Notes
to Financial Statements
For
the Period from Inception, March 9, 2017 through December 31, 2017
NOTE
1 - THE COMPANY
The
Crypto Company (the “Company”, “Crypto”, “we”, “us” or “our”) was
incorporated in the State of Nevada on March 9, 2017 (“Inception”), and is engaged in the business of developing proprietary
source code to create products and tools to facilitate investing in, trading and managing digital assets. The Company also invests
in technologies and tokens in a manner that diversifies exposure to the growing class of digital assets. From time to time, we
may seek strategic acquisitions either by integrating third party teams and technology with our core business or by funding third
party teams in which they may have interest.
Technology
The
Company is developing proprietary technology, including trading management and auditing software, tools and processes to assist
both our own operations and traditional companies, from start-up businesses to well-established companies. We may consider using
our technology to build additional units around our existing platform, or selling or licensing our technology to third party institutions
for a fee.
Media
and Ongoing Education
The
Company also engages in public discourse on an ongoing basis and regularly host roundtable webinars to educate the public about
the cryptocurrency market.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation -
The Company prepares its consolidated financial statements based upon the accrual method of accounting,
recognizing income when earned and expenses when incurred.
On
June 7, 2017 (the “Transaction Date”), Crypto Sub, Inc. (formerly known as The Crypto Company) (“Crypto Sub”)
completed a reverse acquisition of Croe, Inc. as a result of a Stock Sale, Stock Dividend and Share Exchange, each as described
below and collectively referred to as the “Transaction”.
Transaction
- The Transaction included three steps, as follows:
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●
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Stock
Sale -
On June 7, 2017, the Company entered into (i) a Share Purchase Agreement (the “Restricted Share Purchase
Agreement”) with Crypto Sub and John B. Thomas P.C., in its sole capacity as representative for certain shareholders
of the Company; and (ii) a Share Purchase Agreement (the “Free Trading Share Purchase Agreement”, and together
with the Restricted Share Purchase Agreement, the “Share Purchase Agreements”) with Crypto Sub, Uptick Capital,
LLC (“Uptick Capital”) and John B. Thomas P.C., in its sole capacity as representative for certain shareholders
of the Company. Pursuant to the Share Purchase Agreements, the shareholders of the Company sold an aggregate of 11,235,000
shares of common stock of the Company to Crypto Sub and 100,000 shares of common stock of the Company to Uptick Capital, representing
an aggregate of 100% of the issued and outstanding common stock of the Company as of such date, for aggregate proceeds of
$411,650, including escrow and other transaction related fees to the selling shareholders (the “Stock Sale”).
A portion of the acquisition cost equal to $399,300 is expensed as a general and administrative expense in the accompanying
consolidated statement of operations.
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The
Company purchased 10,000,000 shares held by Deborah Thomas, the former Chief Executive Officer, principal accounting and financial
officer and director of the Company, representing approximately 88.22% of the outstanding common stock of the Company immediately
prior to the Stock Sale, were sold at a price of $0.031 per share, and an aggregate of 1,335,000 shares held by the remaining
shareholders of the Company were sold at a price of $0.075 per share.
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In
connection with the Stock Sale, effective as of June 7, 2017, (i) Deborah Thomas resigned as Chief Executive Officer, principal
accounting officer and director of the Company and Elliott Polatoff resigned as Secretary and director of the Company; and
(ii) Michael Poutre was appointed Chief Executive Officer and sole director of the Company, James Gilbert was appointed President
of the Company and Ron Levy was appointed Chief Operating Officer of the Company.
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●
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Stock
Dividend -
On June 7, 2017, Crypto Sub issued to its shareholders a stock dividend (the “Stock Dividend”)
of 10,918,007 shares of common stock of the Company acquired through the Stock Sale, distributed on a pro-rata basis, such
that the shareholders of Crypto Sub received fifteen shares of common stock of the Company for each share of common stock
of Crypto Sub held as of June 6, 2017.
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Immediately
following the consummation of the Stock Sale and the distribution of the Stock Dividend, Crypto Sub held 316,993 shares, representing
4.26% of the issued and outstanding shares of common stock of the Company, and the shareholders of Crypto Sub, collectively,
held 10,918,007 shares, representing 94.40% of the issued and outstanding shares of common stock of the Company. Of the 316,993
shares held by Crypto Sub, 129,238 shares were transferred to certain officers and consultants of Crypto Sub in exchange for
their services related to the Transaction, and the remaining shares were retired in June 2017.
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●
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Share
Exchange -
On June 7, 2017, the Company, entered into a Share Exchange Agreement (the “Exchange Agreement”)
with Michael Poutre, in his sole capacity as representative for the shareholders of Crypto Sub, pursuant to which each issued
and outstanding share of common stock of Crypto Sub was exchanged for shares of common stock of the Company (the “Share
Exchange”), resulting in the aggregate issuance of 7,026,614 shares of common stock of the Company, on a pro-rata basis,
as provided on the Exchange Agreement, to the shareholders of Crypto Sub, in exchange for 727,867 shares of common stock of
Crypto Sub.
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The
Transaction was treated as a reverse acquisition of Croe, and the Company is treated as the acquirer, for financial accounting
and reporting purposes, while Croe is treated as the acquired entity. As of the effective date of the Transaction, Croe had no
liabilities or obligations. Accordingly, only the historical operations of Crypto Sub, prior to the Transaction, are incorporated
herein.
The
comparative financial statements for the fiscal year ended December 31, 2016 have been omitted as the Company had no operations
during the period.
Consolidation
–
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Crypto
Sub. All significant intercompany accounts and transactions are eliminated in consolidation.
Liquidity
- The Company has limited revenues since Inception through December 31, 2017, which were primarily limited to realized gains
on investments in cryptocurrency. The Company has raised net proceeds of $12,281,927 in cash from common stock issuances from
Inception through December 31, 2017, and had $8,950,244 in cash as of December 31, 2017 and working capital of $11,203,256. However,
immediately after December 31, 2017, the Company utilized $4,736,400 in cash to acquire a company formed under the laws of the
Republic of Germany, Coin Tracking, GmbH. Also, the Company has a limited operating history and its prospects are subject to risks,
expenses and uncertainties frequently encountered by early-stage companies. These risks include, but are not limited to, the uncertainties
of availability of financing and achieving future profitability and the success of an unproven business plan in an emerging industry.
Management anticipates that the Company will be dependent, for the near future, on investment capital to fund operating expenses.
The Company intends to position itself so that it may be able to raise funds through the capital markets. There can be no assurance
that such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows
from operations, raise capital or reduce certain discretionary spending could have a material adverse effect on the Company’s
ability to achieve its intended business objectives.
Use
of estimates
- The preparation of these consolidated financial statements in conformity accounting principles generally accepted
in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The Company bases its estimates
on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. The Company’s significant estimates and assumptions include but are not limited to the recoverability
and useful lives of long-lived assets, valuation and recoverability of investments, valuation allowances of deferred taxes, and
stock-based compensation expenses. Actual results may differ from these estimates. In addition, any change in these estimates
or their related assumptions could have an adverse effect on the Company’s operating results.
Cash
and cash equivalents
- The Company defines its cash and cash equivalents to include only cash on hand and certain highly liquid
investments with original maturities of ninety days or less.
The
Company maintains its cash and cash equivalents at financial institutions, the balances of which may, at times, exceed federally
insured limits. Management believes that the risk of loss due to the concentration is minimal.
Investments
–
Investments comprise of several cryptocurrencies and are reported at fair value as determined by digital asset markets
with realize gains and losses calculated on a trade data basis as the difference between the fair value and cost of cryptocurrencies
transferred. The Company recognizes the fair value changes in unrealized appreciation or depreciation on investment through the
accompanying Statement of Operations. For the period from Inception through December 31, 2017, the Company has a balance of $2,917,627
in investments.
Equipment
- Equipment are recorded at cost and depreciated using the straight line method over the estimated useful life ranging from
three to five years. Normal repairs and maintenance are expensed as incurred. Expenditures that materially adapt, improve, or
alter the nature of the underlying assets are capitalized. When equipment are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to income.
Impairment
of long lived assets -
The Company analyzes its long-lived assets for potential impairment. Impairment losses are recorded
on long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those
assets are less than the net carrying amount of the assets. In such cases, the carrying values of assets to be held and used are
adjusted to their estimated fair value, less estimated selling expenses. For the period from Inception through December 31, 2017,
the Company recognized no impairment losses on its long-lived assets.
Income
taxes -
Deferred tax assets and liabilities are recognized for expected future consequences of events that have been included
in the financial statements or tax returns. Under the asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using
the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based
on available evidence, are not expected to be realized. The provision for income taxes represents the tax payable for the period
and the change during the period in deferred tax assets and liabilities. For the period from Inception through December 31, 2017,
the Income tax payable of $800 reflects the minimum franchise tax for the State of California.
When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax
benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Fair
value measurements
- The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations
based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest
priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level
of input has different levels of subjectivity and difficulty involved in determining fair value.
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Level
1
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Inputs
are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurable date.
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Level
2
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Inputs,
other than quoted prices included in Level 1, that are observable for the asset or liability through corroboration with market
data at the measurement date.
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Level
3
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Unobservable
inputs that reflect management’s best estimate of what participants would use in pricing the asset or liability at the
measurement date.
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The
carrying amounts of the Company’s financial assets and liabilities, including cash, accounts payable, and accrued liabilities
approximate fair value because of the short maturity of these instruments.
Revenue
recognition
- The Company records the realized gain or loss on the investments on a trade date basis. The changes in unrealized
appreciation or depreciation on the investments are measured to market on the last day of every month at 11:59 p.m., Pacific Time,
based on publicly available cryptocurrency exchanges. The Company classifies investment in cryptocurrency as trading investments.
Trading generally reflects active and frequent buying and selling, and is generally used with the objective of generating profits
on short-term difference in price.
The
Company recognizes consulting revenue when the service is rendered, the fee for arrangement is fixed or determinable, and collectability
is reasonably assured.
Stock-based
compensation
- In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company
measures the compensation costs of stock-based compensation arrangements based on the grant date fair value of granted instruments
and recognizes the costs in financial statements over the period during which employees are required to provide services. Stock-based
compensation arrangements include stock options.
Equity
instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments,
as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date
and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined,
is reached or (b) when the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The compensation
cost is remeasured at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees
can result in significant volatility in compensation expense.
The
Company accounts for its stock based compensation using the Black-Scholes model to estimate the fair value of stock option awards.
Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s
common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non-employees
are expected to hold their options prior to exercise, and (iii) risk-free interest rate.
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 period
from Inception through December 31, 2017, the Company had no potentially dilutive common stock equivalents. Therefore, the basic
EPS and the diluted EPS are the same.
Marketing
expense -
Marketing expenses are charged to operations, under general and administrative expenses. For the period from Inception
through December 31, 2017, the Company incurred $20,054 in marketing expenses.
NOTE
3 - RECENT ACCOUNTING PRONOUNCEMENTS
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2017-11
, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic
815): I. Accounting for Certain Financial Instruments with Down Rounds and II. Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception.
This ASU changes the classification analysis of certain equity-linked financial instruments (or embedded
features) with down round features. When determining whether certain financial instruments should be classified as liabilities
or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is
indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
The amendments also require entities to recognize the effect of the down round feature on earnings per share when it is triggered.
ASU 2017-11 should be adopted retrospectively or as a cumulative-effect adjustment as of the date of adoption, only to financial
instruments outstanding as of the initial application date. ASU 2017-11 will be effective for annual reporting periods, and interim
periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an
interim period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial
statements and related disclosures.
In
May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which
provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified
award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same
immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument
or liability instrument is the same immediately before and after the modification. The new standard becomes effective for us on
January 1, 2018. We do not expect that ASU No. 2017-09 will have a material impact on the Company’s consolidated financial
statements and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most
leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new
disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from
leases. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. The amendments in this update
should be applied under a modified retrospective approach. We are evaluating the effect that ASU No. 2016-02 will have on our
consolidated financial statements and related disclosures.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers
,
which will supersede the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605
,
Revenue Recognition
and most industry-specific guidance when it becomes effective. In March, April, May and December 2016,
and in September 2017, the FASB issued additional guidance related to Topic 606. Topic 606 affects any entity that enters into
contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless
those contracts are within the scope of other standards. The core principle of Topic 606 is that a company will recognize revenue
when it transfers 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. In doing so, companies will need to use more judgment and make more estimates
than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
Topic 606 is effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after
December 15, 2017, and entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as
of the date of adoption. The Company has evaluated the impact of Topic 606 on its financial statements and the adoption of this
guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
NOTE
4 - INVESTMENT IN CRYPTOCURRENCY
The
investment in cryptocurrency is classified as a Level 2 asset because inputs are from exchanges with price variability. The following
table summarizes the Company’s investments at fair value for the period from Inception through December 31, 2017:
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Level
1
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Level
2
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Level
3
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Investment
in cryptocurrency
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$
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-
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$
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2,749,809
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$
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167,818
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The
Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are
fair, consistent and verifiable. Valuation of the Company’s Level 3 investments are for Initial Coin Offerings (“ICO’s”)
for which there is no active market at December 31, 2017. These ICO’s are valued at cost which approximates fair value at
December 31, 2017. At the time that the ICO’s have an available market exchange, the investments will be reclassified to
Level 2.
The
following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the year ended
December 31, 2017:
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Level 3
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Cryptocurrency
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Balance at Inception, March 9, 2017
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$
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-
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Realized gains/(losses)
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-
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Purchases, sales, issuances, and settlement, net
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167,818
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Unrealized gains relating to investments still held at the
reporting date
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-
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Balance, December 31, 2017
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$
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167,818
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The
following table summarizes the cryptocurrencies held as of December 31, 2017:
Ripple
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$
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377,057
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Bitcoin
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286,946
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IOTA
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180,150
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Ethereum
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170,006
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Litecoin
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156,659
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EOS
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148,094
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Monero
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136,105
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Dash
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121,314
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NEO
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116,910
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Stratis
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110,652
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Various
other currencies
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1,113,734
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$
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2,917,627
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NOTE
5 - EQUIPMENT
Equipment
for the period from Inception through December 31, 2017 consist of:
Computer
equipment
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$
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69,241
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Furniture
equipment
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3,754
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72,995
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Less
accumulated depreciation
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(4,675
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)
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$
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68,320
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NOTE
6 - OTHER ASSET
Pursuant
to a Note Purchase Agreement dated as of March 27, 2017 by and between the Company and Rimrock Gold Corp, (“Rimrock”),
the Company agreed to fund up to $300,000 to settle outstanding convertible debt of and accounts payable by and on behalf of Rimrock
and to pay certain ongoing accounting expenses, for the ultimate acquisition of Rimrock, a public company located in Las Vegas,
Nevada with limited operations. The Company had expected to consummate the acquisition in 2018. For the period from Inception
through December 31, 2017, the Company advanced $134,100 on behalf of Rimrock to settle the aforementioned liabilities. As of
December 31, 2017, the Board of Directors determined that it is in the best interests of the Company and its stockholders not
to proceed with the acquisition of or any other business combination with Rimrock, and halted all future advances. The Company
has deemed this asset unrealizable and therefore, has been expensed for the period from Inception through December 31, 2017.
NOTE
7 - SUMMARY OF COMMON STOCK TRANSACTIONS
On
December 12, 2017, the Company issued to approximately 76 accredited investors an aggregate of 1,053,848 shares of common stock
of the Company at a price of $7.00 per share, for aggregate proceeds of approximately $7,377,139. We incurred financing costs
of $76,073.
On
September 25, 2017, the Company issued to nine accredited investors (i) an aggregate of 672,500 shares of common stock of the
Company at a price of $2.00 per share, and (ii) three-year warrants to purchase an aggregate of 168,125 shares of common stock
(See Note 8) of the Company at an exercise price of $2.00 per share, for aggregate proceeds of $1,345,000.
On
September 20, 2017, the Company issued to two accredited investors an aggregate of 62,500 shares of common stock of the Company
at a price of approximately $2.00 per share, in exchange for digital currency equal to aggregate proceeds of approximately $125,012.
On
September 8, 2017, the Company issued to eleven accredited investors an aggregate of 437,488 shares of common stock of the Company
at a price of $2.00 per share for aggregate proceeds of $874,975.
On
June 14, 2017, Crypto Sub transferred an aggregate of 129,238 shares of common stock of its parent company Croe, held by Crypto
Sub, to certain officers and consultants of Crypto Sub in exchange for their services in connection with the Transaction. Accordingly,
the Company recorded an expense of $166,717 based on the fair value of the shares on the measurement date.
On
June 13, 2017, the Company issued to four accredited investors an aggregate of 47,500 shares of common stock of the Company at
a purchase price of $2.00 per share for aggregate proceeds of $95,000.
On
June 7, 2017, Crypto Sub’s shareholders received an aggregate of (i) 10,918,007 shares of common stock of Croe in connection
with the Stock Dividend issued by Crypto Sub, and (ii) 7,026,614 shares of common stock of Croe in exchange for all of the outstanding
shares of common stock of Crypto Sub (noted above) in connection with the Share Exchange. As part of the Transaction, Crypto Sub
retained 316,993 shares of common stock of its parent company, Croe. Crypto Sub retained 187,755 shares of common stock of its
parent company Croe, at a historical cost of $8,473, which has been eliminated in consolidation.
For
the period from Inception through June 6, 2017, Crypto Sub issued 477,867 shares of common stock of Crypto Sub for aggregate proceeds
of $2,665,886 of capital, to fund its operations. At its inception on March 9, 2017, Crypto Sub initially issued to its founders
(i) 125,000 shares of its common stock in exchange for consulting services, valued at $200,000, and (ii) 125,000 shares of its
common stock for investments in cryptocurrency, valued at $100,000. The securities issued in the foregoing transactions were exempt
from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section
4(a)(2) of the Securities Act and Regulation D promulgated thereunder inasmuch as the securities were offered and sold solely
to accredited investors and the Company did not engage in any form of general solicitation or general advertising in making the
offering.
NOTE
8 – WARRANTS FOR COMMON STOCK
For
the period from Inception through December 31, 2017, outstanding warrants to purchase shares of common stock were as follows:
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Number
of Shares
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Issuance
Date
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Exercisable
for
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Expiration
Date
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Exercise
Price
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Outstanding
Under
Warrants
|
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September
2017
|
|
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Common
Shares
|
|
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September
25, 2020
|
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$
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2.00
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|
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168,125
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|
The
warrants expire on the third anniversary of their respective issuance dates. The exercise price of the warrants is subject to
adjustment from time to time, as provided therein, to prevent dilution of purchase rights granted thereunder. The warrants are
considered indexed to the Company’s own stock and therefore no subsequent remeasurement is required.
NOTE
9 - SUMMARY OF STOCK OPTIONS
On
July 21, 2017, the Company’s board of directors adopted the 2017 Equity Incentive Plan (the “Plan), which was approved
by its stockholders on August 24, 2017. The Plan is administered by the board of directors (the “Administrator”).
Under the Plan, the Company may grant equity awards to eligible participants which may take the form of stock options (both incentive
stock options and non-qualified stock options) and restricted stock awards. Awards may be granted to officers, employees, nonemployee
directors (as defined in the Plan) and other key persons (including consultants and prospective employees). The term of any stock
option award may not exceed 10 years and may be subject to vesting conditions, as determined by the Administrator. Options granted
generally vest over eighteen months. Incentive stock options may be granted only to employees of the Company or any subsidiary
that is a “subsidiary corporation” within the meaning of Section 424(f) of the Internal Revenue Code.
5,000,000
shares of the Company’s common stock are reserved for issuance under the Plan. For the period from Inception through December
31, 2017, there are outstanding stock option awards issued from the Plan covering a total of 644,531 shares of the Company’s
common stock and there remain reserved for future awards 4,342,969 shares of the Company’s common stock. The weighted average
exercise price of the outstanding stock options is $2.32 per share, and the remaining contractual term is 9.61 years.
For
the period from Inception through December 31, 2017, the Company granted 260,000 and 397,031 options to employees and nonemployees,
respectively.
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Weighted
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Weighted
|
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Average
|
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Aggregate
|
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Average
|
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Remaining
|
|
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Intrinsic
|
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Number
|
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Exercise
|
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Contractual
|
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Value
|
|
|
|
of
Shares
|
|
|
Price
|
|
|
Term
(years)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, beginning of period
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
granted
|
|
|
657,031
|
|
|
$
|
2.28
|
|
|
|
9.61
|
|
|
|
-
|
|
Options
exercised
|
|
|
12,500
|
|
|
$
|
1.00
|
|
|
|
9.50
|
|
|
|
-
|
|
Options
canceled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
outstanding, end of period
|
|
|
644,531
|
|
|
$
|
2.32
|
|
|
|
9.61
|
|
|
$
|
11,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable and expected to vest, end of period
|
|
|
159,531
|
|
|
$
|
2.90
|
|
|
|
9.61
|
|
|
$
|
2,728
|
|
For
the period from Inception through December 31, 2017, the Company had not granted any restricted stock awards.
As
of December 31, 2017, approximately $3,088,000 of total unrecognized compensation costs related to stock options is expected to
be recognized over a weighted average period of approximately 2 years.
The
determination of the fair value of stock-based compensation awards utilizing the Black-Scholes model is affected by the Company’s
stock price and a number of complex and subjective assumptions, including stock price, volatility, expected life of the equity
award, forfeitures rates if any, risk-free interest rates and expected dividends. Volatility is based on the historical volatility
of comparable companies measured over the most recent period, generally commensurate with the expected life of the Company’s
stock options, adjusted for future expectations given the Company’s limited historical share price data.
The
risk-free rate is based on implied yields in effect at the time of the grant on U.S. Treasury zero-coupon bonds with remaining
terms equal to the expected term of the stock options. The expected dividend is based on the Company’s history and expectation
of dividend payouts. Forfeitures are recognized when they occur.
The
range of assumptions used for the year ending December 31 are as follows:
|
|
2017
|
|
|
|
Ranges
|
|
Weighted-average
volatility
|
|
|
36-75%
|
|
Expected
dividends
|
|
|
0%
|
|
Expected
term (in years)
|
|
|
5.71-10
years
|
|
Risk-free
rate
|
|
|
1.91-2.40%
|
|
NOTE
10 - RELATED PARTY TRANSACTION
On
March 9, 2017, Crypto Sub issued 125,000 shares of common stock of Crypto Sub to an employee of Crypto Sub, in exchange for an
initial investment made in the form of cryptocurrency, valued at $100,000, based on the fair value of the investment on the date
of such investment. On June 7, 2017, the employee received (i) 1,875,000 shares of common stock of Croe in connection with the
Stock Dividend issued by Crypto Sub, and (ii) 1,125,000 shares of common stock of Croe in exchange for all of the employee’s
shares of Crypto Sub in connection with the Share Exchange.
On
March 9, 2017, Crypto Sub issued 300,000 shares of common stock of Crypto Sub to James Gilbert, the President of the Company,
in exchange for $200,000. On June 7, 2017, Mr. Gilbert received (i) 4,500,000 shares of common stock of Croe in connection with
the Stock Dividend issued by Crypto Sub, and (ii) 2,700,000 shares of common stock of Croe in exchange for all of his shares of
Crypto Sub in connection with the Share Exchange.
On
March 9, 2017, Crypto Sub issued (i) 125,000 shares of common stock of Crypto Sub to Redwood Fund LP (“Redwood”) in
exchange for $200,000; and (ii) 125,000 shares of common stock of Crypto Sub to Imperial Strategies, LLC (“Imperial Strategies”)
in exchange for certain services rendered, valued at $200,000, as of the date of such issuance. Michael Poutre, the Chief Executive
Officer of the Company, and Ron Levy, the Chief Operating Officer of the Company, are Chief Executive Officer and Chief Operating
Officer, respectively, of Ladyface Capital, LLC, the General Partner of Redwood, and, as a result, had an indirect material interest
in the shares owned by Redwood. Mr. Poutre is the sole member of MP2 Ventures, LLC, a member of Imperial Strategies, and, as of
September 1, 2017, Mr. Poutre and Mr. Levy are Chief Executive Officer and Chief Operating Officer, respectively of Imperial Strategies
and, as a result, have an indirect material interest in the shares owned by Imperial Strategies. On June 7, 2017, each of Redwood
and Imperial Strategies received (i) 1,875,000 shares of common stock of Croe in connection with the Stock Dividend issued by
Crypto Sub, and (ii) 1,125,000 shares of common stock of Croe in exchange for all of their shares of Crypto Sub in connection
with the Share Exchange.
For
the period from Inception through December 31, 2017, the Company paid consulting fees of $180,000 to MP2 Ventures, LLC, of which
Michael Poutre, the Chief Executive Officer of the Company, is the sole member, for his services rendered as Chief Executive Officer.
For
the period from Inception through December 31, 2017, the Company paid consulting fees of $60,000 to Company Coda, LP, of which
Ron Levy, the Chief Executive Officer of the Company, is the sole member, for his services rendered as Chief Operating Officer.
The
Company has a services agreement with Full Stack Finance for CFO and Accounting outsource services. Ivan Ivankovich, CFO of the
Company, is the Co- Managing Director of Full Stack Finance. Emad Boulos, an employee of Full Stack Finance, serves as The Crypto
Company’s Controller. The Company paid a total of $111,075 in fees to Full Stack Finance during the period from Inception
through December 31, 2017, and as of December 31, 2017, there is a no balance due to Full Stack Finance.
NOTE
11 - BASIC AND DILUTED LOSS PER SHARE
The
following is a reconciliation of the numerator and denominator of the basic and diluted loss per share computations for the period
from Inception through December 31, 2017:
|
|
For the period
from Inception to
December 31, 2017
|
|
Numerator for basic and diluted income per share:
|
|
|
|
|
Net loss
|
|
$
|
(7,767,559
|
)
|
|
|
|
|
|
Denominator for basic and diluted income per share:
|
|
|
|
|
Weighted average shares (basic)
|
|
|
16,746,792
|
|
Common stock equivalents
|
|
|
-
|
|
Weighted average shares (diluted)
|
|
|
16,746,792
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
Basic
|
|
$
|
(0.46
|
)
|
Diluted
|
|
$
|
(0.46
|
)
|
NOTE
12 - PROVISION FOR INCOME TAXES
Income
taxes
- For the period from Inception through December 31, 2017, the components of the provision for income taxes are as follows:
Current:
|
|
|
|
|
Federal
|
|
$
|
-
|
|
State
|
|
|
800
|
|
Total
current
|
|
|
800
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
Federal
|
|
|
-
|
|
State
|
|
|
-
|
|
Total
deferred
|
|
|
-
|
|
Provision
for income taxes
|
|
$
|
800
|
|
For
the period from Inception through December 31, 2017, the significant components of the Company’s net deferred tax assets
are as follows:
Net
operating loss carryforwards
|
|
$
|
815,300
|
|
Stock
based compensation
|
|
|
1,764,100
|
|
Unrealized
gains on investments in cryptocurrency
|
|
|
(482,200
|
)
|
|
|
|
2,097,200
|
|
Valuation
allowance
|
|
|
(2,097,200
|
)
|
|
|
$
|
-
|
|
During
the period from Inception to December 31, 2017, the valuation allowance increased by $2,097,200.
For
the period from Inception through December 31, 2017, the Company had NOLs for Federal and State of California reporting purposes
of approximately $3,019,600, which expire in 2037. The Federal and State of California tax codes provide for restrictive limitations
on the annual utilization of NOLs to offset taxable income when the stock ownership of a company significantly changes, as defined.
Utilization of these amounts could be further limited if additional ownership changes occur in the future.
The
following is a reconciliation of the amount of income tax expense that would result from applying the statutory federal tax rates
to pre-tax loss and the reported amount of income tax expense for the period from Inception through December 31, 2017:
Tax
benefit at federal statutory rate
|
|
$
|
(1,631,190
|
)
|
State
income tax benefit, net of federal benefit
|
|
|
(465,210
|
)
|
Increase
in valuation allowance
|
|
|
2,097,200
|
|
Income
tax expense
|
|
$
|
800
|
|
NOTE
13 - COMMITMENTS AND CONTINGENCIES
Operating
leases
- On May 15, 2017, the Company entered into a lease agreement with Soba Living, LLC for the rental of office space.
The agreement, which had a term of three months, then month to month thereafter, provides for monthly rent of $6,000 through September
30, 2018.
Effective
June 7, 2017, the Company terminated the sublease agreement between Croe, Inc. and Acadia Properties for the sublease of office
space in Draper, Utah.
Facility
rent expense for the period from Inception through December 31, 2017 was $45,000.
Legal
- From time to time, the Company may become subject to legal proceedings, claims, and litigation arising in the ordinary course
of business, none of which, in management’s opinion, will result in judgments that would have a material adverse effect
on the financial position or results of operations of the Company. Please see a summary of legal proceedings in Item 3 of this
Annual Report, all of which have been voluntarily dismissed as of the date of this Annual Report.
Indemnities
and guarantees
- During the normal course of business, the Company has made certain indemnities and guarantees under which
it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the
Company’s officers and directors, under which the Company may be required to indemnify such persons for liabilities arising
out of their respective relationships. In connection with its facility lease, the Company has indemnified the lessor for certain
claims arising from the use of the facility. The duration of these indemnities and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments
for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying balance sheet.
NOTE
14 – SUBSEQUENT EVENTS
On
January 3, 2018, the Company granted to an advisor a non-qualified option to purchase 25,000 shares of the Company’s common
stock at a purchase price of $7.00 per share, pursuant to the terms of the Company’s 2017 Equity Incentive Plan and the
applicable stock option agreement.
On
January 16, 2018, pursuant to an Equity Purchase Agreement (the “Agreement”) entered into on December 22, 2017 by
and among the Company, CoinTracking, GmbH, a Nevada limited liability company and wholly-owned subsidiary of the Company (“CoinTracking”),
Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany (“Kachel Holding”), and Dario Kachel,
an individual, CoinTracking purchased from Kachel Holding 12,525 shares of CoinTracking GmbH, an entity formed under the laws
of Germany (the “GmbH”), representing 50.1% of the equity interests in the GmbH, for a purchase price of (i) $4,736,400
in cash, and (ii) 473,640 shares of common stock of the Company, par value $0.001 per share, subject to adjustment as provided
in the Agreement (the “CoinTracking Acquisition”). Following administrative procedures as required under applicable
German laws, the CoinTracking Acquisition was consummated on January 26, 2018.
On
January 19, 2018, the Company granted to an advisor a non-qualified option to purchase 75,000 shares of the Company’s common
stock at a purchase price of $7.00 per share, pursuant to the terms of the Company’s 2017 Equity Incentive Plan and the
applicable stock option agreement.
On
January 19, 2018, the Company granted to an advisor a non-qualified option to purchase 25,000 shares of the Company’s common
stock at a purchase price of $10.00 per share, pursuant to the terms of the Company’s 2017 Equity Incentive Plan and the
applicable stock option agreement.
On
March 14, 2018, the Company granted to an advisor a non-qualified option to purchase 25,000 shares of the Company’s common
stock at a purchase price of $10.00 per share, pursuant to the terms of the Company’s 2017 Equity Incentive Plan and the
applicable stock option agreement.
As
of March 25, 2018, the Company’s investments in cryptocurrency described in Note 4 incurred an unrealized decrease in fair
value of approximately $966,000 for the period from January 1, 2018 through March 25, 2018 (last weekly valuation date) from the
calculated market value of $2,917,627 at December 31, 2017.
There
were no other events subsequent to December 31, 2017, through the date of this filing, other than those described, that would
require disclosure in these financial statements.