Note
1 – Organization and Accounting Policies
CalEthos,
Inc. (the “Company”) (fka RealSource Residential, Inc.) 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.
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 bylaws 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.
On
December 20, 2018, all outstanding shares of Founder Preferred Stock was converted in to shares of the Company’s common stock on
a one-for-one basis pursuant to the terms of the Founder Preferred Stock.
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. The primary activity of the Company’s management is to seek and investigate various
opportunities in the California cannabis industry, and if such investigation warrants, acquire assets and create a business around them,
acquire part or all of an operating cannabis business or invest in a joint venture with other more established companies already in the
cannabis industry. The Company will not restrict its search to any specific business, segment of the cannabis industry or geographical
location and the Company may participate in a business venture of virtually any kind or nature that the board of directors believe is
beneficial to the Company and its shareholders.
Financial
Statement Presentation
The
accompanying unaudited condensed financial statements have been prepared in conformity with generally accepted accounting principles
in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation
S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared
in accordance with GAAP, have been condensed or omitted. GAAP requires management to make estimates and assumptions that affect reported
amounts and related disclosures. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary
for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31, 2020. The balance sheet as of December 31, 2019 has been
derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP for
complete financial statements. For further information, refer to the financial statements and notes thereto contained in the Annual Report
on Form 10-K for the year ended December 31, 2019. The notes to the unaudited condensed financial statements are presented on a going
concern basis unless otherwise noted.
Basis
of Presentation
The
accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern. The Company
has no established operations. The Company incurred a net loss of approximately $476,000 for the three months ended March 31, 2020 and
had an accumulated deficit of approximately $9,802,000 as of March 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 condensed 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.
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 consolidated 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 consolidated statement of operations.
Earnings Per Share
We use ASC 260, “Earnings
Per Share” for calculating the basic and diluted earnings (loss) per share. We compute basic earnings (loss) per share
by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is
computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding
during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and warrants
and stock awards. For periods with a net loss, basic and diluted loss per share 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 1,690,214 common share equivalents
at March 31, 2020 and 484,000 common share equivalents at March 31, 2019. For the three months ended March 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 – Accounts Payable and Accrued Liabilities
The
following table summarizes the Company’s accounts payable and accrued expense balances as of the date indicated:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Trade payables
|
|
$
|
224,000
|
|
|
$
|
187,000
|
|
Accrued liabilities
|
|
|
196,000
|
|
|
|
176,000
|
|
Accrued interest
|
|
|
3,000
|
|
|
|
−
|
|
Accounts payable and
accrued expenses
|
|
$
|
423,000
|
|
|
$
|
363,000
|
|
Note
3 – Convertible Promissory Notes
During
the period ended March 31, 2020, the Company issued convertible promissory notes in the amount of $146,000 (the “Notes”).
The Notes were issued in exchange for the 85,975 shares of series A convertible preferred stock. The Notes are non-interest bearing with
the principal due and payable starting on February 28, 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 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 73,000 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.
As of March 31, 2020, the amortization expense was approximately $161,000.
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.
As
of March 31, 2020 and 2019, convertible promissory notes consisted of the following
|
|
2020
|
|
|
2019
|
|
Principal amount
|
|
$
|
653,000
|
|
|
$
|
506,000
|
|
Original issue discount
|
|
|
(2,000
|
)
|
|
|
(19,000
|
)
|
Warrant discount
|
|
|
(10,000
|
)
|
|
|
(79,000
|
)
|
Conversion feature discount
|
|
|
(10,000
|
)
|
|
|
(85,000
|
)
|
Net balance
|
|
$
|
631,000
|
|
|
$
|
323,000
|
|
Interest expense on default
convertible notes amounting to $3,000 and $0 for the three months ended March 31, 2020 and 2019, respectively.
Note
4 – 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 events:
Subsequent
to March 31, 2020, the Company issued six (6) additional Notes for total cash proceeds of $60,000.
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 instalment 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
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 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
March 2021, the CEO agreed to forgive approximately $68,000 due to him.
In
March 2021, the CFO agree 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 instalment 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.