NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
NOTE
1 – ORGANIZATION AND DESCRIPTION OF THE BUSINESS
The
Crypto Company was incorporated in the State of Nevada on March 9, 2017 (“Inception”). The Company is engaged in the
business of providing consulting services and education for distributed ledger technologies (“blockchain”), for the
building of technological infrastructure and enterprise blockchain technology solutions. The Company currently generates revenues
and incurs expenses solely through these consulting operations.
Unless
expressly indicated or the context requires otherwise, the terms “Crypto,” the “Company,” “we,”
“us,” and “our” in this quarterly Report on Form 10-Q for the period ended September 30, 2020 (“Quarterly
Report”) refer to The Crypto Company and, where appropriate, its wholly-owned subsidiaries, Crypto Sub, Inc., a Nevada
corporation (“Crypto Sub”); CoinTracking, LLC, a Nevada limited liability company (“CoinTracking”); and
Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”).
During
the year ended December 31, 2019, the Company generated revenues and incurred expenses primarily through the business of providing
consulting services and education for distributed ledger technologies (“blockchain”), for the building of technological
infrastructure and enterprise blockchain technology solutions,
The
Company’s accounting year-end is December 31.
COVID-19
On
March 11, 2020, the World Health Organization (“WHO”) declared the Covid-19 outbreak to be a global pandemic. In addition
to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions
and volatility in the global financial markets. Most US states and many countries have issued policies intended to stop or slow
the further spread of the disease.
Covid-19
and the U.S’s response to the pandemic are significantly affecting the economy. There are no comparable events that provide
guidance as to the effect the Covid-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain
and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business, or
our operations.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management’s
Representation of Interim Financial Statements
The
accompanying unaudited consolidated financial statements have been prepared by the Company without audit pursuant to the rules
and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included
in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate
to make the information presented not misleading. These consolidated financial statements include all of the adjustments, which
in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments
are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These consolidated
financial statements should be read in conjunction with the audited consolidated financial statements at December 31, 2019, and
2018.
The
Company prepares its consolidated financial statements based upon the accrual method of accounting, recognizing income when earned
and expenses when incurred.
Basis
of Presentation and Principles of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Crypto Sub, CoinTracking,
and Malibu Blockchain, as well as its prior 50.1% ownership of CoinTracking GmbH. On January 2, 2019, the Company sold its entire
equity ownership stake in CoinTracking GmbH. All significant intercompany accounts and transactions are eliminated in consolidation.
Liquidity
and Going Concern
The
Company’s consolidated financial statements are prepared using the accrual method of accounting in accordance with United
States (“U.S.”) generally accepted accounting principles (“GAAP”) and have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company
has incurred significant losses and experienced negative cash flows since inception. As of September 30, 2020, the Company had
cash of $114,342. In addition, the Company’s net loss was $2,310,810 for the nine months ended September 30, 2020. The Company’s
working capital was negative $2,233,741 as of September 30, 2020. As of September 30, 2020, the accumulated deficit amounted to
$32,575,981. As a result of the Company’s history of losses and financial condition, there is substantial doubt about the
ability of the Company to continue as a going concern.
The
ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining
the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come
due. Management is evaluating different strategies to obtain financing to fund the Company’s expenses and achieve a level
of revenue adequate to support the Company’s current cost structure. Financing strategies may include, but are not limited
to, private placements of capital stock, debt borrowings, partnerships and/or collaborations. There can be no assurance that any
of these future-funding efforts will be successful or that the Company will be able to replace the revenues lost as a result of
the sale of CoinTracking GmbH, for the remaining quarters of 2020 and beyond. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
Use
of estimates
The
preparation of these consolidated financial statements in conformity with US GAAP requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets
and liabilities. The Company bases its estimates on historical experience and on various other assumptions 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 that are not readily apparent from other sources. The Company’s significant estimates and assumptions include
but are not limited to the valuation allowances of deferred taxes, and share-based compensation expenses. Actual results may differ
from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on
the Company’s operating results.
Cash
and cash equivalents
The
Company defines its cash and cash equivalents to include only cash on hand and certain highly liquid investments with original
maturities of ninety days or less. The Company maintains its cash and cash equivalents at financial institutions, the balances
of which may, at times, exceed federally insured limits. Management believes that the risk of loss due to the concentration is
minimal.
Investments
in cryptocurrency
Investments were comprised of
several cryptocurrencies the Company owned, of which a majority was Bitcoin, that were actively traded on
exchanges. During 2018, the Company sold most of its investments and during 2019 wrote-off all those investments because
there was no method to obtain liquidity for those investments. During the quarter ended September 30, 2020, one of those
investments that had been previously been written off became valuable and the Company liquidated the extent of its holdings
at that time for cash proceeds of $208,964. The Company recorded this recovery as other income in its financial
statements. As previously disclosed, the Company has ceased operations of its
former cryptocurrency investment segment, and the Company liquidates newly issued/accessible assets from old investments as promptly
as practicable for the sole purpose of winding down the Company’s legacy cryptocurrency investment segment.
The
Company records its investments as indefinite-lived intangible assets at cost less impairment and are reported as long-term assets
in the consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment
annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the
indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment,
the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment
exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not
necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment
loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
The primary exchanges and principal markets the Company utilized for its trading were Kraken, Bittrex, Poloniex, and Bitstamp.
As
of September 30, 2020, the Company had written off the value of it investments in cryptocurrency.
Investments
non-cryptocurrency
The
Company has historically invested in simple agreement for future tokens (“SAFT”) and a simple agreement for future
equity (“SAFE”) agreements. The SAFT agreements provide for the issuance of tokens in anticipation of a future token
generation event, with the number of tokens predetermined based on the price established in each respective agreement. The SAFE
investment included provisions that provide for either equity or tokens or both. As of September 30, 2020, and December 31, 2019
the Company had written off its investments in non-cryptocurrency.
Business
combination
The
purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from
the acquired business based on their estimated fair values with the residual of the purchase price recorded as goodwill. The results
of operations of acquired businesses are included in our operating results from the dates of acquisition.
Foreign
Currency Translation
Results
of foreign operations are translated into USD using average rates prevailing throughout the period, while assets and liabilities
are translated in USD at period end foreign exchange rates. Transactions gains and losses resulting from exchange rate changes
on transactions denominated in currencies other than the functional currency of the applicable subsidiary are included in the
consolidated statements of operations, within other income, in the year in which the change occurs. The Company’s functional
currency is USD while the functional currency for CoinTracking GmbH, which was owned by the Company for the first two calendar
days of 2019, is in euros.
Income
taxes
Deferred
tax assets and liabilities are recognized for expected future consequences of events that have been included in the financial
statements or tax returns. Under the asset and liability method, deferred income tax assets and liabilities are determined based
on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently
enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence,
are not expected to be realized. The provision for income taxes represents the tax payable for the period and the change during
the period in deferred tax assets and liabilities.
When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceed the amount measured as described above is reflected as a liability for unrecognized tax benefits
along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
As
of September 30, 2020, we are subject to federal taxation in the U.S, as well as state taxes. For 2018, we were subject to taxation
in Germany as well. The Company has not been audited by the U.S. Internal Revenue Service, nor has the Company been audited by
any states or in Germany. On January 2, 2019, the Company sold its entire equity ownership stake in CoinTracking GmbH.
Fair
value measurements
The
Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations
based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level of input has different
levels of subjectivity and the difficulty involved in determining fair value.
|
Level
1
|
Inputs
are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurable date.
|
|
|
|
|
Level
2
|
Inputs,
other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market
data at the measurement date.
|
|
|
|
|
Level
3
|
Unobservable
inputs that reflect management’s best estimate of what participants would use in pricing the asset or liability at the
measurement date.
|
The
carrying amounts of the Company’s financial assets and liabilities, including cash, accounts payable and accrued expenses
approximate fair value because of the short maturity of these instruments.
Revenue
recognition
The
Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of
the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The following five steps are applied to achieve that core principle:
|
●
|
Step
1:
|
Identify
the contract with the customer
|
|
●
|
Step
2:
|
Identify
the performance obligations in the contract
|
|
●
|
Step
3:
|
Determine
the transaction price
|
|
●
|
Step
4:
|
Allocate
the transaction price to the performance obligations in the contract
|
|
●
|
Step
5:
|
Recognize
revenue when the Company satisfies a performance obligation
|
In
order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services
in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition
of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer
can benefit from the good or service either on its own or together with other resources that are readily available to the customer
(i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the
customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is
distinct within the context of the contract).
If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods
or services is identified that is distinct.
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised
goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
Variable
consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The
transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point
in time or over time as appropriate.
The
Company adopted ASC 606 as of January 1, 2018, using the modified retrospective transition method for contracts as of the date
of initial application. There was no cumulative impact on the Company’s retained earnings.
During
2019, the Company’s main source of revenue was consulting and development services for two customers. The Company has determined
that revenue should be recognized over time, as the service is provided. The Company considered the criteria in ASC 606 in reaching
this determination, specifically:
|
●
|
The
customer receives and consumes the benefit provided by the Company’s performance as the Company performs.
|
|
●
|
The
Company’s performance enhances an asset controlled by the customer.
|
|
●
|
The
Company’s performance does not create an asset with alternative use, and the Company has an enforceable right to payment
for performance completed to date.
|
The
consulting arrangement meet more than one of the criteria above.
Share-based
compensation
In
accordance with ASC No. 718, Compensation-Stock Compensation (“ASC 718”), the Company measures the compensation costs
of share-based compensation arrangements based on the grant date fair value of granted instruments and recognizes the costs in
financial statements over the period during which employees are required to provide services. Share-based compensation arrangements
include stock options.
On
January 1, 2019, the Company adopted ASC No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which
simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments
to employees, with certain exceptions. Previously, share-based payments to nonemployees was accounted for in accordance with ASC
No. 505, Equity-Based Payments to Non-Employees, which required compensation cost to be remeasured at fair value at each reporting
period when the award vests. As a result, stock option-based payments to non-employees resulted in significant volatility in compensation
expense in prior years.
The
Company accounts for its share-based compensation using the Black-Scholes model to estimate the fair value of stock option awards.
Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s
common stock price, (ii) expected life of the award, which for options is the time over which employees and non-employees are
expected to hold their options prior to exercise, and (iii) risk-free interest rate.
Net
loss per common share
The
Company reports earnings per share (“EPS”) with a dual presentation of basic EPS and diluted EPS. Basic EPS is computed
as net income divided by the weighted average of common shares for the period. Diluted EPS reflects the potential dilution that
could occur from common shares issued through stock options, or warrants. For the three and nine months ended September 30, 2020,
and 2019, the Company had no potentially dilutive common stock equivalents. Therefore, the basic EPS and diluted EPS are the same.
NOTE
3 - RECENT ACCOUNTING PRONOUNCEMENTS
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and
does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial
position or results of operations.
NOTE
4 - ACQUISITION
On
January 16, 2018, pursuant to an Equity Purchase Agreement (the “CoinTracking Purchase Agreement”) entered into on
December 22, 2017, by and among the Company, CoinTracking, Kachel Holding GmbH, an entity formed under the laws of the Republic
of Germany (“Kachel Holding”), and Dario Kachel, an individual, CoinTracking purchased from Kachel Holding 12,525
shares of CoinTracking GmbH, an entity formed under the laws of Germany (“CoinTracking GmbH”), representing 50.1%
of the equity interests in CoinTracking GmbH, for a purchase price of (i) $4,736,400 in cash, and (ii) 473,640 shares of common
stock of the Company, par value $0.001 per share, subject to adjustment as provided in the CoinTracking Purchase Agreement (the
“CoinTracking Acquisition”). The CoinTracking Acquisition was consummated on January 26, 2018.
On
December 28, 2018, CoinTracking agreed on the purchase and assignment of shares, agreements on a purchase price of the loan agreement
and a compensation agreement, with Kachel Holding and CoinTracking GmbH pursuant to which, on January 2, 2019, CoinTracking sold
12,525 shares of equity interest in CoinTracking GmbH, representing 50.1% of the outstanding equity interests in CoinTracking
GmbH and CoinTracking’s entire equity ownership stake in CoinTracking GmbH, to Kachel Holding in exchange for $2,200,000,
of which (i) $1,000,000 was paid in cash to CoinTracking and (ii) $1,200,000 was applied toward the repayment of an outstanding
loan of $1,500,000 from CoinTracking GmbH to CoinTracking under the CoinTracking Note (the “CoinTracking Disposition”).
In
2019, the Company had holdings of cryptocurrency from its investment segment, and therefore has classified those assets as assets
held for sale in its consolidated balance sheets, and reports current operating results as discontinued operations in the consolidated
statements of operations for the year ended December 31, 2019. The balance of cryptocurrency assets on our balance sheet as of
September 30, 2020, and December 31, 2019, was zero.
NOTE
5 – NOTE PAYABLE
On
April 3, 2018, CoinTracking entered into a Loan Agreement (the
“Loan Agreement”) with CoinTracking GmbH, which provided for total borrowings of up to $3,000,000. During 2018, CoinTracking
borrowed $1,500,000 in exchange for three promissory notes (the “CoinTracking Note”) in the amounts of $300,000, $700,000,
and $500,000, respectively. On December 31, 2018, the CoinTracking Note was still outstanding. On January 2, 2019, the Company
sold its equity ownership stake in CoinTracking GmbH, and $1,200,000 of the sales proceeds were applied toward repayment of the
$1,500,000 outstanding loan amount under the CoinTracking Note. The remaining balance of $300,000 is outstanding as of September
30, 2020, with a due date of March 31, 2021 which due date was extended from the prior due date of May 28, 2020 pursuant to
an amendment dated December 28, 2018 The Note bears interest at 3%, which is payable quarterly, in arrears for additional information.
Interest
expense was $2,250 and $6,750 for the three and nine months ended September 30, 2020, and for three month
and nine month period ended September 30, 2019, respectively.
|
●
|
On
May 8, 2020, The Crypto Company (the “Company”) entered into a promissory
note (the “Promissory Note”) with First Bank, a Missouri banking corporation,
which provides for a loan of $53,492 (the “PPP Loan”) pursuant to the Paycheck
Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”). The PPP Loan has a two-year term and bears interest at a rate
of 1.0% per annum. Monthly principal and interest payments are deferred for six months
after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity
with no prepayment penalties. The Promissory Note contains events of default and other
provisions customary for a loan of this type.
|
|
|
|
|
●
|
On
June 10, 2020, the Registrant received a loan from the Small Business Administration
of $12,100 (the “SBA Loan”). The SBA Loan bears interest at 3.75% per annum
and is payable over 30 years with all payments of principal and interest deferred for
the first 12 months.
|
NOTE
6 – CONVERTIBLE NOTES
The
balance of Convertible Notes was $125,000 and $75,000 as of September 30, 2020 and December 31, 2019.
In
June 2020, the Company issued Convertible Notes (“June 2020 Notes”) to an accredited investors for an aggregate
amount of $5,000. The June 2020 Notes mature on June 2025, unless earlier converted. The Notes bear interest at a rate of 5%
per year. The Notes will automatically convert into shares of common stock on the earlier to occur of a) a qualified equity
financing, with the conversion price equal to 50% of the common stock price paid by the purchasers of the equity, or b) on
the maturity date, at a price per share equal to the fair market value of the Company’s common stock on that date. If a
change in control occurs before either of the automatic conversion events, the holders of the June 2020 Notes will have the
option to convert the June 2020 Notes at a price per share equal to the fair market value of the common stock at the time of
such conversion. The Company can prepay the principal and interest, in cash, at any time without any premium or penalty. The
June 2020 Notes have no voting rights, do not participate in dividends, and are unsecured. The Company believes it is more
likely than not that the June 2020 Notes will not be automatically converted in connection with a qualified equity financing
prior to either prepayment or automatic conversion on maturity.
In
April 2020, the Company issued three Convertible Notes (“April 2020 Notes”) to three accredited investors for an aggregate
amount of $22,500. The April 2020 Notes mature on April 2025, unless earlier converted. The April 2020 Notes bear interest at
a rate of 5% per year. The April 2020 Notes will automatically convert into shares of common stock on the earlier to occur of
a) a qualified equity financing, with the conversion price equal to 50% of the common stock price paid by the purchasers of the
equity, or b) on the maturity date, at a price per share equal to the fair market value of the Company’s common stock on
that date. If a change in control occurs before either of the automatic conversion events, the holders of the April 2020 Notes
will have the option to convert the April 2020 Notes at a price per share equal to the fair market value of the common stock at
the time of such conversion. The Company can prepay the principal and interest, in cash, at any time without any premium or penalty.
The April 2020 Notes have no voting rights, do not participate in dividends, and are unsecured. The Company believes it is more
likely than not that the April 2020 Notes will not be automatically converted in connection with a qualified equity financing
prior to either prepayment or automatic conversion on maturity.
In
February 2020, the Company issued three Convertible Notes (“February 2020 Notes”) to three accredited investors for
an aggregate amount of $22,500. The February 2020 Notes mature on February 2025, unless earlier converted. The February 2020 Notes
bear interest at a rate of 5% per year. The February 2020 Notes will automatically convert into shares of common stock on the
earlier to occur of a) a qualified equity financing, with the conversion price equal to 50% of the common stock price paid by
the purchasers of the equity, or b) on the maturity date, at a price per share equal to the fair market value of the Company’s
common stock on that date. If a change in control occurs before either of the automatic conversion events, the holders of the
February 2020 Notes will have the option to convert the February 2020 Notes at a price per share equal to the fair market value
of the common stock at the time of such conversion. The Company can prepay the principal and interest, in cash, at any time without
any premium or penalty. The February 2020 Notes have no voting rights, do not participate in dividends, and are unsecured. The
Company believes it is more likely than not that the February 2020 Notes will not be automatically converted in connection with
a qualified equity financing prior to either prepayment or automatic conversion on maturity.
On
September 23, 2019, the Company issued two Convertible Notes (“September 2019 Notes”) to two accredited investors
for an aggregate amount of $75,000. The September 2019 Notes mature on September 23, 2024, unless earlier converted. The September
2019 Notes bear interest at a rate of 5% per year. The September 2019 Notes will automatically convert into shares of common stock
on the earlier to occur of a) a qualified equity financing, with the conversion price equal to 50% of the common stock price paid
by the purchasers of the equity, or b) on the maturity date, at a price per share equal to the fair market value of the Company’s
common stock on that date. If a change in control occurs before either of the automatic conversion events, the holders of the
September 2019 Notes will have the option to convert the September 2019 Notes at a price per share equal to the fair market value
of the common stock at the time of such conversion. The Company can prepay the principal and interest, in cash, at any time without
any premium or penalty. The September 2019 Notes have no voting rights, do not participate in dividends, and are unsecured. The
Company believes it is more likely than not that the September 2019 Notes will not be automatically converted in connection with
a qualified equity financing prior to either prepayment or automatic conversion on maturity.
The
Company reviewed ASC 815 – Derivatives and Hedging, to determine if the embedded feature in the Notes, specifically the
equity conversion feature, should be accounted for as a derivative instrument. The Company considered whether the Notes included
net settlement, either explicitly by the terms of the Notes or by other means, such as through the resale of the shares obtained
on conversion in the public markets. The Company determined that the Notes do not contain a net settlement option. Also, conversion
to cash through the public markets is unlikely, as only 3% of the Company’s outstanding shares are in public float, and
the Company’s shares are listed on the OTC grey market, resulting in limited trades of insignificant volume. The Company
cannot determine when, or if, its shares will be listed on an active exchange, and if shares available to trade will increase.
[In connection with the September 2019 Notes, the Company issued 75,000 warrants to purchase the Company’s common stock
at a warrant price of $0.01 per share. The warrants expire in three years. The Company determined the fair value of the warrants
utilizing the Black-Scholes model, resulting in an expense of $50,000, included in interest expense in the Company’s consolidated
statements of operations for the nine months ended September 30, 2020.
Interest
expense was $1,607 and $52,633 for the three and nine months ended September 30, 2020, respectively, compared to $1,279 for three
month and nine month period ended September 30, 2019, respectively.
NOTE
7 – WARRANTS FOR COMMON STOCK
As
of September 30, 2020, outstanding warrants to purchase shares of the Company’s common stock were as follows:
Issuance Date
|
|
Exercisable for
|
|
Expiration Date
|
|
Exercise Price
|
|
|
Number
of Shares
Outstanding
Under
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2019
|
|
Common Shares
|
|
September 24, 2022
|
|
$
|
0.01
|
|
|
|
75,000
|
|
February 2020
|
|
Common Shares
|
|
February 6, 2030
|
|
$
|
0.01
|
|
|
|
10,000
|
|
February 2020
|
|
Common Shares
|
|
February 12, 2030
|
|
$
|
0.01
|
|
|
|
2,500
|
|
February 2020
|
|
Common Shares
|
|
February 19, 2030
|
|
$
|
0.01
|
|
|
|
10,000
|
|
April 2020
|
|
Common Shares
|
|
April 20, 2030
|
|
$
|
0.01
|
|
|
|
22,500
|
|
June 2020
|
|
Common Shares
|
|
June 9, 2030
|
|
$
|
0.01
|
|
|
|
5,000
|
|
The
exercise price of the warrants is subject to adjustment from time to time, as provided therein, to prevent dilution of purchase
rights granted thereunder. The warrants are considered indexed to the Company’s own stock and therefore no subsequent remeasurement
is required.
NOTE
8 - SUMMARY OF STOCK OPTIONS
On
July 21, 2017, the Company’s board of directors adopted The Crypto Company 2017 Equity Incentive Plan (the “Plan”),
which was approved by its stockholders on August 24, 2017. The Plan is administered by the board of directors (the “Administrator”).
Under the Plan, the Company may grant equity awards to eligible participants which may take the form of stock options (both incentive
stock options and non-qualified stock options) and restricted stock awards. Awards may be granted to officers, employees, non-employee
directors (as defined in the Plan) and other key persons (including consultants and prospective employees). The term of any stock
option award may not exceed 10 years and may be subject to vesting conditions, as determined by the Administrator. Options granted
generally vest over eighteen to thirty-six months. Incentive stock options may be granted only to employees of the Company or
any subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Internal Revenue Code.
During
the nine month period ended September 30, 2020, the Company issued 500,000 stock options to members of its board of directors,
1,250,000 stock options to its chief executive officer, and 170,000 stock options to others.
5,000,000
shares of the Company’s common stock are reserved for issuance under the Plan. As of September 30, 2020, there are outstanding
stock option awards issued from the Plan covering a total of 1,920,000 shares of the Company’s common stock and there remain
reserved for future awards 3,080,000 shares of the Company’s common stock.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
of Shares
|
|
|
Price
|
|
|
(years)
|
|
|
Value
|
|
Options outstanding, at December 31, 2019
|
|
|
346,349
|
|
|
$
|
8.73
|
|
|
|
8.38
|
|
|
|
3,025,003
|
|
Options granted
|
|
|
1,920,000
|
|
|
|
1.00
|
|
|
|
4.63
|
|
|
|
1,920,000
|
|
Options canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options outstanding, at September 30, 2020
|
|
|
2,266,429
|
|
|
$
|
2.18
|
|
|
|
5.63
|
|
|
$
|
4,495,003
|
|
Exercisable
|
|
|
2,266,429
|
|
|
$
|
2.18
|
|
|
|
5.63
|
|
|
$
|
4,495,003
|
|
Vested and exercisable and expected to vest, end of the period
|
|
|
2,266,429
|
|
|
$
|
2.18
|
|
|
|
5.63
|
|
|
$
|
4,495,003
|
|
The
Company recognized an increase in expense of $1,801,655 and $-0- for share-based compensation related to stock options for the
three and nine month period ended September 30, 2020, respectively. See “Note 10 – Discontinued Operations”
for share-based compensation related to our former cryptocurrency investment segment and CoinTracking GmbH for the nine months
ended September 30, 2019.
There
were no options exercised for the three months ended September 30, 2019 and 2020 and for the nine months ended September 30, 2020.
The
Company did not grant any restricted stock awards during the three and nine month period ended September 30, 2020, respectively.
As
of September 30, 2020, there was $0 of unrecognized compensation costs related to stock options issued to employees and nonemployees.
The
determination of the fair value of share-based compensation awards utilizing the Black-Scholes model is affected by the Company’s
stock price and a number of complex and subjective assumptions, including stock price, volatility, expected life of the equity
award, forfeitures rates if any, risk-free interest rates and expected dividends. Volatility is based on the historical volatility
of comparable companies measured over the most recent period, generally commensurate with the expected life of the Company’s
stock options, adjusted for future expectations given the Company’s limited historical share price data.
The
range of assumptions used for the nine months ended September 30, 2020, are as follows:
|
|
Nine Months Ended
September 30, 2020
|
|
|
|
|
Ranges
|
|
Volatility
|
|
|
36
– 115
|
%
|
Expected dividends
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5.00
– 10 years
|
|
Risk-free rate
|
|
|
0.17
– 2.95
|
%
|
NOTE
9 - RELATED PARTY TRANSACTIONS
The
Company previously had a services agreement with Full Stack Finance for chief financial officer and accounting outsource services.
Ivan Ivankovich, the Company’s CFO until he resigned effective December 6, 2019, is the Co-Managing Director of Full Stack
Finance. The Company did not incur expenses in the current year. As of September 30, 2020, and December 31, 2019, there was a
balance due to Full Stack Finance of $18,000 and $133,834, respectively, which is included in accounts payable and accrued
expenses on the accompanying consolidated balance sheets.
On
April 3, 2018, CoinTracking entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, pursuant
to which CoinTracking GmbH was to provide a loan (the “CoinTracking Loan”) of up to $3,000,000 to CoinTracking, to
be advanced to CoinTracking in one or more tranches, at such times and in such amounts as requested by CoinTracking from time
to time, on or before the tenth anniversary of the Loan Agreement. The Company was deemed obligor of CoinTracking’s obligations
under the Loan Agreement for United States Federal income tax purposes. Interest on the CoinTracking Loan accrued at a rate per
annum of the greater of (i) three percent (3%), or (ii) the interest rates published monthly by the United States Internal Revenue
Service and in effect under section 1274(d) of the Internal Revenue Code in effect as of the date of issuance of any promissory
note under the CoinTracking Loan, and payable quarterly. During the year ended December 31, 2018, pursuant to the Loan Agreement,
CoinTracking GmbH advanced $1,500,000 to CoinTracking in exchange for three promissory notes (the “CoinTracking Note”)
in the amounts of $300,000, $700,000 and $500,000, respectively, which were still outstanding as of December 31, 2018. CoinTracking
and CoinTracking GmbH are consolidated entities, as such, the loan and advances are intercompany transactions and are eliminated
in consolidation. On January 2, 2019, the Company sold its equity ownership stake in CoinTracking GmbH, and $1,200,000 of the
sale proceeds were applied toward repayment of the $1,500,000 outstanding loan amount under the CoinTracking Note, leaving a remaining
balance of $300,000. See “Note 5 – Note Payable” for additional details.
Effective
May 14, 2018, Michael Poutre, former Chief Executive Officer, and director of the Company resigned from all of his then-current
roles with the Company. Mr. Poutre remained a consultant until November 2018. In connection with Mr. Poutre’s resignation,
the Company entered into a Separation and Consulting Agreement and General Mutual Release (the “Separation and Consulting
Agreement”), which was executed on May 9, 2018, and approved by the Board of Directors on May 14, 2018. The Separation and
Consulting Agreement was not effective until May 17, 2018, following the end of the revocation period. The Separation and Consulting
Agreement provided that the Company pay Mr. Poutre a lump-sum cash payment of (i) his earned but unpaid base salary, (ii) his
accrued but unpaid vacation time, and (iii) any outstanding requests for expense reimbursements that are approved pursuant to
Company policy. Mr. Poutre served as a consultant of the Company for six months at a rate of $30,000 per month, payable in two
separate tranches. The Separation and Consulting Agreement contained other standard provisions contained in agreements of this
nature including non-disparagement and a general release of any and all claims. During 2018, the Company paid Mr. Poutre $90,000
of the $180,000 due in connection with his Separation and Consulting Agreement.
On
January 15, 2019, the Company entered into a settlement agreement with Mr. Poutre, whereby the Company agreed to pay Mr. Poutre
$40,000 as settlement of all amounts outstanding in connection with his Separation and Consulting Agreement
NOTE
10 – DISCONTINUED OPERATIONS
On
December 28, 2018, the Company entered into the Agreement with Kachel Holding and CoinTracking GmbH to sell its controlling interest
in CoinTracking GmbH. CoinTracking GmbH was acquired by the Company on January 26, 2018. On January 2, 2019, pursuant to the Agreement,
the Company sold 12,525 shares of equity interest in CoinTracking GmbH, representing 50.1% of the equity interests in CoinTracking
GmbH and 100% of CoinTracking’s holdings in CoinTracking GmbH, to Kachel Holding in exchange for $2,200,000, of which (i)
$1,000,000 was paid in cash to CoinTracking and (ii) $1,200,000 was applied toward the repayment of an outstanding loan in the
amount of $1,500,000 from CoinTracking GmbH to CoinTracking under the CoinTracking Note.
The
Company retained no ownership in CoinTracking GmbH and has no continuing involvement with CoinTracking as of the date of the sale.
A
reconciliation of the operations of the cryptocurrency investment segment and CoinTracking GmbH to the consolidated statements
of operations is shown below:
|
|
For the Three Months ended
|
|
|
For the Nine Months ended
|
|
|
|
September 30,
2020
|
|
|
September 30, 2019
|
|
|
September 30,
2020
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of CoinTracking GmbH
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,166
|
|
Net realized gain on investment in cryptocurrency
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72,634
|
|
Impairment of investments, cryptocurrency
|
|
|
-
|
|
|
|
(276
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(loss) before provision for income taxes
|
|
|
-
|
|
|
|
(276
|
)
|
|
|
-
|
|
|
|
86,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss)
|
|
$
|
-
|
|
|
$
|
(276
|
)
|
|
$
|
-
|
|
|
$
|
86,524
|
|
Loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income/(loss) attributable to Crypto Company
|
|
$
|
-
|
|
|
$
|
(276
|
)
|
|
$
|
-
|
|
|
$
|
86,524
|
|
Included
in the net income for the nine months ended September 30, 2020, and September 30, 2019, is $-0- and $86,524 respectively, from
the cryptocurrency investment segment.
NOTE
11 - COMMITMENTS AND CONTINGENCIES
Facility
rent expense was $1,891 for the nine months ended September 30, 2020, and $3,565 for the nine months ended September 30, 2019,
respectively.
NOTE
12 – SUBSEQUENT EVENTS
In
accordance with ASC 855-10 management has performed an evaluation of subsequent events from September 30, 2020, through the date
the financial statements were available to be issued, and has determined that there are no items requiring disclosure with
the exception the following: Beginning in October 2020 and through November 10, 2020 the Company received approximately 545 Filecoin
tokens from a previous investment that had been previously written off valued at approximately $16,611. Due to the nature of digital
assets, the Filecoin investment that previously was considered to have no value delivered their tokens to us, with value, during
the three months ended September 30, 2020.
As
previously disclosed, the Company has ceased operations of its former cryptocurrency investment segment, and the Company liquidates
newly issued/accessible assets from old investments as promptly as practicable for the sole purpose of winding down the Company’s
legacy cryptocurrency investment segment.
Additionally
in November 2020, the Company issued 10,000 cashless stock options at a strike price of $14.00 per share, and 10,000 restricted
common shares to a consultant valued at $14.00 per share, or $70,000.