UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-50331
CalEthos, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 98-0371433 | |
|
(State or other jurisdiction
of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
| 11753 Willard Avenue Tustin, California | 92782 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (714) 352-5315
Securities registered under Section 12(b) of the Act:
| None | N/A | |
| Title of each class | Name of each exchange on which registered |
Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by checkmark whether the registrant has (1) 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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by checkmark 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.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] | Smaller reporting company [X] |
| Emerging growth company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common stock, other than shares held by persons who may be deemed affiliates of the registrant, as of June 30, 2019, the last day of the registrant’s most recently completed second fiscal quarter, was $4,281,422, computed by reference to the closing sales price for the registrant’s common stock on June 28, 2019, as reported on The OTC Pink Market.
As of March 18, 2020, there were 16,634,951 outstanding shares of the registrant’s common stock, par value $0.001 per share.
CalEthos, Inc.
Annual Report on Form 10-K
For the Fiscal-Year Ended December 31, 2019
TABLE OF CONTENTS
| i |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are “forward-looking statements”. Forward-looking statements can be identified by the use of forward-looking terminology, such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “seek”, “estimate”, “project”, “could”, “may” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader of the forward-looking statements that any such statements that are contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products and other factors, some of which are described in this report and some of which are discussed in our other filings with the Securities and Exchange Commission. These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
Important factors to consider in evaluating any forward-looking statements include:
| ● | our ability to diversify our operations; | |
| ● | our ability to implement our business plan; | |
| ● | our ability to attract key personnel; | |
| ● | our ability to operate profitably; | |
| ● | our ability to efficiently and effectively finance our operations, and/or purchase orders; | |
| ● | inability to achieve future sales levels or other operating results; | |
| ● | inability to raise additional financing for working capital; | |
| ● | inability to efficiently manage our operations; | |
| ● | the inability of management to effectively implement our strategies and business plans; | |
| ● | the unavailability of funds for capital expenditures and/or general working capital; | |
| ● | the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain; | |
| ● | deterioration in general or regional economic conditions; | |
| ● | changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate; | |
| ● | adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations; |
| ii |
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.
Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. If, as now, we are considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.
Throughout this report, unless otherwise designated, the terms “we,” “us,” “our,” “the Company” and “our company” refer to CalEthos, Inc., a Nevada corporation. All amounts are in U.S. Dollars, unless otherwise indicated.
| iii |
| 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 newly appointed 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 intention of Mr. Campbell to establish our company in the rapidly-growing legal cannabis industry, initially in the State of California, and our current management is currently exploring a number of business opportunities for engaging our company in such a business. 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.
| 4 |
At this time, the primary activity of our management is to seek, investigate and, if such investigation warrants, acquire an interest in business opportunities in the California cannabis industry. We will not restrict our search to any specific business, segment of the cannabis industry or geographical location and we may participate in a business venture of virtually any kind or nature.
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 cannabis 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.
| 5 |
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.
| 6 |
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 cannabis 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.
| 7 |
Recent Developments
Over the course of 2019, our Chief Executive Officer, Michael Campbell, and our President, Piers Cooper, developed a plan to build a chain of large-format retail store and event center facilities to serve the needs of the rapidly-growing Southern California cannabis market. As currently contemplated, each cannabis store/event center will be called SHOWCASE and include fifteen to twenty thousand square feet of retail showroom and three to five thousand square feet of conference space for daily educational events, classes, workshops and seminars. Our goal is to become a dominate cannabis retailer in the Southern California market by operating up to ten SHOWCASE facilities over the next three years that are strategically located in cities with upscale demographics. Numerous reports in the cannabis industry project that the Southern California market for cannabis products could be worth $7+ billion per year by 2025.
As previously announced, on January 16, 2020, we entered into a Stock Purchase Agreement dated as of January 15, 2020 (the “Purchase Agreement”) with Terra Tech Corp., a Nevada corporation (the “Seller”), pursuant to which we agreed to purchase from the Seller (the “Share Purchase”) all of the issued and outstanding capital stock of 1815 Carnegie Santa Ana Corp., a California corporation and a wholly-owned subsidiary of the Seller (“Carnegie Corp.”), for an aggregate purchase price of $6.0 million consisting of (i) $3.0 million in cash and (ii) $3.0 million in shares of the Company’s common stock (the “Share Consideration”).
The primary assets of Carnegie Corp. are the state and local licenses and permits required to operate a cannabis dispensary at the approximately 29,500-square-foot industrial building located at 1815 Carnegie Avenue, Santa Ana, California (the “Property”). The Purchase Agreement contemplates that in connection with the closing of the Share Purchase, we will enter into a five-year real property lease of the Property from an affiliate of the Seller. Pursuant to the Purchase Agreement, the closing is conditioned upon, among other things, our raising a minimum of $4 million of gross proceeds from the sale of debt or equity securities and other customary closing conditions. The Purchase Agreement also provides for limited termination rights, including, among others, a right of termination by the Seller in the event the Share Purchase had not been consummated before February 28, 2020, which condition was not met.
We are currently in discussions with the Seller regarding the certain proposed amendments to the Purchase Agreement, including an amendment to extend the date by which we must raise the necessary capital to finance the purchase. However, there can be no assurance that we will reach an agreement with the Seller regarding any such amendments or that the Seller will not terminate the Purchase Agreement prior to executing any amendments.
We are also pursuing other opportunities to purchase or lease facilities in Los Angeles, Orange and San Diego counties that currently have the required state and local licenses and permits for a dispensary business.
Competition
As we currently have no operations, this section is not applicable.
| 8 |
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.
| 9 |
| Item 5. | Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities. |
Our common stock is listed for quotation on the OTC Pink Market under the trading symbol “BUUZ”. Trading in our common stock in the over-the-counter market has been limited and the quotations set forth below are not necessarily indicative of actual market values. The following table sets forth, for the periods indicated, the high and low closing prices for each quarter within the last two fiscal years ended December 31, 2019 as reported by the quotation service operated by the OTC Markets Group. All quotations for the OTC Pink Market reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| Quarter Ended | High | Low | ||||||
| December 31, 2019 | $ | 1.1000 | $ | 1.1000 | ||||
| September 30, 2019 | 1.0000 | 1.0000 | ||||||
| June 30, 2019 | 1.6000 | 1.6000 | ||||||
| March 31 2019 | 1.5000 | 1.5000 | ||||||
| December 31, 2018 | 2.2000 | 0.5301 | ||||||
| September 30, 2018 | 2.7200 | 0.5062 | ||||||
| June 30, 2018 | 1.5000 | 0.8750 | ||||||
| March 31 2018 | 1.0000 | 0.7750 | ||||||
On March 18, 2020, the closing price for our common stock on the OTC Pink Market as reported by the quotation service operated by the OTC Markets Group was $1.25.
Transfer Agent
Nevada Agency and Transfer Company is the registrar and transfer agent for our common shares. Their address is 50 West Liberty, Suite 880 Reno, Nevada, 89501 Telephone: 775-322-0626, Facsimile: 775-322-5623.
Holders of Our Common Stock
As of March 18, 2020, there were 51 registered holders of record of our common stock. As of such date, 16,634,951 shares of common stock were issued and outstanding. The number of our shareholders of record excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.
Dividend Policy
We have not declared or paid any cash dividends since inception. Although there are no restrictions that limit our ability to pay dividends on our common shares, we do not intend to pay dividends for the foreseeable future.
Equity Compensation Plan Information
We currently do not have an equity compensation plan in place.
| Item 6. | Selected Financial Data. |
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation. |
The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Annual Report.
| 10 |
Our audited financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.
Plan of Operations
Following the Change of Control Transactions, as described above, our board of directors determined to establish our company in the rapidly-growing legal cannabis industry. As of the filing of this Report, our new management is still in the process of refining and finalizing the course of action needed to implement our proposed new business operations. As a result, management has not determined our actual short-term or long-term cash requirements, which management expects to be substantial.
We will require substantial financing to commence meaningful business operations and to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development plans, any commercialization efforts or 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 and 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 funds, however, may not be available when we need them 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 we require it, our ability to commence our proposed business operations, to continue to grow and support our business and to respond to business challenges could be significantly limited.
Over the course of 2019, our Chief Executive Officer, Michael Campbell, and our President, Piers Cooper, developed a plan to build a chain of large-format retail stores and event centers facilities to serve the needs of the rapidly-growing Southern California cannabis market. As currently contemplated, each cannabis store/event center will be called SHOWCASE and include fifteen to twenty thousand square feet of retail showroom and three to five thousand square feet of conference space for daily educational events, classes, workshops and seminars. Our goal is to become a dominate cannabis retailer in the Southern California market by operating up to ten SHOWCASE facilities over the next three years that are strategically located in cities with upscale demographics.
As previously announced, on January 16, 2020, the Company entered into a Stock Purchase Agreement dated as of January 15, 2020 (the “Purchase Agreement”) with Terra Tech Corp., a Nevada corporation (the “Seller”), pursuant to which the Company agreed to purchase from the Seller (the “Share Purchase”) all of the issued and outstanding capital stock of 1815 Carnegie Santa Ana Corp., a California corporation and a wholly-owned subsidiary of the Seller (“Carnegie Corp.”), for an aggregate purchase price of $6.0 million consisting of (i) $3.0 million in cash and (ii) $3.0 million in shares of the Company’s common stock (the “Share Consideration”).
In addition, the Company will require an additional $3.5 million for buildout, furniture, fixture systems and equipment and $1.5 million for opening the store and working capital. The Company plans to fund the required capital needs through the sale of the Company’s debt or equity securities to be determined based on the current market conditions.
The primary assets of Carnegie Corp. are the state and local licenses and permits required to operate a cannabis dispensary at the approximately 29,500-square-foot industrial building located at 1815 Carnegie Avenue, Santa Ana, California (the “Property”). The Purchase Agreement contemplates that in connection with the closing of the Share Purchase, the Company will enter into a five-year real property lease of the Property from an affiliate of the Seller. Pursuant to the Purchase Agreement, the closing is conditioned upon, among other things, the Company raising a minimum of $4.0 million of gross proceeds from the sale of the Company’s debt or equity securities and other customary closing conditions. The Purchase Agreement also provides for limited termination rights, including, among others, a right of termination by the Seller in the event the Share Purchase had not been consummated before February 28, 2020, which condition was not met.
| 11 |
The Company is currently in discussions with the Seller regarding the certain proposed amendments to the Purchase Agreement, including an amendment to extend the date by which the Company must raise the necessary capital to finance the purchase. However, there can be no assurance that the Company will reach an agreement with the Seller regarding any such amendments or that the Seller will not terminate the Purchase Agreement prior to executing any amendments. In addition, there is no assurance the Company can raise the required capital to execute the Purchase Agreement or the funds to complete the buildout and working capital requirements.
Results of Operations for the years ended December 31, 2019 and 2018
The following summary should be read in conjunction with our audited financial statements for the years ended December 31, 2019 and 2018
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | $ | - | $ | - | ||||
| Operating Expenses | ||||||||
| Professional fees | 1,154,000 | 215,000 | ||||||
| General and administrative | 40,000 | 13,000 | ||||||
| Total Expenses | 1,194,000 | 228,000 | ||||||
| Financing costs | (305,000 | ) | - | |||||
| Net loss | $ | (1,499,000 | ) | $ | (228,000 | ) | ||
Revenue
For the years ended December 31, 2019 and 2018, we had no revenues.
Expenses
Our operating expenses increased from $228,000 in year ended December 31, 2018 to $1,194,000 in the year ended December 31, 2019, which represented an increase of $966,000. The increase was attributable to the increase in (1) hiring of consultants to analyze and determine the Company’s future business model for approximately $962,000, (2) the use of legal services for approximately $122,000, (3) accounting and auditing fees for approximately $70,000, and (3) general and administrative expenses for approximately $40,000.
Financing Costs
Our financing cost of approximately $305,000 is attributable to the amortization of the relative fair value of warrants, original issue discount and the value ascribed to the beneficial conversion all of which related to the issuance of convertible debentures.
| 12 |
Liquidity and Capital Resources
Our financial position as of December 31:
Working Capital
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Current Assets | $ | 125,000 | $ | 14,000 | ||||
| Current Liabilities | (686,000 | ) | (180,000 | ) | ||||
| Working (Deficit) Capital | $ | (561,000 | ) | $ | (166,000 | |||
Working capital decreased from a $166,000 deficit as of December 31, 2018 to a deficit of $561,000 as of December 31, 2019 for a total change of $(395,000). The change was a result of our increase in accruals for services rendered by consultants during the year ended December 31, 2019. Also, the issuance of convertible debentures with a face value of $506,000, which included an original issue discount of $46,000, for net proceeds of $460,000. The net proceeds were allocated between the relative fair value of $204,000 for the associated warrants issued and $239,000 associated with the beneficial conversion feature of the convertible debentures.
Cash Flows
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net cash used by operating activities | $ | (418,000 | ) | $ | (45,000 | ) | ||
| Net cash provided by (used in) investing activities | 12,000 | (12,000 | ) | |||||
| Net cash provided by financing activities | 529,000 | 50,000 | ||||||
| Change in cash during the period | 123,000 | (7,000 | ) | |||||
| Cash, beginning of period | - | 7,000 | ||||||
| Cash, end of period | $ | 123,000 | $ | - | ||||
Cash used in operating activities increased by approximately $373,000, which predominantly related to expenditures for legal and consultant fees incurred in implementing our planned business operations. Operating activities used $45,000 in cash for the year ended December 31, 2018 for operating expenses.
Cash provided by financing activities related to the approximately $69,000 from the sale of our series A convertible preferred stock and approximately $460,000 from the sale of our convertible promissory notes.
Going Concern
The audited financial statements included in this Report have been prepared on a going concern basis, which implies that our company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business. We are a “shell company” with no meaningful assets or operations presently. Our company has not generated revenues in the last two fiscal years, has never paid any dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of our company as a going concern is dependent upon: (i) continued financial support from our shareholders; (ii) the ability of our company to continue raising necessary debt or equity financing to achieve its operating objectives; and (iii) our ability to acquire assets and establish a business or merge or otherwise acquire business opportunities.
Our independent auditors included an explanatory paragraph in their report on our financial statements for the year ended December 31, 2019 regarding concerns about our ability to continue as a going concern. In addition, our financial statements contain further note disclosures in this regard. The implementation of our business plan is dependent upon our ability to continue raising sufficient new capital from equity or debt markets in order to fund our on-going operating losses and real estate acquisition activities. The issuance of additional equity securities could result in a significant dilution in the equity interests of our current stockholders.
Application of Critical Accounting Policies
The preparation of 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 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.
| 13 |
Basis of Presentation
The financial statements and related notes included in this Annual Report are presented in accordance with United States generally accepted accounting principles (“US GAAP”) and are expressed in US dollars.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAP requires our 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 period. We base our estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are readily apparent from other sources. The actual results experienced by our company may differ materially from our management’s estimates. To the extent there are material differences, future results may be affected. Estimates used in preparing these financial statements include the fair value of share-based payments, deferred income taxes, financial instruments and assumptions relating to going concern.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statements and the tax basis of assets and liabilities, and net operating loss carry forwards based on using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the year that includes the enactment date. Deferred tax assets are only recognized to the extent that it is considered more likely than not that the assets will be realized.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing the net loss by the weighted average number of outstanding common shares during the year. Diluted loss per share gives effect to all potentially dilutive common shares outstanding during the year, including convertible debt, stock options and share purchase warrants, using the treasury stock method. The computation of diluted loss per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on loss per share.
Recent Accounting Pronouncements
We do not believe that any recently issued, but not yet effective accounting standards if currently adopted, will have a material effect on our financial statements.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial position, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
| 14 |
| Item 8. | Financial Statements and Supplementary Data. |
Our financial statements and notes thereto and the reports of RBSM LLP and Novogradac & Company LLP, our independent registered public accounting firms, are set forth on pages F-1 through F-15 of this Report.
| Item 9. | Changes In and Disagreements With Accountants On Accounting and Financial Disclosure. |
Not Applicable
| Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures
As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act, our principal executive officer and principal financial officer evaluated our company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, these officers concluded that as of the end of the period covered by this Annual Report on Form 10-K, these disclosure controls and procedures were not effective.
The conclusion that our disclosure controls and procedures were not effective was due to the presence of material weaknesses in internal control over financial reporting as identified below under the heading “Management’s Report on Internal Control Over Financial Reporting.” Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdown can occur because of simple error or mistake.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) for our company. Our internal control over financial reporting is designed to provide reasonable assurance, not absolute assurance, regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
| 15 |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the design and operation of our internal control over financial reporting as of December 31, 2019 based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, our management concluded our internal control over financial reporting was not effective as at December 31, 2019 due to the following material weaknesses which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines; (iii) inadequate security and restricted access to computer systems including insufficient disaster recovery plans; and (iv) no written whistle-blower policy.
We plan to take steps to enhance and improve the design of our internal controls over financial reporting when our company has sufficient staff to allocate responsibilities. During the period covered by this Report, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes once our financial resources will support the required staffing level: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; (ii) adopt sufficient written policies and procedures for accounting and financial reporting and a whistle-blower policy; and (iii) implement sufficient security and restricted access measures regarding our computer systems and implement a disaster recovery plan. The remediation efforts set out in (i) and (iii) are largely dependent upon our company securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely effected in a material manner.
This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Report.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Changes In Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information. |
None.
| 16 |
| Item 10. | Directors, Executive Officers and Corporate Governance. |
Directors and Executive Officers
At March 28, 2020, our directors and executive officers, their ages and their positions held with our company were as follows:
| Name | Age | Position(s) Held with the Company | ||
| Michael Campbell | 63 | Chairman of the Board and Chief Executive Officer | ||
| Piers Cooper | 59 | President and Board Member | ||
| Dean S. Skupen | 59 | Chief Financial Officer |
There are no arrangements between our directors and any other person pursuant to which our directors were nominated or elected for their positions. There are no family relationships among our directors or officers.
The following biographical information regarding our directors and executive officers.
Michael Campbell. Mr. Campbell became our Chief Executive Officer on September 12, 2018. For the past 18 years, Mr. Campbell has been the managing director of M1 Advisors LLC, a business advisory and consulting firm that has engineered, orchestrated and provided support and services to numerous private-to-public transitions, debt and equity financings and hyper-organic-growth and consolidation strategies in a wide range of industries. In addition, from December 2011 to February 2017, Mr. Campbell was the Chief Executive Officer and a director of NXChain, Inc., a publicly-traded start-up shell company in the cryptocurrency business that was a successor to AgriVest Americas Inc., a publicly-traded start-up shell company that sought to acquire cattle ranches in Brazil for conversion to soybean farms. Mr. Campbell spent the first 20 years of his career in the high-tech industry creating and operating various companies that included a computer retailing operation, data-storage peripheral company with three computer disk-drive manufacturing companies through joint ventures with the Russian, Chinese and Spanish governments, a specialized call-center company for telco broadband provisioning and an online broadband services ordering and order aggregation company with the Regional Bell Operating Companies.
Piers Cooper. Mr. Cooper became our President and a director on September 12, 2018. Mr. Cooper has spent the majority of the last 18 years as a venture capital and private equity investor. In addition, from January 2013 to April 2015, Mr. Cooper was initially Chief Operating Officer and then Chief Executive Officer of Advocate Inc., an enterprise software startup company. Mr. Cooper spent his early career as a management consultant prior to joining Oracle Corp. in 1994 where he held various roles initially in Europe, where he ran advanced technology consulting, then in the U.S., where he ran worldwide business development and subsequently was Vice President of Corporate development and a managing director of the Oracle venture fund.
Dean S. Skupen. Mr. Skupen became our Chief Financial Officer on September 12, 2018. Mr. Skupen is a business advisor who has provided various financial accounting services to, or acted as the Interim Chief Financial Officer for, a number of public companies since 2010. Prior to that, he was a Partner at Stonefield Josephson, Inc. (now Marcum, LLP), an accounting firm with five offices throughout California where he provided auditing and consulting services to public companies and to privately-held entrepreneurial companies transitioning to public ownership in diverse industries. Mr. Skupen graduated from the University of Southern California with a Bachelor of Science degree in Accounting. In addition, he is licensed as a Certified Public Accountant in the State of California.
All of our officers are currently serving in such capacities as consultants to our company, and we presently have no employees. Our officers and directors are also engaged in outside business activities. Our officers and directors, other than Mr. Campbell, anticipate that they will devote limited time to our business until we are no longer a “shell” company and are engaged in an active trade or business The specific amount of time that management will devote to our company may vary from week to week or even day to day, and therefore the specific amount of time that management will devote to our company on a weekly basis cannot be ascertained with any level of certainty. In all cases, management intends to spend as much time as is necessary to exercise its fiduciary duties as officers and directors of our company.
| 17 |
Involvement in Certain Legal Proceedings
None of our directors and executive officers have been involved in any of the following events during the past ten years:
| 1. | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | |
| 2. | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences); | |
| 3. | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; | |
| 4. | being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, where the judgment has not been reversed, suspended, or vacated; | |
| 5. | being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any federal or state securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Director Independence
We currently have two directors: Michael Campbell and Piers Cooper. We have determined that these directors are not independent directors, as that term is used in the Nasdaq Listing Rules of the Nasdaq Stock Market LLC. Once we have acquired significant assets and are no longer a “shell” company, we will appoint one or more independent directors to our board of directors.
Board Committees
We do not have a standing Audit Committee. We do not believe that the lack of an Audit Committee has had or will have any adverse effect on our financial statements, based upon current operations; however, our board of directors will consider establishing an Audit Committee of independent directors as the number of directors increases. Until such time, our board of directors will perform the duties of an Audit Committee including delegating an auditor firm and interacting with them.
We do not have a standing Compensation Committee. Presently, our executive officers, who constitute our only employees, do not take salary or other benefits from our company. As we continue to develop our initial products and commence selling such products on a wholesale or retail basis, we expect to increase the size of our board to include independent directors who will approve the compensation arrangements with our executive officers.
We also do not have a Nominating Committee as we have not adopted any procedures by which security holders may recommend nominees to our board of directors.
| 18 |
Code of Ethics
Effective January 29, 2004, our Board of Directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, members of our board of directors, our company’s officers, contractors, consultants and advisors. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to our company at the address on the cover of this Annual Report.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, and without conducting any independent investigation of our own we believe that during the fiscal year ended December 31, 2019, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with.
| Item 11. | Executive Compensation. |
The following table sets forth all compensation awarded to, earned by or paid to the chief executive officer (“CEO”) of our company during the years ended December 31, 2019 and 2018. No compensation was paid to any other executive officer of our company during such periods.
SUMMARY COMPENSATION TABLE
| Name and Principal Position |
Fiscal
Year |
Salary
($) |
Bonus
($) |
Stock Awards ($) |
Option Awards
($) |
Non-Equity Incentive Plan Compensation
($) |
Nonqualified Deferred Compensation Earnings
($) |
All Other Compensation ($) |
Total
($) |
|||||||||||||||||||||||||||
| Michael Campbell(1) | 2019 | - | - | - | - | - | - | 180,000 | (1) | $ | 180,000 | (1) | ||||||||||||||||||||||||
| Chief Executive Officer | 2018 | - | - | - | - | - | - | 15,000 | (1) | 15,000 | (1) | |||||||||||||||||||||||||
| Nathan W. Hanks(2) | 2019 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Former Chief Executive Officer | 2018 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| (1) | Represents amounts paid to Mr. Campbell under his consulting agreement. |
| (2) | Mr. Hanks resigned as our Chief Executive Officer, and Mr. Campbell was appointed our Chief Executive Office, on September 12, 2018. |
Outstanding Equity Awards At Annual Period End
There were no outstanding equity awards at December 31, 2019.
Aggregated Option Exercises
There were no options exercised by any officer or director of our company during the year ended December 31, 2019.
| 19 |
Long-Term Incentive Plan
Currently, our company does not have a long-term incentive plan in favor of any director, officer, consultant or employee of our company.
Directors Compensation
No director compensation was paid during the years ended December 31, 2019 and 2018 in the form of cash expenses, stock awards, option awards, non-equity incentive plan compensation, pension value and nonqualified deferred compensation earnings or any other type of compensation. We do not currently pay any cash fees to our directors, nor do we pay directors’ expenses in attending board meetings.
Employment Agreements
We are not presently a party to any employment agreements.
Pension and Retirement Plans
Currently, we do not offer any annuity, pension or retirement benefits to be paid to any of our officers, directors or employees, in the event of retirement.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The following table sets forth, as of March 28, 2020, the names, addresses and number of shares of common stock beneficially owned by (i) all persons known to our management to be beneficial owners of more than 5% of the outstanding shares of our common stock, (ii) each director of our company, (iii) each named Executive Officer and (iv) all executive officers and directors of our company as a group (except as indicated, each beneficial owner listed exercises sole voting power and sole dispositive power over the shares beneficially owned):
| Amount and | ||||||||
| Nature of | ||||||||
| Name and Address of | Beneficial | Percent | ||||||
| Beneficial Owner | Ownership | of Class(1) | ||||||
| M1 Advisors LLC(2) | 8,954,199 | 53.8 | % | |||||
| Michael B. Campbell(2) | 8,954,199 | 53.8 | % | |||||
| Piers Cooper(3) | 4,753,467 | 28.6 | %* | |||||
| Dean Skupen(4) | 250,000 | 1.5 | % | |||||
| All executive officers and directors as a group (3 persons) | 937,375 | 83.9 | % | |||||
| * | Less than 1%. |
| (1) | Except as indicated in the footnotes to this table, we believe that all persons named in the table have sole voting and investment power with respect to all common stock shown as beneficially owned by them. In accordance with the rules of the Securities and Exchange Commission (the “Commission”), a person or entity is deemed to be the beneficial owner of common stock that can be acquired by such person or entity within sixty (60) days upon the exercise of options or warrants or other rights to acquire common stock. Each beneficial owner’s percentage ownership is determined by assuming that options and warrants that are held by such person (but not those held by any other person) and which are exercisable within sixty (60) days have been exercised. The inclusion herein of such shares listed as beneficially owned does not constitute an admission of beneficial ownership. |
| (2) | Represents shares of common stock owned of record by M1 Advisors LLC. The address of Michael B. Campbell and M1 Advisors LLC is 11756 Willard Avenue, Tustin, CA 92782. Mr. Campbell is the sole manager of M1 Advisors LLC. |
| (3) | Represents shares of common stock owned of record by a family trust for which Mr. Cooper and his wife are the trustees. The address of Mr. Cooper is 11756 Willard Avenue, Tustin, CA 92782. |
| (4) | Represents shares of common stock of record by DSS Consulting Corporation, a company controlled by Mr. Skupen. The address of DSS Consulting Corporation is 638 Lindero Canyon Road, Oak Park, CA 9137. |
| 20 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
To the best of our knowledge, except as set forth below, during the last fiscal year, there were no material transactions, or series of similar transactions, or any currently proposed transactions, or series of similar transactions, to which we were or are to be a party, in which the amount involved exceeds $120,000 or one percent of the average total assets at year end for each of the last two fiscal years, and in which any director or executive officer, or any security holder who is known by us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest.
| Item 14. | Principal Accountant Fees And Services. |
Audit Fees
The aggregate fees billed for professional services rendered by RBSM LLP, our principal accountants for the years ended December 31, 2019 and 2018, for the audit of financial statements, quarterly reviews of our interim financial statements and services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements for these periods were as follows:
|
For the Years ended December 31, |
||||||||
| 2019 | 2018 | |||||||
| Audit Fees and Audit Related Fees | $ | 10,000 | $ | 14,000 | ||||
| Tax Fees | — | — | ||||||
| All Other Fees | — | — | ||||||
| Total | $ | 10,000 | $ | 14,000 | ||||
In the above table, “audit fees” are fees billed by our company’s external auditor for services provided in auditing our company’s financial statements for the periods indicated above. “Audit-related fees” are fees not included in audit fees that are billed by the auditor for assurance and related services, including quarterly reviews, that are reasonably related to the performance of the audit of our company’s financial statements. “Tax fees” are fees billed by the auditor for professional services rendered for tax compliance, tax advice and tax planning. “All other fees” are fees billed by the auditor for products and services not included in the foregoing categories.
Our board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by our board of directors either before or after the respective services were rendered.
| 21 |
| Item. 15. | Exhibits, Financial Statement Schedules. |
| 22 |
| Exhibit | ||
| Number | Description | |
| 101.ins** | XBRL Instance Document | |
| 101.xsd** | XBRL Taxonomy Extension Schema Document | |
| 101.cal** | XBRL Taxonomy Calculation Linkbase Document | |
| 101.def** | XBRL Taxonomy Definition Linkbase Document | |
| 101.lab** | XBRL Taxonomy Label Linkbase Document | |
| 101.pre** | XBRL Taxonomy Presentation Linkbase Document |
| ** | Furnished. Not filed. Not incorporated by reference. Not subject to liability. |
| *** | A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. |
| 23 |
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 1st day of April 2020.
| CalEthos, Inc. | ||
| By: | /s/ Michael Campbell | |
| Name: | Michael Campbell | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Michael Campbell | Chief Executive Officer and Director | Date: March 30, 2020 | ||
| Michael Campbell | (Principal Executive Officer) | |||
| /s/ Dean S. Skupen | Chief Financial Officer | Date: March 30, 2020 | ||
| Dean S. Skupen | (Principal Accounting Officer) | |||
| /s/ Piers Cooper | Director | Date: March 30, 2020 | ||
| Piers Cooper |
| 24 |
CalEthos, Inc.
December 31, 2019 and 2018
Index to the Financial Statements
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
CalEthos, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of CalEthos, Inc. (the “Company”), a Nevada corporation, as of December 31, 2019 and 2018, and the related statements of operations, changes in stockholders’ (deficit) equity and cash flows for the years ended December 31, 2019 and 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1, the Company had an accumulated deficit at December 31, 2019, and a net loss and periodic cash flow difficulties for year ended December 31, 2019. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (the “PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2018.
/s/RBSM LLP
RBSM LLP
March 30, 2020
Larkspur, CA
New York Washington DC Nevada California Greece China and India
Member ANTEA INTERNATIONAL with offices worldwide
| F-2 |
Balance Sheets
As of December 31,
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 123,000 | $ | - | ||||
| Cash held by officer | - | 12,000 | ||||||
| Prepaid expenses | 2,000 | 2,000 | ||||||
| Total Current Assets | 125,000 | 14,000 | ||||||
| Total Assets | $ | 125,000 | $ | 14,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | 363,000 | $ | 180,000 | ||||
| Convertible promissory notes, net | 323,000 | - | ||||||
| Total Current Liabilities | 686,000 | 180,000 | ||||||
| Total Liabilities | 686,000 | 180,000 | ||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Series A convertible preferred stock, par value $0.001, 3,600,000 shares authorized, 85,975 issued and outstanding (liquidation value of $119,000) | - | - | ||||||
| Preferred stock par value $0.001, 100,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
| Common stock par value $0.001, 100,000,000 shares authorized; 16,634,951 and 16,634,951, respectively, shares issued and outstanding | 17,000 | 17,000 | ||||||
| Additional paid-in capital | 8,750,000 | 7,660,000 | ||||||
| Stock subscription receivable | (2,000 | ) | (16,000 | ) | ||||
| Accumulated deficit | (9,326,000 | ) | (7,827,000 | ) | ||||
| Total Stockholders’ Deficit | (561,000 | ) | (166,000 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 125,000 | $ | 14,000 | ||||
See accompanying notes to the financial statements.
| F-3 |
Statements of Operations
For the Years Ended December 31,
| 2019 | 2018 | |||||||
| Revenue | $ | - | $ | - | ||||
| Operating expenses: | ||||||||
| Professional fees | 1,154,000 | 215,000 | ||||||
| General and administrative expenses | 40,000 | 13,000 | ||||||
| Total operating expenses | 1,194,000 | 228,000 | ||||||
| Other Expense – finance costs | (305,000 | ) | - | |||||
| Loss before income tax provision | (1,499,000 | ) | (228,000 | ) | ||||
| Income tax provision | - | - | ||||||
| Net Loss | (1,499,000 | ) | (228,000 | ) | ||||
| Deemed dividend on conversion price reset of preferred stock series A | (36,000 | ) | - | |||||
| Net Loss attributable to shareholders | $ | (1,535,000 | ) | $ | (228,000 | ) | ||
| Earnings per share: | ||||||||
| - Basic and diluted | $ | (0.09 | ) | $ | (0.23 | ) | ||
| Weighted average common shares outstanding: | ||||||||
| - Basic and diluted | 16,634,951 | 1,010,330 | ||||||
See accompanying notes to the financial statements.
| F-4 |
Statement of Changes in Stockholders’ Equity (Deficit)
For the Years Ended December 31, 2019 and 2018
| Series A | Total | |||||||||||||||||||||||||||||||||||
| Founder Preferred | Convertible | Additional | Stockholders’ | |||||||||||||||||||||||||||||||||
| Stock | Preferred | Common Stock | Paid-In | Accumulated | Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (deficit) | ||||||||||||||||||||||||||||
| Balance January 1, 2018 | - | $ | - | - | $ | - | 630,207 | $ | 1,000 | $ | 7,601,000 | $ | (7,599,000 | ) | $ | 3,000 | ||||||||||||||||||||
| Shareholders’ assumption of liabilities | - | - | - | - | - | - | 9,000 | - | 9,000 | |||||||||||||||||||||||||||
| Common stock issued for cash | - | - | - | - | 250,000 | - | - | - | ||||||||||||||||||||||||||||
| Issuance of Founder preferred stock | 15,754,744 | 16,000 | - | - | - | - | - | - | 16,000 | |||||||||||||||||||||||||||
| Issuance of series A convertible preferred | 35,975 | - | - | - | 50,000 | - | 50,000 | |||||||||||||||||||||||||||||
| Conversion of Founder preferred stock | (15,754,744 | ) | (16,000 | ) | - | - | 15,754,744 | 16,000 | - | - | - | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (228,000 | ) | (228,000 | ) | |||||||||||||||||||||||||
| Balance Dec 31, 2018 | - | $ | - | 35,975 | $ | - | 16,634,951 | $ | 17,000 | $ | 7,660,000 | $ | (7,827,000 | ) | $ | (150,000 | ) | |||||||||||||||||||
| Proceeds from the sale of series A convertible preferred stock | 50,000 | - | - | - | 69,000 | - | 69,000 | |||||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible promissory notes | - | - | - | - | - | - | 205,000 | - | 205,000 | |||||||||||||||||||||||||||
| Beneficial conversion feature associated with convertible promissory notes | - | - | - | - | - | - | 239,000 | - | 251,000 | |||||||||||||||||||||||||||
| Stock options issued for services | - | - | - | - | - | - | 577,000 | - | 577,000 | |||||||||||||||||||||||||||
| Conversion price reset for preferred stock series A | - | - | - | - | - | - | 36,000 | - | 36,000 | |||||||||||||||||||||||||||
| Deemed dividend on conversion price reset of preferred stock series A | - | - | - | - | - | - | (36,000 | ) | - | (36,000 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (1,499,000 | ) | (1,499,000 | ) | |||||||||||||||||||||||||
| - | $ | - | 85,975 | $ | 0 | 16,634,951 | $ | 17,000 | $ | 8,750,000 | $ | (9,326,000 | ) | $ | (561,000 | ) | ||||||||||||||||||||
See accompanying notes to the financial statements.
| F-5 |
Statements of Cash Flows
For the Years Ended December 31,
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,499,000 | ) | $ | (228,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of convertible promissory notes discounts | 305,000 | - | ||||||
| Fair value of equity-based compensation | 577,000 | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | - | (2,000 | ) | |||||
| Accounts payable and accrued expenses | 199,000 | 185,000 | ||||||
| Net cash used in operating activities | (418,000 | ) | (45,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash held by officer | 12,000 | (12,000 | ) | |||||
| Net cash provided by investing activities | 12,000 | (12,000 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the issuance of convertible promissory notes | 460,000 | - | ||||||
| Proceeds from issuance of convertible preferred stock | 69,000 | 50,000 | ||||||
| Net cash used in financing activities | 529,000 | 50,000 | ||||||
| Net change in cash | 123,000 | (7,000 | ) | |||||
| Cash at beginning of reporting period | - | 7,000 | ||||||
| Cash at end of reporting period | $ | 123,000 | $ | - | ||||
| Supplemental disclosure of cash flows information: | ||||||||
| Interest paid | $ | - | $ | |||||
| Income tax paid | $ | - | $ | - | ||||
| Supplemental disclosure of noncash financing activities: | ||||||||
| Undeposited funds from issuance of founder preferred shares | $ | - | $ | 16,000 | ||||
| Relative fair value of warrants issued with convertible notes | $ | 205,000 | $ | - | ||||
| Beneficial conversion feature issued with convertible notes | $ | 239,000 | $ | - | ||||
| Stock subscription receivable | $ | (14,000 | ) | $ | - | |||
| Shareholders’ assumption of liabilities | $ | - | $ | 9,000 | ||||
See accompanying notes to the financial statements.
| F-6 |
December 31, 2019 and 2018
Notes to the Financial Statements
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 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.
| F-7 |
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. 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 and or invest or 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 is beneficial to the Company and its shareholders.
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.
Basis of Presentation
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has no established operations.
Going Concern and Liquidity
The Company incurred a net loss of approximately $1,499,000 for the year ended December 31, 2019, and had an accumulated deficit of approximately $9,326,000 as of December 31, 2019. 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.
| F-8 |
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.
Reclassification
Certain amounts for 2018 have been reclassified to conform to the classification for 2019.
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 Disclosures 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, 2019 and 2018, 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, 2019, the Company had no assets or liabilities that require fair value measurement.
| F-9 |
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. At December 31, 2019 and 2018, 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.
| F-10 |
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.
Warrants
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 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 Black-Scholes 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.
Basic and Diluted Net Loss per Common
Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. Since the Company had a net loss for the year ended December 31, 2019, the series A convertible preferred stock and the outstanding warrants would be considered anti-dilutive.
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%.
| F-11 |
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 2012.
Note 2 – Cash Held by Officer
With the transition of the new Company management in September 2018, the Company’s previous bank account was closed. The new management was not able to set up a new bank account. The fourth quarter, of 2018, operating expenses, of approximately $38,000 were paid from a bank account held in the name of the Company’s Chief Executive officer.
Also, the $50,000 raised from the issuance of the Series A convertible preferred stock, in the fourth quarter of 2018 (see note 5), was transferred into a bank account held in the name of the Chief Executive Officer.
The amounts for cash held by officer of $12,000, as of December 31, 2018, was a net amount. During the first quarter of 2019, the Company has its own bank account and funds of the Company have been transferred into the Company’s bank account.
Note 3 – Related Party Transactions
During the years ended December 331, 2019 ad 2018, the Company paid approximately $180,000 and $45,000 to M1 Advisors for the services of the Company’s CEO and miscellaneous operating expenses.
| F-12 |
Note 4 – Convertible Promissory Notes
During the year ended December 31, 2019, the Company issued convertible promissory notes in the amount of $506,000 (the “Notes”). The total proceeds were approximately $460,000, due to approximately $46,000 of original issue discount. The Notes are non-interest bearing with the principal due and payable starting in February 2020. 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, instrument or document involving any indebtedness for borrowed money of more than $100,000 in the aggregate, 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 253,000 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 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 $205,000 and of the beneficial conversion totaled approximately $239,000, which amounts are being amortized and expensed over the term of the Notes. For the year ended December 31, 2019, the amortization expense was approximately $277,000.
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 December 31, 2019, convertible promissory notes consisted of the following:
| Principal Amount | $ | 506,000 | ||
| Original issue discount | (19,000 | ) | ||
| Warrant discount | (79,000 | ) | ||
| Conversion feature discount | (85,000 | ) | ||
| Net balance | $ | 323,000 |
The discounts of $166,000, as of December 31, 2019, will be amortized and expensed over the remaining contractual life of the convertible promissory notes. The amortization expense will be approximately $166,000 for the year ending December 31, 2020.
As of the date of release of these financial statements, approximately $242,000 of the convertible promissory notes, were not repaid as of the maturity date. The note holders have not requested payment.
Note 5 – Stockholders’ (Deficit) Equity
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.
| F-13 |
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.
During the year ended December 31, 2018, the Company issued 250,000 shares of the Company’s common stock for $250.
Preferred Stock
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 4 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.
| F-14 |
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
Capital Contributions
During the quarter ended September 30, 2018, the Company did not have sufficient funds to pay off certain outstanding liabilities. The then-majority shareholders of the Company assumed and paid off these liabilities of approximately $9,000.
Warrants
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 the Vice President of Capital Markets of the Company as a full-time employee. |
| F-15 |
Option to purchase 250,000
| i. | 50,000 shares vest upon the completion of the Company’s first Retail Showcase Store; | |
| 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; and | |
| iii. | 100,000 shares to vest 1/12th per month thereafter. |
Option to purchase 15,000 shares
| i. | 15,000 shares to vest upon the completion of the Company’s first Retail Showcase Store. |
The options to 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 when the 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.
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 Black-Scholes 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 warrants activities for the reporting period ended December 31, 2019 and 2018 (all share and per share data reflects the reverse stock split):
|
Number of Warrant Shares |
Exercise Price Range Per Share |
Weighted Average Exercise Price |
Relative Fair Value |
Aggregate Intrinsic Value |
||||||||||||||||
| Balance, January 1, 2018 | 184,800 | $ | 12.50 | $ | 12.50 | $ | - | $ | - | |||||||||||
| Granted | - | - | - | - | - | |||||||||||||||
| Canceled | - | - | - | - | - | |||||||||||||||
| Exercised | - | - | - | - | - | |||||||||||||||
| Expired | - | - | - | - | - | |||||||||||||||
| Balance, December 31, 2018 | 184,800 | $ | 12.50 | $ | 12.50 | $ | - | $ | - | |||||||||||
| Granted | 385,000 | 0.001 | .001 | 1.49 | 578,000 | |||||||||||||||
| Canceled | - | - | - | - | - | |||||||||||||||
| Exercised | - | - | - | - | - | |||||||||||||||
| Expired | - | - | - | - | - | |||||||||||||||
| Balance, December 31, 2019 | 569,800 | $ | - | $ | 4.05 | $ | - | $ | 423,000 | |||||||||||
| Earned and exercisable, Dec 31, 2019 | 569,800 | $ | - | $ | 4.05 | $ | - | $ | 423,000 | |||||||||||
| Unvested, December 31, 2019 | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
The following table summarizes information concerning outstanding and exercisable warrants as of December 31, 2019:
| Warrants Outstanding | Warrants 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 | 2.25 | .001 | 385,000 | 2.25 | .001 | |||||||||||||||||||
| $ | 12.50 | 184,800 | .95 | $ | 12.50 | 184,800 | .95 | $ | 12.50 | |||||||||||||||||
| F-16 |
Note 6 – Deferred Tax Assets and Income Tax Provision
Deferred Tax Assets
At December 31, 2019, the Company had net operating loss (“NOL”) carry–forwards for Federal income tax purposes of $979,000 that may be offset against future taxable income through 2037, in general. 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 $206,000 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 161,000 for the year ended December 31, 2019.
Components of deferred tax assets are as follows as of December 31:
| 2019 | 2018 | |||||||
| Net deferred tax assets – Non-current: | ||||||||
| Expected income tax benefit from NOL carry-forwards | $ | 206,000 | $ | 45,000 | ||||
| Less valuation allowance | (206,000 | ) | (45,000 | ) | ||||
| 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:
| 2019 | 2018 | |||||||
| 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 7 – Subsequent Events
The Company has evaluated all events that occur after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The following events occurred.
On January 16, 2020, the Company entered into a Stock Purchase Agreement dated as of January 15, 2020 (the “Purchase Agreement”) with Terra Tech Corp., a Nevada corporation (the “Seller”), pursuant to which the Company agreed to purchase from the Seller (the “Share Purchase”) all of the issued and outstanding capital stock of 1815 Carnegie Santa Ana Corp., a California corporation and a wholly-owned subsidiary of the Seller (“Carnegie Corp.”), for an aggregate purchase price of $6.0 million consisting of (i) $3.0 million in cash and (ii) $3.0 million in shares of the Company’s common stock (the “Share Consideration”).
In February 2020, the Company entered into a conversion agreement with the holders of the series A convertible preferred stock. The holders agreed to exchange the 85,975 shares of series A convertible preferred stock, with a value of approximately $119,000 along with undeclared dividends of approximately $15,000 for a total of $133,000, into convertible promissory notes with a principal amount of approximately $147,000, which includes an original issuance discount of $14,000. Also, the holders received warrants to purchase 73,304 shares of the Company’s common stock for $1.50 per share. The convertible promissory notes have a maturity date of February 28,2021.
| F-17 |
Exhibit 10.4
[Form of oid Convertible Promissory Note]
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS NOTE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
| Principal Amount: | $ | Issue Date: | February [__] 2020 | |
| Purchase Price: | $ | |||
| Original Issue Discount: | $ |
OID CONVERTIBLE PROMISSORY NOTE
FOR VALUE RECEIVED, CALETHOS INC. a Nevada corporation (hereinafter called the “Borrower”), hereby promises to pay to the order [_________________________], or its registered assigns (the “Holder”), the sum of $___,___.00 on February 28, 2021 (the “Maturity Date”). Any amount of principal on this Note which is not paid on the Maturity Date shall bear interest at the rate of ten percent (10%) per annum from the Maturity Date until the same is paid (“Default Interest”). Default Interest shall be computed on the basis of a 365-day year and the actual number of days elapsed. All payments due hereunder (to the extent not converted into shares of the Borrower’s common stock, par value $0.001 per share (the “Common Stock”) in accordance with the terms hereof) shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day. As used in this Note, the term “business day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain closed. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Subscription Agreement dated the date hereof, pursuant to which this Note was originally issued (the “Subscription Agreement”). This Note is one of an issue of OID Convertible Promissory Notes issued pursuant to one or more subscription agreements having terms substantially identical to the Subscription Agreement (collectively, the “Other Notes” and together with this Note, the “Notes”).
In lieu of the accrual of interest on the outstanding principal amount hereof on any date prior to the Maturity Date, this Note carries an original issue discount of $_____ (the “OID”), thus, the purchase price of this Note shall be $_____, computed as follows: $_____ initial principal balance less the OID.
Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Borrower and will not impose personal liability upon the holder thereof.
The following terms shall apply to this Note:
Article I. CONVERSION RIGHTS
1.1 Conversion Right. The Holder shall have the right from time to time, following the date of this Note in respect of the remaining outstanding principal amount of this Note to convert all or any part of the outstanding and unpaid principal amount of this Note into fully paid and non-assessable shares of Common Stock (a “Conversion”), as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified, at a conversion price per share of One Dollar ($1.00) per share of Common Stock (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events) (the “Conversion Price”). The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form attached hereto as Exhibit A (the “Notice of Conversion”), delivered to the Borrower by the Holder in accordance with Section 1.2 below; provided that the Notice of Conversion is submitted by facsimile or e-mail (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 6:00 p.m., New York, New York time on such conversion date (the “Conversion Date”). The term “Conversion Amount” means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion plus (2) at the Holder’s option, Default Interest, if any, on the amounts referred to in the immediately preceding clause (1).
1.2 Method of Conversion.
(a) Mechanics of Conversion. Subject to Section 1.1, this Note may be converted by the Holder in whole or in part at any time from time to time after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) at the principal office of the Borrower.
b) Surrender of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless the entire unpaid principal amount of this Note is so converted. The Holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Note upon each such conversion. In the event of any dispute or discrepancy, such records of the Borrower shall, prima facie, be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Note is converted as aforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of the Holder a new Note of like tenor, registered as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid principal amount of this Note. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be less than the amount stated on the face hereof.
(c) Payment of Taxes. The Borrower shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Note in a name other than that of the Holder (or in street name), and the Borrower shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are to be held for the Holder’s account) requesting the issuance thereof shall have paid to the Borrower the amount of any such tax or shall have established to the satisfaction of the Borrower that such tax has been paid.
| 2 |
(d) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower from the Holder of a facsimile transmission or e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 1.2, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (the “Deadline”).
(e) Obligation of Borrower to Deliver Common Stock. Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid Default Interest, if any, on this Note shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower’s obligation to issue and deliver the certificates for, or other evidence of, Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 6:00 p.m., New York, New York time, on such date.
(f) Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions contained in Section 1.1 and in this Section 1.2, the Borrower may cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system.
1.3 Concerning the Shares. The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) such shares are sold pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 (“Rule 144”) (or a successor rule) under the Securities Act, or (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.3 and who is an Accredited Investor (as defined in the Subscription Agreement). Except as otherwise provided in the Subscription Agreement (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered under the Securities Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:
| 3 |
“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”
1.4 Effect of Certain Events.
(a) Adjustment Due to Dilutive Issuance. If, at any time when any portion of the Note remains unpaid or unconverted, the Borrower issues or sells, or in accordance with this Section 1.4(a) hereof is deemed to have issued or sold, any shares of 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) or for consideration per share which is less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “Dilutive Issuance”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the consideration per share received by the Borrower in such Dilutive Issuance.
The Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or grants any warrants, rights or options (not including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “Options”) and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options.
| 4 |
Additionally, the Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options), and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For the purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon such conversion or exchange” is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.
(b) Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section 1.4, the Borrower, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of this Note.
1.5 Status as Shareholder. Upon submission of a Notice of Conversion by a Holder, (i) the converted portion of this Note covered thereby shall be deemed converted into shares of Common Stock and (ii) the Holder’s rights as a Holder of such converted portion of this Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Borrower to comply with the terms of this Note. Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the delivery of a Conversion Notice, then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Borrower) the Holder shall regain the rights of a Holder of this Note with respect to such unconverted portions of this Note and the Borrower shall, as soon as practicable, return such unconverted Note to the Holder or, if the Note has not been surrendered, adjust its records to reflect that such portion of this Note has not been converted. In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, the right to receive Default Interest.
1.6 Mandatory Conversion.
(a) Trigger Events. Upon (i) the closing of the sale of shares of Common Stock to the public in an underwritten public offering pursuant to an effective registration statement under the Securities Act resulting in at least $10,000,000 of gross proceeds to the Borrower, (ii) the close of business on the sixtieth (60th) consecutive day on which the closing price of the 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 aggregate principal amount of the outstanding Notes, given at a meeting of such holders of Notes duly called for that purpose or pursuant to a written consent of such holders (the time of such closing or the date and time specified or the time of the event specified in such vote or written consent is referred to herein as the “Mandatory Conversion Time”), the outstanding principal amount of this Note and all Default Interest, if any, shall automatically be converted into shares of Common Stock, at the then effective Conversion Price.
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(b) Procedural Requirements. All holders of record of Notes shall be sent written notice of the Mandatory Conversion Time and the place designated for mandatory conversion of all outstanding Notes pursuant to this Section 1.6. Such notice need not be sent in advance of the occurrence of the Mandatory Conversion Time. Upon receipt of such notice, each holder of Notes shall surrender his, her or its Note for all such shares (or, if such holder alleges that such Note has been lost, stolen or destroyed, a lost Note affidavit and agreement reasonably acceptable to the Borrower to indemnify the Borrower against any claim that may be made against the Borrower on account of the alleged loss, theft or destruction of such Note) to the Borrower at the place designated in such notice. If so required by the Borrower, Notes surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Borrower, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. All rights with respect to the Notes converted pursuant to this Section 1.6, including the rights, if any, other than as a holder of Common Stock, will terminate at the Mandatory Conversion Time (notwithstanding the failure of the holder or holders thereof to surrender the Notes at or prior to such time), except only the rights of the holders thereof, upon surrender of their Notes (or lost Note affidavit and agreement) therefor, to receive the items provided for in the next sentence of this Section 1.6(b). As soon as practicable after the Mandatory Conversion Time and the surrender of the Note or Notes (or lost Note affidavit and agreement), the Borrower shall issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof. Such converted Notes shall be cancelled.
Article II. CERTAIN COVENANTS
2.1 Debt Covenant. If the Company shall create, incur, assume, guarantee or otherwise become liable for any obligation or liability for money borrowed in an amount in the aggregate at any time in excess of $50,000 while the Notes remain outstanding, the Company shall, within five (5) business days of the date of creating, assuming, guaranteeing or otherwise becoming liable for such obligation or obligations (the “Date of Incurrence”), provide written notice of such obligation or liability to the holders of the Notes and of the Date of Incurrence thereof, and the holders of the Notes shall thereafter for a period of twenty (20) days following the Date of Incurrence have the right, but not the obligation, by written notice to the Company, to accelerate the maturity date of their Notes to the thirtieth (30th) day following the Date of Incurrence; provided, however, that an obligation or liability for money borrowed shall not include (i) the endorsement of negotiable instruments for deposit or collection, (ii) indebtedness to trade creditors or financial institutions incurred in the ordinary course of business, (iii) indebtedness secured by a mortgage on real property, or (iv) borrowings, the proceeds of which shall be used to repay the Notes.
Article III. EVENTS OF DEFAULT
If any of the following events of default (each, an “Event of Default”) shall occur:
3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the principal hereof or Default Interest thereon when due on this Note, whether at maturity, upon acceleration or otherwise and such payment default shall have continued uncured for a period of three (3) business days after the date such payment was due.
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3.2 Conversion and the Shares. The Borrower fails to issue shares of Common Stock to the Holder (or announces or threatens in writing that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails to transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) any certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, the Borrower directs its transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in transferring (or issuing) (electronically or in certificated form) any certificate for shares of Common Stock to be issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, or fails to remove (or directs its transfer agent not to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any written announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for three (3) business days after the Holder shall have delivered a Notice of Conversion.
3.3 Breach of Covenants. The Borrower breaches any material covenant or other material term or condition contained in this Note and any collateral documents including but not limited to the Subscription Agreement and such breach continues for a period of ten (10) days after written notice thereof to the Borrower from the Holder.
3.4 Breach of Representations and Warranties. Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Subscription Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Note or the Subscription Agreement.
3.5 Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.
3.6 Judgments. 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 property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.
3.7 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower.
3.8 Delisting of Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTC (which specifically includes the Pink Sheets electronic quotation system) or an equivalent replacement exchange, or a national securities exchange that is registered with the Securities and Exchange Commission under Section 6 of the Exchange Act.
3.9 Liquidation. Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.
3.10 Cessation of Operations. Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts become due.
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Upon the occurrence of an Event of Default and at any time thereafter, if any Event of Default shall then be continuing, unless such Event of Default shall have been waived by a majority in interest of all Notes issued pursuant to a Subscription Agreement, the Holder shall have the right to declare all obligations hereunder to become immediately due and payable and to exercise any and all rights and remedies provided for in this Note or under applicable law.
Article IV. MISCELLANEOUS
4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
4.2 Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be:
If to the Borrower, to:
CalEthos Inc.
11753 Willard Avenue,
Tustin, CA 92782
Attention: Michael Campbell, Chief Executive Officer
E-Mail: M1campbell@hotmail.com
With a copy by fax only to (which copy shall not constitute notice):
Pryor Cashman LLP
7 Times Square
New York, NY 10036
Attention: Eric M. Hellige, Esq.
Facsimile: (212) 326-0806
E-Mail: ehellige@pryorcashman.com
If to the Holder:
[ ]
With a copy by fax only to (which copy shall not constitute notice):
[ ]
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4.3 Amendments. This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder. The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Notes issued pursuant to the Subscription Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented.
4.4 Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit of the Holder and its successors and assigns. Each transferee of this Note must be an “accredited investor” (as defined in Rule 501(a) of the Securities Act). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.
4.5 Cost of Collection. If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection, including reasonable attorneys’ fees.
4.6 Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only in the state courts of New York or in the federal courts located in the state and county of New York. The parties to this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Borrower and Holder waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Note or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
4.7 Certain Amounts. Whenever pursuant to this Note the Borrower is required to pay an amount in excess of the outstanding principal amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest, the Borrower and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Note may be difficult to determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty and is intended to compensate the Holder in part for loss of the opportunity to convert this Note and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Note at a price in excess of the price paid for such shares pursuant to this Note. The Borrower and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Note into shares of Common Stock.
4.8 Subscription Agreement. By its acceptance of this Note, each party agrees to be bound by the applicable terms of the Subscription Agreement.
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4.9 Notice of Corporate Events. Except as otherwise provided below, the Holder of this Note shall have no rights as a Holder of Common Stock unless and only to the extent that it converts this Note into Common Stock. The Borrower shall provide the Holder with prior notification of any meeting of the Borrower’s shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Borrower of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Borrower or any proposed liquidation, dissolution or winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. The Borrower shall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this Section 4.9.
4.10 Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.
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IN WITNESS WHEREOF, Borrower has caused this Note to be signed as of the date set forth above.
| CALETHOS INC. | ||
| By: | ||
| Name: | Michael Campbell | |
| Title: | Chief Executive Officer | |
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EXHIBIT A
NOTICE OF CONVERSION
The undersigned hereby elects to convert $_____ principal amount of the OID Convertible Promissory Note (the “Note”) of CalEthos, Inc., a Nevada corporation (the “Company”), to which this Notice of Conversion is attached, into that number of shares of Common Stock (as defined in the Note) set forth below, according to the conditions of the Note, as of the date written below. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any.
Box Checked as to applicable instructions:
| ☐ | If eligible, the Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”). |
Name of DTC Prime Broker:
Account Number:
| ☐ | The undersigned hereby requests that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder’s calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: |
| Date of Conversion: | _____________ |
| Applicable Conversion Price: | $____________ |
| Number of Shares of Common Stock to be Issued | |
| Pursuant to Conversion of the Note: | ______________ |
| Amount of Principal Balance Due remaining | |
| Under the Note after this conversion: | ______________ |
| Note Holder | |
| Witness |
Exhibit 10.5
[FORM OF] SERIES A WARRANT
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES LAWS IN RELIANCE ON EXEMPTIONS FROM REGISTRATION REQUIREMENTS UNDER SAID LAWS, AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN.
CALETHOS INC.
Series A Warrant for the Purchase of up to _____ Shares of
Common Stock, par value $0.001 per share
| No. WA-__ | _____ Shares |
| Issue Date: ______________ |
THIS CERTIFIES that, for value received, ______________________, with an address at _____________________________________________________ (including any transferee, the “Holder”), is entitled to subscribe for and purchase from CalEthos Inc., a Nevada corporation (the “Company”), upon the terms and conditions set forth herein, at any time or from time to time before 5:00 P.M., New York time, on February 28, 2023 (the “Exercise Period”), up to _________________ (_____) shares of Common Stock, par value $0.001 per share (the “Common Stock”), of the Company at an initial exercise price per share of $1.50, subject to adjustment pursuant to the terms hereof (the “Exercise Price”). As used herein, the term “this Series A Warrant” shall mean and include this Series A Warrant and any Series A Warrant or Series A Warrants hereafter issued as a consequence of the exercise or transfer of this Series A Warrant in whole or in part.
The number of shares of Common Stock issuable upon exercise of this Series A Warrant (the “Series A Warrant Shares”) and the Exercise Price may be adjusted from time to time as hereinafter set forth.
1. (a) This Series A Warrant may be exercised during the Exercise Period as to all or a lesser number of whole Series A Warrant Shares by the surrender of this Series A Warrant (with the Exercise Form attached hereto duly executed) to the Company at its principal executive office, which is located on the date hereof at 11753 Willard Avenue, Tustin, CA 92782, Attention: Chief Financial Officer, or at such other place as is designated in writing by the Company, together with cash, a certified or bank cashier’s check or wire transfer of immediately available funds payable to the order of the Company in an amount equal to the Exercise Price multiplied by the number of Series A Warrant Shares for which this Series A Warrant is being exercised. Upon the exercise of this Series A Warrant pursuant to this Section 1(a), the Holder shall receive, in addition to the Series A Warrant Shares for which this Series A Warrant is exercised, a new stock purchase warrant (a “Series B Warrant”) to purchase a number of shares of Common Stock equal to the number of Series A Warrant Shares purchased at an exercise price equal to $1.50 per share, subject to adjustment. The Series B Warrant shall be exercisable to purchase shares of Common Stock at any time, or from time-to-time, up to and including 5:00 P.M., New York time, on the third anniversary date of the date of the issuance of the Series B Warrant; provided, however, if such date is not a Business Day, then on the Business Day immediately following such date.
(b) This Series A Warrant may also be exercised by the Holder through a cashless exercise, as described in this Section 1(b). This Series A Warrant may be exercised, in whole or in part, by (i) the delivery to the Company of a duly executed Exercise Form specifying the number of Series A Warrant Shares to be applied to such exercise, and (ii) the surrender to a common carrier for overnight delivery to the Company, or as soon as practicable following the date the Holder delivers the Exercise Form to the Company, of this Series A Warrant (or an indemnification undertaking with respect to this Series A Warrant in the case of its loss, theft or destruction). The number of shares of Common Stock to be issued upon exercise of this Series A Warrant pursuant to this Section 1(b) shall equal the value of this Series A Warrant (or the portion thereof being canceled) computed as of the date of delivery of this Series A Warrant to the Company using the following formula:
| X = |
Y(A-B)
A |
where:
| X = the number of shares of Common Stock to be issued to the Holder under this Section 1(b); | |
| Y = the number of Series A Warrant Shares identified in the Exercise Form as being applied to the subject exercise; | |
| A = the Current Market Price on such date; and | |
| B = the Exercise Price on such date |
For purposes of this Section 1(b), the “Current Market Price” per share of Common Stock on any day shall mean: (i) if the principal trading market for such securities is a national or regional securities exchange, the closing price on such exchange on such day; or (ii) if (i) above is not applicable, and if bid and ask prices for shares of Common Stock are reported in the over-the-counter market of the OTC Markets Group, Inc., the average of the high bid and low ask prices so reported on such day. Notwithstanding the foregoing, if there is no reported closing price or bid and ask prices, as the case may be, for the day in question, then the Current Market Price shall be determined as of the latest date prior to such day for which such closing price or bid and ask prices, as the case may be, are available, unless such securities have not been traded on an exchange or in the over-the-counter market for 30 or more days immediately prior to the day in question, in which case the Current Market Price shall be determined in good faith by, and reflected in a formal resolution of, the Board of Directors of the Company.
The Company acknowledges and agrees that this Series A Warrant was issued on the Issue Date set forth on the face of this Series A Warrant (the “Issuance Date”). Consequently, the Company acknowledges and agrees that, if the Holder conducts a cashless exercise pursuant to this Section 1(b), the period during which the Holder held this Series A Warrant may, for purposes of Rule 144 promulgated under the Securities Act of 1933, as amended (the “Act”), be “tacked” to the period during which the Holder holds the Series A Warrant Shares received upon such cashless exercise.
2. Upon each exercise of the Holder’s rights to purchase Series A Warrant Shares, the Holder shall be deemed to be the holder of record of the Series A Warrant Shares issuable upon such exercise, notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Series A Warrant Shares shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise of this Series A Warrant, the Company shall issue and deliver to the Holder a certificate or certificates for the Series A Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Series A Warrant should be exercised in part only, the Company shall, upon surrender of this Series A Warrant for cancellation, execute and deliver a new Series A Warrant evidencing the right of the Holder to purchase the balance of the Series A Warrant Shares (or portions thereof) subject to purchase hereunder.
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3. (a) Any Series A Warrants issued upon the registration of transfer or exercise in part of this Series A Warrant shall be numbered and shall be registered in a Series A Warrant Register as they are issued. The Company shall be entitled to treat the registered holder of any Series A Warrant on the Series A Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Series A Warrant on the part of any other person, and shall not be liable for any registration or transfer of Series A Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration or transfer, or with the knowledge of such facts that its participation therein amounts to bad faith. The transfer of this Series A Warrant may be registered on the books of the Company upon delivery thereof duly endorsed by the Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian or other legal representative, due authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Series A Warrant or Series A Warrants to the person entitled thereto. This Series A Warrant may be exchanged, at the option of the Holder thereof, for another Series A Warrant, or other Series A Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Series A Warrant Shares (or portions thereof), upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company may require prior to registering any transfer of a Series A Warrant an opinion of counsel reasonably satisfactory to the Company that such transfer complies with the provisions of the Act, and the rules and regulations thereunder.
(b) The Holder acknowledges that he has been advised by the Company that neither this Series A Warrant nor the Series A Warrant Shares have been registered under the Act, that this Series A Warrant is being or has been issued and the Series A Warrant Shares may be issued on the basis of the statutory exemption provided by Section 4(2) of the Act or Rule 506 of Regulation D promulgated thereunder, or both, relating to transactions by an issuer not involving any public offering, and that the Company’s reliance thereon is based in part upon the representations made by the original Holder in the Subscription Agreements. The Holder acknowledges that he has been informed by the Company of, or is otherwise familiar with, the nature of the limitations imposed by the Act and the rules and regulations thereunder on the transfer of securities. In particular, the Holder agrees that no sale, assignment or transfer of this Series A Warrant or the Series A Warrant Shares issuable upon exercise hereof shall be valid or effective, and the Company shall not be required to give any effect to any such sale, assignment or transfer, unless (i) the sale, assignment or transfer of this Series A Warrant or such Series A Warrant Shares is registered under the Act, it being understood that neither this Series A Warrant nor such Series A Warrant Shares are currently registered for sale and that the Company has no obligation or intention to so register this Series A Warrant or such Series A Warrant Shares except as specifically provided for in the Registration Rights Agreement (as defined or described in the Subscription Agreement), or (ii) this Series A Warrant or such Series A Warrant Shares are sold, assigned or transferred in accordance with all the requirements and limitations of Rule 144 under the Act, it being understood that Rule 144 is not available at the time of the original issuance of this Series A Warrant for the sale of this Series A Warrant or such Series A Warrant Shares and that there can be no assurance that Rule 144 sales will be available at any subsequent time, or (iii) such sale, assignment, or transfer is otherwise exempt from registration under the Act in the opinion of counsel reasonably acceptable to the Company.
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4. The Company shall at all times reserve and keep available out its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the rights to purchase all Series A Warrant Shares granted pursuant to the Series A Warrants, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company covenants that all shares of Common Stock issuable upon exercise of this Series A Warrant, upon receipt by the Company of the full Exercise Price therefor, shall be validly issued, fully paid, nonassessable, and free of preemptive rights.
5. (a) In case the Company shall at any time after the date the Series A Warrants were first issued (i) declare a dividend on the outstanding Common Stock payable in shares of its capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares, or (iv) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the Exercise Price, and the number of Series A Warrant Shares issuable upon exercise of this Series A Warrant, in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, shall be proportionately adjusted so that the Holder after such time shall be entitled to receive the aggregate number and kind of shares which, if such Series A Warrant had been exercised immediately prior to such time, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for the issuance to all holders of Common Stock of rights, options, or warrants to subscribe for or purchase Common Stock (or securities convertible into or exchangeable for Common Stock) at a price per share (or having a conversion or exchange price per share, if a security convertible into or exchangeable for Common Stock) less than the then applicable Exercise Price per share on such record date, then, in each case, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on such record date plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so to be offered (or the aggregate initial conversion or exchange price of the convertible or exchangeable securities so to be offered) would purchase at such Exercise Price and the denominator of which shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock to be offered for subscription or purchase (or into which the convertible or exchangeable securities so to be offered are initially convertible or exchangeable). Such adjustment shall become effective at the close of business on such record date; provided, however, that, to the extent the shares of Common Stock (or securities convertible into or exchangeable for shares of Common Stock) are not delivered, the Exercise Price shall be readjusted after the expiration of such rights, options, or warrants (but only with respect to warrants exercised after such expiration), to the Exercise Price which would then be in effect had the adjustments made upon the issuance of such rights, options, or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into or exchangeable for shares of Common Stock) actually issued. In case any subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the board of directors of the Company, whose determination shall be conclusive.
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(c) In case the Company shall distribute to all holders of Common Stock (including any such distribution made to the stockholders of the Company in connection with a consolidation or merger in which the Company is the continuing corporation) evidences of its indebtedness, cash (other than any cash dividend which, together with any cash dividends paid within the 12 months prior to the record date for such distribution, does not exceed 5% of the then applicable Exercise Price at the record date for such distribution) or assets (other than distributions and dividends payable in shares of Common Stock), or rights, options or warrants to subscribe for or purchase Common Stock, or securities convertible into or exchangeable for shares of Common Stock (excluding those with respect to the issuance of which an adjustment of the Exercise Price is provided pursuant to Section 5(b) hereof), then, in each case, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date for the determination of stockholders entitled to receive such distribution by a fraction, the numerator of which shall be the then applicable Exercise Price per share of Common Stock on such record date, less the fair market value (as determined in good faith by, and reflected in a formal resolution of, the board of directors of the Company, whose determination shall be conclusive absent manifest error) of the portion of the evidences of indebtedness or assets so to be distributed, or of such rights, options or warrants or convertible or exchangeable securities, or the amount of such cash, applicable to one share, and the denominator of which shall be such Exercise Price per share of Common Stock. Such adjustment shall become effective at the close of business on such record date.
(d) No adjustment in the Exercise Price shall be required if such adjustment is less than $.01; provided, however, that any adjustments which by reason of this Section 5(d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5 shall be made to the nearest cent or to the nearest one-thousandth of a share, as the case may be.
(e) In any case in which this Section 5 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the Holder, if the Holder exercised this Series A Warrant after such record date, the shares of Common Stock, if any, issuable upon such exercise over and above the shares of Common Stock, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Company shall deliver to the Holder a due bill or other appropriate instrument evidencing the Holder’s right to receive such additional shares upon the occurrence of the event requiring such adjustment.
(f) Upon each adjustment of the Exercise Price as a result of the calculations made in Sections 5(b) or 5(c) hereof, this Series A Warrant shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of shares (calculated to the nearest thousandth) obtained by multiplying (A) the number of shares purchasable upon exercise of this Series A Warrant prior to such adjustment by (B) a fraction, the numerator of which is the Exercise Price in effect prior to such adjustment and the denominator of which is the Exercise Price in effect immediately after such adjustment.
(g) Whenever there shall be an adjustment as provided in this Section 5, the Company shall promptly cause written notice thereof to be sent by registered mail, postage prepaid, to the Holder, at its address as it shall appear in the Series A Warrant Register, which notice shall be accompanied by an officer’s certificate setting forth the number of Series A Warrant Shares purchasable upon the exercise of this Series A Warrant and the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the computation thereof, which officer’s certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error.
(h) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company upon the exercise of this Series A Warrant. If any fraction of a share would be issuable on the exercise of this Series A Warrant (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the Exercise Price of such share of Common Stock on the date of exercise of this Series A Warrant.
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6. (a) In case of any consolidation or combination with or merger of the Company with or into another corporation or entity (other than a merger, consolidation or combination in which the Company is the surviving or continuing corporation), or in case of any sale, lease or conveyance to another corporation, entity or person of the property and assets of any nature of the Company as an entirety or substantially as an entirety, or any compulsory share exchange, pursuant to which share exchange the Common Stock is converted into other securities, cash or other property (collectively an “Extraordinary Event”), then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby the Holder shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the Series A Warrant Shares immediately theretofore issuable upon exercise of this Series A Warrant, such shares of stock, securities or assets as would have been issuable or payable with respect to or in exchange for a number of Series A Warrant Shares equal to the number of Series A Warrant Shares immediately theretofore issuable upon exercise of this Series A Warrant, had such Extraordinary Event not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof (including, without limitation, provision for adjustment of the Exercise Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such Extraordinary Event unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such Extraordinary Event shall assume the obligation to deliver to the Holder, at the last address of the Holder appearing on the books of the Company, such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to purchase, and the other obligations under this Series A Warrant. The provisions of this paragraph shall similarly apply to successive Extraordinary Events.
(b) In case of any reclassification or change of the shares of Common Stock issuable upon exercise of this Series A Warrant (other than a change in par value or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), or in case of any consolidation, combination or merger of another corporation or entity into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), the Holder shall have the right thereafter to receive upon exercise of this Series A Warrant solely the kind and amount of shares of stock and other securities, property or cash, or any combination thereof receivable upon such reclassification, change, consolidation, combination or merger by a holder of the number of shares of Common Stock for which this Series A Warrant might have been exercised immediately prior to such reclassification, change, consolidation, combination or merger. Thereafter, appropriate provision shall be made for adjustments, which shall be as nearly equivalent as practicable to the adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, combinations, mergers, sales, leases or conveyances.
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7. In case at any time the Company shall propose to:
(a) pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or make any other distribution (other than regularly scheduled cash dividends which are not in a greater amount per share than the most recent such cash dividend) to all holders of Common Stock; or
(b) issue any rights, warrants or other securities to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, warrants or other securities; or
(c) effect any reclassification or change of outstanding shares of Common Stock, or any consolidation, merger, sale, lease or conveyance of property or other Extraordinary Event; or
(d) effect any liquidation, dissolution or winding-up of the Company; or
(e) take any other action which would cause an adjustment to the Exercise Price;
then, and in any one or more of such cases, the Company shall give written notice thereof, by registered mail, postage prepaid, to the Holder at the Holder’s address as it shall appear in the Series A Warrant Register, mailed at least 15 days prior to (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividend, distribution, rights, warrants or other securities are to be determined, (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution or winding-up is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up, or (iii) the date of such action which would require an adjustment to the Exercise Price.
8. The issuance of any shares or other securities upon the exercise of this Series A Warrant, and the delivery of certificates or other instruments representing such shares or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.
9. The Series A Warrant Shares issued upon exercise of this Series A Warrant shall be subject to a stop transfer order and the certificate or certificates evidencing such Series A Warrant Shares shall bear the following legend:
“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES LAWS, AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.”
10. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Series A Warrant (and upon surrender of any Series A Warrant if mutilated), the Company shall execute and deliver to the Holder thereof a new Series A Warrant of like date, tenor and denomination.
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11. The holder of this Series A Warrant shall not have solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Series A Warrant.
12. Any term of this Series A Warrant may be amended or waived upon the written consent of the Company and the holders of Series A Warrants representing at least 50% of the number of shares of Common Stock then subject to all outstanding Series A Warrants (the “Majority Holders”); provided, that (x) any such amendment or waiver must apply to all Series A Warrants; and (y) the number of Series A Warrant Shares subject to this Series A Warrant, the Exercise Price and the Exercise Period may not be amended, and the right to exercise this Series A Warrant may not be altered or waived, without the written consent of the Holder.
13. This Series A Warrant has been negotiated and consummated in the State of New York and shall be governed by, and construed in accordance with the laws of the State of New York applicable to contracts made and performed within such State, without regard to principles governing conflicts of law. The Company and, by accepting this Series A Warrant, the Holder, each irrevocably submits to the exclusive jurisdiction of the courts of the State of New York located in New York County and the United States District Court for the Southern District of New York for the purpose of any suit, action, proceeding or judgment relating to or arising out of this Series A Warrant and the transactions contemplated hereby. Service of process in connection with any such suit, action or proceeding may be served on each party hereto anywhere in the world by the same methods as are specified for the giving of notices under the Subscription Agreements. The Company and, by accepting this Series A Warrant, the Holder, each irrevocably consents to the jurisdiction of any such court in any such suit, action or proceeding and to the laying of venue in such court. The Company and, by accepting this Series A Warrant, the Holder, each irrevocably waives any objection to the laying of venue of any such suit, action or proceeding brought in such courts and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. EACH OF THE COMPANY AND, BY ITS ACCEPTANCE HEREOF, THE HOLDER HEREBY WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS WARRANT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.
Dated: __________, 2020
| CalEthos Inc. | ||
| By: | ||
| Name: | ||
| Title: | ||
| 8 |
CALETHOS INC.
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the attached Series A Warrant.)
| To: | CalEthos Inc. |
| 11753 Willard Avenue | |
| Tustin, CA 92782 | |
| Attention: Michael Campbell |
FOR VALUE RECEIVED, _______________ hereby sells, assigns, and transfers unto _______________ that certain Series A Warrant (Number WA-______) to purchase __________ shares of Common Stock, par value $0.001 per share, of CalEthos Inc. (the “Company”), together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint ________________________ attorney to transfer such Series A Warrant on the books of the Company, with full power of substitution.
Dated: _________
Signature: _________________________________
Notice:
The signature on the foregoing Assignment must correspond to the name as written upon the face of this Series A Warrant in every particular, without alteration or enlargement or any change whatsoever.
CALETHOS INC.
EXERCISE FORM
(To be completed and signed only upon exercise of the Series A Warrants)
| To: | CalEthos Inc. |
| 11753 Willard Avenue | |
| Tustin, CA 92782 | |
| Attention: Michael Campbell |
The undersigned hereby exercises his or its rights to purchase ___________ Series A Warrant Shares covered by the within Series A Warrant and tenders payment herewith in the amount of $_________ by [tendering cash, a wire of immediately available funds or delivering a certified check or bank cashier’s check, payable to the order of the Company] [surrendering ______ shares of Common Stock received upon exercise of the attached Series A Warrant, which shares have a Current Market Price equal to such payment] in accordance with the terms thereof, and requests that certificates for such securities be issued in the name of, and delivered to:
| (Print Name, Address and Social Security | |
| or Tax Identification Number) |
and, if such number of Series A Warrant Shares shall not be all the Series A Warrant Shares covered by the within Series A Warrant, that a new Series A Warrant for the balance of the Series A Warrant Shares covered by the within Series A Warrant be registered in the name of, and delivered to, the undersigned at the address stated below.
| Dated: ____________, ________ | Name: | |
| (Please Print) | ||
| Address: | ||
| (Signature) |
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Michael Campbell, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of CalEthos, Inc. (the “Registrant”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 30, 2020 | /s/ Michael Campbell |
| Michael Campbell | |
|
President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Dean S. Skupen, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of CalEthos, Inc. (the “Registrant”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 30, 2020 | /s/ Dean S. Skupen |
| Dean S. Skupen | |
|
Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CalEthos, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2019 (the “Report”), I, Michael Campbell, Chief Executive Officer of the Company, and I, Dean S. Skupen, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: March 30, 2020 | /s/ Michael Campbell |
| Michael Campbell | |
|
President and Chief Executive Officer (Principal Executive Officer) |
| Date: March 30, 2020 | /s/ Dean S. Skupen |
| Dean S. Skupen | |
|
Chief Financial Officer (Principal Financial Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed from within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.