10-K: CalEthos Eyes Geothermal-Powered Data Center Campus in Southern California

CalEthos is developing a large-scale, geothermal-powered data center campus in Southern California, aiming to lease powered building lots and buildings to enterprise IT companies.

Summary

• CalEthos, Inc. is focusing on developing a large-scale, geothermal-powered data center campus in Southern California.
• The company is planning a 635-acre, vertically-integrated campus in Imperial County, leveraging the area's geothermal and lithium resources.
• The site is planned to support a gigawatt or more of onsite geothermal power production, a switchyard for offsite power connections, and twelve 25-acre building lots.
• CalEthos intends to offer powered land leases, powered shell leases, build-to-suit leases, and co-development options to hyperscale and data center development companies.
• The company expects to have lease agreements signed for all or a substantial part of the development by the end of 2025 or early 2026.
• CalEthos is also evaluating sites in other states with geothermal resources and internet connectivity for future data center campuses.
• The company anticipates completing land use and zone change approvals by the end of 2025 or during the first quarter of 2026.
• Initial construction of the data center campus and utility lines is planned to start by the end of the second quarter 2026.
• Design, planning, and environmental reports for onsite geothermal production systems are expected to be submitted by mid-2026.
• CalEthos is completing a master services agreement with a geothermal technology company for advanced closed-loop geothermal production technology, with designs expected by the end of 2025.
• The company believes 100% clean-energy-powered data centers are crucial for meeting carbon-neutral climate goals.
• CalEthos has contracted with leading data center and energy advisory firms for site assessments, feasibility studies, and engineering plans.
• The company plans to develop its site to support up to three million square feet of data center facilities utilizing 2 gigawatts or more of baseload geothermal power.
• The data center industry is forecasting that data center capacity will triple within the next five years.
• The industry is not only large, but also very profitable, with the principal data center developer/operator companies averaging EBITDA margins of 50% or more on lease revenues.
• The industrys total annual contribution to national employment has increased from 2.9 million jobs in 2017 to 4.7 million jobs in 2023.
• The industrys total annual contribution to national labor income surged from $209 billion in 2017 to $404 billion in 2023.
• The industrys annual contribution to U.S. value added, or gross domestic product (GDP), rose from $355 billion in 2017 to $727 billion in 2023.
• With continued technology improvements and reductions in project costs, geothermal could meet up to 15% of global electricity demand growth by 2050.
• The key participants in the data center market with which we will compete are infrastructure developers, such as Tract, ScaleUp, Stream, Quantum Loophole and Cloverleaf Infrastructure, and data center companies such as Digital Realty, Equinix, CyrusOne, QTS, Vantage and Compass, among many others.

Sentiment

Score: 4

Explanation: The document presents a mixed sentiment. While the company has a promising business plan and is targeting a growing market, it faces significant financial challenges, including net losses, an accumulated deficit, and the need to raise additional capital. The presence of material weaknesses in internal control over financial reporting also raises concerns.

Positives

• The company is developing a large-scale, geothermal-powered data center campus in Southern California.
• The company is planning a 635-acre, vertically-integrated campus in Imperial County, leveraging the area's geothermal and lithium resources.
• The site is planned to support a gigawatt or more of onsite geothermal power production, a switchyard for offsite power connections, and twelve 25-acre building lots.
• CalEthos intends to offer powered land leases, powered shell leases, build-to-suit leases, and co-development options to hyperscale and data center development companies.
• The company expects to have lease agreements signed for all or a substantial part of the development by the end of 2025 or early 2026.
• CalEthos believes its clean energy approach will provide a significant competitive advantage.
• The company has contracted with HDR Engineering, ZGlobal, American Dark Fiber, and Linesight for various assessments and plans.
• The industry is not only large, but also very profitable, with the principal data center developer/operator companies averaging EBITDA margins of 50% or more on lease revenues.
• The industrys total annual contribution to national employment has increased from 2.9 million jobs in 2017 to 4.7 million jobs in 2023.
• The industrys total annual contribution to national labor income surged from $209 billion in 2017 to $404 billion in 2023.
• The industrys annual contribution to U.S. value added, or gross domestic product (GDP), rose from $355 billion in 2017 to $727 billion in 2023.
• With continued technology improvements and reductions in project costs, geothermal could meet up to 15% of global electricity demand growth by 2050.

Negatives

• The company incurred a net loss of approximately $12,590,000 for the year ended December 31, 2024.
• The company had an accumulated deficit of approximately $31,870,000 as of December 31, 2024.
• The company had no recurring revenue from operations.
• The company has financed its activities principally through debt and equity financing and shareholder contributions.
• Management expects to incur additional losses and cash outflows in the foreseeable future in connection with its operating activities.
• These conditions raise substantial doubt about the Companys ability to continue as a going concern for one year from the issuance of these consolidated financial statements.
• The company has only limited capital with which to pay these anticipated expenses.
• The company may not be able to secure financing on favorable terms, or at all, to meet its future capital needs.
• The company's disclosure controls and procedures were not effective due to the presence of material weaknesses in internal control over financial reporting.

Risks

• The company's ability to finance and complete the design and construction of its proposed data center operations is uncertain.
• Obtaining necessary regulatory approvals for data center operations and energy needs poses a risk.
• The company's ability to implement its business plan and attract key personnel is not guaranteed.
• Operating profitably and efficiently financing operations are subject to uncertainty.
• The company faces risks related to achieving future sales levels, raising additional financing, and managing operations effectively.
• Management's ability to implement strategies and business plans effectively is a risk factor.
• The unavailability of funds for capital expenditures and/or general working capital could hinder progress.
• Deterioration in general or regional economic conditions could adversely affect the company.
• Changes in U.S. GAAP or in the legal, regulatory, and legislative environments pose risks.
• Adverse state or federal legislation or regulation could increase compliance costs.
• The company faces intense competition in the data center industry from established players with greater resources.
• Competition for key third-party service providers, including engineers and contractors, is intense.
• The company faces competition from real estate developers for suitable properties.
• The company's intellectual property rights may not be adequately protected.
• The company may be subject to intellectual property infringement claims.
• The company's reliance on estimates and assumptions in its accounting policies could lead to material misstatements.
• The company's internal control over financial reporting was not effective as at December 31, 2024 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.

Future Outlook

CalEthos plans to complete land use and zone change approvals by the end of 2025 or during the first quarter of 2026, with initial construction of the data center campus and utility lines planned to start by the end of the second quarter 2026. The company expects to have lease agreements signed for a substantial part of the development by the end of 2025 or early 2026.

Management Comments

• We believe 100% clean-energy-powered data centers are an important element in the ability of the U.S. to meet its carbon neutral climate goals and for hyperscale and enterprise IT companies to meet their shareholder and customer commitments to have an ESG-compliant, clean digital footprint before 2030.
• As a result, we believe the availability of nearby clean energy and our ability to produce geothermal power on our site will provide us a significant competitive advantage in the marketplace.

Industry Context

The data center industry is experiencing significant growth, driven by increased demand for data processing and storage infrastructure. The industry is forecasting that data center capacity will triple within the next five years. The key constraint for the growth of data centers is the availability of power. The U.S. is expected to see the highest share of new data centers outside of China.

Comparison to Industry Standards

• The principal data center developer/operator companies averaged EBITDA margins of 50% or more on lease revenues, those that are publicly traded were valued at an average of 25 times EBITDA.
• The industrys total annual contribution to national employment has increased from 2.9 million jobs in 2017 to 4.7 million jobs in 2023, marking a 60 percent rise over this period.
• The industrys total annual contribution to national labor income surged from $209 billion in 2017 to $404 billion in 2023, reflecting a 93 percent increase.
• The industrys annual contribution to U. S. value added, or gross domestic product (GDP), rose from $355 billion in 2017 to $727 billion in 2023, marking a 105% increase.

Management Changes

Related Party Transactions

• Between December 11, 2023 and February 20, 2024, we entered into a series of exchange subscription agreements (each, an Exchange Agreement) with 14 holders (each, a Holder) of our outstanding promissory notes and, in certain cases, related outstanding stock purchase warrants, pursuant to which we and the Holders agreed to exchange their promissory notes, and, if applicable, related stock purchase warrants, for shares of our common stock.
• Nanosha Investments LLC, a limited liability company controlled by Sean Fontenot, a director of our company (Nanosha), entered into an Exchange Agreement with us pursuant to which it exchanged (i) a promissory note with outstanding principal and accrued interest in the aggregate amount of $4,287,193, and (ii) a warrant for the purchase of 1,540,000 shares of common stock, for 8,574,386 of the Exchange Shares.
• On February 12, 2024, Nanosha made a loan to us in the amount of $1,000,000 in consideration for which we issued to Nanosha a promissory note in the principal amount of $1,000,000 that bore interest at the rate of 10% per annum and originally matured on May 30, 2024 and a five-year warrant to purchase up to 200,000 shares of common stock with an initial exercise price of $0.50 per share.
• On December 15, 2024, we entered into an exchange subscription agreement with Nanosha pursuant to which Nanosha exchanged (i) the promissory note we issued to Nanosha on February 12, 2024 in the principal amount of $1,000,000, and (ii) the warrants we issued to Nanosha on May 30, 2024 and August 31, 2024 for the purchase of an aggregate of 600,000 shares of common stock, for (a) 500,000 shares of common stock and (b) a five-year warrant to purchase an aggregate of 2,258,877 shares of common stock for a purchase price of $2.00 per share.

Stakeholder Impact

• Shareholders face potential dilution from future equity issuances.
• Employees may experience uncertainty due to the company's financial challenges and potential need for cost-cutting measures.
• Customers may benefit from the development of a clean-energy-powered data center, but face risks related to the company's ability to execute its plans.
• Suppliers and creditors face risks related to the company's ability to meet its financial obligations.
• The local community in Imperial County may benefit from job creation and economic development, but also face potential environmental impacts from data center construction and operation.

Next Steps

• Completing the vertically-integrated, geothermal-powered data center campus land-use plan and zone change with Imperial County Planning and Development.
• Completing plans, timelines, and budgets for required county and state environmental studies and reports.
• Obtaining required approvals to start initial construction of the data center campus and external utility lines by the end of the second quarter 2026.
• Completing and submitting design, planning, and environmental reports for planned onsite geothermal production systems by mid-2026.
• Completing a master services agreement with a geothermal technology and development company before the end of June 2025.
• Completing designs for subsurface and surface components of geothermal production systems before the end of 2025.

Key Dates

Keywords

data center, geothermal energy, data center campus, clean energy, Imperial County, infrastructure, colocation, CalEthos, data, power