Notes
to Consolidated Financial Statements
NOTE
1 – THE COMPANY
The
Crypto Company was incorporated in the State of Nevada on March 9, 2017 (“Inception”). The Company is engaged in the
business of providing consulting services and education for distributed ledger technologies (“blockchain”), for the
building of technological infrastructure and enterprise blockchain technology solutions. The Company currently generates revenues
and incurs expenses solely through these consulting operations.
Unless
expressly indicated or the context requires otherwise, the terms “Crypto,” the “Company,” “we,”
“us,” and “our” in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (this “Annual
Report”) refer to The Crypto Company and, where appropriate, its wholly owned subsidiaries, Crypto Sub, Inc., a Nevada corporation
(“Crypto Sub”); CoinTracking, LLC, a Nevada limited liability company (“CoinTracking”); and Malibu Blockchain,
LLC, a Nevada limited liability company (“Malibu Blockchain”).
During
the year ended December 31, 2020, the Company generated revenues and incurred expenses primarily through the business of
providing consulting services and education for distributed ledger technologies (“blockchain”), for the building of
technological infrastructure and enterprise blockchain technology solutions, both of which have ceased operations as of the date
of this Annual Report.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation – The company prepares its consolidated financial statements based upon the accrual method of accounting,
recognizing income when earned and expenses when incurred.
Consolidation
– The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Crypto
Sub, CoinTracking, and Malibu Blockchain, as well as its 50.1% ownership of CoinTracking GmbH for the period ended January 2,
2019. On January 2, 2019, the Company sold its entire equity ownership stake in CoinTracking GmbH. All significant intercompany
accounts and transactions are eliminated in consolidation.
Recent
Developments
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 December
31, 2020, the Company had cash of $26,326. In addition, the Company’s net loss was $2,472,717 for the year ended December
31, 2020. The Company’s working capital was negative $2,395,647 as of December 31, 2020.
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 be able to replace the revenues lost as a result of
the sale of CoinTracking GmbH, for 2020 and beyond. 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.
Use
of estimates – The preparation of these consolidated financial statements in conformity with US GAAP requires management
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related
disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant
estimates and assumptions include but are not limited to the recoverability and useful lives of long-lived assets, allocation
of revenue on software subscriptions, valuation of goodwill from business acquisitions, valuation and recoverability of investments,
valuation allowances of deferred taxes, and share-based compensation expenses. Actual results may differ from these estimates.
In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating
results.
Cash
and cash equivalents – The Company defines its cash and cash equivalents to include only cash on hand and certain highly
liquid investments with original maturities of ninety days or less. The Company maintains its cash and cash equivalents at financial
institutions, the balances of which may, at times, exceed federally insured limits. Management believes that the risk of loss
due to the concentration is minimal.
Investments
in cryptocurrency – Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin,
that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less
impairment and are reported as long-term assets in the consolidated balance sheets. An intangible asset with an indefinite useful
life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur
indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount
exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine
whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an
impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform
a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the
asset. Subsequent reversal of impairment losses is not permitted. 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
Consolidated Statements of Operations.
Investments
– non-cryptocurrency
During
the year ended December 31, 2020, we received tokens from investments that were previously written down to -0- value. These tokens
were immediately liquidated, and the total proceeds received from them was $247,392.
In
May 2019, we received tokens (Cosmos) and immediately liquidated them for $70,634 in proceeds.
Equipment
– Equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life ranging
from three to five years. Normal repairs and maintenance are expensed as incurred. Expenditures that materially adapt, improve,
or alter the nature of the underlying assets are capitalized. When equipment is retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to income.
Impairment
of long-lived assets – The Company analyzes its long-lived assets, including intangible assets with finite useful lives
(subject to amortization) acquired in connection with the acquisition of CoinTracking GmbH, for potential impairment. Impairment
losses are recorded on long-lived assets when indicators of impairment are present, and for intangible assets acquired in connection
with acquisitions, the undiscounted cash flows estimated to be generated by those assets are less than the net carrying amount
of the assets. In such cases, the carrying values of assets to be held and used are adjusted to their estimated fair value, less
estimated selling expenses. For the year ended December 31, 2018, the Company recognized an impairment loss of $2,749,646 on its
definite lived intangible assets related to CoinTracking GmbH, classified as Held for Sale. On January 2, 2019, the Company sold
its entire equity ownership stake in CoinTracking GmbH.
Business
combination – The purchase price of an acquired company is allocated between tangible and intangible assets acquired
and liabilities assumed from the acquired business based on their estimated fair values with the residual of the purchase price
recorded as goodwill. The results of operations of acquired businesses are included in our operating results from the dates of
acquisition.
Goodwill
and 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. Intangible assets resulting from the acquisitions of entities
accounted for using the purchase method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable
intangible assets are comprised of purchased customer relationships, trade names, and developed technologies. Intangible assets
subject to amortization are amortized over the period of estimated economic benefit of five years. In accordance with ASC 350,
Intangibles – Goodwill and Other (“ASC 350”), goodwill and other intangible assets with indefinite lives are
not amortized but tested annually, on December 31, or more frequently if the Company believes indicators of impairment exist.
Indefinite lived intangible assets also include investments in cryptocurrency (see Investments in Cryptocurrency).
The
Company assesses whether goodwill impairment and indefinite lived intangible assets exists using both qualitative and quantitative
assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely
than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative
assessment the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed to determine
whether a goodwill impairment exists at the reporting unit.
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.
When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax
benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
As
of December 31, 2019, 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. On January 2, 2019, we sold
our entire equity ownership stake in CoinTracking GmbH.
Fair
value measurements – The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations
based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest
priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level
of input has different levels of subjectivity and difficulty involved in determining fair value.
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Level
1
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Inputs
are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurable date.
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Level
2
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Inputs,
other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market
data at the measurement date.
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Level
3
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Unobservable
inputs that reflect management’s best estimate of what participants would use in pricing the asset or liability at the
measurement date.
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The
carrying amounts of the Company’s financial assets and liabilities, including cash, accounts payable and accrued 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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●
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Step
5: Recognize revenue when the Company satisfies a performance obligation
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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 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 year
ended December 31, 2020 and the year ended December 31, 2019, 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
$-0- of marketing expenses for the year ended December 31, 2020, compared to $49,324 for year ended December 31, 2019.
Reclassifications
– Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Such reclassifications had no effect on the Company’s financial position, results of operations or cashflows.
NOTE
3 – RECENT ACCOUNTING PRONOUNCEMENTS NTD: AUDITORS TO UPDATE NOTE 3
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, 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 became 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
4 – INVESTMENTS, NON-CRYPTOCURRENCY:
The
Company has invested $417,818 in non-tradeable token pre-sale and SAFT agreements, including $250,000 during the year ended December
31, 2018. In addition, the Company invested $250,000 during the year ended December 31, 2018 as part of a financing in accordance
with a SAFE investment in a private enterprise. These investments are included as Level 3 investments as there was no active market
as of December 31, 2018.
The
Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are
fair, consistent, and verifiable. Non-cryptocurrency investments are carried at cost which approximates fair value at December
31, 2018. The Company considers the length of its investments, of which a majority were made during the current year, as well
as its comprehensive investment process which includes reviews of white papers, preparation of either short or long forms analysis
that is reviewed by the Company’s internal investment committee, among other factors in determining fair value. At the time
that the investments are tokenized and available on active market exchanges, the investments will be reclassified to investments
in cryptocurrency.
In
April 2019, Cosmos tokens (ATOMs) were issued and listed and sold through an exchange. The Company promptly liquidated these on
April 28, 2019.
The
following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the year ended
December 31, 2019:
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Level 3
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Non-
Cryptocurrency
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Balance at December 31,
2018
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$
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2,005
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Transfers to investments in cryptocurrency
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-
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Purchases, sales, issuances, and
settlement, net
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-
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Impairment
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(2,005
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)
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Balance at
December 31, 2019
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$
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-
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These
investments are included in assets held for sale at December 31, 2018.
NOTE
5 – IMPAIRMENT OF 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 Note 5 - Acquisition). Intangible assets include software development costs, related to the CoinTracking GMBH SaaS platform,
customer base and trade name.
As
of December 31, 2019, the balance of goodwill and intangible assets were $-0- due to the divestiture of CoinTracking GmbH on January
2, 2019.
NOTE
6 – WARRANTS FOR COMMON STOCK
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
7 – SUMMARY OF STOCK OPTIONS
On
July 21, 2017, the Company’s board of directors adopted The Crypto Company 2017 Equity Incentive Plan (the “Plan”),
which was approved by its stockholders on August 24, 2017. The Plan is administered by the board of directors (the “Administrator”).
Under the Plan, the Company may grant equity awards to eligible participants which may take the form of stock options (both incentive
stock options and non-qualified stock options) and restricted stock awards. Awards may be granted to officers, employees, non-employee
directors (as defined in the Plan) and other key persons (including consultants and prospective employees). The term of any stock
option award may not exceed 10 years and may be subject to vesting conditions, as determined by the Administrator. Options granted
generally vest over eighteen to thirty-six months. Incentive stock options may be granted only to employees of the Company or
any subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Internal Revenue Code.
During
the year ended December 31, 2020, the Company issued 500,000 stock options to members of its board of directors, 1,250,00 stock
options to employees, and 170,000 stock options to non-employees. No stock options were issued in 2019.
5,000,000
shares of the Company’s common stock are reserved for issuance under the Plan. As of December 31, 2020, there are outstanding
stock option awards issued from the Plan covering a total of 2,281,349 shares of the Company’s common stock and there remain
reserved for future awards 2,718,651 shares of the Company’s common stock.
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Weighted
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Average
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Weighted
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Remaining
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Average
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Contractual
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Number
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Exercise
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Term
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of
Shares
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Price
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|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, at December 31, 2018
|
|
|
1,401,612
|
|
|
$
|
5.83
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(1,055,263
|
)
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding,
at December 31, 2019
|
|
|
346,349
|
|
|
$
|
5.83
|
|
|
|
8.4
|
|
Options granted
|
|
|
1,935,000
|
|
|
$
|
1.10
|
|
|
|
|
|
Options cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options outstanding,
at December 31, 2020
|
|
|
2,281,349
|
|
|
$
|
2.26
|
|
|
|
5.25
|
|
The
Company recognized $1,976,673 and $-0- of compensation expense related to stock options for the years ended December 31, 2020
and 2019, respectively
During
the years ended December 31, 2020 and December 31, 2019 the Company did not grant any restricted stock awards.
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 year ended December 31, 2020 was as follows:
|
|
Year
ended
December 31, 2020
|
|
|
|
Ranges
|
|
Volatility
|
|
|
36
– 115
|
%
|
Expected dividends
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5
– 10 years
|
|
Risk-free rate
|
|
|
0.17
– 2.95
|
%
|
Stock
options issued to nonemployees are revalued at each vesting tranche and/or reporting date in accordance with ASC 505.
NOTE
8 – RELATED PARTY TRANSACTIONS
There
were no related party transaction in 2020.
The
Company has a loan receivable from an officer of CoinTracking GmbH as of December 31, 2018 totaling $170,684. The loan is due
upon demand and it bears interest at 2%. During the year ended December 31, 2018 and the period from Inception to December 31,
2017 interest income accrued for this loan was $3,300 and $0, respectively, which is included in other income/(expense) on the
accompanying consolidated statements of operations. During the year ended December 31, 2018, the company sold $939,155 in cryptocurrency
held by CoinTracking GmbH to an officer of CoinTracking GmbH, in accordance with a shareholder resolution entered into on September
21, 2018.
On
April 3, 2018, CoinTracking entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, pursuant
to which CoinTracking GmbH may provide a loan (the “CoinTracking Loan”) of up to $3,000,000 to CoinTracking, to be
advanced to CoinTracking in one or more tranches, at such times and in such amounts as may be requested by CoinTracking from time
to time, on or before the tenth anniversary of the Loan Agreement. The Company is deemed obligor of CoinTracking’s obligations
under the Loan Agreement for United States Federal income tax purposes. Interest on the CoinTracking Loan will accrue at a rate
per annum of the greater of (i) three percent (3%), or (ii) the interest rates published monthly by the United States Internal
Revenue Service and in effect under section 1274(d) of the Internal Revenue Code in effect as of the date of issuance of any promissory
note under the CoinTracking Loan, and will be payable quarterly. During the year ended December 31, 2018, pursuant to the Loan
Agreement, CoinTracking GmbH advanced $1,500,000 to CoinTracking in exchange for three promissory notes (the “CoinTracking
Note”) in the amounts of $300,000, $700,000, and $500,000, respectively, which is still outstanding as of December
31, 2018. The CoinTracking Note will mature on the second anniversary thereof. CoinTracking and CoinTracking GmbH are consolidated
entities, as such, the loan and advances are intercompany transactions and are eliminated in consolidation. Subsequent to December
31, 2018, the Company sold its equity ownership stake in CoinTracking GmbH, and $1,200,000 of the sale proceeds were applied toward
repayment of the $1,500,000 outstanding loan amount under the CoinTracking Note. See “Note 17 - 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 until November 2018. In connection with Mr. Poutre’s resignation,
the Company entered into a Separation and Consulting Agreement and General Mutual Release (the “Separation and Consulting
Agreement”), which was executed on May 9, 2018 and approved by the Board of Directors on May 14, 2018. The Separation and
Consulting Agreement was not effective until May 17, 2018, following the end of the revocation period. The Separation and Consulting
Agreement provides that the Company 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. 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. During 2018, the Company paid Mr. Poutre $90,000
of the $180,000 due in connection with his Separation and Consulting Agreement. Subsequent to December 31, 2018, the Company reached
a settlement with Mr. Poutre, reducing the final amount due to $40,000 (see Note 14 – Subsequent Events).
NOTE
9 – BASIC AND DILUTED LOSS PER SHARE
The
following is a reconciliation of the basic and diluted loss per share computations for the year ended December 31, 2020 and the
period from Inception through December 31, 2019:
|
|
Year
ended
December 31,
2020
|
|
|
Year
ended
December 31,
2019
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted income
per share:
|
|
|
|
|
|
|
|
|
Net loss from continuing
operations attributable to the Company
|
|
|
(2,817,717
|
)
|
|
$
|
(1.808.622
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Income/(loss)
attributable to the Company
|
|
|
-
|
|
|
|
84,849
|
|
Net loss per
share attributable to the Company
|
|
|
(2,817,717
|
)
|
|
$
|
(1,723,773
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted
income per share:
|
|
|
|
|
|
|
|
|
Weighted average shares (basic)
|
|
|
21,401,204
|
|
|
|
21,219,382
|
|
Common stock
equivalents
|
|
|
-
|
|
|
|
-
|
|
Weighted average
shares (diluted)
|
|
|
21,401,204
|
|
|
|
21,219,382
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per
share:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
attributable to the Company
|
|
|
(0.13
|
)
|
|
$
|
(0.09
|
)
|
Net loss from
discontinued operations attributable to the Company
|
|
|
-
|
|
|
|
(0.00
|
)
|
Net loss attributable
to the Company
|
|
|
(0.13
|
)
|
|
$
|
(0.09
|
)
|
NOTE
10 - COMMITMENTS AND CONTINGENCIES
On
November 1, 2018, the Company relocated its corporate office and entered into a month-to-month office agreement with Regus Management
Group, LLC. Facility rent expense was $1,524 for the year ended December 31, 2020.
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. In a letter to us dated as of November 22, 2019, the SEC’s Division of Enforcement advised us that the
investigation has concluded and that the SEC will not seek to impose any fines or file any 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
11 – PROVISION FOR Income taxes
Income
Tax – The components of the provision for income taxes are as follows:
|
|
For
the Year Ended
December 31, 2020
|
|
|
For
the Year Ended
December 31, 2019
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
1,600
|
|
Total
current
|
|
$
|
-
|
|
|
$
|
1,600
|
|
The
following is a summary of the deferred tax assets:
|
|
Year
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
0
|
|
|
$
|
3,011,000
|
|
Deferred tax asset
|
|
|
0
|
|
|
|
3,011,000
|
|
Valuation allowance
|
|
|
(0
|
)
|
|
|
(3,011,000
|
)
|
Net deferred
tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2019, we had a net operating loss carryforward for federal income tax purposes of approximately $10,564,000 portions
of which will begin to expire in 2037. Utilization of some of the federal and state net operating loss and credit carryforwards
are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization.
Note
12 - SUBSEQUENT EVENTS
Acquisition
of Blockchain Training Alliance, Inc.
On
March 24, 2021, the Company entered into a Stock Purchase Agreement (the “BTA SPA”) with Blockchain Training Alliance,
Inc. (“BTA”) and its stockholders pursuant to which the Company will acquire all of the issued and outstanding stock
of BTA (the “BTA Transaction”). The aggregate purchase price is $1,250,000, of which $600,000 will be delivered in
cash at closing, $150,000 will be delivered through the issuance by the Company of a $150,000 promissory note that is payable
on the twelve month anniversary of closing, and by the delivery of that number of shares of Company common stock valued at $500,000
divided by the lesser of 80% of the twenty day weighted average closing price for the Company’s common stock prior to closing
or $10.00.
The
BTA SPA contains customary representations and warranties and covenants, including provisions for indemnification, subject to
the limitations described in the BTA SPA. The closing of the BTA Acquisition is subject to various closing conditions, including
that BTA must obtain a 409A Valuation that results in an enterprise value of BTA within 10% of $1,250,000 and that BTA must be
debt-free at or before closing. The parties may terminate the SPA if any of the closing conditions have not been satisfied or
the transaction has not closed on or before April 30, 2021. There is no financing condition to our obligation to consummate the
transaction.
Aedan
Financial Corporation Asset Purchase Agreement
On
March 24, 2021, the Company entered into an Asset Purchase Agreement (the “Aedan APA”) with Aedan Financial Corporation
(“Aedan”) and Eric Fitzgerald pursuant to which the Company will acquire substantially all of the assets of Aedan
(the “Aedan Transaction”). Mr. Fitzgerald is the majority stockholder of Aedan. The aggregate purchase price for the
assets is $10,000,000, which will be paid through the delivery of: $100,000 in cash; 20,000 shares of restricted Company common
stock; and that number of shares of Company common stock equal to $9,900,000 divided by the higher of 80% of the twenty day weighted
average closing price for the Company’s common stock prior to closing or $5.00, whichever is higher.
The
APA contains customary representations and warranties and covenants, including provisions for indemnification. The closing of
the Aedan Acquisition is subject to various closing conditions, including that Aedan shall have re-launched its Aedan Safe application
in the Android store and that certain defined milestones related to that application have been achieved. The APA may be terminated
under certain circumstances, including by the Company if the closing conditions have not been achieved by April 30, 2021. There
is no financing condition to our obligation to consummate the transaction.
Subsequent
to December 31, 2020 we raised $825,000 from five accredited investors through the private placement of 550,000 common shares
at $1.50 per shares along with a matching number of five year warrant exercisable at $0.50 per share.