NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – THE COMPANY
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 quarter ended June 30, 2019 (this “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”); Malibu Blockchain,
LLC, a Nevada limited liability company (“Malibu Blockchain”); and, where applicable, CoinTracking’s majority-owned
subsidiary, CoinTracking GmbH, which was sold on January 2, 2019.
During
the year ended December 31, 2018, the Company had two principal business segments that generated revenues and incurred expenses,
both of which have ceased operations as of the date of this Quarterly report:
The
cryptocurrency investment segment generated revenues that primarily consisted of amounts earned through trading activities of
cryptocurrencies. The Company recorded its investments in cryptocurrency as indefinite lived intangible assets, at cost less impairment,
and are reported as long-term assets in the condensed consolidated balance sheets. Realized gains and losses on sales of investments
in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statement of operations
and comprehensive income.
The
Company also generated software subscription revenues through CoinTracking GmbH and generates minimal amounts of consulting revenue.
The software subscription segment consisted primarily of amounts earned through subscriptions to the CoinTracking GmbH website.
Operating expenses related to this segment consisted primarily of technology infrastructure and general administrative costs primarily
incurred in Germany.
NOTE
2 – RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS
The
purpose of restatement is to correct errors in the Company’s previously issued financial statements, as disclosed in the
Company’s Current Report on Form 8-K filed on January 3, 2019. The restatement is in connection with the accounting for
investments in cryptocurrency at fair value as opposed to intangible assets with indefinite lives and record such investments
in cryptocurrency at historical cost less impairment, if any. Management previously reported its investments in cryptocurrency
at fair value, with changes in fair value reported as unrealized gains and losses in its consolidated statements of operations.
The Company has corrected the error in its Annual Report on 10-K for the year ended December 31, 2018 for the period from January
1, 2018 to June 30, 2018, and for the period from inception to December 31, 2017. The Company’s investment in cryptocurrency
at December 31, 2017 were accounted for in error and were overstated from their historical cost by $1,785,742. In addition, the
Company corrected the classification of its net realized gain/loss on investments in cryptocurrency by reclassifying them from
revenue to other income(expense).
The
Company has also determined that its classification and disclosures of $367,639 in investments, as of June 30, 2018, were incorrectly
described as investments in Initial Coin Offerings and included as investments in cryptocurrency in its consolidated balance sheets.
The investments were made in accordance with token pre-sale and simple agreement for tokens agreements (“SAFT”), and
should be included as investments, non-cryptocurrency in the Company’s consolidated balance sheets. The Company reclassified
the balance and changed the related disclosures in this current filing. Management believes the reclassification is material to
the Company’s condensed consolidated financial statements in the period from January 1, 2018 to June 30, 2018, and for the
period from inception to December 31, 2017.
Finally,
in connection with the acquisition of CoinTracking GmbH, the Company completed its allocation of the consideration transferred
to the assets acquired and liabilities assumed based on the information available and valuation of the fair value of tangible
and intangible assets acquired and liabilities assumed. The result was the recording of intangible assets of $7,726,356, noncontrolling
interest of $9,434,984, and an additional adjustment of $267,401 to net assets acquired, resulting in an adjustment to increase
goodwill of $1,976,029. The Company recorded amortization expense of $993,023 relating to certain intangible assets acquired for
the year ended December 31, 2018, of which $275,024 and $486,176 have been restated for the three and six months ended June 30,
2018, respectively. As a result of these changes, the Company restated its consolidated balance sheet and condensed consolidated
statements of operations and comprehensive loss for the three and six months ended June 30, 2018, as noted below. The restatement
adjustments below represent the Company’s consolidated financial statements for the periods noted, and are not allocated
between continuing and discontinued operations. On January 2, 2019, the Company sold its entire equity ownership stake in CoinTracking
GmbH. See “Note 15 – Discontinued Operations” for additional details.
The
Company’s originally disclosed accounting policy, from the Company’s Quarterly Report on Form 10-Q for the three months
ended June 30, 2018 regarding investments in cryptocurrency stated that:
“
Investments
in cryptocurrency
– Investments are comprised primarily of two types of cryptocurrency investments. The Company owns
several cryptocurrencies, of which a majority is Bitcoin, which are actively traded on exchanges and are reported at fair value
as determined by digital asset markets with realized gains and losses calculated on a trade date basis as the difference between
the fair value and cost of cryptocurrencies transferred.
Management
believes that
measuring cryptocurrencies at fair value, consistent with the accounting for trading investments in commodities and securities
with changes in fair value recognized on both the balance sheet and profit and loss statements, best reflects the Company’s
financial position and the economics and characteristics of its cryptocurrency investments. The Company recognizes the fair value
changes in unrealized gains and losses on investment through the accompanying Statement of Operations. For the six-month period
ended June 30, 2018, the Company had a condensed consolidated balance of $2,200,449 in investments in cryptocurrencies. The Company
believes that it would be able to liquidate a majority of its portfolio into cash within one to seven days, if needed. As of June
30, 2018, the Company’s holdings represent on average 1.3% of the daily volume of total 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. These exchanges, in the aggregate, account for approximately $168,000,000
in Bitcoin/U.S. dollars (“USD”) trades per day globally.
In
addition, the Company’s cryptocurrency investments include Initial Coin Offerings (“ICOs”), which primarily
consist of tokens that are not currently traded on an exchange. The Company records these investments at cost, as there is no
active market. As of June 30, 2018, ICOs represent $367,639 of the Company’s investments in cryptocurrencies. For the six-month
period ended June 30, 2018, the Company recognized no impairment losses on investments in ICOs.
Investments
– non-cryptocurrency
– During the six months ended June 30, 2018, the Company invested $250,000 as part of a financing
in accordance with a simple agreement for future equity (“SAFE”), representing 4% interest, at the time of the investment,
in a private enterprise. The Company’s investment may take the form of equity in the future, relating to a potential equity
financing or initial public offering and a token grant in the event of a successful ICO by the enterprise. The Company has evaluated
the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to
account for the investment using the cost method since the equity securities are not marketable and do not give the Company significant
influence. The Company has determined that there is no impairment to date due to the recent nature of the investment and the early
stage development of the platform and has included such asset as a level 3 investment.”
The
Company’s updated accounting policy regarding investments in cryptocurrency transactions and remeasurement states that:
“
Investments
in cryptocurrency
– Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin,
that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less
impairment and are reported as long-term assets in the condensed 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
utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.
Realized
gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the
condensed consolidated statement of operations and comprehensive income.
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 December
31, 2018, and June 30, 2019 the Company’s investment in SAFT and SAFE agreements was $2,005, and $0, respectively.
The
Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other,
in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable
and do not give the Company significant influence. The Company impaired the remaining $160,050 of its token pre-sale or SAFT investments
as of December 31, 2018 as the Company determined that a token generation event and trading on an active change were remote.
During
the year ended December 31, 2018, the Company wrote-off its SAFE investment as the enterprise changed its primary business model
and required additional financing to bring its products to market.”
The
Company has determined that its previously issued financial statements should be restated on a prospective basis. Accordingly,
the Company is not amending and re-filing the financial statements included in its prior quarterly reports on Form 10-Q for each
of the quarterly periods from Inception through June 30, 2018, nor in its Annual Report for the period from Inception through
December 31, 2017. Management believes the errors are material when considering quantitative materiality. Management does not
believe it is probable that the judgment of a reasonable person relying upon its prior filings would have been changed or influenced
by the inclusion or correction of the item, nor is there a substantial likelihood that a reasonable person would consider it important.
The
effect of the restatement on the Company’s net loss, net loss attributable to The Crypto Company, comprehensive income and
per-share amounts for the three and six months ended June 30, 2018 are as follows:
|
|
|
Three
months ended June 30, 2018
|
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
(1)
|
|
|
Restatement
Adjustment
(2)
|
|
|
As
Restated
|
|
|
Net
realized gain/(loss) on investment in cryptocurrency
|
|
$
|
(299,086
|
)
|
|
$
|
299,086
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
General and administrative
expenses
|
|
|
2,969,183
|
|
|
|
-
|
|
|
|
275,024
|
|
|
|
3,244,207
|
|
|
Operating loss
|
|
|
(7,465,131
|
)
|
|
|
299,086
|
|
|
|
(275,024
|
)
|
|
|
(7,441,069
|
)
|
|
Other income(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized
appreciation on investment in cryptocurrency
|
|
|
249,847
|
|
|
|
(249,487
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net realized gain/(loss)
on investment in cryptocurrency
|
|
|
|
|
|
|
360,353
|
|
|
|
-
|
|
|
|
360,353
|
|
|
Impairment of investments
in cryptocurrency
|
|
|
|
|
|
|
(227,784
|
)
|
|
|
-
|
|
|
|
(227,784
|
)
|
|
Loss before provision
for income taxes
|
|
|
(7,145,543
|
)
|
|
|
182,168
|
|
|
|
(275,024
|
)
|
|
|
(7,238,399
|
)
|
|
Net loss
|
|
|
(7,145,543
|
)
|
|
|
182,168
|
|
|
|
(275,024
|
)
|
|
|
(7,238,399
|
)
|
|
Loss attributable
to noncontrolling interest
|
|
|
126,766
|
|
|
|
-
|
|
|
|
(137,532
|
)
|
|
|
(10,766
|
)
|
|
Net loss attributable
to the Crypto Company
|
|
|
(7,272,309
|
)
|
|
|
182,168
|
|
|
|
(137,492
|
)
|
|
|
(7,227,633
|
)
|
|
Net loss attributable
to the Crypto Company per common share - basic and diluted
|
|
|
(0.34
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.34
|
)
|
|
Weighted average
common shares outstanding - basic and diluted
|
|
|
21,131,457
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,131,457
|
|
|
|
|
Six
months ended June 30, 2018
|
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
(1)
|
|
|
Restatement
Adjustment
(2)
|
|
|
As
Restated
|
|
|
Net realized gain/(loss)
on investment in cryptocurrency
|
|
$
|
773,512
|
|
|
$
|
(773,512
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
General and administrative expenses
|
|
|
5,667,975
|
|
|
|
-
|
|
|
|
486,176
|
|
|
|
6,154,151
|
|
|
Operating loss
|
|
|
(7,991,255
|
)
|
|
|
(773,512
|
)
|
|
|
(486,176
|
)
|
|
|
(9,250,943
|
)
|
|
Other income(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation
on investment in cryptocurrency
|
|
|
(2,745,337
|
)
|
|
|
2,745,337
|
|
|
|
-
|
|
|
|
-
|
|
|
Net realized gain/(loss) on investment
in cryptocurrency
|
|
|
|
|
|
|
1,412,353
|
|
|
|
-
|
|
|
|
1,412,353
|
|
|
Impairment of investments in cryptocurrency
|
|
|
-
|
|
|
|
(1,614,301
|
)
|
|
|
-
|
|
|
|
(1,614,301
|
)
|
|
Loss before provision for income taxes
|
|
|
(10,666,492
|
)
|
|
|
1,769,877
|
|
|
|
(486,176
|
)
|
|
|
(9,382,791
|
)
|
|
Net loss
|
|
|
(10,667,292
|
)
|
|
|
1,769,877
|
|
|
|
(486,176
|
)
|
|
|
(9,383,591
|
)
|
|
Loss attributable to noncontrolling
interest
|
|
|
(236,035
|
)
|
|
|
-
|
|
|
|
(243,359
|
)
|
|
|
(479,394
|
)
|
|
Net loss attributable to the crypto
Company
|
|
|
(10,431,256
|
)
|
|
|
1,769,877
|
|
|
|
(242,818
|
)
|
|
|
(8,904,197
|
)
|
|
Net loss attributable to the Crypto
Company per common share - basic and diluted
|
|
|
(0.50
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.42
|
)
|
|
Weighted average common shares outstanding
- basic and diluted
|
|
|
21,003,328
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,003,328
|
|
|
|
(1)
|
Reflects
the restatement in connection with the accounting for investments in cryptocurrency as intangible assets with indefinite lives
and record such investments in cryptocurrency at cost less impairment.
|
|
|
(2)
|
Reflects
the restatement of the intangible asset amortization due to the completion of the preliminary valuation of the fair value
of tangible and intangible assets acquired and related liabilities in connection with the acquisition of CoinTracking GmbH
on January 26, 2018.
|
The
effect of the restatement on the Company’s condensed consolidated balance sheet as of June 30, 2018 is as follows:
|
|
|
As
of June 30, 2018
|
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
(1)
|
|
|
Restatement
Adjustment
(2)
|
|
|
Restatement
Adjustment
(3)
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in cryptocurrency,
net
|
|
$
|
2,200,449
|
|
|
$
|
(2,200,449
|
)
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
-
|
|
|
Prepaid expenses and other current assets
|
|
|
196,773
|
|
|
|
-
|
|
|
|
11,096
|
|
|
|
|
|
|
|
207,869
|
|
|
Total current assets
|
|
|
3,834,768
|
|
|
|
(2,200,449
|
)
|
|
|
11,096
|
|
|
|
|
|
|
|
1,645,415
|
|
|
Investment in cryptocurrency, net
|
|
|
-
|
|
|
|
2,184,636
|
|
|
|
-
|
|
|
|
|
|
|
|
2,184,636
|
|
|
Equipment, net of accumulated depreciation
|
|
|
108,159
|
|
|
|
-
|
|
|
|
(184
|
)
|
|
|
|
|
|
|
107,975
|
|
|
Intangible assets, net
|
|
|
176,989
|
|
|
|
-
|
|
|
|
6,669,056
|
|
|
|
|
|
|
|
6,846,045
|
|
|
Goodwill
|
|
|
9,392,685
|
|
|
|
-
|
|
|
|
1,856,958
|
|
|
|
|
|
|
|
11,249,643
|
|
|
Total assets
|
|
|
13,843,400
|
|
|
|
(15,813
|
)
|
|
|
8,536,926
|
|
|
|
|
|
|
|
22,364,513
|
|
|
Accounts payable and accrued expenses
|
|
|
769,236
|
|
|
|
-
|
|
|
|
140,287
|
|
|
|
|
|
|
|
909,523
|
|
|
Current liabilities
|
|
|
3,570,284
|
|
|
|
-
|
|
|
|
140,287
|
|
|
|
|
|
|
|
3,710,571
|
|
|
Total liabilities
|
|
|
4,978,492
|
|
|
|
-
|
|
|
|
140,287
|
|
|
|
|
|
|
|
5,118,779
|
|
|
Accumulated deficit
|
|
|
(18,198,814
|
)
|
|
|
(15,813
|
)
|
|
|
(242,871
|
)
|
|
|
|
|
|
|
(18,457,498
|
)
|
|
Accumulated other comprehensive income
|
|
|
(551,778
|
)
|
|
|
-
|
|
|
|
(552,119
|
)
|
|
|
550,844
|
|
|
|
(553,053
|
)
|
|
Noncontrolling interest
|
|
|
(236,035
|
)
|
|
|
-
|
|
|
|
9,191,625
|
|
|
|
(550,844
|
)
|
|
|
8,404,746
|
|
|
Total stockholders’ equity
|
|
|
8,864,908
|
|
|
|
(15,813
|
)
|
|
|
8,396,636
|
|
|
|
|
|
|
|
17,245,731
|
|
|
Total Liabilities and stockholders’
equity
|
|
|
13,843,400
|
|
|
|
(15,813
|
)
|
|
|
8,536,926
|
|
|
|
|
|
|
|
22,364,513
|
|
|
|
(1)
|
Reflects
the restatement in connection with the accounting for investments in cryptocurrency as intangible assets with indefinite lives
and record such investments in cryptocurrency at cost less impairment.
|
|
|
(2)
|
Reflects
the restatement of the intangible asset amortization due to the completion of the preliminary valuation of the fair value
of tangible and intangible assets acquired and related liabilities in connection with the acquisition of CoinTracking GmbH
on January 26, 2018.
|
|
|
(3)
|
Allocate
other comprehensive income, related to CoinTracking GmbH, to noncontrolling interest.
|
The
effect of the restatement on the Company’s consolidated statement of cash flows for the six months ended June 30, 2018,
are as follows:
|
|
|
Six
months ended June 30, 2018
|
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
(1)
|
|
|
Restatement
Adjustment
(2)
|
|
|
As
Restated
|
|
|
Net loss
|
|
$
|
(10,667,291
|
)
|
|
$
|
1,769,877
|
|
|
$
|
(486,171
|
)
|
|
$
|
(9,383,591
|
)
|
|
Net change in unrealized appreciation
(depreciation) on investment in cryptocurrency
|
|
|
2,745,337
|
|
|
|
(2,745,337
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net realized gain on investments in
cryptocurrency
|
|
|
(773,512
|
)
|
|
|
(638,841
|
)
|
|
|
-
|
|
|
|
(1,412,353
|
)
|
|
Impairment of investments in cryptocurrency
|
|
|
-
|
|
|
|
1,614,301
|
|
|
|
-
|
|
|
|
1,614,301
|
|
|
Depreciation and amortization
|
|
|
186,359
|
|
|
|
|
|
|
|
388,681
|
|
|
|
575,040
|
|
|
Net proceeds from sales of investments
in cryptocurrency
|
|
|
538,289
|
|
|
|
(538,289
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Other net changes
|
|
|
-
|
|
|
|
451
|
|
|
|
-
|
|
|
|
451
|
|
|
Net cash provided by operating activities
|
|
|
(4,036,587
|
)
|
|
|
(546,820
|
)
|
|
|
(97,495
|
)
|
|
|
(4,680,902
|
)
|
|
Proceeds from sales of investments in
cryptocurrency
|
|
|
-
|
|
|
|
3,916,468
|
|
|
|
-
|
|
|
|
3,916,468
|
|
|
Purchase of investments in cryptocurrency
|
|
|
-
|
|
|
|
(3,378,180
|
)
|
|
|
-
|
|
|
|
(3,378,180
|
)
|
|
Other net changes
|
|
|
|
|
|
|
23,339
|
|
|
|
-
|
|
|
|
23,339
|
|
|
Net cash used in investing activities
|
|
|
(3,660,016
|
)
|
|
|
561,627
|
|
|
|
-
|
|
|
|
(3,098,389
|
)
|
|
Effect on exchange rate changes on cash
|
|
|
(123,703
|
)
|
|
|
-
|
|
|
|
82,687
|
|
|
|
(41,016
|
)
|
|
Noncash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryptocurrency acquired in trade of
cryptocurrency investments
|
|
$
|
-
|
|
|
$
|
4,733,341
|
|
|
|
-
|
|
|
$
|
4,733,341
|
|
|
Customer payments received in cryptocurrency
|
|
$
|
-
|
|
|
|
-
|
|
|
|
838,885
|
|
|
$
|
838,885
|
|
|
Purchase of contract asset for commissions
and incentives with investments in cryptocurrency
|
|
$
|
-
|
|
|
|
-
|
|
|
|
161,213
|
|
|
$
|
161,213
|
|
|
|
(1)
|
Reflects
the restatement in connection with the accounting for investments in cryptocurrency as intangible assets with indefinite lives
and record such investments in cryptocurrency at cost less impairment.
|
|
|
(2)
|
Reflects
the restatement of the intangible asset amortization due to the completion of the preliminary valuation of the fair value
of tangible and intangible assets acquired and related liabilities in connection with the acquisition of CoinTracking GmbH
on January 26, 2018.
|
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
– The company prepares its condensed consolidated financial statements based upon the accrual method
of accounting, recognizing income when earned and expenses when incurred.
Consolidation
– The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries,
Crypto Sub, CoinTracking, and Malibu Blockchain, as well as its 50.1% ownership of CoinTracking GmbH for the period ended June
30, 2018. 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.
Recent
Developments –
On December 28, 2018, CoinTracking entered into an agreement on the purchase and assignment of shares,
agreements on a purchase price of loan agreement, and a compensation agreement (collectively, the “Agreement”), pursuant
to the laws of the Republic of Germany, with Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany (“Kachel
Holding”), and CoinTracking GmbH. On January 2, 2019, pursuant to the Agreement, CoinTracking 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.
As
a result of the pending sale as of December 31, 2018, of CoinTracking’s entire equity ownership stake in CoinTracking GmbH,
and a strategic shift in the Company’s business in the fourth quarter of 2018 away from cryptocurrency investing to blockchain
consulting and education, the assets and liabilities to be sold or disposed of other than by sale are reported in assets and liabilities
held for sale in the Consolidated Balance Sheets as of December 31, 2018. Additionally, the current operating results associated
with these assets and liabilities have been reclassified to give effect to these changes and are reported as discontinued operations
in the Consolidated Statements of Operations for all periods presented.
Liquidity
and Going Concern
– The Company’s condensed 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 June 30, 2019, the Company had cash of $186,317, a decline of $968,678 from the June 30, 2018 balance of $1,154,995. In
addition, the Company’s net loss before provision for income taxes was $578,691 for the six months ended June 30, 2019.
The Company’s working capital was negative ($1,131,000) as of June 30, 2019. During 2018, the Company liquidated a majority
of its investments in cryptocurrency. In addition, on January 2, 2019, the Company sold its equity interest in CoinTracking GmbH
for $2,200,000, of which (i) $1,000,000 was received in cash and (ii) $1,200,000 was applied toward the repayment of an outstanding
loan in the amount of $1,500,000 from CoinTracking GmbH. The cash received from the liquidation of the Company’s investment
in cryptocurrency helped fund the Company’s operations during 2018, and the funds received from the sale of CoinTracking
GmbH will be used to help fund operations in 2019. As of June 30, 2019, the accumulated deficit amounted to $29,035,240. 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, in 2019 and beyond. The condensed 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 condensed 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 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 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 are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin,
that were actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less
impairment and are reported as long-term assets in the condensed 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 utilizes for its trading
are Kraken, Bittrex, Poloniex and Bitstamp.
Realized
gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the
condensed consolidated statements of operations. For the six months ended June 30, 2019, realized gains and losses are included
in discontinued operations. See “Note – Discontinued Operations” for additional details.
The
following table summarizes the historical cost of cryptocurrencies, held as of June 30, 2019:
|
Ethereum
|
|
|
1,612
|
|
|
Other Cryptocurrencies
|
|
|
339
|
|
|
Balance at June 30, 2019
|
|
$
|
1,951
|
|
The
investments in cryptocurrency are included in assets held for sale at June 30, 2019.
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 December
31, 2018, the Company’s investment in SAFT and SAFE agreements was $2,005, representing a single investment which was sold
during the six months ended June 30, 2019.
The
Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other,
in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable
and do not give the Company significant influence. The Company impaired the remaining $160,050 of its token pre-sale or SAFT investments
as of December 31, 2018 as the Company determined that a token generation event and trading on an active change were remote.
During
the year ended December 31, 2018, the Company wrote-off its SAFE investment as the enterprise changed its primary business model
and required additional financing to bring its products to market.
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 is 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, including intangible assets with finite useful lives
(subject to amortization) acquired in connection with the acquisition of CoinTracking GmbH, for potential impairment. Impairment
losses are recorded on long-lived assets when indicators of impairment are present, and for intangible assets acquired in connection
with acquisitions, 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.
Most
of the Company’s long-lived assets, including all of its goodwill and a majority of its intangible, was held by CoinTracking
GmbH, which was reclassified to Assets Held for Sale at December 31, 2018, and sold on January 2, 2019. Therefore, as of June
30, 2019, the Company has no impairment losses.
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
and indefinite lived intangible assets
– The Company records the excess of purchase price over the fair value of the
tangible and identifiable intangible assets acquired as goodwill. Intangible assets resulting from the acquisitions of entities
accounted for using the purchase method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable
intangible assets are comprised of purchased customer relationships, trade names, and developed technologies. Intangible assets
subject to amortization are amortized over the period of estimated economic benefit of five years. In accordance with ASC 350,
Intangibles – Goodwill and Other (“ASC 350”), goodwill and other intangible assets with indefinite lives are
not amortized but tested annually, on December 31, or more frequently if the Company believes indicators of impairment exist.
Indefinite lived intangible assets also include investments in cryptocurrency (see Investments in Cryptocurrency).
The
Company assesses whether goodwill impairment and indefinite lived intangible assets exists using both 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.
In
addition, the Company capitalized certain costs incurred with developing its CoinTracking SaaS platform in accordance with ASC
985-20, Software — Costs of Software to be Sold, Leased, or Marketed once technological feasibility has been established.
Capitalized software costs primarily include i) external direct costs of services utilized in software development and ii) compensation
and related benefits for employees who are directly associated with software development. We amortized our capitalized software
costs over a five-year period, reflecting the estimated useful lives of the assets.
The
Company’s goodwill and a majority of its indefinite lived intangible assets were held by CoinTracking GmbH and were reclassified
to Assets Held for Sale as of December 31, 2018 and sold on January 2, 2019. Therefore, the Company has no goodwill, and $20,968
of indefinite lived intangible assets as of June 30, 2019, included in other assets on its condensed consolidated balance sheets.
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 condensed 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 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 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.
As
of June 30, 2019, 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 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 is no cumulative impact to the Company’s retained earnings at January 1, 2018. See “Note
6 – Subscription Revenue Recognition” for additional information on the impact to the Company.
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 period of 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 six months ended June 30, 2019 and 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. The Company incurred
marketing expenses of $5,000 and $16,835 for the three and six months ended June 30, 2019, respectively, and $85,570 and $134,629
for the three and six months ended June 30, 2018, respectively.
Reclassifications
–
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Such reclassifications had no effect on the Company’s financial position, results of operations or cashflows.
NOTE
4 - RECENT ACCOUNTING PRONOUNCEMENTS
In
July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. The amendments in this ASU clarify certain aspects of the
guidance related to: reporting comprehensive income, debt modification and extinguishment, income taxes related to stock compensation,
income taxes related to business combinations, derivatives and hedging, fair value measurements, brokers and dealers liabilities,
and plan accounting. This new standard is effective for annual reporting periods, and interim periods within those annual periods,
beginning after December 15, 2018. The adoption of ASU No. 2018-09 did not have a material impact on the Company’s consolidated
financial statements and related disclosures.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. The amendments in this ASU remove, add, and modify certain disclosures. The ASU removes
the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2
of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation process for Level 3 fair
value measurements; and (4) certain other requirements for nonpublic entities. The ASU adds the following disclosure requirements:
(1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair
value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, disclosure of other quantitative information
may be more appropriate if the entity determines that other quantitative information would be a more reasonable and rational method
to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU modifies disclosure
requirements in Topic 820 relating to timing of liquidation of an investee’s assets, the disclosure of the date when restrictions
from redemption might lapse, the intention of the measurement uncertainty disclosure, and certain other requirements for nonpublic
entities. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning
after December 15, 2019. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated
financial statements and related disclosures.
In
August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this
ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements
that include an internal-use software). The amendments in this ASU require an entity (customer) in a hosting arrangement that
is a service to (1) determine which implementation costs to capitalize as an asset related to the service contract and which costs
to expense; (2) expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term
of the hosting arrangement; (3) apply the existing impairment guidance to the capitalized implementation costs as if the costs
were long-lived assets; (4) present the expense related to the capitalized implementation costs in the same line item in the statement
of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation
costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting arrangements; and
(5) present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment
for the fees of the associated hosting arrangement would be presented. This new standard is effective for annual reporting periods,
and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-15 is not expected
to have a material impact on the Company’s consolidated financial statements and related disclosures.
In
June 2018, the FASB issued ASU 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.
The ASU expands the
scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees,
to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based
payments to non-employees and employees will be substantially aligned. Management currently does not plan to early adopt this
guidance.
The new standard is effective for annual reporting periods beginning after December
15, 2018 with early adoption permitted. The adoption of ASU No. 2018-07 did not have a material
impact on the Company’s
consolidated financial statements and related disclosures.
In
July 2017, the FASB issued No. 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 EPS
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. The adoption of ASU No. 2017-11 did
not have a material impact on the Company’s consolidated financial statements and related disclosures.
In
January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350) which 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. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s
consolidated financial statements and related disclosures.
In
February 2016, the FASB issued ASU 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 became effective for us on January 1, 2019. Early adoption is permitted. The amendments in this update
should be applied under a modified retrospective approach. Adoption of ASU No. 2016-02 and will not have a significant impact
on our consolidated financial statements and related disclosures.
NOTE
5 - ACQUISITION
On
January 26, 2018, the Company, through its wholly owned subsidiary, CoinTracking, 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 a total purchase
price valued at $9,472,800. On the acquisition date, the fair market value of $10 per share for the Company’s common stock
was determined using a trading range from November 2017, discounted further due to lack of marketability. The Company used this
approach due to the lack of trading volume since (i) the stock trading was suspended by the SEC in December 2017 and was moved
to OTC Grey market by the OTC Markets Group, Inc. on January 3, 2018, (ii) stock sales to accredited investors on December 12,
2017, at $7 per share, and (iii) a valuation performed as of March 31, 2018. The equity purchase agreement between the Company
and CoinTracking GmbH included a purchase price adjustment pursuant to which the consideration would increase if the share price
of the Company’s common stock closed below $10 per share on July 2, 2018. No adjustment was required.
CoinTracking
GmbH provides its customers with the ability to view and monitor their own cryptocurrency portfolios as well as tax calculation
and reporting services. Customers may not make trades through the CoinTracking GmbH platform. The purpose of the acquisition was
to increase the Company’s presence in the digital asset industry and build strategic alliances.
The
condensed consolidated financial statements were prepared using the acquisition method of accounting in accordance with ASC 805,
Business Combinations, and have been included in the Company’s consolidated results as of the acquisition date with the
Company considered as the accounting acquirer and CoinTracking GmbH 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. Acquisition-related costs were expensed as incurred and were not considered
to be significant.
In
the fourth quarter of the year ended December 31, 2018, the Company completed its allocation of the consideration transferred
to the assets acquired and liabilities assumed based on the fair value of tangible and intangible assets acquired and liabilities
assumed. The result was the recording of intangible assets of $7,726,356, noncontrolling interest of $9,434,984, and an additional
adjustment of $267,401 to net assets acquired, resulting in an adjustment to increase goodwill of $1,976,029, from $10,014,881
to $11,990,910.
The
table below summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition, as of December
31, 2018:
|
|
|
CoinTracking
GmbH
|
|
|
Cash and cash equivalents
|
|
$
|
1,547,097
|
|
|
Investment in cryptocurrency
|
|
|
1,115,345
|
|
|
Loan receivable – related party
|
|
|
194,380
|
|
|
Other current assets
|
|
|
296,273
|
|
|
Goodwill
|
|
|
11,990,910
|
|
|
Intangible assets
|
|
|
7,726,356
|
|
|
Other assets
|
|
|
14,633
|
|
|
Total
assets
|
|
$
|
22,884,994
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
360,486
|
|
|
Contract liabilities, short term
|
|
|
2,686,858
|
|
|
Contract liabilities, long term
|
|
|
929,866
|
|
|
Noncontrolling
interest
|
|
|
9,434,984
|
|
|
Total
liabilities
|
|
|
13,412,194
|
|
|
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 $11,990,910 of goodwill on the date of acquisition.
Unaudited
pro forma financial information
The
unaudited pro forma financial information in the table below presents the combined results of the Company and CoinTracking GmbH
as if the acquisition 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 acquisition actually occurred on January 1, 2018.
For
the three and six months ended June 30, 2018:
|
|
|
Three
months ended
June 30, 2018
|
|
|
Six
months ended
June 30, 2018
|
|
|
Revenue
|
|
$
|
885,833
|
|
|
$
|
1,458,495
|
|
|
Net loss
|
|
$
|
(7,145,543
|
)
|
|
|
(10,374,966
|
)
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.49
|
)
|
On
January 2, 2019, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 15 – Discontinued
Operations” for additional details.
NOTE
6 – SUBSCRIPTION REVENUE RECOGNITION
CoinTracking
GmbH accounted for a contract when it had approval and commitment from all parties, the rights of the parties and payment terms
were identified, the contract had commercial substance and collectability of consideration was probable. Revenue was recognized
when control of the promised services were transferred to the Company’s customers over time, and in an amount that reflected
the consideration the Company was contractually due in exchange for those services. Most of the Company’s contracts with
customers were single, or have few distinct performance obligations, and the transaction price was allocated to each performance
obligation using the stand-alone selling price.
CoinTracking
GmbH’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, subject to certain
conditions identified in our terms and conditions. Revenue is initially deferred and recognized using the straight-line method
over the term of the applicable subscription period, which primarily range from annual to perpetual.
Transaction
Price
The
objective of determining the transaction price was to estimate the amount of consideration the Company was due in exchange for
services, including amounts that are variable. CoinTracking GmbH had a standalone sales price for its subscription service, which
varied based on length of subscription. Further, the Company excluded from the measurement of transaction price all taxes assessed
by governmental authorities that were both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii)
collected from customers. Accordingly, such tax amounts were not included as a component of revenue or cost of revenue.
Estimates
of certain revenue
Revenue
collected in advance for subscriptions ranging from annual to perpetual packages were 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 an unlimited length of time, the Company 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 customers was appropriate.
Net
Revenue and Charge-back Reserves
CoinTracking
GmbH did not maintain an allowance for doubtful accounts because the customer prepaid for the subscription in advance before access
was provided to CoinTracking GmbH’s website. The Company maintained a reserve for potential credits issued to consumers
or other revenue adjustments when necessary. In addition, as of December 31, 2018, PayPal withheld $47,872 for potential credits
issued to customers, which was included in assets held for sale on the Company’s condensed consolidated balance sheets.
Contract
Liabilities
Contract
liabilities were recorded when payments were received or due in advance of performing CoinTracking GmbH’s service obligations
and were recognized over the service period, which primarily related to prepayments of subscription revenue. At the acquisition
date of January 26, 2018, CoinTracking GmbH’s total contract liabilities were $3,616,724, and we recognized revenue of $3,553,979
for the year ended December 31, 2018. As of December 31, 2018, $1,750,465 of current contract liabilities and $847,461 of long-term
contract liabilities were included in liabilities held for sale.
Assets
Recognized from the Costs to Obtain a Contract with a Customer
CoinTracking
GmbH determined that certain costs associated with affiliate payments paid to customers pursuant to certain sales incentive programs,
met the requirements to be capitalized as a cost of obtaining a contract. Affiliates were paid in Bitcoin and the expense was
amortized over the applicable subscription period.
The
aggregate contract asset balance at December 31, 2018 was $106,026, included in assets held for sale. On January 2, 2019, the
Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 15 – Discontinued Operations”
for additional details.
NOTE
7 – INVESTMENTS, NON-CRYPTOCURRENCY
The
Company has $160,050 in non-tradeable token pre-sale and SAFT agreements, as of June 30, 2019, of which the entire balance has
been impaired.
The
Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are
fair, consistent and verifiable. Non-cryptocurrency investments are carried at cost which approximates fair value at June 30,
2019. The Company considers the length of its investments, as well as its comprehensive investment process which includes reviews
of white papers, preparation of either short or long forms analysis that is reviewed by the Company’s internal investment
committee, and as well as periodic status updates from its investees, among other factors in determining fair value. At the time
that the investments are tokenized and available on active market exchanges, the investments will be reclassified to investments
in cryptocurrency
The
following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the three months
ended June 30, 2019:
|
|
|
Level 3
|
|
|
|
|
Non-Cryptocurrency
|
|
|
|
|
|
|
|
Balance at December 31,
2018
|
|
$
|
2,005
|
|
|
Transferred to investments in cryptocurrency
|
|
|
(2,005
|
)
|
|
Balance at
June 30, 2019
|
|
$
|
0
|
|
These
investments are included in assets held for sale at December 31, 2018 and June 30, 2019.
NOTE
8 - EQUIPMENT
Equipment
consists of the following:
|
|
|
As
of June 30, 2019
|
|
|
As
of December 31, 2018
|
|
|
Computer equipment
|
|
$
|
98,225
|
|
|
$
|
114,244
|
|
|
Furniture
|
|
|
14,542
|
|
|
|
20,980
|
|
|
|
|
|
112,767
|
|
|
|
135,224
|
|
|
Less accumulated
depreciation
|
|
|
(36,892
|
)
|
|
|
(35,522
|
)
|
|
|
|
$
|
75,875
|
|
|
$
|
99,701
|
|
Depreciation
expense for equipment was $5,706 and $11,412 for the three and six months ended June 30, 2019, respectively, and $4,928 and $10,519
for the three and six months ended June 30, 2018, respectively. Depreciation expense is included in selling, general and administrative
expenses.
Equipment,
net of accumulated depreciation of $10,369 was included in assets held for sale as of December 31, 2018.
NOTE
9 – IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
Goodwill
represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired
in a business combination. The Company’s goodwill balance is the result of the acquisition of CoinTracking GmbH in the current
year (see Note 5 - Acquisition). Intangible assets include software development costs, related to the CoinTracking GMBH SaaS platform,
customer base and trade name.
The
carrying amount of goodwill at December 31, 2018 was as follows:
|
|
|
December
31, 2018
|
|
|
Balance at December 31, 2017
|
|
$
|
-
|
|
|
Acquisitions
|
|
|
11,990,910
|
|
|
Impairment
|
|
|
(9,356,105
|
)
|
|
Foreign translation
impact
|
|
|
(940,100
|
)
|
|
|
|
$
|
1,694,705
|
|
The
carrying amounts of intangible assets at December 31, 2018 was as follows:
|
|
|
Estimated
Useful Life
|
|
|
Gross
Carry Amount
|
|
|
Accumulated
Amortization
|
|
|
Impairment
|
|
|
Balance
as of
December 31, 2018
|
|
|
Trade name
|
|
|
-
|
|
|
$
|
1,797,768
|
|
|
|
-
|
|
|
$
|
(993,833
|
)
|
|
$
|
803,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
5
Years
|
|
|
|
4,264,412
|
|
|
|
(795,888
|
)
|
|
|
(2,366,546
|
)
|
|
|
1,101,978
|
|
|
Customer base
|
|
|
5
Years
|
|
|
|
1,058,422
|
|
|
|
(197,458
|
)
|
|
|
(270,267
|
)
|
|
|
590,697
|
|
|
Capitalized software
|
|
|
5
Years
|
|
|
|
127,937
|
|
|
|
(15,104
|
)
|
|
|
(112,833
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
7,248,539
|
|
|
$
|
(1,008,450
|
)
|
|
$
|
(3,743,479
|
)
|
|
$
|
2,496,610
|
|
The
Company’s goodwill and intangible assets relate to CoinTracking GmbH and are therefore included as held for sale on the
condensed consolidated balance sheets, and amortization expense is included in loss from discontinued operations in the condensed
consolidated statements of operations for the three and six months ended June 30, 2018.
Intangible
assets with finite useful lives are amortized over their respective estimated useful lives. Amortization expense related to intangible
assets was $275,024 and $486,176 for the three and six months ended June 30, 2018, respectively. There was no amortization expense
related to intangible assets for the three and six months ended June 30, 2019.
Amortization
expense for intangible assets is included in general and administrative expenses in discontinued operations (see Note 15 –
Discontinued Operations).
Impairment
of goodwill and indefinite lived intangible assets
The
Company performed its annual impairment test at December 31, 2018. Based on the guidance in ASC 350 – Intangibles –
Goodwill and Other, management of the Company elected to bypass the qualitative assessment of goodwill and proceeded directly
to performing the first step of the goodwill impairment test. The first step of the goodwill impairment test indicated that the
fair value of goodwill was below its carrying value, indicating impairment. The Company then performed the second step of the
goodwill impairment test, comparing the implied fair value of goodwill to its carrying value, resulting in an impairment charge
of $9,356,105. In addition, the Company recognized an impairment charge of $998,833 related to the Trade Name indefinite lived
intangible asset and $2,749,646 on its definite lived intangible assets related to CoinTracking GmbH, which are both classified
as assets held for sale. There was no impairment for the three months ended June 30, 2019.
CoinTracking
GmbH was acquired in the first quarter of 2018, shortly after bitcoin and other cryptocurrencies reached their highest market
values, resulting in significant customer signups for CoinTracking GmbH’s software subscription service. Beginning in early
2018, the market value of cryptocurrencies declined sharply, resulting in a steady decline in new customer signups. While software
subscription revenues for 2018 were in line with the Company’s projections, the Company reduced its projected revenue expectations
for future years in line with the decline in new customer signups. On January 2, 2019, the Company agreed to sell the software
subscription business back to the noncontrolling shareholder at a sales price of $2,200,000, significantly below the $9,472,800
purchase price paid by the Company in January 2018.
The
Company estimates the fair value of its reporting units using a weighting of fair values derived from both the income approach
and the market approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present
value of estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates
and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average
cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to
the business’s ability to execute on the projected cash flows. The market approach estimates fair value based on market
multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics
as the reporting unit. The weighting of the fair value derived from the market approach ranges from 0% to 50% depending on the
level of comparability of these publicly traded companies to the reporting unit. The Company used a 50% weighting of these two
approaches in determining the fair value of CoinTracking GmbH, which fair value approximated the Company’s sales price.
NOTE
10 – NOTE PAYABLE
In
2018, CoinTracking entered into a Loan Agreements (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. At 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 June 30, 2019, with a due date of May 28, 2020. The Note bears interest at
3%, which is payable quarterly, in arrears. See Note 13 – Related Party Transactions for additional information.
Interest
expense was $2,250 and $4,325 for the three and six months ended June 30, 2019, respectively.
NOTE
11 – WARRANTS FOR COMMON STOCK
As
of June 30, 2019, outstanding warrants to purchase shares of the Company’s 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 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
12 - 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 three and six months ended June 30, 2019, the Company did not issue any options
5,000,000
shares of the Company’s common stock are reserved for issuance under the Plan. As of the six-month period ended June 30,
2019, there are outstanding stock option awards issued from the Plan covering a total of 966,716 shares of the Company’s
common stock and there remain reserved for future awards 3,979,355 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, 2018
|
|
|
1,401,612
|
|
|
$
|
5.83
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(434,896
|
)
|
|
$
|
5.72
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Options outstanding,
at September 30, 2018
|
|
|
966,716
|
|
|
$
|
5.88
|
|
|
|
8.78
|
|
|
$
|
-
|
|
|
Exercisable
|
|
|
927,133
|
|
|
$
|
5.93
|
|
|
|
8.78
|
|
|
$
|
-
|
|
|
Vested and exercisable
and expected to vest, end of period
|
|
|
966,716
|
|
|
$
|
5.88
|
|
|
|
8.78
|
|
|
$
|
-
|
|
The
Company recognized a reduction in expense of $180,693 and $239,485 for share-based compensation related to stock options for the
three and six months ended June 30, 2019, respectively, compared to an expense of $4,757,580 and $4,049,441 for the three and
six months ended June 30, 2018, respectively, which amounts include $530,776 and $550,867 for the three and six months ended June
30, 2018, respectively, of expense related to our former cryptocurrency investment segment, included in discontinued operations.
The
total intrinsic value for options exercised, determined using the market price of our common stock on the date of exercise, was
$663,767 for the six months ended June 30, 2018. There were no options exercised for the three months ended June 30, 2018 and
2019 and for the six months ended June 30, 2019.
The
Company did not grant any restricted stock awards during the six months ended June 30, 2019 and 2018, respectively
.
As
of June 30, 2019, there was less than $1,000 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 six months ended June 30, 2018 are as follows:
|
|
|
Six
Months Ended
June 30, 2018
|
|
|
|
|
|
Ranges
|
|
|
Volatility
|
|
|
36
– 55
|
%
|
|
Expected dividends
|
|
|
0
|
%
|
|
Expected term (in years)
|
|
|
5.00
– 10 years
|
|
|
Risk-free rate
|
|
|
1.91
– 2.95
|
%
|
NOTE
13 - RELATED PARTY TRANSACTIONS
The
Company has a services agreement with Full Stack Finance for chief financial officer and accounting outsource services. Ivan Ivankovich,
the Company’s CFO, is the Co-Managing Director of Full Stack Finance. The Company expensed $255,833 and $394,092 in fees
to Full Stack Finance during the three and six months ended June 30, 2018, respectively, included in general and administrative
expenses in the condensed consolidated statements of operations. The Company did not incur expenses in the current year. As of
June 30, 2019 and December 31, 2018, there was a balance due to Full Stack Finance of $83,130 and $133,834, respectively, which
is included in accounts payable and accrued expenses on the accompanying condensed 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 10 – 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. In connection with
the settlement the Company reduced its accounts payable and accrued expenses to $40,000 as of December 31, 2018.
NOTE
14 - BASIC AND DILUTED LOSS PER SHARE
The
following is a reconciliation of the basic and diluted loss per share computations for the three and six months ended June 30,
2019 and 2018:
|
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Numerator for basic and diluted income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing
operations attributable to the Crypto Company
|
|
$
|
(314,687
|
)
|
|
$
|
(6,419,073
|
)
|
|
$
|
(665,491
|
)
|
|
$
|
(7,583,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
attributable to the Crypto Company
|
|
|
72,634
|
|
|
|
(808,560
|
)
|
|
|
86,800
|
|
|
|
(1,320,650
|
)
|
|
Net loss attributable
to the Crypto Company
|
|
$
|
(242,053
|
)
|
|
$
|
(7,227,633
|
)
|
|
$
|
(578,691
|
)
|
|
$
|
(8,904,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (basic)
|
|
|
21,212,860
|
|
|
|
21,131,457
|
|
|
|
21,212,860
|
|
|
|
21,003,328
|
|
|
Common stock
equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Weighted average shares (diluted)
|
|
|
21,212,860
|
|
|
|
21,131,457
|
|
|
|
21,212,860
|
|
|
|
21,003,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
attributable to the Company
|
|
$
|
(0.01
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.36
|
)
|
|
Net loss from
discontinued operations attributable to the Company
|
|
|
-
|
|
|
|
(0.04
|
)
|
|
|
-
|
|
|
|
(0.06
|
)
|
|
Net loss attributable
to the Company
|
|
$
|
(0.01
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.42
|
)
|
NOTE
15 – 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.
In
addition, during the fourth quarter of 2018, there was a strategic shift in the Company’s business away from cryptocurrency
investing to blockchain consulting and education. As a result of the sale of CoinTracking GmbH and the shift in the Company’s
operations, the Company reclassified the assets and liabilities divested as held for sale as of December 31, 2018 and June 30,
2019. 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 condensed consolidated
statements of operations is shown below:
|
|
|
For
the Three Months ended
|
|
|
For
the Six Months ended
|
|
|
|
|
June
30, 2019
|
|
|
June
30, 2018
|
|
|
June
30, 2019
|
|
|
June
30, 2018
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
revenue, net
|
|
$
|
-
|
|
|
|
884,587
|
|
|
$
|
-
|
|
|
$
|
1,341,283
|
|
|
Other
|
|
|
-
|
|
|
|
1,246
|
|
|
|
-
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
885,833
|
|
|
|
-
|
|
|
|
1,342,824
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription
revenues
|
|
|
-
|
|
|
|
325,115
|
|
|
|
-
|
|
|
|
390,175
|
|
|
General and administrative
expenses
|
|
|
-
|
|
|
|
1,062,571
|
|
|
|
-
|
|
|
|
2,080,612
|
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
530,776
|
|
|
|
-
|
|
|
|
550,867
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating
Expenses
|
|
|
-
|
|
|
|
1,918,462
|
|
|
|
-
|
|
|
|
3,021,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
-
|
|
|
|
(1,032,629
|
)
|
|
|
-
|
|
|
|
(1,678,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of
CoinTracking GmbH
|
|
|
-
|
|
|
|
-
|
|
|
|
14,166
|
|
|
|
-
|
|
|
Other income(expense)
|
|
|
|
|
|
|
80,735
|
|
|
|
|
|
|
|
80,735
|
|
|
Net realized gain
on investment in cryptocurrency
|
|
|
72,634
|
|
|
|
360,353
|
|
|
|
72,634
|
|
|
|
1,412,353
|
|
|
Impairment
of investments, cryptocurrency
|
|
|
-
|
|
|
|
(227,785
|
)
|
|
|
-
|
|
|
|
(1,614,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(loss) before provision for income
taxes
|
|
|
72,634
|
|
|
|
(819,326
|
)
|
|
|
86,800
|
|
|
|
(1,800,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net income (loss)
|
|
$
|
72,634
|
|
|
$
|
(819,325
|
)
|
|
$
|
86,800
|
|
|
$
|
(1,800,044
|
)
|
|
Loss attributable
to noncontrolling interest
|
|
|
-
|
|
|
|
(10,766
|
)
|
|
|
-
|
|
|
|
(479,394
|
)
|
|
Income/(loss)
attributable to Crypto Company
|
|
$
|
72,634
|
|
|
$
|
(808,560
|
)
|
|
$
|
86,800
|
|
|
$
|
(1,320,650
|
)
|
Included
in the net income (loss) for the three and six months ended June 30, 2019 is $72,634, respectively, from the cryptocurrency investment
segment. The loss attributable to the Crypto Company for the three and six months ended June 30, 2018, includes $797,949 and $839,333,
respectively, of losses in the Company’s former cryptocurrency investment segment, of which 100% is attributable to the
Crypto Company.
A
reconciliation of the assets and liabilities held for sale of the cryptocurrency investment segment and CoinTracking GmbH to the
condensed consolidated balance sheets is shown below:
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
1,104,202
|
|
|
Loan receivable, related party
|
|
|
-
|
|
|
|
170,684
|
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
103,086
|
|
|
Impairment in assets held for sale
|
|
|
-
|
|
|
|
(743,987
|
)
|
|
Contract asset
for commissions and incentives, current portion
|
|
|
-
|
|
|
|
73,733
|
|
|
Total current assets
held for sale
|
|
|
-
|
|
|
|
707,718
|
|
|
Equipment, net of accumulated depreciation
|
|
|
-
|
|
|
|
10,369
|
|
|
Contract asset for commissions and incentives,
net of current portion
|
|
|
-
|
|
|
|
32,293
|
|
|
Investment in cryptocurrency
|
|
|
1,951
|
|
|
|
229,280
|
|
|
Investments, non-cryptocurrency
|
|
|
-
|
|
|
|
2,005
|
|
|
Goodwill
|
|
|
-
|
|
|
|
1,694,705
|
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
2,496,610
|
|
|
Other assets
|
|
|
-
|
|
|
|
17,083
|
|
|
Total
noncurrent assets held for sale
|
|
|
1,951
|
|
|
|
4,482,345
|
|
|
Total
assets held for sale
|
|
$
|
1,951
|
|
|
$
|
5,190,063
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
-
|
|
|
|
362,149
|
|
|
Income taxes payable
|
|
|
-
|
|
|
|
167,846
|
|
|
Contract liabilities,
net of current portion
|
|
|
-
|
|
|
|
1,750,465
|
|
|
Total current liabilities
held for sale
|
|
|
-
|
|
|
|
2,280,460
|
|
|
Contract liabilities,
net of current portion
|
|
|
-
|
|
|
|
847,461
|
|
|
Total
noncurrent liabilities held for sale
|
|
|
-
|
|
|
|
847,861
|
|
|
Total
liabilities held for sale
|
|
$
|
-
|
|
|
$
|
3,127,921
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
discontinued operations:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
-
|
|
|
$
|
1,047,526
|
|
|
Impairment
of goodwill
|
|
$
|
-
|
|
|
$
|
9,356,105
|
|
|
Impairment
of intangible assets
|
|
$
|
-
|
|
|
$
|
3,743,479
|
|
|
Capital
expenditures
|
|
$
|
-
|
|
|
$
|
19,943
|
|
The
balance sheet asset held for sale at June 30, 2019 represents the cryptocurrency investment segment.
NOTE
16 - COMMITMENTS AND CONTINGENCIES
The
Company rents, on a month to month basis, for $344 per month its corporate office from Regus Management Group, LLC, located at
22809 Pacific Coast Highway, Malibu, CA 90265. Facility rent expense was $1,032 and $2,533 for the three and six months ended
June 30, 2019, respectively, and $10,478 and $35,501 for the three and six months ended June 30, 2018, respectively, at the Company’s
prior leased property.
Legal
Contingencies – As previously disclosed, we received a subpoena on May 15, 2018, from the SEC’s Division of Enforcement
in connection with a formal investigation it is conducting involving us as well as other unrelated public issuers who are holders
of or provide services related to digital assets. The subpoena requested that we produce certain documents to the SEC’s
Division of Enforcement by May 30, 2018. We are unable to predict how long the SEC’s investigation will continue or whether,
at the conclusion of its investigation, the SEC will seek to impose fines or file an enforcement action against us. Additionally,
the Company may from time to time become subject to legal proceedings, claims, and litigation arising in the ordinary course of
business.
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
17 - SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the filing of this
Quarterly Report on Form 10-Q and determined that there
have been no events that have occurred that would require adjustments to our disclosure in the consolidated financial statements.