Item
1. Business
The
Crypto Company (the “Company”, “Crypto”, “we”, “us” or “our”) was
incorporated in the State of Utah on December 2, 2013 under the name Croe, Inc. On October 3, 2017, the Company filed Articles
of Conversion with the Utah Secretary of State and the Nevada Secretary of State to effectively change its state of Incorporation
to Nevada, and filed Articles of Incorporation with the Nevada Secretary of State to change its name to The Crypto Company.
Crypto
Sub, Inc. (formerly known as The Crypto Company) (“Crypto Sub”) was incorporated in the State of Nevada on March 9,
2017 (“Inception”). On June 7, 2017, Crypto Sub completed a reverse acquisition of Croe, Inc. as a result of a Stock
Sale, Stock Dividend and Share Exchange, each as described below and collectively referred to as the “Acquisition”.
On October 3, 2017, we changed our name to The Crypto Company to better reflect our new business. We are located at 23805 Stuart
Ranch Road, Suite 235 in Malibu, California and our telephone number is (424) 228-9955. Our website can be accessed at www.thecryptocompany.com.
The information contained on or that may be obtained from our website is not a part of this report. Crypto Sub and CoinTracking,
LLC, a Nevada limited liability company (“CoinTracking”), operate as wholly-owned subsidiaries of Crypto.
Prior
to the Acquisition, the Company was an early stage fitness apparel company with the mission of creating supportive, protective,
and innovative sports bras and fitness apparel.
The
Acquisition
Stock
Sale
On
June 7, 2017, the Company entered into (i) a Share Purchase Agreement (the “Restricted Share Purchase Agreement”)
with Crypto Sub and John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company; and (ii)
a Share Purchase Agreement (the “Free Trading Share Purchase Agreement”, and together with the Restricted Share Purchase
Agreement, the “Share Purchase Agreements”) with Crypto Sub, Uptick Capital, LLC (“Uptick Capital”) and
John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company. Pursuant to the Share Purchase
Agreements, the shareholders of the Company sold an aggregate of 11,235,000 shares of common stock of the Company to Crypto Sub
and 100,000 shares of common stock of the Company to Uptick Capital, representing an aggregate of 100% of the issued and outstanding
common stock of the Company as of such date, for aggregate proceeds of $411,650, including escrow and other transaction related
fees to the selling shareholders (the “Stock Sale”). A portion of the acquisition cost equal to $399,300 is expensed
as a general and administrative expense in the accompanying consolidated statement of operations.
10,000,000
shares held by Deborah Thomas, the former Chief Executive Officer, principal accounting and financial officer and director of
the Company, representing approximately 88.22% of the outstanding common stock of the Company immediately prior to the Stock Sale,
were sold at a price of $0.031 per share, and an aggregate of 1,335,000 shares held by the remaining shareholders of the Company
were sold at a price of $0.075 per share.
In
connection with the Stock Sale, effective as of June 7, 2017, (i) Deborah Thomas resigned as Chief Executive Officer, principal
accounting officer and director of the Company and Elliott Polatoff resigned as Secretary and director of the Company; and (ii)
Michael Poutre was appointed Chief Executive Officer and sole director of the Company, James Gilbert was appointed President of
the Company and Ron Levy was appointed Chief Operating Officer of the Company.
Stock
Dividend
On
June 7, 2017, Crypto Sub issued to its shareholders a stock dividend (the “Stock Dividend”) of 10,918,007 shares of
common stock of the Company acquired through the Stock Sale, distributed on a pro-rata basis, such that the shareholders of Crypto
Sub received fifteen shares of common stock of the Company for each share of common stock of Crypto Sub held as of June 6, 2017.
Immediately
following the consummation of the Stock Sale and the distribution of the Stock Dividend, Crypto Sub held 316,993 shares, representing
4.26% of the issued and outstanding shares of common stock of the Company, and the shareholders of Crypto Sub, collectively, held
10,918,007 shares, representing 94.40% of the issued and outstanding shares of common stock of the Company. Of the 316,993 shares
held by Crypto Sub, 129,238 shares were transferred to certain officers and consultants of Crypto Sub in exchange for their services
related to the Transaction, and the remaining shares were retained by Crypto Sub.
Share
Exchange
On
June 7, 2017, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with Michael Poutre,
in his sole capacity as representative for the shareholders of Crypto Sub, pursuant to which each issued and outstanding share
of common stock of Crypto Sub was exchanged for shares of common stock of the Company (the “Share Exchange”), resulting
in the aggregate issuance of 7,026,614 shares of common stock of the Company, on a pro-rata basis, as provided on the Exchange
Agreement, to the shareholders of Crypto Sub, in exchange for 727,867 shares of common stock of Crypto Sub.
The
Stock Sale, the Stock Dividend and the Share Exchange are collectively referred to as the “Acquisition”. Immediately
following the Acquisition, (i) Crypto Sub became a wholly owned subsidiary of the Company; (ii) all of the former shareholders
of Crypto Sub became shareholders of the Company, on a pro-rata basis; and (iii) the operations of the Company solely consisted
of the operations of Crypto Sub.
CoinTracking
GmbH
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”). Following administrative procedures as required under applicable German laws, the CoinTracking
Acquisition was consummated on January 26, 2018.
Overview
of Our Business
We
are engaged in the business of building technological infrastructure and a proprietary investment portfolio. We are also engaged
in the business of building strategic alliances to assist third parties in the exchange of value in the digital asset market,
solely by providing such third parties with tools, computer software/programming and educational material that may prove useful
to them as they independently invest in, trade and manage their own digital assets. We also seek to build strategic alliances
with other companies and from time to time may seek strategic acquisitions of entities or technologies that we believe may aid
our development of proprietary products and tools designed to help third parties to independently invest in, trade and manage
their own digital assets.
We
currently have two principal business operations that generate revenues and incur expenses:
The
software subscription operation generates revenues through CoinTracking GmbH and minimal amounts of consulting revenue. Such revenues
consist primarily of amounts earned through subscriptions to the CoinTracking GmbH website. The software subscription operation
incurs expenses that consist primarily of operating expenses composed of technology infrastructure and general administrative
costs primarily incurred in Germany.
The
cryptocurrency investment operation generates revenues that primarily consist of amounts earned through trading activities of
cryptocurrencies. We record the realized gain or loss on the investments on a trade date basis. Trading generally reflects active
and frequent buying and selling, and is generally used with the dual objectives of generating profits on short-term differences
in price and gaining hands on experience in the cryptocurrency marketplace to aid in the development of our proprietary software.
The cryptocurrency investment operation incurs expenses that consist primarily of operating expenses composed of general and administrative
costs in North America, consisting of legal, accounting, consulting and contracting fees, as well as costs related to product
development and marketing.
CoinTracking
Platform
Our
majority-owned subsidiary, CoinTracking GmbH, operates a Software as a Service (“SaaS”) platform that allows users
to track and manage value, profit, loss and other information regarding their investments in cryptocurrency (“coin”
or “cryptocurrency”), available via web-based or mobile application. However, the CoinTracking GmbH platform does
not allow users to trade their cryptocurrencies. Subscribers pay in advance for the services, primarily by PayPal or cryptocurrencies,
and the subscription periods range from annual to perpetual. The CoinTracking GmbH platform allows individuals and entities to
record exactly when and where they acquired coins of any variety, as well as the acquisition prices for those coins. The platform
also assists subscribers in determining the current trading price for a variety of coins on various third-party exchanges, such
as Bittrex, Kraken and Coinbase, and has a number of other features designed to make the CoinTracking GmbH platform a valuable
landing portal for holders of cryptocurrencies. Key features include those designed to allow users to see a current and historical
“dashboard” view of their coin-based holdings and activities and to assist users in accounting for gains and losses
without having to go to many other websites on a piecemeal basis or requiring use of a calculator and Excel spreadsheet.
Technology
We
are developing proprietary technology, including trading management and auditing software, tools and processes, to assist third
parties to independently trade and manage their own digital assets. We do not provide, and do not intend to provide, any functionality
that allows a subscriber to make any form of cryptocurrency trade. A subscriber must go to an unrelated third-party website or
exchange in order to enter into a virtual currency purchase or sale transaction. We may use our technology or license technology
from third parties to build additional units around our existing platform, or sell or license our technology to third-party institutions
for a fee.
We
are developing and intend to market and license possible software solution related indices that track digital tokens and represent
specific market segments, such that one can more efficiently monitor and track trends and events in the digital token asset class.
The indices are algorithmic in that they are designed with rule sets that can be programmatically (not manually curated) based
on pricing and supply information available from exchanges and other websites in what we believe to be a more user-friendly format.
Investment
Portfolio
In
addition to our ordinary operations, we also utilize a significant portion of our assets to trade a diversified proprietary portfolio
of digital assets. We have developed and launched a proprietary trading operation. We currently employ three individuals who are
primarily responsible for conducting coin-based trading of our proprietary account. One has a background as a registered Financial
Industry Regulatory Authority (“FINRA”) market-maker who formerly held the Series 7, 55 and 66 licenses. Another has
a background as a buy-side trader at two money managers in California and New York. The third trader is an algorithmic trader
who has a background as a software developer and financial engineer. Certain other members of our 18 person staff (including clerical)
provide research, administration and accounting support as part of their ancillary duties.
Cryptocurrency
Trade Floor Operations
Cryptocurrency
traders access the cryptocurrency trade floor through a locked door that is separate from our general operations. Funds have been
allocated to each trader based on his experience and performance. Each cryptocurrency trader is responsible for making their own
decisions with the funds that have been allocated to them and each trader completes trades on our accounts on the various cryptocurrency
exchanges. We have never traded other individuals’ or entities’ funds. We do not, and do not intend to, accept or
manage any investor, client, or other third party assets. We invest solely our own assets and incur no management fees.
Each
cryptocurrency trader has cryptocurrency trading accounts on one or more of the various cryptocurrency exchanges and has been
allocated funds, in the form of U.S. dollars, to trade in those accounts. The traders themselves do not have access to move funds
on or off of the cryptocurrency exchanges and must engage the Director of Trading Operations or a Company senior executive to
authorize the movement of assets between exchanges or bank accounts.
Orders
are executed on the cryptocurrency exchanges when interest on the exchange matches the order that the trader placed on the exchange,
or when the trader matches his interest with an order that already existed on the exchange. This is the basis for order execution.
There are no relationships between our trade desk and any other market participant to match trades, handle discretion or any other
market activity. Our traders place orders that are matched by other exchange participants in order to make the purchase or sale
at the price and size that both participants desire. There are no defined market participants that are identifiable on the cryptocurrency
exchanges and so the only details that we manage are price, timing, and size. All of these factors are determined by the individual
trader. There is no clearing firm in cryptocurrency “exchange” trading. There is no universal price discovery or trade
routing as each trade is made on a per exchange basis.
We
hold our cryptocurrency on cold wallets, hot wallets and exchanges. The exchanges on which we trade cryptocurrency provide support
for two-factor authentication. We have protections and supervision in place including encryption, password management and access,
offsite backups held in a bank safe deposit box and physical barriers for access and transfer of digitalaccess.
While
we intend to generate revenue from the trading of our proprietary virtual currency portfolio, the trading and management of our
proprietary portfolio is primarily intended to provide hands-on virtual currency trading experience. Trading of and evaluation
of our proprietary portfolio often involves proprietary investment strategies based on proprietary algorithms, processes and standards
developed and implemented by in-house traders, analysts, researchers and other personnel experienced in trading cryptocurrencies.
We believe that hands-on trading experience can provide important insight for any entity seeking to engage in virtual currency
related endeavors. It can also be an important factor in evaluating targets for potential business acquisitions. We believe that
by retaining individuals whose responsibilities include (in whole or in part) trading of our proprietary virtual currency portfolio,
we will gain a better understanding as to what may be potentially useful to customers and what features or utilities might be
of interest to them.
Strategic
Acquisitions
Following
the CoinTracking Acquisition, and in furtherance of our development of the technology and source code necessary to create products
and services to assist third parties to independently invest in, trade and manage their own digital assets and to build strategic
alliances to better supply services that may facilitate the exchange of value in the digital asset marketplace, we may seek from
time to time additional strategic acquisitions of majority and minority equity interests in entities and technology that demonstrate
(i) established, protectable and scalable revenues; (ii) substantial market share; (iii) established brand equity and customer
loyalty; (iv) proprietary technology with competitive advantages; (v) quality personnel; and (vi) strategic access to international
markets.
Media
Opportunities
We
engage in public discourse on an ongoing basis and host roundtable webinars to educate the public about the cryptocurrency market
and intend to expand our presence at industry conferences to develop and expand our community and content network. We do not express
opinions regarding the advisability of investing in a particular digital asset or in the digital asset marketplace, and we do
not receive compensation in connection with these roundtable webinars.
Intellectual
Property
We
regard our service marks, including “The Crypto Company”, as having significant value and as being important factors
in the marketing of our products and services. Our policy is to pursue registration of our marks whenever possible and to oppose
vigorously any infringement of our marks.
Market
Overview
Blockchain
The
blockchain is the underlying technology that powers cryptocurrencies. It is a decentralized database or digital “ledger”
of transactions across a peer-to-peer network of computers or “nodes” that use the underlying infrastructure of the
Internet to validate and process valuable transactions. While using the blockchain, participants can transfer information across
the Internet without the need of a central third party. In a financial transaction, the buyer and seller interact directly without
the need for verification by a trusted third-party intermediary. The actual record of transaction is pseudonymous, but the identifying
information is encrypted, preventing personal information from being shared.
The
primary benefits of blockchain include the following:
|
|
●
|
Fraud
reduction
: Blockchain technology has the potential to positively disrupt most industries since it can work for nearly
every type of transaction that involves value, including money, property and goods. From a business perspective, the technology
may be leveraged for process improvement, helping to reduce human error, prevent fraud and streamline data storage.
|
|
|
|
|
|
|
●
|
Transparency
:
Financial organizations may use the blockchain to store records digitally and leverage the technology for any type of transaction
that needs to be verified by a trusted third party.
|
|
|
|
|
|
|
●
|
Security
:
Transactions may include transferring digital or physical assets, verifying chain of custody and protecting intellectual property.
In an era with increasing cybercrime and strict regulatory requirements, blockchain offers a highly fraud resistant technology
that can protect and authenticate almost any type of transaction.
|
|
|
|
|
|
|
●
|
Efficiency
:
Both Permissioned and Public blockchains offer significant improvements in efficiency to retail and business implementations
by reducing cost and time in the duplicate databases and ledgers that companies and intermediaries must maintain in the absence
of a shared, trusted and immutable system.
|
Competition
We
have a number of competitors, ranging in size, consisting primarily of Hedge funds, as well as portfolio managers and trading
systems, which compete directly with CoinTracking GmbH. Our two main competitors are Digital Currency Group and Galaxy Digital.
None of our direct competitors are reporting companies under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). While the competitive landscape is continually growing, we remain one of the few among our competitors who develops
proprietary technology.
Governmental
Regulations
The
digital currencies in which we invest are subject to regulation by the U.S. Securities and Exchange Commission (the “SEC”)
and the U.S. Commodities Futures Trading Commission (the “CFTC”), both of which develop regulations, on an ongoing
basis, in a rapidly growing, volatile and highly speculative market. For a discussion of recently issued rulings by the SEC and
the CFTC and how such rulings may impact our business, please see the Risk Factors in Item 1A.
Market
Opportunity and Our Mission
As
the digital currency industry continues to grow, management believes that companies in a wide range of businesses will increasingly
adopt digital currencies as part of their business. As such, consumers, entrepreneurs and the general public will seek investment
in the industry. Our mission is to provide investors with a diversified exposure to cryptocurrency markets.
Proposed
Stock Split
On
December 12, 2017, the Company’s Board and a majority of its stockholders approved a forward split of the Company’s
Common Stock at a ratio of 10-for-1 (the “Stock Split”) such that each share of Common Stock issued and outstanding
as of December 12, 2017 shall, immediately following the effective time of the Stock Split, automatically be converted into and
exchanged for 10 shares of Common Stock. The Company filed a Definitive Information Statement on Schedule 14C with the SEC on
January 5, 2018. On January 12, 2018, the Company submitted an Issuer Company-Related Action Form to FINRA for approval of the
Stock Split. On March 1, 2018, we received a letter from FINRA rejecting the Stock Split on the basis of deficiency and in the
interest of the protection of investors, the public interest and to maintain fair and orderly markets. On March 8, 2018, the Company
submitted an appeal to FINRA pursuant to FINRA Rule 6490, which is scheduled to be reviewed by FINRA’s Uniform Practice
Code Committee on April 27, 2018.
We
cannot guarantee that FINRA’s review of our appeal will result in a positive outcome or when the necessary approvals will
be received and the Stock Split will be effectuated, if at all. To the extent that the Stock Split is effectuated, resulting in
the issuance of additional shares of common stock, dilution to the interests of any stockholders who acquired their shares after
December 12, 2017 will occur and the rights of such holders of common stock might be materially and adversely affected.
Employees
As
of March 26, 2018, we had 21 full-time employees and no part-time employees and we retain the services of several qualified consultants.
We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.
None of our employees is represented by a labor union, and we believe that our employee relations are good.