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. We are also engaged in the business of building strategic alliances to assist third
parties in the exchange of value in the digital asset market, solely by providing such third parties with tools, computer software/programming
and educational material that may prove useful to them as they independently invest in, trade and manage their own digital assets.
We also seek to build strategic alliances with other companies and from time to time may seek strategic acquisitions of entities
or technologies that we believe may aid our development of proprietary products and tools designed to help third parties to independently
invest in, trade and manage their own digital assets.
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 (“CT”); Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”); and,
where applicable, CT’s majority-owned subsidiary, CoinTracking GmbH, which was sold subsequent to September 30, 2018. See
“Note 16 - Subsequent Events” for additional details.
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 operations of companies, from
start-up businesses to well-established companies. We do not provide, and do not intend to provide, any functionality that allows
a subscriber to make any form of cryptocurrency trade. A subscriber must go to an unrelated third-party website or exchange in
order to enter into a virtual currency purchase or sale transaction. We may consider using our technology or license technology
from third parties to build additional units around our existing platform, or we may consider selling or licensing our technology
to third-party institutions for a fee.
NOTE
2 –
Restatement of the Consolidated Financial Statements
The
purpose of restatement is to correct errors in the Company’s previously issued financial statements, as disclosed in the
Company’s Current Report on Form 8-K filed subsequent to September 30, 2018, on January 3, 2019. The restatement is in connection
with the accounting for investments in cryptocurrency at fair value as opposed to intangible assets with indefinite lives and
record such investments in cryptocurrency at historical cost less impairment, if any. Management previously reported its investments
in cryptocurrency at fair value, with changes in fair value reported as unrealized gains and losses in its condensed consolidated
statements of operations. The Company has corrected the error in this Quarterly Report for its prior periods. The Company’s
investment in cryptocurrency for the comparative nine-months ended September 30, 2017 were accounted for in error and were overstated
from their historical cost by $85,266. In addition, the Company is correcting the classification of its net realized gain/loss
on investments in cryptocurrency in this Quarterly Report by reclassifying them from revenue to other income(expense).
The
Company has also determined that its classification and disclosures of $367,639 in investments, as of June 30, 2018, were incorrectly
described as investments in Initial Coin Offerings and included as investments in cryptocurrency in its condensed consolidated
balance sheets. The investments were made in accordance with token pre-sale and simple agreement for tokens agreements (“SAFT”),
and should be included as investments, non-cryptocurrency in the Company’s condensed consolidated balance sheets. The Company
is reclassifying the balance and changing the related disclosures in this current filing. Management believes the reclassification
is material to the Company’s condensed consolidated financial statements in prior periods.
Finally,
in connection with the acquisition of CoinTracking GmbH, the Company has completed its 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. The result is the recording of intangible assets
of $7,726,356, noncontrolling interest of $9,434,984, and a reduction of $43,348 to net assets acquired, resulting in a
preliminary adjustment to increase goodwill of $1,665,279. The Company recorded additional amortization expense of $757,923
relating to certain intangible assets acquired of which $211,153 and $486,176 have been restated for the three and six months
ended March 31 and June 30, 2018, respectively. As a result of these changes, the Company is restating its condensed consolidated
balance sheet and condensed consolidated statements of operations and comprehensive loss for the three months ended March 31,
2018 and June 30, 2018, as noted below. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in
CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
The
Company’s originally disclosed accounting policy, from the Company’s Quarterly Report on Form 10-Q for the three months
ended June 30, 2018 regarding investments in cryptocurrency stated that:
“
Investments
in cryptocurrency
- Investments are comprised primarily of two types of cryptocurrency investments. The Company owns several
cryptocurrencies, of which a majority is Bitcoin, which are actively traded on exchanges and are reported at fair value as determined
by digital asset markets with realized gains and losses calculated on a trade date basis as the difference between the fair value
and cost of cryptocurrencies transferred.
Management
believes that measuring cryptocurrencies
at fair value, consistent with the accounting for trading investments in commodities and securities with changes in fair value
recognized on both the balance sheet and profit and loss statements, best reflects the Company’s financial position and
the economics and characteristics of its cryptocurrency investments. The Company recognizes the fair value changes in unrealized
gains and losses on investment through the accompanying Statement of Operations. For the six-month period ended June 30, 2018,
the Company had a consolidated balance of $2,200,449 in investments in cryptocurrencies. The Company believes that it would be
able to liquidate a majority of its portfolio into cash within one to seven days, if needed. As of June 30, 2018, the Company’s
holdings represent on average 1.3% of the daily volume of total trades on the specific exchanges where it would be able to convert
its holdings to cash. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex
and Bitstamp. These exchanges, in the aggregate, account for approximately $168,000,000 in Bitcoin/U.S. dollars (“USD”)
trades per day globally.
In
addition, the Company’s cryptocurrency investments include Initial Coin Offerings (“ICOs”), which primarily
consist of tokens that are not currently traded on an exchange. The Company records these investments at cost, as there is no
active market. As of June 30, 2018, ICOs represent $367,639 of the Company’s investments in cryptocurrencies. For the six-month
period ended June 30, 2018, the Company recognized no impairment losses on investments in ICOs.
Investments
– non-cryptocurrency
– During the six months ended June 30, 2018, the Company invested $250,000 as part of a financing
in accordance with a simple agreement for future equity (“SAFE”), representing 4% interest, at the time of the investment,
in a private enterprise. The Company’s investment may take the form of equity in the future, relating to a potential equity
financing or initial public offering and a token grant in the event of a successful ICO by the enterprise. The Company has evaluated
the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to
account for the investment using the cost method since the equity securities are not marketable and do not give the Company significant
influence. The Company has determined that there is no impairment to date due to the recent nature of the investment and the early
stage development of the platform and has included such asset as a level 3 investment.”
The
Company’s updated accounting policy regarding investments in cryptocurrency transactions and remeasurement states that:
“
Investments
in cryptocurrency
– Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin,
that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less
impairment and are reported as long-term assets in the condensed consolidated balance sheets. An intangible asset with an indefinite
useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances
occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying
amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment
to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than
not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required
to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis
of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company
utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.
Realized
gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the
condensed consolidated statement of operations and comprehensive income.
Investments
– non-cryptocurrency
– As of September 30, 2018, the Company has invested $667,818 as part of nine financings,
including $500,000 during the nine months ended September 30, 2018. The investments include $417,818 invested in accordance with
eight token pre-sale and simple agreement for future tokens (“SAFT”) agreements. The agreements provide for the issuance
of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established
in each respective agreement. In addition, the Company invested $250,000 as part of a financing in accordance with a simple agreement
for future equity (“SAFE”) agreement, representing 4% interest, at the time of the investment, in a private enterprise.
The Company’s SAFE 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 Initial Coin Offering (“ICO”) by the enterprise.
The
Company has received tokens for $250,189 of its investments, at cost, which have been transferred to an active exchange and included
in Investment in cryptocurrency, net in the condensed consolidated balance sheet, during the nine months ended September 30, 2018.
The
Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other,
in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable
and do not give the Company significant influence. The Company has determined that there is no impairment for its token pre-sale
or SAFT investments as of September 30, 2018 as a majority were entered into in the last twelve months and progress has been demonstrated
toward tokenization.
During
the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business
model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment loss
of $250,000, representing the full value of its investment.”
The
Company has determined that its previously issued financial statements should be restated on a prospective basis. Accordingly
the Company is not amending and re-filing the financial statements included in its prior quarterly reports on Form 10-Q, nor in
its Annual Report for the period from March 9, 2017 (“Inception”), through December 31, 2017. Management believes
the errors are material when considering quantitative materiality. Management does not believe it is probable that the judgment
of a reasonable person relying upon its prior filings would have been changed or influenced by the inclusion or correction of
the item, nor is there a substantial likelihood that a reasonable person would consider it important.
The
effect of the restatement on the Company’s condensed consolidated balance sheet as of September 30, 2017 is as follows:
|
|
September
30, 2017
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in cryptocurrency, net
|
|
$
|
900,110
|
|
|
$
|
(900,110
|
)
(1)
|
|
$
|
-
|
|
Total
current assets
|
|
|
3,582,863
|
|
|
|
(900,110
|
)
(1)
|
|
|
2,682,753
|
|
Investment
in cryptocurrency, net
|
|
|
-
|
|
|
|
(814,844
|
)
(1)
|
|
|
814,844
|
|
Total
assets
|
|
|
3,724,522
|
|
|
|
(85,266
|
)
|
|
|
3,639,256
|
|
Accumulated
deficit
|
|
|
(2,708,728
|
)
|
|
|
(85,266
|
)
|
|
|
(2,793,994
|
)
|
Total
stockholders’ equity
|
|
|
3,575,507
|
|
|
|
(85,266
|
)
|
|
|
3,490,241
|
|
Total
liabilities and stockholders’ equity
|
|
|
3,724,522
|
|
|
|
(85,266
|
)
|
|
|
3,639,256
|
|
|
(1)
|
Includes
reclassification of investments in cryptocurrency from current assets to long-term assets.
|
The
effect of the restatement on the Company’s condensed consolidated statement of operations for the three and nine months
ended September 30, 2017, are as follows:
|
|
For
the three months ended September 30, 2017
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain on investment in cryptocurrency
|
|
$
|
481,692
|
|
|
$
|
(481,692
|
)
(1)
|
|
$
|
-
|
|
Operating
loss
|
|
|
(1,201,249
|
)
|
|
|
(481,692
|
)
(1)
|
|
|
(1,682,941
|
)
|
Net
change in unrealized appreciation (depreciation) on investment in cryptocurrency
|
|
|
(303,805
|
)
|
|
|
303,805
|
|
|
|
-
|
|
Other
income(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain on investment in cryptocurrency
|
|
|
-
|
|
|
|
481,692
|
(1)
|
|
|
481,692
|
|
Loss
before provision for income taxes
|
|
|
(1,507,073
|
)
|
|
|
303,805
|
|
|
|
(1,203,268
|
)
|
Net
loss
|
|
|
(1,507,073
|
)
|
|
|
303,805
|
|
|
|
(1,203,268
|
)
|
Net
loss per common share - basic and diluted
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
(0.06
|
)
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
18,565,062
|
|
|
|
|
|
|
|
18,565,062
|
|
|
|
For
the nine months ended September 30, 2017
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
|
|
|
As
Restated
|
|
Net
realized gain on investment in cryptocurrency
|
|
$
|
564,332
|
|
|
$
|
(564,332
|
)
(1)
|
|
$
|
-
|
|
Operating
loss
|
|
|
(2,791,175
|
)
|
|
|
(564,332
|
)
(1)
|
|
|
(3,355,507
|
)
|
Net
change in unrealized appreciation (depreciation) on investment in cryptocurrency
|
|
|
85,266
|
|
|
|
(85,266
|
)
|
|
|
-
|
|
Other
income(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain on investment in cryptocurrency
|
|
|
-
|
|
|
|
564,332
|
(1)
|
|
|
564,332
|
|
Loss
before provision for income taxes
|
|
|
(2,707,928
|
)
|
|
|
(85,266
|
)
|
|
|
(2,793,194
|
)
|
Net
loss
|
|
|
(2,708,728
|
)
|
|
|
(85,266
|
)
|
|
|
(2,793,994
|
)
|
Net
loss per common share - basic and diluted
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
(0.18
|
)
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
15,371,770
|
|
|
|
|
|
|
|
15,371,770
|
|
|
(1)
|
Restatement
adjustment includes reclassification of net realized gain/(loss) on investment in cryptocurrency from revenue to other income(expense).
|
The
effect of the restatement on the Company’s consolidated statement of cash flows for the nine months ended September 30,
2017 are as follows:
|
|
For
the nine months ended September 30, 2017
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
|
|
|
As
Restated
|
|
Net
loss
|
|
$
|
(2,708,728
|
)
|
|
$
|
(85,266
|
)
|
|
$
|
(2,793,994
|
)
|
Net
change in unrealized appreciation (depreciation) on investment in cryptocurrency
|
|
|
(85,266
|
)
|
|
|
85,266
|
|
|
|
-
|
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryptocurrency
acquired in trade of cryptocurrency investments
|
|
$
|
-
|
|
|
$
|
2,716,018
|
|
|
$
|
2,716,018
|
|
The
effect of the restatement on the Company’s net loss, net loss attributable to The Crypto Company, comprehensive income and
per-share amounts for the prior interim periods of 2018 are as follows:
|
|
For
the three months ended March 31, 2018
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
(1)
|
|
|
Restatement
Adjustment
(2)
|
|
|
As
Restated
|
|
Net
loss
|
|
$
|
(3,521,747
|
)
|
|
$
|
1,587,709
|
|
|
$
|
(211,153
|
)
|
|
$
|
(2,145,192
|
)
|
Net
loss attributable to The Crypto Company
|
|
|
(3,158,947
|
)
|
|
|
1,587,709
|
|
|
|
(105,326
|
)
|
|
|
(1,676,564
|
)
|
Net
loss per common share - basic and diluted
|
|
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.08
|
)
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
20,864,198
|
|
|
|
-
|
|
|
|
|
|
|
|
20,864,198
|
|
|
|
For
the three months ended June 30, 2018
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
(1)
|
|
|
Restatement
Adjustment
(2)
|
|
|
As
Restated
|
|
Net
loss
|
|
$
|
(7,145,543
|
)
|
|
$
|
182,168
|
|
|
$
|
(275,024
|
)
|
|
$
|
(7,238,399
|
)
|
Net
loss attributable to The Crypto Company
|
|
|
(7,272,309
|
)
|
|
|
182,925
|
|
|
|
(137,237
|
)
|
|
|
(7,226,621
|
)
|
Net
loss per common share - basic and diluted
|
|
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.34
|
)
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
21,131,457
|
|
|
|
-
|
|
|
|
|
|
|
|
21,131,457
|
|
|
|
For
the six months ended June 30, 2018
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
(1)
|
|
|
Restatement
Adjustment
(2)
|
|
|
As
Restated
|
|
Net
loss
|
|
$
|
(10,667,291
|
)
|
|
$
|
1,769,877
|
|
|
$
|
(486,176
|
)
|
|
$
|
(9,383,590
|
)
|
Net
loss attributable to The Crypto Company
|
|
|
(10,431,256
|
)
|
|
|
1,770,634
|
|
|
|
(243,359
|
)
|
|
|
(8,903,981
|
)
|
Net
loss per common share - basic and diluted
|
|
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.42
|
)
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
21,003,328
|
|
|
|
-
|
|
|
|
|
|
|
|
21,003,328
|
|
|
(1)
|
Reflects
the restatement in connection with the accounting for investments in cryptocurrency as intangible assets with indefinite lives
and record such investments in cryptocurrency at cost less impairment.
|
|
(2)
|
Reflects
the restatement of the intangible asset amortization due to the completion of the preliminary valuation of the fair value
of tangible and intangible assets acquired and related liabilities in connection with the acquisition of CoinTracking GmbH
on January 26, 2018.
|
The
effect of the restatement on the Company’s net loss, per-share amounts, and selected balance sheet amounts for the year
ended December 31, 2017 are as follows:
|
|
December
31, 2017
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
|
|
|
Audited
and Restated
|
|
Investment
in cryptocurrency, net
|
|
$
|
2,917,627
|
|
|
$
|
(2,917,627
|
)
|
|
$
|
-
|
|
Total
current assets
|
|
|
11,901,665
|
|
|
|
(2,917,627
|
)
(1)
|
|
|
8,984,038
|
|
Investment
in cryptocurrency, net
|
|
|
2,917,627
|
|
|
|
(1,785,742
|
)
(1)
|
|
|
1,131,885
|
|
Total
assets
|
|
|
11,971,485
|
|
|
|
(1,785,742
|
)
|
|
|
10,185,743
|
|
Accumulated
deficit
|
|
|
(7,767,559
|
)
|
|
|
(1,785,742
|
)
|
|
|
(9,553,301
|
)
|
Total
stockholders’ equity
|
|
|
11,273,076
|
|
|
|
(1,785,742
|
)
|
|
|
9,487,334
|
|
Total
liabilities and stockholders’ equity
|
|
|
11,971,485
|
|
|
|
(1,785,742
|
)
|
|
|
10,185,743
|
|
|
(1)
|
Includes
reclassification of investments in cryptocurrency from current assets to long-term assets.
|
|
|
December
31, 2017
|
|
|
|
As
Previously Reported
|
|
|
Restatement
Adjustment
|
|
|
Audited
and Restated
|
|
Net
loss
|
|
$
|
(7,767,559
|
)
|
|
$
|
(1,785,742
|
)
|
|
$
|
(9,553,301
|
)
|
Net
loss per common share - basic and diluted
|
|
|
(0.46
|
)
|
|
|
|
|
|
|
(0.57
|
)
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
16,746,792
|
|
|
|
-
|
|
|
|
16,746,792
|
|
Accumulated
deficit
|
|
|
(7,767,559
|
)
|
|
|
(1,785,742
|
)
|
|
|
(9,553,301
|
)
|
Total
stockholders’ equity
|
|
|
11,273,076
|
|
|
|
(1,785,742
|
)
|
|
|
9,487,334
|
|
NOTE
3 – 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 (as restated) and the accompanying unaudited condensed consolidated financial statements as of September
30, 2018 and September 30, 2017 (as restated) 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 Company’s Annual Report for the period from March 9, 2017 (“Inception”),
through December 31, 2017.
Consolidation
– The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries,
Crypto Sub, CT, and Malibu Blockchain, as well as its 50.1% ownership of CoinTracking GmbH. All significant intercompany accounts
and transactions are eliminated in consolidation. Subsequent to September 30, 2018, the Company sold its entire equity ownership
stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
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 September 30, 2018, the Company had cash of $387,287, a decline of $8,562,957 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 ($1,582,593)
as of September 30, 2018, which includes a contract liability of $2,122,316, 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 the majority
of tradeable cryptocurrency held in its cryptocurrency investment segment, which had a balance of $1,007,753 at June 30, 2018,
to help fund its operations. As of September 30, 2018, the accumulated deficit amounted to $20,656,840. 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 2019 and
beyond. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Use
of estimates
- The preparation of these condensed consolidated financial statements in conformity with US GAAP requires management
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related
disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant
estimates and assumptions include but are not limited to the recoverability and useful lives of long-lived assets, allocation
of revenue on software subscriptions, valuation of goodwill from business acquisitions, valuation and recoverability of investments,
valuation allowances of deferred taxes, and share-based compensation expenses. Actual results may differ from these estimates.
In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating
results.
Cash
and cash equivalents
- The Company defines its cash and cash equivalents to include only cash on hand and certain highly liquid
investments with original maturities of ninety days or less. The Company maintains its cash and cash equivalents at financial
institutions, the balances of which may, at times, exceed federally insured limits. Management believes that the risk of loss
due to the concentration is minimal.
Investments
in cryptocurrency
- Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin,
that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less
impairment and are reported as long-term assets in the condensed consolidated balance sheets. An intangible asset with an indefinite
useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances
occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying
amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment
to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than
not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required
to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis
of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company
utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.
Realized
gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the
condensed consolidated statement of operations and comprehensive income.
The
following table presents additional information about investments in cryptocurrency, as of September 30, 2018:
|
|
September
30, 2018
|
|
Balance
at January 1, 2018
|
|
$
|
964,067
|
|
Acquisition
of CoinTracking GmbH
|
|
|
1,115,345
|
|
Purchases
of cryptocurrency
|
|
|
5,267,025
|
|
Net
realized gains on investments in cryptocurrency
|
|
|
1,303,433
|
|
Customer
payments in cryptocurrency
|
|
|
1,102,723
|
|
Transfer
from investments, non-cryptocurrency
|
|
|
255,763
|
|
Sales of cryptocurrency
|
|
|
(7,490,278
|
)
|
Expenditures
of cryptocurrency
|
|
|
(280,377
|
)
|
Impairment
of cryptocurrency
|
|
|
(1,869,241
|
)
|
Foreign
currency impact
|
|
|
(20,812
|
)
|
Balance
at September 30, 2018
|
|
$
|
347,648
|
|
The
following table summarizes the historical cost of cryptocurrencies, held as of September 30, 2018:
Bitcoin
|
|
$
|
263,562
|
|
Ethereum
|
|
|
31,750
|
|
Celsius
|
|
|
25,163
|
|
Litecoin
|
|
|
10,111
|
|
Bitcoin
Cash
|
|
|
7,230
|
|
Rightmesh
|
|
|
6,200
|
|
Tezos
|
|
|
5,574
|
|
Dash
|
|
|
3,194
|
|
Monero
|
|
|
1,135
|
|
DigiByte
|
|
|
901
|
|
Ethereum
Classic
|
|
|
841
|
|
Dogecoin
|
|
|
614
|
|
Zcash
|
|
|
582
|
|
Lisk
|
|
|
513
|
|
Bitcoin
Private
|
|
|
507
|
|
Stratis
|
|
|
421
|
|
Steem
|
|
|
332
|
|
Syscoin
|
|
|
302
|
|
NEM
|
|
|
274
|
|
Vertcoin
|
|
|
259
|
|
Decred
|
|
|
255
|
|
Other
Cryptocurrencies
|
|
|
695
|
|
|
|
$
|
347,648
|
|
Investments
– non-cryptocurrency
– As of September 30, 2018, the Company has invested $667,818 as part of nine financings,
including $500,000 during the nine months ended September 30, 2018. The investments include $417,818 invested in accordance with
eight token pre-sale and simple agreement for future tokens (“SAFT”) agreements. The agreements provide for the issuance
of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established
in each respective agreement. In addition, the Company invested $250,000 as part of a financing in accordance with a simple agreement
for future equity (“SAFE”) agreement, representing 4% interest, at the time of the investment, in a private enterprise.
The Company’s SAFE 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 Initial Coin Offering (“ICO”) by the enterprise.
The
Company has received tokens for $255,763 of its investments, at cost, which have been transferred to an active exchange and included
in Investment in cryptocurrency, net in the condensed consolidated balance sheet, during the nine months ended September 30, 2018.
The
Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other,
in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable
and do not give the Company significant influence. The Company has determined that there is no impairment of its token pre-sale
or SAFT investments as of September 30, 2018 as a majority were entered into in the last twelve months and progress has been demonstrated
toward tokenization.
During
the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business
model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment loss
of $250,000, representing the full value of its 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 is retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to income.
Impairment
of long-lived assets -
The Company analyzes its long-lived assets, including indefinite lived intangible assets which include
investments in cryptocurrency (see Investments in Cryptocurrency) and intangible assets acquired in connection with the acquisition
of CoinTracking GmbH, for potential impairment. Subsequent to September 30, 2018, the Company sold its entire equity ownership
stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. Impairment losses are recorded
on long-lived assets when indicators of impairment are present, and for intangible assets acquired in connection with acquisitions,
the undiscounted cash flows estimated to be generated by those assets are less than the net carrying amount of the assets. In
such cases, the carrying values of assets to be held and used are adjusted to their estimated fair value, less estimated selling
expenses. For the nine-month period ended September 30, 2018, the Company recognized impairment losses of $1,869,241 on its indefinite
lived intangible assets. There was no impairment in the period from Inception to September 30, 2017.
Business
combination -
The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities
assumed from the acquired business based on their estimated fair values with the residual of the purchase price recorded as goodwill.
The results of operations of acquired businesses are included in our operating results from the dates of acquisition.
Goodwill
and indefinite lived intangible assets
- The Company records the excess of purchase price over the fair value of the tangible
and identifiable intangible assets acquired as goodwill. 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 and indefinite lived intangible assets exists using both qualitative and quantitative
assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely
than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative
assessment the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed to determine
whether a goodwill impairment exists at the reporting unit.
Based
on its analysis, the Company’s management believes that no impairment of the carrying value of its goodwill existed at September
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.
Based
on its analysis of its indefinite lived intangible assets, which are valued using a discounted cash flow model, the Company’s
management believes there is no impairment of the carrying value of its indefinite lived intangible assets as of September 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 in the future.
In
addition, we capitalized certain costs incurred with developing our CT SaaS platform in accordance with ASC 985-20, Software —
Costs of Software to be Sold, Leased, or Marketed once technological feasibility has been established. Capitalized software costs
primarily include (i) external direct costs of services utilized in software development and (ii) compensation and
related benefits for employees who are directly associated with software development. We amortized our capitalized software costs
over a five-year period, reflecting the estimated useful lives of the assets.
Foreign
Currency Translation
- Results of foreign operations are translated into USD using average rates prevailing throughout the
period, while assets and liabilities are translated in USD at period end foreign exchange rates. Transactions gains and losses
resulting from exchange rate changes on transactions denominated in currencies other than the functional currency of the applicable
subsidiary are included in the consolidated statements of operations, within other income, in the year in which the change occurs.
The Company’s functional currency is USD while the functional currency for CoinTracking GmbH is in euros.
Income
taxes -
Deferred tax assets and liabilities are recognized for expected future consequences of events that have been included
in the financial statements or tax returns. Under the asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using
the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based
on available evidence, are not expected to be realized. The provision for income taxes represents the tax payable for the period
and the change during the period in deferred tax assets and liabilities. For the nine-month period ended September 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.
As
of September 30, 2018, 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. Subsequent to September 30,
2018, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional
details.
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 had two streams of principal revenue segments as of September 30, 2018, software subscription
and cryptocurrency investments. The cryptocurrency investment segment primarily consisted of amounts earned through trading activities
of cryptocurrencies. The Company recorded its investments in cryptocurrency as indefinite lived intangible assets, at cost less
impairment, and are reported as long-term assets in the condensed consolidated balance sheets. Realized gains and losses on sales
of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated
statements of operations and comprehensive income. As of September 30, 2018, the Company liquidated substantially all of the tradeable
cryptocurrency held by its cryptocurrency investment segment, although the Company continues to hold a small amount of tradeable
cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and simple agreement for tokens agreements
investments.
The
Company also generated subscription revenues through its majority-owned subsidiary CoinTracking GmbH and generates 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 6 – Subscription Revenue Recognition” for additional information on the
impact to the Company.
Share-based
compensation
- In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company
measures the compensation costs of share-based compensation arrangements based on the grant date fair value of granted instruments
and recognizes the costs in financial statements over the period during which employees are required to provide services. Share-based
compensation arrangements include stock options.
Equity
instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments,
as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date
and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined,
is reached or (b) when the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The compensation
cost is remeasured at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees
can result in significant volatility in compensation expense.
The
Company accounts for its share-based compensation using the Black-Scholes model to estimate the fair value of stock option awards.
Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s
common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non-employees
are expected to hold their options prior to exercise, and (iii) risk-free interest rate.
Net
loss per common share
- The Company reports earnings per share (“EPS”) with a dual presentation of basic EPS and
diluted EPS. Basic EPS is computed as net income divided by the weighted average of common shares for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issued through stock options, or warrants. For the three-
and nine-month periods ended September 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 $48,460
and $333,969 of marketing expenses for the three and nine months ended September 30, 2018, respectively, compared to $21,968 and
$35,468 for the three months ended September 30, 2017 and for the period from Inception through September 30, 2017, respectively.
NOTE
4 - RECENT ACCOUNTING PRONOUNCEMENTS
In
July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. The amendments in this ASU clarify certain aspects of the
guidance related to: reporting comprehensive income, debt modification and extinguishment, income taxes related to stock compensation,
income taxes related to business combinations, derivatives and hedging, fair value measurements, brokers and dealers liabilities,
and plan accounting. This new standard is effective for annual reporting periods, and interim periods within those annual periods,
beginning after December 15, 2018. The adoption of ASU No. 2018-09 did not have a material impact on the Company’s consolidated
financial statements and related disclosures.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. The amendments in this ASU remove, add, and modify certain disclosures. The ASU removes
the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2
of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation process for Level 3 fair
value measurements; and (4) certain other requirements for nonpublic entities. The ASU adds the following disclosure requirements:
(1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair
value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, disclosure of other quantitative information
may be more appropriate if the entity determines that other quantitative information would be a more reasonable and rational method
to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU modifies disclosure
requirements in Topic 820 relating to timing of liquidation of an investee’s assets, the disclosure of the date when restrictions
from redemption might lapse, the intention of the measurement uncertainty disclosure, and certain other requirements for nonpublic
entities. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning
after December 15, 2019. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated
financial statements and related disclosures.
In
August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this
ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements
that include an internal-use software). The amendments in this ASU require an entity (customer) in a hosting arrangement that
is a service to (1) determine which implementation costs to capitalize as an asset related to the service contract and which costs
to expense; (2) expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term
of the hosting arrangement; (3) apply the existing impairment guidance to the capitalized implementation costs as if the costs
were long-lived assets; (4) present the expense related to the capitalized implementation costs in the same line item in the statement
of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation
costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting arrangements; and
(5) present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment
for the fees of the associated hosting arrangement would be presented. This new standard is effective for annual reporting periods,
and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-15 is not expected
to have a material impact on the Company’s consolidated financial statements and related disclosures.
In
June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting
,
which simplifies
the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees,
with certain exceptions.
The ASU expands the
scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees,
to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based
payments to non-employees and employees will be substantially aligned. Management currently does not plan to early adopt this
guidance.
The new standard is effective for annual reporting periods beginning after December
15, 2018 with early adoption permitted. The 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 did not 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 issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350) which removes “Step
Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will
now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of
goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within
those years, with early adoption permitted. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s
consolidated financial statements and related disclosures.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most
leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new
disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from
leases. The new standard 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 is not expected to have a significant impact
on our consolidated financial statements and related disclosures.
NOTE
5 - ACQUISITION
On
January 26, 2018, CT, 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 a total purchase price valued
at $9,472,800. On the acquisition date, the fair market value of $10 per share for the Company’s common stock was determined
using a trading range from November 2017, discounted further due to lack of marketability. The Company used this approach due
to the lack of trading volume since (i) the stock trading was suspended by the SEC in December 2017 and was moved to OTC Grey
market by the OTC Markets Group, Inc. on January 3, 2018, (ii) stock sales to accredited investors on December 12, 2017, at $7
per share, and (iii) a valuation performed as of March 31, 2018. The equity purchase agreement between the Company and CoinTracking
GmbH included a purchase price adjustment pursuant to which the consideration would increase if the share price of the Company’s
common stock closed below $10 per share on July 2, 2018. No adjustment was required. CoinTracking GmbH provides its customers
with the ability to view and monitor their own cryptocurrency portfolios as well as tax calculation and reporting services. Customers
may not make trades through the CoinTracking GmbH platform. The purpose of the acquisition was to increase the Company’s
presence in the digital asset industry and build strategic alliances.
The
consolidated financial statements were prepared using the acquisition method of accounting in accordance with FASB ASC 805, Business
Combinations, and have been included in the Company’s consolidated results as of the acquisition date with the Company considered
as the accounting acquirer and CoinTracking GmbH as the accounting acquiree.
Accordingly,
consideration paid by the Company to complete the acquisition was allocated to the identifiable assets and liabilities of CoinTracking
GmbH based on estimated fair values as of the closing date. 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 and included
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Subsequent to September 30, 2018 and the 2018 fiscal
year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional
details. 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 USD, 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
|
|
|
296,273
|
|
Goodwill
|
|
|
11,990,910
|
|
Intangible assets
|
|
|
7,726,356
|
|
Other assets
|
|
|
14,633
|
|
Total assets
|
|
$
|
22,884,994
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
360,486
|
|
Contract liabilities, short term
|
|
|
2,686,858
|
|
Contract liabilities, long term
|
|
|
929,866
|
|
Noncontrolling interest
|
|
|
9,434,984
|
|
Total liabilities
|
|
|
13,412,194
|
|
Net assets acquired
|
|
$
|
9,472,800
|
|
The
purchase price was based on the expected financial performance of CoinTracking GmbH and not on the value of the net identifiable
assets at the time of acquisition. This resulted in a significant portion of the purchase price being attributed to goodwill.
As a result, the Company recognized $11,990,910 of goodwill on the date of acquisition.
Unaudited
pro forma financial information
The
unaudited pro forma financial information in the table below presents the combined results of the Company and CoinTracking GmbH
as if 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 nine months ended September 30, 2018:
|
|
Three-months
|
|
|
Nine Months
|
|
Revenue
|
|
$
|
1,227,971
|
|
|
$
|
2,686,465
|
|
Net loss
|
|
|
(1,910,215
|
)
|
|
|
(11,001,482
|
)
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.52
|
)
|
Subsequent
to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note
16 - Subsequent Events” for additional details.
NOTE
6 – 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 was recognized
when control of the promised services was transferred to the Company’s customers over time, and in an amount that reflects
the consideration the Company was contractually due in exchange for those services. Most of the Company’s contracts with
customers were single, or had few distinct performance obligations, and the transaction price was allocated to each performance
obligation using the stand-alone selling price.
CoinTracking
GmbH’s revenue is primarily derived directly from users in the form of subscriptions. Subscription revenue is presented
net of credits and credit card chargebacks. Subscribers pay in advance, primarily by PayPal or cryptocurrencies, subject to certain
conditions identified in our terms and conditions. Revenue is initially deferred and recognized using the straight-line method
over the term of the applicable subscription period, which primarily range from annual to perpetual.
Transaction
Price
The
objective of determining the transaction price was to estimate the amount of consideration the Company was due in exchange for
services, including amounts that are variable. CoinTracking GmbH has a standalone sales price for its subscription service, which
varies based on length of subscription. Further, the Company excluded from the measurement of transaction price all taxes assessed
by governmental authorities that were both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii)
collected from customers. Accordingly, such tax amounts were not included as a component of revenue or cost of revenue.
Estimates
of certain revenue
Revenue
collected in advance for subscriptions ranging from annual to perpetual packages were deferred and recognized as revenue on a
straight-line basis over the terms of the applicable subscription period or performance obligation period. For “lifetime”
revenue packages, where the customer had access to the website for an unlimited length of time, the Company elected to recognize
revenue on a straight-line basis over three years. We believe that based on the short history of customer data, customer relationship
period, and number of available alternative providers, and anticipation of future changes to the blockchain industry, a measure
of three years of performance obligation to customers was appropriate.
Net
Revenue and Charge-back Reserves
CoinTracking
GmbH 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 maintained a reserve for potential credits issued to consumers or
other revenue adjustments. In addition, as of September 30, 2018, PayPal withheld $36,583 for potential credits issued to customers,
which is included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet.
Contract
Liabilities
Contract
liabilities were recorded when payments were received or due in advance of performing CoinTracking GmbH’s service obligations
and was recognized over the service period, which primarily related to prepayments of subscription revenue. At the acquisition
date of January 26, 2018, CoinTracking GmbH’s total contract liabilities were $3,616,724, and we recognized revenue of $2,570,795
for the nine months ended September 30, 2018. As of September 30, 2018, $2,122,316 of current contract liabilities were recorded
and $1,173,531of 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 nine months ended September 30, 2018, the Company recognized expense of $87,520 and $150,274, respectively, related
to the amortization of affiliate payments. The aggregate contract asset balance at September 30, 2018 was $146,071.
Subsequent
to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note
16 - Subsequent Events” for additional details.
NOTE
7 - SEGMENT INFORMATION
The
Company organized its operations into two segments: a software subscription segment and a cryptocurrency investment segment.
The
software subscription segment primarily consisted of amounts earned through subscriptions to the CoinTracking GmbH website. Among
other features, the CoinTracking GmbH website offers subscriptions, 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 was technology infrastructure and general administrative costs primarily incurred in
Germany. Subsequent to September 30, 2018, we sold to Kachel Holding GmbH our entire equity ownership stake in CoinTracking GmbH,
consisting of 12,525 shares representing 50.1% of the outstanding equity interests in CoinTracking GmbH. See “Note 16 -
Subsequent Events” for additional details.
The
cryptocurrency investment segment primarily consisted of amounts earned, if any, through proprietary trading activities of cryptocurrencies,
and costs were operating expenses that consists of general and administrative costs in North America. The Company did not trade
or manage other individuals’ or entities’ funds and has no current plans to do so. As of September 30, 2018, the Company
liquidated substantially all of the tradeable cryptocurrency held in this segment, although the Company continues to hold a small
amount of tradeable cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and SAFT investments.
There
are no intercompany internal revenue transactions between our reportable segments. These segments reflected the way our chief
operating decision maker evaluated the Company’s business performance and managed its operations.
The
following table summarizes the Company’s operating income by segment for the three months ended September 30, 2018 and 2017:
|
|
Three months ended September 30, 2018
|
|
|
|
Cryptocurrency Investment
|
|
|
Software Subscription
|
|
|
Total
|
|
Revenue, net
|
|
$
|
-
|
|
|
$
|
1,227,971
|
|
|
$
|
1,227,971
|
|
Costs and expenses
|
|
|
(1,929,000
|
)
|
|
|
(647,371
|
)
|
|
|
(2,576,371
|
)
|
Operating income/(loss)
|
|
$
|
(1,929,000
|
)
|
|
$
|
580,600
|
|
|
$
|
(1,348,400
|
)
|
|
|
Three months ended September 30, 2017
|
|
|
|
Cryptocurrency Investment
|
|
|
Software Subscription
|
|
|
Total
|
|
Revenue, net
|
|
$
|
6,000
|
|
|
$
|
-
|
|
|
$
|
6,000
|
|
Costs and expenses
|
|
|
(1,688,941
|
)
|
|
|
-
|
|
|
|
(1,688,941
|
)
|
Operating income/(loss)
|
|
$
|
(1,682,941
|
)
|
|
$
|
-
|
|
|
$
|
(1,682,941
|
)
|
The
following table summarizes the Company’s operating income by segment for the nine months ended September 30, 2018:
|
|
Nine months ended September 30, 2018
|
|
|
|
Cryptocurrency Investment
|
|
|
Software Subscription
|
|
|
Total
|
|
Revenue, net
|
|
$
|
-
|
|
|
$
|
2,570,795
|
|
|
$
|
2,570,795
|
|
Costs and expenses
|
|
|
(10,741,907
|
)
|
|
|
(2,415,537
|
)
|
|
|
(12,833,641
|
)
|
Operating income/(loss)
|
|
$
|
(10,741,907
|
)
|
|
$
|
(155,258
|
)
|
|
$
|
(10,586,649
|
)
|
The
following table summarizes the Company’s operating income by segment for the period from Inception to September 30, 2017:
|
|
|
|
|
|
Period from Inception to September 30, 2017
|
|
|
|
Cryptocurrency Investment
|
|
|
Software Subscription
|
|
|
Total
|
|
Revenue, net
|
|
$
|
6,000
|
|
|
$
|
-
|
|
|
$
|
6,000
|
|
Costs and expenses
|
|
|
(3,361,507
|
)
|
|
|
-
|
|
|
|
(3,361,507
|
)
|
Operating income/(loss)
|
|
$
|
(3,355,507
|
)
|
|
$
|
|
|
|
$
|
(3,355,507
|
)
|
NOTE
8 – INVESTMENTS, NON-CRYPTOCURRENCY
The
Company invested $362,055 in non-tradeable token pre-sale and SAFT agreements. In addition, the Company invested $250,000 as part
of a financing in accordance with a SAFE investment in a private enterprise. These investments are included as Level 3 investments
as there was no active market as of September 30, 2018.
The
Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are
fair, consistent and verifiable. Non-cryptocurrency investments are carried at cost which approximates fair value at September
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 investments are tokenized and available on active market exchanges, the investments will be reclassified to investments
in cryptocurrency
The
following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the nine months
ended September 30, 2018:
|
|
Level 3
|
|
|
|
Cryptocurrency
|
|
|
|
|
|
Balance at December 31, 2017
|
|
$
|
167,818
|
|
Transfers to investments in cryptocurrency
|
|
|
(255,763
|
)
|
Purchases, sales, issuances, and settlement, net
|
|
|
500,000
|
|
Impairment
|
|
|
(250,000
|
)
|
Balance, September 30, 2018
|
|
$
|
162,055
|
|
NOTE
9 - EQUIPMENT
Equipment
consists of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Computer equipment
|
|
$
|
114,834
|
|
|
$
|
69,241
|
|
Furniture equipment
|
|
|
14,542
|
|
|
|
3,754
|
|
|
|
|
129,376
|
|
|
|
72,995
|
|
Less accumulated depreciation
|
|
|
(26,730
|
)
|
|
|
(4,675
|
)
|
|
|
$
|
102,646
|
|
|
$
|
68,320
|
|
NOTE
10 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired
in a business combination. The Company’s goodwill balance is the result of the acquisition of CoinTracking GmbH in the current
year (see footnote 5). Intangible assets include software development costs, related to the CoinTracking GMBH SaaS platform.
The
carrying amount of goodwill for the nine months ended September 30, 2018 was as follows:
|
|
September 30, 2018
|
|
Balance at December 31, 2017
|
|
$
|
-
|
|
Acquisitions
|
|
|
11,990,910
|
|
Foreign translation impact
|
|
|
(790,456
|
)
|
|
|
$
|
11,200,454
|
|
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
September 30, 2018.
The
carrying amounts of intangible assets for the nine months ended September 30, 2018 were as follows:
|
|
Estimated Useful Life
|
|
Gross Carry Amount
|
|
|
Accumulated Amortization
|
|
|
Balance as of
September 30, 2018
|
|
Trade name
|
|
-
|
|
$
|
1,821,785
|
|
|
|
-
|
|
|
$
|
1,821,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
5 Years
|
|
|
4,322,158
|
|
|
|
(590,230
|
)
|
|
|
3,731,928
|
|
Customer base
|
|
5 Years
|
|
|
1,072,755
|
|
|
|
(146,494
|
)
|
|
|
926,261
|
|
Capitalized software
|
|
5 Years
|
|
|
129,669
|
|
|
|
(14,407
|
)
|
|
|
115,262
|
|
|
|
|
|
$
|
7,346,367
|
|
|
$
|
(751,131
|
)
|
|
$
|
6,595,236
|
|
Intangible
assets with finite useful lives are amortized over their respective estimated useful lives. Amortization expense related to intangible
assets was $772,745 and $241,767 for the three and nine months ended September 30, 2018, respectively. There was not any amortization
expense related to intangible assets in the respective 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 September 30, 2018:
Year ending December 31,
|
|
Future Amortization
|
|
2018 (remaining)
|
|
$
|
275,149
|
|
2019
|
|
|
1.100,594
|
|
2020
|
|
|
1,100,594
|
|
2021
|
|
|
1,100,594
|
|
2022
|
|
|
1,100,594
|
|
Thereafter
|
|
|
95,926
|
|
|
|
$
|
4,773,451
|
|
NOTE
11 – WARRANTS FOR COMMON STOCK
As
of September 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 nine months ended September 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 nine-month period ended September
30, 2018, there are outstanding stock option awards issued from the Plan covering a total of 2,144,492 shares of the Company’s
common stock and there remain reserved for future awards 2,855,508 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
|
|
|
(1,265,672
|
)
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(41,429
|
)
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
Options outstanding, at September 30, 2018
|
|
|
2,144,492
|
|
|
$
|
6.03
|
|
|
|
9.42
|
|
|
$
|
88,384,029
|
|
Exercisable
|
|
|
914,847
|
|
|
$
|
6.04
|
|
|
|
9.66
|
|
|
$
|
37,863,445
|
|
Vested and exercisable and expected to vest, end of period
|
|
|
2,144,492
|
|
|
$
|
6.03
|
|
|
|
9.42
|
|
|
$
|
88,384,029
|
|
The
Company recognized $512,648, and $4,562,089 of compensation expense related to stock options for the three and nine months ended
September 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 $203,282 during the three and nine months ended September 30, 2018, respectively.
During
the nine-month period ended September 30, 2018 and the period from Inception through September 30, 2017 the Company had not granted
any restricted stock awards.
As
of September 30, 2018, approximately $1,400,000 of total unrecognized compensation costs related to stock options issued to employees
is expected to be recognized over a weighted average period of approximately 1.10 years.
The
determination of the fair value of share-based compensation awards utilizing the Black-Scholes model is affected by the Company’s
stock price and a number of complex and subjective assumptions, including stock price, volatility, expected life of the equity
award, forfeitures rates if any, risk-free interest rates and expected dividends. Volatility is based on the historical volatility
of comparable companies measured over the most recent period, generally commensurate with the expected life of the Company’s
stock options, adjusted for future expectations given the Company’s limited historical share price data.
The
risk-free rate is based on implied yields in effect at the time of the grant on U.S. Treasury zero-coupon bonds with remaining
terms equal to the expected term of the stock options. The expected dividend is based on the Company’s history and expectation
of dividend payouts. Forfeitures are recognized when they occur.
The
range of assumptions used for the nine-month period ended September 30, 2018 are as follows:
|
|
September 30, 2018
|
|
|
|
|
Ranges
|
|
Volatility
|
|
|
36 - 75
|
%
|
Expected dividends
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5.00 - 10 years
|
|
Risk-free rate
|
|
|
1.91
– 3.05
|
%
|
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. The Company paid a total of $87,150 and $454,199
in fees to Full Stack Finance during the three-month and nine-month period ended September 30, 2018, respectively, and as of September
30, 2018, there was a balance of $142,854 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 September 30, 2018 totaling $176,489. The loan is due
upon demand and it bears interest at 2%. During the quarter ended September 30, 2018 and the period from Inception to September
30, 2017 interest income accrued for this loan was $2,400 and $0, respectively, which is included in other income/(expense) on
the accompanying condensed consolidated statements of operations. In addition, the company has a shareholder receivable of $939,155
from this officer of CoinTracking GmbH, representing the sale of a majority of the Company’s investment in cryptocurrency
in its software subscription segment in accordance with a shareholder resolution entered into on September 21, 2018. Subsequent
to September 30, 2018, the Company received this amount from the officer of CoinTracking GmbH on October 2, 2018.
On
April 3, 2018, CT 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 CT, to be advanced to CT in one or more tranches,
at such times and in such amounts as may be requested by CT from time to time, on or before the tenth anniversary of the Loan
Agreement. The Company is deemed obligor of CT’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 September 30, 2018, pursuant to the Loan Agreement, CoinTracking GmbH advanced $1,500,000
to CT 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 September 30, 2018. The CoinTracking Note will mature on the second anniversary
thereof. CT and CoinTracking GmbH are consolidated entities, as such, the loan and advances are intercompany transactions and
are eliminated in consolidation. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking
GmbH, and $1,200,000 of the sale proceeds was applied toward repayment of the $1,500,000 outstanding loan amount under the CoinTracking
Note. See “Note 16 - Subsequent Events” for additional details.
Effective
May 14, 2018, Michael Poutre, former Chief Executive Officer and director of the Company resigned from all of his then-current
roles with the Company. Mr. Poutre remained a consultant to the Company until subsequent to September 30, 2018, when he ceased
to be a consultant in 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
pays Mr. Poutre a lump-sum cash payment of (i) his earned but unpaid base salary, (ii) his accrued but unpaid vacation time, and
(iii) any outstanding requests for expense reimbursements that are approved pursuant to Company policy. Mr. Poutre served as a
consultant of the Company for six months at a rate of $30,000 per month, payable in two separate tranches, though the Company
may terminate his services for any reason. As of September 30, 2018, $90,000 remained unpaid, included in accounts payable and
accrued expenses on the Company’s condensed consolidated balance sheet. 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 September 30, 2018
|
|
|
For the nine months
ended September 30, 2018
|
|
Numerator for basic and diluted income per share:
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company
|
|
$
|
(7,331,622
|
)
|
|
$
|
(16,235,817
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted income per share:
|
|
|
|
|
|
|
|
|
Weighted average shares (basic)
|
|
|
21,172,782
|
|
|
|
21,060,434
|
|
Common stock equivalents
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares (diluted)
|
|
|
21,172,782
|
|
|
|
21,060,434
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.35
|
)
|
|
$
|
(0.77
|
)
|
NOTE
15 - COMMITMENTS AND CONTINGENCIES
Subsequent
to September 30, 2018, on November 1, 2018, the Company relocated its corporate office and entered into a month-to-month
office agreement with Regus Management Group, LLC for $344 per month. Facility rent expense was $27,813 and $94,111 for the three
and nine months ended September 30, 2018, respectively, and $18,000 for the three months ended September 30, 2018 and $27,000for
the period from Inception to September 30, 2017 respectively.
Legal
Contingencies – As previously disclosed, we received a subpoena on May 15, 2018, from the SEC’s Division of Enforcement
in connection with a formal investigation it is conducting involving us as well as other unrelated public issuers who are holders
of or provide services related to digital assets. The subpoena requested that we produce certain documents to the SEC’s
Division of Enforcement by May 30, 2018. We are unable to predict how long the SEC’s investigation will continue or whether,
at the conclusion of its investigation, the SEC will seek to impose fines or file an enforcement action against us. Additionally,
the Company may from time to time become subject to legal proceedings, claims, and litigation arising in the ordinary course of
business.
Indemnities
and guarantees - During the normal course of business, the Company has made certain indemnities and guarantees under which it
may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the Company’s
officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their
respective relationships. In connection with its facility lease, the Company has indemnified the lessor for certain claims arising
from the use of the facility. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The
majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company
could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations,
and no liabilities have been recorded for these indemnities and guarantees in the accompanying balance sheet.
Note
16
- SUBSEQUENT EVENTS
On
October 10, 2018, the Company issued to two accredited investors 40,000 shares of common stock of the Company at a price of $5.00
per share, for net aggregate proceeds of $200,000.
On
December 28, 2018, CT entered into an agreement on the purchase and assignment of shares, agreements on a purchase price of loan
agreement and a compensation agreement, pursuant to the laws of the Republic of Germany, with Kachel Holding GmbH, an entity formed
under the laws of the Republic of Germany (“Kachel Holding”), and CoinTracking GmbH pursuant to which, on January
2, 2019, CT sold 12,525 shares of equity interest in CoinTracking GmbH, representing 50.1% of the outstanding equity interests
in CoinTracking GmbH and CT’s entire equity ownership stake in CoinTracking GmbH, to Kachel Holding in exchange for $2,200,000,
of which (i) $1,000,000 was paid in cash to CT and (ii) $1,200,000 was applied toward the repayment of an outstanding loan in
the amount of $1,500,000 from CoinTracking GmbH to CT under the CoinTracking Note.