainty affects management’s accounting estimates and assumptions,
which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and
information become known. The Company will continue to consider the potential impact of the COVID-19 pandemic on its business operations.
Earnings
Per Share
The
Company uses ASC 260, “ Earnings Per Share ” for calculating the basic and diluted earnings (loss) per share. The Company
computes basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted
earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential
common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock
options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share is the same, in that any potential
common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.
Securities
that could potentially dilute loss per share in the future were not included in the computation of diluted loss per share for the three
and nine months ended September 30, 2023 and 2022 because their inclusion would be anti-dilutive. Common share equivalents amounted to
14,495,621 as of September 30, 2023.
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 – Data Center Costs
DATA
CENTER COSTS
On
March 30, 2023, the Company signed an option agreement to acquire 80 acres of commercially-zoned land in Imperial County, California
(the “Option”) for $ 3,360,000 (“Purchase Price”). The Option expires in September 2024. The Company paid a non-refundable
deposit of $ 84,000 on the signing of the Option, which has been recognized as other assets in the condensed consolidated balance sheet.
The Company is required to deposit an additional $ 84,000 into escrow (“Escrow Funds”) within 10 days after the execution
of the purchase agreement. As of the issuance of these interim condensed consolidated financial statements, the escrow had not been set
up. Once the escrow is set up, the Company will deposit the $ 84,000 . If the Company does not exercise the Option by September 2024, the
Escrow funds will be returned to the Company.
6
The
Purchase Price is payable with a cash payment of $ 1,680,000 and the issuance of 840,000 shares of the Company’s common stock (the
“Purchase Shares”). At the closing of the purchase (“Closing Date”), if the stock is trading at a value less
than $ 1.00 per share, the Company is required to issue a promissory note in the amount of $ 840,000 , payable on the third anniversary
of the closing date, with an interest rate equal to the Secured Overnight Financing Rate plus 2.0 %.
If
the Purchase Shares are issued at the Closing Date, the Company has agreed to repurchase the Purchase Shares (the “Put Option”)
under specific circumstances. However, the Put Option expires if the Company’s common stock trades above $2.00 per share for 120
consecutive days. If the Company’s common stock trades below $2.00 per share for 10 consecutive days, the Holder has the option
for the Company to repurchase the Purchase Shares for $2.00 per share.
As
of September 30, 2023, the Company has incurred costs of approximately $ 1,232,000
for the development of the Data Center and has capitalized approximately $ 113,000
of interest expense related to the convertible promissory notes.
On
June 23, 2023, the Company signed a contract with HDR Engineering, Inc. to provide site assessment and feasibility to connect critical
resources for data center operations and develop a shovel-ready development plan for the Company’s initial 80-acre site. The Company
completed this development phase in October 2023 with an estimated cost of approximately $ 525,000 .
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
September 30,
December 31,
2023
2022
Accounts payable
$ 508,000
$ 186,000
Accrued expenses
193,000
28,000
Accrued interest
677,000
326,000
Accounts payable and accrued expenses
$ 1,378,000
$ 540,000
Accrued
Interest
The
following table presents the details of accrued interest as of the dates indicated:
SCHEDULE
OF ACCRUED INTEREST
September 30,
December 31,
2023
2022
Notes payable
$ 23,000
$ 17,000
Convertible promissory notes
654,000
309,000
Balance, end of period
$ 677,000
$ 326,000
Note
4 – Notes Payable
NOTES
PAYABLE
The
table below summarizes the transactions as of the dates indicated:
SCHEDULE
OF NOTES PAYABLE
September 30,
December 31,
2023
2022
Balance, beginning of the year
$ 61,000
$ 61,000
Additions
–
–
Payments
–
–
Balance, end of the year
$ 61,000
$ 61,000
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
was due on or before March 11, 2022. During any event of default under the note, the interest rate shall increase to 10 % per annum. Events
of default include failure to pay principal or interest, breach of covenants, breach of representations and warranties, borrower’s
assignment of a 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 interest amount outstanding under this note was $ 11,000 and $ 5,000 , respectively,
as of September 30, 2023.
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 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 and interest amount outstanding under this note was $ 50,000 and $ 18,000 , respectively, as of
September 30, 2023.
Interest
expense on these notes payable amounted to $ 9,000 and $ 9,000 for the nine months ended September 30, 2023 and September 30, 2022, respectively.
Note
5 – Convertible Promissory Notes
CONVERTIBLE
PROMISSORY NOTES
Convertible
promissory notes consisted of the following as of the dates indicated:
SCHEDULE
OF CONVERTIBLE PROMISSORY NOTES
September 30,
December 31,
2023
2022
Principal
Balance, beginning of year
$ 4,613,000
$ 4,613,000
Additions
–
–
Balance, end of year
4,613,000
4,613,000
Discount
Balance, beginning of year
–
1,526,000
Additions
–
–
Amortization
–
( 1,526,000 )
Balance, end of year
–
–
Net carrying amount
$ 4,613,000
$ 4,613,000
The
effective interest rate used to amortize the debt discount for the nine months ended September 30, 2023 and 2022 ranged from 4.76 % to
64.60 %.
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
September 30,
December 31,
2023
2022
Principal
$ 4,613,000
$ 4,613,000
Interest
652,000
309,000
Total
5,265,000
4,922,000
Conversion price per share
1.00 – 1.25
1.00 – 1.25
Potential future share
4,212,000
4,125,699
Interest
expense on default convertible promissory notes amounted to $ 343,000 for the nine months ended September 30, 2023, of which $ 113,000
was capitalized as data center cost.
8
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.
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.
Employment
Agreement
In
June 2023, the Company executed an employment agreement (“Employment Agreement”) to employ an individual to be the Company’s
President and Chief Operating Officer (“Executive”). As compensation for services rendered, the Executive will be paid a
base salary of $ 250,000 per annum. The Executive’s base salary may be increased as certain milestones are met, such as 1) when
the necessary governmental permits are granted to start construction of the Data Center, 2) once the Data Center is operational and at
least 25% of the planned MW’s of collation capacity is leased. Also, at the discretion of the Company, following each calendar
year of continued employment, the Executive shall be eligible to receive a discretionary bonus of up to fifty percent ( 50%) of Executive’s
base salary during the first year of employment, up to seventy-five percent (75%) of Executive’s then-current base salary during
the second year of employment, and up to one-hundred percent (100%) of Executive’s then-current base salary during Executive’s
third year of employment (the “Bonus”). Payment of the Bonus will be based on achieving certain goals and performance criteria
established by the Company . In addition, the Executive was granted options to purchase 600,000 and 1,900,000 shares of the Company’s
common stock (see Note 7 – Stockholders Deficit) for further information.
The
Employment Agreement also provides for certain severance benefits upon termination by the Company without “cause” or by the
Executive for good reason. In the event of a termination by the Company without cause or by the Executive for good reason after the first
full year of employment, the Executive would be entitled to (i) continued payment of the base salary for the lesser of six months or
the remaining term of the Employment Agreement, subject to the Executive signing a timely and effective separation agreement containing
a release of all claims against the Company and other customary terms; provided, however, that if such termination is between the 91 st
day and the end of the first year of employment, the Executive will be entitled to a pro-rata portion of such payment.
Note
7 – Stockholders Deficit
STOCKHOLDERS
DEFICIT
Stock
options
As
part of the Employment Agreement, as defined in Note 6 – Commitments and Contingencies, the executive was granted an incentive
stock option (“Incentive Option”) and a non-qualified stock option (“Non-Qual Option”) (collectively “Stock
Options”) to purchase 600,000 and 1,900,000 , respectively, shares of the Company’s common stock for $ 0.50 per share. The
Stock Options are exercisable for a period of seven years from the date of grant, which was June 19, 2023 (“Grant Date”).
The
Incentive Option shall vest and become exercisable as follows: (i) options to purchase up to 200,000 shares of Common Stock shall vest
and become exercisable on the first anniversary of the Grant Date; (ii) options to purchase up to 200,000 shares of Common Stock shall
vest and become exercisable on the second anniversary of the Grant Date; and (iii) options to purchase up to 200,000 shares of Common
Stock shall vest and become exercisable on the third anniversary of the Grant Date; provided that the Optionee is an employee in good
standing with the Company on such applicable vesting date. The Incentive Option Grant Date fair value of $ 600,000 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 339 %, the fair value of common stock $ 0.50 , estimated life of 5 years, risk-free rate of 3.99 % and dividend rate of $ 0 . For the nine
months ended September 30, 2023, approximately $ 221,000 was earned. Of the amount earned of $ 221,000 approximately $ 166,000 was capitalized
as date center cost and the remaining $ 55,000 was expensed as stock-based compensation.
9
The
Non-Qual Option shall vest and become exercisable as follows:
(1)
216,666
shares on each of the first two anniversaries of the Grant Date and 216,668 shares on the third anniversary of the Grant Date, provided
that the Optionee is an employee or Board member in good standing with the Company on such applicable vesting date.
(2)
the
remaining 1,250,000 shares based on the Company completing the following milestones:
a.
250,000
shares upon completion of the initial site development plan and Data Center design, and submission of a complete set of plans to
Imperial County Planning and Development Department for approvals and permits.
b.
250,000
shares upon the Company receiving permits necessary to start construction of the data center site and facilities (including but not
limited to power substation, water delivery, pumping, storage and on-site distribution systems, fiber conduit lines and communications
systems, and on-site roads, water, power and communications grid, warehousing, offices, administration, support and security buildings,
perimeter walls and security systems).
c.
250,000
shares upon the completion of construction of a complete data center facility and receipt of an occupancy permit for such facility,
either for a Data Center facility to be built as a “build to suit” building for a hyperscale company or as a wholesale
colocation building for enterprise IT customers.
d.
500,000
shares upon signing a build-to-suit contract or one or more contracts being signed for 50% or more of a constructed and operational
wholesale colocation facility’s capacity.
The
Company’s management has accounted for the Non-Qual Option 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 development phase (a) will be completed by March 31, 2024, the second development phase (b) by September 30, 2024, the
third development phase (c) by March 31, 2025 and the fourth development phase by September 30, 2025. The estimated service period will
be adjusted for actual and expected completion date changes. Any such change will be recognized prospectively, and the remaining deferred
compensation will be recognized over the remaining service period.
The
Non-Qual Option Grant Date fair value of $ 550,000 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 range of 137 % to 176 %, the fair value of common stock $ 0.50 ,
estimated life range of 3.9 years to 4.5 years, risk-free rate range of 4.7 % to 5.2 % and dividend rate of $ 0 . For the three months ended
September 30, 2023, the Company recorded compensation expenses of approximately $ 18,000 .
As
of September 30, 2023, the Company had 2,500,000 stock options outstanding, of which all were unvested, with weighted average remaining
life, strike price and grant date fair value of 7 years, $ 0.50 and $ 0.47 , respectively, and intrinsic value of nil.
Warrants
During
the nine months ending September 30, 2023, 89,804 warrants expired. As of September 30, 2023, the remaining outstanding balance of warrants
was 1,678,500 , with a weighted average exercise price of $ 1.86 , average remaining life of 0.39 years, weighed average grant date fair
value of approximately $ 0.47 .
Note
8 – Subsequent Events
SUBSEQUENT
EVENTS
The
Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued
to determine if they must be reported. The management of the Company determined there are no reportable events.
10
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.