CALETHOS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended
This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with theSecurities and Exchange Commission . See "Cautionary Note Regarding Forward Looking Statements."
Plan of Operations
As of the filing of this Report, it is our plan to continue our focus on building a large-scale, clean-energy powered, containerized, immersion-cooled data center operation that will provide wholesale colocation services to high-density computing, enterprise customers. While it was originally part of our strategy to build such a facility for our own utilization with the bitcoin mining systems that we planned to manufacture and use for our own bitcoin mining operations, going forward, our operating plan is to focus only on developing and building clean-energy powered, containerized, immersion-cooled data centers for enterprise customers. To this end, we are currently negotiating the acquisition of up to 1,000 acres of land inSouthern California on which we plan to initially build a 100-megawatt (MW) clean-energy powered, containerized, immersion-cooled data center. Our strategy is to have the data center operations powered by a direct off-grid connection to 100% clean-energy sources and a substation for connectivity to the local utility's electrical grid for back-up and to use for transmitting any excess electricity to other potential clean-energy customers. Once our negotiations for land and power purchase agreements are completed, we intend to complete a land use plan and environmental impact report that will be submitted to authorities for approval and for permits to start construction. We expect, based on all related factors, that a submittable plan, which will include civil engineering, data center and infrastructure design, a construction schedule, and preliminary environmental reports, will take approximately six months to complete. Once submitted to the appropriate governmental departments and agencies for approval, it is expected that it could take another 12 months or more before we receive the required permits for construction, and that the construction could take another 6 months or more to complete depending on supply chain issues at the time for data center, electrical and communication connectivity components of the data center build.
As we move through the development process to build a clean-energy powered, containerized, immersion-cooled data center, we will continue to refine and finalize the courses of action needed to implement our business plan and operations. As a result, management has not fully determined our actual short-term or long-term capital requirements, which management expects to be substantial.
It is anticipated that we will incur significant expenses in the implementation of our business plan as described herein, and that we will require substantial financing to complete the development of a submittable land use plan and the construction of the planned data center operations. A failure to obtain this necessary capital when required on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our development plans, any commercialization efforts and any other operations. We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs. In addition, even if we are able to obtain sufficient funding to commence our business operations, we may need to pursue additional financing in the future to make expenditures and/or investments to support the growth of our business. In addition, we may require additional capital to pursue our business objectives and respond to new competitive pressures, pay extraordinary expenses or fund our growth, including through acquisitions. Additional funding, however, may not be available when required on terms that are acceptable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when it is required, our ability to commence and grow our proposed business operations, to support our business and to respond to business challenges could be significantly limited.
We currently have only limited capital with which to pay these anticipated expenses. To fund our business plan going forward, we intend to raise funds from investors by issuing common stock, preferred stock and/or debt securities.
12 Results of Operations The table summarizes the results of operations for the three and six months endedJune 30 : For the Three Months Ended For the Six Months Ended June 30, June 30, 2022 2021 2022 2021 Revenues $ - $ - $ - $ - Operating expenses Professional fees 177,000 72,000 422,000 131,000 Stock based compensation 3,206,000 561,000 6,376,000 575,000 General and administrative expenses 31,000 3,000 35,000 5,000 Impairment loss 154,000 - 154,000 - Total operating expenses 3,568,000 636,000 6,987,000 711,000 Loss from operations (3,568,000 ) (636,000 ) (6, 987,000 ) (711,000 ) Other expenses Financing costs (606,000 ) (22,000 ) (1,113,000 ) (39,000 ) Total other expenses (606,000 ) (22,000 ) (1,113,000 ) (39,000 ) Loss before provision for income taxes (4,174,000 ) (658,000 ) (8,100,000 ) (750,000 ) Provision for income taxes - - - - Net loss$ (4,174,000 ) $ (658,000 ) $ (8,100,000 ) $ (750,000 ) Revenues
The Company had no revenues for the six months ended
Expenses
Operating expenses for the six months ended
Liquidity and Capital Resources
The Company's financial position as ofJune 30, 2022 andDecember 31, 2021 were as follows: Working Deficit June 30, December 31, 2022 2021 (Unaudited) Current assets$ 2,404,000 $ 3,054,000 Current liabilities 4,669,000 3,632,000 Working deficit$ (2,265,000 ) $ (578,000 ) AtJune 30, 2022 , the Company had cash of approximately$2,401,000 and prepaid expenses of approximately$3,000 . Working deficit increased by approximately$1,687,000 fromDecember 31, 2021 toJune 30, 2022 . Cash Flows For the Six Months Ended June 30, 2022 2021
Net cash used in operating activities$ (513,000 ) $ (143,000 ) Net cash used in investing activities (107,000 )
–
Net cash provided by (used in) financing activities (25,000 ) 151,000 Effect of exchange rate changes
(1,000 )
–
Increase (decrease) in Cash during the Period (646,000 )
8,000 Cash, Beginning of Period 3,047,000 - Cash, End of Period$ 2,401,000 $ 8,000 13
Cash flows used in operating activities
Net cash used in operating activities increased by$370,000 or 259% during the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 due to (1) stock based compensation expense, (2) amortization of convertible promissory note discounts and, (3) impairment loss.
Cash flows used in investing activity
Net cash used in investing activity increased by$107,000 or 100% during the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 due to payments for design and development work for the Company's ASIC chip which was discontinued subsequent toJune 30, 2022 .
Cash flows used in financing activities
The Company had net cash used in financing activities during the six months endedJune 30, 2022 due to$25,000 repayment of notes payable. Conversely, it had net cash provided by financing activities during the six months endedJune 30, 2021 mainly due to proceeds from convertible promissory notes and notes payable amounting to$50,000 and$99,000 , respectively.
Capital Requirements
The Company estimates that it will require up to$2 million of its current cash for expenses and operating costs to complete the development of a comprehensive plan for its planned clean-energy powered, containerized, immersion-cooled data center operation. Once the plans are approved for construction by the requisite authorities, the Company estimates the initial phase of its planned data center operation will cost approximately$52 million to build. Past the plan development phase, the Company will need to raise capital in order to build its planned operations and achieve its growth targets, which the company plans to raise from investors by issuing common stock, preferred stock and/or debt securities. However, there can be no assurance that such financings will be available in sufficient amounts and on acceptable terms when it's needed. 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 but not limited to the condition of the capital market, investor interest in our business plan, demand for the Company's services by enterprise customers, the timing of approvals from authorities to start construction, the management of working capital, and reasonable payment terms and conditions for purchase of goods and services we will need to build our data center operation.
Critical Accounting Policies
The preparation of condensed consolidated financial statements in conformity withUnited States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying disclosures of our company. Although these estimates are based on management's knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary from the formation date. All material intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency Translation
The financial statements of our foreign subsidiary, for which the functional currency is the local currency, are translated intoU.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders' equity (deficit). Gains or losses from foreign currency transactions are recognized in the consolidated statements
of operations. Debt and Debt Discounts
In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company first allocates the cash proceeds of the notes between the notes and the warrants on a relative fair value basis, secondly, proceeds are then allocated to the conversion feature. 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. These costs are classified on the consolidated balance sheet as a direct deduction from the debt liability. The Company amortizes these costs over the term of its debt agreements as financing cost in the consolidated statement of operations. Stock-Based Compensation
We account for our stock-based compensation under ASC 718, "Compensation - Stock Compensation" using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. 14 We use the fair value method for equity instruments granted to non-employees and use the BSM model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant (measurement date) and is recognized over the vesting periods.
Recent Accounting Pronouncements
The Company's management reviewed all recently issued accounting standard
updates ("ASU's") not yet adopted by the Company and does not believe the future
adoptions of any such ASU's may be expected to cause a material impact on the
Company's condensed consolidated financial condition or the results of its
operations.
Off-Balance Sheet Arrangements
As of
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