NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - THE COMPANY
The
Crypto Company (the “Company”, “Crypto”, “we”, “us” or “our”) was
incorporated in the State of Nevada on March 9, 2017 (“Inception”), and is engaged in the business of building technological
infrastructure, a proprietary investment portfolio and strategic alliances to facilitate the exchange of value in the digital
asset market and, specifically, to assist third parties with investing in, trading and managing digital assets. We also invest
in technologies and tokens in a manner that diversifies exposure to the growing class of digital assets. From time to time, we
may seek strategic acquisitions either by integrating third party teams and technology with our core business or by funding third
party teams in which we may have interest.
On
January 26, 2018, CoinTracking, LLC (“CoinTracking”), a Nevada limited liability company and wholly owned subsidiary
of The Crypto Company, acquired 50.1% of CoinTracking GmbH, and the remaining 49.9% of CoinTracking GmbH is owned by Kachel Holding
GmbH, a private limited liability company (Gesellschaft mit beschränkter Haftung) organized under the laws of the Federal
Republic of Germany. CoinTracking, GmbH, was incorporated in December 2017, and operates as a SAAS platform, which allows users
to track and manage value, profit, loss and other information regarding their investments in cryptocurrencies available via web-based
or mobile application. Prior to December 2017, CoinTracking, GmbH operated as a sole proprietorship starting in 2013.
Technology
The
Company is developing proprietary technology, including trading management and auditing software, tools and processes to assist
both our own operations and traditional companies, from start-up businesses to well-established companies. We may consider using
our technology to build additional units around our existing platform, or selling or licensing our technology to third party institutions
for a fee.
Media
and Ongoing Education
The
Company also engages in public discourse on an ongoing basis and regularly host roundtable webinars to educate the public about
the cryptocurrency market.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
- The included balance sheet as of December 31, 2017, was derived from audited financial statements and the
accompanying unaudited condensed consolidated financial statements as March 31, 2018 and 2017 of the Company have been prepared
in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim
financial information and pursuant to the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated
financial statements have been included.
The
results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or
for the full year.
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Annual Report on Form 10-K for the period from March 9, 2017 (“Inception”),
through December 31, 2017, filed with the Securities and Exchange Commission on April 2, 2018.
Consolidation
- The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Crypto
Sub and CoinTracking, LLC and its 50.1% ownership of CoinTracking, GmbH. All significant intercompany accounts and transactions
are eliminated in consolidation.
Liquidity
- The Company had limited revenues during the three months ended March 31, 2018, or since inception of March 9, 2017, limited
to realized gains on investments in cryptocurrency and software subscription revenue from their CoinTracking business acquisition.
The Company has raised an aggregate of $12,281,997 in cash from common stock issuances from inception on March 9, 2017 through
March 31, 2018, and had $3,678,730 in cash as of March 31, 2018 and working capital of $2,612,740. Management believes that the
Company has adequate cash and liquid cryptocurrency holdings as of March 31, 2018 to meet its operating cash needs for the next
12-15 months. The Company has the ability to structure its variable and fixed costs to offset delays in raising additional capital
in the private or public markets. However, the Company has a limited operating history and its prospects are subject to risks,
expenses and uncertainties frequently encountered by early-stage companies. These risks include, but are not limited to, the uncertainties
of availability of financing and achieving future profitability. Management anticipates that the Company will be dependent, for
the near future, on investment capital to fund operating expenses. The Company intends to position itself so that it may be able
to raise funds through the capital markets. There can be no assurance that such financing will be available at terms acceptable
to the Company, if at all. Failure to generate sufficient cash flows from operations, raise capital or reduce certain discretionary
spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives.
Use
of estimates
- The preparation of these consolidated financial statements in conformity accounting principles generally accepted
in the United States of America 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 recoverability
and useful lives of long-lived assets, allocation of revenue on software subscriptions, valuation of goodwill from business acquisitions,
valuation and recoverability of investments, valuation allowances of deferred taxes, and stock-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
-
Investments are comprised of several cryptocurrencies and are reported at fair value as determined by digital asset markets
with realized gains and losses calculated on a trade data basis as the difference between the fair value and cost of cryptocurrencies
transferred. The Company recognizes the fair value changes in unrealized appreciation or depreciation on investment through the
accompanying Statement of Operations. For the three-month period ended March 31, 2018, the Company had a consolidated balance
of $2,744,353 in investments. The Company believes that it would be able to liquidate a majority of its portfolio into cash within
24 hours, if needed. As of the Balance Sheet date, the Company’s holdings represent on average ~0.28% of the total volume
of trades on the specific exchanges where it would be able to convert its holdings to cash. The primary exchanges and principal
markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp which, in the aggregate, account
for approximately $105 million in Bitcoin/USD trades per day.
Equipment
- Equipment is recorded at cost and depreciated using the straight line method over the estimated useful life ranging from
three to five years. Normal repairs and maintenance are expensed as incurred. Expenditures that materially adapt, improve, or
alter the nature of the underlying assets are capitalized. When equipment are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to income.
Impairment
of long lived assets -
The Company analyzes its long-lived assets for potential impairment. Impairment losses are recorded
on long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those
assets are less than the net carrying amount of the assets. In such cases, the carrying values of assets to be held and used are
adjusted to their estimated fair value, less estimated selling expenses. For the three-month period ended March 31, 2018, the
Company recognized no impairment losses on its long-lived assets.
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.
Goodwill
- The Company records the excess of purchase price over the fair value of the tangible and identifiable intangible assets
acquired as goodwill. Goodwill and intangible assets with indefinite lives are tested for impairment at least annually and whenever
events or circumstances occur indicating that a possible impairment may have been incurred. Intangible assets with finite lives
are amortized over their useful lives.
The
Company assesses whether goodwill impairment exists using both the qualitative and quantitative assessments. The qualitative assessment
involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting
unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company determines it is
more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to
perform a qualitative assessment, a quantitative assessment is performed to determine whether a goodwill impairment exists at
the reporting unit.
Based
on its analysis, the Company’s management believes that no impairment of the carrying value of its goodwill existed at March
31, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products
and services will continue which could result in impairment of goodwill in the future.
Foreign
Currency Translation
- Results of foreign operations are translated into U.S. dollars using average rates prevailing throughout
the period, while assets and liabilities are translated in U.S. dollars 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) expense, net, in the
year in which the change occurs. The Company’s functional currency is U.S. dollars while the functional currency for CoinTracking
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. For the three-month period ended March 31, 2018, the
income tax payable of $800 reflects the minimum franchise tax for the State of California.
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 exceeds 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.
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 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 that 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 liabilities
approximate fair value because of the short maturity of these instruments.
Revenue
recognition
– The Company has two streams of principal revenue segments as of March 31, 2018. The Company records the
realized gain or loss on the investments on a trade date basis. The changes in unrealized appreciation or depreciation on the
investments are measured to market on the last day of every month at 11:59 p.m., Pacific Time, based on publicly available cryptocurrency
exchanges. The Company classifies investments in cryptocurrency as trading investments. Trading generally reflects active and
frequent buying and selling, and is generally used with the objective of generating profits on short-term difference in price.
The
Company also has subscription revenues through its subsidiary Coin Tracking LLC and significantly minimal amounts of consulting
revenue. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 supersedes nearly
all existing revenue recognition guidance under GAAP. The Company adopted ASU No. 2014-09 as of January 1, 2018 using the modified
retrospective transition method for contracts as of the date of initial application. There is no cumulative impact to the Company’s
retained earnings at January 1, 2018. See “Note 5 - Revenue Recognition” for additional information on the impact
to the Company.
Stock-based
compensation
- In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company
measures the compensation costs of stock-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. Stock-based
compensation arrangements include stock options.
Equity
instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments,
as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date
and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined,
is reached or (b) when the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The compensation
cost is remeasured at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees
can result in significant volatility in compensation expense.
The
Company accounts for its stock 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 period of time over which employees and non-employees
are expected to hold their options prior to exercise, and (iii) risk-free interest rate.
Risks
and uncertainties -
The Company is subject to various risks including market risk, liquidity risk, and other risks related
to its investments in cryptocurrency. Investing in cryptocurrency is currently unregulated, highly speculative, and volatile.
The
prices of cryptocurrency could materially and adversely affect an investment in the shares of the Company. The prices of the cryptocurrencies
have a limited history. During such history, the cryptocurrencies’ prices have been volatile and subject to influence by
many factors including the levels of liquidity. If the cryptocurrency’s markets continue to experience significant price
fluctuations, the Company may experience losses. Several factors may affect the prices of the cryptocurrencies, including, but
not limited to, global cryptocurrency supply and demand, and competition from other forms of digital currency or payments services.
There
is currently no clearing house for cryptocurrency, nor is there a central or major depository for the custody of cryptocurrency.
There is a risk that some or all of the Company’s cryptocurrencies could be lost or stolen. The Company does not have insurance
protection on its cryptocurrency which exposes the Company and its shareholders to the risk of loss of the Company’s cryptocurrency.
Further, cryptocurrency transactions are irrevocable. Stolen or incorrectly transferred of cryptocurrency may be irretrievable.
As a result, any incorrectly executed cryptocurrency transactions could adversely affect an investment in the Company.
To
the extent private keys for the cryptocurrency’s addresses are lost, destroyed or otherwise compromised and no backup of
the private keys are accessible, the Company may be unable to access the cryptocurrency held in the associated address and the
private key will not be capable of being restored by the cryptocurrency network.
The
processes by which cryptocurrency transactions are settled are dependent on the cryptocurrency peer-to-peer network, and as such,
the Company is subject to operational risk. A risk also exists with respect to previously unknown technical vulnerabilities, which
may adversely affect the value of the cryptocurrencies.
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-month
period ended March 31, 2018, the Company had no potentially dilutive common stock equivalents. Therefore, the basic EPS and the
diluted EPS are the same.
Marketing
expense -
Marketing expenses are charged to operations, under general and administrative expenses. For the three-month period
ended March 31, 2018 and for the period from Inception, March 9, 2017 through March 31, 2017, the Company incurred $48,699 and
$0, respectively, in marketing expenses.
NOTE
3 - RECENT ACCOUNTING PRONOUNCEMENTS
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2017-11
, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic
815): I. Accounting for Certain Financial Instruments with Down Rounds and II. Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception.
This ASU changes the classification analysis of certain equity-linked financial instruments (or embedded
features) with down round features. When determining whether certain financial instruments should be classified as liabilities
or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is
indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
The amendments also require entities to recognize the effect of the down round feature on earnings per share when it is triggered.
ASU 2017-11 should be adopted retrospectively or as a cumulative-effect adjustment as of the date of adoption, only to financial
instruments outstanding as of the initial application date. ASU 2017-11 will be effective for annual reporting periods, and interim
periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an
interim period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial
statements and related disclosures.
In
May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which
provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified
award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same
immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument
or liability instrument is the same immediately before and after the modification. The new standard became effective for us on
January 1, 2018. The Company has evaluated the impact of Topic 718 on its financial statements and the adoption of this guidance
will not have a material impact on the Company’s consolidated financial statements and related disclosures.
FASB
ASU 2017-01 “Clarifying the Definition of a Business (Topic 805)”
– In January 2017, the FASB issued 2017-1.
The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets
and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross
assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred
assets and activities is not a business. The guidance also requires a business to include at least one substantive process and
narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective
for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU
did not have a significant impact on our consolidated results of operations, cash flows and financial position.
FASB
ASU 2017-04 “Simplifying the Test for Goodwill Impairment (Topic 350)” – In January 2017, the FASB issued 2017-04.
The guidance removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation.
A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed
the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for
interim periods within those years, with early adoption permitted. We do not currently expect this ASU to have a significant impact
on our consolidated financial statements and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most
leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new
disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from
leases. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. The amendments in this update
should be applied under a modified retrospective approach. We are evaluating the effect that ASU No. 2016-02 will have on our
consolidated financial statements and related disclosures.
NOTE
4 - ACQUISITION
On
January 26, 2018, CoinTracking LLC, a wholly-owned subsidiary of the Company, acquired 50.1% of the equity interest in CoinTracking
GmbH, for (i) $4,736,400 in cash and (ii) 473,640 shares of common stock of the Company at $10 per share for total purchase price
valued at $9,472,800. CoinTracking, with its newly acquired subsidiary, provides its customers with access to cryptocurrency token
tracking, portfolio management, and tax calculation and reporting. The acquisition was to increase our presence in the digital
asset industry and build strategic alliances.
The
combined statements of operations were prepared using the acquisition method of accounting in accordance with Financial Accounting
Standards Board Accounting Standards Codification (“ASC”) Topic 805,
Business Combinations
, and have been included
in the Company’s consolidated results as of acquisition date with Crypto Company considered as the accounting acquirer and
Coin Tracking as the accounting acquiree.
Accordingly,
consideration paid by the Company to complete the acquisition was allocated to the identifiable assets and liabilities
of CoinTracking, GmbH based on estimated fair values as of the closing date. We made a preliminary allocation of the consideration
transferred to the assets acquired and liabilities assumed based on the information available and preliminary valuation of the
fair value of tangible and intangible assets acquired and liabilities assumed. Acquisition-related costs were expensed as incurred
and were not considered to be significant. We expect to include the final purchase price allocation related to this acquisition
in our Quarterly Report on Form 10-Q for the period ended June 30, 2018. Therefore, the valuation of certain assets and liabilities
in the CoinTracking, GmbH acquisition is preliminary and subject to change.
The
table below summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
CoinTracking
|
|
Cash
and cash equivalents
|
|
$
|
1,547,097
|
|
Investment
in cryptocurrency
|
|
|
1,115,345
|
|
Other
current assets
|
|
|
479,057
|
|
Goodwill
|
|
|
10,325,631
|
|
Other
assets
|
|
|
144,566
|
|
Total
assets
|
|
$
|
13,611,696
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
522,172
|
|
Contract
liabilities, short term
|
|
|
2,686,858
|
|
Contract
liabilities, long term
|
|
|
929,866
|
|
Total
liabilities
|
|
|
4,138,896
|
|
Net
assets acquired
|
|
$
|
9,472,800
|
|
The
purchase price was based on the expected financial performance of CoinTracking, GmbH and not on the value of the net identifiable
assets at the time of acquisition. This resulted in a significant portion of the purchase price being attributed to goodwill.
As a result, the Company recognized $10,325,631 of goodwill on the acquisition.
Based
on its analysis, the Company’s management believes that no impairment of the carrying value of its goodwill existed at March
31, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products
and services will continue which could result in impairment of goodwill in the future.
Unaudited
pro forma financial information
The
unaudited pro forma financial information in the table below presents the combined results of the Company and Coin Tracking as
if these acquisitions had occurred on January 1, 2018. The unaudited pro forma financial information includes adjustments required
under the acquisition method of accounting and is presented for informational purposes only and is not necessarily indicative
of the results that would have been achieved had the acquisitions actually occurred on January 1, 2018.
For
the three months ended March 31, 2018:
Revenue
|
|
$
|
1,645,260
|
|
Net
loss
|
|
$
|
(3,229,423
|
)
|
Basic
and diluted loss per share:
|
|
|
|
|
Basic
|
|
$
|
(0.15
|
)
|
Diluted
|
|
$
|
(0.15
|
)
|
NOTE
5 – SUBSCRIPTION REVENUE RECOGNITION
Revenue
Recognition
CoinTracking
accounts for a contract when it has approval and commitment from all parties, the rights of the parties and payment terms are
identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when
control of the promised services is transferred to our customers, and in an amount that reflects the consideration the Company
is contractually due in exchange for those services. Most of the Company’s contracts with customers are single, or have
few distinct performance obligations, the transaction price is allocated to each performance obligation using the stand-alone
selling price.
CoinTracking’s
revenue is primarily derived directly from users in the form of subscriptions. Subscription revenue is presented net of credits
and credit card chargebacks. Subscribers pay in advance, primarily by Paypal or cryptocurrencies, and, subject to certain conditions
identified in our terms and conditions. Revenue is initially deferred and is recognized using the straight-line method over the
terms of the applicable subscription period, which primarily range from one to three years.
Transaction
Price
The
objective of determining the transaction price is to estimate the amount of consideration the Company is due in exchange for services,
including amounts that are variable. CoinTracking has a standalone sales price for each subscription service. Further, The Company
excludes from the measurement of transaction price all taxes assessed by governmental authorities that are both (i) imposed on
and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts
are not included as a component of revenue or cost of revenue.
Estimates
of certain revenue
Revenue
collected in advance for subscriptions ranging 1 or 2 years or lifetime packages are deferred and recognized as revenue on a straight-line
basis over the terms of the applicable subscription period or performance obligation period. For “lifetime” revenue
packages, where the customer has access to the website for unlimited length of time, the Company has elected to recognize revenue
on a straight-line basis over three years. We believe that based on the short history of customer data, customer relationship
period, and number of available alternative providers, and anticipation of future changes to the blockchain industry, a measure
of three years of performance obligation to our customers appears to be appropriate. The Company intends to re-evaluate the length
of the performance obligation period for lifetime revenue packages periodically based on historical and industry data and adjust
it as deemed necessary.
Net
Revenue and Charge-back Reserves
CoinTracking
does not maintain an allowance for doubtful accounts because the customer prepays for subscription in advance before access is
provided to Coin Tracking’s website. The Company also maintains allowances to reserve for potential credits issued to consumers
or other revenue adjustments primarily through Paypal reserves. We recorded a reserve of $160,436 at March 31, 2018 which is based
primarily upon historical experience.
Contract
Liabilities
Contract
liabilities are recorded when payments are received or due in advance of performing our service obligations and is recognized
over the service period, which primarily relates to prepayments of subscription revenue. At the acquisition date of Jan 26, 2018,
CoinTracking’s total contract liabilities were $3,616,724, and we recognized revenue of $456,922 as of March 31, 2018. As
of March 31, 2018, $3,033,817, of current contract liabilities were recorded and $1,433,858 of long term contract liabilities
were recorded, respectively. As of December 31, 2017, we did not have consolidated contract liabilities.
Assets
Recognized from the Costs to Obtain a Contract with a Customer
CoinTracking
has determined that certain costs, primarily referral commissions or affiliate payments paid to customers pursuant to certain
sales incentive programs, meet the requirements to be capitalized as a cost of obtaining a contract. Affiliate expenses are paid
in Bitcoins, as a sales incentive programs and are amortized over the subscription period. For sales incentive programs where
the subscription period is one year, the Company has elected the practical expedient to expense the costs as incurred. The Company
generally capitalizes over the term of the applicable subscription.
During
the three months ended March 31, 2018, the Company recognized expense of $30,654 related to the amortization of these costs. The
aggregate contract asset balance at March 31, 2018 is $126,140.
NOTE
6 - SEGMENT INFORMATION
The
Company has organized its operations into two segments: trading in cryptocurrencies and subscription in CoinTracking’s,
web-based platform.
The
trading segment primarily consists of amounts earned through trading activities of cryptocurrencies and costs are operating expenses
that consists of general and administrative costs in North America.
CoinTracking’s
segment primarily consists of amounts earned through subscriptions to the CoinTracking website. Operating expense related to this
segment is technology infrastructure and general administrative costs primarily incurred in Germany.
There
are no intercompany internal revenue transactions between our reportable segments. These segments reflect the way our chief operating
decision maker evaluates the Company’s business performance and manages its operations.
The
following table summarizes the Company’s operating income by segment for the three-month period ended March 31, 2018:
|
|
Three
months ended
|
|
|
|
3/31/2018
|
|
|
|
Trading
|
|
|
Subscription
|
|
|
Total
|
|
Revenue,
net
|
|
$
|
1,072,598
|
|
|
$
|
456,992
|
|
|
$
|
1,529,590
|
|
Costs
and Expenses
|
|
|
(1,439,020
|
)
|
|
|
(705,960
|
)
|
|
|
(2,144,980
|
)
|
Operating
Loss
|
|
$
|
(366,422
|
)
|
|
$
|
(248,968
|
)
|
|
$
|
(615,390
|
)
|
The
trading segment’s costs and expenses were offset by a favorable impact of share-based compensation of $708,139 as of March
31, 2018. This $708,139 was recorded as an offset to operating expenses in the accompanying statement of operations and comprehensive
loss for the quarter ended March 31, 2018 and was a result in the decline of the estimated value of the Company’s common
stock during the three months ended March 31, 2018.
The
following table summarizes the Company’s operating income by segment for the period from Inception, March 9, 2017 to March
31, 2017:
|
|
Inception
to 3/31/2017
|
|
|
|
Trading
|
|
|
Subscription
|
|
|
Total
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Costs
and Expenses
|
|
|
(660,016
|
)
|
|
|
-
|
|
|
|
(660,016
|
)
|
Operating
Income
|
|
$
|
(660,016
|
)
|
|
$
|
-
|
|
|
$
|
(660,016
|
)
|
NOTE
7 - INVESTMENT IN CRYPTOCURRENCY
The
investment in cryptocurrency is classified as a Level 2 asset because inputs are from cryptocurrency exchanges with price variability.
The following table summarizes the Company’s investments at fair value for the three-month period ended March 31, 2018:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Investment
in cryptocurrency
|
|
$
|
-
|
|
|
$
|
2,426,724
|
|
|
$
|
317,629
|
|
The
Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are
fair, consistent and verifiable. Valuation of the Company’s Level 3 investments are for Initial Coin Offerings (“ICO’s”)
for which there is no active market at March 31, 2018. These ICO’s are valued at cost which approximates fair value at March
31, 2018. At the time that the ICO’s have an available market exchange, the investments will be reclassified to Level 2.
The
following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the three-month
period ended March 31, 2018:
|
|
Level
3
|
|
|
|
Cryptocurrency
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
$
|
167,818
|
|
Transfers
to Level 2 investments
|
|
|
(50,189
|
)
|
Purchases,
sales, issuances, and settlement, net
|
|
|
200,000
|
|
Balance,
March 31, 2018
|
|
$
|
317,629
|
|
The
following table summarizes the cryptocurrencies, other than ICO’s, held as of March 31, 2018:
Bitcoin
|
|
$
|
1,344,914
|
|
Ethereum
|
|
|
106,123
|
|
Polymath
|
|
|
83,928
|
|
Ripple
|
|
|
78,336
|
|
Litecoin
|
|
|
69,244
|
|
Bitcoin
Cash
|
|
|
56,283
|
|
blockVEE
|
|
|
48,495
|
|
Cardano
|
|
|
37,955
|
|
Dash
|
|
|
31,484
|
|
EOS
|
|
|
35,858
|
|
Various
other currencies
|
|
|
534,104
|
|
|
|
$
|
2,426,724
|
|
NOTE
8 - EQUIPMENT
Equipment
consists of the following:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Computer
equipment
|
|
$
|
225,241
|
|
|
$
|
69,241
|
|
Furniture
equipment
|
|
|
15,167
|
|
|
|
3,754
|
|
|
|
|
240,408
|
|
|
|
72,995
|
|
Less
accumulated depreciation
|
|
|
(21,776
|
)
|
|
|
(4,675
|
)
|
|
|
$
|
218,632
|
|
|
$
|
68,320
|
|
NOTE
9 - SUMMARY OF COMMON STOCK TRANSACTIONS
On
March 20, 2018, upon exercise of a stock option by a consultant of the Company, the Company issued 7,031 shares of common stock
at an exercise price of $0.01 per share.
On
January 31, 2018, upon partial exercise of a stock option by an employee of the Company, the Company issued 14,667 shares of common
stock as a cashless exercise.
During the quarter ended March 31, 2018,
an employee exercised a stock option for 12,494 shares of common stock at an exercise price of $2.00 per share. As of March 31,
2018, these shares have not yet been issued and, as a result, there is a common stock payable of $24,988 at March 31, 2018 in
the accompanying balance sheet.
On
January 16, 2018, pursuant to an Equity Purchase Agreement (the “Agreement”) entered into on December 22, 2017 by
and among the Company, CoinTracking, LLC, a Nevada limited liability company and wholly-owned subsidiary of 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 which consisted, in part, of 473,640 shares of common stock of the Company (the “CoinTracking Acquisition”).
The transaction closed on January 26, 2018 (see Note 4).
NOTE
10 – WARRANTS FOR COMMON STOCK
For
the three-month period ended March 31, 2018, no stock purchase warrants were issued. As of March 31, 2018, outstanding warrants
to purchase shares of common stock were as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Issuance
Date
|
|
Exercisable
for
|
|
|
Expiration
Date
|
|
|
Exercise
Price
|
|
|
Outstanding
Under
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
2017
|
|
Common
Shares
|
|
|
September
25, 2020
|
|
|
$
|
2.00
|
|
|
|
168,125
|
|
The
warrants expire on the third anniversary of their respective issuance dates. 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
11 - SUMMARY OF STOCK OPTIONS
On
July 21, 2017, the Company’s board of directors adopted the 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, nonemployee
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 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.
5,000,000
shares of the Company’s common stock are reserved for issuance under the Plan. For the three-month period ended March 31,
2018, there are outstanding stock option awards issued from the Plan covering a total of 807,031 shares of the Company’s
common stock and there remain reserved for future awards 4,171,271 shares of the Company’s common stock. The weighted average
exercise price of the outstanding stock options is $3.46 per share, and the remaining contractual term is 9.45 years.
During
the three-month period ended March 31, 2018, the Company granted 150,000 options to nonemployees.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Term (years)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, at December 31, 2017
|
|
|
644,531
|
|
|
$
|
2.32
|
|
|
|
9.61
|
|
|
$
|
11,421
|
|
Options granted
|
|
|
150,000
|
|
|
$
|
8.00
|
|
|
|
9.83
|
|
|
|
6,600
|
|
Options exercised
|
|
|
37,858
|
|
|
$
|
1.63
|
|
|
|
9.37
|
|
|
|
1,907
|
|
Options outstanding, at March 31, 2018
|
|
|
756,668
|
|
|
$
|
3.46
|
|
|
|
9.45
|
|
|
$
|
36,729
|
|
Vested and exercisable and expected to vest, end of period
|
|
|
160,834
|
|
|
$
|
2.93
|
|
|
|
9.35
|
|
|
$
|
7,892
|
|
During
the three-month period ended March 31, 2018 and the period from Inception, March, 9, 2017 through March 31, 2017 the Company had
not granted any restricted stock awards.
As
of March 31, 2018, approximately $118,094 of total unrecognized compensation costs related to stock options is expected to be
recognized over a weighted average period of approximately 2 years.
The
determination of the fair value of stock-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
risk-free rate is based on implied yields in effect at the time of the grant on U.S. Treasury zero-coupon bonds with remaining
terms equal to the expected term of the stock options. The expected dividend is based on the Company’s history and expectation
of dividend payouts. Forfeitures are recognized when they occur.
The
range of assumptions used for the three-month period ended March 31, 2018 are as follows:
|
|
March
31, 2018
|
|
|
|
|
Ranges
|
|
Weighted-average
volatility
|
|
|
36-75
|
%
|
Expected
dividends
|
|
|
0
|
%
|
Expected
term (in years)
|
|
|
5.71-10
years
|
|
Risk-free
rate
|
|
|
1.91-2.40
|
%
|
During
the three months ended March 31, 2018, there was a decline of the estimated value of the Company’s common stock. As a result,
at March 31, 2018, the credit balance of $708,139 share based compensation represents an adjustment to offset the previously recorded
stock compensation costs during 2017, as stock options issued to nonemployees are revalued at each vesting tranche and/or reporting
date in accordance with ASC 505.
NOTE
12 - RELATED PARTY TRANSACTIONS
On
March 9, 2017, Crypto Sub issued 125,000 shares of common stock of Crypto Sub to an employee of Crypto Sub, in exchange for an
initial investment made in the form of cryptocurrency, valued at $100,000, based on the fair value of the investment on the date
of such investment. In addition, based on the fair value of the shares of common stock of the Company at the time of issuance,
the Company recorded an additional $100,000 of share based compensation expense related to the transaction.
On
March 9, 2017, Crypto Sub issued 300,000 shares of common stock of Crypto Sub to James Gilbert, the Chairman, Chief Executive
Officer and President of the Company, in exchange for $200,000. In addition, based on the fair value of the shares of common stock
of the Company at the time of issuance, the Company recorded an additional $280,000 of share based compensation expense related
to the transaction.
On
March 9, 2017, Crypto Sub issued (i) 125,000 shares of common stock of Crypto Sub to Redwood Fund LP (“Redwood”) in
exchange for $200,000; and (ii) 125,000 shares of common stock of Crypto Sub to Imperial Strategies, LLC (“Imperial Strategies”)
in exchange for certain services rendered, valued at $200,000, as of the date of such issuance. Michael Poutre, the Chief Executive
Officer of the Company, and Ron Levy, the Chief Operating Officer of the Company, are Chief Executive Officer and Chief Operating
Officer, respectively, of Ladyface Capital, LLC, the General Partner of Redwood, and, as a result, had an indirect material interest
in the shares owned by Redwood.
The
Company has a services agreement with Full Stack Finance for CFO and Accounting outsource services. Ivan Ivankovich, CFO of the
Company, is the Co- Managing Director of Full Stack Finance. Emad Boulos, an employee of Full Stack Finance, serves as The Crypto
Company’s Controller. The Company paid a total of $138,259 in fees to Full Stack Finance during the three-month period ended
March 31, 2018, and as of March 31, 2018, there was a balance of $68,000 due to Full Stack Finance, which is included in accounts
payable and accrued expenses on the accompanying balance sheet.
The
Company has a loan receivable from an officer of CoinTracking GmbH as of March 31, 2018 totaling $194,380. The loan is due upon
demand and it bears interest at 2%. During the quarter ended March 31, 2018 and the period from March 9, 2017 to March
31, 2017 interest income accrued for this loan was $295 and $0, respectively, which is included in other income on the accompanying
statement of operations.
NOTE
13 - BASIC AND DILUTED LOSS PER SHARE
The
following is a reconciliation of the numerator and denominator of the basic and diluted loss per share computations for the three-month
period ended March 31, 2018:
|
|
For
the three months ended March 31, 2018
|
|
Numerator
for basic and diluted income per share:
|
|
|
|
|
Comprehensive
loss attributable to The Crypto Company
|
|
$
|
(3,153,118
|
)
|
|
|
|
|
|
Denominator
for basic and diluted income per share:
|
|
|
|
|
Weighted
average shares (basic)
|
|
|
20,864,198
|
|
Common
stock equivalents
|
|
|
-
|
|
Weighted
average shares (diluted)
|
|
|
20,864,198
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share:
|
|
|
|
|
Basic
|
|
$
|
(0.15
|
)
|
Diluted
|
|
$
|
(0.15
|
)
|
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Operating
leases
- On May 15, 2017, the Company entered into a lease agreement with Soba Living, LLC for the rental of office space.
The agreement is a month to month lease, which requires monthly rents of $6,000 through September 30, 2018.
On
January 18, 2018, the Company entered into a short-term lease agreement with Miramar Property Investment Co., for an office space
on a month-to-month basis, requiring monthly rents of $3,024 expiring through September 30, 2018.
Facility
rent expense for the three-month period ended March 31, 2018 and the period from March 9, 2017 to March 31, 2017 was $25,023 and
$0, respectively.
Legal
- From time to time, the Company may become subject to legal proceedings, claims, and litigation arising in the ordinary course
of business, none of which, in management’s opinion, will result in judgments that would have a material adverse effect
on the financial position or results of operations of the Company. Please see a summary of legal proceedings in Item 1 of Part
II of this Quarterly Report, all of which have been voluntarily dismissed as of the date of this Quarterly Report.
Indemnities
and guarantees
- During the normal course of business, the Company has made certain indemnities and guarantees under which
it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the
Company’s officers and directors, under which the Company may be required to indemnify such persons for liabilities arising
out of their respective relationships. In connection with its facility lease, the Company has indemnified the lessor for certain
claims arising from the use of the facility. The duration of these indemnities and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments
for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying balance sheet.
NOTE
15 – SUBSEQUENT EVENTS
On
April 3, 2018, CoinTracking, LLC, a Nevada limited liability company and a wholly-owned subsidiary of the Company (“Borrower”),
entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, a private limited liabilty company organized
under the laws of the Federal Republic of Germany (“Lender”), pursuant to which Lender may provide a loan (the “CoinTracking
Loan”) of up to $3,000,000 to Borrower, to be advanced to Borrower in one or more tranches, at such times and in such amounts
as may be requested by Borrower from time to time, on or before the tenth anniversary of the Loan Agreement. The Company is deemed
obligor of Borrower’s obligations under the Loan Agreement for United States Federal income tax purposes. Interest on the
CoinTracking Loan will accrue 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 will be payable quarterly. On April 3, 2018,
pursuant to the Loan Agreement, Lender advanced $1,000,000 to Borrower in exchange for a promissory note (the “CoinTracking
Note”) of equal principal amount. The CoinTracking Note will mature on the second anniversary thereof. The Borrower and
Lender are consolidating entities, as such, the loan and advances are considered to be intercompany transactions and will be eliminated
in consolidation.
Effective
as of April 17, 2018, Jeffrey Berman and Holly Ruxin were appointed directors of the Company, each for a term of six months from
the effective date of appointment or until his or her earlier death, resignation or removal. The Company entered into a Director
Services Agreement with each of Mr. Berman and Ms. Ruxin, pursuant to which each of Mr. Berman and Ms. Ruxin will be entitled
to receive (i) a fee of $80,000 per annum, payable quarterly, and (ii) a ten-year option to purchase 100,000 shares of common
stock of the Company at an exercise price of $10.00 per share, which option shall be fully vested on the six-month anniversary
of the date of grant.
Effective
as of April 18, 2018, Anthony Strickland, Jeffrey Berman, and Holly Ruxin were appointed to the Audit Committee and Compensation
Committee, with Ms. Ruxin serving as Chairperson of the Audit Committee and Mr. Strickland Serving as Chairperson of the Compensation
Committee.
On
April 18, 2018, the Company issued to James Gilbert 202,512 shares of common stock of the Company, immediately vested, for certain
services performed on behalf of the Company.
Effective
May 14, 2018, Michael Poutre, former Chief Executive Officer and a director of the Company, resigned from all of his current roles
with the Company effective immediately. Mr. Poutre will remain as a consultant to the Company until November 2018. In connection
with Mr. Poutre’s resignation from the Company, 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 provides that the Company will 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 will serve as a consultant of the Company for six months at a rate of $30,000
per month, payable in two separate tranches, though the Company may terminate his services for any reason. The Separation and
Consulting Agreement contains other standard provisions contained in agreements of this nature including non-disparagement and
a general release of any and all claims
.
Effective May 14, 2018, James Gilbert, the President of the Company, was appointed Chairman of the Company’s
Board of Directors and Chief Executive Officer. The Company did not enter into any new employment agreement with Mr. Gilbert, and
Mr. Gilbert has no family relationship with any director or executive officer of the Company.