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”) and is engaged in the business
of building technological infrastructure, a proprietary investment portfolio and strategic alliances to facilitate the exchange
of value in the digital asset market and, specifically, to assist third parties with investing in, trading and managing their
own digital assets. From time to time, we may seek strategic acquisitions either by integrating third-party teams and technology
with our core business or by funding third-party teams in which we may have interest. Unless expressly indicated or the context
requires otherwise, the terms “Crypto,” the “Company,” “we,” “us,” and “our”
in 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.
On
January 26, 2018, CoinTracking, a Nevada limited liability company and wholly owned subsidiary of the Cypto Company, acquired
50.1% of CoinTracking GmbH. The remaining 49.9% of CoinTracking GmbH is owned by Kachel Holding GmbH, a private limited liability
company (Gesellschaft mit beschränkter Haftung) organized under the laws of the Federal Republic of Germany (“Kachel
Holding”). CoinTracking GmbH operates as a Software as a Service (“SaaS”) platform that allows users to track
and manage value, profit, loss and other information regarding their investments in cryptocurrencies (but not trade their cryptocurrencies)
available via web-based or mobile application. Prior to December 2017, CoinTracking GmbH operated as a sole proprietorship starting
in 2013.
Technology
The
Company is developing proprietary technology and source code to create products and services that will assist third-parties by
providing them with the tools, computer programming and training to independently invest in, trade and manage their own digital
assets, including trading management and auditing software, tools and processes to assist in the trading and management of our
own proprietary portfolio of digital assets and the 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 hosts roundtable webinars to educate the public about
the cryptocurrency market. The Company does not express opinions regarding the advisability of investing in a particular digital
asset or in the digital asset marketplace, and it does not receive compensation in connection with these roundtable webinars.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
- The included condensed consolidated balance sheet as of December 31, 2017, was derived from audited financial
statements and the accompanying unaudited condensed consolidated financial statements as June 30, 2018 and 2017 of the Company
have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”)
for interim financial information and pursuant to the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the
condensed consolidated financial statements have been included.
The
results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or
for the full year.
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Annual Report on Form 10-K for the period from Inception through December
31, 2017, filed with the Securities and Exchange Commission (“SEC”) on April 2, 2018.
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. All significant intercompany accounts
and transactions are eliminated in consolidation.
Liquidity
and Going Concern
- The Company’s condensed consolidated financial statements are prepared using the accrual method of
accounting in accordance with US 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, 2018, the Company had cash of $1,154,996, a decline of $7,795,248 from the
December 31, 2017 balance of $8,950,244. This decline is due, in part, to the acquisition of CoinTracking GmbH in January 2018,
which included $3,189,303 of cash consideration, net of acquired cash. The Company’s working capital was $264,484 as of
June 30, 2018, which includes a contract liability of $2,800,248, representing advanced payments from customers for subscription
service, which is initially deferred and recognized on a straight-line method over the terms of the applicable subscription period.
Management does not anticipate settling this liability in cash. After June 30, 2018, the Company liquidated its cryptocurrency
of $1,022,099 at June 30, 2018, included on its condensed consolidated balance sheet, to help fund its operations. As of June
30, 2018, the accumulated deficit amounted to $18,198,814. 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 achieve its projected level of revenue in 2018 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 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
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 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/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.
Equipment
- Equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life ranging from
three to five years. Normal repairs and maintenance are expensed as incurred. Expenditures that materially adapt, improve, or
alter the nature of the underlying assets are capitalized. When equipment are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to income.
Impairment
of long lived assets -
The Company analyzes its long-lived assets for potential impairment. Impairment losses are recorded
on long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those
assets are less than the net carrying amount of the assets. In such cases, the carrying values of assets to be held and used are
adjusted to their estimated fair value, less estimated selling expenses. For the six-month period ended June 30, 2018, the Company
recognized no impairment losses on its long-lived assets.
Business
combination -
The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities
assumed from the acquired business based on their estimated fair values with the residual of the purchase price recorded as goodwill.
The results of operations of acquired businesses are included in our operating results from the dates of acquisition.
Goodwill
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. Goodwill and intangible assets with indefinite lives are tested for impairment at least
annually on December 31, and whenever events or circumstances occur indicating that a possible impairment may have been incurred.
Intangible assets with finite lives are amortized over their useful lives.
The
Company assesses whether goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment
involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting
unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company determines it is
more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to
perform a qualitative assessment, a quantitative assessment is performed to determine whether a goodwill impairment exists at
the reporting unit.
Based
on its analysis, the Company’s management believes that no impairment of the carrying value of its goodwill existed at June
30, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products
and services will continue which could result in impairment of goodwill in the future.
In
addition, we capitalize certain costs incurred with developing our 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 amortize our capitalized software costs over
a three-year period, reflecting the estimated useful lives of the assets.
Foreign
Currency Translation
- Results of foreign operations are translated into U.S. dollars using average rates prevailing throughout
the period, while assets and liabilities are translated in U.S. dollars at period end foreign exchange rates. Transactions gains
and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency of
the applicable subsidiary are included in the consolidated statements of operations, within other income, in the year in which
the change occurs. The Company’s functional currency is U.S. dollars 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. For the six-month period ended June 30, 2018, the income
tax payable of $800 reflects the minimum franchise tax for the State of California.
When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax
benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
We
are subject to taxation in the U.S., as well as state and German taxes. 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.
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 has two streams of principal revenue segments as of June 30, 2018, software subscription and
cryptocurrency investments. The Company records the realized gain or loss on the investments on a trade date basis. In addition,
the changes in unrealized gains or losses on the investments are marked to market on the last day of every month at 11:59 p.m.,
Pacific Time, based on publicly available cryptocurrency exchanges. The Company classifies investments in cryptocurrency as trading
investments. Trading generally reflects active and frequent buying and selling and is generally used with the dual objective of
generating profits on short-term difference in price and gaining hands on experience in the cryptocurrency marketplace to aid
in the development of our proprietary software.
The
Company also has subscription revenues through its majority-owned subsidiary CoinTracking GmbH and minimal amounts of consulting
revenue. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 supersedes nearly all existing revenue recognition guidance
under US GAAP. The Company adopted ASU No. 2014-09 as of January 1, 2018 using the modified retrospective transition method for
contracts as of the date of initial application. There is no cumulative impact to the Company’s retained earnings at January
1, 2018. See “Note 5 - Revenue Recognition” for additional information on the impact to the Company.
Currently,
in the US GAAP accounting framework, there is no authoritative guidance specifically related to the accounting treatment of cryptocurrencies,
and management has
exercised significant judgement in determining appropriate accounting
treatment. 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 our cryptocurrency investments.
Realized gains and losses for the Company’s cryptocurrency segment are included in revenues.
Stock-based
compensation
- In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company
measures the compensation costs of stock-based compensation arrangements based on the grant date fair value of granted instruments
and recognizes the costs in financial statements over the period during which employees are required to provide services. Stock-based
compensation arrangements include stock options.
Equity
instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments,
as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date
and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined,
is reached or (b) when the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The compensation
cost is remeasured at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees
can result in significant volatility in compensation expense.
The
Company accounts for its stock-based compensation using the Black-Scholes model to estimate the fair value of stock option awards.
Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s
common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non-employees
are expected to hold their options prior to exercise, and (iii) risk-free interest rate.
Risks
and uncertainties -
The Company is subject to various risks including market risk, liquidity risk, and other risks related
to its investments in cryptocurrency. Investing in cryptocurrency is currently unregulated, highly speculative, and volatile.
The
prices of cryptocurrency could materially and adversely affect an investment in the shares of the Company. The prices of the cryptocurrencies
have a limited history. During such history, the cryptocurrencies’ prices have been volatile and subject to influence by
many factors including the levels of liquidity. If the cryptocurrency’s markets continue to experience significant price
fluctuations, the Company may experience losses. Several factors may affect the prices of the cryptocurrencies, including, but
not limited to, global cryptocurrency supply and demand, and competition from other forms of digital currency or payments services.
There
is currently no clearing house for cryptocurrency, nor is there a central or major depository for the custody of cryptocurrency.
There is a risk that some or all of the Company’s cryptocurrencies could be lost or stolen. The Company does not have insurance
protection on its cryptocurrency which exposes the Company and its shareholders to the risk of loss of the Company’s cryptocurrency.
Further, cryptocurrency transactions are irrevocable. Stolen or incorrectly transferred of cryptocurrency may be irretrievable.
As a result, any incorrectly executed cryptocurrency transactions could adversely affect an investment in the Company.
To
the extent private keys for the cryptocurrency’s addresses are lost, destroyed or otherwise compromised and no backup of
the private keys are accessible, the Company may be unable to access the cryptocurrency held in the associated address and the
private key will not be capable of being restored by the cryptocurrency network.
The
processes by which cryptocurrency transactions are settled are dependent on the cryptocurrency peer-to-peer network, and as such,
the Company is subject to operational risk. A risk also exists with respect to previously unknown technical vulnerabilities, which
may adversely affect the value of the cryptocurrencies.
Net
loss per common share
- The Company reports earnings per share (“EPS”) with a dual presentation of basic EPS and
diluted EPS. Basic EPS is computed as net income divided by the weighted average of common shares for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issued through stock options, or warrants. For the three and
six month periods ended June 30, 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 $85,570
and $134,269 of marketing expenses for the three and six months ended June 30, 2018, respectively, compared to $13,500 for the
three months ended June 30, 2017 and for the period from Inception through June 30, 2017.
NOTE
3 - RECENT ACCOUNTING PRONOUNCEMENTS
In
June 2018, 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 Company is evaluating the effect that ASU No. 2018-07 will have on its 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. Early adoption is permitted, including
adoption in an interim period. The adoption of ASU No. 2017-11 is not expected to have a material impact on the Company’s
consolidated financial statements and related disclosures.
In
May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which
provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified
award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same
immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument
or liability instrument is the same immediately before and after the modification. The new standard became effective for us on
January 1, 2018. Adoption of the ASU No. 2017-11 did not have a significant impact on our consolidated financial statements and
related disclosures.
In
January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (Topic 805). The new guidance that changes
the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated
in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities
is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition
of outputs by more closely aligning it with how outputs are described in ASC 606, Revenue from Contracts with Customers. The ASU
is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption
of ASU No. 2017-01 did not have a significant impact on our consolidated financial statements and related disclosures.
In
January 2017, the FASB issues, 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 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. Adoption of ASU No. 2016-02 will not have a significant impact on our
consolidated financial statements and related disclosures.
NOTE
4 - ACQUISITION
On
January 26, 2018, CoinTracking, a wholly-owned subsidiary of the Company, acquired 50.1% of the equity interest in CoinTracking
GmbH, for (i) $4,736,400 in cash and (ii) 473,640 shares of common stock of the Company at $10 per share for total purchase price
valued at $9,472,800. 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 our presence in the
digital asset industry and build strategic alliances.
The
consolidated financial statements were prepared using the acquisition method of accounting in accordance with FASB ASC805,
Business
Combinations
, and have been included in the Company’s consolidated results as of 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. We made a preliminary allocation of the consideration transferred
to the assets acquired and liabilities assumed based on the information available and preliminary valuation of the fair value
of tangible and intangible assets acquired and liabilities assumed. Acquisition-related costs were expensed as incurred and were
not considered to be significant. We expect to complete the final purchase price allocation related to this acquisition prior
to year-end. Therefore, the valuation of certain assets and liabilities in the CoinTracking GmbH acquisition is preliminary and
subject to change.
The
table below summarizes the fair values of the assets acquired and liabilities assumed, translated from euros to U.S. dollars,
at the date of acquisition:
|
|
CoinTracking
GmbH
|
|
Cash
and cash equivalents
|
|
$
|
1,547,097
|
|
Investment
in cryptocurrency
|
|
|
1,115,345
|
|
Loan
receivable – related party
|
|
|
194,380
|
|
Other
current assets
|
|
|
284,677
|
|
Goodwill
|
|
|
10,014,881
|
|
Other
assets
|
|
|
144,566
|
|
Total
assets
|
|
$
|
13,300,946
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
211,422
|
|
Contract
liabilities, short term
|
|
|
2,686,858
|
|
Contract
liabilities, long term
|
|
|
929,866
|
|
Total
liabilities
|
|
|
3,828,146
|
|
Net
assets acquired
|
|
$
|
9,472,800
|
|
During
the six months ended June 30, 2018, the Company recorded an adjustment to current liabilities assumed of $250,000, resulting in
a reduction of goodwill.
The purchase price was based on the expected
financial performance of CoinTracking GmbH and not on the value of the net identifiable assets at the time of acquisition. This
resulted in a significant portion of the purchase price being attributed to goodwill. As a result, the Company recognized $10,014,881
of goodwill on the date of acquisition. Once the purchase price allocation is completed, the Company expects a portion of goodwill
to be allocated to non-controlling interests and intangible assets, primarily software and technology and a non-compete
agreement with the former majority shareholder of CoinTracking GmbH, included as finite-lived intangible assets, which will
increase amortization expense by a significant amount.
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 these acquisitions had occurred on January 1, 2018. The unaudited pro forma financial information includes adjustments required
under the acquisition method of accounting and is presented for informational purposes only and is not necessarily indicative
of the results that would have been achieved had the acquisitions actually occurred on January 1, 2018.
For
the three and six months ended June 30, 2018:
|
|
Three-months
|
|
|
Six
Months
|
|
Revenue
|
|
$
|
586,747
|
|
|
$
|
2,232,007
|
|
Net
loss
|
|
$
|
(7,145,543
|
)
|
|
|
(10,374,966
|
)
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.49
|
)
|
NOTE
5 – SUBSCRIPTION REVENUE RECOGNITION
CoinTracking
GmbH accounts for a contract when it has approval and commitment from all parties, the rights of the parties and payment terms
are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when
control of the promised services is transferred to our customers, and in an amount that reflects the consideration the Company
is contractually due in exchange for those services. Most of the Company’s contracts with customers are single, or have
few distinct performance obligations, the transaction price is allocated to each performance obligation using the stand-alone
selling price.
CoinTracking
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, and, subject
to certain conditions identified in our terms and conditions. Revenue is initially deferred and is recognized using the straight-line
method over the terms of the applicable subscription period, which primarily range from annual to perpetual.
Transaction
Price
The
objective of determining the transaction price is to estimate the amount of consideration the Company is due in exchange for services,
including amounts that are variable. CoinTracking GmbH has a standalone sales price for its subscription service, which varies
based on length of subscription. Further, the Company excludes from the measurement of transaction price all taxes assessed by
governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected
from customers. Accordingly, such tax amounts are not included as a component of revenue or cost of revenue.
Estimates
of certain revenue
Revenue
collected in advance for subscriptions ranging from annual to perpetual packages are deferred and recognized as revenue on a straight-line
basis over the terms of the applicable subscription period or performance obligation period. For “lifetime” revenue
packages, where the customer has access to the website for unlimited length of time, the Company has elected to recognize revenue
on a straight-line basis over three years. We believe that based on the short history of customer data, customer relationship
period, and number of available alternative providers, and anticipation of future changes to the blockchain industry, a measure
of three years of performance obligation to our customers appears to be appropriate. The Company intends to re-evaluate the length
of the performance obligation period for lifetime revenue packages periodically based on historical and industry data and adjust
it as deemed necessary.
Net
Revenue and Charge-back Reserves
CoinTracking
GmbH does not maintain an allowance for doubtful accounts because the customer prepays for subscription in advance before access
is provided to CoinTracking GmbH’s website. The Company maintains a reserve for potential credits issued to consumers or
other revenue adjustments. In addition, as of June 30, 2018, PayPal withheld $49,856 for potential credits issued to customers,
which is included in prepaid expenses and other current assets on our condensed Balance Sheet.
Contract
Liabilities
Contract
liabilities are recorded when payments are received or due in advance of performing CoinTracking GmbH’s service obligations
and is recognized over the service period, which primarily relates 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 $1,341,284
for the six months ended June 30, 2018. As of June 30, 2018, $2,800,248 of current contract liabilities were recorded and $1,408,208
of long-term contract liabilities were recorded. As of December 31, 2017, we did not have consolidated contract liabilities.
Assets
Recognized from the Costs to Obtain a Contract with a Customer
CoinTracking
GmbH has determined that certain costs associated with affiliate payments paid to customers pursuant to certain sales incentive
programs, meet the requirements to be capitalized as a cost of obtaining a contract. Affiliates are paid in Bitcoins and expense
is amortized over the applicable subscription period.
During
the three and six months ended June 30, 2018, the Company recognized expense of $32,100 and $62,754, respectively, related to
the amortization of affiliate payments. The aggregate contract asset balance at June 30, 2018 is $158,360.
NOTE
6 - SEGMENT INFORMATION
The
Company has organized its operations into two segments: a software subscription segment and a cryptocurrency investment segment.
The
software subscription segment primarily consists of amounts earned through subscriptions to the CoinTracking GmbH website. Among
other features, the CoinTracking GmbH website offers subscriptions, currently ranging from annual to perpetual, that allow individuals
and entities to record exactly when and where they acquired virtual currencies of any variety, as well as their acquisition prices.
Operating expense related to this segment is technology infrastructure and general administrative costs primarily incurred in
Germany.
The
cryptocurrency investment segment primarily consists of amounts earned, if any, through proprietary trading activities of cryptocurrencies
and costs are operating expenses that consists of general and administrative costs in North America. The Company does not trade
or manage other individuals’ or entities’ funds and has no current plans to do so.
There
are no intercompany internal revenue transactions between our reportable segments. These segments reflect the way our chief operating
decision maker evaluates the Company’s business performance and manages its operations.
The
following table summarizes the Company’s operating income by segment for the three months ended June 30:
|
|
2018
|
|
|
|
Cryptocurrency
Investment
|
|
|
Software
Subscription
|
|
|
Total
|
|
Revenue,
net
|
|
$
|
(299,086
|
)
|
|
$
|
885,833
|
|
|
$
|
586,747
|
|
Costs
and expenses
|
|
|
(7,397,216
|
)
|
|
|
(654,662
|
)
|
|
|
(8,051,878
|
)
|
Operating
income/(loss)
|
|
$
|
(7,696,302
|
)
|
|
$
|
231,171
|
|
|
$
|
(7,465,131
|
)
|
|
|
2017
|
|
|
|
Cryptocurrency
Investment
|
|
|
Software
Subscription
|
|
|
Total
|
|
Revenue,
net
|
|
$
|
82,640
|
|
|
$
|
-
|
|
|
$
|
82,640
|
|
Costs
and expenses
|
|
|
(1,391,465
|
)
|
|
|
-
|
|
|
|
(1,391,465
|
)
|
Operating
loss
|
|
$
|
(1,308,825
|
)
|
|
$
|
-
|
|
|
$
|
(1,308,825
|
)
|
The
following table summarizes the Company’s operating income by segment for the six months ended June 30:
|
|
2018
|
|
|
|
Cryptocurrency
Investment
|
|
|
Software
Subscription
|
|
|
Total
|
|
Revenue,
net
|
|
$
|
773,512
|
|
|
$
|
1,342,825
|
|
|
$
|
2,116,337
|
|
Costs
and expenses
|
|
|
(8,836,235
|
)
|
|
|
(1,271,374
|
)
|
|
|
(10,107,592
|
)
|
Operating
income/(loss)
|
|
$
|
(8,062,723
|
)
|
|
|
71,468
|
|
|
|
(7,991,255
|
)
|
The
following table summarizes the Company’s operating income by segment for the period from Inception to June 30, 2017:
|
|
2017
|
|
|
|
Cryptocurrency
Investment
|
|
|
Software
Subscription
|
|
|
Total
|
|
Revenue,
net
|
|
$
|
82,640
|
|
|
$
|
-
|
|
|
$
|
82,640
|
|
Costs
and expenses
|
|
|
(1,672,565
|
)
|
|
|
-
|
|
|
|
(1,672,565
|
)
|
Operating
loss
|
|
$
|
(1,589,925
|
)
|
|
$
|
-
|
|
|
$
|
(1,589,925
|
)
|
NOTE 7 - INVESTMENTS
Investments include cryptocurrency
classified as a Level 2 asset because inputs are from cryptocurrency exchanges with price variability. The Company also invests
in a SAFE and ICOs which are included as Level 3 investments as there was no active market as of June 30, 2018. The following
table summarizes the Company’s investments at fair value as of June 30, 2018:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Investment
in cryptocurrency
|
|
$
|
-
|
|
|
$
|
1,832,810
|
|
|
$
|
617
,639
|
|
The
Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are
fair, consistent and verifiable. ICOs are carried at cost which approximates fair value at June 30, 2018. The Company considers
the length of its investments, of which a majority were made during the current year, 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, among other factors in determining fair value. At the time that the ICOs 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 six months
ended June 30, 2018:
|
|
Level
3
|
|
|
|
Cryptocurrency
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
$
|
167,818
|
|
Transfers
to Level 2 investments
|
|
|
(50,179
|
)
|
Purchases,
sales, issuances, and settlement, net
|
|
|
500,000
|
|
Balance,
June 30, 2018
|
|
$
|
367,639
|
|
The
following table summarizes the fair value of cryptocurrencies, other than ICOs, held as of June 30, 2018:
Bitcoin
|
|
$
|
1,223,488
|
|
Ethereum
|
|
|
105,432
|
|
Bitcoin
Cash
|
|
|
70,028
|
|
Litecoin
|
|
|
42,316
|
|
Cardano
|
|
|
25,822
|
|
EOS
|
|
|
24,525
|
|
Stellar
Lumens
|
|
|
24,369
|
|
BlockVee
|
|
|
23,445
|
|
Ether
Classis
|
|
|
23,037
|
|
Binance
Coin
|
|
|
21,108
|
|
NEO
|
|
|
20,882
|
|
Dash
|
|
|
20,271
|
|
Monero
|
|
|
17,619
|
|
Polymath
|
|
|
16,281
|
|
OmiseGO
|
|
|
15,143
|
|
Enigma
|
|
|
14,096
|
|
Ontology
|
|
|
13,761
|
|
Vechain
|
|
|
13,457
|
|
Qtum
|
|
|
13,122
|
|
Steem
|
|
|
10,473
|
|
Zcash
|
|
|
9,893
|
|
Siacoin
|
|
|
9,466
|
|
Basic
Attention Token
|
|
|
8,665
|
|
0x
|
|
|
8,429
|
|
ICON
|
|
|
8,387
|
|
Nano
|
|
|
8,298
|
|
Lisk
|
|
|
8,272
|
|
Aeternity
|
|
|
7,946
|
|
Zilliqa
|
|
|
7,827
|
|
Metal
|
|
|
6,342
|
|
Aragon
|
|
|
4,757
|
|
Bitcoin
Private
|
|
|
1,948
|
|
Ripple
|
|
|
1,384
|
|
DigiByte
|
|
|
752
|
|
Decred
|
|
|
435
|
|
NavCoin
|
|
|
234
|
|
Startis
|
|
|
215
|
|
Dogecoin
|
|
|
188
|
|
Gas
|
|
|
170
|
|
NEM
|
|
|
157
|
|
Horizen
|
|
|
122
|
|
Waves
|
|
|
100
|
|
CloakCoin
|
|
|
45
|
|
Decentraland
|
|
|
37
|
|
PIVX
|
|
|
32
|
|
Bytom
|
|
|
20
|
|
Nebulas
|
|
|
14
|
|
|
|
$
|
1,832,810
|
|
NOTE
8 - EQUIPMENT
Equipment
consists of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Computer
equipment
|
|
$
|
107,850
|
|
|
$
|
69,241
|
|
Furniture
equipment
|
|
|
15,322
|
|
|
|
3,754
|
|
|
|
|
123,172
|
|
|
|
72,995
|
|
Less
accumulated depreciation
|
|
|
(15,013
|
)
|
|
|
(4,675
|
)
|
|
|
$
|
108,159
|
|
|
$
|
68,320
|
|
NOTE
9 – GOODWILL AND INTANGBILE 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 footnote 4). Intangible assets include software development costs, related to our CoinTracking GMBH SaaS platform.
The
carrying amount of goodwill and intangible assets for the six months ended June 30, 2018 were as follows:
|
|
Balance as of December 31, 2017(net of amortization)
|
|
|
Additions
|
|
|
Amortization
|
|
|
Balance as of
June 30, 2018
|
|
Goodwill
|
|
$
|
-
|
|
|
$
|
9,392,685
|
|
|
|
-
|
|
|
$
|
9,392,685
|
(1)
|
Capitalized Software
|
|
$
|
-
|
|
|
$
|
217,632
|
|
|
$
|
(40,644
|
)
|
|
$
|
176,988
|
|
|
|
$
|
-
|
|
|
$
|
9,610,317
|
|
|
$
|
(40,644
|
)
|
|
$
|
9,569,673
|
|
(1)
|
Goodwill
is recorded in euros and translated to U.S. dollars, in accordance with ASC 830, Foreign Currency Matters, and therefore,
is subject to fluctuations.
|
The
Company evaluates the recoverability of goodwill annually as of December 31, and whenever events or changes in circumstances indicate
to us that the carrying amount may not be recoverable. There were no conditions that indicated any impairment of goodwill as of June
30, 2018.
Intangible
assets with finite useful lives are amortized over their respective estimated useful lives. Amortization expense related to intangible
assets was $9,060 for the three and six months ended June 30, 2018, respectively, and $0 for the prior year
periods.
Amortization
expense for intangible assets is included in general and administrative expenses. The following table provides estimated future
amortization expense related to intangible assets as of June 30, 2018:
Year ending
December 31,
|
|
Future
Amortization
|
|
2018 (remaining)
|
|
$
|
37,564
|
|
2019
|
|
|
75,129
|
|
2020
|
|
|
51,611
|
|
2021
|
|
|
12,684
|
|
2022
|
|
|
-
|
|
|
|
$
|
176,988
|
|
NOTE
10 - SUMMARY OF COMMON STOCK TRANSACTIONS
On
April 18, 2018, the Company issued to James Gilbert 202,512 shares of common stock of the Company, valued at $7 per share at the
time of issuance, or $1,417,584, for certain services performed on behalf of the Company.
On
March 20, 2018, upon exercise of a stock option by a consultant of the Company, the Company issued 7,031 shares of common stock
at an exercise price of $0.01 per share.
On
January 31, 2018, upon partial exercise of a stock option by an employee of the Company, the Company issued 14,667 shares of common
stock as a cashless exercise.
On
January 22, 2018, a consultant of the Company exercised 12,494 stock options at an exercise price of $2.00 per share. The Company
did not issue the shares upon exercise, recording a common stock payable on its condensed consolidated balance sheet at March
31, 2018. On May 16, 2018, the Company issued the shares and recorded the issuance to common stock and additional paid-in-capital.
On
January 16, 2018, pursuant to an Equity Purchase Agreement (the “Agreement”) entered into on December 22, 2017 by
and among the Company, CoinTracking, Kachel Holding, and Dario Kachel, CoinTracking purchased from Kachel Holding 12,525 shares
of CoinTracking GmbH, representing 50.1% of the equity interests in CoinTracking GmbH, for a purchase price which consisted, in
part, of 473,640 shares of common stock of the Company (the “CoinTracking Acquisition”). The transaction closed on
January 26, 2018 (see Note 4).
NOTE
11 – WARRANTS FOR COMMON STOCK
During
the six-month period ended June 30, 2018, no stock purchase warrants were issued. As of June 30, 2018, 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 six months ended June 30, 2018, the Company issued an additional 450,000 stock options to members of our board of directors,
1,957,062 stock options to employees, and 400,000 stock options to non-employees.
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,
2018, there are outstanding stock option awards issued from the Plan covering a total of 3,163,735 shares of the Company’s
common stock and there remain reserved for future awards 1,836,265 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, 2017
|
|
|
644,531
|
|
|
$
|
2.32
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
2,807,062
|
|
|
$
|
7.37
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(250,000
|
)
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(37,858
|
)
|
|
$
|
1.63
|
|
|
|
|
|
|
|
|
|
Options outstanding, at June 30, 2018
|
|
|
3,163,735
|
|
|
$
|
6.44
|
|
|
|
9.44
|
|
|
$
|
128,764,882
|
|
Exercisable
|
|
|
637,117
|
|
|
$
|
5.73
|
|
|
|
9.66
|
|
|
$
|
25,762,945
|
|
Vested and exercisable and expected to vest, end of period
|
|
|
3,163,735
|
|
|
$
|
6.44
|
|
|
|
9.44
|
|
|
$
|
128,764,882
|
|
The
Company recognized $3,339,996, and $2,631,857 of compensation expense related to stock options for the three and six months ended
June 30, 2018, respectively.
The
total intrinsic value for options exercised, determined using the market price of our common stock on the date of exercise, was
$0 and $2,978,095 during the three and six months ended June 30, 2018, respectively.
During
the six-month period ended June 30, 2018 and the period from Inception through June 30, 2017 the Company had not granted any restricted
stock awards.
As
of June 30, 2018, approximately $5,522,520 of total unrecognized compensation costs related to stock options issued to employees
is expected to be recognized over a weighted average period of approximately 1.23 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 six-month period ended June 30, 2018 are as follows:
|
|
June 30, 2018
|
|
|
|
|
Ranges
|
|
Weighted-average volatility
|
|
|
36 - 75
|
%
|
Expected dividends
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5.00 - 10 years
|
|
Risk-free rate
|
|
|
1.91 - 2.95
|
%
|
Stock
options issued to nonemployees are revalued at each vesting tranche and/or reporting date in accordance with ASC 505.
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. Emad Boulos, an employee of Full Stack Finance, serves
as the Company’s Controller. The Company paid a total of $255,833 and $394,092 in fees to Full Stack Finance during the
three-month and six-month period ended June 30, 2018, respectively, and as of June 30, 2018, there was a balance of $138,791 due
to Full Stack Finance, which is included in accounts payable and accrued expenses on the accompanying condensed consolidated balance
sheets.
The
Company has a loan receivable from an officer of CoinTracking GmbH as of June 30, 2018 totaling $168,423. The loan is due upon
demand and it bears interest at 2%. During the quarter ended June 30, 2018 and the period from Inception to June 30, 2017 interest
income accrued for this loan was $1,246 and $0, respectively, which is included in other income on the accompanying condensed
consolidated statements of operations.
On
April 3, 2018, CoinTracking entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, pursuant
to which CoinTracking GmbH may 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 may be requested by CoinTracking from time
to time, on or before the tenth anniversary of the Loan Agreement. The Company is deemed obligor of CoinTracking’s obligations
under the Loan Agreement for United States Federal income tax purposes. Interest on the CoinTracking Loan will accrue at a rate
per annum of the greater of (i) three percent (3%), or (ii) the interest rates published monthly by the United States Internal
Revenue Service and in effect under section 1274(d) of the Internal Revenue Code in effect as of the date of issuance of any promissory
note under the CoinTracking Loan, and will be payable quarterly. During the three months ended June 30, 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 is still outstanding as of June 30, 2018.
The CoinTracking Note will mature on the second anniversary thereof. CoinTracking and CoinTracking GmbH are consolidated entities,
as such, the loan and advances are considered to be intercompany transactions and are eliminated in consolidation.
Effective
May 14, 2018, Michael Poutre, former Chief Executive Officer and director of the Company, resigned from all of his current roles
with the Company. Mr. Poutre will remain a consultant to the Company 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 provides that the Company will pay Mr. Poutre a lump-sum cash payment of (i) his earned but unpaid base
salary, (ii) his accrued but unpaid vacation time, and (iii) any outstanding requests for expense reimbursements that are approved
pursuant to Company policy. Mr. Poutre will serve as a consultant of the Company for six months at a rate of $30,000 per month,
payable in two separate tranches, though the Company may terminate his services for any reason. The Separation and Consulting
Agreement contains other standard provisions contained in agreements of this nature including non-disparagement and a general
release of any and all claims
.
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 months
ended June 30, 2018
|
|
|
For the six months
ended June 30, 2018
|
|
Numerator for basic and diluted income per share:
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company
|
|
$
|
(7,272,309
|
)
|
|
$
|
(10,431,256
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted income per share:
|
|
|
|
|
|
|
|
|
Weighted average shares (basic)
|
|
|
21,131,457
|
|
|
|
21,003,328
|
|
Common stock equivalents
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares (diluted)
|
|
|
21,131,457
|
|
|
|
21,003,328
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.50
|
)
|
NOTE
15 - COMMITMENTS AND CONTINGENCIES
Operating
leases
- On May 15, 2017, the Company entered into a lease agreement with Soba Living, LLC for the rental of office space.
The agreement is a month-to-month lease, which requires monthly rents of $6,000 through September 30, 2018.
On
January 18, 2018, the Company entered into a short-term lease agreement with Miramar Property Investment Co., for an office space
on a month-to-month basis, requiring monthly rents of $3,024 expiring through September 30, 2018.
Facility
rent expense was $10,478 and $9,000 for the three months ended June 30, 2018 and 2017, respectively, and $35,501 and $9,000, for
the six months ended June 30, 2018 and the three-month period from Inception to June 30, 2017 respectively.
Legal
– On May 15, 2018, we received a subpoena 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. Additionally, the Company may from time to time become subject to legal proceedings, claims, and litigation arising in
the ordinary course of business. Please see a summary of legal proceedings in Part II Item 1 of this Quarterly Report on Form
10-Q, as well as Part II, Item 1A. “Risk Factors.”
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
16: SUBSEQUENT EVENTS
On
July 3, 2018, upon exercise of a stock option by a member of the Company’s board of directors, the Company issued 3,571
shares of common stock at an exercise price of $7.00 per share.
As of August 31, 2018, the Company liquidated,
into cash, all its investment in cryptocurrency held by the cryptocurrency investment segment, which had a balance of $1,022,099
as of June 30, 2018, included in investment in cryptocurrency, of The Crypto Company in the condensed consolidated balance
sheet.