UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _______________
Commission File Number: 000-55726
THE CRYPTO COMPANY
(Exact name of registrant as specified in its charter)
| Nevada | 46-4212105 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
23805 Stuart Ranch Road, Suite 235
Malibu, California 90265
(Address of principal executive offices)
(424) 228-9955
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] | Smaller reporting company [X] |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
As of July 26, 2019, the issuer had 21,212,860 shares of common stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
| 2 |
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the period from March 9, 2017 (“Inception”), through December 31, 2017, as filed on April 2, 2018 with the U.S. Securities and Exchange Commission (“SEC”), as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on September 14, 2018, as further amended by Amendment No. 2 on Form 10-K/A filed with the SEC on April 4, 2019 (the “2017 Annual Report”) and in any subsequent filings with the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms “Crypto”, the “Company”, “we”, “us” and “our” in this Quarterly Report refer to The Crypto Company, a Nevada corporation, and, where appropriate, its wholly owned subsidiaries, Crypto Sub, Inc., a Nevada corporation; CoinTracking, LLC, a Nevada limited liability company (“CT”); Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”); and, where applicable, CT’s former majority-owned subsidiary, CoinTracking GmbH. Subsequent to September 30, 2018, on January 2, 2019, CT sold to Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany, CT’s entire equity ownership stake in CoinTracking GmbH, consisting of 12,525 shares representing 50.1% of the outstanding equity interests in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
| 3 |
THE CRYPTO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2018 | December 31, 2017 | |||||||
| (unaudited) | (Restated) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 387,287 | $ | 8,950,244 | ||||
| Accounts receivable, net | - | 500 | ||||||
| Loan receivable, related party | 172,489 | - | ||||||
| Receivable from shareholder | 939,155 | - | ||||||
| Prepaid expenses and other current assets | 134,694 | 33,294 | ||||||
| Contract asset for commissions and incentives, current portion | 97,541 | - | ||||||
| Total current assets | 1,731,166 | 8,984,038 | ||||||
| Equipment, net of accumulated depreciation | 102,644 | 68,320 | ||||||
| Investment in cryptocurrency | 347,648 | 1,131,885 | ||||||
| Investments, non-cryptocurrency | 162,055 | - | ||||||
| Contract asset for commissions and incentives, net of current portion | 48,530 | - | ||||||
| Intangible assets, net | 6,595,236 | - | ||||||
| Goodwill | 11,200,454 | - | ||||||
| Other assets | 40,283 | 1,500 | ||||||
| TOTAL ASSETS | $ | 20,228,016 | $ | 10,185,743 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 1,190,643 | $ | 697,609 | ||||
| Income taxes payable | 800 | 800 | ||||||
| Contract liabilities, current portion | 2,122,316 | - | ||||||
| Total current liabilities | 3,313,759 | 698,409 | ||||||
| Contract liabilities, net of current portion | 1,173,531 | - | ||||||
| TOTAL LIABILITIES | 4,487,290 | 698,409 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value; 50,000,000 shares authorized, 21,172,860 and 20,458,945 shares issued and outstanding, respectively | 21,169 | 20,459 | ||||||
| Additional paid-in-capital | 28,368,009 | 19,020,176 | ||||||
| Accumulated deficit | (20,656,840 | ) | (9,553,301 | ) | ||||
| Accumulated other comprehensive income | (619,278 | ) | - | |||||
| TOTAL CRYPTO COMPANY EQUITY | 7,113,060 | 9,487,334 | ||||||
| Noncontrolling interests | 8,627,666 | - | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 15,740,726 | 9,487,334 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 20,228,016 | $ | 10,185,743 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
THE CRYPTO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
| For
the Three Months Ended September 30, | For
the Nine Months Ended | Period
from Inception March 9, 2017 through | ||||||||||||||
| 2018 | 2017 | September 30, 2018 | September 30, 2017 | |||||||||||||
| (Restated) | (Restated) | |||||||||||||||
| Revenue: | ||||||||||||||||
| Subscription revenue, net | $ | 1,227,971 | $ | - | $ | 2,570,795 | $ | - | ||||||||
| Other | - | 6,000 | - | 6,000 | ||||||||||||
| Total Revenue, net | 1,227,971 | 6,000 | 2,570,795 | 6,000 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Cost of subscription revenues | 200,615 | - | 590,791 | - | ||||||||||||
| General and administrative expenses | 1,863,108 | 972,434 | 8,004,564 | 2,278,283 | ||||||||||||
| Share-based compensation | 512,648 | 716,507 | 4,562,089 | 1,083,224 | ||||||||||||
| Total Operating Expenses | 2,576,371 | 1,688,941 | 13,157,444 | 3,361,507 | ||||||||||||
| Operating loss | (1,348,400 | ) | (1,682,941 | ) | (10,586,649 | ) | (3,355,507 | ) | ||||||||
| Net realized gains/(losses) on investment in cryptocurrency | (108,920 | ) | 481,692 | 1,303,433 | 564,332 | |||||||||||
| Impairment of investments, non-cryptocurrency | (250,000 | ) | - | (250,000 | ) | - | ||||||||||
| Impairment of investments, cryptocurrency | (254,941 | ) | - | (1,869,241 | ) | |||||||||||
| Other income(expense) | 52,045 | (2,019 | ) | 109,452 | (2,019 | ) | ||||||||||
| Loss before provision for income taxes | (1,910,216 | ) | (1,203,268 | ) | (11,293,005 | ) | (2,793,194 | ) | ||||||||
| Provision for income taxes | - | - | 800 | 800 | ||||||||||||
| Net loss | (1,910,216 | ) | (1,203,268 | ) | (11,293,805 | ) | (2,793,994 | ) | ||||||||
| Income/(loss) attributable to noncontrolling interests | 289,129 | - | (190,266 | ) | - | |||||||||||
| Net loss attributable to Crypto Company | (2,199.345 | ) | (1,203,268 | ) | (11,103,539 | ) | (2,793,994 | ) | ||||||||
| Other comprehensive loss | ||||||||||||||||
| Foreign currency translation adjustment | 484,619 | - | (619,278 | ) | - | |||||||||||
| Foreign currency translation adjustment attributable to noncontrolling interest | (617,053 | ) | - | (617,053 | ) | - | ||||||||||
| Comprehensive loss | $ | (2,331.779 | ) | $ | (1,203,268 | ) | $ | (12,339,870 | ) | $ | (2,793,994 | ) | ||||
| Net loss attributable to the Crypto Company per common share - basic and diluted | $ | (0.10 | ) | $ | (0.06 | ) | $ | (0.53 | ) | $ | (0.18 | ) | ||||
| Weighted average common shares outstanding - basic and diluted | 21,172,782 | 18,565,062 | 21,060,434 | 15,371,770 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
THE CRYPTO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For
the Nine Months Ended September 30, 2018 | For
the Period from Inception March 9, 2017 Through September 30, 2017 | |||||||
| (Restated) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (11,293,805 | ) | $ | (2,793,994 | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Net realized gain on investment in cryptocurrency | (1,303,433 | ) | (564,332 | ) | ||||
| Impairment of investments in cryptocurrency | 1,869,241 | - | ||||||
| Impairment of investments, non-cryptocurrency | 250,000 | - | ||||||
| Expenses paid in cryptocurrency | 101,384 | - | ||||||
| Depreciation and amortization | 897,302 | 1,918 | ||||||
| Share-based compensation | 4,562,088 | 1,083,224 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | 500 | (6,000 | ) | |||||
| Loan receivable, related party | 21,891 | - | ||||||
| Prepaid expenses | 124,753 | (85,349 | ) | |||||
| Accounts payable and accrued expenses | 117,548 | 149,015 | ||||||
| Contract liabilities | (1,188,092 | ) | - | |||||
| Other assets | (24,150 | ) | (109,750 | ) | ||||
| Net cash used in operating activities | (5,864,773 | ) | (2,215,518 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Payments for purchase of equipment | (40,842 | ) | (33,827 | ) | ||||
| Cash paid for acquisition, net of cash acquired | (3,189,303 | ) | - | |||||
| Proceeds from sales of cryptocurrency | 6,551,123 | - | ||||||
| Purchase of investments, non-cryptocurrency | (500,000 | ) | (25,512 | ) | ||||
| Purchase of investments in cryptocurrency | (5,267,025 | ) | - | |||||
| Capitalized software development | (130,771 | ) | - | |||||
| Net cash used in investing activities | (2,576,818 | ) | (169,089 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from common stock issuance | - | 4,976,011 | ||||||
| Proceeds from exercise of stock options | 50,057 | - | ||||||
| Net cash provided by financing activities | 50,057 | 4,976,011 | ||||||
| Effect of exchange rate changes on cash | (171,423 | ) | - | |||||
| Net (decrease) increase in cash and cash equivalents | (8,562,957 | ) | 2,591,404 | |||||
| Cash and cash equivalents at the beginning of the period | 8,950,244 | - | ||||||
| Cash and cash equivalents at the end of the period | $ | 387,287 | $ | 2,591,404 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
THE CRYPTO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | $ | 565 | |||||
| Noncash investment activities: | ||||||||
| Shares of common stock issued in exchange of investment in cryptocurrency | $ | - | $ | 225,000 | ||||
| Transfer of non-cryptocurrency to investments in cryptocurrency | $ | 255,763 | - | |||||
| Customer payments received in cryptocurrency | $ | 1,102,723 | $ | - | ||||
| Sale of cryptocurrency to shareholder | $ | 939,155 | $ | - | ||||
| Cryptocurrency acquired in trade of cryptocurrency investments | $ | 5,031,280 | $ | 3,626,161 | ||||
| Issue of common stock for acquisition of CoinTracking GmbH | $ | 4,736,400 | $ | - | ||||
| Purchase of contract asset for commissions and incentives with investments in cryptocurrency | $ | 178,992 | $ | - | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
THE CRYPTO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY
The Crypto Company was incorporated in the State of Nevada on March 9, 2017 (“Inception”) and is engaged in the business of building technological infrastructure. We are also engaged in the business of building strategic alliances to assist third parties in the exchange of value in the digital asset market, solely by providing such third parties with tools, computer software/programming and educational material that may prove useful to them as they independently invest in, trade and manage their own digital assets. We also seek to build strategic alliances with other companies and from time to time may seek strategic acquisitions of entities or technologies that we believe may aid our development of proprietary products and tools designed to help third parties to independently invest in, trade and manage their own digital assets.
Unless expressly indicated or the context requires otherwise, the terms “Crypto,” the “Company,” “we,” “us,” and “our” in this Quarterly Report refer to The Crypto Company and, where appropriate, its wholly owned subsidiaries, Crypto Sub, Inc., a Nevada corporation (“Crypto Sub”); CoinTracking, LLC, a Nevada limited liability company (“CT”); Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”); and, where applicable, CT’s majority-owned subsidiary, CoinTracking GmbH, which was sold subsequent to September 30, 2018. See “Note 16 - Subsequent Events” for additional details.
Technology
The Company is developing proprietary technology and source code to create products and services that will assist third parties by providing them with the tools, computer programming and training to independently invest in, trade and manage their own digital assets, including trading management and auditing software, tools and processes to assist in the operations of companies, from start-up businesses to well-established companies. We do not provide, and do not intend to provide, any functionality that allows a subscriber to make any form of cryptocurrency trade. A subscriber must go to an unrelated third-party website or exchange in order to enter into a virtual currency purchase or sale transaction. We may consider using our technology or license technology from third parties to build additional units around our existing platform, or we may consider selling or licensing our technology to third-party institutions for a fee.
NOTE 2 – Restatement of the Consolidated Financial Statements
The purpose of restatement is to correct errors in the Company’s previously issued financial statements, as disclosed in the Company’s Current Report on Form 8-K filed subsequent to September 30, 2018, on January 3, 2019. The restatement is in connection with the accounting for investments in cryptocurrency at fair value as opposed to intangible assets with indefinite lives and record such investments in cryptocurrency at historical cost less impairment, if any. Management previously reported its investments in cryptocurrency at fair value, with changes in fair value reported as unrealized gains and losses in its condensed consolidated statements of operations. The Company has corrected the error in this Quarterly Report for its prior periods. The Company’s investment in cryptocurrency for the comparative nine-months ended September 30, 2017 were accounted for in error and were overstated from their historical cost by $85,266. In addition, the Company is correcting the classification of its net realized gain/loss on investments in cryptocurrency in this Quarterly Report by reclassifying them from revenue to other income(expense).
The Company has also determined that its classification and disclosures of $367,639 in investments, as of June 30, 2018, were incorrectly described as investments in Initial Coin Offerings and included as investments in cryptocurrency in its condensed consolidated balance sheets. The investments were made in accordance with token pre-sale and simple agreement for tokens agreements (“SAFT”), and should be included as investments, non-cryptocurrency in the Company’s condensed consolidated balance sheets. The Company is reclassifying the balance and changing the related disclosures in this current filing. Management believes the reclassification is material to the Company’s condensed consolidated financial statements in prior periods.
| 8 |
Finally, in connection with the acquisition of CoinTracking GmbH, the Company has completed its preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed based on the information available and preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed. The result is the recording of intangible assets of $7,726,356, noncontrolling interest of $9,434,984, and a reduction of $43,348 to net assets acquired, resulting in a preliminary adjustment to increase goodwill of $1,665,279. The Company recorded additional amortization expense of $757,923 relating to certain intangible assets acquired of which $211,153 and $486,176 have been restated for the three and six months ended March 31 and June 30, 2018, respectively. As a result of these changes, the Company is restating its condensed consolidated balance sheet and condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018 and June 30, 2018, as noted below. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
The Company’s originally disclosed accounting policy, from the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2018 regarding investments in cryptocurrency stated that:
“Investments in cryptocurrency - Investments are comprised primarily of two types of cryptocurrency investments. The Company owns several cryptocurrencies, of which a majority is Bitcoin, which are actively traded on exchanges and are reported at fair value as determined by digital asset markets with realized gains and losses calculated on a trade date basis as the difference between the fair value and cost of cryptocurrencies transferred. Management believes that measuring cryptocurrencies at fair value, consistent with the accounting for trading investments in commodities and securities with changes in fair value recognized on both the balance sheet and profit and loss statements, best reflects the Company’s financial position and the economics and characteristics of its cryptocurrency investments. The Company recognizes the fair value changes in unrealized gains and losses on investment through the accompanying Statement of Operations. For the six-month period ended June 30, 2018, the Company had a consolidated balance of $2,200,449 in investments in cryptocurrencies. The Company believes that it would be able to liquidate a majority of its portfolio into cash within one to seven days, if needed. As of June 30, 2018, the Company’s holdings represent on average 1.3% of the daily volume of total trades on the specific exchanges where it would be able to convert its holdings to cash. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp. These exchanges, in the aggregate, account for approximately $168,000,000 in Bitcoin/U.S. dollars (“USD”) trades per day globally.
In addition, the Company’s cryptocurrency investments include Initial Coin Offerings (“ICOs”), which primarily consist of tokens that are not currently traded on an exchange. The Company records these investments at cost, as there is no active market. As of June 30, 2018, ICOs represent $367,639 of the Company’s investments in cryptocurrencies. For the six-month period ended June 30, 2018, the Company recognized no impairment losses on investments in ICOs.
Investments – non-cryptocurrency – During the six months ended June 30, 2018, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”), representing 4% interest, at the time of the investment, in a private enterprise. The Company’s investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful ICO by the enterprise. The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for the investment using the cost method since the equity securities are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment to date due to the recent nature of the investment and the early stage development of the platform and has included such asset as a level 3 investment.”
The Company’s updated accounting policy regarding investments in cryptocurrency transactions and remeasurement states that:
“Investments in cryptocurrency – Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin, that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less impairment and are reported as long-term assets in the condensed consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.
| 9 |
Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statement of operations and comprehensive income.
Investments – non-cryptocurrency – As of September 30, 2018, the Company has invested $667,818 as part of nine financings, including $500,000 during the nine months ended September 30, 2018. The investments include $417,818 invested in accordance with eight token pre-sale and simple agreement for future tokens (“SAFT”) agreements. The agreements provide for the issuance of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established in each respective agreement. In addition, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”) agreement, representing 4% interest, at the time of the investment, in a private enterprise. The Company’s SAFE investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful Initial Coin Offering (“ICO”) by the enterprise.
The Company has received tokens for $250,189 of its investments, at cost, which have been transferred to an active exchange and included in Investment in cryptocurrency, net in the condensed consolidated balance sheet, during the nine months ended September 30, 2018.
The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment for its token pre-sale or SAFT investments as of September 30, 2018 as a majority were entered into in the last twelve months and progress has been demonstrated toward tokenization.
During the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment loss of $250,000, representing the full value of its investment.”
The Company has determined that its previously issued financial statements should be restated on a prospective basis. Accordingly the Company is not amending and re-filing the financial statements included in its prior quarterly reports on Form 10-Q, nor in its Annual Report for the period from March 9, 2017 (“Inception”), through December 31, 2017. Management believes the errors are material when considering quantitative materiality. Management does not believe it is probable that the judgment of a reasonable person relying upon its prior filings would have been changed or influenced by the inclusion or correction of the item, nor is there a substantial likelihood that a reasonable person would consider it important.
The effect of the restatement on the Company’s condensed consolidated balance sheet as of September 30, 2017 is as follows:
| September 30, 2017 | ||||||||||||
| As Previously Reported | Restatement Adjustment | As Restated | ||||||||||
| Investment in cryptocurrency, net | $ | 900,110 | $ | (900,110 | )(1) | $ | - | |||||
| Total current assets | 3,582,863 | (900,110 | )(1) | 2,682,753 | ||||||||
| Investment in cryptocurrency, net | - | (814,844 | )(1) | 814,844 | ||||||||
| Total assets | 3,724,522 | (85,266 | ) | 3,639,256 | ||||||||
| Accumulated deficit | (2,708,728 | ) | (85,266 | ) | (2,793,994 | ) | ||||||
| Total stockholders’ equity | 3,575,507 | (85,266 | ) | 3,490,241 | ||||||||
| Total liabilities and stockholders’ equity | 3,724,522 | (85,266 | ) | 3,639,256 | ||||||||
| (1) | Includes reclassification of investments in cryptocurrency from current assets to long-term assets. |
| 10 |
The effect of the restatement on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2017, are as follows:
| For the three months ended September 30, 2017 | ||||||||||||
| As Previously Reported | Restatement Adjustment | As Restated | ||||||||||
| Net realized gain on investment in cryptocurrency | $ | 481,692 | $ | (481,692 | )(1) | $ | - | |||||
| Operating loss | (1,201,249 | ) | (481,692 | )(1) | (1,682,941 | ) | ||||||
| Net change in unrealized appreciation (depreciation) on investment in cryptocurrency | (303,805 | ) | 303,805 | - | ||||||||
| Other income(expense): | ||||||||||||
| Net realized gain on investment in cryptocurrency | - | 481,692 | (1) | 481,692 | ||||||||
| Loss before provision for income taxes | (1,507,073 | ) | 303,805 | (1,203,268 | ) | |||||||
| Net loss | (1,507,073 | ) | 303,805 | (1,203,268 | ) | |||||||
| Net loss per common share - basic and diluted | (0.08 | ) | (0.06 | ) | ||||||||
| Weighted average common shares outstanding - basic and diluted | 18,565,062 | 18,565,062 | ||||||||||
| For the nine months ended September 30, 2017 | ||||||||||||
| As Previously Reported | Restatement Adjustment | As Restated | ||||||||||
| Net realized gain on investment in cryptocurrency | $ | 564,332 | $ | (564,332 | )(1) | $ | - | |||||
| Operating loss | (2,791,175 | ) | (564,332 | )(1) | (3,355,507 | ) | ||||||
| Net change in unrealized appreciation (depreciation) on investment in cryptocurrency | 85,266 | (85,266 | ) | - | ||||||||
| Other income(expense): | ||||||||||||
| Net realized gain on investment in cryptocurrency | - | 564,332 | (1) | 564,332 | ||||||||
| Loss before provision for income taxes | (2,707,928 | ) | (85,266 | ) | (2,793,194 | ) | ||||||
| Net loss | (2,708,728 | ) | (85,266 | ) | (2,793,994 | ) | ||||||
| Net loss per common share - basic and diluted | (0.18 | ) | (0.18 | ) | ||||||||
| Weighted average common shares outstanding - basic and diluted | 15,371,770 | 15,371,770 | ||||||||||
| (1) | Restatement adjustment includes reclassification of net realized gain/(loss) on investment in cryptocurrency from revenue to other income(expense). |
| 11 |
The effect of the restatement on the Company’s consolidated statement of cash flows for the nine months ended September 30, 2017 are as follows:
| For the nine months ended September 30, 2017 | ||||||||||||
| As Previously Reported | Restatement Adjustment | As Restated | ||||||||||
| Net loss | $ | (2,708,728 | ) | $ | (85,266 | ) | $ | (2,793,994 | ) | |||
| Net change in unrealized appreciation (depreciation) on investment in cryptocurrency | (85,266 | ) | 85,266 | - | ||||||||
| Noncash investing activities: | ||||||||||||
| Cryptocurrency acquired in trade of cryptocurrency investments | $ | - | $ | 2,716,018 | $ | 2,716,018 | ||||||
The effect of the restatement on the Company’s net loss, net loss attributable to The Crypto Company, comprehensive income and per-share amounts for the prior interim periods of 2018 are as follows:
| For the three months ended March 31, 2018 | ||||||||||||||||
| As Previously Reported | Restatement Adjustment (1) | Restatement Adjustment (2) | As Restated | |||||||||||||
| Net loss | $ | (3,521,747 | ) | $ | 1,587,709 | $ | (211,153 | ) | $ | (2,145,192 | ) | |||||
| Net loss attributable to The Crypto Company | (3,158,947 | ) | 1,587,709 | (105,326 | ) | (1,676,564 | ) | |||||||||
| Net loss per common share - basic and diluted | (0.15 | ) | (0.08 | ) | ||||||||||||
| Weighted average common shares outstanding - basic and diluted | 20,864,198 | - | 20,864,198 | |||||||||||||
| For the three months ended June 30, 2018 | ||||||||||||||||
| As Previously Reported | Restatement Adjustment (1) | Restatement Adjustment (2) | As Restated | |||||||||||||
| Net loss | $ | (7,145,543 | ) | $ | 182,168 | $ | (275,024 | ) | $ | (7,238,399 | ) | |||||
| Net loss attributable to The Crypto Company | (7,272,309 | ) | 182,925 | (137,237 | ) | (7,226,621 | ) | |||||||||
| Net loss per common share - basic and diluted | (0.34 | ) | (0.34 | ) | ||||||||||||
| Weighted average common shares outstanding - basic and diluted | 21,131,457 | - | 21,131,457 | |||||||||||||
| For the six months ended June 30, 2018 | ||||||||||||||||
| As Previously Reported | Restatement Adjustment (1) | Restatement Adjustment (2) | As Restated | |||||||||||||
| Net loss | $ | (10,667,291 | ) | $ | 1,769,877 | $ | (486,176 | ) | $ | (9,383,590 | ) | |||||
| Net loss attributable to The Crypto Company | (10,431,256 | ) | 1,770,634 | (243,359 | ) | (8,903,981 | ) | |||||||||
| Net loss per common share - basic and diluted | (0.50 | ) | (0.42 | ) | ||||||||||||
| Weighted average common shares outstanding - basic and diluted | 21,003,328 | - | 21,003,328 | |||||||||||||
| (1) | Reflects the restatement in connection with the accounting for investments in cryptocurrency as intangible assets with indefinite lives and record such investments in cryptocurrency at cost less impairment. | |
| (2) | Reflects the restatement of the intangible asset amortization due to the completion of the preliminary valuation of the fair value of tangible and intangible assets acquired and related liabilities in connection with the acquisition of CoinTracking GmbH on January 26, 2018. |
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The effect of the restatement on the Company’s net loss, per-share amounts, and selected balance sheet amounts for the year ended December 31, 2017 are as follows:
| December 31, 2017 | ||||||||||||
| As Previously Reported | Restatement Adjustment | Audited and Restated | ||||||||||
| Investment in cryptocurrency, net | $ | 2,917,627 | $ | (2,917,627 | ) | $ | - | |||||
| Total current assets | 11,901,665 | (2,917,627 | )(1) | 8,984,038 | ||||||||
| Investment in cryptocurrency, net | 2,917,627 | (1,785,742 | )(1) | 1,131,885 | ||||||||
| Total assets | 11,971,485 | (1,785,742 | ) | 10,185,743 | ||||||||
| Accumulated deficit | (7,767,559 | ) | (1,785,742 | ) | (9,553,301 | ) | ||||||
| Total stockholders’ equity | 11,273,076 | (1,785,742 | ) | 9,487,334 | ||||||||
| Total liabilities and stockholders’ equity | 11,971,485 | (1,785,742 | ) | 10,185,743 | ||||||||
| (1) | Includes reclassification of investments in cryptocurrency from current assets to long-term assets. |
| December 31, 2017 | ||||||||||||
| As Previously Reported | Restatement Adjustment | Audited and Restated | ||||||||||
| Net loss | $ | (7,767,559 | ) | $ | (1,785,742 | ) | $ | (9,553,301 | ) | |||
| Net loss per common share - basic and diluted | (0.46 | ) | (0.57 | ) | ||||||||
| Weighted average common shares outstanding - basic and diluted | 16,746,792 | - | 16,746,792 | |||||||||
| Accumulated deficit | (7,767,559 | ) | (1,785,742 | ) | (9,553,301 | ) | ||||||
| Total stockholders’ equity | 11,273,076 | (1,785,742 | ) | 9,487,334 | ||||||||
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation – The included condensed consolidated balance sheet as of December 31, 2017, was derived from audited financial statements (as restated) and the accompanying unaudited condensed consolidated financial statements as of September 30, 2018 and September 30, 2017 (as restated) of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated financial statements have been included.
The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report for the period from March 9, 2017 (“Inception”), through December 31, 2017.
Consolidation – The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Crypto Sub, CT, and Malibu Blockchain, as well as its 50.1% ownership of CoinTracking GmbH. All significant intercompany accounts and transactions are eliminated in consolidation. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
Liquidity and Going Concern - The Company’s condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with US GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred significant losses and experienced negative cash flows since Inception. As of September 30, 2018, the Company had cash of $387,287, a decline of $8,562,957 from the December 31, 2017 balance of $8,950,244. This decline is due, in part, to the acquisition of CoinTracking GmbH in January 2018, which included $3,189,303 of cash consideration, net of acquired cash. The Company’s working capital was ($1,582,593) as of September 30, 2018, which includes a contract liability of $2,122,316, representing advanced payments from customers for subscription service, which is initially deferred and recognized on a straight-line method over the terms of the applicable subscription period. Management does not anticipate settling this liability in cash. After June 30, 2018, the Company liquidated the majority of tradeable cryptocurrency held in its cryptocurrency investment segment, which had a balance of $1,007,753 at June 30, 2018, to help fund its operations. As of September 30, 2018, the accumulated deficit amounted to $20,656,840. As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.
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The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management is evaluating different strategies to obtain financing to fund the Company’s expenses and achieve a level of revenue adequate to support the Company’s current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations. There can be no assurance that any of these future-funding efforts will be successful or that the Company will achieve its projected level of revenue in 2019 and beyond. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Use of estimates - The preparation of these condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant estimates and assumptions include but are not limited to the recoverability and useful lives of long-lived assets, allocation of revenue on software subscriptions, valuation of goodwill from business acquisitions, valuation and recoverability of investments, valuation allowances of deferred taxes, and share-based compensation expenses. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating results.
Cash and cash equivalents - The Company defines its cash and cash equivalents to include only cash on hand and certain highly liquid investments with original maturities of ninety days or less. The Company maintains its cash and cash equivalents at financial institutions, the balances of which may, at times, exceed federally insured limits. Management believes that the risk of loss due to the concentration is minimal.
Investments in cryptocurrency - Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin, that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less impairment and are reported as long-term assets in the condensed consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.
Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statement of operations and comprehensive income.
The following table presents additional information about investments in cryptocurrency, as of September 30, 2018:
| September 30, 2018 | ||||
| Balance at January 1, 2018 | $ | 964,067 | ||
| Acquisition of CoinTracking GmbH | 1,115,345 | |||
| Purchases of cryptocurrency | 5,267,025 | |||
| Net realized gains on investments in cryptocurrency | 1,303,433 | |||
| Customer payments in cryptocurrency | 1,102,723 | |||
| Transfer from investments, non-cryptocurrency | 255,763 | |||
| Sales of cryptocurrency | (7,490,278 | ) | ||
| Expenditures of cryptocurrency | (280,377 | ) | ||
| Impairment of cryptocurrency | (1,869,241 | ) | ||
| Foreign currency impact | (20,812 | ) | ||
| Balance at September 30, 2018 | $ | 347,648 | ||
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The following table summarizes the historical cost of cryptocurrencies, held as of September 30, 2018:
| Bitcoin | $ | 263,562 | ||
| Ethereum | 31,750 | |||
| Celsius | 25,163 | |||
| Litecoin | 10,111 | |||
| Bitcoin Cash | 7,230 | |||
| Rightmesh | 6,200 | |||
| Tezos | 5,574 | |||
| Dash | 3,194 | |||
| Monero | 1,135 | |||
| DigiByte | 901 | |||
| Ethereum Classic | 841 | |||
| Dogecoin | 614 | |||
| Zcash | 582 | |||
| Lisk | 513 | |||
| Bitcoin Private | 507 | |||
| Stratis | 421 | |||
| Steem | 332 | |||
| Syscoin | 302 | |||
| NEM | 274 | |||
| Vertcoin | 259 | |||
| Decred | 255 | |||
| Other Cryptocurrencies | 695 | |||
| $ | 347,648 |
Investments – non-cryptocurrency – As of September 30, 2018, the Company has invested $667,818 as part of nine financings, including $500,000 during the nine months ended September 30, 2018. The investments include $417,818 invested in accordance with eight token pre-sale and simple agreement for future tokens (“SAFT”) agreements. The agreements provide for the issuance of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established in each respective agreement. In addition, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”) agreement, representing 4% interest, at the time of the investment, in a private enterprise. The Company’s SAFE investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful Initial Coin Offering (“ICO”) by the enterprise.
The Company has received tokens for $255,763 of its investments, at cost, which have been transferred to an active exchange and included in Investment in cryptocurrency, net in the condensed consolidated balance sheet, during the nine months ended September 30, 2018.
The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment of its token pre-sale or SAFT investments as of September 30, 2018 as a majority were entered into in the last twelve months and progress has been demonstrated toward tokenization.
During the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment loss of $250,000, representing the full value of its investment.
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Equipment - Equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life ranging from three to five years. Normal repairs and maintenance are expensed as incurred. Expenditures that materially adapt, improve, or alter the nature of the underlying assets are capitalized. When equipment is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to income.
Impairment of long-lived assets - The Company analyzes its long-lived assets, including indefinite lived intangible assets which include investments in cryptocurrency (see Investments in Cryptocurrency) and intangible assets acquired in connection with the acquisition of CoinTracking GmbH, for potential impairment. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. Impairment losses are recorded on long-lived assets when indicators of impairment are present, and for intangible assets acquired in connection with acquisitions, the undiscounted cash flows estimated to be generated by those assets are less than the net carrying amount of the assets. In such cases, the carrying values of assets to be held and used are adjusted to their estimated fair value, less estimated selling expenses. For the nine-month period ended September 30, 2018, the Company recognized impairment losses of $1,869,241 on its indefinite lived intangible assets. There was no impairment in the period from Inception to September 30, 2017.
Business combination - The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values with the residual of the purchase price recorded as goodwill. The results of operations of acquired businesses are included in our operating results from the dates of acquisition.
Goodwill and indefinite lived intangible assets - The Company records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. Goodwill and intangible assets with indefinite lives are tested for impairment at least annually on December 31, and whenever events or circumstances occur indicating that a possible impairment may have been incurred. Intangible assets with finite lives are amortized over their useful lives.
The Company assesses whether goodwill impairment and indefinite lived intangible assets exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed to determine whether a goodwill impairment exists at the reporting unit.
Based on its analysis, the Company’s management believes that no impairment of the carrying value of its goodwill existed at September 30, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products and services will continue which could result in impairment of goodwill in the future.
Based on its analysis of its indefinite lived intangible assets, which are valued using a discounted cash flow model, the Company’s management believes there is no impairment of the carrying value of its indefinite lived intangible assets as of September 30, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products and services will continue which could result in impairment in the future.
In addition, we capitalized certain costs incurred with developing our CT SaaS platform in accordance with ASC 985-20, Software — Costs of Software to be Sold, Leased, or Marketed once technological feasibility has been established. Capitalized software costs primarily include (i) external direct costs of services utilized in software development and (ii) compensation and related benefits for employees who are directly associated with software development. We amortized our capitalized software costs over a five-year period, reflecting the estimated useful lives of the assets.
Foreign Currency Translation - Results of foreign operations are translated into USD using average rates prevailing throughout the period, while assets and liabilities are translated in USD at period end foreign exchange rates. Transactions gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency of the applicable subsidiary are included in the consolidated statements of operations, within other income, in the year in which the change occurs. The Company’s functional currency is USD while the functional currency for CoinTracking GmbH is in euros.
| 16 |
Income taxes - Deferred tax assets and liabilities are recognized for expected future consequences of events that have been included in the financial statements or tax returns. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. For the nine-month period ended September 30, 2018, the income tax payable of $800 reflects the minimum franchise tax for the State of California.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
As of September 30, 2018, we are subject to taxation in the U.S., as well as state and German taxes. The Company has not been audited by the U.S. Internal Revenue Service, nor has the Company been audited by any states or in Germany. Subsequent to September 30, 2018, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
Fair value measurements - The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level of input has different levels of subjectivity and difficulty involved in determining fair value.
| Level 1 | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurable date. | |
| Level 2 | Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market data at the measurement date. | |
| Level 3 | Unobservable inputs that reflect management’s best estimate of what participants would use in pricing the asset or liability at the measurement date. |
The carrying amounts of the Company’s financial assets and liabilities, including cash, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments.
Revenue recognition – The Company had two streams of principal revenue segments as of September 30, 2018, software subscription and cryptocurrency investments. The cryptocurrency investment segment primarily consisted of amounts earned through trading activities of cryptocurrencies. The Company recorded its investments in cryptocurrency as indefinite lived intangible assets, at cost less impairment, and are reported as long-term assets in the condensed consolidated balance sheets. Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statements of operations and comprehensive income. As of September 30, 2018, the Company liquidated substantially all of the tradeable cryptocurrency held by its cryptocurrency investment segment, although the Company continues to hold a small amount of tradeable cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and simple agreement for tokens agreements investments.
| 17 |
The Company also generated subscription revenues through its majority-owned subsidiary CoinTracking GmbH and generates minimal amounts of consulting revenue. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 supersedes nearly all existing revenue recognition guidance under US GAAP. The Company adopted ASU No. 2014-09 as of January 1, 2018 using the modified retrospective transition method for contracts as of the date of initial application. There is no cumulative impact to the Company’s retained earnings at January 1, 2018. See “Note 6 – Subscription Revenue Recognition” for additional information on the impact to the Company.
Share-based compensation - In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company measures the compensation costs of share-based compensation arrangements based on the grant date fair value of granted instruments and recognizes the costs in financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options.
Equity instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The compensation cost is remeasured at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees can result in significant volatility in compensation expense.
The Company accounts for its share-based compensation using the Black-Scholes model to estimate the fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non-employees are expected to hold their options prior to exercise, and (iii) risk-free interest rate.
Net loss per common share - The Company reports earnings per share (“EPS”) with a dual presentation of basic EPS and diluted EPS. Basic EPS is computed as net income divided by the weighted average of common shares for the period. Diluted EPS reflects the potential dilution that could occur from common shares issued through stock options, or warrants. For the three- and nine-month periods ended September 30, 2018, the Company had no potentially dilutive common stock equivalents. Therefore, the basic EPS and the diluted EPS are the same.
Marketing expense - Marketing expenses are charged to operations, under general and administrative expenses. The Company incurred $48,460 and $333,969 of marketing expenses for the three and nine months ended September 30, 2018, respectively, compared to $21,968 and $35,468 for the three months ended September 30, 2017 and for the period from Inception through September 30, 2017, respectively.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. The amendments in this ASU clarify certain aspects of the guidance related to: reporting comprehensive income, debt modification and extinguishment, income taxes related to stock compensation, income taxes related to business combinations, derivatives and hedging, fair value measurements, brokers and dealers liabilities, and plan accounting. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of ASU No. 2018-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, add, and modify certain disclosures. The ASU removes the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation process for Level 3 fair value measurements; and (4) certain other requirements for nonpublic entities. The ASU adds the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, disclosure of other quantitative information may be more appropriate if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU modifies disclosure requirements in Topic 820 relating to timing of liquidation of an investee’s assets, the disclosure of the date when restrictions from redemption might lapse, the intention of the measurement uncertainty disclosure, and certain other requirements for nonpublic entities. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
| 18 |
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software). The amendments in this ASU require an entity (customer) in a hosting arrangement that is a service to (1) determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense; (2) expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (3) apply the existing impairment guidance to the capitalized implementation costs as if the costs were long-lived assets; (4) present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting arrangements; and (5) present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-15 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. Management currently does not plan to early adopt this guidance. The new standard is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company is evaluating the effect that ASU No. 2018-07 will have on its consolidated financial statements and related disclosures.
In July 2017, the FASB issued No. ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Rounds and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments also require entities to recognize the effect of the down round feature on EPS when it is triggered. ASU 2017-11 should be adopted retrospectively or as a cumulative-effect adjustment as of the date of adoption, only to financial instruments outstanding as of the initial application date. ASU 2017-11 will be effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The adoption of ASU No. 2017-11 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
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In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The new standard became effective for us on January 1, 2018. Adoption of the ASU No. 2017-11 did not have a significant impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (Topic 805). The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606, Revenue from Contracts with Customers. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of ASU No. 2017-01 did not have a significant impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350) which removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. The amendments in this update should be applied under a modified retrospective approach. Adoption of ASU No. 2016-02 is not expected to have a significant impact on our consolidated financial statements and related disclosures.
NOTE 5 - ACQUISITION
On January 26, 2018, CT, a wholly-owned subsidiary of the Company, acquired 50.1% of the equity interest in CoinTracking GmbH, for (i) $4,736,400 in cash and (ii) 473,640 shares of common stock of the Company at $10 per share for a total purchase price valued at $9,472,800. On the acquisition date, the fair market value of $10 per share for the Company’s common stock was determined using a trading range from November 2017, discounted further due to lack of marketability. The Company used this approach due to the lack of trading volume since (i) the stock trading was suspended by the SEC in December 2017 and was moved to OTC Grey market by the OTC Markets Group, Inc. on January 3, 2018, (ii) stock sales to accredited investors on December 12, 2017, at $7 per share, and (iii) a valuation performed as of March 31, 2018. The equity purchase agreement between the Company and CoinTracking GmbH included a purchase price adjustment pursuant to which the consideration would increase if the share price of the Company’s common stock closed below $10 per share on July 2, 2018. No adjustment was required. CoinTracking GmbH provides its customers with the ability to view and monitor their own cryptocurrency portfolios as well as tax calculation and reporting services. Customers may not make trades through the CoinTracking GmbH platform. The purpose of the acquisition was to increase the Company’s presence in the digital asset industry and build strategic alliances.
The consolidated financial statements were prepared using the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations, and have been included in the Company’s consolidated results as of the acquisition date with the Company considered as the accounting acquirer and CoinTracking GmbH as the accounting acquiree.
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Accordingly, consideration paid by the Company to complete the acquisition was allocated to the identifiable assets and liabilities of CoinTracking GmbH based on estimated fair values as of the closing date. We made a preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed based on the information available and preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed. Acquisition-related costs were expensed as incurred and were not considered to be significant. We expect to complete the final purchase price allocation related to this acquisition and included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Subsequent to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. Therefore, the valuation of certain assets and liabilities in the CoinTracking GmbH acquisition is preliminary and subject to change.
The table below summarizes the fair values of the assets acquired and liabilities assumed, translated from euros to USD, at the date of acquisition:
| CoinTracking GmbH | ||||
| Cash and cash equivalents | $ | 1,547,097 | ||
| Investment in cryptocurrency | 1,115,345 | |||
| Loan receivable – related party | 194,380 | |||
| Other current assets | 296,273 | |||
| Goodwill | 11,990,910 | |||
| Intangible assets | 7,726,356 | |||
| Other assets | 14,633 | |||
| Total assets | $ | 22,884,994 | ||
| Current liabilities | $ | 360,486 | ||
| Contract liabilities, short term | 2,686,858 | |||
| Contract liabilities, long term | 929,866 | |||
| Noncontrolling interest | 9,434,984 | |||
| Total liabilities | 13,412,194 | |||
| Net assets acquired | $ | 9,472,800 | ||
The purchase price was based on the expected financial performance of CoinTracking GmbH and not on the value of the net identifiable assets at the time of acquisition. This resulted in a significant portion of the purchase price being attributed to goodwill. As a result, the Company recognized $11,990,910 of goodwill on the date of acquisition.
Unaudited pro forma financial information
The unaudited pro forma financial information in the table below presents the combined results of the Company and CoinTracking GmbH as if these acquisitions had occurred on January 1, 2018. The unaudited pro forma financial information includes adjustments required under the acquisition method of accounting and is presented for informational purposes only and is not necessarily indicative of the results that would have been achieved had the acquisitions actually occurred on January 1, 2018.
For the three and nine months ended September 30, 2018:
| Three-months | Nine Months | |||||||
| Revenue | $ | 1,227,971 | $ | 2,686,465 | ||||
| Net loss | (1,910,215 | ) | (11,001,482 | ) | ||||
| Basic and diluted loss per share: | ||||||||
| Basic and diluted | $ | (0.09 | ) | $ | (0.52 | ) | ||
Subsequent to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
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NOTE 6 – SUBSCRIPTION REVENUE RECOGNITION
CoinTracking GmbH accounts for a contract when it has approval and commitment from all parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue was recognized when control of the promised services was transferred to the Company’s customers over time, and in an amount that reflects the consideration the Company was contractually due in exchange for those services. Most of the Company’s contracts with customers were single, or had few distinct performance obligations, and the transaction price was allocated to each performance obligation using the stand-alone selling price.
CoinTracking GmbH’s revenue is primarily derived directly from users in the form of subscriptions. Subscription revenue is presented net of credits and credit card chargebacks. Subscribers pay in advance, primarily by PayPal or cryptocurrencies, subject to certain conditions identified in our terms and conditions. Revenue is initially deferred and recognized using the straight-line method over the term of the applicable subscription period, which primarily range from annual to perpetual.
Transaction Price
The objective of determining the transaction price was to estimate the amount of consideration the Company was due in exchange for services, including amounts that are variable. CoinTracking GmbH has a standalone sales price for its subscription service, which varies based on length of subscription. Further, the Company excluded from the measurement of transaction price all taxes assessed by governmental authorities that were both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts were not included as a component of revenue or cost of revenue.
Estimates of certain revenue
Revenue collected in advance for subscriptions ranging from annual to perpetual packages were deferred and recognized as revenue on a straight-line basis over the terms of the applicable subscription period or performance obligation period. For “lifetime” revenue packages, where the customer had access to the website for an unlimited length of time, the Company elected to recognize revenue on a straight-line basis over three years. We believe that based on the short history of customer data, customer relationship period, and number of available alternative providers, and anticipation of future changes to the blockchain industry, a measure of three years of performance obligation to customers was appropriate.
Net Revenue and Charge-back Reserves
CoinTracking GmbH does not maintain an allowance for doubtful accounts because the customer prepays for subscription in advance before access is provided to CoinTracking GmbH’s website. The Company maintained a reserve for potential credits issued to consumers or other revenue adjustments. In addition, as of September 30, 2018, PayPal withheld $36,583 for potential credits issued to customers, which is included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet.
Contract Liabilities
Contract liabilities were recorded when payments were received or due in advance of performing CoinTracking GmbH’s service obligations and was recognized over the service period, which primarily related to prepayments of subscription revenue. At the acquisition date of January 26, 2018, CoinTracking GmbH’s total contract liabilities were $3,616,724, and we recognized revenue of $2,570,795 for the nine months ended September 30, 2018. As of September 30, 2018, $2,122,316 of current contract liabilities were recorded and $1,173,531of long-term contract liabilities were recorded. As of December 31, 2017, we did not have consolidated contract liabilities.
Assets Recognized from the Costs to Obtain a Contract with a Customer
CoinTracking GmbH has determined that certain costs associated with affiliate payments paid to customers pursuant to certain sales incentive programs, meet the requirements to be capitalized as a cost of obtaining a contract. Affiliates are paid in Bitcoins and expense is amortized over the applicable subscription period.
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During the three and nine months ended September 30, 2018, the Company recognized expense of $87,520 and $150,274, respectively, related to the amortization of affiliate payments. The aggregate contract asset balance at September 30, 2018 was $146,071.
Subsequent to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
NOTE 7 - SEGMENT INFORMATION
The Company organized its operations into two segments: a software subscription segment and a cryptocurrency investment segment.
The software subscription segment primarily consisted of amounts earned through subscriptions to the CoinTracking GmbH website. Among other features, the CoinTracking GmbH website offers subscriptions, ranging from annual to perpetual, that allow individuals and entities to record exactly when and where they acquired virtual currencies of any variety, as well as their acquisition prices. Operating expense related to this segment was technology infrastructure and general administrative costs primarily incurred in Germany. Subsequent to September 30, 2018, we sold to Kachel Holding GmbH our entire equity ownership stake in CoinTracking GmbH, consisting of 12,525 shares representing 50.1% of the outstanding equity interests in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
The cryptocurrency investment segment primarily consisted of amounts earned, if any, through proprietary trading activities of cryptocurrencies, and costs were operating expenses that consists of general and administrative costs in North America. The Company did not trade or manage other individuals’ or entities’ funds and has no current plans to do so. As of September 30, 2018, the Company liquidated substantially all of the tradeable cryptocurrency held in this segment, although the Company continues to hold a small amount of tradeable cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and SAFT investments.
There are no intercompany internal revenue transactions between our reportable segments. These segments reflected the way our chief operating decision maker evaluated the Company’s business performance and managed its operations.
The following table summarizes the Company’s operating income by segment for the three months ended September 30, 2018 and 2017:
| Three months ended September 30, 2018 | ||||||||||||
| Cryptocurrency Investment | Software Subscription | Total | ||||||||||
| Revenue, net | $ | - | $ | 1,227,971 | $ | 1,227,971 | ||||||
| Costs and expenses | (1,929,000 | ) | (647,371 | ) | (2,576,371 | ) | ||||||
| Operating income/(loss) | $ | (1,929,000 | ) | $ | 580,600 | $ | (1,348,400 | ) | ||||
| Three months ended September 30, 2017 | ||||||||||||
| Cryptocurrency Investment | Software Subscription | Total | ||||||||||
| Revenue, net | $ | 6,000 | $ | - | $ | 6,000 | ||||||
| Costs and expenses | (1,688,941 | ) | - | (1,688,941 | ) | |||||||
| Operating income/(loss) | $ | (1,682,941 | ) | $ | - | $ | (1,682,941 | ) | ||||
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The following table summarizes the Company’s operating income by segment for the nine months ended September 30, 2018:
| Nine months ended September 30, 2018 | ||||||||||||
| Cryptocurrency Investment | Software Subscription | Total | ||||||||||
| Revenue, net | $ | - | $ | 2,570,795 | $ | 2,570,795 | ||||||
| Costs and expenses | (10,741,907 | ) | (2,415,537 | ) | (12,833,641 | ) | ||||||
| Operating income/(loss) | $ | (10,741,907 | ) | $ | (155,258 | ) | $ | (10,586,649 | ) | |||
The following table summarizes the Company’s operating income by segment for the period from Inception to September 30, 2017:
| Period from Inception to September 30, 2017 | ||||||||||||
| Cryptocurrency Investment | Software Subscription | Total | ||||||||||
| Revenue, net | $ | 6,000 | $ | - | $ | 6,000 | ||||||
| Costs and expenses | (3,361,507 | ) | - | (3,361,507 | ) | |||||||
| Operating income/(loss) | $ | (3,355,507 | ) | $ | $ | (3,355,507 | ) | |||||
NOTE 8 – INVESTMENTS, NON-CRYPTOCURRENCY
The Company invested $362,055 in non-tradeable token pre-sale and SAFT agreements. In addition, the Company invested $250,000 as part of a financing in accordance with a SAFE investment in a private enterprise. These investments are included as Level 3 investments as there was no active market as of September 30, 2018.
The Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are fair, consistent and verifiable. Non-cryptocurrency investments are carried at cost which approximates fair value at September 30, 2018. The Company considers the length of its investments, of which a majority were made during the current year, as well as its comprehensive investment process which includes reviews of white papers, preparation of either short or long forms analysis that is reviewed by the Company’s internal investment committee, among other factors in determining fair value. At the time that the investments are tokenized and available on active market exchanges, the investments will be reclassified to investments in cryptocurrency
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the nine months ended September 30, 2018:
| Level 3 | ||||
| Cryptocurrency | ||||
| Balance at December 31, 2017 | $ | 167,818 | ||
| Transfers to investments in cryptocurrency | (255,763 | ) | ||
| Purchases, sales, issuances, and settlement, net | 500,000 | |||
| Impairment | (250,000 | ) | ||
| Balance, September 30, 2018 | $ | 162,055 | ||
NOTE 9 - EQUIPMENT
Equipment consists of the following:
| September 30, 2018 | December 31, 2017 | |||||||
| Computer equipment | $ | 114,834 | $ | 69,241 | ||||
| Furniture equipment | 14,542 | 3,754 | ||||||
| 129,376 | 72,995 | |||||||
| Less accumulated depreciation | (26,730 | ) | (4,675 | ) | ||||
| $ | 102,646 | $ | 68,320 | |||||
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NOTE 10 – GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company’s goodwill balance is the result of the acquisition of CoinTracking GmbH in the current year (see footnote 5). Intangible assets include software development costs, related to the CoinTracking GMBH SaaS platform.
The carrying amount of goodwill for the nine months ended September 30, 2018 was as follows:
| September 30, 2018 | ||||
| Balance at December 31, 2017 | $ | - | ||
| Acquisitions | 11,990,910 | |||
| Foreign translation impact | (790,456 | ) | ||
| $ | 11,200,454 | |||
The Company evaluates the recoverability of goodwill annually as of December 31, and whenever events or changes in circumstances indicate to us that the carrying amount may not be recoverable. There were no conditions that indicated any impairment of goodwill as of September 30, 2018.
The carrying amounts of intangible assets for the nine months ended September 30, 2018 were as follows:
| Estimated Useful Life | Gross Carry Amount | Accumulated Amortization | Balance as of September 30, 2018 | |||||||||||
| Trade name | - | $ | 1,821,785 | - | $ | 1,821,785 | ||||||||
| Software | 5 Years | 4,322,158 | (590,230 | ) | 3,731,928 | |||||||||
| Customer base | 5 Years | 1,072,755 | (146,494 | ) | 926,261 | |||||||||
| Capitalized software | 5 Years | 129,669 | (14,407 | ) | 115,262 | |||||||||
| $ | 7,346,367 | $ | (751,131 | ) | $ | 6,595,236 | ||||||||
Intangible assets with finite useful lives are amortized over their respective estimated useful lives. Amortization expense related to intangible assets was $772,745 and $241,767 for the three and nine months ended September 30, 2018, respectively. There was not any amortization expense related to intangible assets in the respective prior year periods.
Amortization expense for intangible assets is included in general and administrative expenses. The following table provides estimated future amortization expense related to intangible assets as of September 30, 2018:
| Year ending December 31, | Future Amortization | |||
| 2018 (remaining) | $ | 275,149 | ||
| 2019 | 1.100,594 | |||
| 2020 | 1,100,594 | |||
| 2021 | 1,100,594 | |||
| 2022 | 1,100,594 | |||
| Thereafter | 95,926 | |||
| $ | 4,773,451 | |||
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NOTE 11 – WARRANTS FOR COMMON STOCK
As of September 30, 2018, outstanding warrants to purchase shares of the Company’s common stock were as follows:
| Number of Shares | ||||||||||||
| Issuance Date | Exercisable for | Expiration Date | Exercise Price | Outstanding Under Warrants | ||||||||
| September 2017 | Common Shares | September 25, 2020 | $ | 2.00 | 168,125 | |||||||
The warrants expire on the third anniversary of their issuance dates. The exercise price of the warrants is subject to adjustment from time to time, as provided therein, to prevent dilution of purchase rights granted thereunder. The warrants are considered indexed to the Company’s own stock and therefore no subsequent remeasurement is required.
NOTE 12 - SUMMARY OF STOCK OPTIONS
On July 21, 2017, the Company’s board of directors adopted The Crypto Company 2017 Equity Incentive Plan (the “Plan”), which was approved by its stockholders on August 24, 2017. The Plan is administered by the board of directors (the “Administrator”). Under the Plan, the Company may grant equity awards to eligible participants which may take the form of stock options (both incentive stock options and non-qualified stock options) and restricted stock awards. Awards may be granted to officers, employees, non-employee directors (as defined in the Plan) and other key persons (including consultants and prospective employees). The term of any stock option award may not exceed 10 years and may be subject to vesting conditions, as determined by the Administrator. Options granted generally vest over eighteen to thirty-six months. Incentive stock options may be granted only to employees of the Company or any subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Internal Revenue Code.
During the nine months ended September 30, 2018, the Company issued an additional 450,000 stock options to members of our board of directors, 1,957,062 stock options to employees, and 400,000 stock options to non-employees.
5,000,000 shares of the Company’s common stock are reserved for issuance under the Plan. As of the nine-month period ended September 30, 2018, there are outstanding stock option awards issued from the Plan covering a total of 2,144,492 shares of the Company’s common stock and there remain reserved for future awards 2,855,508 shares of the Company’s common stock.
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted | Remaining | |||||||||||||||
| Average | Contractual | Aggregate | ||||||||||||||
| Number | Exercise | Term | Intrinsic | |||||||||||||
| of Shares | Price | (years) | Value | |||||||||||||
| Options outstanding, at December 31, 2017 | 644,531 | $ | 2.32 | |||||||||||||
| Options granted | 2,807,062 | $ | 7.37 | |||||||||||||
| Options cancelled | (1,265,672 | ) | $ | 7.00 | ||||||||||||
| Options exercised | (41,429 | ) | $ | 2.09 | ||||||||||||
| Options outstanding, at September 30, 2018 | 2,144,492 | $ | 6.03 | 9.42 | $ | 88,384,029 | ||||||||||
| Exercisable | 914,847 | $ | 6.04 | 9.66 | $ | 37,863,445 | ||||||||||
| Vested and exercisable and expected to vest, end of period | 2,144,492 | $ | 6.03 | 9.42 | $ | 88,384,029 | ||||||||||
The Company recognized $512,648, and $4,562,089 of compensation expense related to stock options for the three and nine months ended September 30, 2018, respectively.
The total intrinsic value for options exercised, determined using the market price of our common stock on the date of exercise, was $0 and $203,282 during the three and nine months ended September 30, 2018, respectively.
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During the nine-month period ended September 30, 2018 and the period from Inception through September 30, 2017 the Company had not granted any restricted stock awards.
As of September 30, 2018, approximately $1,400,000 of total unrecognized compensation costs related to stock options issued to employees is expected to be recognized over a weighted average period of approximately 1.10 years.
The determination of the fair value of share-based compensation awards utilizing the Black-Scholes model is affected by the Company’s stock price and a number of complex and subjective assumptions, including stock price, volatility, expected life of the equity award, forfeitures rates if any, risk-free interest rates and expected dividends. Volatility is based on the historical volatility of comparable companies measured over the most recent period, generally commensurate with the expected life of the Company’s stock options, adjusted for future expectations given the Company’s limited historical share price data.
The risk-free rate is based on implied yields in effect at the time of the grant on U.S. Treasury zero-coupon bonds with remaining terms equal to the expected term of the stock options. The expected dividend is based on the Company’s history and expectation of dividend payouts. Forfeitures are recognized when they occur.
The range of assumptions used for the nine-month period ended September 30, 2018 are as follows:
| September 30, 2018 | ||||
| Ranges | ||||
| Volatility | 36 - 75 | % | ||
| Expected dividends | 0 | % | ||
| Expected term (in years) | 5.00 - 10 years | |||
| Risk-free rate | 1.91 – 3.05 | % | ||
Stock options issued to nonemployees are revalued at each vesting tranche and/or reporting date in accordance with ASC 505.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has a services agreement with Full Stack Finance for chief financial officer and accounting outsource services. Ivan Ivankovich, the Company’s CFO, is the Co- Managing Director of Full Stack Finance. The Company paid a total of $87,150 and $454,199 in fees to Full Stack Finance during the three-month and nine-month period ended September 30, 2018, respectively, and as of September 30, 2018, there was a balance of $142,854 due to Full Stack Finance, which is included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets.
The Company has a loan receivable from an officer of CoinTracking GmbH as of September 30, 2018 totaling $176,489. The loan is due upon demand and it bears interest at 2%. During the quarter ended September 30, 2018 and the period from Inception to September 30, 2017 interest income accrued for this loan was $2,400 and $0, respectively, which is included in other income/(expense) on the accompanying condensed consolidated statements of operations. In addition, the company has a shareholder receivable of $939,155 from this officer of CoinTracking GmbH, representing the sale of a majority of the Company’s investment in cryptocurrency in its software subscription segment in accordance with a shareholder resolution entered into on September 21, 2018. Subsequent to September 30, 2018, the Company received this amount from the officer of CoinTracking GmbH on October 2, 2018.
On April 3, 2018, CT entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, pursuant to which CoinTracking GmbH may provide a loan (the “CoinTracking Loan”) of up to $3,000,000 to CT, to be advanced to CT in one or more tranches, at such times and in such amounts as may be requested by CT from time to time, on or before the tenth anniversary of the Loan Agreement. The Company is deemed obligor of CT’s obligations under the Loan Agreement for United States Federal income tax purposes. Interest on the CoinTracking Loan will accrue at a rate per annum of the greater of (i) three percent (3%), or (ii) the interest rates published monthly by the United States Internal Revenue Service and in effect under section 1274(d) of the Internal Revenue Code in effect as of the date of issuance of any promissory note under the CoinTracking Loan, and will be payable quarterly. During the three months ended September 30, 2018, pursuant to the Loan Agreement, CoinTracking GmbH advanced $1,500,000 to CT in exchange for three promissory notes (the “CoinTracking Note”) in the amounts of $300,000, $700,000 and $500,000, respectively, which is still outstanding as of September 30, 2018. The CoinTracking Note will mature on the second anniversary thereof. CT and CoinTracking GmbH are consolidated entities, as such, the loan and advances are intercompany transactions and are eliminated in consolidation. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH, and $1,200,000 of the sale proceeds was applied toward repayment of the $1,500,000 outstanding loan amount under the CoinTracking Note. See “Note 16 - Subsequent Events” for additional details.
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Effective May 14, 2018, Michael Poutre, former Chief Executive Officer and director of the Company resigned from all of his then-current roles with the Company. Mr. Poutre remained a consultant to the Company until subsequent to September 30, 2018, when he ceased to be a consultant in November 2018. In connection with Mr. Poutre’s resignation, the Company entered into a Separation and Consulting Agreement and General Mutual Release (the “Separation and Consulting Agreement”), which was executed on May 9, 2018 and approved by the Board of Directors on May 14, 2018. The Separation and Consulting Agreement was not effective until May 17, 2018, following the end of the revocation period. The Separation and Consulting Agreement provides that the Company pays Mr. Poutre a lump-sum cash payment of (i) his earned but unpaid base salary, (ii) his accrued but unpaid vacation time, and (iii) any outstanding requests for expense reimbursements that are approved pursuant to Company policy. Mr. Poutre served as a consultant of the Company for six months at a rate of $30,000 per month, payable in two separate tranches, though the Company may terminate his services for any reason. As of September 30, 2018, $90,000 remained unpaid, included in accounts payable and accrued expenses on the Company’s condensed consolidated balance sheet. The Separation and Consulting Agreement contains other standard provisions contained in agreements of this nature including non-disparagement and a general release of any and all claims.
NOTE 14 - BASIC AND DILUTED LOSS PER SHARE
The following is a reconciliation of the basic and diluted loss per share computations:
| For the three months ended September 30, 2018 | For the nine months ended September 30, 2018 | |||||||
| Numerator for basic and diluted income per share: | ||||||||
| Net loss attributable to the Company | $ | (7,331,622 | ) | $ | (16,235,817 | ) | ||
| Denominator for basic and diluted income per share: | ||||||||
| Weighted average shares (basic) | 21,172,782 | 21,060,434 | ||||||
| Common stock equivalents | - | - | ||||||
| Weighted average shares (diluted) | 21,172,782 | 21,060,434 | ||||||
| Basic and diluted income (loss) per share: | ||||||||
| Basic and diluted | $ | (0.35 | ) | $ | (0.77 | ) | ||
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Subsequent to September 30, 2018, on November 1, 2018, the Company relocated its corporate office and entered into a month-to-month office agreement with Regus Management Group, LLC for $344 per month. Facility rent expense was $27,813 and $94,111 for the three and nine months ended September 30, 2018, respectively, and $18,000 for the three months ended September 30, 2018 and $27,000for the period from Inception to September 30, 2017 respectively.
Legal Contingencies – As previously disclosed, we received a subpoena on May 15, 2018, from the SEC’s Division of Enforcement in connection with a formal investigation it is conducting involving us as well as other unrelated public issuers who are holders of or provide services related to digital assets. The subpoena requested that we produce certain documents to the SEC’s Division of Enforcement by May 30, 2018. We are unable to predict how long the SEC’s investigation will continue or whether, at the conclusion of its investigation, the SEC will seek to impose fines or file an enforcement action against us. Additionally, the Company may from time to time become subject to legal proceedings, claims, and litigation arising in the ordinary course of business.
Indemnities and guarantees - During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the Company’s officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their respective relationships. In connection with its facility lease, the Company has indemnified the lessor for certain claims arising from the use of the facility. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these indemnities and guarantees in the accompanying balance sheet.
Note 16 - SUBSEQUENT EVENTS
On October 10, 2018, the Company issued to two accredited investors 40,000 shares of common stock of the Company at a price of $5.00 per share, for net aggregate proceeds of $200,000.
On December 28, 2018, CT entered into an agreement on the purchase and assignment of shares, agreements on a purchase price of loan agreement and a compensation agreement, pursuant to the laws of the Republic of Germany, with Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany (“Kachel Holding”), and CoinTracking GmbH pursuant to which, on January 2, 2019, CT sold 12,525 shares of equity interest in CoinTracking GmbH, representing 50.1% of the outstanding equity interests in CoinTracking GmbH and CT’s entire equity ownership stake in CoinTracking GmbH, to Kachel Holding in exchange for $2,200,000, of which (i) $1,000,000 was paid in cash to CT and (ii) $1,200,000 was applied toward the repayment of an outstanding loan in the amount of $1,500,000 from CoinTracking GmbH to CT under the CoinTracking Note.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (“Quarterly Report”) and with our audited consolidated financial statements, including the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the period from March 9, 2017 (“Inception”) through December 31, 2017, as filed on April 2, 2018 with the U.S. Securities and Exchange Commission (“SEC”), as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on September 14, 2018, as further amended by Amendment No. 2 on Form 10-K/A filed with the SEC on April 4, 2019 (“2017 Annual Report”). In addition to historical condensed consolidated financial information, the following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs and involve risks and uncertainties. The words “may,” “could,” “should,” “estimate,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “target,” “plan” and similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report, as well as risks referenced in our other filings with the SEC, including Part I, Item 1A. “Risk Factors” of the 2017 Annual Report.
Overview of Our Business
In the discussion below, when we use the terms the “Company”, “we”, “us” and “our”, we refer to The Crypto Company, a Nevada corporation, and, where appropriate, its wholly owned subsidiaries, Crypto Sub, Inc., a Nevada corporation; CoinTracking, LLC, a Nevada limited liability company (“CT”); Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”); and, where applicable, CT’s former majority-owned subsidiary, CoinTracking GmbH, which was sold subsequent to September 30, 2018 as discussed below in “Recent Events”.
Recent Events
On January 2, 2019, CT sold 12,525 shares of equity interest in CoinTracking GmbH, representing 50.1% of the outstanding equity interests in CoinTracking GmbH and CT’s entire equity ownership stake in CoinTracking GmbH, to Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany, in exchange for $2,200,000, of which (i) $1,000,000 was paid in cash to CT and (ii) $1,200,000 was applied toward the repayment of an outstanding loan in the amount of $1,500,000 from CoinTracking GmbH to CT.
We are engaged in the business of building technological infrastructure. We are also engaged in the business of building strategic alliances to assist third parties in the exchange of value in the digital asset market, solely by providing such third parties with tools, computer software/programming and educational material that may prove useful to them as they independently invest in, trade and manage their own digital assets. We also seek to build strategic alliances with other companies and from time to time may seek strategic acquisitions of entities or technologies that we believe may aid our development of proprietary products and tools designed to help third parties to independently invest in, trade and manage their own digital assets.
Business Segments
The Company had two business segments as of September 30, 2018:
The cryptocurrency investment segment primarily consisted of amounts earned through trading activities of cryptocurrencies. The Company recorded its investments in cryptocurrency as indefinite lived intangible assets, at cost less impairment, and are reported as long-term assets in the condensed consolidated balance sheets. Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statement of operations and comprehensive income. As of September 30, 2018, the Company liquidated substantially all of the tradeable cryptocurrency held in this segment, although the Company continues to hold a small amount of tradeable cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and simple agreement for tokens agreements investments.
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The Company also generated software subscription revenues through CoinTracking GmbH and generates minimal amounts of consulting revenue. The software subscription segment consisted primarily of amounts earned through subscriptions to the CoinTracking GmbH website. Operating expenses related to this segment consisted primarily of technology infrastructure and general administrative costs primarily incurred in Germany.
CoinTracking GmbH Platform
Prior to our divestiture on January 2, 2019 of our entire equity ownership stake in CoinTracking GmbH, we were the majority owner of CoinTracking GmbH. CoinTracking GmbH, operates a Software as a Service (“SaaS”) platform for cryptocurrency (“coin” or “cryptocurrency”) tracking. Subscribers pay in advance for the services, primarily by PayPal or cryptocurrencies, and the subscription periods range from annual to perpetual. The CoinTracking GmbH platform allows individuals and entities to record exactly when and where they acquired coins of any variety, as well as the acquisition prices for those coins. The platform also assists subscribers in determining the current trading price for a variety of coins on various third-party exchanges, such as Bittrex, Kraken and Coinbase, and has a number of other features designed to make the CoinTracking GmbH platform a valuable landing portal for holders of cryptocurrencies. Key features include those designed to allow users to see a current and historical “dashboard” view of their coin-based holdings and activities and to assist users in accounting for gains and losses without having to go to many other websites on a piecemeal basis or requiring use of a calculator and electronic spreadsheet.
Technology
We are developing proprietary technology and source code to create products and services that will assist third parties by providing them with the tools, computer programming and training to independently trade and manage their own digital assets, including trading management and auditing software, tools and processes to assist in the operations of companies, from start-up businesses to well-established companies. We do not provide, and do not intend to provide, any functionality that allows a subscriber to make any form of cryptocurrency trade. A subscriber must go to an unrelated third-party website or exchange in order to enter into a virtual currency purchase or sale transaction. We may consider using our technology or license technology from third parties to build additional units around our existing platform, or we may consider selling or licensing our technology to third-party institutions for a fee.
We are currently beta testing possible software solution related indices. The indices are algorithmic in that they are designed with rule sets that can be programmatically (not manually curated) based on pricing and supply information available from exchanges and other websites in what we believe to be a more user-friendly format.
Strategic Acquisitions
In furtherance of our development of the technology and source code necessary to create products and services to assist third parties to independently invest in, trade and manage their own digital assets and to build strategic alliances to better supply services that may facilitate the exchange of value in the digital asset marketplace, we may seek from time to time strategic acquisitions of majority and minority equity interests in entities and technology that demonstrate (i) established, protectable and scalable revenues; (ii) substantial market share; (iii) established brand equity and customer loyalty; (iv) proprietary technology with competitive advantages; (v) quality personnel; and (vi) strategic access to international markets.
Results of Operations
Comparison of the three months ended September 30, 2018 and the three months ended September 30, 2017
Revenue
Cryptocurrency Investment Segment
For the three months ended September 30, 2018, our cryptocurrency investment segment did not generate any revenues.
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Software Subscription Segment
We recorded software subscription revenue of $1,227,971 for the three months ended September 30, 2018, from the acquired CoinTracking GmbH business. This segment had no revenues for the three months ended September 30, 2017 as the segment was not acquired until January 26, 2018.
CoinTracking GmbH has a standalone sales price for its subscription service. Subscription services collected in advance, which are initially deferred and recognized as revenue on a straight-line method over the terms of the applicable subscription period, are fixed in the quantity of cryptocurrency received. Subscription services recorded as deferred revenue upon sign-up are recognized based on the current market value of the cryptocurrency on the date received. Therefore, the amount we recognized as revenue fluctuated based on the fluctuation in cryptocurrency market values. Bitcoin represented over 90% of our cryptocurrency receipts under the software subscription segment.
General and administrative expenses and share based compensation
Cryptocurrency Investment Segment
For the three months ended September 30, 2018, our general and administrative expenses were $1,343,645 in this segment, compared to $972,434 for the three months ended September 30, 2017. General and administrative expenses consist primarily of costs relating to professional fees, payroll and payroll-related expenses and depreciation and amortization expenses.
Professional services included in general and administrative expenses consisted primarily of contracting fees, consulting fees, accounting fees, and legal costs. The increase for 2018 reflects increased costs associated with being a public company, in particular outside legal and accounting costs.
Share-based compensation was $512,648 for the three months ended September 30, 2018, compared to $716,507 for the three months ended September 30, 2017. Share-based compensation decreased due to a decline in the value of the Company’s common stock, resulting in an adjustment to offset a portion of the previously recorded share-based compensation for non-employees, which are remeasured quarterly. In addition, stock compensation decreased due to the cancellation of 1,265,672 stock options during the three months ended September 30, 2018.
Software Subscription Segment
For the three months ended September 30, 2018, we incurred $519,463 in general and administrative expenses in this segment, which primarily consisted of costs relating to professional fees, marketing costs, affiliate payments paid to customers, payroll and payroll-related expenses and depreciation and amortization expense from the acquired CoinTracking GmbH business. Depreciation and amortization expense was $203,684 for the three months ended September 30, 2018, primarily due to amortization of certain intangible assets acquired in connection with the acquisition of CoinTracking GmbH. The intangible assets were determined based on completion of the preliminary allocation of the fair value of the assets and liabilities acquired. This segment had no operations for the prior year period.
Professional fees primarily included legal and accounting fees.
Net change in realized gains/(losses) on investment in cryptocurrency
Cryptocurrency Investment Segment
We recorded net realized gains from our sales of cryptocurrencies in this segment of $137,985 for the three months ended September 30, 2018, compared to net realized gains of $481,692 in the prior year period. Our realized gains and losses are primarily from market fluctuations in our investments in cryptocurrency and are measured based on the market value at the time of sale, compared to our historical cost, less impairment where appropriate.
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Software Subscription Segment
We recorded net realized losses from our sales of cryptocurrencies in this segment of $29,065 for the three months ended September 30, 2018. This segment had no operations in the prior year period. Our realized gains and losses are primarily from market fluctuations in our holdings of cryptocurrency and are measured based on the market value at the time of sale or disbursement, compared to our historical cost, less impairment where appropriate.
Impairment
We recognize impairment on investments in cryptocurrency and investments, non-cryptocurrency caused by decreases in market value based upon Level 1 and Level 3 inputs, respectively. See Fair value of Financial Instruments above. Such impairment in the value of our cryptocurrencies is included in other income (expense) in our condensed consolidated statements of operations.
Cryptocurrency Investment Segment
Impairment of investments, non-cryptocurrency in this segment was $250,000 and $0 for the three months ended September 30, 2018 and 2017, respectively. During the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment representing the full value of its investment.
Software Subscription Segment
Impairments of cryptocurrencies in this segment was $86,304 for the three months ended September 30, 2018. This segment had no operations in the prior year period.
Comparison of the nine months ended September 30, 2018 and for the period from Inception to September 30, 2017
Revenue
Cryptocurrency Investment Segment
For the nine months ended September 30, 2018, our cryptocurrency investment segment did not generate any revenues.
Software Subscription Segment
We recorded software subscription revenue of $2,570,795 for the nine months ended September 30, 2018, from the acquired CoinTracking GmbH business. This segment had no revenues for the period from Inception to September 30, 2017 as the segment was not acquired until January 26, 2018.
General and administrative expenses and share based compensation
Cryptocurrency Investment Segment
For the nine months ended September 30, 2018, our general and administrative expenses were $6,107,111 in this segment compared to $2,278,283 for the period from Inception to September 30, 2017. General and administrative expenses consist primarily of costs relating to professional fees, and payroll and payroll-related expenses.
Professional services included in general and administrative expenses consisted primarily of contracting fees, consulting fees, accounting fees, and legal costs. The increase for the nine months ended September 30, 2018 reflects increased costs associated with being a public company, in particular outside legal and accounting costs. In addition, the prior year period includes general and administrative expenses for a period of less than seven months.
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Share-based compensation was $4,562,089 for the nine months ended September 30, 2018, compared to $1,083,224 for the period from Inception to September 30, 2017. Share-based compensation increased primarily due to the issuance of 1,541,390 stock options, net of cancellations, to our employees and advisors for the nine months ended September 30, 2018, compared to 585,000 for the prior year period. In addition, share-based compensation includes $1,417,584 for the nine months ended September 30, 2018 for common stock issued to our former CEO, James Gilbert, in connection with services rendered, compared to $1,045,450 for the period from Inception to September 30, 2017, for common stock issued to certain officers and consultants for services rendered, including services in connection with a stock dividend, stock sale and share exchange.
Software Subscription Segment
For the nine months ended September 30, 2018, we incurred $1,897,453 in general and administrative expenses in this segment, which primarily consisted of costs relating to professional fees, and payroll and payroll-related expenses from the acquired CoinTracking GmbH business. Depreciation and amortization expense was $760,043 for the nine months ended September 30, 2018, primarily due to amortization of certain intangible assets acquired in connection with the acquisition of CoinTracking GmbH. The intangible assets were determined based on completion of the preliminary allocation of the fair value of the assets and liabilities acquired. This segment had no operations for the prior year period.
Net change in realized gains/(losses) on investment in cryptocurrency
Cryptocurrency Investment Segment
We recorded net realized gains from sales of cryptocurrencies in this segment of $1,280,748 for the nine months ended September 30, 2018, compared to $564,332 for the period from Inception to September 30, 2017. Our realized gains are primarily from market fluctuations in our investments in cryptocurrency and are measured based on market value at the time of sale, compared to our historical cost, less impairment where appropriate.
Software Subscription Segment
We recorded net realized gains from our sales of cryptocurrencies in this segment of $22,685 for the nine months ended September 30, 2018. This segment had no operations in the prior year period. Our realized gains and losses are primarily from market fluctuations in our holdings of cryptocurrency and are measured based on the market value at the time of sale or disbursement, compared to our historical cost, less impairment where appropriate.
Impairment
Cryptocurrency Investment Segment
Impairment of investment in cryptocurrency was $1,165,175 for the nine months ended September 30, 2018. There was no impairment for the period from Inception to September 30, 2017. The market value of cryptocurrencies has decreased in 2018, resulting in a decline below carrying cost for most of our investments.
Impairment of investments, non-cryptocurrency in this segment was $250,000 and $0 for the nine months ended September 30, 2018 and the period from Inception to September 30, 2017, respectively. During the third quarter of 2018, the Company determined that its SAFE investment was impaired as the enterprise changed its primary business model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment representing the full value of its investment.
Software Subscription Segment
Impairments of cryptocurrencies in this segment was $704,066 for the nine months ended September 30, 2018. This segment had no operations in the prior year period.
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Liquidity, Going Concern and Capital Resources
Our condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with US GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred significant losses and experienced negative cash flows from operations since Inception. As of September 30, 2018, the Company had cash of $387,287, a decline of $8,562,957 from the December 31, 2017 balance of $8,950,244. This decline is due, in part, to the acquisition of CoinTracking GmbH in January 2018, which included $3,189,303 of cash consideration, net of acquired cash. The Company’s working capital was ($1,582,593) as of September 30, 2018, which includes a contract liability of $2,122,316, representing advanced payments from customers for subscription service, which is initially deferred and recognized on a straight-line method over the terms of the applicable subscription period. Management does not anticipate settling this liability in cash. During the three months ended September 30, 2018, the Company liquidated the majority of the tradeable cryptocurrency held in its cryptocurrency investment segment which had a balance of $1,007,753 at June 30, 2018, to help fund its operations. As of September 30, 2018, the accumulated deficit amounted to $20,656,840. As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management is evaluating different strategies to obtain financing to fund the Company’s expenses and achieve a level of revenue adequate to support the Company’s current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations. There can be no assurance that any of these future-funding efforts will be successful or that the Company will achieve its projected level of revenue in 2019 and beyond. The 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.
The following table summarizes the primary sources and uses of cash for the period presented below:
| Nine Months ended September 30, 2018 | ||||
| Net cash used in operating activities | $ | (5,864,773 | ) | |
| Net cash used in investing activities | (2,576,818 | ) | ||
| Net cash provided by financing activities | 50,057 | |||
| Effects of exchange rate on cash | (171,423 | ) | ||
| Net decrease in cash and cash equivalents | $ | (8,562,957 | ) | |
Operating Activities
We have incurred, and expect to continue to incur, significant expenses in the areas of professional fees and contracting services.
Net cash used in operating activities for the nine months ended September 30, 2018 was $5,864,773 compared to $2,215,518 for the period from Inception to September 30, 2017. The increase of $3,649,255 was primarily due to an increase in our net loss to $11,293,805 for the nine months ended September 30, 2018 compared to $2,793,994 the period from Inception to September 30, 2017. In addition, our net realized gain on investments in cryptocurrency increased to $1,303,433 for the nine months ended September 30, 2018 from $564,332 the period from Inception to September 30, 2017, and our deferred revenue, part of our software subscription segment acquired in 2018, decreased $1,188,092 for the nine months ended September 30, 2018 compared to the period from Inception to September 30, 2017, due to a decrease in subscription sales beginning in the second quarter of the current year. This decrease was offset, in part, by an increase in non-cash share-based compensation to $4,562,088 for the nine months ended September 30, 2018 compared to $1,083,224 in the prior year, higher depreciation and amortization expense of $897,302 for the nine months ended September 30, 2018 compared to $1,918 in the prior year period, and an impairment loss on investments in cryptocurrency of $1,869,241 for the nine months ended September 30, 2018, compared to $0 in the prior year period.
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The increased loss for the nine months ended September 30, 2018 was primarily due to a growth in our general and administrative expenses, as these costs have increased as the result of being a public company and include amortization expense for the intangibles assets acquired in connection with our acquisition of CoinTracking GmbH in January 2018. In addition, share-based compensation is higher for the nine months ended September 30, 2018 compared to the prior year period, as the Company has granted significant stock options to employees and non-employees and issued shares of common stock to the Company’s former CEO, James Gilbert for services rendered. Finally, in the first nine months of September 2018, we incurred a significant impairment loss on our investments in cryptocurrency, due to a decline in market value. There was no impairment in the prior year. Management is implementing numerous cost cutting measures to reduce its expenditures, in particular as it relates to payroll and payroll related costs, consulting services, contracting fees, consulting fees, accounting fees, and legal costs.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2018 was $2,576,818 compared to $169,089 for the prior year period, due to the acquisition of CoinTracking GmbH on January 26, 2018 for $3,189,303, net of acquired cash of $1,547,097, offset by sales of investments in cryptocurrency, net of purchases of $1,278,524, for the nine months ended September 30, 2018, and the purchase of additional SAFT and SAFE investments included in Investments, non-cryptocurrency of $494,426. There was no cash used to purchase investments in cryptocurrency in the prior year period.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2018 was $50,057, compared to $4,976,011 in the prior year period. The decrease of $4,925,954 was the result of three separate common stock issuances in the prior year period, totaling 1,635,355 shares and net proceeds of $4,976,011. There were no such issuances in the nine months ended September 30, 2018.
Trends, Events and Uncertainties
Other than as discussed elsewhere in this Quarterly Report, our Forms 10-Q for the three months ended March 31, 2018 and June 30, 2018, and our 2017 Annual Report, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent liabilities. We base our judgments on our historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making estimates about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have no material changes to our Critical Accounting Policies and Estimates disclosure as filed in our 2017 Annual Report.
Recent Accounting Pronouncements
See Note 4 to the condensed consolidated financial statements for a discussion of recent accounting pronouncements.
Off-Balance Sheet Transactions
We do not have any off-balance sheet transactions.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
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ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2018. Based upon (1) that evaluation, (2) the fact that the Company’s previously issued financial statements for the period from Inception to December 31, 2017 and each fiscal quarter therein, and for the quarterly periods ended March 31, 2018 and June 30, 2018 (collectively, the “Relevant Periods”), should no longer be relied upon because of errors in those financial statements and (3) the fact that the Company is restating those financial statements in this Quarterly Report and the Company’s subsequent periodic reports to correct such errors, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2018, due to the material weaknesses in our internal control over financial reporting in connection with the Company’s previous accounting treatment for its investments in cryptocurrency, as well as the material weaknesses in our internal control over financial reporting described in the 2017 Annual Report, which have not yet been remediated.
The errors that necessitated restatement of the Company’s previously issued financial statements for the Relevant Periods resulted from (1) the misclassification of accounting for investments in cryptocurrency at fair value, as opposed to intangible assets with indefinite lives and recording such investments in cryptocurrency at cost less impairment, if any, and (2) the misclassification of accounting for certain investments in token pre-sale and simple agreements for future tokens that were incorrectly described as investments in Initial Coin Offerings and included as investments in cryptocurrency in the Company’s condensed consolidated balance sheets when such investments should be included as investments, non-cryptocurrency in the Company’s condensed consolidated balance sheets.
As we previously disclosed in our 2017 Annual Report, the other matters involving internal controls and procedures that our management considered to be material weaknesses were as follows:
| ● | we have not performed a risk assessment and mapped our processes to control objectives; | |
| ● | we have not implemented comprehensive entity-level internal controls; | |
| ● | we have not implemented adequate system and manual controls; and | |
| ● | we do not have sufficient segregation of duties. |
Management’s Actions and Plans to Remediate Material Weaknesses
Management is responsible for implementing changes and improvements to internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses. Management believes that progress has been made to remediate the underlying causes of the material weaknesses in internal control over financial reporting and has taken the following steps to remediate such material weaknesses:
| ● | Implemented a formal quarterly review of financial information with our Chief Executive Officer and each managing director that oversees a portion of the business. These individuals provide a certification that the operating results are accurate to the best of their knowledge. | |
| ● | Account reconciliations are now prepared for all material accounts and independently reviewed. | |
| ● | Expenditures are approved by our Chief Executive Officer. | |
| ● | We have hired a Controller. |
Management plans to take the following steps to further remediate the material weaknesses as follows:
| ● | Perform a risk assessment and map processes to control objectives and, where necessary, implement and document internal controls in accordance with the 2013 Committee of Sponsoring Organizations of the Treadway Commission. | |
| ● | Our entity-level controls are, generally, informal and we intend to evaluate current processes, supplement where necessary, and document requirements. | |
| ● | Evaluate system and manual controls, identify specific weaknesses, and implement a comprehensive system of internal controls. | |
| ● | Asses and remediate personnel weaknesses. | |
| ● | Appoint a Chief Financial Officer with public company experience. |
Management understands that in order to remediate the Company’s material weaknesses, additional segregation of duties, changes in personnel and technologies are necessary. We will not consider these material weaknesses fully remediated until management has tested those internal controls and found them to be operating effectively.
Changes in Internal Control over Financial Reporting
Other than as described above, there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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See discussion of legal proceedings in Note 15 (Commitments and Contingencies) to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report, which is incorporated by reference into this Item 1 of Part II.
+ This document is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: July 26, 2019 | THE CRYPTO COMPANY | |
| (Registrant) | ||
| By: | /s/ Ron Levy | |
| Ron Levy | ||
| Chief Executive Officer, Chief Operating Officer and Secretary (Principal Executive Officer) | ||
| By: | /s/ Ivan Ivankovich | |
| Ivan Ivankovich | ||
| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
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SETTLEMENT AGREEMENT AND GENERAL MUTUAL RELEASE
This SETTLEMENT AGREEMENT AND GENERAL MUTUAL RELEASE (the “Agreement”), dated as of the date of the last signature below (“Effective Date”), is made by and between The Crypto Company, Inc. (“Company”) and James Gilbert (“Director” and, collectively with Company, the “Parties”).
WHEREAS, Director currently is a Director and Chairman of the Board, and he is resigning from both positions;
WHEREAS, the Parties have come to an agreement regarding the conclusion of Director’s services as a Director and Chairman of the Board he holds or held with Company and all of its parents, subsidiaries and affiliates;
WHEREAS, the Parties acknowledge that (1) the law firm of Drinker Biddle & Reath LLP (“DBR”) currently represents the Company and has discussed representing Director in various separate legal matters unrelated to this Agreement and the attached Release Agreement, (2) DBR represents the Company in connection with this Agreement; (3) Director consents to DBR representing Company in connection with this Agreement; (4) the Parties acknowledge their respective right to consult with and retain separate counsel with respect to their respective waivers, and have been provided an opportunity to do so; and (5) the Parties hereby waive any actual or potential conflict of interest as a result of DBR’s legal representation of the Company in connection with this Agreement and its representation of the Company and potential representation of the Director in separate legal matters.
NOW, THEREFORE, in consideration of the mutual promises of the parties to this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Company and Director agree as follows:
1. Incorporation of Recitals. The recitals above are hereby incorporated by reference as contractual terms of this Agreement.
2. Termination of Service and Resignation from Offices. As of the date the resignation letter is signed, (the “Termination Date”), Director resigns from all offices, appointments, and positions he holds with Company, and any of Company’s parents, subsidiaries and affiliates, including his position as Chairman of the Board of Directors. After the Termination Date, Director shall not represent that Director is a, director, employee or officer of Company or any of its parents, subsidiaries and affiliates for any purpose.
3. Releases. As an express condition for the obligations set forth in this Agreement, Director and Company will execute the Release Agreement attached hereto as Exhibit A, which shall become binding on the Parties as of the Effective Date. In the event the Release Agreement is not fully executed, this Agreement shall be void ab initio and of no force.
4. Mutual Non-Disparagement. Director agrees not to make to any person or entity any false, disparaging, or derogatory comments about Company or any of their parents, subsidiaries and affiliates, or any of their employees, clients, contractors, and agents. Company’s executive management team and board members agree that it will not make to any person or entity any false, disparaging, or derogatory comments about Director, and that it will direct its senior management team not to make to any person or entity any false, disparaging, or derogatory comments about Director.
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5. Return of Records and Property. Upon the Termination Date or at any time upon Company’s (or its successors’) reasonable request, Director shall promptly deliver to Company any and all of Company’s property in his possession or under his control, including manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, printouts, computer disks, computer tapes, source codes, data, tables, or calculations, and all copies thereof, documents that in whole or in part contain any trade secrets or confidential, proprietary, or other secret information of Company, or its respective subsidiaries or affiliates, and all copies thereof, and keys, access cards, access codes, passwords, credit cards, personal computers, telephones, and other electronic equipment belonging to Company.
6. General Provisions.
a. Restrictions. Notwithstanding anything to the contrary herein, Director understands that nothing in this Agreement or any other agreement that Director may have with Company restricts or prohibits Director from initiating communications directly with, responding to any inquiries from, providing testimony before, providing confidential information to, reporting possible violations of law or regulation to, or from filing a claim or assisting with an investigation directly with a self-regulatory authority or a government agency or entity, including but not limited to the Securities Exchange Commission and the federal Office of Occupational Health (collectively, “Government Agencies”), or from making other disclosures that are protected under the whistleblower provisions of state or federal law or regulation, and Director does not need Company’s prior authorization to engage in such conduct. Notwithstanding, in making any such disclosures or communications, Director must take all reasonable precautions to prevent any unauthorized use or disclosure of any information that may constitute Company’s confidential information to any parties other than the Government Agencies. This Agreement does not limit Director’s right to receive an award for information provided to any Government Agencies.
b. No Admission. This Agreement is not, and shall not be construed to be, an admission of liability, culpability, or any other legal conclusion. The Parties agree that no Party to this Agreement is to be construed as the prevailing or successful party within the meaning of any federal, state, or local statute, law, ordinance, rule, or regulation with regard to the decision to enter into this Agreement.
c. Modification. This Agreement may not be released, discharged, abandoned, supplemented, changed, or modified in any manner, orally or otherwise, except by an instrument in writing signed and duly executed by each of the Parties hereto.
d. Entire Agreement. This Agreement and the Release Agreement contain and constitute the entire understanding and agreement between the Parties on its subject matter, and, except as otherwise provided herein, they supersede and cancel all previous negotiations, agreements, commitments, and writings in connection herewith. If a conflict or inconsistency is found between the terms of this Agreement and any other agreement, the terms of this Agreement shall prevail.
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e. Waiver. Failure to insist upon strict compliance with any term, covenant, or condition of this Agreement shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of any right or power under this Agreement at any time or times be deemed a waiver or relinquishment of such right or power at any other time or times.
f. Severability. Invalidity or unenforceability of any provision of this Agreement shall in no way affect the validity of enforceability of any other provision.
g. Heirs, Successors, and Assigns. The terms of this Agreement shall be binding upon the Parties hereto and their respective heirs, successors, and assigns.
h. Governing Law and Choice of Forum. All questions concerning the construction, validity, and interpretation of this Release Agreement will be governed by the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents, and without regard to any choice-of-law or conflict-of-law provisions. Any action or other proceeding relating in any way to this Agreement and/or the Release Agreement, including but not limited to any action initiated to construe or enforce any of the provisions herein, shall be filed exclusively in the Superior Court of the State of California for the County of Los Angeles. In the event of litigation or other legal proceedings arising out of our related to the interpretation or enforcement of this Agreement and/or the Release Agreement, the prevailing party in any such proceeding shall be entitled to recover all reasonable costs and expenses incurred by that party, including but not limited to reasonable attorneys’ fees, in addition to any other relief to which he or it may be entitled.
i. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same Agreement.
7. Acknowledgements. Director hereby acknowledges (a) that he has carefully read and fully understands the provisions of this Agreement and the Release Agreement; (b) that he has had the opportunity to fully discuss them with counsel; and (c) that he intends to be legally bound hereby and thereby. Director affirms that the terms stated in this Agreement and the Release Agreement are the only consideration for executing this Agreement and the Release Agreement and that no other representations, promises, or agreements of any kind have been made by any person or entity to cause him to sign this Agreement or the Release Agreement. Director further acknowledges that he is signing this Agreement and the Release Agreement voluntarily and without coercion because he believes they are fair and reasonable and for no other reason.
[Signature Page Follows]
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IN WITNESS WHEREOF, Company has caused this Agreement to be executed by its duly authorized officers, and Director has signed this Agreement, effective as of the date(s) written below.
| THE CRYPTO COMPANY | ||
| By: | /s/ Ron Levy | |
| Date: 9/24/2018 | Name: | Ron Levy |
| Title: | Chief Executive Officer, Chief Operating Officer and Secretary | |
| DIRECTOR | |
| Date: 9/24/2018 | /s/ James Gilbert |
| James Gilbert |
EXHIBIT A
This MUTUAL RELEASE AGREEMENT (this “Release Agreement”) is made and entered into by and between The Crypto Company, Inc., a California corporation (the “Company”), and James Gilbert (the “Director”).
WHEREAS, Director was a member and Chairman of the Company’s Board of Directors until the execution of his resignation letter at which time he resigned from both roles;
WHEREAS, Director and Company entered into that certain Settlement Agreement and General Release (the “Agreement”) to which this Release Agreement is attached;
WHEREAS, pursuant to Section 3 of the Agreement, full execution of this Release Agreement is a condition precedent to Director’s and Company’s respective obligations under the Agreement;
NOW, THEREFORE, in consideration of the promises and mutual agreements contained herein and in the Agreement, the sufficiency and receipt of which are hereby acknowledged, Company and Director agree as follows:
1. Director’s General Release and Waiver of Claims.
a. In consideration of Company’s release of claims, and subject to full performance by Company under the terms and conditions specified therein, Director, on behalf of himself and Director’s spouse, attorneys, heirs, executors, administrators, trustees, legal representatives, agents, successors and assigns (hereinafter collectively referred to for purposes of this Section 1 as the “Director”), HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, GENERALLY RELEASES, AND FOREVER DISCHARGES Company and its past, present and future affiliates, related entities, parent companies, subsidiary companies, divisions, and each of their respective predecessors, officers, directors, managers, employees, trustees, fiduciaries, administrators, Directors, agents, representatives, principals, accountants, insurers, attorneys, successors and assigns (collectively, the “Company Released Parties”) from any and all claims, charges, demands, sums of money, actions, rights, promises, agreements, causes of action, obligations, losses, suits, costs, counsel fees, and liabilities of any kind or nature whatsoever, at law or in equity, WHETHER KNOWN OR UNKNOWN, existing or contingent, suspected or unsuspected, apparent or concealed, foreign or domestic which Director has now or in the future may claim to have against any or all of Company Released Parties, including without limitation claims based upon, arising out of, or in any way relating to any facts, acts, conduct, omissions, transactions, occurrences, contracts, claims, events, causes, matters or things of any conceivable kind or character existing or occurring or claimed to exist or to have occurred prior to Director’s execution of this Release Agreement that are in any way based upon, arising under, or relating to Director’s service with Company or any of its subsidiaries or affiliates, the termination of Director’s service with Company or any of its subsidiaries or affiliates, Director’s services as an officer, director of Company or any of its subsidiaries or affiliates (hereinafter collectively referred to as the “Director’s Released Claims”).
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b. To the fullest extent permitted by law, and subject to the provisions of Section 1.d below, Director represents and affirms that he has not filed or caused to be filed on Director’s behalf any complaint, action, lawsuit, arbitration, request for relief, claim, or other proceeding (legal, equitable, administrative, or of any other nature) against any of Company Released Parties related to the Director’s Released Claims and, to the best of Director’s knowledge and belief, there are no outstanding complaints, actions, lawsuits, arbitrations, requests for relief, claims, or other proceedings (legal, equitable, administrative or of any other nature) asserted on behalf of Director against any of Company Released Parties related to any of the Director’s Released Claims.
c. In waiving and releasing any and all claims whether or not now known, Director understands that this means that, if he later discovers facts different from or in addition to those facts currently known by him, or believed by him to be true, the waivers and releases of this Release Agreement will remain effective in all respects — despite such different or additional facts and Director’s later discovery of such facts, even if he would not have agreed to this Release Agreement if he had prior knowledge of such facts. Director further acknowledges he had read Section 1542 of the California Civil Code which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
Director understands that Section 1542 gives Director the right not to release existing claims of which Director is not now aware, unless Director voluntarily chooses to waive this right. Even though Director is aware of this right, Director nevertheless hereby expressly and voluntarily waives the rights described in Section 1542 (or any similar relevant law of any state, other jurisdiction, or country) and elects to assume all risks for claims that now exist in Director’s favor, known or unknown, arising from the Director’s Released Claims.
d. Nothing in this Section 1, or elsewhere in this Release Agreement, is intended as, or shall be deemed or operate as, a release by Director of (i) any rights or claims of Director for indemnification or related duties by any Company Released Party under any written indemnification agreement, Company’s By-Laws or Articles of Incorporation, or under applicable law, (ii) any rights to coverage under any director and officer liability insurance or other insurance policies or any run-off policy thereto, (iii) any rights or claims under federal or state law that cannot, as a matter of law, be waived by private agreement, (iv) any claims arising out of Director’s rights as a shareholder of Company, and (v) any claims arising after the effective date of this Release Agreement.
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2. Company’s General Release and Waiver of Claims.
a. In consideration of Director’s release of claims, and subject to full performance by Director under the terms and conditions specified therein, Company, on behalf of itself and its past, present and future affiliates, related entities, parent companies, subsidiary companies, divisions and each of their respective officers, directors, managers, employees, trustees, fiduciaries, administrators, Directors, agents, representatives, principals, accountants, insurers, attorneys, successors and assigns (hereinafter collectively referred to for purposes of this Section 2 as the “Company”), HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, GENERALLY RELEASES, AND FOREVER DISCHARGES Director and his spouse, attorneys, heirs, executors, administrators, trustees, legal representatives, agents, successors and assigns, (collectively, the “Director Released Parties”) from any and all claims, charges, demands, sums of money, actions, rights, promises, agreements, causes of action, obligations, losses, suits, costs, counsel fees, and liabilities of any kind or nature whatsoever, at law or in equity, WHETHER KNOWN OR UNKNOWN, existing or contingent, suspected or unsuspected, apparent or concealed, foreign or domestic which Company has now or in the future may claim to have against Director Released Parties, including without limitation claims based upon, arising out of, or in any way relating to any facts, acts, conduct, omissions, transactions, occurrences, contracts, claims, events, causes, matters or things of any conceivable kind or character existing or occurring or claimed to exist or to have occurred prior to Company’s execution of this Release Agreement that are in any way based upon, arising under, or relating to Director’s service with Company, or any of Company’s subsidiaries or affiliates, the termination of Director’s service with Company, or any of its subsidiaries or affiliates, or Director’s services as an officer, director of Company or any of its subsidiaries or affiliates (hereinafter collectively referred to as the “Company’s Released Claims”).
b. To the fullest extent permitted by law, and subject to the provisions of Section d below, Company represents and affirms that it has not filed or caused to be filed on Company’s behalf any complaint, action, lawsuit, arbitration, request for relief, claim, or other proceeding (legal, equitable, administrative, or of any other nature) against any of Director Released Parties related to the Company’s Released Claims and, to the best of Company’s knowledge and belief, there are no outstanding complaints, actions, lawsuits, arbitrations, requests for relief, claims, or other proceedings (legal, equitable, administrative or of any other nature) asserted on behalf of Company against any of Director Released Parties related to any of the Company’s Released Claims.
c. In waiving and releasing any and all claims whether or not now known, Company understands that this means that, if it later discovers facts different from or in addition to those facts currently known by him, or believed by him to be true, the waivers and releases of this Release Agreement will remain effective in all respects — despite such different or additional facts and Company’s later discovery of such facts, even if it would not have agreed to this Release Agreement if it had prior knowledge of such facts. Company further acknowledges he had read Section 1542 of the California Civil Code which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
Company understands that Section 1542 gives Company the right not to release existing claims of which Company is not now aware, unless Company voluntarily chooses to waive this right. Even though Company is aware of this right, Company nevertheless hereby expressly and voluntarily waives the rights described in Section 1542 (or any similar relevant law of any state, other jurisdiction, or country) and elects to assume all risks for claims that now exist in Company’s favor, known or unknown, arising from the Company’s Released Claims.
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d. Nothing in this Section 2, or elsewhere in this Release Agreement, is intended as, or shall be deemed or operate as, a release by Company of (i) any claims to enforce obligations or limitations of Director under the Agreement or this Release Agreement, (ii) any rights or claims under federal or state law that cannot, as a matter of law, be waived by private agreement, (iii) any public reporting requirements mandated by law, and (iv) any claims arising after the effective date of this Release Agreement.
3. Covenant Not to Sue.
a. By Director. Director, on behalf of himself and Director’s spouse, attorneys, heirs, executors, administrators, trustees, legal representatives, agents, successors and assigns (the “Director Parties”), hereby covenants forever not to, whether directly or indirectly or whether individually or collectively, initiate, assert, file, prosecute, maintain, commence, institute, sponsor, encourage, assist, volunteer, advise, represent, cooperate with, or facilitate any complaint, action, proceeding, investigation, arbitration, lawsuit, or claim or any legal, equitable, or administrative proceeding of any nature, against any of Company Released Parties in connection with the Director’s Released Claims (other than with respect to any rights or claims specified in Sections 1.b and 1.d herein), and represents and warrants that no other person or entity has initiated or, to the extent within Director’s control, will initiate any such proceeding on Director’s or their behalf.
b. By Company. Company, on behalf of itself and its past, present and future affiliates, related entities, parent companies, subsidiary companies, divisions and each of their respective officers, directors, managers, employees, trustees, fiduciaries, administrators, agents, representatives, principals, accountants, insurers, attorneys, successors and assigns (the “Company Parties”), hereby covenants forever not to, whether directly or indirectly or whether individually or collectively, initiate, assert, file, prosecute, maintain, commence, institute, sponsor, encourage, assist, volunteer, advise, represent, cooperate with, or facilitate any complaint, action, proceeding, investigation, arbitration, lawsuit, or claim or any legal, equitable, or administrative proceeding of any nature, against any of Director Released Parties in connection with the Company’s Released Claims (other than with respect to any rights or claims specified in Sections 2b and 2d herein), and represents and warrants that no other person or entity has initiated or, to the extent within Company’s control, will initiate any such proceeding on Director’s or their behalf.
4. No Admission of Liability. It is understood that nothing in this Release Agreement is to be construed as an admission on behalf of Director Released Parties or Company Released Parties of any wrongdoing, any such wrongdoing being expressly denied.
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5. Restrictions. Notwithstanding anything to the contrary herein, Director understands that nothing in this Release Agreement or any other agreement that Director may have with Company restricts or prohibits Director from initiating communications directly with, responding to any inquiries from, providing testimony before, providing confidential information to, reporting possible violations of law or regulation to, or from filing a claim or assisting with an investigation directly with a self-regulatory authority or a government agency or entity, including but not limited to the Securities Exchange Commission and the federal Office of Occupational Health (collectively, “Government Agencies”), or from making other disclosures that are protected under the whistleblower provisions of state or federal law or regulation, and Director does not need Company’s prior authorization to engage in such conduct. Notwithstanding, in making any such disclosures or communications, Director must take all reasonable precautions to prevent any unauthorized use or disclosure of any information that may constitute Company’s confidential information to any parties other than the Government Agencies. This Agreement does not limit Director’s right to receive an award for information provided to any Government Agencies.
6. Indemnification: Claim by Third Party. Subject to the applicable provisions of California law as regards Directors of corporations, including Corporations Code Section 317, in the event that the Director is made a party or threatened to be made a party to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative (a “Proceeding”), other than any Proceeding initiated by the Company related to enforcement of this Release Agreement, by reason of the fact that the Director was a director or officer of the Company, or any affiliate of the Company, or was serving at the request of the Company as a director, officer, member or agent of another corporation or a partnership, joint venture, trust, or other enterprise, the Director shall be indemnified and held harmless by the Company from and against any liabilities, costs, claims, and expenses, including all costs and expenses incurred in defense of any Proceeding (including attorneys’ fees). Costs and expenses incurred by the Director in defense of such Proceeding (including attorneys’ fees) shall be paid by the Company in advance of the final disposition of such litigation upon receipt by the Company of: (i) a written request for payment; (ii) appropriate documentation evidencing the incurrence, amount, and nature of the costs and expenses for which payment is being sought; and (iii) an undertaking adequate under applicable law made by or on behalf of the Director to repay the amounts so paid if it shall ultimately be determined that the Director is not entitled to be indemnified by the Company under this Agreement. Additionally, for a period of six (6) years after the Effective Date, the Company or any successor to the Company shall purchase and maintain, at its own expense, directors’ and officers’ liability insurance providing coverage to the Director on terms that are no less favorable than the coverage provided to other directors and similarly situated Directors of the Company.
7. Director and Company Acknowledgments. Director and Company acknowledge that,
a. the consideration provided for herein is good and valuable;
b. before entering into this Release Agreement, he or it, as applicable, has had the opportunity to consult with any attorney or other advisor of the his or its choice, and has done so;
c. any and all questions regarding this Release Agreement have been asked and answered to his or its complete satisfaction;
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d. He or it has read this Release Agreement and understands all of its terms, including, without limitation, the waiver and release of claims set forth in Section 1a and Section 2a above;
e. He or it has entered into this Release Agreement of his or its own free will;
f. in entering this Release Agreement, the he or it has made his or its own investigation of the facts and is relying solely upon his or its own judgment, knowledge and the advice of his or its own attorney and/or other advisor; and
g. no promises, statements, understandings, or representations have been made to him or it by any person to induce him or it to enter into the Agreement or this Release Agreement other than the express terms set forth herein, and he or it is not relying upon any promises, statements, understandings, or representations other than those expressly set forth in the Agreement and this Release Agreement.
8. Director Acknowledgements. Director further acknowledges that Director has not relied on legal counsel from any of Company Released Parties.
9. Miscellaneous.
a. Governing Law. All questions concerning the construction, validity, and interpretation of this Release Agreement will be governed by the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents, and without regard to any choice-of-law or conflict-of-law provisions.
b. Construction. The parties have jointly participated in the negotiation and drafting of this Release Agreement, and, in the event an ambiguity or question of intent or interpretation arises, this Release Agreement shall be construed as jointly drafted by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring either party by virtue of the authorship of any provision of the Release Agreement.
c. Counterparts. This Release Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same agreement.
d. Successors and Assigns. Director may not assign this Release Agreement or any of his rights and duties hereunder. Company may assign this Release Agreement to an entity controlled by or under common control with Company or to an entity that acquires all or substantially all of the stock or assets of Company. The provisions of this Release Agreement shall be binding on and shall inure to the benefit of Director, Company and their respective assigns, including any successor in interest to Company who acquires all or substantially all of Company’s stock or assets.
e. Severability. It is expressly understood and agreed that although Director and Company consider the provisions contained in this Release Agreement to be reasonable, if any one or more of the provisions contained in this Release Agreement will, for any reason, be held to be invalid, illegal, or unenforceable in any respect by a final judicial determination made by a court of competent jurisdiction, such invalidity, illegality, or unenforceability will not affect the other provisions of this Release Agreement, and this Release Agreement will, be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. If moreover, any one or more of the provisions contained in this Release Agreement will for any reason be held to be excessively broad as to duration, geographical scope, activity, or subject, it will be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it will then appear consistent with the general intent of Director and Company insofar as possible.
f. Modification. This Release Agreement may not be modified or amended except in writing signed by the parties. No term or condition of this Release Agreement will be deemed to have been waived except in writing by the party charged with waiver. A waiver shall operate only as to the specific term or condition waived and will not constitute a waiver for the future or act on anything other than that which is specifically waived.
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THE UNDERSIGNED HAVE CAREFULLY READ THE FOREGOING RELEASE AGREEMENT, KNOW THE CONTENTS THEREOF, FULLY UNDERSTAND IT, AND AGREE TO ITS TERMS.
IN WITNESS WHEREOF, the parties hereto have executed this Release Agreement as of the date set forth below.
| THE CRYPTO COMPANY | ||
| By: | /s/ Ron Levy | |
| Date: 9/24/2018 | Name: | Ron Levy |
| Title: | Chief Executive Officer, Chief Operating Officer and Secretary | |
I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THE FOREGOING RELEASE AGREEMENT, THAT I UNDERSTAND ALL OF ITS TERMS, AND THAT I AM ENTERING INTO IT VOLUNTARILY. I FURTHER ACKNOWLEDGE THAT I AM AWARE OF MY RIGHTS TO CONSULT WITH AN ATTORNEY ABOUT IT, AND STATE THAT BEFORE SIGNING THIS RELEASE AGREEMENT, I HAVE EXERCISED THESE RIGHTS TO THE FULL EXTENT THAT I DESIRED.
| DIRECTOR | |
| Date: 9/24/2018 | /s/ James Gilbert |
| James Gilbert |
| A-7 |
9/24/2018
The Crypto Company
23085 Stuart Ranch Road, Suite 235
Malibu, CA
Attention: Ron Levy
Pursuant to Section 3.04 of the Bylaws of The Crypto Company (the “Company”), I hereby resign from any and all positions that I hold in my capacity as a director of the Company. I confirm that my resignation is not due to any disagreement with the Company over any matter relating to the Company’s operations, policies or practices. This resignation is effective as of the date hereof
| Very truly yours, | |
| /s/ James Gilbert | |
| Name: James Gilbert |
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Ron Levy, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2018 of The Crypto Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the period presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of small business issuer’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal controls over financial reporting.
| Date: July 26, 2019 | |
| /s/ Ron Levy | |
| Ron Levy | |
| Chief Executive Officer, Chief Operating Officer and Secretary | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Ivan Ivankovich, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2018 of The Crypto Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the period presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of small business issuer’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal controls over financial reporting.
| Date: July 26, 2019 | |
| /s/ Ivan Ivankovich | |
| Ivan Ivankovich | |
| Chief Financial Officer | |
| (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Crypto Company. (the “Company”) on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ron Levy, Chief Executive Officer, Chief Operating Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of July 26, 2019.
| /s/ Ron Levy | |
| Ron Levy | |
| Chief Executive Officer, Chief Operating Officer and Secretary | |
| (Principal Executive Officer) |
A signed original of this written statement, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement, has been provided to The Crypto Company, and will be retained by The Crypto Company, and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Crypto Company (the “Company”) on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ivan Ivankovich, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of July 26, 2019.
| /s/ Ivan Ivankovich | |
| Ivan Ivankovich | |
| Chief Financial Officer | |
| (Principal Financial Officer and Principal Accounting Officer) |
A signed original of this written statement, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement, has been provided to The Crypto Company, and will be retained by The Crypto Company, and furnished to the Securities and Exchange Commission or its staff upon request.
Document and Entity Information - shares |
9 Months Ended | |
|---|---|---|
Sep. 30, 2018 |
Jul. 26, 2019 |
|
| Document And Entity Information | ||
| Entity Registrant Name | Crypto Co | |
| Entity Central Index Key | 0001688126 | |
| Document Type | 10-Q | |
| Document Period End Date | Sep. 30, 2018 | |
| Amendment Flag | false | |
| Current Fiscal Year End Date | --12-31 | |
| Entity's Reporting Status Current | No | |
| Entity Interactive Data Current | Yes | |
| Entity Filer Category | Non-accelerated Filer | |
| Entity Small Business Flag | true | |
| Entity Emerging Growth Company | false | |
| Entity Ex Transition Period | false | |
| Entity Shell Company | false | |
| Entity Common Stock, Shares Outstanding | 21,212,860 | |
| Document Fiscal Period Focus | Q3 | |
| Document Fiscal Year Focus | 2018 |
Condensed Consolidated Balance Sheet (Parenthetical) - $ / shares |
Sep. 30, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 50,000,000 | 50,000,000 |
| Common Stock, shares issued | 21,172,860 | 20,458,945 |
| Common Stock, shares outstanding | 21,172,860 | 20,458,945 |
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($) |
3 Months Ended | 7 Months Ended | 9 Months Ended | |
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2017 |
Sep. 30, 2018 |
|
| Revenue: | ||||
| Total Revenue, net | $ 1,227,971 | $ 6,000 | $ 6,000 | $ 2,570,795 |
| Operating expenses: | ||||
| Cost of subscription revenues | 200,615 | 590,791 | ||
| General and administrative expenses | 1,863,108 | 972,434 | 2,278,283 | 8,004,564 |
| Share-based compensation | 512,648 | 716,507 | 1,083,224 | 4,562,089 |
| Total Operating Expenses | 2,576,371 | 1,688,941 | 3,361,507 | 13,157,444 |
| Operating loss | (1,348,400) | (1,682,941) | (3,355,507) | (10,586,649) |
| Net realized gains/(losses) on investment in cryptocurrency | (108,920) | 481,692 | 564,332 | 1,303,433 |
| Impairment of investments, non-cryptocurrency | (250,000) | (250,000) | ||
| Impairment of investments, cryptocurrency | (254,941) | (1,869,241) | ||
| Other income(expense) | 52,045 | (2,019) | (2,019) | 109,452 |
| Loss before provision for income taxes | (1,910,216) | (1,203,268) | (2,793,194) | (11,293,005) |
| Provision for income taxes | 800 | 800 | ||
| Net loss | (1,910,216) | (1,203,268) | (2,793,994) | (11,293,805) |
| Income/(loss) attributable to noncontrolling interests | 289,129 | (190,266) | ||
| Net loss attributable to Crypto Company | (2,199,345) | (1,203,268) | (2,793,994) | (11,103,539) |
| Other comprehensive loss | ||||
| Foreign currency translation adjustment | 484,619 | (619,278) | ||
| Foreign currency translation adjustment attributable to noncontrolling interest | (617,053) | (617,053) | ||
| Comprehensive loss | $ (2,331,779) | $ (1,203,268) | $ (2,793,994) | $ (12,339,870) |
| Net loss attributable to the Crypto Company per common share - basic and diluted | $ (0.10) | $ (0.06) | $ (0.18) | $ (0.53) |
| Weighted average common shares outstanding - basic and diluted | 21,172,782 | 18,565,062 | 15,371,770 | 21,060,434 |
| Subscription Revenue, Net [Member] | ||||
| Revenue: | ||||
| Total Revenue, net | $ 1,227,971 | $ 2,570,795 | ||
| Other [Member] | ||||
| Revenue: | ||||
| Total Revenue, net | $ 6,000 | $ 6,000 | ||
The Company |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| The Company |
NOTE 1 – THE COMPANY
The Crypto Company was incorporated in the State of Nevada on March 9, 2017 (“Inception”) and is engaged in the business of building technological infrastructure. We are also engaged in the business of building strategic alliances to assist third parties in the exchange of value in the digital asset market, solely by providing such third parties with tools, computer software/programming and educational material that may prove useful to them as they independently invest in, trade and manage their own digital assets. We also seek to build strategic alliances with other companies and from time to time may seek strategic acquisitions of entities or technologies that we believe may aid our development of proprietary products and tools designed to help third parties to independently invest in, trade and manage their own digital assets.
Unless expressly indicated or the context requires otherwise, the terms “Crypto,” the “Company,” “we,” “us,” and “our” in this Quarterly Report refer to The Crypto Company and, where appropriate, its wholly owned subsidiaries, Crypto Sub, Inc., a Nevada corporation (“Crypto Sub”); CoinTracking, LLC, a Nevada limited liability company (“CT”); Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”); and, where applicable, CT’s majority-owned subsidiary, CoinTracking GmbH, which was sold subsequent to September 30, 2018. See “Note 16 - Subsequent Events” for additional details.
Technology
The Company is developing proprietary technology and source code to create products and services that will assist third parties by providing them with the tools, computer programming and training to independently invest in, trade and manage their own digital assets, including trading management and auditing software, tools and processes to assist in the operations of companies, from start-up businesses to well-established companies. We do not provide, and do not intend to provide, any functionality that allows a subscriber to make any form of cryptocurrency trade. A subscriber must go to an unrelated third-party website or exchange in order to enter into a virtual currency purchase or sale transaction. We may consider using our technology or license technology from third parties to build additional units around our existing platform, or we may consider selling or licensing our technology to third-party institutions for a fee. |
Restatement of the Consolidated Financial Statements |
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| Accounting Changes and Error Corrections [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restatement of the Consolidated Financial Statements | NOTE 2 – Restatement of the Consolidated Financial Statements
The purpose of restatement is to correct errors in the Company’s previously issued financial statements, as disclosed in the Company’s Current Report on Form 8-K filed subsequent to September 30, 2018, on January 3, 2019. The restatement is in connection with the accounting for investments in cryptocurrency at fair value as opposed to intangible assets with indefinite lives and record such investments in cryptocurrency at historical cost less impairment, if any. Management previously reported its investments in cryptocurrency at fair value, with changes in fair value reported as unrealized gains and losses in its condensed consolidated statements of operations. The Company has corrected the error in this Quarterly Report for its prior periods. The Company’s investment in cryptocurrency for the comparative nine-months ended September 30, 2017 were accounted for in error and were overstated from their historical cost by $85,266. In addition, the Company is correcting the classification of its net realized gain/loss on investments in cryptocurrency in this Quarterly Report by reclassifying them from revenue to other income(expense).
The Company has also determined that its classification and disclosures of $367,639 in investments, as of June 30, 2018, were incorrectly described as investments in Initial Coin Offerings and included as investments in cryptocurrency in its condensed consolidated balance sheets. The investments were made in accordance with token pre-sale and simple agreement for tokens agreements (“SAFT”), and should be included as investments, non-cryptocurrency in the Company’s condensed consolidated balance sheets. The Company is reclassifying the balance and changing the related disclosures in this current filing. Management believes the reclassification is material to the Company’s condensed consolidated financial statements in prior periods.
Finally, in connection with the acquisition of CoinTracking GmbH, the Company has completed its preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed based on the information available and preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed. The result is the recording of intangible assets of $7,726,356, noncontrolling interest of $9,434,984, and a reduction of $43,348 to net assets acquired, resulting in a preliminary adjustment to increase goodwill of $1,665,279. The Company recorded additional amortization expense of $757,923 relating to certain intangible assets acquired of which $211,153 and $486,176 have been restated for the three and six months ended March 31 and June 30, 2018, respectively. As a result of these changes, the Company is restating its condensed consolidated balance sheet and condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018 and June 30, 2018, as noted below. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
The Company’s originally disclosed accounting policy, from the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2018 regarding investments in cryptocurrency stated that:
“Investments in cryptocurrency - Investments are comprised primarily of two types of cryptocurrency investments. The Company owns several cryptocurrencies, of which a majority is Bitcoin, which are actively traded on exchanges and are reported at fair value as determined by digital asset markets with realized gains and losses calculated on a trade date basis as the difference between the fair value and cost of cryptocurrencies transferred. Management believes that measuring cryptocurrencies at fair value, consistent with the accounting for trading investments in commodities and securities with changes in fair value recognized on both the balance sheet and profit and loss statements, best reflects the Company’s financial position and the economics and characteristics of its cryptocurrency investments. The Company recognizes the fair value changes in unrealized gains and losses on investment through the accompanying Statement of Operations. For the six-month period ended June 30, 2018, the Company had a consolidated balance of $2,200,449 in investments in cryptocurrencies. The Company believes that it would be able to liquidate a majority of its portfolio into cash within one to seven days, if needed. As of June 30, 2018, the Company’s holdings represent on average 1.3% of the daily volume of total trades on the specific exchanges where it would be able to convert its holdings to cash. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp. These exchanges, in the aggregate, account for approximately $168,000,000 in Bitcoin/U.S. dollars (“USD”) trades per day globally.
In addition, the Company’s cryptocurrency investments include Initial Coin Offerings (“ICOs”), which primarily consist of tokens that are not currently traded on an exchange. The Company records these investments at cost, as there is no active market. As of June 30, 2018, ICOs represent $367,639 of the Company’s investments in cryptocurrencies. For the six-month period ended June 30, 2018, the Company recognized no impairment losses on investments in ICOs.
Investments – non-cryptocurrency – During the six months ended June 30, 2018, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”), representing 4% interest, at the time of the investment, in a private enterprise. The Company’s investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful ICO by the enterprise. The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for the investment using the cost method since the equity securities are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment to date due to the recent nature of the investment and the early stage development of the platform and has included such asset as a level 3 investment.”
The Company’s updated accounting policy regarding investments in cryptocurrency transactions and remeasurement states that:
“Investments in cryptocurrency – Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin, that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less impairment and are reported as long-term assets in the condensed consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.
Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statement of operations and comprehensive income.
Investments – non-cryptocurrency – As of September 30, 2018, the Company has invested $667,818 as part of nine financings, including $500,000 during the nine months ended September 30, 2018. The investments include $417,818 invested in accordance with eight token pre-sale and simple agreement for future tokens (“SAFT”) agreements. The agreements provide for the issuance of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established in each respective agreement. In addition, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”) agreement, representing 4% interest, at the time of the investment, in a private enterprise. The Company’s SAFE investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful Initial Coin Offering (“ICO”) by the enterprise.
The Company has received tokens for $250,189 of its investments, at cost, which have been transferred to an active exchange and included in Investment in cryptocurrency, net in the condensed consolidated balance sheet, during the nine months ended September 30, 2018.
The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment for its token pre-sale or SAFT investments as of September 30, 2018 as a majority were entered into in the last twelve months and progress has been demonstrated toward tokenization.
During the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment loss of $250,000, representing the full value of its investment.”
The Company has determined that its previously issued financial statements should be restated on a prospective basis. Accordingly the Company is not amending and re-filing the financial statements included in its prior quarterly reports on Form 10-Q, nor in its Annual Report for the period from March 9, 2017 (“Inception”), through December 31, 2017. Management believes the errors are material when considering quantitative materiality. Management does not believe it is probable that the judgment of a reasonable person relying upon its prior filings would have been changed or influenced by the inclusion or correction of the item, nor is there a substantial likelihood that a reasonable person would consider it important.
The effect of the restatement on the Company’s condensed consolidated balance sheet as of September 30, 2017 is as follows:
The effect of the restatement on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2017, are as follows:
The effect of the restatement on the Company’s consolidated statement of cash flows for the nine months ended September 30, 2017 are as follows:
The effect of the restatement on the Company’s net loss, net loss attributable to The Crypto Company, comprehensive income and per-share amounts for the prior interim periods of 2018 are as follows:
The effect of the restatement on the Company’s net loss, per-share amounts, and selected balance sheet amounts for the year ended December 31, 2017 are as follows:
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Summary of Significant Accounting Policies |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies |
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation – The included condensed consolidated balance sheet as of December 31, 2017, was derived from audited financial statements (as restated) and the accompanying unaudited condensed consolidated financial statements as of September 30, 2018 and September 30, 2017 (as restated) of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated financial statements have been included.
The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report for the period from March 9, 2017 (“Inception”), through December 31, 2017.
Consolidation – The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Crypto Sub, CT, and Malibu Blockchain, as well as its 50.1% ownership of CoinTracking GmbH. All significant intercompany accounts and transactions are eliminated in consolidation. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
Liquidity and Going Concern - The Company’s condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with US GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred significant losses and experienced negative cash flows since Inception. As of September 30, 2018, the Company had cash of $387,287, a decline of $8,562,957 from the December 31, 2017 balance of $8,950,244. This decline is due, in part, to the acquisition of CoinTracking GmbH in January 2018, which included $3,189,303 of cash consideration, net of acquired cash. The Company’s working capital was ($1,582,593) as of September 30, 2018, which includes a contract liability of $2,122,316, representing advanced payments from customers for subscription service, which is initially deferred and recognized on a straight-line method over the terms of the applicable subscription period. Management does not anticipate settling this liability in cash. After June 30, 2018, the Company liquidated the majority of tradeable cryptocurrency held in its cryptocurrency investment segment, which had a balance of $1,007,753 at June 30, 2018, to help fund its operations. As of September 30, 2018, the accumulated deficit amounted to $20,656,840. As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management is evaluating different strategies to obtain financing to fund the Company’s expenses and achieve a level of revenue adequate to support the Company’s current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations. There can be no assurance that any of these future-funding efforts will be successful or that the Company will achieve its projected level of revenue in 2019 and beyond. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Use of estimates - The preparation of these condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant estimates and assumptions include but are not limited to the recoverability and useful lives of long-lived assets, allocation of revenue on software subscriptions, valuation of goodwill from business acquisitions, valuation and recoverability of investments, valuation allowances of deferred taxes, and share-based compensation expenses. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating results.
Cash and cash equivalents - The Company defines its cash and cash equivalents to include only cash on hand and certain highly liquid investments with original maturities of ninety days or less. The Company maintains its cash and cash equivalents at financial institutions, the balances of which may, at times, exceed federally insured limits. Management believes that the risk of loss due to the concentration is minimal.
Investments in cryptocurrency - Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin, that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less impairment and are reported as long-term assets in the condensed consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.
Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statement of operations and comprehensive income.
The following table presents additional information about investments in cryptocurrency, as of September 30, 2018:
The following table summarizes the historical cost of cryptocurrencies, held as of September 30, 2018:
Investments – non-cryptocurrency – As of September 30, 2018, the Company has invested $667,818 as part of nine financings, including $500,000 during the nine months ended September 30, 2018. The investments include $417,818 invested in accordance with eight token pre-sale and simple agreement for future tokens (“SAFT”) agreements. The agreements provide for the issuance of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established in each respective agreement. In addition, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”) agreement, representing 4% interest, at the time of the investment, in a private enterprise. The Company’s SAFE investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful Initial Coin Offering (“ICO”) by the enterprise.
The Company has received tokens for $255,763 of its investments, at cost, which have been transferred to an active exchange and included in Investment in cryptocurrency, net in the condensed consolidated balance sheet, during the nine months ended September 30, 2018.
The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment of its token pre-sale or SAFT investments as of September 30, 2018 as a majority were entered into in the last twelve months and progress has been demonstrated toward tokenization.
During the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment loss of $250,000, representing the full value of its investment.
Equipment - Equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life ranging from three to five years. Normal repairs and maintenance are expensed as incurred. Expenditures that materially adapt, improve, or alter the nature of the underlying assets are capitalized. When equipment is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to income.
Impairment of long-lived assets - The Company analyzes its long-lived assets, including indefinite lived intangible assets which include investments in cryptocurrency (see Investments in Cryptocurrency) and intangible assets acquired in connection with the acquisition of CoinTracking GmbH, for potential impairment. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. Impairment losses are recorded on long-lived assets when indicators of impairment are present, and for intangible assets acquired in connection with acquisitions, the undiscounted cash flows estimated to be generated by those assets are less than the net carrying amount of the assets. In such cases, the carrying values of assets to be held and used are adjusted to their estimated fair value, less estimated selling expenses. For the nine-month period ended September 30, 2018, the Company recognized impairment losses of $1,869,241 on its indefinite lived intangible assets. There was no impairment in the period from Inception to September 30, 2017.
Business combination - The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values with the residual of the purchase price recorded as goodwill. The results of operations of acquired businesses are included in our operating results from the dates of acquisition.
Goodwill and indefinite lived intangible assets - The Company records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. Goodwill and intangible assets with indefinite lives are tested for impairment at least annually on December 31, and whenever events or circumstances occur indicating that a possible impairment may have been incurred. Intangible assets with finite lives are amortized over their useful lives.
The Company assesses whether goodwill impairment and indefinite lived intangible assets exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed to determine whether a goodwill impairment exists at the reporting unit.
Based on its analysis, the Company’s management believes that no impairment of the carrying value of its goodwill existed at September 30, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products and services will continue which could result in impairment of goodwill in the future.
Based on its analysis of its indefinite lived intangible assets, which are valued using a discounted cash flow model, the Company’s management believes there is no impairment of the carrying value of its indefinite lived intangible assets as of September 30, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products and services will continue which could result in impairment in the future.
In addition, we capitalized certain costs incurred with developing our CT SaaS platform in accordance with ASC 985-20, Software — Costs of Software to be Sold, Leased, or Marketed once technological feasibility has been established. Capitalized software costs primarily include (i) external direct costs of services utilized in software development and (ii) compensation and related benefits for employees who are directly associated with software development. We amortized our capitalized software costs over a five-year period, reflecting the estimated useful lives of the assets.
Foreign Currency Translation - Results of foreign operations are translated into USD using average rates prevailing throughout the period, while assets and liabilities are translated in USD at period end foreign exchange rates. Transactions gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency of the applicable subsidiary are included in the consolidated statements of operations, within other income, in the year in which the change occurs. The Company’s functional currency is USD while the functional currency for CoinTracking GmbH is in euros.
Income taxes - Deferred tax assets and liabilities are recognized for expected future consequences of events that have been included in the financial statements or tax returns. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. For the nine-month period ended September 30, 2018, the income tax payable of $800 reflects the minimum franchise tax for the State of California.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
As of September 30, 2018, we are subject to taxation in the U.S., as well as state and German taxes. The Company has not been audited by the U.S. Internal Revenue Service, nor has the Company been audited by any states or in Germany. Subsequent to September 30, 2018, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
Fair value measurements - The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level of input has different levels of subjectivity and difficulty involved in determining fair value.
The carrying amounts of the Company’s financial assets and liabilities, including cash, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments.
Revenue recognition – The Company had two streams of principal revenue segments as of September 30, 2018, software subscription and cryptocurrency investments. The cryptocurrency investment segment primarily consisted of amounts earned through trading activities of cryptocurrencies. The Company recorded its investments in cryptocurrency as indefinite lived intangible assets, at cost less impairment, and are reported as long-term assets in the condensed consolidated balance sheets. Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statements of operations and comprehensive income. As of September 30, 2018, the Company liquidated substantially all of the tradeable cryptocurrency held by its cryptocurrency investment segment, although the Company continues to hold a small amount of tradeable cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and simple agreement for tokens agreements investments.
The Company also generated subscription revenues through its majority-owned subsidiary CoinTracking GmbH and generates minimal amounts of consulting revenue. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 supersedes nearly all existing revenue recognition guidance under US GAAP. The Company adopted ASU No. 2014-09 as of January 1, 2018 using the modified retrospective transition method for contracts as of the date of initial application. There is no cumulative impact to the Company’s retained earnings at January 1, 2018. See “Note 6 – Subscription Revenue Recognition” for additional information on the impact to the Company.
Share-based compensation - In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company measures the compensation costs of share-based compensation arrangements based on the grant date fair value of granted instruments and recognizes the costs in financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options.
Equity instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The compensation cost is remeasured at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees can result in significant volatility in compensation expense.
The Company accounts for its share-based compensation using the Black-Scholes model to estimate the fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non-employees are expected to hold their options prior to exercise, and (iii) risk-free interest rate.
Net loss per common share - The Company reports earnings per share (“EPS”) with a dual presentation of basic EPS and diluted EPS. Basic EPS is computed as net income divided by the weighted average of common shares for the period. Diluted EPS reflects the potential dilution that could occur from common shares issued through stock options, or warrants. For the three- and nine-month periods ended September 30, 2018, the Company had no potentially dilutive common stock equivalents. Therefore, the basic EPS and the diluted EPS are the same.
Marketing expense - Marketing expenses are charged to operations, under general and administrative expenses. The Company incurred $48,460 and $333,969 of marketing expenses for the three and nine months ended September 30, 2018, respectively, compared to $21,968 and $35,468 for the three months ended September 30, 2017 and for the period from Inception through September 30, 2017, respectively. |
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Recent Accounting Pronouncements |
9 Months Ended |
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Sep. 30, 2018 | |
| New Accounting Pronouncements and Changes in Accounting Principles [Abstract] | |
| Recent Accounting Pronouncements |
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. The amendments in this ASU clarify certain aspects of the guidance related to: reporting comprehensive income, debt modification and extinguishment, income taxes related to stock compensation, income taxes related to business combinations, derivatives and hedging, fair value measurements, brokers and dealers liabilities, and plan accounting. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of ASU No. 2018-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, add, and modify certain disclosures. The ASU removes the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation process for Level 3 fair value measurements; and (4) certain other requirements for nonpublic entities. The ASU adds the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, disclosure of other quantitative information may be more appropriate if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU modifies disclosure requirements in Topic 820 relating to timing of liquidation of an investee’s assets, the disclosure of the date when restrictions from redemption might lapse, the intention of the measurement uncertainty disclosure, and certain other requirements for nonpublic entities. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software). The amendments in this ASU require an entity (customer) in a hosting arrangement that is a service to (1) determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense; (2) expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (3) apply the existing impairment guidance to the capitalized implementation costs as if the costs were long-lived assets; (4) present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting arrangements; and (5) present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-15 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. Management currently does not plan to early adopt this guidance. The new standard is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company is evaluating the effect that ASU No. 2018-07 will have on its consolidated financial statements and related disclosures.
In July 2017, the FASB issued No. ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Rounds and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments also require entities to recognize the effect of the down round feature on EPS when it is triggered. ASU 2017-11 should be adopted retrospectively or as a cumulative-effect adjustment as of the date of adoption, only to financial instruments outstanding as of the initial application date. ASU 2017-11 will be effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The adoption of ASU No. 2017-11 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The new standard became effective for us on January 1, 2018. Adoption of the ASU No. 2017-11 did not have a significant impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (Topic 805). The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606, Revenue from Contracts with Customers. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of ASU No. 2017-01 did not have a significant impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350) which removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. The amendments in this update should be applied under a modified retrospective approach. Adoption of ASU No. 2016-02 is not expected to have a significant impact on our consolidated financial statements and related disclosures. |
Acquisition |
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| Business Combinations [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition |
NOTE 5 - ACQUISITION
On January 26, 2018, CT, a wholly-owned subsidiary of the Company, acquired 50.1% of the equity interest in CoinTracking GmbH, for (i) $4,736,400 in cash and (ii) 473,640 shares of common stock of the Company at $10 per share for a total purchase price valued at $9,472,800. On the acquisition date, the fair market value of $10 per share for the Company’s common stock was determined using a trading range from November 2017, discounted further due to lack of marketability. The Company used this approach due to the lack of trading volume since (i) the stock trading was suspended by the SEC in December 2017 and was moved to OTC Grey market by the OTC Markets Group, Inc. on January 3, 2018, (ii) stock sales to accredited investors on December 12, 2017, at $7 per share, and (iii) a valuation performed as of March 31, 2018. The equity purchase agreement between the Company and CoinTracking GmbH included a purchase price adjustment pursuant to which the consideration would increase if the share price of the Company’s common stock closed below $10 per share on July 2, 2018. No adjustment was required. CoinTracking GmbH provides its customers with the ability to view and monitor their own cryptocurrency portfolios as well as tax calculation and reporting services. Customers may not make trades through the CoinTracking GmbH platform. The purpose of the acquisition was to increase the Company’s presence in the digital asset industry and build strategic alliances.
The consolidated financial statements were prepared using the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations, and have been included in the Company’s consolidated results as of the acquisition date with the Company considered as the accounting acquirer and CoinTracking GmbH as the accounting acquiree.
Accordingly, consideration paid by the Company to complete the acquisition was allocated to the identifiable assets and liabilities of CoinTracking GmbH based on estimated fair values as of the closing date. We made a preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed based on the information available and preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed. Acquisition-related costs were expensed as incurred and were not considered to be significant. We expect to complete the final purchase price allocation related to this acquisition and included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Subsequent to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. Therefore, the valuation of certain assets and liabilities in the CoinTracking GmbH acquisition is preliminary and subject to change.
The table below summarizes the fair values of the assets acquired and liabilities assumed, translated from euros to USD, at the date of acquisition:
The purchase price was based on the expected financial performance of CoinTracking GmbH and not on the value of the net identifiable assets at the time of acquisition. This resulted in a significant portion of the purchase price being attributed to goodwill. As a result, the Company recognized $11,990,910 of goodwill on the date of acquisition.
Unaudited pro forma financial information
The unaudited pro forma financial information in the table below presents the combined results of the Company and CoinTracking GmbH as if these acquisitions had occurred on January 1, 2018. The unaudited pro forma financial information includes adjustments required under the acquisition method of accounting and is presented for informational purposes only and is not necessarily indicative of the results that would have been achieved had the acquisitions actually occurred on January 1, 2018.
For the three and nine months ended September 30, 2018:
Subsequent to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. |
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Subscription Revenue Recognition |
9 Months Ended |
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Sep. 30, 2018 | |
| Subscription Revenue Recognition | |
| Subscription Revenue Recognition |
NOTE 6 – SUBSCRIPTION REVENUE RECOGNITION
CoinTracking GmbH accounts for a contract when it has approval and commitment from all parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue was recognized when control of the promised services was transferred to the Company’s customers over time, and in an amount that reflects the consideration the Company was contractually due in exchange for those services. Most of the Company’s contracts with customers were single, or had few distinct performance obligations, and the transaction price was allocated to each performance obligation using the stand-alone selling price.
CoinTracking GmbH’s revenue is primarily derived directly from users in the form of subscriptions. Subscription revenue is presented net of credits and credit card chargebacks. Subscribers pay in advance, primarily by PayPal or cryptocurrencies, subject to certain conditions identified in our terms and conditions. Revenue is initially deferred and recognized using the straight-line method over the term of the applicable subscription period, which primarily range from annual to perpetual.
Transaction Price
The objective of determining the transaction price was to estimate the amount of consideration the Company was due in exchange for services, including amounts that are variable. CoinTracking GmbH has a standalone sales price for its subscription service, which varies based on length of subscription. Further, the Company excluded from the measurement of transaction price all taxes assessed by governmental authorities that were both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts were not included as a component of revenue or cost of revenue.
Estimates of certain revenue
Revenue collected in advance for subscriptions ranging from annual to perpetual packages were deferred and recognized as revenue on a straight-line basis over the terms of the applicable subscription period or performance obligation period. For “lifetime” revenue packages, where the customer had access to the website for an unlimited length of time, the Company elected to recognize revenue on a straight-line basis over three years. We believe that based on the short history of customer data, customer relationship period, and number of available alternative providers, and anticipation of future changes to the blockchain industry, a measure of three years of performance obligation to customers was appropriate.
Net Revenue and Charge-back Reserves
CoinTracking GmbH does not maintain an allowance for doubtful accounts because the customer prepays for subscription in advance before access is provided to CoinTracking GmbH’s website. The Company maintained a reserve for potential credits issued to consumers or other revenue adjustments. In addition, as of September 30, 2018, PayPal withheld $36,583 for potential credits issued to customers, which is included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet.
Contract Liabilities
Contract liabilities were recorded when payments were received or due in advance of performing CoinTracking GmbH’s service obligations and was recognized over the service period, which primarily related to prepayments of subscription revenue. At the acquisition date of January 26, 2018, CoinTracking GmbH’s total contract liabilities were $3,616,724, and we recognized revenue of $2,570,795 for the nine months ended September 30, 2018. As of September 30, 2018, $2,122,316 of current contract liabilities were recorded and $1,173,531of long-term contract liabilities were recorded. As of December 31, 2017, we did not have consolidated contract liabilities.
Assets Recognized from the Costs to Obtain a Contract with a Customer
CoinTracking GmbH has determined that certain costs associated with affiliate payments paid to customers pursuant to certain sales incentive programs, meet the requirements to be capitalized as a cost of obtaining a contract. Affiliates are paid in Bitcoins and expense is amortized over the applicable subscription period.
During the three and nine months ended September 30, 2018, the Company recognized expense of $87,520 and $150,274, respectively, related to the amortization of affiliate payments. The aggregate contract asset balance at September 30, 2018 was $146,071.
Subsequent to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. |
Segment Information |
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| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Information |
NOTE 7 - SEGMENT INFORMATION
The Company organized its operations into two segments: a software subscription segment and a cryptocurrency investment segment.
The software subscription segment primarily consisted of amounts earned through subscriptions to the CoinTracking GmbH website. Among other features, the CoinTracking GmbH website offers subscriptions, ranging from annual to perpetual, that allow individuals and entities to record exactly when and where they acquired virtual currencies of any variety, as well as their acquisition prices. Operating expense related to this segment was technology infrastructure and general administrative costs primarily incurred in Germany. Subsequent to September 30, 2018, we sold to Kachel Holding GmbH our entire equity ownership stake in CoinTracking GmbH, consisting of 12,525 shares representing 50.1% of the outstanding equity interests in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.
The cryptocurrency investment segment primarily consisted of amounts earned, if any, through proprietary trading activities of cryptocurrencies, and costs were operating expenses that consists of general and administrative costs in North America. The Company did not trade or manage other individuals’ or entities’ funds and has no current plans to do so. As of September 30, 2018, the Company liquidated substantially all of the tradeable cryptocurrency held in this segment, although the Company continues to hold a small amount of tradeable cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and SAFT investments.
There are no intercompany internal revenue transactions between our reportable segments. These segments reflected the way our chief operating decision maker evaluated the Company’s business performance and managed its operations.
The following table summarizes the Company’s operating income by segment for the three months ended September 30, 2018 and 2017:
The following table summarizes the Company’s operating income by segment for the nine months ended September 30, 2018:
The following table summarizes the Company’s operating income by segment for the period from Inception to September 30, 2017:
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Investments, Non-cryptocurrency |
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| Investments [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| Investments, Non-cryptocurrency |
NOTE 8 – INVESTMENTS, NON-CRYPTOCURRENCY
The Company invested $362,055 in non-tradeable token pre-sale and SAFT agreements. In addition, the Company invested $250,000 as part of a financing in accordance with a SAFE investment in a private enterprise. These investments are included as Level 3 investments as there was no active market as of September 30, 2018.
The Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are fair, consistent and verifiable. Non-cryptocurrency investments are carried at cost which approximates fair value at September 30, 2018. The Company considers the length of its investments, of which a majority were made during the current year, as well as its comprehensive investment process which includes reviews of white papers, preparation of either short or long forms analysis that is reviewed by the Company’s internal investment committee, among other factors in determining fair value. At the time that the investments are tokenized and available on active market exchanges, the investments will be reclassified to investments in cryptocurrency
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the nine months ended September 30, 2018:
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Equipment |
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| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equipment |
NOTE 9 - EQUIPMENT
Equipment consists of the following:
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Goodwill and Intangible Assets |
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| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets |
NOTE 10 – GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company’s goodwill balance is the result of the acquisition of CoinTracking GmbH in the current year (see footnote 5). Intangible assets include software development costs, related to the CoinTracking GMBH SaaS platform.
The carrying amount of goodwill for the nine months ended September 30, 2018 was as follows:
The Company evaluates the recoverability of goodwill annually as of December 31, and whenever events or changes in circumstances indicate to us that the carrying amount may not be recoverable. There were no conditions that indicated any impairment of goodwill as of September 30, 2018.
The carrying amounts of intangible assets for the nine months ended September 30, 2018 were as follows:
Intangible assets with finite useful lives are amortized over their respective estimated useful lives. Amortization expense related to intangible assets was $772,745 and $241,767 for the three and nine months ended September 30, 2018, respectively. There was not any amortization expense related to intangible assets in the respective prior year periods.
Amortization expense for intangible assets is included in general and administrative expenses. The following table provides estimated future amortization expense related to intangible assets as of September 30, 2018:
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Warrants for Common Stock |
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| Warrants for Common Stock |
NOTE 11 – WARRANTS FOR COMMON STOCK
As of September 30, 2018, outstanding warrants to purchase shares of the Company’s common stock were as follows:
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. |
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Summary of Stock Options |
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| Share-based Payment Arrangement [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Stock Options |
NOTE 12 - SUMMARY OF STOCK OPTIONS
On July 21, 2017, the Company’s board of directors adopted The Crypto Company 2017 Equity Incentive Plan (the “Plan”), which was approved by its stockholders on August 24, 2017. The Plan is administered by the board of directors (the “Administrator”). Under the Plan, the Company may grant equity awards to eligible participants which may take the form of stock options (both incentive stock options and non-qualified stock options) and restricted stock awards. Awards may be granted to officers, employees, non-employee directors (as defined in the Plan) and other key persons (including consultants and prospective employees). The term of any stock option award may not exceed 10 years and may be subject to vesting conditions, as determined by the Administrator. Options granted generally vest over eighteen to thirty-six months. Incentive stock options may be granted only to employees of the Company or any subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Internal Revenue Code.
During the nine months ended September 30, 2018, the Company issued an additional 450,000 stock options to members of our board of directors, 1,957,062 stock options to employees, and 400,000 stock options to non-employees.
5,000,000 shares of the Company’s common stock are reserved for issuance under the Plan. As of the nine-month period ended September 30, 2018, there are outstanding stock option awards issued from the Plan covering a total of 2,144,492 shares of the Company’s common stock and there remain reserved for future awards 2,855,508 shares of the Company’s common stock.
The Company recognized $512,648, and $4,562,089 of compensation expense related to stock options for the three and nine months ended September 30, 2018, respectively.
The total intrinsic value for options exercised, determined using the market price of our common stock on the date of exercise, was $0 and $203,282 during the three and nine months ended September 30, 2018, respectively.
During the nine-month period ended September 30, 2018 and the period from Inception through September 30, 2017 the Company had not granted any restricted stock awards.
As of September 30, 2018, approximately $1,400,000 of total unrecognized compensation costs related to stock options issued to employees is expected to be recognized over a weighted average period of approximately 1.10 years.
The determination of the fair value of share-based compensation awards utilizing the Black-Scholes model is affected by the Company’s stock price and a number of complex and subjective assumptions, including stock price, volatility, expected life of the equity award, forfeitures rates if any, risk-free interest rates and expected dividends. Volatility is based on the historical volatility of comparable companies measured over the most recent period, generally commensurate with the expected life of the Company’s stock options, adjusted for future expectations given the Company’s limited historical share price data.
The risk-free rate is based on implied yields in effect at the time of the grant on U.S. Treasury zero-coupon bonds with remaining terms equal to the expected term of the stock options. The expected dividend is based on the Company’s history and expectation of dividend payouts. Forfeitures are recognized when they occur.
The range of assumptions used for the nine-month period ended September 30, 2018 are as follows:
Stock options issued to nonemployees are revalued at each vesting tranche and/or reporting date in accordance with ASC 505. |
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Related Party Transactions |
9 Months Ended |
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Sep. 30, 2018 | |
| Related Party Transactions [Abstract] | |
| Related Party Transactions |
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has a services agreement with Full Stack Finance for chief financial officer and accounting outsource services. Ivan Ivankovich, the Company’s CFO, is the Co- Managing Director of Full Stack Finance. The Company paid a total of $87,150 and $454,199 in fees to Full Stack Finance during the three-month and nine-month period ended September 30, 2018, respectively, and as of September 30, 2018, there was a balance of $142,854 due to Full Stack Finance, which is included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets.
The Company has a loan receivable from an officer of CoinTracking GmbH as of September 30, 2018 totaling $176,489. The loan is due upon demand and it bears interest at 2%. During the quarter ended September 30, 2018 and the period from Inception to September 30, 2017 interest income accrued for this loan was $2,400 and $0, respectively, which is included in other income/(expense) on the accompanying condensed consolidated statements of operations. In addition, the company has a shareholder receivable of $939,155 from this officer of CoinTracking GmbH, representing the sale of a majority of the Company’s investment in cryptocurrency in its software subscription segment in accordance with a shareholder resolution entered into on September 21, 2018. Subsequent to September 30, 2018, the Company received this amount from the officer of CoinTracking GmbH on October 2, 2018.
On April 3, 2018, CT entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, pursuant to which CoinTracking GmbH may provide a loan (the “CoinTracking Loan”) of up to $3,000,000 to CT, to be advanced to CT in one or more tranches, at such times and in such amounts as may be requested by CT from time to time, on or before the tenth anniversary of the Loan Agreement. The Company is deemed obligor of CT’s obligations under the Loan Agreement for United States Federal income tax purposes. Interest on the CoinTracking Loan will accrue at a rate per annum of the greater of (i) three percent (3%), or (ii) the interest rates published monthly by the United States Internal Revenue Service and in effect under section 1274(d) of the Internal Revenue Code in effect as of the date of issuance of any promissory note under the CoinTracking Loan, and will be payable quarterly. During the three months ended September 30, 2018, pursuant to the Loan Agreement, CoinTracking GmbH advanced $1,500,000 to CT in exchange for three promissory notes (the “CoinTracking Note”) in the amounts of $300,000, $700,000 and $500,000, respectively, which is still outstanding as of September 30, 2018. The CoinTracking Note will mature on the second anniversary thereof. CT and CoinTracking GmbH are consolidated entities, as such, the loan and advances are intercompany transactions and are eliminated in consolidation. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH, and $1,200,000 of the sale proceeds was applied toward repayment of the $1,500,000 outstanding loan amount under the CoinTracking Note. See “Note 16 - Subsequent Events” for additional details.
Effective May 14, 2018, Michael Poutre, former Chief Executive Officer and director of the Company resigned from all of his then-current roles with the Company. Mr. Poutre remained a consultant to the Company until subsequent to September 30, 2018, when he ceased to be a consultant in November 2018. In connection with Mr. Poutre’s resignation, the Company entered into a Separation and Consulting Agreement and General Mutual Release (the “Separation and Consulting Agreement”), which was executed on May 9, 2018 and approved by the Board of Directors on May 14, 2018. The Separation and Consulting Agreement was not effective until May 17, 2018, following the end of the revocation period. The Separation and Consulting Agreement provides that the Company pays Mr. Poutre a lump-sum cash payment of (i) his earned but unpaid base salary, (ii) his accrued but unpaid vacation time, and (iii) any outstanding requests for expense reimbursements that are approved pursuant to Company policy. Mr. Poutre served as a consultant of the Company for six months at a rate of $30,000 per month, payable in two separate tranches, though the Company may terminate his services for any reason. As of September 30, 2018, $90,000 remained unpaid, included in accounts payable and accrued expenses on the Company’s condensed consolidated balance sheet. The Separation and Consulting Agreement contains other standard provisions contained in agreements of this nature including non-disparagement and a general release of any and all claims. |
Basic and Diluted Loss Per Share |
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| Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic and Diluted Loss Per Share |
NOTE 14 - BASIC AND DILUTED LOSS PER SHARE
The following is a reconciliation of the basic and diluted loss per share computations:
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Commitments and Contingencies |
9 Months Ended |
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Sep. 30, 2018 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Commitments and Contingencies |
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Subsequent to September 30, 2018, on November 1, 2018, the Company relocated its corporate office and entered into a month-to-month office agreement with Regus Management Group, LLC for $344 per month. Facility rent expense was $27,813 and $94,111 for the three and nine months ended September 30, 2018, respectively, and $18,000 for the three months ended September 30, 2018 and $27,000for the period from Inception to September 30, 2017 respectively.
Legal Contingencies – As previously disclosed, we received a subpoena on May 15, 2018, from the SEC’s Division of Enforcement in connection with a formal investigation it is conducting involving us as well as other unrelated public issuers who are holders of or provide services related to digital assets. The subpoena requested that we produce certain documents to the SEC’s Division of Enforcement by May 30, 2018. We are unable to predict how long the SEC’s investigation will continue or whether, at the conclusion of its investigation, the SEC will seek to impose fines or file an enforcement action against us. Additionally, the Company may from time to time become subject to legal proceedings, claims, and litigation arising in the ordinary course of business.
Indemnities and guarantees - During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the Company’s officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their respective relationships. In connection with its facility lease, the Company has indemnified the lessor for certain claims arising from the use of the facility. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these indemnities and guarantees in the accompanying balance sheet. |
Subsequent Events |
9 Months Ended |
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Sep. 30, 2018 | |
| Subsequent Events [Abstract] | |
| Subsequent Events |
NOTE 16 - SUBSEQUENT EVENTS
On October 10, 2018, the Company issued to two accredited investors 40,000 shares of common stock of the Company at a price of $5.00 per share, for net aggregate proceeds of $200,000.
On December 28, 2018, CT entered into an agreement on the purchase and assignment of shares, agreements on a purchase price of loan agreement and a compensation agreement, pursuant to the laws of the Republic of Germany, with Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany (“Kachel Holding”), and CoinTracking GmbH pursuant to which, on January 2, 2019, CT sold 12,525 shares of equity interest in CoinTracking GmbH, representing 50.1% of the outstanding equity interests in CoinTracking GmbH and CT’s entire equity ownership stake in CoinTracking GmbH, to Kachel Holding in exchange for $2,200,000, of which (i) $1,000,000 was paid in cash to CT and (ii) $1,200,000 was applied toward the repayment of an outstanding loan in the amount of $1,500,000 from CoinTracking GmbH to CT under the CoinTracking Note. |
Summary of Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation |
Basis of presentation – The included condensed consolidated balance sheet as of December 31, 2017, was derived from audited financial statements (as restated) and the accompanying unaudited condensed consolidated financial statements as of September 30, 2018 and September 30, 2017 (as restated) of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated financial statements have been included.
The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report for the period from March 9, 2017 (“Inception”), through December 31, 2017. |
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| Consolidation |
Consolidation – The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Crypto Sub, CT, and Malibu Blockchain, as well as its 50.1% ownership of CoinTracking GmbH. All significant intercompany accounts and transactions are eliminated in consolidation. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. |
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| Liquidity and Going Concern |
Liquidity and Going Concern - The Company’s condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with US GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred significant losses and experienced negative cash flows since Inception. As of September 30, 2018, the Company had cash of $387,287, a decline of $8,562,957 from the December 31, 2017 balance of $8,950,244. This decline is due, in part, to the acquisition of CoinTracking GmbH in January 2018, which included $3,189,303 of cash consideration, net of acquired cash. The Company’s working capital was ($1,582,593) as of September 30, 2018, which includes a contract liability of $2,122,316, representing advanced payments from customers for subscription service, which is initially deferred and recognized on a straight-line method over the terms of the applicable subscription period. Management does not anticipate settling this liability in cash. After June 30, 2018, the Company liquidated the majority of tradeable cryptocurrency held in its cryptocurrency investment segment, which had a balance of $1,007,753 at June 30, 2018, to help fund its operations. As of September 30, 2018, the accumulated deficit amounted to $20,656,840. As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management is evaluating different strategies to obtain financing to fund the Company’s expenses and achieve a level of revenue adequate to support the Company’s current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations. There can be no assurance that any of these future-funding efforts will be successful or that the Company will achieve its projected level of revenue in 2019 and beyond. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. |
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| Use of Estimates |
Use of estimates - The preparation of these condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant estimates and assumptions include but are not limited to the recoverability and useful lives of long-lived assets, allocation of revenue on software subscriptions, valuation of goodwill from business acquisitions, valuation and recoverability of investments, valuation allowances of deferred taxes, and share-based compensation expenses. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating results. |
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| Cash and Cash Equivalents |
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. |
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| Investments in Cryptocurrency |
Investments in cryptocurrency - Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin, that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less impairment and are reported as long-term assets in the condensed consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.
Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statement of operations and comprehensive income.
The following table presents additional information about investments in cryptocurrency, as of September 30, 2018:
The following table summarizes the historical cost of cryptocurrencies, held as of September 30, 2018:
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| Investments - Non-cryptocurrency |
Investments – non-cryptocurrency – As of September 30, 2018, the Company has invested $667,818 as part of nine financings, including $500,000 during the nine months ended September 30, 2018. The investments include $417,818 invested in accordance with eight token pre-sale and simple agreement for future tokens (“SAFT”) agreements. The agreements provide for the issuance of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established in each respective agreement. In addition, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”) agreement, representing 4% interest, at the time of the investment, in a private enterprise. The Company’s SAFE investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful Initial Coin Offering (“ICO”) by the enterprise.
The Company has received tokens for $255,763 of its investments, at cost, which have been transferred to an active exchange and included in Investment in cryptocurrency, net in the condensed consolidated balance sheet, during the nine months ended September 30, 2018.
The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment of its token pre-sale or SAFT investments as of September 30, 2018 as a majority were entered into in the last twelve months and progress has been demonstrated toward tokenization.
During the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment loss of $250,000, representing the full value of its investment. |
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| Equipment |
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. |
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| Impairment of Long-lived Assets |
Impairment of long-lived assets - The Company analyzes its long-lived assets, including indefinite lived intangible assets which include investments in cryptocurrency (see Investments in Cryptocurrency) and intangible assets acquired in connection with the acquisition of CoinTracking GmbH, for potential impairment. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. Impairment losses are recorded on long-lived assets when indicators of impairment are present, and for intangible assets acquired in connection with acquisitions, the undiscounted cash flows estimated to be generated by those assets are less than the net carrying amount of the assets. In such cases, the carrying values of assets to be held and used are adjusted to their estimated fair value, less estimated selling expenses. For the nine-month period ended September 30, 2018, the Company recognized impairment losses of $1,869,241 on its indefinite lived intangible assets. There was no impairment in the period from Inception to September 30, 2017. |
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| Business Combination |
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. |
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| Goodwill and Indefinite Lived Intangible Assets |
Goodwill and indefinite lived intangible assets - The Company records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. Goodwill and intangible assets with indefinite lives are tested for impairment at least annually on December 31, and whenever events or circumstances occur indicating that a possible impairment may have been incurred. Intangible assets with finite lives are amortized over their useful lives.
The Company assesses whether goodwill impairment and indefinite lived intangible assets exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed to determine whether a goodwill impairment exists at the reporting unit.
Based on its analysis, the Company’s management believes that no impairment of the carrying value of its goodwill existed at September 30, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products and services will continue which could result in impairment of goodwill in the future.
Based on its analysis of its indefinite lived intangible assets, which are valued using a discounted cash flow model, the Company’s management believes there is no impairment of the carrying value of its indefinite lived intangible assets as of September 30, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products and services will continue which could result in impairment in the future.
In addition, we capitalized certain costs incurred with developing our CT SaaS platform in accordance with ASC 985-20, Software — Costs of Software to be Sold, Leased, or Marketed once technological feasibility has been established. Capitalized software costs primarily include (i) external direct costs of services utilized in software development and (ii) compensation and related benefits for employees who are directly associated with software development. We amortized our capitalized software costs over a five-year period, reflecting the estimated useful lives of the assets. |
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| Foreign Currency Translation |
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. |
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| Income Taxes |
Income taxes - Deferred tax assets and liabilities are recognized for expected future consequences of events that have been included in the financial statements or tax returns. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. For the nine-month period ended September 30, 2018, the income tax payable of $800 reflects the minimum franchise tax for the State of California.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
As of September 30, 2018, we are subject to taxation in the U.S., as well as state and German taxes. The Company has not been audited by the U.S. Internal Revenue Service, nor has the Company been audited by any states or in Germany. Subsequent to September 30, 2018, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. |
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| Fair Value Measurements |
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.
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. |
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| Revenue Recognition |
Revenue recognition – The Company had two streams of principal revenue segments as of September 30, 2018, software subscription and cryptocurrency investments. The cryptocurrency investment segment primarily consisted of amounts earned through trading activities of cryptocurrencies. The Company recorded its investments in cryptocurrency as indefinite lived intangible assets, at cost less impairment, and are reported as long-term assets in the condensed consolidated balance sheets. Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statements of operations and comprehensive income. As of September 30, 2018, the Company liquidated substantially all of the tradeable cryptocurrency held by its cryptocurrency investment segment, although the Company continues to hold a small amount of tradeable cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and simple agreement for tokens agreements investments.
The Company also generated subscription revenues through its majority-owned subsidiary CoinTracking GmbH and generates minimal amounts of consulting revenue. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 supersedes nearly all existing revenue recognition guidance under US GAAP. The Company adopted ASU No. 2014-09 as of January 1, 2018 using the modified retrospective transition method for contracts as of the date of initial application. There is no cumulative impact to the Company’s retained earnings at January 1, 2018. See “Note 6 – Subscription Revenue Recognition” for additional information on the impact to the Company. |
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| Stock-based Compensation |
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. |
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| Net Loss Per Common Share |
Net loss per common share - The Company reports earnings per share (“EPS”) with a dual presentation of basic EPS and diluted EPS. Basic EPS is computed as net income divided by the weighted average of common shares for the period. Diluted EPS reflects the potential dilution that could occur from common shares issued through stock options, or warrants. For the three- and nine-month periods ended September 30, 2018, the Company had no potentially dilutive common stock equivalents. Therefore, the basic EPS and the diluted EPS are the same. |
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| Marketing Expense |
Marketing expense - Marketing expenses are charged to operations, under general and administrative expenses. The Company incurred $48,460 and $333,969 of marketing expenses for the three and nine months ended September 30, 2018, respectively, compared to $21,968 and $35,468 for the three months ended September 30, 2017 and for the period from Inception through September 30, 2017, respectively. |
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Restatement of the Consolidated Financial Statements (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Changes and Error Corrections [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Restatement of Consolidated Financial Statements | The effect of the restatement on the Company’s condensed consolidated balance sheet as of September 30, 2017 is as follows:
The effect of the restatement on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2017, are as follows:
The effect of the restatement on the Company’s consolidated statement of cash flows for the nine months ended September 30, 2017 are as follows:
The effect of the restatement on the Company’s net loss, net loss attributable to The Crypto Company, comprehensive income and per-share amounts for the prior interim periods of 2018 are as follows:
The effect of the restatement on the Company’s net loss, per-share amounts, and selected balance sheet amounts for the year ended December 31, 2017 are as follows:
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||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Investments in Cryptocurrency |
The following table presents additional information about investments in cryptocurrency, as of September 30, 2018:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Cryptocurrencies Held |
The following table summarizes the historical cost of cryptocurrencies, held as of September 30, 2018:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Fair Value of Assets Acquired and Liabilities Assumed |
The table below summarizes the fair values of the assets acquired and liabilities assumed, translated from euros to USD, at the date of acquisition:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Unaudited Pro Forma Financial Information |
For the three and nine months ended September 30, 2018:
|
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Segment Information (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Operating Income (Loss) by Segment |
The following table summarizes the Company’s operating income by segment for the three months ended September 30, 2018 and 2017:
The following table summarizes the Company’s operating income by segment for the nine months ended September 30, 2018:
The following table summarizes the Company’s operating income by segment for the period from Inception to September 30, 2017:
|
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Investments, Non-cryptocurrency (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||
| Investments [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| Schedule of Fair Value of Investments in Cryptocurrency |
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the nine months ended September 30, 2018:
|
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Equipment (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Equipment |
Equipment consists of the following:
|
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Goodwill and Intangible Assets (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Goodwill |
The carrying amount of goodwill for the nine months ended September 30, 2018 was as follows:
|
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| Schedule of Intangible Assets |
The carrying amounts of intangible assets for the nine months ended September 30, 2018 were as follows:
|
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| Schedule of Estimated Future Amortization Expense Related to Intangible Assets |
The following table provides estimated future amortization expense related to intangible assets as of September 30, 2018:
|
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Warrants for Common Stock (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants For Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Outstanding Warrants to Purchase Shares of Common Stock |
As of September 30, 2018, outstanding warrants to purchase shares of the Company’s common stock were as follows:
|
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Summary of Stock Options (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Payment Arrangement [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stock Options Activity |
|
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| Schedule of Stock Option Assumptions Used |
The range of assumptions used for the nine-month period ended September 30, 2018 are as follows:
|
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Basic and Diluted Loss Per Share (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Earnings Per Share Basic and Diluted |
The following is a reconciliation of the basic and diluted loss per share computations:
|
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Restatement of the Consolidated Financial Statements - Schedule of Restatement of Consolidated Financial Statements (Details) - USD ($) |
3 Months Ended | 6 Months Ended | 7 Months Ended | 9 Months Ended | 12 Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 |
Jun. 30, 2018 |
Mar. 31, 2018 |
Sep. 30, 2017 |
Jun. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Dec. 31, 2017 |
||||||||||
| Investment in cryptocurrency, net | $ 347,648 | $ 347,648 | $ 1,131,885 | ||||||||||||||
| Total current assets | 1,731,166 | 2,682,753 | 2,682,753 | 1,731,166 | 8,984,038 | ||||||||||||
| Investment in cryptocurrency, net | 814,844 | 814,844 | 1,131,885 | ||||||||||||||
| Total assets | 20,228,016 | 3,639,256 | 3,639,256 | 20,228,016 | 10,185,743 | ||||||||||||
| Accumulated deficit | (20,656,840) | (2,793,994) | (2,793,994) | (20,656,840) | (9,553,301) | ||||||||||||
| Total stockholders' equity | 7,113,060 | 3,490,241 | 3,490,241 | 7,113,060 | 9,487,334 | ||||||||||||
| Total liabilities and stockholders' equity | 20,228,016 | 3,639,256 | 3,639,256 | 20,228,016 | 10,185,743 | ||||||||||||
| Net realized gain on investment in cryptocurrency | |||||||||||||||||
| Operating loss | (1,348,400) | (1,682,941) | (3,355,507) | (10,586,649) | |||||||||||||
| Net change in unrealized appreciation (depreciation) on investment in cryptocurrency | |||||||||||||||||
| Net realized gain on investment in cryptocurrency | (108,920) | 481,692 | 564,332 | 1,303,433 | |||||||||||||
| Loss before provision for income taxes | (1,910,216) | (1,203,268) | (2,793,194) | (11,293,005) | |||||||||||||
| Net loss | (1,910,216) | $ (7,238,399) | $ (2,145,192) | (1,203,268) | $ (9,383,590) | (2,793,994) | (11,293,805) | ||||||||||
| Net loss attributable to The Crypto Company | $ (2,199,345) | $ (7,226,621) | $ (1,676,564) | $ (1,203,268) | $ (8,903,981) | $ (2,793,994) | $ (11,103,539) | $ (9,553,301) | |||||||||
| Net loss per common share - basic and diluted | $ (0.10) | $ (0.34) | $ (0.08) | $ (0.06) | $ (0.42) | $ (0.18) | $ (0.53) | $ (0.57) | |||||||||
| Weighted average common shares outstanding - basic and diluted | 21,172,782 | 21,131,457 | 20,864,198 | 18,565,062 | 21,003,328 | 15,371,770 | 21,060,434 | 16,746,792 | |||||||||
| Cryptocurrency acquired in trade of cryptocurrency investments | $ 3,626,161 | $ 5,031,280 | |||||||||||||||
| Previously Reported [Member] | |||||||||||||||||
| Investment in cryptocurrency, net | $ 900,110 | 900,110 | $ 2,917,627 | ||||||||||||||
| Total current assets | 3,582,863 | 3,582,863 | 11,901,665 | ||||||||||||||
| Investment in cryptocurrency, net | 2,917,627 | ||||||||||||||||
| Total assets | 3,724,522 | 3,724,522 | 11,971,485 | ||||||||||||||
| Accumulated deficit | (2,708,728) | (2,708,728) | (7,767,559) | ||||||||||||||
| Total stockholders' equity | 3,575,507 | 3,575,507 | 11,273,076 | ||||||||||||||
| Total liabilities and stockholders' equity | 3,724,522 | 3,724,522 | 11,971,485 | ||||||||||||||
| Net realized gain on investment in cryptocurrency | 481,692 | 564,332 | |||||||||||||||
| Operating loss | (1,201,249) | (2,791,175) | |||||||||||||||
| Net change in unrealized appreciation (depreciation) on investment in cryptocurrency | (303,805) | 85,266 | |||||||||||||||
| Net realized gain on investment in cryptocurrency | |||||||||||||||||
| Loss before provision for income taxes | (1,507,073) | (2,707,928) | |||||||||||||||
| Net loss | $ (7,145,543) | $ (3,521,747) | $ (1,507,073) | $ (10,667,291) | $ (2,708,728) | ||||||||||||
| Net loss attributable to The Crypto Company | $ (7,272,309) | $ (3,158,947) | $ (10,431,256) | $ (7,767,559) | |||||||||||||
| Net loss per common share - basic and diluted | $ (0.34) | $ (0.15) | $ (0.08) | $ (0.50) | $ (0.18) | $ (0.46) | |||||||||||
| Weighted average common shares outstanding - basic and diluted | 21,131,457 | 20,864,198 | 18,565,062 | 21,003,328 | 15,371,770 | 16,746,792 | |||||||||||
| Cryptocurrency acquired in trade of cryptocurrency investments | |||||||||||||||||
| Restatement Adjustment [Member] | |||||||||||||||||
| Investment in cryptocurrency, net | [1] | $ (900,110) | (900,110) | $ (2,917,627) | |||||||||||||
| Total current assets | [1] | (900,110) | (900,110) | (2,917,627) | |||||||||||||
| Investment in cryptocurrency, net | [1] | (814,844) | (814,844) | (1,785,742) | |||||||||||||
| Total assets | (85,266) | (85,266) | (1,785,742) | ||||||||||||||
| Accumulated deficit | (85,266) | (85,266) | (1,785,742) | ||||||||||||||
| Total stockholders' equity | (85,266) | (85,266) | (1,785,742) | ||||||||||||||
| Total liabilities and stockholders' equity | (85,266) | (85,266) | (1,785,742) | ||||||||||||||
| Net realized gain on investment in cryptocurrency | [2] | (481,692) | (564,332) | ||||||||||||||
| Operating loss | [2] | (481,692) | (564,332) | ||||||||||||||
| Net change in unrealized appreciation (depreciation) on investment in cryptocurrency | 303,805 | (85,266) | |||||||||||||||
| Net realized gain on investment in cryptocurrency | [2] | 481,692 | 564,332 | ||||||||||||||
| Loss before provision for income taxes | 303,805 | (85,266) | |||||||||||||||
| Net loss | $ 303,805 | (85,266) | |||||||||||||||
| Net loss attributable to The Crypto Company | $ (1,785,742) | ||||||||||||||||
| Weighted average common shares outstanding - basic and diluted | |||||||||||||||||
| Cryptocurrency acquired in trade of cryptocurrency investments | $ 2,716,018 | ||||||||||||||||
| Restatement Adjustment (1) [Member] | |||||||||||||||||
| Net loss | [3] | $ 182,168 | $ 1,587,709 | $ 1,769,877 | |||||||||||||
| Net loss attributable to The Crypto Company | [3] | $ 182,925 | $ 1,587,709 | $ 1,770,634 | |||||||||||||
| Weighted average common shares outstanding - basic and diluted | [3] | ||||||||||||||||
| Restatement Adjustment (2) [Member] | |||||||||||||||||
| Net loss | [4] | $ (275,024) | $ (211,153) | $ (486,176) | |||||||||||||
| Net loss attributable to The Crypto Company | [4] | $ (137,237) | $ (105,326) | $ (243,359) | |||||||||||||
| |||||||||||||||||
Summary of Significant Accounting Policies - Schedule of Investments in Cryptocurrency (Details) - USD ($) |
7 Months Ended | 9 Months Ended |
|---|---|---|
Sep. 30, 2017 |
Sep. 30, 2018 |
|
| Accounting Policies [Abstract] | ||
| Balance at January 1, 2018 | $ 1,131,885 | |
| Acquisition of CoinTracking GmbH | 1,115,345 | |
| Purchases of cryptocurrency | 5,267,025 | |
| Net realized gains on investments in cryptocurrency | 1,303,433 | |
| Customer payments in cryptocurrency | 1,102,723 | |
| Transfer from investments, non-cryptocurrency | 255,763 | |
| Sales of cryptocurrency | (7,490,278) | |
| Expenditures of cryptocurrency | (280,377) | |
| Impairment of cryptocurrency | (1,869,241) | |
| Foreign currency impact | (20,812) | |
| Balance at September 30, 2018 | $ 347,648 |
Summary of Significant Accounting Policies - Summary of Cryptocurrencies Held (Details) - USD ($) |
Sep. 30, 2018 |
Dec. 31, 2017 |
Sep. 30, 2017 |
|---|---|---|---|
| Investments | $ 347,648 | $ 1,131,885 | |
| Bitcoin [Member] | |||
| Investments | 263,562 | ||
| Ethereum [Member] | |||
| Investments | 31,750 | ||
| Celsius [Member] | |||
| Investments | 25,163 | ||
| Litecoin [Member] | |||
| Investments | 10,111 | ||
| Bitcoin Cash [Member] | |||
| Investments | 7,230 | ||
| Rightmesh [Member] | |||
| Investments | 6,200 | ||
| Tezos [Member] | |||
| Investments | 5,574 | ||
| Dash [Member] | |||
| Investments | 3,194 | ||
| Monero [Member] | |||
| Investments | 1,135 | ||
| DigiByte [Member] | |||
| Investments | 901 | ||
| Ethereum Classic [Member] | |||
| Investments | 841 | ||
| Dogecoin [Member] | |||
| Investments | 614 | ||
| Zcash [Member] | |||
| Investments | 582 | ||
| Lisk [Member] | |||
| Investments | 513 | ||
| Bitcoin Private [Member] | |||
| Investments | 507 | ||
| Stratis [Member] | |||
| Investments | 421 | ||
| Steem [Member] | |||
| Investments | 332 | ||
| Syscoin [Member] | |||
| Investments | 302 | ||
| NEM [Member] | |||
| Investments | 274 | ||
| Vertcoin [Member] | |||
| Investments | 259 | ||
| Decred [Member] | |||
| Investments | 255 | ||
| Other Cryptocurrencies [Member] | |||
| Investments | $ 695 |
Acquisition (Details Narrative) - USD ($) |
7 Months Ended | 9 Months Ended | ||||
|---|---|---|---|---|---|---|
Jan. 26, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Jun. 30, 2018 |
Dec. 31, 2017 |
Dec. 12, 2017 |
|
| Equity interests, percentage | 4.00% | |||||
| Purchase price | $ 3,189,303 | |||||
| Goodwill on acquisition | $ 11,200,454 | |||||
| CoinTracking GmbH [Member] | ||||||
| Equity interests, percentage | 50.10% | 50.10% | ||||
| Payments to acquire businesses in cash | $ 4,736,400 | |||||
| Number of common stock shares purchased | 473,640 | 12,525 | ||||
| Business combination, purchase price per share | $ 10 | |||||
| Purchase price | $ 9,472,800 | |||||
| Goodwill on acquisition | $ 11,990,910 | |||||
| CoinTracking GmbH [Member] | Accredited Investors [Member] | ||||||
| Business combination, purchase price per share | $ 7 |
Acquisition - Schedule of Fair Value of Assets Acquired and Liabilities Assumed (Details) - USD ($) |
Sep. 30, 2018 |
Jan. 26, 2018 |
Dec. 31, 2017 |
|---|---|---|---|
| Goodwill | $ 11,200,454 | ||
| CoinTracking GmbH [Member] | |||
| Cash and cash equivalents | $ 1,547,097 | ||
| Investment in cryptocurrency | 1,115,345 | ||
| Loan receivable - related party | 194,380 | ||
| Other current assets | 296,273 | ||
| Goodwill | 11,990,910 | ||
| Intangible assets | 7,726,356 | ||
| Other assets | 14,633 | ||
| Total assets | 22,884,994 | ||
| Current liabilities | 360,486 | ||
| Contract liabilities, short term | 2,686,858 | ||
| Contract liabilities, long term | 929,866 | ||
| Noncontrolling interest | 9,434,984 | ||
| Total liabilities | 13,412,194 | ||
| Net assets acquired | $ 9,472,800 |
Acquisition - Schedule of Unaudited Pro Forma Financial Information (Details) - USD ($) |
3 Months Ended | 9 Months Ended |
|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2018 |
|
| Business Combinations [Abstract] | ||
| Revenue | $ 1,227,971 | $ 2,686,465 |
| Net loss | $ (1,910,215) | $ (11,001,482) |
| Basic and diluted loss per share: Basic and diluted | $ (0.09) | $ (0.52) |
Subscription Revenue Recognition (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2018 |
Jan. 26, 2018 |
Dec. 31, 2017 |
|
| Subscriptions of revenue, description | Revenue collected in advance for subscriptions ranging from annual to perpetual packages were deferred and recognized as revenue on a straight-line basis over the terms of the applicable subscription period or performance obligation period. For "lifetime" revenue packages, where the customer had access to the website for an unlimited length of time, the Company elected to recognize revenue on a straight-line basis over three years. | |||
| Potential credit withheld by paypal | $ 36,583 | |||
| Subscription revenue | 2,570,795 | |||
| Contract liabilities, current | $ 2,122,316 | 2,122,316 | ||
| Contract liabilities, noncurrent | 1,173,531 | 1,173,531 | ||
| Amortization of sales incentive programs cost | 87,520 | 150,274 | ||
| Aggregate contract asset | $ 146,071 | $ 146,071 | ||
| CoinTracking LLC [Member] | ||||
| Contract liabilities | $ 3,616,724 |
Segment Information (Details Narrative) |
9 Months Ended | ||
|---|---|---|---|
|
Jan. 26, 2018
shares
|
Sep. 30, 2018
Segments
shares
|
Jun. 30, 2018 |
|
| Number of operating segments | Segments | 2 | ||
| Equity interests | 4.00% | ||
| CoinTracking GmbH [Member] | |||
| Number shares purchased | shares | 473,640 | 12,525 | |
| Equity interests | 50.10% | 50.10% |
Segment Information - Schedule of Operating Income (Loss) by Segment (Details) - USD ($) |
3 Months Ended | 7 Months Ended | 9 Months Ended | |
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2017 |
Sep. 30, 2018 |
|
| Revenue, net | $ 1,227,971 | $ 6,000 | $ 6,000 | $ 2,570,795 |
| Cost and expenses | (2,576,371) | (1,688,941) | (3,361,507) | (12,833,641) |
| Operating income/(loss) | (1,348,400) | (1,682,941) | (3,355,507) | (10,586,649) |
| Cryptocurrency Investment [Member] | ||||
| Revenue, net | 6,000 | 6,000 | ||
| Cost and expenses | (1,929,000) | (1,688,941) | (3,361,507) | (10,741,907) |
| Operating income/(loss) | (1,929,000) | (1,682,941) | (3,355,507) | (10,741,907) |
| Software Subscription [Member] | ||||
| Revenue, net | 1,227,971 | 2,570,795 | ||
| Cost and expenses | (647,371) | (2,415,537) | ||
| Operating income/(loss) | $ 580,600 | $ (155,258) | ||
Investments, Non-Cryptocurrency (Details Narrative) - SAFT Agreements [Member] |
Sep. 30, 2018
USD ($)
|
|---|---|
| Non-tradeable Token Pre Sale [Member] | |
| Investments, non-cryptocurrency | $ 362,055 |
| Private Enterprise [Member] | |
| Investments, non-cryptocurrency | $ 250,000 |
Investments, Non-Cryptocurrency - Schedule of Fair Value of Investments in Cryptocurrency (Details) - USD ($) |
3 Months Ended | 7 Months Ended | 9 Months Ended | |
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2017 |
Sep. 30, 2018 |
|
| Investment in non-cryptocurrency, beginning balance | ||||
| Impairment | $ (250,000) | (250,000) | ||
| Investment in non-cryptocurrency, ending balance | 162,055 | 162,055 | ||
| Level 3 [Member] | ||||
| Investment in non-cryptocurrency, beginning balance | 167,818 | |||
| Transfers to investments in cryptocurrency | (255,763) | |||
| Purchases, sales, issuances, and settlement, net | 500,000 | |||
| Impairment | (250,000) | |||
| Investment in non-cryptocurrency, ending balance | $ 162,055 | $ 162,055 | ||
Equipment - Schedule of Equipment (Details) - USD ($) |
Sep. 30, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Equipment, gross | $ 129,376 | $ 72,995 |
| Less accumulated depreciation | (26,730) | (4,675) |
| Equipment, net | 102,644 | 68,320 |
| Computer Equipment [Member] | ||
| Equipment, gross | 114,834 | 69,241 |
| Furniture Equipment [Member] | ||
| Equipment, gross | $ 14,542 | $ 3,754 |
Goodwill and Intangible Assets (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended |
|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2018 |
|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Impairment of goodwill | ||
| Amortization expense related to intangible assets | $ 772,745 | $ 241,767 |
Goodwill and Intangible Assets - Schedule of Goodwill and Intangible Assets (Details) |
9 Months Ended |
|---|---|
|
Sep. 30, 2018
USD ($)
| |
| Goodwill and Intangible Assets Disclosure [Abstract] | |
| Goodwill, beginning balance | |
| Acquisitions | 11,990,910 |
| Foreign translation impact | (790,456) |
| Goodwill, ending balance | $ 11,200,454 |
Goodwill and Intangible Assets - Schedule of Intangible Assets (Details) - USD ($) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
|
| Gross Carry Amount | $ 7,346,367 | |
| Accumulated Amortization | (751,131) | |
| Intangible Assets, Net | $ 6,595,236 | |
| Trade Names [Member] | ||
| Estimated Useful Life | 0 years | |
| Gross Carry Amount | $ 1,821,785 | |
| Accumulated Amortization | ||
| Intangible Assets, Net | $ 1,821,785 | |
| Software [Member] | ||
| Estimated Useful Life | 5 years | |
| Gross Carry Amount | $ 4,322,158 | |
| Accumulated Amortization | (590,230) | |
| Intangible Assets, Net | $ 3,731,928 | |
| Customer Base [Member] | ||
| Estimated Useful Life | 5 years | |
| Gross Carry Amount | $ 1,072,755 | |
| Accumulated Amortization | (146,494) | |
| Intangible Assets, Net | $ 926,261 | |
| Capitalized Software [Member] | ||
| Estimated Useful Life | 5 years | |
| Gross Carry Amount | $ 129,669 | |
| Accumulated Amortization | (14,407) | |
| Intangible Assets, Net | $ 115,262 |
Goodwill and Intangible Assets - Schedule of Estimated Future Amortization Expense Related to Intangible Assets (Details) |
Sep. 30, 2018
USD ($)
|
|---|---|
| Goodwill and Intangible Assets Disclosure [Abstract] | |
| 2018 (remaining) | $ 275,149 |
| 2019 | 1,100,594 |
| 2020 | 1,100,594 |
| 2021 | 1,100,594 |
| 2022 | 1,100,594 |
| Thereafter | 95,926 |
| Total amortization expense | $ 4,773,451 |
Warrants for Common Stock - Schedule of Outstanding Warrants to Purchase Shares of Common Stock (Details) - Warrant [Member] |
9 Months Ended |
|---|---|
|
Sep. 30, 2018
$ / shares
shares
| |
| Issuance Date | September 2017 |
| Exercisable for | Common Shares |
| Expiration Date | Sep. 25, 2020 |
| Exercise Price | $ / shares | $ 2.00 |
| Number of Shares Outstanding Under Warrants | shares | 168,125 |
Summary of Stock Options - Schedule of Stock Option Assumptions Used (Details) |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Expected dividends | 0.00% |
| Minimum [Member] | |
| Volatility | 36.00% |
| Expected term (in years) | 5 years |
| Risk-free rate | 1.91% |
| Maximum [Member] | |
| Volatility | 75.00% |
| Expected term (in years) | 10 years |
| Risk-free rate | 3.05% |
Basic and Diluted Loss Per Share - Schedule of Earnings Per Share Basic and Diluted (Details) - USD ($) |
3 Months Ended | 6 Months Ended | 7 Months Ended | 9 Months Ended | 12 Months Ended | |||
|---|---|---|---|---|---|---|---|---|
Sep. 30, 2018 |
Jun. 30, 2018 |
Mar. 31, 2018 |
Sep. 30, 2017 |
Jun. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Dec. 31, 2017 |
|
| Earnings Per Share [Abstract] | ||||||||
| Numerator for basic and diluted income per share: Net loss attributable to the Company | $ (1,910,216) | $ (7,238,399) | $ (2,145,192) | $ (1,203,268) | $ (9,383,590) | $ (2,793,994) | $ (11,293,805) | |
| Denominator for basic and diluted income per share: Weighted average shares (basic) | 21,172,782 | 21,060,434 | ||||||
| Denominator for basic and diluted income per share: Common stock equivalents | ||||||||
| Denominator for basic and diluted income per share: Weighted average shares (diluted) | 21,172,782 | 21,060,434 | ||||||
| Basic and diluted income (loss) per share: Basic and diluted | $ (0.10) | $ (0.34) | $ (0.08) | $ (0.06) | $ (0.42) | $ (0.18) | $ (0.53) | $ (0.57) |
Commitments and Contingencies (Details Narrative) - USD ($) |
3 Months Ended | 7 Months Ended | 9 Months Ended | |
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2017 |
Sep. 30, 2018 |
|
| Facility rent expense | $ 27,813 | $ 18,000 | $ 27,000 | $ 94,111 |
| November 1, 2018 [Member] | Regus Management Group, LLC [Member] | ||||
| Monthly rent | $ 344 | |||
Subsequent Events (Details Narrative) - USD ($) |
7 Months Ended | 9 Months Ended | ||||
|---|---|---|---|---|---|---|
Dec. 28, 2018 |
Oct. 10, 2018 |
Jan. 26, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Jun. 30, 2018 |
|
| Proceeds from common stock | $ 4,976,011 | |||||
| Equity interests | 4.00% | |||||
| CoinTracking GmbH [Member] | ||||||
| Number shares purchased | 473,640 | 12,525 | ||||
| Equity interests | 50.10% | 50.10% | ||||
| Payments to acquire businesses in cash | $ 4,736,400 | |||||
| Proceeds from sales of equity | $ 1,200,000 | |||||
| Repayment of outstanding loan | $ 1,500,000 | |||||
| Subsequent Event [Member] | Loan Agreement [Member] | CoinTracking GmbH [Member] | ||||||
| Number shares purchased | 12,525 | |||||
| Equity interests | 50.10% | |||||
| Conversion of equity ownership shares | $ 2,200,000 | |||||
| Payments to acquire businesses in cash | 1,000,000 | |||||
| Proceeds from sales of equity | 1,200,000 | |||||
| Repayment of outstanding loan | $ 1,500,000 | |||||
| Subsequent Event [Member] | Two Accredited Investors [Member] | ||||||
| Number of common stock shares issued | 40,000 | |||||
| Shares issued price per share | $ 5.00 | |||||
| Proceeds from common stock | $ 200,000 |