Notes
to Consolidated Financial Statements
NOTE
1 – THE COMPANY
The
Crypto Company was incorporated in the State of Nevada on March 9, 2017. 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 these consolidated financial statements refer to The Crypto Company and, where appropriate, its wholly-owned
subsidiary Blockchain Training Alliance, Inc. (“BTA”) and an inactive subsidiary Coin Tracking, LLC (“CoinTracking”).
The
Company entered into a Stock Purchase Agreement (the “SPA”) effective as of March 24, 2021 with Blockchain Training Alliance
(“BTA”) and its stockholders. On April 8, 2021, the Company completed the acquisition of all of the issued and outstanding
stock of BTA and BTA became a wholly-owned subsidiary of the Company. As a result of this acquisition, the operations of BTA became consolidated
with Company operations on April 8, 2021.
BTA
is a blockchain training company and service provider that provides training and educational courses focused on blockchain technology
and education as to the general understanding of blockchain to corporate and individual clients.
During
the years ended December 31, 2021 and 2020, the Company generated revenues and incurred expenses primarily through the
business of providing consulting services and education for distributed ledger technologies (“blockchain”), for the building
of technological infrastructure and enterprise blockchain technology solutions, both of which have ceased operations as of the date of
this Annual Report.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation – The company prepares its
consolidated financial statements based upon the accrual method of accounting, recognizing income when earned and expenses when incurred.
Consolidation
– The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, Blockchain Training Alliance and CoinTracking LLC which is inactive.
All significant intercompany accounts and transactions are eliminated in consolidation.
Use
of estimates – The preparation of these consolidated
financial statements in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The Company bases its
estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. The Company’s significant estimates and assumptions include but are not limited to the 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 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 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.
Realized
gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the Consolidated
Statements of Operations.
As
of the December 31, 2021 and 2020 there were $-0- in investments in cryptocurrency on the Company’s Balance Sheet. However, during
the year ended December 31, 2021 the Company received tokens from cryptocurrency investments that were previously written
down to -0-
value. These tokens were immediately liquidated, and the total proceeds received from them was $1,164,662
and classified as “Other Income from
the Recovery of Tokens” in the Company’s Statement of Operations.
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. For the year ended December 31, 2018, the
Company recognized an impairment loss of $2,749,646
on its definite lived intangible assets related
to CoinTracking GmbH, classified as Held for Sale. On January 2, 2019, the Company sold its entire equity ownership stake in CoinTracking
GmbH.
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 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. As of December 31, 2021 the Company determined that no impairment had occurred.
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 December 31,
2021, we had a net operating loss carryforward for federal income tax purposes of approximately $10,613,000
portions of which will begin to expire
in 2037. Utilization of some of the federal and state net operating loss and credit
carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code
of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before
utilization.
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
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.
Equity
instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required
by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date and recognition
period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when
the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The compensation cost is remeasured
at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees can result in
significant volatility in compensation expense.
The
Company accounts for its 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 year ended
December 31, 2021 and the year ended December 31, 2020, 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 $33,965
of marketing expenses for the year ended December
31, 2021, compared to $-0-
for year ended December 31, 2020.
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
3 – RECENT ACCOUNTING PRONOUNCEMENTS
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not
believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position
or results of operations except as noted below:
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU
2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which
requires a hypothetical purchase price allocation. Under this pronouncement, an entity would perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment change for
the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed
the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. ASU
2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be
applied on a prospective basis.
On
November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting
standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types
of entities. Specifically, ASU 2019-10 amends the effective date for ASU 2017-04 to fiscal years beginning after December 15, 2022, and
interim periods therein.
Early
adoption continues to be permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on its financial statements for both annual and
interim reporting periods.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) which enhances and simplifies various aspects of the income
tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business
combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective
for public companies with fiscal years beginning after December 15, 2020; early adoption is permitted. We are evaluating the impact of
this amendment on our consolidated financial statements.
In
February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to
SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards
Update No. 2016-02, Leases (Topic 842) which amends the effective date of the original pronouncement for smaller reporting companies.
ASU 2016-13 and its amendments will be effective for us for interim and annual periods in fiscal years beginning after December 15, 2022.
We believe the adoption will modify the way we analyze financial instruments, but we do not anticipate a material impact on results of
operations. We are in the process of determining the effects adoption will have on our consolidated financial statements.
In
August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging
- Contracts in Entity’s Own Equity (Subtopic 815 - 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting
for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on
an entity’s own equity. The ASU2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim
periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including
interim periods within those fiscal years. The Company is evaluating the impact of this guidance on its consolidated financial statements.
NOTE
4 – ACQUISTION
BTA
and its stockholders. On April 8, 2021, the Company completed the acquisition of all of the issued and outstanding stock of BTA and BTA
became a wholly owned subsidiary of the Company. At the closing the Company delivered to the sellers a total of $600,000
in cash, promissory notes in the total principal
amount of $150,000
bearing 1%
interest per annum, and an aggregate of 201,439
shares of Company common stock valued at $604,317
in accordance with the terms of the SPA. Additionally,
the Company acquired $4,860
in cash at BTA.
As
a result of the foregoing the Company initially recorded goodwill of $1,349,457.
The Company conducted a valuation study on the acquisition of BTA. The final valuation report determined the amount goodwill to be $740,469
and the remaining $650,000
of the goodwill relates to amortizable intangibles
amortized over a fifteen-year period, or approximately $54,166
per year.
During
the twelve months ended December 31, 2021 the Company recorded $32,499
in amortization expense. As of December 31,
2021 the balance of goodwill and intangibles was $740,469 and $617,501 compared to $-0- and $-0-, respectively.
NOTE
5 – 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 year ended December 31, 2020, the Company issued 500,000
stock options to members of its board of directors,
1,250,000
stock options to employees, and 170,000
stock options to non-employees. No stock options
were issued in 2021.
5,000,000
shares of the Company’s common stock are reserved
for issuance under the Plan. As of December 31, 2021, there are outstanding stock option awards issued from the Plan covering a total
of 2,281,349
shares of the Company’s common stock and
there remain reserved for future awards 2,718,651
shares of the Company’s common stock.
SCHEDULE
OF STOCK OPTIONS ACTIVITY
| | |
| | |
| | |
Weighted | |
| | |
| | |
| | |
Average | |
| | |
| | |
Weighted | | |
Remaining | |
| | |
| | |
Average | | |
Contractual | |
| | |
Number | | |
Exercise | | |
Term | |
| | |
of
Shares | | |
Price | | |
(years) | |
| | |
| | |
| | |
| |
| Options
outstanding, at December 31, 2019 | |
| 346,349 | | |
$ | 5.83 | | |
| | |
| Options
granted | |
| 1,935,000 | | |
| 1.10 | | |
| | |
| Options
cancelled | |
| | | |
| | | |
| | |
| Options
exercised | |
| | | |
| | | |
| | |
| Options
outstanding, at December 31, 2020 | |
| 2,281,349 | | |
$ | 2.26 | | |
| 5.25 | |
| Options
granted | |
| - | | |
$ | | | |
| | |
| Options
cancelled | |
| - | | |
| | | |
| | |
| Options
exercised | |
| - | | |
| | | |
| | |
| Options
vested and outstanding, at December 31, 2021 | |
| 2,281,349 | | |
$ | 2.26 | | |
| 4.25 | |
The
Company recognized $-0-
and $1,976,673
of compensation expense related to stock options
for the years ended December 31, 2021 and 2020, respectively.
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
risk-free rate is based on implied yields in effect at the time of the grant on U.S. Treasury zero-coupon bonds with remaining terms
equal to the expected term of the stock options. The expected dividend is based on the Company’s history and expectation of dividend
pay-outs. Forfeitures are recognized when they occur.
The
range of assumptions used for the year ended December 31, 2020 was as follows:
Schedule
Of Stock Option Assumptions
SCHEDULE
OF STOCK OPTION ASSUMPTIONS USED
| | |
Year
ended
December 31, 2020 | |
| | |
Ranges | |
| Volatility | |
| 36
–
115 | % |
| Expected
dividends | |
| 0 | % |
| Expected
term (in years) | |
| 5
–
10
years | |
| Risk-free
rate | |
| 0.17
–
2.95 | % |
The Company recognized $715,215 and $-0- of compensation
expense related to restricted stock awards for the years ended December 31, 2021 and 2020, respectively. The $715,215 dollar expense
represented the issuance of 231,610 shares for services which were valued at approximately $3.08 per share based on the Company’s
stock trading price on the OTC market on the date of issuance.
NOTE
6 – RELATED PARTY TRANSACTIONS
There
were no related party transaction in 2021 or 2020.
NOTE
7 - COMMITMENTS AND CONTINGENCIES
On
November 1, 2018, the Company relocated its corporate office and entered into a month-to-month office agreement with Regus Management
Group, LLC. Facility rent expense was $1,574
for the year ended December 31, 2021.
Legal
Contingencies
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
8 - SUBSEQUENT
EVENTS
AJB
Capital Investments Loan #1
Effective
January 13, 2022, the Company borrowed funds pursuant to the terms of a Securities Purchase Agreement
(the “AJB SPA”) entered into with AJB Capital Investments, LLC (“AJB”), and issued a Promissory Note in the principal
amount of $750,000
(the “AJB Note”) to AJB in a private
transaction for a purchase price of $675,000
(giving effect to a 10%
original issue discount). In connection with the sale of the AJB Note, the Company also paid certain fees and due diligence costs of
AJB and brokerage fees to J.H. Darbie & Co., a registered broker-dealer. After payment of the fees and costs, the net proceeds to
the Company were $655,250,
which will be used for working capital, to fund potential acquisitions or other forms of strategic relationships, and other general corporate
purposes.
The
maturity date of the AJB Note is July 12, 2022, but it may be extended for six months upon the consent of AJB and the Company. The AJB
Note bears interest at 10%
per year, and principal and accrued interest is due on the maturity date. The Company may prepay the AJB Note at any time without penalty.
Under the terms of the AJB Note, the Company may not sell a significant portion of its assets without the approval of AJB, may not issue
additional debt that is not subordinate to AJB, must comply with the Company’s reporting requirements under the Securities Exchange
Act of 1934, and must maintain the listing of the Company’s common stock on the OTC Market or other exchange, among other restrictions
and requirements. The Company’s failure to make required payments under the AJB Note or to comply with any of these covenants,
among other matters, would constitute an event of default. Upon
an event of default under the AJB SPA or AJB Note, the AJB Note will bear interest at 18%, AJB may immediately accelerate the AJB Note
due date, AJB may convert the amount outstanding under the AJB Note into shares of Company common stock at a discount to the market price
of the stock, and AJB will be entitled to its costs of collection, among other penalties and remedies.
The
Company provided various representations, warranties, and covenants to AJB in the AJB SPA. The Company’s breach of any representation
or warranty, or failure to comply with the covenants would constitute an event of default. Also pursuant to the AJB SPA, the Company
paid AJB a commitment fee of 125,000
unregistered shares of the Company’s common
stock (the “commitment fee shares”). If, after the sixth month anniversary of closing and before the thirty-sixth month anniversary
of closing, AJB has been unable to sell the commitment fee shares for $375,000,
then the Company may be required to issue additional shares or pay cash in the amount of the shortfall. However, if the Company pays
the AJB Note off before July 12, 2022, then the Company may redeem 62,500
of the commitment fee shares for one dollar.
Pursuant to the AJB SPA, the Company also issued to AJB a common stock purchase warrant (the “warrant”) to purchase 500,000
shares of the Company’s common stock for
$5.25
per share. The warrant expires on January
12, 2025. The warrant also includes various covenants
of the Company for the benefit of the warrant holder and includes a beneficial ownership limitation on the holder that, in certain circumstances,
may serve to restrict the holder’s right to exercise the warrant. The Company also entered into a Security Agreement with AJB pursuant
to which the Company granted to AJB a security interest in substantially all of the Company’s assets to secure the Company’
obligations under the AJB SPA, AJB Note and warrant.
Sixth
Street Lending Loan
Effective
January 18, 2022, the Company borrowed funds pursuant to a Securities Purchase Agreement (the “Sixth Street SPA”) entered
into with Sixth Street Lending, LLC (“Sixth Street”) and issued a Promissory Note in the principal amount of $116,200
(the “Sixth Street Note”) to Sixth
Street in a private transaction to for a purchase price of $103,750
(giving effect to an original issue discount).
The Company agreed to various covenants in the Sixth Street SPA. After payment of the fees, the net proceeds to the Company were $100,000,
which will be used for working capital and other general corporate purposes.
The
Sixth Street Note has a maturity date of January
13, 2023 and the Company has agreed to pay interest
on the unpaid principal balance of the Sixth Street Note at the rate of twelve percent (12.0%)
per annum from the date on which the Sixth Street Note was issued until the same becomes due and payable, whether at maturity or upon
acceleration or by prepayment or otherwise. Payments are due monthly, beginning in the end of February 2022. The Company has the right
to prepay the Sixth Street Note in accordance with the terms set forth in the Sixth Street Note.
Following
an event of default, and subject to certain limitations, the outstanding amount of the Sixth Street Note may be converted into shares
of Company common stock. Amounts due under the Sixth Street Note would be converted into shares of the Company’s common stock at
a conversion price equal to 75%
of the lowest trading price with a 10-day lookback immediately preceding the date of conversion. In addition, upon the occurrence and
during the continuation of an event of default the Sixth Street Note will become immediately due and payable and the Company shall pay
to Sixth Street, in full satisfaction of its obligations thereunder, additional amounts as set forth in the Sixth Street Note. In no
event may Sixth Street effect a conversion if such conversion, along with all other shares of Company common stock beneficially owned
by Sixth Street and its affiliates would exceed 4.99%
of the outstanding shares of Company common stock.
February
2022 Miner Acquisitions
Effective
February 23, 2022, the Company entered into two separate Purchase Agreement and Bill of Sales to purchase a total of 215 cryptocurrency
miners (each, a “Purchase Agreement”). The first Purchase Agreement was entered into with Bitmine Immersion Technologies,
Inc. (“BIT”) whereby the Company agreed to purchase a total of 95 miners for a total purchase price of $337,500 and the second
Purchase Agreement was entered into with Innovative Digital investors, LLC (“IDI”) whereby the Company agreed to purchase
a total of120 miners for a total purchase price of $696,000. In each case the Company paid one half of the purchase price at closing
(effective February 25, 2022) and the other half of the purchase price is payable in accordance with a 10% unsecured promissory note
delivered to each of BIT and IDI. The promissory note delivered to BIT is in the principal amount of $168,750, is payable in two installment
payments, and has a maturity date of May 15, 2022. The promissory note delivered to IDI is in the principal amount of $348,000, is payable
in four installment payments, and has a maturity date of October 15, 2022.
AJB
February 2022 Loan Transaction #2
On
February 24, 2022, the Company borrowed additional funds pursuant to the terms of a Securities Purchase Agreement (the “Feb. SPA”)
entered into with AJB Capital Investments, LLC (“AJB”), and issued a Promissory Note in the principal amount of $300,000
(the “Feb. Note”) to ABJ in a private transaction for a purchase price of $275,000 (giving effect to an original issue discount).
After payment of the fees and costs, the net proceeds to the Company were $257,000, which will be used for working capital and other
general corporate purposes.
The
maturity date of the Feb. Note is August 24, 2022, but it may be extended for six months upon the consent of AJB and the Company. The
Feb. Note bears interest at 10% per year, and principal and accrued interest is due on the maturity date. The Company may prepay the
Feb. Note at any time without penalty. The Company’s failure to make required payments under the AJB Note or to comply with various
covenants, among other matters, would constitute an event of default. Upon an event of default under the Feb. SPA or Feb. Note, the Feb.
Note will bear interest at 18%, AJB may immediately accelerate the Feb. Note due date, AJB may convert the amount outstanding under the
Feb. Note into shares of Company common stock at a discount to the market price of the stock, and AJB will be entitled to its costs of
collection, among other penalties and remedies.
The
Company provided various representations, warranties, and covenants to AJB in the Feb SPA. The Company’s breach of any representation
or warranty, or failure to comply with the covenants would constitute an event of default. Also pursuant to the Feb. SPA, the Company
paid AJB a commitment fee of 60,000 unregistered shares of the Company’s common stock (the “commitment fee shares”).
If, after the sixth month anniversary of closing and before the thirty-sixth month anniversary of closing, AJB has been unable to sell
the commitment fee shares for $150,000, then the Company may be required to issue additional shares or pay cash in the amount of the
shortfall. However, if the Company pays the Feb. Note off before its maturity date, then the Company may redeem 24,000 of the commitment
fee shares for one dollar. Pursuant to the Feb. SPA, the Company also issued to AJB a common stock purchase warrant (the “warrant”)
to purchase 200,000 shares of the Company’s common stock for $5.25 per share. The warrant expires on February 24, 2025. The warrant
also includes various covenants of the Company for the benefit of the warrant holder and includes a beneficial ownership limitation on
the holder that, in certain circumstances, may serve to restrict the holder’s right to exercise the warrant. The Company also entered
into a Security Agreement with AJB pursuant to which the Company granted to AJB a security interest in substantially all of the Company’s
assets to secure the Company’ obligations under the Feb. SPA, Feb. Note and warrant.