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 from certain then majority stockholders of our company
an aggregate of 440,256 shares (after giving effect to the subsequent reverse stock split described below) of our common stock,
which shares represented approximately 70% of the issued and outstanding shares of capital stock of our company at that time,
for aggregate cash payments amounting to $260,000.
On
September 12, 2018, following the closing of the change of control transaction described above, we entered into a Series A Preferred
Stock Purchase Agreement (the “Preferred Purchase Agreement”) with M1 Advisors, Piers Cooper, our former President
and director, and the other investors who were signatories thereto (collectively, the Purchasers”). Pursuant to the Preferred
Purchase Agreement, the Purchasers purchased from us an aggregate of 15,600,544 shares of Series A preferred stock, par value
$0.001 per share (“Series A Preferred Stock”), for an aggregate purchase price of $15,600.54, or $0.001 per share.
Of the shares sold, 9,320,414 shares were purchased by M1 Advisors and 4,674,330 shares were purchased by Mr. Cooper. All of such
shares of preferred stock were converted into shares of our common stock on December 20, 2018.
After
the consummation of the change of control transaction and the sale of the Series A Preferred Stock on September 12, 2018 (the
“Change of Control Transactions”), our company remained a shell company with no operating business. As a result of
the September 12, 2018 transactions, our current executive officers and directors acquired effective control of our company and,
in connection with such transactions, our board of directors determined to establish our company in the rapidly-growing legal
cannabis industry, initially in the State of California. In order to fund such proposed business plan, we intend to raise additional
funds from investors by issuing our common stock, preferred stock and/or debt securities to fund future operations, including
the acquisition of manufacturing facilities and equipment.
On
August 28, 2018, we filed a Certificate of Change to our Articles of Incorporation with the Secretary of State of the State of
Nevada to (i) reduce our authorized shares of common stock from 100,000,000 shares to 4,000,000 shares and (ii) to effectuate
a stock combination or reverse stock split whereby every 25 outstanding shares of our common stock were converted into one share
of common stock. This amendment became effective on August 30, 2018. All share and per share amounts in this Report have been
restated to give effect to such reverse stock split.
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 increase 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.
Plan
of Operations
Immediately
prior to the consummation of the Change of Control Transactions, our company was a shell company with no operating business. As
a result of the Change of Control Transactions, Mr. Campbell acquired control of our company. It is the current intention of Mr.
Campbell for our company to develop and manufacture a next generation high-performance computer system that is scalable, upgradeable
and cost effective for processing cryptocurrencies, tokens and blockchain-based transactions. In order to fund our proposed business
plan, we intend to raise funds from investors by issuing common stock, preferred stock and/or debt securities. Upon the consummation
of such fundraising efforts and the commencement of such operations, it is expected that our company will cease being a shell
company.
To
enter into our proposed new business, we may seek to acquire one or more other companies that have businesses that are synergistic
to our proposed business or to acquire all or a portion of the assets of such businesses. We may also engage employees, consultants
or third parties to assist us in developing our own products or services.
This
discussion of our proposed business is purposefully general and is not meant to be restrictive of our virtually unlimited discretion
to search for and enter into potential business opportunities. Management anticipates that, initially, we may be able to participate
in only one potential business venture because we have nominal assets and limited financial resources. This lack of diversification
should be considered a substantial risk to our shareholders because it will not permit us to offset potential losses from one
venture against gains from another.
We
may seek a business opportunity with entities that have recently commenced operations, or that wish to utilize the public marketplace
in order to raise additional capital in order to expand into new products or markets, to develop a new product or service, or
for other corporate purposes. We may acquire assets and establish wholly-owned subsidiaries in various businesses or acquire existing
businesses as subsidiaries.
We
anticipate that the selection of a business opportunity in which to participate will be complex and extremely risky. Due to general
economic conditions, rapid technological advances being made in some industries and shortages of available capital. Our management
believes there are numerous firms seeking the perceived benefits of a publicly-registered corporation. Such perceived benefits
may include facilitating or improving the terms on which additional equity financing may be sought, providing liquidity for incentive
stock options or similar benefits to key employees, and providing liquidity (subject to restrictions of applicable statutes) for
all shareholders, among other factors. Available business opportunities may occur in many different segments of the cryptocurrency
or blockchain industry and at various stages of development, all of which will make the task of comparative investigation and
analysis of such business opportunities extremely difficult and complex.
Our
officers have only limited experience in managing a shell company similar to ours and will rely upon their own efforts in accomplishing
our business purposes. Nevertheless, we anticipate we will locate and make contact with possible target businesses primarily through
the efforts of our officers and directors, who will meet personally with existing management and key personnel, visit and inspect
material facilities, assets, products and services belonging to such prospects, and undertake such further reasonable investigation
as they deem appropriate. Management has a network of business contacts, including our outside lawyers and accountants, and believes
that prospective target businesses will be referred to us through this network.
We
also anticipate that prospective target businesses will be brought to our attention from various other non-affiliated sources,
including securities broker-dealers, investment bankers, venture capitalists, bankers, and other members of the financial community.
We have neither the present intention, nor does the present potential exist for us, to consummate a business combination with
a target business in which our management or their affiliates or associates directly or indirectly have a pecuniary interest,
although no existing corporate policies would prevent this from occurring. We may engage the services of professional firms that
specialize in finding business acquisitions and pay a finder’s fee or other compensation.
The
analysis of new business opportunities will be undertaken by, or under the supervision of, our officers and directors. In analyzing
prospective business opportunities, management will consider such matters as the available technical, financial and managerial
resources; working capital and other financial requirements; history of operations, if any; prospects for the future; nature of
present and expected competition; the quality and experience of management services that may be available and the depth of that
management; the potential for further research, development or exploration; specific risk factors not now foreseeable but that
then may be anticipated to impact the proposed activities of our company; the potential for growth or expansion; the potential
for profit; the perceived public recognition of, or acceptance of, products, services or trades; name identification; the regulatory
landscape relating to the proposed business; and other relevant factors. Our officers and directors expect to meet personally
with management and key personnel of the business opportunity as part of their investigation. To the extent possible, we intend
to utilize written reports and investigation to evaluate the above factors. We will not acquire or merge with any company for
which audited financial statements cannot be obtained within a reasonable period of time after closing of the proposed transaction.
Our limited funds and the lack of full-time management, however, will likely make it impracticable to conduct a complete and exhaustive
investigation and analysis of a target business before we commit our capital or other resources thereto. Management decisions,
therefore, will likely be made without detailed feasibility studies, independent analysis, market surveys and the like which would
be desirable if we had more funds available. We will be particularly dependent in making decisions upon information provided by
the promoter, owner, sponsor or others associated with the business opportunity seeking our participation.
We
will not restrict our search to any specific kind of business, but we may acquire a venture that is in its preliminary or development
stage, which is already in operation, or in essentially any stage of its corporate life. It is impossible to predict at this time
the status of any business in which we may become engaged, in that such business may need to seek additional capital, may desire
to have its shares publicly traded, or may seek other perceived advantages which we may offer.
It
is anticipated that we will incur expenses in the implementation of the business plan described herein, and such expenses may
be substantial. However, we currently have only limited capital with which to pay these anticipated expenses.
The
time and costs required to select and evaluate a target business (including conducting a due diligence review) and to structure
and consummate the business combination (including negotiating relevant agreements and preparing requisite documents for filing
pursuant to applicable securities laws and state “blue sky” and corporation laws) cannot presently be ascertained
with any degree of certainty. Our officers and directors only devote a limited portion of their time to the operations of our
company, and, accordingly, consummation of a business combination may require a greater period of time than if they devoted their
full time to our company’s affairs. However, our officers and directors will devote such time as they deem reasonably needed.
In
implementing a structure for a particular business opportunity, we may become a party to a merger, consolidation, reorganization,
joint venture or licensing agreement with another corporation or entity. We may also acquire the stock or assets of an existing
business. Upon the consummation of a transaction, it is possible that our present management and shareholders will no longer be
in control of our company. In addition, our directors may, as part of the terms of the acquisition transaction, resign and be
replaced by new directors without a vote of our current shareholders or may sell their stock in our company. Any and all such
sales will only be made in compliance with the securities laws of the United States and any applicable state.
It
is anticipated that any securities issued in any such reorganization will be issued in reliance upon exemption from registration
under applicable federal and state securities laws. In some circumstances, however, as a negotiated element of its transaction,
we may agree to register all or a part of such securities immediately after the transaction is consummated or at specified times
thereafter. If such registration occurs, of which there can be no assurance, it will be undertaken by the surviving entity after
we have successfully consummated a merger or acquisition and we are no longer considered a “shell” company. Until
such time as this occurs, we do not intend to register any additional securities. The issuance of substantial additional securities
and their potential sale into any trading market that may develop in our securities may have a depressive effect on the value
of our securities in the future, if such a market develops, of which there is no assurance.
As
a general rule, federal and state tax laws and regulations have a significant impact upon the structuring of business combinations.
We will evaluate the possible tax consequences of any prospective business combination and will endeavor to structure a business
combination so as to achieve the most favorable tax treatment for us, the target company and their respective stockholders. However,
there can be no assurance that the Internal Revenue Service (“IRS”) or relevant state tax authorities will ultimately
assent to our tax treatment of a particular consummated business combination.
To
the extent the IRS or any relevant state tax authorities ultimately prevail in recharacterizing the tax treatment of a business
combination, there may be adverse tax consequences to us, the target business and their respective stockholders. Tax considerations
as well as other relevant factors will be evaluated in determining the precise structure of a particular business combination,
which could be effected through various forms of a merger, consolidation or stock or asset acquisition.
While
the actual terms of a transaction to which we may be a party cannot be predicted, it may be expected that the parties to the business
transaction will find it desirable to avoid the creation of a taxable event and thereby structure the acquisition in a so-called
“tax-free” reorganization under Sections 368(a) (1) or 351 of the Internal Revenue Code of 1986, as amended (the “Code”).
In order to obtain tax-free treatment under the Code, it may be necessary for the owners of the target business to own 80% or
more of the voting stock of the surviving entity. In such event, our shareholders would retain less than 20% of the issued and
outstanding shares of the surviving entity, which would result in significant dilution in the equity of such shareholders. Nonetheless,
there can be no assurance that the IRS or relevant state tax authorities will ultimately assent to our tax treatment of a particular
consummated business combination.
With
respect to any merger or acquisition, negotiations with the target company’s management is expected to focus on the percentage
of our company that the target company shareholders would acquire in exchange for all of their shareholdings in the target company.
Depending upon, among other things, the target company’s assets and liabilities, it is possible that our shareholders will
hold a substantially lesser percentage ownership interest in our company following any merger or acquisition. The percentage ownership
may be subject to significant reduction in the event we acquire a target company with substantial assets. Any merger or acquisition
effected by us can be expected to have a significant dilutive effect on the percentage of shares held by our then shareholders.
We
will participate in a business opportunity only after the negotiation and execution of appropriate written agreements. Although
the terms of such agreements cannot be predicted, generally such agreements will require some specific representations and warranties
by all of the parties thereto, will specify certain events of default, will detail the terms of closing and the conditions which
must be satisfied by each of the parties prior to and after such closing, will outline the manner of bearing costs, including
costs associated with our attorneys and accountants, will set forth remedies on default and will include miscellaneous other terms.
As
stated hereinabove, we will not acquire or merge with any entity that cannot provide independent audited financial statements
within a reasonable period of time after closing of the proposed transaction. We are subject to all of the reporting requirements
included in the Exchange Act. Included in these requirements is the affirmative duty to file independent audited financial statements
as part of our Current Report on Form 8-K to be filed with the Securities and Exchange Commission upon consummation of a merger
or acquisition, as well as the audited financial statements included in our annual report on Form 10-K. If such audited financial
statements are not available at closing, or within time parameters necessary to insure our compliance with the requirements of
the Exchange Act, or if the audited financial statements provided do not conform to the representations made by the candidate
to be acquired in the closing documents, the closing documents will provide that the proposed transaction will be voidable, at
the discretion of our present management.
We
do not intend to provide our security holders with any complete disclosure documents, including audited financial statements,
concerning an acquisition or merger candidate and its business prior to the consummation of any acquisition or merger transaction.
Our
company will remain an insignificant participant among the firms that engage in the acquisition of business opportunities in the
cryptocurrency and blockchain industry, particularly in the State of California. There are many established venture capital and
financial concerns that have significantly greater financial and personnel resources and technical expertise than we have. In
view of our combined extremely limited financial resources and limited management availability, we will continue to be at a significant
competitive disadvantage compared to our competitors.
We
have had in the past, and continue to have, discussions with potential acquisition targets, or merger or acquisition partners,
and while we do not have a definitive agreement in place with any potential acquisition target or partner to do so, we anticipate
issuing shares of our common stock, and possibly preferred stock, as part of any merger or acquisition with a merger or acquisition
partner.
Competition
As
we currently have no operations, this section is not applicable.
Intellectual
Property
Currently
we have no intellectual property.
Employees
We
currently do not have any employees and our officers and directors are serving our company as consultants and independent contractors.
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.
Notes
to the Financial Statements
For
the Years Ended December 31, 2020 and 2019
Note
1 - Organization and Accounting Policies
CalEthos,
Inc. (the “Company”) was incorporated on March 20, 2002 under the laws of the State of Nevada. Since the second quarter of
2016, the Company has been a “shell” company, as defined in Rule 12b-2 under the Exchange Act.
On
December 20, 2018, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada
to change the Company name from “RealSource Residential, Inc.” to “CalEthos, Inc.”. This amendment became effective
immediately upon filing on December 20, 2018.
Change
in Control
On
May 16, 2018, certain majority stockholders of the Company, including certain former directors and officers of the Company, entered into
a stock purchase agreement dated May 16, 2018 (the “Control Purchase Agreement”) with RealSource Acquisition Group, LLC,
a Utah limited liability company (“RealSource Acquisition”), whereby RealSource Acquisition agreed to purchase an aggregate
of 11,006,356 shares (440,256 shares after giving effect to the Reverse Stock Split (see Note 3) (the “Control Shares”) of
the Company’s issued and outstanding shares of common stock for an aggregate purchase price of $180,000. Immediately prior to the
closing under the Control Purchase Agreement on September 12, 2018 (the “Closing Date”), RealSource Acquisition assigned
its rights under the Control Purchase Agreement to M1 Advisors, LLC, a Delaware limited liability company (“M1 Advisors”),
pursuant to a purchase agreement and assignment and assumption of contract rights dated as of August 28, 2018 between RealSource Acquisition
and M1 Advisors. M1 Advisors paid RealSource Acquisition $80,000 as consideration for such assignment.
Effective
on the Closing Date, and in accordance with the amended and restated by laws of the Company and the requirements of the Control Purchase
Agreement, (a) each of Michael S. Anderson, Nathan W. Hanks and V. Kelly Randall resigned as directors of the Company, (b) Michael Campbell,
the sole member of M1 Advisors, and Piers Cooper were elected to the Company’s board of directors, and (c) Mr. Hanks also resigned
as president and chief executive officer of the Company, Mr. Randall also resigned as chief operating office and chief financial officer
of the Company, Mr. Campbell was appointed the chief executive officer of the Company and Piers Cooper was appointed president of the
Company.
On
the Closing Date, the Company entered into a series A preferred stock purchase agreement dated as of the Closing Date (the “Preferred
Purchase Agreement”) with M1 Advisors, which is an entity controlled by Michael Campbell, the Company’s chief executive officer
and a director of the Company at such time, Piers Cooper, the Company’s president and a director of the Company at such time, the
members of RealSource Acquisition, and the other investors who were signatories thereto (collectively, the Purchasers”). Pursuant
to the Preferred Purchase Agreement, the Company sold to the Purchasers an aggregate of 15,600,544 shares of the Company’s series
A preferred stock, which has since been re-designated as Founder preferred stock (“Founder Preferred Stock”), for an aggregate
purchase price of $16,000, or $0.001 per share. Of the Founder Preferred Stock purchased, 9,320,414 shares were purchased by M1 Advisors,
4,674,330 shares were purchased by Mr. Cooper and an aggregate of 1,195,000 shares were purchased by the members of RealSource Acquisition
or their assigns.
Immediately
following the above transactions, an aggregate of 15,600,544 shares of Founder Preferred Stock and 630,207 shares of common stock was
issued and outstanding. At such time, the shares of Founder Preferred Stock and common stock owned by M1 Advisors represented approximately
60.14% of the issued and outstanding shares of capital stock of the Company on a fully-diluted basis and the shares of Founder Preferred
Stock owned by Mr. Cooper represented approximately 28.80% of the issued and outstanding shares of capital stock of the Company on a
fully-diluted basis. The shares of Founder Preferred Stock acquired by M1 Advisors were purchased with funds that M1 Advisors borrowed
from another entity controlled by Mr. Campbell.
Business
Activity
Following
the change in control, as described above, the board of directors determined to establish the Company in the rapidly-growing cannabis
industry, initially in the State of California. As of December 31, 2020, the primary activity of the Company’s management
is to develop and implement a plan to manufacture high-performance computer systems that are scalable, upgradeable and cost effective
for processing cryptocurrencies, tokens and blockchain-based transactions, and if other opportunities warrant, acquire assets
and all or part of other companies operating in the cryptocurrency mining hardware industry and or invest or joint venture with
other more established companies already in the industry. The Company will not restrict its search to any specific business, segment
of the cryptocurrency mining hardware industry or geographical location and the Company may participate in a business venture
of virtually any kind or nature that is beneficial to the Company and its shareholders.
Basis
of Presentation
The
accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) and assuming that the Company will continue as a going concern. The Company has no established operations
as of December 31, 2020.
Accounting
Policies
The
Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting
policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of
the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments,
often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant
and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.
Going
Concern and Liquidity
The
Company incurred a net loss of approximately $756,000 for the year ended December 31, 2020, and had an accumulated deficit of
approximately $10,082,000 as of December 31, 2020. 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 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.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 financial statements and the reported amounts of revenue and expenses during the reporting periods.
Fair
Value of Financial Instruments
The
Company has estimated the fair value of its financial instruments using the available market information and valuation methodologies
considered to be appropriate and has determined that the book value of the Company’s prepaid expenses, accounts payable and accrued
expenses, as of December 31, 2020 and 2019, respectively, approximate fair value based of their short-term nature.
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, 2020, 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. As of December 31, 2020 and
2019, the Company held only cash deposits at a financial institution.
Related
Parties
The
Company follows 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
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 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 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 interest expense - debt discount in
the statement of operations.
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.
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.
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 is a United States Company, incorporated in the state of Delaware and has its office in California. The Company has no foreign
operations.
The
tax reform bill that Congress voted to approve December 20, 2017, also known as the “Tax Cuts and Jobs Act”, made sweeping
modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions, and a move
to a territorial system for corporations that have overseas earnings. The act replaced the prior-law graduated corporate tax rate, which
taxed income over $10 million at 35%, with a flat rate of 21%.
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.
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 are 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.
There
were 1,800,214 common share equivalents at December 31, 2020 and 1,397,000 common share equivalents at December 31, 2019. For the years ended December 31, 2020 and 2019, these potential shares were excluded from the shares used to calculate diluted. These securities
were not included in the computation of diluted net earnings per share as their effect would have been antidilutive.
Recent
Accounting Pronouncements
Changes
to accounting principles are established by the Financial Accounting Standards Board’s (“FASB”) in the form of Accounting
Standards Update (“ASU”) to the FASB’s Codification. We consider the applicability and impact of all ASUs on our financial
position, results of operations, cash flows, or presentation thereof. The Company reviewed all recently issued pronouncement in 2021,
but not yet effective, and does not believe the future adoption of any such pronouncements may be expected to cause a material impact
on the Company’s financial condition or the results of its operations.
Note
2 – Cash and Cash Equivalents
Cash
equivalents are short-term cash investments, which are made for varying periods of up to three (3) months, depending on the immediate
cash requirements of the Company and earn interest at prevailing short-term investment rate. As of December 31, 2020 and 2019, the Company
held only cash deposits at a financial institution amounting to $0 and $123,000, respectively.
Note
3 – Related Party Transactions
The
Company incurred approximately $180,000 for years ended December 31, 2020 and 2019, and paid approximately $112,000 and $180,000,
respectively, to M1 Advisors for the services of the Company’s CEO and miscellaneous operating expenses.
Note
4 – Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses as of December 31, are as follows:
|
|
2020
|
|
|
2019
|
|
Accounts payable
|
|
$
|
316,000
|
|
|
$
|
187,000
|
|
Accrued expenses
|
|
|
255,000
|
|
|
|
176,000
|
|
Accrued interest
|
|
|
40,000
|
|
|
|
–
|
|
Accounts payable and accrued expenses
|
|
$
|
611,000
|
|
|
$
|
363,000
|
|
Note 5
– Notes Payable
During the year ended December 31, 2020, the Company
issued a promissory note for $11,000 (“Promissory Note”). The total proceeds were $10,000, due to approximately $1,000 for
an original issue discount. The Promissory Note is non-interest bearing with the principal due and payable in August 2020. Any amount
of unpaid principal on the date of maturity will accrue interest at rate of 10% per annum (default interest). The original issue discount
was amortized over the term of the Promissory Note, which was one month. As of September 30, 2020, the Promissory note was in default,
so the Company accrued approximately $1,000 of default interest.
Note
6 – Convertible Promissory Notes
During
the year ended December 31, 2020, the Company issued convertible promissory notes in the amount of $213,000 (the “Notes”).
The total cash proceeds were approximately $60,000, approximately $147,000 from the conversion of Series A Preferred Stock into convertible
promissory note and approximately $6,000 original issue discount (“OID”). The Notes are non-interest bearing with the principal
due and payable starting in February 2021. Any amount of unpaid principal on the date of maturity will accrue interest at rate of 10%
per annum (default interest). The principal amount and all accrued interest are convertible into shares of the Company’s common
stock, as of the date of issuance, at a rate of $1.00 per share (“Conversion Rate”). 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 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 to purchase an aggregate
of 359,000 shares of the Company’s common stock for a purchase price of $1.50 per share, subject to adjustments.
In
accordance with ASC 470 - Debt, the Company has accounted for the issuance of the Notes as an extinguishment of the series A preferred
stock. Under extinguishment accounting, the difference between the fair value of the Notes and book basis of the series A preferred stock
of $86,000 was accounted for as a loss on extinguishment. Also, the fair value of the Warrants of $52,000 was recorded as a loss on extinguishment.
The difference between the fair value of the Notes and the face value of the notes of $58,000 was recorded as additional paid on capital.
In addition, 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 totaled approximately $3,000 and of the beneficial conversion totaled approximately
$0, which amounts are being amortized and expensed over the term of the Notes. For the year ended December 31, 2020, the amortization
expense was approximately $187,000.
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 818-15 Derivatives and Hedging.
The convertible promissory notes consisted of the following:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Principal Amount
|
|
$
|
708,000
|
|
|
$
|
506,000
|
|
Original issue discount
|
|
|
(3,000
|
)
|
|
|
(19,000
|
)
|
Warrant discount
|
|
|
(2,000
|
)
|
|
|
(79,000
|
)
|
Conversion feature discount
|
|
|
–
|
|
|
|
(85,000
|
)
|
Net balance
|
|
$
|
703,000
|
|
|
$
|
323,000
|
|
The
discounts of $5,000 as of December 31, 2020, will be amortized and expensed over the remaining contractual life of the convertible promissory
notes. The amortization expense will be approximately $5,000 for the year ending December 31, 2021.
Interest
expense on default convertible notes amounted to approximately $39,000 and $0 for the years ended December 31, 2020 and
2019.
Note
7 – Stockholders’ Deficit
Shares
Authorized
On
August 28, 2018, the Company filed a Certificate of Change to the Articles of Incorporation with the Secretary of State of the State
of Nevada to (i) reduce the authorized shares of common stock from 100,000,000 shares to 4,000,000 shares and (ii) to effectuate a stock
combination or reverse stock split whereby every 25 outstanding shares of the Company’s common stock were converted into one share
of common stock. This amendment became effective on August 30, 2018. All share and per share amounts in these financial statements have
been restated to give effect to such reverse stock split.
On
December 20, 2018, the Company filed a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the State
of Nevada to increase the Company’s 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.
The
Company is authorized to issue 200,000,000 shares of which 100,000,000 shares shall be preferred stock, par value $0.001 per share, and
100,000,000 shares shall be common stock, par value $0.001 per share.
Common
Stock
In
accordance with the Control Purchase Agreement, the Company was required to effectuate a reverse stock split of the Company’s common
stock (the “Reverse Stock Split”). The Company’s board of directors approved the Reverse Stock Split of the Company’s
authorized, issued and outstanding shares of common stock at a ratio of one for twenty-five. In connection with the Reverse Stock Split,
which was effected on September 11, 2018, the issued and outstanding shares of the Company’s common stock decreased from 15,719,645
shares to 630,207 shares as of December 31, 2017. The par value was amended to be $0.001 per share. All share information has been retroactively
restated for the Reverse Stock Split.
As
of December 31, 2020 and 2019, the Company issued 16,634,951 shares for both periods at $0.001 per share.
Preferred
Stocks
Founders
Preferred Stock
On
September 12, 2018, the Company’s board of directors approved, and the Company filed with the Secretary of State of the State of
Nevada, a certificate of designation pursuant to which 15,754,744 shares of the Company’s authorized preferred stock were designated
as Series A Preferred Stock. The Series A Preferred Stock had one vote per share, had other rights, including upon liquidation of the
Company, identical to those of the Company’s common stock, and was automatically convertible into shares of the Company’s
common stock, initially on a one-for-one basis, upon any increase in the Company’s authorized but unissued shares of the Company’s
common stock to a number that will allow for the issued and outstanding shares of Series A Preferred Stock to be converted in full.
On
September 12, 2018, the Company issued and sold an aggregate of 15,754,744 shares of Series A Preferred Stock for an aggregate purchase
price of $16,000.
On
October 14, 2018, the board of directors of Company approved, and on October 22, 2018, the holders of all of the outstanding shares of
the Company’s Series A Preferred Stock consented to, an amendment to the certificate of designation that the Company filed with
the Secretary of State of the State of Nevada to create the outstanding Series A Preferred Stock, to change the designation of the outstanding
Series A Preferred Stock from “Series A Preferred Stock” to “Founder Preferred Stock.” An amendment to the Certificate
to effect such change was filed with the Secretary of State of Nevada on October 29, 2018.
On
December 20, 2018, all of the Founder Preferred Stock was converted into 15,754,744 shares of the Company’s common stock.
Series
A Convertible Preferred Stock
In
January 2019, the Company issued and sold an aggregate of 50,000 shares of Series A Preferred Stock for an aggregate purchase price of
$69,000, or $1.38 per share.
The
Company initiated a private placement of shares of series A convertible preferred stock. During the years ended December 31, 2019 and
2018, the Company sold 50,000 and 35,975, respectively, shares of Series A for total proceeds of approximately $69,000 and $50,000, respectively,
or $1.38 per share.
The
Series A is convertible into shares of the Company’s common stock at the rate of $1.38 per share, subject to adjustments based
on the Company’s future sales of financial instruments at a value less than $1.38 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 85,975 shares of Series A Preferred Stock into a Convertible Promissory Notes in the principal
amount approximately $147,000.
Issuance
of Stock Options
The
Company entered into three separate consulting agreements with provisions for the issuance of options under the Company’s 2019
Stock Options Plan to purchase 685,000, 250,000 and 15,000 shares of the Company’s common stock. The Options will have a life of
three years from the vesting date and an exercise price of $0.001 per share with the following vesting terms:
Option
to purchase 685,000 shares
|
i.
|
385,000 shares vest upon
the signing of the consulting agreement; and
|
|
ii.
|
300,000 shares vest on
the first anniversary of the date on which the consultant serves as full-time employee as the Company’s Vice President of Capital
Markets. As of the expiration of the contract, the employee was not hired by the Company. These options would have been issued if
the performance condition was met. As the performance condition was not met prior to expiration of the contract, these options
were neither issued nor ever granted.
|
Option
to purchase 250,000 shares
|
i.
|
50,000
shares vest upon the completion of the Company’s first Retail Showcase Store. As the performance condition was not met prior
to expiration of the contract, these options were neither issued nor ever granted;
|
|
ii.
|
100,000
shares vest on the first anniversary date on which the consultant serves as the Vice President of Retail Store Development of the
Company as full-time employee. As the performance condition was not met prior to expiration of the contract, these options were
neither issued nor ever granted; and
|
|
iii.
|
100,000
shares to vest 1/12th per month thereafter. As the performance condition was not met prior to expiration of the contract,
these options were neither issued nor ever granted.
|
Option
to purchase 15,000 shares
|
i.
|
15,000
shares to vest upon the completion of the Company’s first Retail Showcase Store. As the performance condition was not met
prior to expiration of the contract, these options were neither issued nor ever granted.
|
The
options that could be granted to the consultants will be performance-based awards to be vested once the individuals are considered
to be employees of the Company. Each of the consultants has the option to become a full-time employee only after Company has received
a minimum of $5,000,000 in debt or equity financing for the Company’s operations (the “Financing”). This is the time
that the Company would begin to operate and use the services of the three option holders. Until the Financing occurs, the Company will
be in the predevelopment stage of its intended business model. As of 12/31/2020 all of these consultant agreements had been terminated,
as such, no options were issued nor ever granted.
An
option to purchase 385,000 shares of the Company’s common stock, for $0.001 per share, was granted and vested on April 1, 2019.
For the year ended December 31, 2019, the compensation expense, classified as professional fees in the statement of operations, was $577,000,
which was calculated using the BSM fair value option-pricing model with key input variables provided by management, as of the date of
issuance: volatility of 324%, fair value of common stock $1.50, term of option 3 years, risk free rate of 2.29% and dividend rate of
$0.
The
table below summarizes the Company’s stock option activities for the reporting period ended December 31, 2020 and 2019 (all
share and per share data reflects the reverse stock split):
|
|
Number of
Stock
Option
Shares
|
|
|
Exercise
Price
Range Per
Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Relative
Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance, January 1, 2019
|
|
|
184,800
|
|
|
$
|
12.50
|
|
|
$
|
12.50
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
385,000
|
|
|
|
0.001
|
|
|
|
0.001
|
|
|
|
1.49
|
|
|
|
578,000
|
|
Canceled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2019
|
|
|
569,800
|
|
|
$
|
–
|
|
|
$
|
4.05
|
|
|
$
|
–
|
|
|
$
|
423,000
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Canceled
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(184,800
|
)
|
|
|
12.50
|
|
|
|
12.50
|
|
|
|
–
|
|
|
|
–
|
|
Balance, December 31, 2020
|
|
|
385,000
|
|
|
$
|
–
|
|
|
$
|
0.001
|
|
|
$
|
–
|
|
|
$
|
7,315
|
|
Earned and exercisable, Dec 31, 2020
|
|
|
385,000
|
|
|
$
|
–
|
|
|
$
|
0.001
|
|
|
$
|
–
|
|
|
$
|
7,315
|
|
Unvested, December 31, 2020
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The
following table summarizes information concerning outstanding and exercisable stock options as of December 31, 2020:
|
|
|
Stock Options Outstanding
|
|
|
|
|
|
Stock Options Exercisable
|
|
Range of Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Average
Remaining
Contractual
Life (in
years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Average
Remaining
Contractual
Life (in
years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.001
|
|
|
|
385,000
|
|
|
|
1.25
|
|
|
$
|
0.001
|
|
|
|
385,000
|
|
|
|
1.25
|
|
|
$
|
0.001
|
|
Warrants
Issued
The
table below summarizes the Company’s warrant activities for the reporting period ended December 31, 2020 and 2019
|
|
Number
of warrants issued
|
|
|
Exercise
Price
|
|
|
Weighted
Average Exercise Price
|
|
Balance,
January 1, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
253,000
|
|
|
|
1.50
|
|
|
|
1.50
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance,
December 31, 2019
|
|
|
253,000
|
|
|
|
1.50
|
|
|
|
1.50
|
|
Granted
|
|
|
100,804
|
|
|
|
1.50
|
|
|
|
1.50
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance,
December 31, 2020
|
|
|
353,804
|
|
|
|
1.50
|
|
|
|
1.50
|
|
Note
8 – Deferred Tax Assets and Income Tax Provision
Deferred
Tax Assets
At
December 31, 2020, the Company had net operating loss (“NOL”) carry forwards for Federal income tax purposes of
$1,425,000 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 $1,425,000 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.
On
September 12, 2018, the Company believes that an “ownership change” has occurred within the meaning of Sections 382 and 383
of the Code. An ownership change is generally defined as a more than 50 percentage point increase in equity ownership by “5 percent
shareholders” (as that term is defined for purposes of Sections 382 and 383 of the Code) in any three-year period or since the
last ownership change if such prior ownership change occurred within the prior three-year period. As a result of the ownership change
on September 12, 2018, the limitations on the use of pre-change losses and other carry forward tax attributes in Sections 382 and 383
of the Code apply and the Company will not be able to utilize any portion of their NOL carry forwards from the years prior to December
31, 2017 and the portion of the NOL for 2018 allocable to the portion of the year prior to September 12, 2018. The utilization of the
NOL for 2018 allocable to the portion of the year after September 12, 2018 and the NOLs from subsequent years should not be affected
by the ownership change on the September 12, 2018.
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 increased by approximately $93,000 and
$161,000 for the reporting periods ended
December 31, 2020 and 2019, respectively.
Components
of deferred tax assets are as follows as of December 31:
|
|
2020
|
|
|
2019
|
|
Net deferred tax assets – Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax benefit from NOL carry-forwards
|
|
$
|
299,000
|
|
|
$
|
206,000
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(299,000
|
)
|
|
|
(206,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
−
|
|
|
$
|
−
|
|
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:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance on net operating loss carry-forwards
|
|
|
(21.0
|
)
|
|
|
(21.0
|
)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Note
9 – 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 non-adjusting event:
On
January 5, 2021, Piers Cooper (“Mr. Cooper”), our President and a member of our Board of Directors, resigned as an
officer and director of our company (“Termination Agreement”). As part of the Termination Agreement, Mr. Cooper’s
agreed to return 3,674,330 shares of the Company’s common stock (“Cancelled Shares”). The Cancelled shares
were to be returned within thirty days of Mr. Cooper’s execution of the Termination Agreement, which was January 5, 2021.
The Cancelled Shares were returned and cancelled on April 19, 2021.
In
January 2021, the Company issued a promissory note for cash amounting to $15,000 with 8% annual interest per year and a maturity date
of March 31, 2022. Interest will be computed starting January 11, 2021 and payable at maturity date together with the principal amount.
In the event of default, the interest rate of the note shall increase to 10% per annum and computed on the basis of the actual number
of days elapsed and a 365-day year.
In
February 2021, the Company issued a promissory note for cash amounting to $25,000 with 10% annual interest per year and a maturity date
of February 19, 2022. The principal and accrued interest is payable in a single installment on or before the maturity date. In the event
of default, the interest rate of the note shall increase to 15% per annum and computed on the basis of the actual number of days elapsed
and a 365-day or 366-day year.
In
March 2021, the Company issued a convertible promissory note in the amount of $55,000 (the “Note”). The total proceeds
were approximately $50,000, due to approximately $5,000 for an original issue discount. The Note is non-interest bearing with the principal
due and payable starting in March 2022. Any amount of unpaid principal on the date of maturity will accrue interest at rate of
10% per annum (default interest). The principal amount and all accrued interest are convertible into shares of the Company’s common
stock, as of the date of issuance, at a rate of $1.00 per share (“Conversion Rate”). 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 27,500 shares of the Company’s common
stock for a purchase price of $1.50 per share, subject to adjustments.
In
February 2021, the Company signed a new consulting agreement that granted one of its shareholders an option to purchase
750,000 shares of the Company’s common stock at $0.001 per share for the consultancy work provided from August 2020
to February 2021. The options were fully vested on the date of issuance.
In
March 2021, the CEO agreed to forgive approximately $68,000 due to him.
In
March 2021, the CFO agreed to reduce amount due to him from approximately $127,000 to $30,000. For the reduction of $97,000, the
Company will issue 75,000 shares of common stock. The remaining liability of $30,000 will be paid in cash.
In April 2021, the
Company issued a promissory note for cash amounting to $8,550 with 0% annual interest per year if paid at a maturity date of July 5,
2021. In the event of default, the interest rate of the note shall increase to 8% per annum and computed on the basis of the actual number
of days elapsed and a 365-day or 366-day year.
In April 2021, an option holder exercised two options for 385,000 and 750,000
shares of the Company’s common stock at an exercise price of $0.001 for both options. The shares for the options have yet to be issued.
In
April 2021, the Company issued a promissory note for cash amounting to $50,000 with 10% annual interest per year and a maturity date
of April 22, 2022. The principal and accrued interest is payable in a single installment on or before the maturity date. In the event
of default, the interest rate of the note shall increase to 15% per annum and computed on the basis of the actual number of days elapsed
and a 365-day or 366-day year.