NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
NOTE
1 – ORGANIZATION AND DESCRIPTION OF THE BUSINESS
The Crypto Company was incorporated in
the State of Nevada on March 9, 2017. The Company is engaged in the business of providing consulting, training, and educational and related
services for distributed ledger technologies (“blockchain”), for corporate and individual clients, enterprises for general
blockchain education, as well as for the building of technological infrastructure and enterprise blockchain technology solutions. In
recent periods the Company has generated revenues and incurs expenses solely through these consulting and related operations.
In February 2022 the Company acquired bitcoin mining equipment and entered into an arrangement with a third party to host and operate
the equipment. The mining equipment began mining bitcoin and generated approximately $19,000 in revenue during the three months ended
March 31, 2022.
Unless
expressly indicated or the context requires otherwise, the terms “Crypto,” the “Company,” “we,” “us,”
and “our” in these consolidated financial statements refer to The Crypto Company and, where appropriate, its wholly-owned
subsidiary Blockchain Training Alliance, Inc. (“BTA”) and an inactive subsidiary Coin Tracking, LLC (“CoinTracking”).
The
Company entered into a Stock Purchase Agreement (the “SPA”) effective as of March 24, 2021 with BTA and its stockholders.
On April 8, 2021, the Company completed the acquisition of all of the issued and outstanding stock of BTA and BTA became a wholly-owned
subsidiary of the Company. As a result of this acquisition, the operations of BTA became consolidated with Company operations on April
8, 2021.
BTA
is a blockchain training company and service provider that provides training and educational courses focused on blockchain technology
and education as to the general understanding of blockchain to corporate and individual clients.
The
Company’s accounting year-end is December 31.
COVID-19
On March 11, 2020, the World Health Organization
declared the Covid-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic has, in general,
had a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets, and has
contributed to inflation, supply chain constraints, labor shortages and other adverse economic effects. Most U.S. states and
many countries have, at times, issued various policies intended to stop or slow the further spread of the disease.
Covid-19
and the U.S.’s response to the pandemic has caused economic volatility since the pandemic’s outbreak. There are no recent
comparable events that provide guidance as to the effect the Covid-19 pandemic may have, and, as a result, the ultimate effect of the
pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we
serve, our business, or our operations.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Liquidity and Going Concern
The Company’s consolidated financial
statements are prepared using the accrual method of accounting in accordance with United States (“U.S.”) generally accepted
accounting principles (“GAAP”) and have been prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities in the normal course of business. The Company has incurred significant losses and experienced negative
cash flows since inception. As of March 31, 2022, the Company had cash of $98,796. In addition, the Company’s net loss was $2,484,176
for the three months ended March 31, 2022. The Company’s working capital was negative $2,956,178 as of March 31, 2022. As of March
31, 2022, the accumulated deficit amounted to $36,352,694. 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. The 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.
Management’s
Representation of Interim Financial Statements
The
accompanying unaudited consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations
of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or
omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented
not misleading. These consolidated financial statements include all of the adjustments, which in the opinion of management are necessary
to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim
results are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements as of December 31, 2021.
The
Company prepares its consolidated financial statements based upon the accrual method of accounting, recognizing income when earned and
expenses when incurred.
Basis
of Presentation and Principles of Consolidation
Use
of estimates
The
preparation of these consolidated financial statements in conformity with 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
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
were comprised of several cryptocurrencies the Company owned, of which a majority was Bitcoin, that were actively traded on exchanges.
During 2018, the Company sold most of its investments and during 2019 wrote-off the remainder of all those investments because there
was no method to obtain liquidity for those investments. The Company recorded this recovery as other income in its financial statements.
As previously disclosed, the Company has ceased operations of its former cryptocurrency investment segment, and the Company liquidates
newly issued/accessible assets from old investments as promptly as practicable for the sole purpose of winding down the Company’s
legacy cryptocurrency investment segment.
The
Company records its investments as indefinite-lived intangible assets at cost less impairment and are reported as long-term assets in
the consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually,
or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived
asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the
option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is
determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company
concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss
establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal
markets the Company utilized for its trading were Kraken, Bittrex, Poloniex, and Bitstamp.
As
of March 31, 2022, the Company had written off the value of its investments in cryptocurrency.
Investments
non-cryptocurrency
The
Company previously invested in simple agreement for future tokens (“SAFT”) and a simple agreement for future equity
(“SAFE”) agreements. The SAFT agreements provide for the issuance of tokens in anticipation of a future token generation
event, with the number of tokens predetermined based on the price established in each respective agreement. The SAFE investment included
provisions that provide for either equity or tokens or both. As of March 31, 2022, and December 31, 2021 the Company had written-off
its investments in non-cryptocurrency.
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.
Income
taxes
Deferred
tax assets and liabilities are recognized for expected future consequences of events that have been included in the financial statements
or tax returns. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and
liabilities.
When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely
of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken
that exceed 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 March 31, 2022, we are subject to federal taxation in the U.S., as well as state taxes. The Company has not been audited by the U.S.
Internal Revenue Service.
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 the
difficulty involved in determining fair value.
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Level
1 |
Inputs
are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurable date. |
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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. |
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|
|
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Level
3 |
Unobservable
inputs that reflect management’s best estimate of what participants would use in pricing the asset or liability at the measurement
date. |
The
carrying amounts of the Company’s financial assets and liabilities, including cash, accounts payable and accrued expenses approximate
fair value because of the short maturity of these instruments.
Revenue
recognition
The
Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of the new
revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five
steps are applied to achieve that core principle:
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● |
Step
1: |
Identify
the contract with the customer |
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● |
Step
2: |
Identify
the performance obligations in the contract |
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● |
Step
3: |
Determine
the transaction price |
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● |
Step
4: |
Allocate
the transaction price to the performance obligations in the contract |
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● |
Step
5: |
Recognize
revenue when the Company satisfies a performance obligation |
In
order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in
the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of
a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can
benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e.,
the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the
context of the contract).
If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services
is identified that is distinct.
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods
or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
When determining the transaction price, an entity must consider the effects of all of the following:
Variable
consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price
allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time
as appropriate.
The
Company adopted ASC 606 as of January 1, 2018, using the modified retrospective transition method for contracts as of the date of initial
application. There was no cumulative impact on the Company’s retained earnings.
During
the quarter ended March 31, 2022, the Company’s main source of revenue was consulting and education services to numerous
customers provided by and through BTA. The Company has determined that revenue should be recognized over time, as the service is provided.
The Company considered the criteria in ASC 606 in reaching this determination, specifically:
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The
customer receives and consumes the benefit provided by the Company’s performance as the Company performs. |
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● |
The
Company’s performance enhances an asset controlled by the customer. |
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● |
The
Company’s performance does not create an asset with alternative use, and the Company has an enforceable right to payment for
performance completed to date. |
The
consulting arrangement meet more than one of the criteria above.
Share-based
compensation
In
accordance with ASC No. 718, Compensation-Stock Compensation, the Company measures the compensation costs of share-based compensation
arrangements based on the grant date fair value of granted instruments and recognizes the costs in financial statements over the period
during which employees are required to provide services. Share-based compensation arrangements include stock options.
On
January 1, 2019, the Company adopted ASC No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies
the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with
certain exceptions. Previously, share-based payments to nonemployees was accounted for in accordance with ASC No. 505, Equity-Based Payments
to Non-Employees, which required compensation cost to be remeasured at fair value at each reporting period when the award vests. As a
result, stock option-based payments to non-employees resulted in significant volatility in compensation expense in prior years.
The
Company accounts for its share-based compensation using the Black-Scholes model to estimate the fair value of stock option awards. Using
this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s common stock
price, (ii) expected life of the award, which for options is the 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-month period ended March 31, 2022, and 2021, the Company
had no potentially dilutive common stock equivalents. Therefore, the basic EPS and diluted EPS are the same.
NOTE
3 - RECENT ACCOUNTING PRONOUNCEMENTS
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not
believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position
or results of operations.
NOTE
4 -GOODWILL AND INTANGIBLE ASSETS
The
Company entered into a Stock Purchase Agreement (the “SPA”) effective as of March 24, 2021 with BTA and its stockholders.
On April 8, 2021, the Company completed the acquisition of all of the issued and outstanding stock of BTA and BTA became a wholly owned
subsidiary of the Company. At the closing the Company delivered to the sellers a total of $600,000 in cash, promissory notes in the total
principal amount of $150,000 bearing 1% interest per annum, and an aggregate of 201,439 shares of Company common stock valued at $604,317
in accordance with the terms of the SPA. Additionally, the Company acquired $4,860 in cash at BTA.
As
a result of the foregoing the Company initially recorded goodwill of $1,349,457. The Company conducted a valuation study on the acquisition
of BTA. The final valuation report determined the amount goodwill to be $699,457 and the remaining $650,000 of the goodwill relates to
amortizable intangibles amortized over a fifteen-year period, or approximately $54,166 per year.
During
the three months ended March 31, 2022 the Company recorded $10,833 in amortization expense.
NOTE
5 – NOTE PAYABLE
On
April 3, 2018, CoinTracking entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, which provided for
total borrowings of up to $3,000,000.
During 2018, CoinTracking borrowed $1,500,000
in exchange for three promissory notes (collectively,
the “CoinTracking Note”) in the amounts of $300,000,
$700,000,
and $500,000,
respectively. On December 31, 2018, the CoinTracking Note was still outstanding. On January 2, 2019, the Company sold its equity ownership
stake in CoinTracking GmbH, and $1,200,000
of the sales proceeds were applied toward repayment
of the $1,500,000
outstanding loan amount under the CoinTracking
Note. The remaining balance of $300,000
is outstanding as of March 31, 2022, with a due
date of March 31, 2023 which due date was extended from the prior due date of March 31, 2021 pursuant to an amendment dated December
28, 2018. The CoinTracking Note bears interest at 3%,
which is payable monthly, in arrears. All payments shall be applied first to all accrued and unpaid interest and second to the outstanding
principal balance, as applicable.
Interest expense for Notes Payable
was $40,339 for the three-month period ended March 31, 2022, respectively, compared to $2,250, respectively during the same
three-month period ended March 31, 2021.
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● |
On
June 10, 2020, the Company received a loan from the Small Business Administration of $12,100 (the “2020 SBA Loan”). The
2020 SBA Loan bears interest at 3.75% per annum and is payable over 30 years with all payments of principal and interest deferred
for the first 12 months. |
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On
February 2, 2021, the Company received a loan from the Small Business Administration of $18,265 (the “2021 SBA Loan”).
The 2021 SBA Loan bears interest at 1% per annum and is payable over 5 years with all payments of principal and interest deferred
for the first 10 months. |
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In
connection with the BTA acquisition, on April 7, 2021, the Company delivered a promissory note (the “Promissory Notes”)
to each of the former stockholders of BTA, with the aggregate principal amount of the Promissory Notes being $150,000.
The Promissory Notes each have a one-year
term and bear interest at a rate of 1.0%
per annum. Principal
and interest payments are due on the twelve-month anniversary of the issuance of the Promissory Notes, unless earlier paid or accelerated
under the terms of the notes. The Promissory
Notes contains events of default and other provisions customary for a loan of this type. Subsequent to March 31, 2022 the Promissory
Notes were repaid in full. |
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Effective February 23, 2022, the Company entered into
two separate Purchase Agreement and Bill of Sales to purchase a total of 215
cryptocurrency miners (each, a “Purchase Agreement”). The first Purchase Agreement was entered into with Bitmine
Immersion Technologies, Inc. (“BIT”) whereby the Company agreed to purchase a total of 95
miners for a total purchase price of $337,500
and the second Purchase Agreement was entered into with Innovative Digital investors, LLC (“IDI”) whereby the Company
agreed to purchase a total of 120
miners for a total purchase price of $696,000.
In each case the Company paid one half of the purchase price at closing (effective February 25, 2022) and the other half of the
purchase price is payable in accordance with a 10%
unsecured promissory note delivered to each of BIT and IDI. The promissory note delivered to BIT is in the principal amount of
$168,750,
is payable in two installment payments, and had a maturity date of May
15, 2022. The promissory note delivered to IDI is in the principal amount of $348,000,
is payable in four installment payments, and had a maturity date of October
15, 2022. |
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|
The due dates on the Bitmine May 15, 2022 and October
15,2022 payments were extended two months by mutual agreement due to supply chain delays effecting the shipment of mining
equipment. |
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● |
Effective
January 13, 2022, the Company borrowed funds pursuant to the terms of a Securities Purchase Agreement (the “AJB SPA”)
entered into with AJB Capital Investments, LLC (“AJB”), and issued a Promissory Note in the principal amount of $750,000 (the
“AJB Note”) to AJB in a private transaction for a purchase price of $675,000 (giving effect to a 10% original
issue discount). In connection with the sale of the AJB Note, the Company also paid certain fees and due diligence costs of AJB and
brokerage fees to J.H. Darbie & Co., a registered broker-dealer. The maturity date of the AJB Note is July 12, 2022, but it may
be extended for six months upon the consent of AJB and the Company. The AJB Note bears interest at 10% per year, and principal
and accrued interest is due on the maturity date. The Company may prepay the AJB Note at any time without penalty. Under the terms
of the AJB Note, the Company may not sell a significant portion of its assets without the approval of AJB, may not issue additional
debt that is not subordinate to AJB, must comply with the Company’s reporting requirements under the Securities Exchange Act
of 1934, and must maintain the listing of the Company’s common stock on the OTC Market or other exchange, among other restrictions
and requirements. The Company’s failure to make required payments under the AJB Note or to comply with any of these covenants,
among other matters, would constitute an event of default. Upon an event of default under the AJB SPA or AJB Note, the AJB Note
will bear interest at 18%, AJB may immediately accelerate the AJB Note due date, AJB may convert the amount outstanding under the
AJB Note into shares of Company common stock at a discount to the market price of the stock, and AJB will be entitled to its costs
of collection, among other penalties and remedies. |
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Effective
January 18, 2022, the Company borrowed funds pursuant to a Securities Purchase Agreement (the “Sixth Street SPA”) entered
into with Sixth Street Lending, LLC (“Sixth Street”) and issued a Promissory Note in the principal amount of $116,200 (the
“Sixth Street Note”) to Sixth Street in a private transaction to for a purchase price of $103,750 (giving effect
to an original issue discount). The Company agreed to various covenants in the Sixth Street SPA. The Sixth Street Note has a maturity
date of January 13, 2023 and the Company has agreed to pay interest on the unpaid principal balance of the Sixth Street
Note at the rate of twelve percent (12.0%) per annum from the date on which the Sixth Street Note was issued until the same becomes
due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. Payments are due monthly, beginning in the
end of February 2022. The Company has the right to prepay the Sixth Street Note in accordance with the terms set forth in the Sixth
Street Note. |
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Following
an event of default, and subject to certain limitations, the outstanding amount of the Sixth Street Note may be converted into shares
of Company common stock. Amounts due under the Sixth Street Note would be converted into shares of the Company’s common stock
at a conversion price equal to 75% of the lowest trading price with a 10-day lookback immediately preceding the date of conversion.
In addition, upon the occurrence and during the continuation of an event of default the Sixth Street Note will become immediately
due and payable and the Company shall pay to Sixth Street, in full satisfaction of its obligations thereunder, additional amounts
as set forth in the Sixth Street Note. In no event may Sixth Street effect a conversion if such conversion, along with all other
shares of Company common stock beneficially owned by Sixth Street and its affiliates would exceed 4.99% of the outstanding shares
of Company common stock. |
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On
February 24, 2022, the Company borrowed additional funds pursuant to the terms of a Securities Purchase Agreement (the “Feb.
SPA”) entered into with AJB Capital Investments, LLC (“AJB”), and issued a Promissory Note in the principal amount
of $300,000 (the “Feb. Note”) to ABJ in a private transaction for a purchase price of $275,000 (giving effect
to an original issue discount). The maturity date of the Feb. Note is August 24, 2022, but it may be extended for six months
upon the consent of AJB and the Company. The Feb. Note bears interest at 10% per year, and principal and accrued interest is
due on the maturity date. The Company may prepay the Feb. Note at any time without penalty. The Company’s failure to make required
payments under the AJB Note or to comply with various covenants, among other matters, would constitute an event of default. Upon
an event of default under the Feb. SPA or Feb. Note, the Feb. Note will bear interest at 18%, AJB may immediately accelerate the
Feb. Note due date, AJB may convert the amount outstanding under the Feb. Note into shares of Company common stock at a discount
to the market price of the stock, and AJB will be entitled to its costs of collection, among other penalties and remedies. |
NOTE
6 – CONVERTIBLE NOTES
The
balance of outstanding Convertible Notes was $125,000 as of March 31, 2022.
In
June 2020, the Company issued Convertible Notes (“June 2020 Notes”) to an accredited investor for an aggregate amount of
$5,000. The June 2020 Notes mature in June 2025, unless earlier converted. The June 2020 Notes bear interest at a rate of 5% per year.
The June 2020 Notes will automatically convert into shares of common stock on the earlier to occur of a) a qualified equity financing,
with the conversion price equal to 50% of the common stock price paid by the purchasers of the equity, or b) on the maturity date, at
a price per share equal to the fair market value of the Company’s common stock on that date. If a change in control occurs before
either of the automatic conversion events, the holders of the June 2020 Notes will have the option to convert the June 2020 Notes at
a price per share equal to the fair market value of the common stock at the time of such conversion. The Company can prepay the principal
and interest, in cash, at any time without any premium or penalty. The June 2020 Notes have no voting rights, do not participate in dividends,
and are unsecured. The Company believes it is more likely than not that the June 2020 Notes will not be automatically converted in connection
with a qualified equity financing prior to either prepayment or automatic conversion on maturity.
In
April 2020, the Company issued three Convertible Notes (“April 2020 Notes”) to three accredited investors for an aggregate
amount of $22,500. The April 2020 Notes mature in April 2025, unless earlier converted. The April 2020 Notes bear interest at a rate
of 5% per year. The April 2020 Notes will automatically convert into shares of common stock on the earlier to occur of a) a qualified
equity financing, with the conversion price equal to 50% of the common stock price paid by the purchasers of the equity, or b) on the
maturity date, at a price per share equal to the fair market value of the Company’s common stock on that date. If a change in control
occurs before either of the automatic conversion events, the holders of the April 2020 Notes will have the option to convert the April
2020 Notes at a price per share equal to the fair market value of the common stock at the time of such conversion. The Company can prepay
the principal and interest, in cash, at any time without any premium or penalty. The April 2020 Notes have no voting rights, do not participate
in dividends, and are unsecured. The Company believes it is more likely than not that the April 2020 Notes will not be automatically
converted in connection with a qualified equity financing prior to either prepayment or automatic conversion on maturity.
In
February 2020, the Company issued three Convertible Notes (“February 2020 Notes”) to three accredited investors for an aggregate
amount of $22,500. The February 2020 Notes mature in February 2025, unless earlier converted. The February 2020 Notes bear interest at
a rate of 5% per year. The February 2020 Notes will automatically convert into shares of common stock on the earlier to occur of a) a
qualified equity financing, with the conversion price equal to 50% of the common stock price paid by the purchasers of the equity, or
b) on the maturity date, at a price per share equal to the fair market value of the Company’s common stock on that date. If a change
in control occurs before either of the automatic conversion events, the holders of the February 2020 Notes will have the option to convert
the February 2020 Notes at a price per share equal to the fair market value of the common stock at the time of such conversion. The Company
can prepay the principal and interest, in cash, at any time without any premium or penalty. The February 2020 Notes have no voting rights,
do not participate in dividends, and are unsecured. The Company believes it is more likely than not that the February 2020 Notes will
not be automatically converted in connection with a qualified equity financing prior to either prepayment or automatic conversion on
maturity.
Interest expense for Convertible Notes
was $1,541
for the three months ended March 31, 2022, and the three months ended March 31, 2021, respectively.
NOTE
7 – WARRANTS FOR COMMON STOCK
As
of March 31, 2022, outstanding warrants to purchase shares of the Company’s common stock were as follows:
SCHEDULE OF OUTSTANDING WARRANTS TO PURCHASE SHARES OF COMMON STOCK
| Issuance Date | |
Exercisable for | |
Expiration Date | |
Exercise Price | | |
Number of Shares Outstanding Under Warrants | |
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| September 2019 | |
Common Shares | |
September 24, 2022 | |
$ | 0.01 | | |
| 75,000 | |
| February 2020 | |
Common Shares | |
February 6, 2030 | |
$ | 0.01 | | |
| 10,000 | |
| February 2020 | |
Common Shares | |
February 12, 2030 | |
$ | 0.01 | | |
| 2,500 | |
| February 2020 | |
Common Shares | |
February 19, 2030 | |
$ | 0.01 | | |
| 10,000 | |
| April 2020 | |
Common Shares | |
April 20, 2030 | |
$ | 0.01 | | |
| 22,500 | |
| June 2020 | |
Common Shares | |
June 9, 2030 | |
$ | 0.01 | | |
| 5,000 | |
| March 2021 | |
Common Shares | |
February 28, 2026 | |
$ | 0.50 | | |
| 362,500 | |
| January 2022 | |
Common Shares | |
January 12, 2025 | |
$ | 5.25 | | |
| 500,000 | |
| February 2022 | |
Common Shares | |
February 24, 2025 | |
$ | 5.25 | | |
| 200,000 | |
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
8 - SUMMARY OF STOCK OPTIONS
On
July 21, 2017, the Company’s board of directors adopted The Crypto Company 2017 Equity Incentive Plan (the “Plan”),
which was approved by its stockholders on August 24, 2017. The Plan is administered by the board of directors (the “Administrator”).
Under the Plan, the Company may grant equity awards to eligible participants which may take the form of stock options (both incentive
stock options and non-qualified stock options) and restricted stock awards. Awards may be granted to officers, employees, non-employee
directors (as defined in the Plan) and other key persons (including consultants and prospective employees). The term of any stock option
award may not exceed 10 years and may be subject to vesting conditions, as determined by the Administrator. Options granted generally
vest over eighteen to thirty-six months. Incentive stock options may be granted only to employees of the Company or any subsidiary that
is a “subsidiary corporation” within the meaning of Section 424(f) of the Internal Revenue Code.
During
the three-month period ended March 31, 2022, the Company did not issue any stock options.
5,000,000
shares of the Company’s common stock are reserved for issuance under the Plan. As of March 31, 2022, there are outstanding stock
option awards issued from the Plan covering a total of 2,281,429 shares of the Company’s common stock and there remain reserved
for future awards 2,718,571 shares of the Company’s common stock.
SCHEDULE OF STOCK OPTIONS ACTIVITY
| | |
| | |
| | |
Weighted | | |
| |
| | |
| | |
| | |
Average | | |
| |
| | |
| | |
Weighted | | |
Remaining | | |
| |
| | |
| | |
Average | | |
Contractual | | |
Aggregate | |
| | |
Number | | |
Exercise | | |
Term | | |
Intrinsic | |
| | |
of Shares | | |
Price | | |
(years) | | |
Value | |
| Options outstanding, on December 31, 2021 | |
| 2,281,429 | | |
$ | 2.26 | | |
| 4.25 | | |
| 5,155,003 | |
| Options granted | |
| - | | |
| - | | |
| - | | |
| - | |
| Options canceled | |
| - | | |
| - | | |
| - | | |
| - | |
| Options exercised | |
| - | | |
| - | | |
| - | | |
| - | |
| Options outstanding, on March 31, 2022 | |
| 2,281,429 | | |
$ | 2.26 | | |
| 4.0 | | |
$ | 5,155,003 | |
| Vested and exercisable | |
| 2,281,429 | | |
$ | 2.26 | | |
| 4.0 | | |
$ | 5,155,003 | |
The
Company recognized $-0- for share-based compensation related to stock options for the three month period ended March 31, 2022.
There
were no options exercised for the three months ended March 31, 2022.
The
Company granted 309,650 shares of restricted stock during the three-month period ended March 31, 2022.
The
Company recognized $885,461 for share-based compensation related to restricted stock issued for the three month period ended March 31,
2022.
As
of March 31, 2022, there was $-0- of unrecognized compensation costs related to stock options issued to employees and nonemployees.
NOTE
9- COMMITMENTS AND CONTINGENCIES
Facility
rent expense was $-0- for the three months ended March 31, 2022, and March 31, 2021, respectively.
NOTE
10 – SUBSEQUENT EVENTS
Efrat Investments LLC
Loan
On April 7, 2022, the Company borrowed funds
pursuant to the terms of a Securities Purchase Agreement (the “April SPA”) entered into with Efrat Investments LLC (“Efrat”)
and issued a Promissory Note in the principal amount of $220,000 to Efrat (the “Efrat Note”) in a private transaction for
a purchase price of $198,000 (giving effect to an original issue discount). After payment of the fees and costs, the net proceeds from
the Efrat Note will be used by the Company for working capital and other general corporate purposes.
The maturity date of the Efrat Note is September
7, 2022, although the maturity date may be extended for six months upon the consent of Efrat and the Company. The Efrat Note bears interest
at 10% per year, and principal and accrued interest is due on the maturity date. The Company may prepay the Efrat Note at any time without
penalty. Any failure by the Company to make required payments under the Efrat Note or to comply with various covenants, among other matters,
would constitute an event of default. Upon an event of default under the April SPA or the Efrat Note, the Efrat Note will bear interest
at 18%, Efrat may immediately accelerate the Efrat Note due date, Efrat may convert the amount outstanding under the Efrat Note into
shares of Company common stock at a discount to the market price of the stock, and Efrat will be entitled to its costs of collection,
among other penalties and remedies.
The Company provided various representations,
warranties, and covenants to Efrat in the April SPA. Any breach by the Company of any representation or warranty, or failure to comply
with the covenants would constitute an event of default. Also pursuant to the April SPA, the Company paid Efrat a commitment fee of 58,201
unregistered shares of the Company’s common stock (the “commitment fee shares”). If, after the sixth month anniversary
of closing and before the thirty-sixth month anniversary of closing, Efrat has been unable to sell the commitment fee shares for $110,000,
then the Company may be required to issue additional shares or pay cash in the amount of the shortfall. However, if the Company pays
the April Note off before its maturity date, then the Company may redeem 29,101 of the commitment fee shares for one dollar. Pursuant
to the April SPA, the Company also issued to Efrat a common stock purchase warrant (the “warrant”) to purchase 146,667 shares
of the Company’s common stock for $5.25 per share. The warrant expires on April 7, 2025. The warrant also includes various covenants
of the Company for the benefit of the warrant holder and includes a beneficial ownership limitation on the holder that, in certain circumstances,
may serve to restrict the holders right to exercise the warrant. The Company also entered into a Security Agreement with Efrat pursuant
to which the Company granted to Efrat a security interest in substantially all of the Company’s assets to secure the Company obligations
under the Efrat SPA, Efrat Note and warrant, although such security interest is subordinate to the rights of another third party lender.
The offer and sale of the Efrat Note and the
warrant was made in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities
Act”), in reliance on exemptions afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated
thereunder.
AJB Lending LLC Loan
On May 3, 2022, the Company borrowed funds pursuant
to the terms of a Securities Purchase Agreement (the “AJB SPA”) entered into with AJB Capital Investments, LLC (“AJB”),
and issued a Promissory Note in the principal amount of $1,000,000 (the “AJB Note”) to AJB in a private transaction for a
purchase price of $900,000 (giving effect to a 10% original issue discount). In connection with the sale of the AJB Note, the Company
also paid certain fees and due diligence costs of AJB and brokerage fees to J.H. Darbie & Co., a registered broker-dealer.
At the closing the Company repaid all obligations
owed to AJB pursuant to a 10% promissory note in the principal amount of $750,000 issued in favor of AJB in January 2022 (the “Jan.
2022 Note”). As a result, the Jan. 2022 Note is satisfied in full and was terminated. After the repayment of the Jan. 2022 Note,
and after payment of the fees and costs, the $138,125 net proceeds from the issuance of the AJB Note are expected to be utilized for
working capital and other general corporate purposes.
The maturity date of the ABJ Note is November
3, 2022, but it may be extended by the Company for six months with the interest rate to increase during the extension period. The AJB
Note bears interest at 10% per year, and principal and accrued interest is due on the maturity date. The Company may prepay the AJB Note
at any time without penalty. Under the terms of the AJB Note, the Company may not sell a significant portion of its assets without the
approval of AJB, may not issue additional debt that is not subordinate to AJB, must comply with the Company’s reporting requirements
under the Securities Exchange Act of 1934, and must maintain the listing of the Company’s common stock on the OTC Market or other
exchange, among other restrictions and requirements. The Company’s failure to make required payments under the AJB Note or to comply
with any of these covenants, among other matters, would constitute an event of default. Upon an event of default under the AJB SPA or
AJB Note, the AJB Note will bear interest at 18%, AJB may immediately accelerate the AJB Note due date, AJB may convert the amount outstanding
under the AJB Note into shares of Company common stock at a discount to the market price of the stock, and AJB will be entitled to its
costs of collection, among other penalties and remedies.
The Company provided various representations,
warranties, and covenants to AJB in the AJB SPA. The Company’s breach of any representation or warranty, or failure to comply with
the covenants would constitute an event of default. Also pursuant to the AJB SPA, the Company paid AJB a commitment fee of 370,370 unregistered
shares of the Company’s common stock (the “commitment fee shares”). If, after the sixth month anniversary of closing
and before the thirty-sixth month anniversary of closing, AJB has been unable to sell the commitment fee shares for $700,000, then the
Company may be required to issue additional shares or pay cash in the amount of the shortfall. However, if the Company pays the AJB Note
off before November 3, 2022, then the Company may redeem 185,185 of the commitment fee shares for one dollar. Pursuant to the AJB SPA,
the Company also issued to AJB a common stock purchase warrant (the “warrant”) to purchase 750,000 shares of the Company’s
common stock for $5.25 per share. The warrant expires on May 3, 2025. The warrant also includes various covenants of the Company for
the benefit of the warrant holder and includes a beneficial ownership limitation on the holder that, in certain circumstances, may serve
to restrict the holder’s right to exercise the warrant. The Company also entered into a Security Agreement with AJB pursuant to
which the Company granted to AJB a security interest in substantially all of the Company’s assets to secure the Company obligations
under the AJB SPA, AJB Note and warrant.
The offer and sale of the AJB Note and the warrant
was made in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities
Act”), in reliance on exemptions afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated
thereunder.
Additionally, the Company issued 12,000 shares related to services
performed and 74,250 shares issued for cashless exercise of warrants.