CalEthos, Inc. - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File No. 000-50331

CalEthos, Inc.

(Exact name of registrant as specified in its charter)

(714) 352-5315

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒`

As of August 14, 2023, there were 14,495,621 outstanding shares of the registrant’s common stock, par value $0.001 per share.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

CalEthos, Inc.

For the Six Months Ended June 30, 2023

Index to the Condensed Consolidated Financial Statements

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:

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.

CalEthos, Inc.

Condensed Consolidated Balance Sheets

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.

CalEthos, Inc.

Unaudited Condensed Consolidated Statements of Operations

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.

CalEthos, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Deficit

For the Three and Six Months Ended June 30, 2023 and 2022

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.

CalEthos, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30,

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.

CalEthos, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 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 June 30, 2023 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These interim unaudited condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim six-month periods ended June 30, 2023 and 2022. The results for the six months ended June 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 $416,000 for the six months ended June 30, 2023 and had an accumulated deficit of approximately $15,066,000 as of June 30, 2023. 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 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 the development of its 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 six months ended June 30, 2023 and 2022 because their inclusion would be anti-dilutive. Common share equivalents amounted to 6,000,250 as of June 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.

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 June 30, 2023, the Company has incurred and capitalized approximately $135,000 of cost for the development of the Data Center and capitalized approximately $14,000 of interest expense from 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 plans to complete this development phase by the end of the third quarter of 2023 and the estimated cost to be approximately $500,000.

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

Accrued Interest

The following table presents the details of accrued interest as of the dates indicated:

SCHEDULE OF ACCRUED INTEREST

Note 4 – Notes Payable

NOTES PAYABLE

The table below summarizes the transactions as of the dates indicated:

SCHEDULE OF NOTES PAYABLE

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 $3,000, respectively, as of June 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 $14,000, respectively, as of June 30, 2023.

Interest expense on these notes payable amounted to $6,000 and $6,000 for the six months ended June 30, 2023 and June 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

The effective interest rate used to amortize the debt discount for the six months ended June 30, 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

Interest expense on default convertible promissory notes amounted to $229,000 for the six months ended June 30, 2023, of which $14,000 was capitalized as data center cost. The interest expense and amortization of discount on default convertible promissory notes amounted to $37,000 and $1,071,000, respectively, for the six months ended June 30, 2022.

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 three months ended June 30, 2023, the Company recorded compensation expenses of approximately $6,000.

The Non-Qual Option shall vest and become exercisable as follows:

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 June 30, 2023, the Company recorded compensation expenses of approximately $18,000.

As of June 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 six months ending June 30, 2023, 84,304 warrants expired. As of June 30, 2023, the remaining outstanding balance of warrants is 1,684,000, with a weighted average exercise price of $1.84, average remaining life of 0.46 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2022.

This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with the Securities and Exchange Commission. See “Cautionary Note Regarding Forward Looking Statements.”

Plan of Operations

As of the filing of this Report, it is our plan to continue our focus on building a large-scale, clean-energy-powered, data center operation using the latest energy-efficient cooling technologies and to provide wholesale colocation services to enterprise IT and hyperscale customers. To implement this plan, we have optioned 80 acres of land for the initial phase of development and contracted HDR Engineering, Inc., a data center architect and engineering firm (“HDR”) to provide master planning services that include site feasibility and a shovel-ready site development plan. In addition, we are having on-going discussions and negotiations to acquire clean energy from the local power utility and nearby geothermal power plants and solar farms and contracting a network engineering firm to evaluate and engineer various paths to run conduit for accessing close-by internet fiber networks.

On June 23, 2023 we engaged HDR to complete a feasibility study and site development master plan. Once the plan is developed, we will submit plans to authorities for approval and for permits to start construction. We expect, based on all related factors, that a submittable plan, which will include civil engineering, data center and infrastructure design and construction schedule, will take approximately three to six months to complete. Once submitted to the appropriate governmental departments and agencies for approval, it is expected that it could take another three months or more before we receive the required permits to start construction, and that the construction could take another six to twelve months to complete depending on supply chain issues at the time for data center, electrical and communication connectivity components of the data center build.

As we move through the development process to build a clean-energy powered data center operation, we will continue to refine and finalize the courses of action needed to implement our business plan and operations. As a result, management has not fully determined our actual short-term or long-term capital requirements, which management expects to be substantial.

It is anticipated that we will incur significant expenses in the implementation of our business plan as described herein, and that we will require substantial financing to complete the development and construction of the planned data center operation. A failure to obtain this necessary capital when required on acceptable terms, or at all, could force us to delay, limit, reduce, or terminate our development plans, any commercialization efforts and any other operations. We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs. In addition, even if we are able to obtain sufficient funding to commence our business operations, we may need to pursue additional financing in the future to make expenditures and/or investments to support the growth of our business. In addition, we may require additional capital to pursue our business objectives and respond to new competitive pressures, pay extraordinary expenses or fund our growth, including through acquisitions. Additional funding, however, may not be available when required on terms that are acceptable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when it is required, our ability to commence and grow our proposed business operations, to support our business and to respond to business challenges could be significantly limited.

We currently have only limited capital with which to pay these anticipated expenses. To fund our business plan going forward, we intend to raise funds from investors by issuing common stock, preferred stock and/or debt securities.

Results of Operations

The table summarizes the results of operations for the three and six months ended June 30:

Revenues

The Company had no revenues for the three and six months ended June 30, 2023 and 2022.

Expenses

Operating expenses for the three and six months ended June 30, 2023 were $154,000 and $251,000, respectively, compared to $3,568,000 and $6,987,000 for the three and six months ended June 30, 2022, respectively. The decrease in both the three and six month June 30, 2023 operating expenses was attributable to both the decline in our professional fees and equity-based compensation.

Liquidity and Capital Resources

The Company’s financial position as of June 30, 2023 and December 31, 2022 were as follows:

Working Capital Deficit

The Company’s working capital deficit increased by $622,000 as of June 30, 2023 from $3,143,000 as of December 31, 2022. The decline was due to the use of approximately $178,000 for operating expenses and $184,000 for data center development costs, and the increase in our accounts payable and accrued expense of approximately $268,000.

Cash Flows

Cash flows used in operating activities

Net cash used in operating activities decreased by $335,000 during the six months ended June 30, 2023 from $513,000 for six months ended June 30, 2022. The decrease resulted from the reduction in our operating expense related to professional fees during the six months ended June 30, 2023.

Cash flows used in investing activity

Net cash used in investing activity increased by $77,000 during the six months ended June 30, 2023 from $107,000 for the six months ended June 30, 2022. The increase resulted from the expenditures during the six months ended June 30, 2023 for the development activities for our data center project.

Cash flows used in financing activities

Net cash used in financing activities decreased by $25,000 during the six months ended June 30, 2023 as compared to $25,000 for the six months ended June 30, 2022. The decrease resulted from our not making any repayments of our outstanding notes payable.

Capital Requirements

We estimate that we will require up to $2 million for expenses and operating costs to complete the development of a comprehensive plan for our planned clean-energy powered, containerized, immersion-cooled data center operation. Once the plans are approved for construction by the requisite authorities, we estimate the initial phase of our planned data center operation will cost between $60 to $75 million to build.

Past the plan development phase, we will need to raise capital in order to build our planned operations and achieve our growth targets, which we plan to raise from investors by issuing common stock, preferred stock and/or debt securities. However, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms when it is needed. The precise amount and timing of our funding needs cannot be determined accurately at this time, and will depend on a number of factors, including but not limited to the condition of the capital market, investor interest in our business plan, demand for our services by enterprise customers, the timing of approvals from authorities to start construction, the management of working capital, and reasonable payment terms and conditions for the purchase of the goods and services we will need to build our data center operation.

Critical Accounting Policies

The preparation of condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying disclosures of our company. Although these estimates are based on management’s knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of our company and its wholly-owned subsidiary from the formation date. All material intercompany transactions and balances have been eliminated in consolidation.

Foreign Currency Translation

The financial statements of our foreign subsidiary, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders’ equity (deficit). Gains or losses from foreign currency transactions are recognized in the consolidated statements of operations.

Debt and Debt Discounts

In accordance with ASC 470-20, Debt with Conversion and Other Options, we first allocate the cash proceeds of the notes between the notes and the warrants on a relative fair value basis. Secondly, proceeds are then allocated to the conversion feature.

We account for debt discounts originating in connection with conversion features that remain embedded in the related notes in accordance with ASC 470-20. These costs are classified on the consolidated balance sheet as a direct deduction from the debt liability. We amortize these costs over the term of our debt agreements as financing cost in the consolidated statement of operations.

Stock-Based Compensation

We account for our stock-based compensation under ASC 718, “Compensation – Stock Compensation” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

We use the fair value method for equity instruments granted to non-employees and use the BSM model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant (measurement date) and is recognized over the vesting periods.

Recent Accounting Pronouncements

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.

Off-Balance Sheet Arrangements

As of June 30, 2023, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required under Regulation S-K for smaller reporting companies.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer (our “Certifying Officers”), conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

Based on their evaluation, the Certifying Officers concluded that, as of June 30, 2023, our disclosure controls and procedures were not effective.

The material weakness related to internal control over financial reporting that was identified at June 30, 2022 was that we did not have sufficient personnel staffing in our accounting and financial reporting department. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements.

This control deficiency could result in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis. However, our management believes that the material weakness identified does not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weakness had any effect on the accuracy of our financial statements included as part of this Quarterly Report.

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking action and implementing additional enhancements or improvements, as necessary and as funds allow.

Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Internal Controls

Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

PART II - OTHER INFORMATION

Item 1. 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 1A. Risk Factors

We are a small reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information under this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Unregistered Securities

There have been no sales of unregistered securities within the period covered by this report that would be required to be disclosed pursuant to Item 701 of Regulation S-K.

Repurchases of Shares or of Company Equity Securities

None.

Item 3. Default Upon Senior Securities

As of June 30, 2023, we had notes payable of $61,000, convertible promissory notes payable of $4,613,000 and accrued interest of $558,000, all of which were past due and all of which were in default. See Notes 4 and 5 to our accompanying unaudited condensed consolidated financial statements.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

The following documents are filed as a part of this report or incorporated herein by reference:

SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.