Exhibit 2.6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
| [X] | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2020
or
| [ ] | TRANSITION REPORT UNDER 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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
23823 Malibu Road, #50477
Malibu, CA 90265
(Address of principal executive offices - Zip Code)
Registrant’s telephone number, including area code: (424) 228-9955
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 [X] No [ ]
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 that 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 30, 2020, the value of common stock held by non-affiliates was $15,948,590.
Number of shares outstanding of the Registrant’s common stock was 21,417,841 as of March 24, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
None.
THE CRYPTO COMPANY
Table of Contents
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this report. In particular, forward-looking statements include statements relating to future actions, prospective products, applications, customers and technologies, and future performance or future financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
| ● | our ability to execute our business plan and achieve profitability; | |
| ● | our limited operating history; | |
| ● | rapidly advancing technology; | |
| ● | the impact of competitive or alternative services and technologies; | |
| ● | our ability to remediate material weaknesses in our internal control over financial reporting; | |
| ● | our ability to obtain, expand and maintain protection of any intellectual property or propriety software we are currently developing or may develop in the future; | |
| ● | our exposure to and ability to defend third-party claims and challenges to our intellectual property rights; | |
| ● | our ability to obtain adequate financing in the future, as and when we need it; | |
| ● | our ability to continue as a going concern; | |
| ● | our success at managing the risks involved in the foregoing items; and | |
| ● | other factors discussed in this report. |
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included in this report to conform such statements to actual results or changes in our expectations. You should not place undue reliance on these forward-looking statements.
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Item 1. Business
The Crypto Company (the “Company”, “Crypto”, “we”, “us” or “our”) was incorporated in the State of Nevada on March 9, 2017 (“Inception”). The Company is engaged in the business of providing consulting services and education for distributed ledger technologies (“blockchain”), for the building of technological infrastructure and enterprise blockchain technology solutions. The Company currently generates revenues and incurs expenses solely through these consulting operations. We are located at 23823 Malibu Road #50477 Malibu, California, 90265 and our telephone number is (424) 228-9955. Our website can be accessed at www.thecryptocompany.com. The information from our website is not a part of this report. Crypto Sub and CoinTracking, LLC, a Nevada limited liability company (“CoinTracking”), are wholly-owned subsidiaries of the Company.
History
Stock Sale
On June 7, 2017, the Company entered into (i) a Share Purchase Agreement (the “Restricted Share Purchase Agreement”) with Crypto Sub, Inc. (“Crypto Sub”), incorporated in the State of Nevada on March 9, 2017 (“Inception”), and John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company; and (ii) a Share Purchase Agreement (the “Free Trading Share Purchase Agreement”, and together with the Restricted Share Purchase Agreement, the “Share Purchase Agreements”) with Crypto Sub, Uptick Capital, LLC (“Uptick Capital”) and John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company. Pursuant to the Share Purchase Agreements, the shareholders of the Company sold an aggregate of 11,235,000 shares of common stock of the Company to Crypto Sub and 100,000 shares of common stock of the Company to Uptick Capital, representing an aggregate of 100% of the issued and outstanding common stock of the Company as of such date, for aggregate proceeds of $411,650, including escrow and other transaction-related fees to the selling shareholders (the “Stock Sale”). A portion of the acquisition cost equal to $399,300 is expensed as a general and administrative expense in the accompanying consolidated statement of operations.
10,000,000 shares held by Deborah Thomas, the former Chief Executive Officer, principal accounting and financial officer and director of the Company, representing approximately 88.22% of the outstanding common stock of the Company immediately prior to the Stock Sale, were sold for $0.031 per share, and an aggregate of 1,335,000 shares held by the remaining shareholders of the Company was sold at a price of $0.075 per share.
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In connection with the Stock Sale (i) Deborah Thomas resigned as Chief Executive Officer, principal accounting officer and director of the Company and Elliott Polatoff resigned as Secretary and director of the Company; and (ii) Michael Poutre was appointed Chief Executive Officer and sole director of the Company, James Gilbert was appointed President of the Company and Ron Levy was appointed Chief Operating Officer of the Company, all effective as of June 7, 2017.
Stock Dividend
On June 7, 2017, Crypto Sub issued to its shareholders a stock dividend (the “Stock Dividend”) of 10,918,007 shares of common stock of the Company acquired through the Stock Sale, distributed on a pro-rata basis, such that the shareholders of Crypto Sub received fifteen shares of common stock of the Company for each share of common stock of Crypto Sub held as of June 6, 2017.
Immediately following the consummation of the Stock Sale and the distribution of the Stock Dividend, Crypto Sub held 316,993 shares, representing 4.26% of the issued and outstanding shares of common stock of the Company, and the shareholders of Crypto Sub, collectively, held 10,918,007 shares, representing 94.40% of the issued and outstanding shares of common stock of the Company. Of the 316,993 shares held by Crypto Sub, 129,238 shares were transferred to certain officers and consultants of Crypto Sub in exchange for their services related to the Transaction, and the remaining shares were retained by Crypto Sub.
Share Exchange
On June 7, 2017, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with Michael Poutre, in his sole capacity as representative for the shareholders of Crypto Sub, pursuant to which each issued and outstanding share of common stock of Crypto Sub was exchanged for shares of common stock of the Company (the “Share Exchange”), resulting in the aggregate issuance of 7,026,614 shares of common stock of the Company, on a pro-rata basis, as provided on the Exchange Agreement, to the shareholders of Crypto Sub, in exchange for 727,867 shares of common stock of Crypto Sub.
The Stock Sale, the Stock Dividend and the Share Exchange are collectively referred to as the “Acquisition”. Immediately following the Acquisition, (i) Crypto Sub became a wholly-owned subsidiary of the Company; (ii) all of the former shareholders of Crypto Sub became shareholders of the Company, on a pro-rata basis; and (iii) the operations of the Company solely consisted of the operations of Crypto Sub.
On October 3, 2017, the Company filed Articles of Conversion with the Utah Secretary of State and the Nevada Secretary of State to effectively change its state of Incorporation to Nevada and filed Articles of Incorporation with the Nevada Secretary of State to change its name to The Crypto Company.
Acquisition and Disposition of CoinTracking GmbH
On January 16, 2018, pursuant to an Equity Purchase Agreement (the “CoinTracking Purchase Agreement”) entered into on December 22, 2017, by and among the Company, CoinTracking, Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany (“Kachel Holding”), and Dario Kachel, an individual, CoinTracking purchased from Kachel Holding 12,525 shares of CoinTracking GmbH, an entity formed under the laws of Germany (“CoinTracking GmbH”), representing 50.1% of the equity interests in CoinTracking GmbH, for a purchase price of (i) $4,736,400 in cash, and (ii) 473,640 shares of common stock of the Company, par value $0.001 per share, subject to adjustment as provided in the CoinTracking Purchase Agreement (the “CoinTracking Acquisition”). The CoinTracking Acquisition was consummated on January 26, 2018.
On December 28, 2018, CoinTracking agreed on the purchase and assignment of shares, agreements on a purchase price of the loan agreement and a compensation agreement, with Kachel Holding and CoinTracking GmbH pursuant to which, on January 2, 2019, CoinTracking sold 12,525 shares of equity interest in CoinTracking GmbH, representing 50.1% of the outstanding equity interests in CoinTracking GmbH and CoinTracking’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 CoinTracking and (ii) $1,200,000 was applied toward the repayment of an outstanding loan of $1,500,000 from CoinTracking GmbH to CoinTracking under the CoinTracking Note (the “CoinTracking Disposition”).
In 2019, the Company had holdings of cryptocurrency from its investment segment, and therefore has classified those assets as assets held for sale in its consolidated balance sheets, and reports current operating results as discontinued operations in the consolidated statements of operations for the year ended December 31, 2019. The balance of cryptocurrency assets on our balance sheet as of December 31, 2020 was zero.
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Overview of Our Business
Prior to the Acquisition, the Company was an early stage fitness apparel company with the mission of creating supportive, protective, and innovative sports bras and fitness apparel.
During the year ended December 31, 2018, the Company had two principal business segments that generated revenues and incurred expenses, both of which have ceased operations as of the date of this Annual Report:
| ● | Cryptocurrency Investment Segment. The cryptocurrency investment segment generated revenues that 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. |
| ● | Software Subscription Segment. The Company also generated software subscription revenues through CoinTracking GmbH and generated minimal amounts of consulting revenue. The software subscription segment consisted primarily of amounts earned through subscriptions to the CoinTracking GmbH website. We disposed of our entire ownership interest CoinTracking GmbH on January 2, 2019. |
During the year ended December 31, 2019, the Company generated revenues and incurred expenses primarily through the business of providing consulting services and education for distributed ledger technologies (“blockchain”), for the building of technological infrastructure, and enterprise blockchain technology solutions.
During the year ended December 31, 2020, we continued to provide consulting services and education for the blockchain, for the building of technological infrastructure, and enterprise blockchain technology solutions. We only generated revenues through these operations.
We have disposed of our entire ownership interest in CoinTracking GmbH and also divested substantially all of our cryptocurrency assets owned by our former cryptocurrency investment segment, which has ceased operations.
Strategic Acquisitions
In furtherance of the development of our blockchain consulting services, we may seek from time to time additional 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.
Media Opportunities
We engage in public discourse on an ongoing basis and host roundtable webinars to educate the public about blockchain technology and intend to expand our presence at industry conferences to develop and expand our community and content network. We do not express opinions regarding the advisability of investing in any digital asset or in the digital asset marketplace, and we do not receive compensation in connection with these roundtable webinars.
Intellectual Property
We regard our service marks as having significant value and as being important factors in the marketing of our products and services. Our policy is to pursue registration of our marks whenever possible and to oppose vigorously any infringement of our marks.
Market Overview
Blockchain
The blockchain is a decentralized database or digital “ledger” of transactions across a peer-to-peer network of computers or “nodes” that use the underlying infrastructure of the Internet to validate and process valuable transactions. While using the blockchain, participants can transfer information across the Internet without the need of a central third party. In a financial transaction, the buyer and seller interact directly without the need for verification by a trusted third-party intermediary. The actual record of the transaction is pseudonymous, but the identifying information is encrypted, preventing personal information from being shared.
The primary benefits of blockchain include the following:
| ● | Fraud reduction: Blockchain technology has the potential to positively disrupt most industries since it can work for nearly every type of transaction that involves value, including money, property, and goods. From a business perspective, the technology may be leveraged for process improvement, helping to reduce human error, prevent fraud, and streamline data storage. | |
| ● | Transparency: Financial organizations may use the blockchain to store records digitally and leverage the technology for any type of transaction that needs to be verified by a trusted third party. | |
| ● | Security: Transactions may include transferring digital or physical assets, verifying chain of custody, and protecting intellectual property. In an era with increasing cybercrime and strict regulatory requirements, blockchain offers a highly fraud-resistant technology that can protect and authenticate almost any type of transaction. | |
| ● | Efficiency: Both Permissioned and Public blockchains offer significant improvements in efficiency to retail and business implementations by reducing cost and time in the duplicate databases and ledgers that companies and intermediaries must maintain in the absence of a shared, trusted, and immutable system. |
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Competition
We have a number of competitors, ranging in size, consisting primarily of other similar consulting firms. We believe our main competitors are ConsenSys, Natsoft Corporation, Quest Global Technologies, and CGI Inc. In addition, global audit and assurance firms typically provide consulting services.
Governmental Regulations
Government regulation of blockchain is being actively considered by the United States federal government via a number of agencies (including the U.S. Securities and Exchange Commission (the “SEC”), the U.S. Commodities Future Trading Commission (“CFTC”), Federal Trade Commission (“FTC”), and the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury) and in other countries. Other regulatory bodies are governmental or semi-governmental and have shown an interest in regulating or investigating companies engaged in the blockchain business (NASDAQ, NYSE, FINRA, state securities commissions).
Blockchain regulations are in a nascent state with agencies investigating businesses and their practices, gathering information, and generally trying to understand the risks and uncertainties in order to protect investors in these businesses. Regulations will certainly increase, in many cases, although it is presently not possible to know how they will increase, how regulations will apply to the Company’s businesses, or when they will be effective. Various bills have also been proposed in congress for adoption-related to the Company’s business which may be adopted and have an impact on it. As the regulatory and legal environment evolves, the Company may become subject to new laws and further regulation by the SEC and other agencies, although the Company is not currently trading in digital assets and has no intention to trade in digital assets.
Employees
As of December 31, 2020, we had one full-time employee. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. None of our employees is represented by a labor union, and we believe that our employee relations are good.
Not Applicable
Item 1B. Unresolved Staff Comments
Not applicable. 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 1B.
Due to the onset of Covid-19, all Company personnel now work remotely. The Company does not rent any office space. The Company’s legal address is 23823 Malibu Road, # 50477, Malibu, California 90265.
See discussion of legal proceedings in Note 14 (Commitments and Contingencies) to the Consolidated Financial Statements included in Item 8 of Part II of this Report, which is incorporated by reference into this Item 3 of Part I.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The trading symbol for our common stock is “CRCW”.
The following table sets forth the high and low bid prices for our common stock for the periods indicated as reported by the OTC Grey market. The bid quotations reported by the OTC Grey market reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.
| Period | High | Low | ||||||
| 2020 | ||||||||
| First Quarter | $ | 0.50 | $ | 0.50 | ||||
| Second Quarter | $ | 2.35 | $ | 1.00 | ||||
| Third Quarter | $ | 8.10 | $ | 5.00 | ||||
| Fourth Quarter | $ | 75.00 | $ | 2.15 | ||||
| Period | High | Low | ||||||
| 2019 | ||||||||
| First Quarter | $ | 12.00 | $ | 10.00 | ||||
| Second Quarter | $ | 12.00 | $ | 1.05 | ||||
| Third Quarter | $ | 1.11 | $ | 1.05 | ||||
| Fourth Quarter | $ | 1.11 | $ | 0.50 | ||||
On December 19, 2017, the SEC implemented the Trade Halt, pursuant to Section 12(k) of the Exchange Act, which temporarily suspended trading of the Company’s stock on the OTC Pink market until January 3, 2018. The Trade Halt was lifted by the SEC as of January 4, 2018, at which time the OTC Markets Group Inc. (the “OTC Markets”), automatically, as a matter of course, discontinued the display of quotes for our common stock and moved our common stock to the OTC Grey market. Securities listed on the OTC Grey market are tradable, but broker-dealers of such securities are unable to publicly quote such securities. In a letter to us dated as of November 22, 2019, the SEC Division of Enforcement advised us that the investigation has concluded and that the SEC will not seek to impose any fines or file any enforcement action against us.
Holders
As of March 24, 2021 there were 134 holders of record of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plan
The Company has issued equity awards in the form of stock options from The Crypto Company 2017 Equity Incentive Plan (the “2017 Plan”), which was approved by stockholders on August 24, 2017.
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The following table sets forth information about the 2017 Plan as of December 31, 2020:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted | Remaining | |||||||||||||||
| Average | Contractual | Aggregate | ||||||||||||||
| Number | Exercise | Term | Intrinsic | |||||||||||||
| of Shares | Price | (years) | Value | |||||||||||||
| Options outstanding, at December 31, 2019 | 346,349 | $ | 8.73 | 8.38 | 3,025,003 | |||||||||||
| Options granted | 2,130,000 | 1.10 | 4.54 | 2,130,000 | ||||||||||||
| Options canceled | - | - | ||||||||||||||
| Options exercised | - | - | ||||||||||||||
| Options outstanding, at December 31, 2020 | 2,281,429 | $ | 2.26 | 5.25 | $ | 5,155,003 | ||||||||||
| Vested and exercisable at December 31,2020 | 2,281,429 | $ | 2.18 | 5.25 | $ | 5,155,003 | ||||||||||
Item 6. Selected Financial Data
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. All of such forward-looking statements are expressly qualified by reference to the cautionary statements provided under the caption “Cautionary Note Regarding Forward-Looking Statements” included on page 1 in Part I of this report. Furthermore, a number of known and unknown factors may cause our actual results, performance, or achievements to differ materially from those expressed or implied by the following discussion.
We are engaged in the business of providing consulting services and education for blockchain, for the building of technological infrastructure and enterprise blockchain technology solutions. We currently generate revenues through these consulting and education operations. We have disposed of our entire ownership interest in CoinTracking GmbH and also divested substantially all of our cryptocurrency assets owned by our former cryptocurrency investment segment, which has ceased operations.
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Recent Events
COVID-19 Pandemic
On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Many countries, including the United States, reacted by instituting a wide variety of control measures including states of emergency, mandatory quarantines, required business and school closures, implementing state-wide “shelter in place” orders, and restricting travel. The United States government has taken a number of actions to mitigate the impact of the COVID-19 pandemic on the U.S. economy, including the passage of multiple stimulus packages which provided payments to individuals, additional health-care funding, loans, and grants to certain businesses, temporary amendments to the Internal Revenue Code, and strengthened unemployment insurance.
On December 11, 2020, the U.S. Food and Drug Administration (the “FDA”) issued the first emergency use authorization for the Pfizer-BioNTech COVID-19 vaccine for the prevention of COVID-19 for individuals 16 years of age and older. On December 18, 2020, the FDA issued a second emergency use authorization for the Moderna COVID-19 vaccine. On February 27 2021, Johnson & Johnson received an emergency use authorization for their single-shot vaccine with other companies expected to follow. Distribution of the vaccines has commenced, initially with front-line health-care workers receiving vaccinations followed by individuals deemed at high-risk of contracting COVID-19 or for severe illness from COVID-19. Vaccination distributions continue to become available to a wider group of people with multiple states now distributing to the general public. During these initial phases of the vaccine distribution, vaccine shortages and delays have been caused by high demand outstripping supply and challenging distribution logistics. With vaccine production ramping up and improvements to distribution logistics, vaccine shortages and distribution challenges will continue to improve making the vaccine more available.
The extent to which COVID-19 impacts the Company’s financial results remains fluid and will continue to depend on a number of things, including the extent of the spread of the virus, the rate of infection, possible resurgence of the virus, the emergence of new strains of variants of the virus, the severity of illness and the degree of lethality, the relative effect on various portions of the population, the measures taken to combat the virus and their effectiveness, including the development and availability of vaccines and therapeutics and the prevalence of adoption barriers or resistance to them, the impact of control measures such as states of emergency, mandatory quarantines, and required business and school closures, the effect on international trade of any measures taken to combat the virus, including the reinstitution of travel restrictions, any action taken (such as the lowering of interest rates) by government entities to combat the negative macroeconomic effects of these measures, and other factors.
Management continues to actively work to minimize the current and future impact of this unprecedented situation, making adjustments to operations where appropriate or necessary to try and minimize the impact of COVID-19. This has not, however, caused a significant disruption to the Company operations. Management continues to monitor the impact of COVID-19 on the Company’s financial results.
Discontinued Operations
As a result of the sale of CoinTracking’s entire equity ownership stake in CoinTracking GmbH, and a strategic shift in our business in the fourth quarter of 2018 away from cryptocurrency investing to blockchain consulting and education, the operating results associated with these assets and liabilities have been reclassified to give effect to these changes and are reported as discontinued operations in the Consolidated Statements of Operations for all periods presented. Loss from discontinued operations was $84,849 and $16,376,131 for the years ended December 31, 2019 and December 31, 2018, respectively. The 2018 loss includes an impairment of goodwill of $9,356,105, and impairment of other intangible assets of $3,743,480 related to CoinTracking GmbH. The loss from discontinued operations attributable to the Crypto Company was $9,859,271 for the year ended December 31, 2018, which includes our 50.1% ownership of CoinTracking GmbH. CoinTracking GmbH was acquired in 2018, and therefore, there was no impact on the Company’s prior year results.
There were no losses from discontinued operations recorded for the year ended December 31, 2020.
See Note 15- Discontinued Operations to our Consolidated Financial Statements
Results of Continuing Operations
Comparison of the fiscal years ended December 31, 2020 and December 31, 2019
Revenue
For the year ended December 31, 2020, revenues relating to consulting services were $14,400, compared to $65,743 for the year ended December 31, 2019. The decrease is attributable to lower level of activity in generating consulting services with one of our clients.
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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 year ended December 31, 2020 was $302,812 compared to $1,155,304 for the year ended December 31, 2019. The decrease of $852,492 was primarily due to a decrease in our general and administrative expenses to $749,930 for the year ended December 31, 2020 compared to $1,750,668 for the year ended December 31, 2019. Also, prepaid expenses and accounts payable decreased to $358,667 for the year ended December 31, 2020 compared to $557,767 for the year ended December 31, 2019. Finally, our non-cash share-based compensation increased to $2,321,673 for the year ended December 31, 2020, compared to $-0- for the year ended December 31, 2019.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2020 was $209,935, compared to $1,079,467 for the year ended December 31, 2019. The prior-year period included the sale of CoinTracking GmbH for $2,200,000, net of acquired cash of $1,000,000.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2020 was $117,592, compared to $75,000 for the year ended December 31, 2019. The increase of $42,592 was primarily the result of a decrease in aggregate proceeds from issuance of convertible notes for $25,000, offset by the issuance of $67,592 in loans payable in 2020.
Critical Accounting Policies and Estimates
Stock-Based Compensation
In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company measures the compensation costs of stock-based compensation arrangements based on the grant date fair value of granted instruments and recognizes the costs in financial statements over the period during which employees are required to provide services. Stock-based compensation arrangements include stock options.
Equity instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The compensation cost is remeasured at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees can result in significant volatility in compensation expense.
The Company accounts for its stock-based compensation using the Black-Scholes model to estimate the fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non-employees are expected to hold their options prior to exercise, and (iii) risk-free interest rate.
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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 that 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 liabilities approximate fair value because of the short maturity of these instruments.
Goodwill and Indefinite-lived intangible Assets
We test for the impairment of our goodwill and indefinite-lived assets at least annually and whenever events or circumstances occur indicating that a possible impairment has been incurred.
We perform our annual goodwill impairment test on the first day of our fourth quarter based on the income approach, also known as the discounted cash flow (“DCF”) method, which utilizes the present value of future cash flows to estimate fair value. We also use the market approach, which utilizes market price data of companies engaged in the same or a similar line of business as that of our company, to estimate fair value. A reconciliation of the two methods is performed to assess the reasonableness of fair value of each of the reporting units.
The future cash flows used under the DCF method are derived from estimates of future revenues, operating income, working capital requirements and capital expenditures, which in turn reflect specific global, industry and market conditions. The discount rate developed is based on data and factors relevant to the economies in which the business operates and other risks associated with those cash flows, including the potential variability in the amount and timing of the cash flows. A terminal growth rate is applied to the final year of the projected period and reflects our estimate of stable growth to perpetuity. We then calculate the present value of the respective cash flows for each reporting unit to arrive at the fair value using the income approach and then determine the appropriate weighting between the fair value estimated using the income approach and the fair value estimated using the market approach. Finally, we compare the estimated fair value of our goodwill and indefinite-lived assets to its respective carrying value in order to determine if the goodwill assigned to each reporting unit is potentially impaired. In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment”, which eliminated Step 2 from the goodwill impairment test. If the fair value of the asset exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the asset is less than the carrying value, an impairment charge is recognized for the amount by which the carrying amount exceeds the asset’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that asset. This update is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
| 11 |
Significant assumptions used include management’s estimates of future growth rates, the amount and timing of future operating cash flows, capital expenditures, discount rates, as well as market and industry conditions and relevant comparable company multiples for the market approach. Assumptions utilized are highly judgmental, especially given the role technology plays in driving the demand for consulting services in the blockchain technology space.
Revenue Recognition
The Company recognizes consulting revenue when the service is rendered, the fee for arrangement is fixed or determinable, and collectability is reasonably assured.
Prior to January 2, 2019, CoinTracking GmbH accounted for a contract when it had approval and commitment from all parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the promised services is transferred to 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 in 2018 and prior periods was 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.
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. 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.
Off-Balance Sheet Transactions
We do not have any off-balance sheet transactions.
Trends, Events and Uncertainties
COVID-19 Pandemic
Other than as discussed above and elsewhere in this Annual Report on Form 10-K, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.
| 12 |
Item 7A. 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.
Item 8. Financial Statements and Supplementary Data
See pages beginning with page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Internal Control over Financial Reporting and Evaluation of Disclosure Controls and Procedures.
Conclusions Regarding the Effectiveness 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 Exchange Act, as of December 31, 2020. Based upon (1) that evaluation, and (2) the fact that the Company restated prior period financial statements in the Annual Report for the Year ended December 31, 2019 to correct material errors, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2020, 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 our Annual Report on Form 10-K for the year ended December 31, 2019, and our Quarterly Reports on Forms 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020, which have not yet been fully remediated.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:
| ● | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and | |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
| 13 |
All systems of internal control, no matter how well designed, have inherent limitations. Therefore, even those systems deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in disclosure controls and procedures, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. The framework used in carrying out this evaluation was set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in “Internal Control—Integrated Framework (2013)”.
Based on this evaluation, our management concluded that as of December 31, 2019, our internal control over financial reporting was not effective due to the following matters involving internal controls and procedures that our management considered to be material weaknesses:
| ● | 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. |
| 14 |
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. | |
| ● | Assess 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 three-month period ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On March 24, 2021, the Company entered into a stock purchase agreement with Blockchain Training Alliance, Inc., and its stockholders. On March 24, 2021, the Company entered into an asset purchase agreement with Aedan Financial Corporation and Eric Fitzgerald. See Note 14, Subsequent Events, for additional information, which is incorporated herein by reference into this Item 9B.
Item 10. Directors, Executive Officers and Corporate
Set forth below is certain information regarding our current executive officers and directors. Each of the directors was elected to serve until our next annual meeting of stockholders or until his or her successor is elected and qualified. Our officers are appointed by, and serve at the pleasure of, the board of directors.
| Name | Age | Position | ||
| Ronald Levy | 61 | Director, Chief Executive Officer, Interim Chief Financial Officer, Chief Operating Officer and Secretary | ||
| Anthony Strickland | 51 | Director | ||
| Holly Ruxin | 51 | Director |
Biographical information with respect to our executive officers, directors and key employees is provided below. There are no family relationships between any of our executive officers, directors, or key employees.
Ron Levy. Mr. Levy, 61, has served as our Chief Executive Officer and a Director since May 2018 and Interim Chief Financial Officer since December 2019. Mr. Levy has also served as our Chief Operating Officer since June 2017. Mr. Levy’s experience includes consulting for various emerging growth companies through various growth cycles. He also serves as Chief Operating Officer and beneficial owner at Redwood Fund, LP, a private investment fund and major stockholder of the Company, since February 2014, and Ladyface Capital, LLC, the General Partner of Redwood Fund, LP, since July 2013.
| 15 |
Anthony Strickland. Mr. Strickland, 51, has served as a member of the Board since June 2017 and currently serves as President and Chief Executive Officer of Strong America, an advocacy group and political action committee, since June 2017. Mr. Strickland is a former member of the California State Senate, representing District 19 from 2008 to 2012, and a former California Assemblyman, representing the 37th District from 1998 to 2004. He served as Vice President of GreenWave Energy Solutions LLC, a company that seeks to harness the power of ocean waves to provide energy to Californians, from January 2007 to November 2008. Mr. Strickland earned his B.A. in political science from Whittier College. Because of his experience in legislation and ability to offer guidance on regulatory matters, we concluded that Mr. Strickland should serve as a member of the Board.
Holly Ruxin. Ms. Holly Ruxin, 51, has served as a member of the Board since April 2018 and currently serves as Chief Executive Officer of Montcalm TCR, a San Francisco-based wealth management and capital markets trading firm. Ms. Ruxin began her investment career at Goldman Sachs in the fixed income derivatives arena, and she has managed client assets and led private client teams at Morgan Stanley, Montgomery Securities and Bank of America for over twenty years. Ms. Ruxin is also the founder of Trevor TCR, a non-profit organization designed to invest in what matters and achieve transformation through giving. Ms. Ruxin received a Master of Business Administration in Finance from Columbia University and a Bachelor of Arts in Economics from the University of Michigan. We determined that Ms. Ruxin should serve as a director because of her extensive asset management and capital markets experience.
Code of Ethics
The Company has adopted a Code of Conduct and Ethics that applies to every director, officer, and employee of the Company. Such Code of Conduct and Ethics includes written standards that are reasonably designed to deter wrongdoing and to promote:
| ● | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; | |
| ● | Full, fair, accurate, timely, and understandable disclosure in reports and documents that the Company files with, or submits to, the SEC and in other public communications made by the Company; | |
| ● | Compliance with applicable governmental laws, rules, and regulations; | |
| ● | The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and | |
| ● | Accountability for adherence to the code. |
A copy of the Code of Conduct and Ethics is available on the Company’s website at www.thecryptocompany.com.
Director Nominations
The Company does not have any defined procedures by which stockholders may submit nominations for directors and there has been no change to that policy.
Audit Committee and Audit Committee Financial Expert
The board of directors has an Audit Committee comprised of its two independent board members, Holly Ruxin and Anthony Strickland. Ms. Ruxin serves as the Chair of that committee. The Audit Committee oversees the accounting and financial reporting processes of the Company and the audits of the Company’s consolidated financial statements.
| 16 |
Item 11. Executive Compensation
2020 Summary Compensation Table
The following table provides information regarding the total compensation for services rendered in all capacities that was earned during the fiscal year indicated by our named executive officers for 2020.
| Name and Principal Position | Year | Salary | Bonus ($) | Stock Awards ($)(4) | Option Awards ($)(4) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||
| Ron Levy, | 2020 | $ | 360,000 | (3) | 1,250,000 | - | - | - | 1,610,000 | |||||||||||||||||||||
| (Chief Executive, Interim Chief Financial Officer, and Chief Operating Officer(1) | 2019 | $ | 0 | - | - | - | - | - | 0 | |||||||||||||||||||||
| Ivan Ivankovich, | 2020 | - | - | - | - | - | - | - | ||||||||||||||||||||||
| Chief Financial Officer(2) | 2019 | - | - | - | - | - | - | 106,000 | ||||||||||||||||||||||
| (1) | Appointed as Chief Executive Officer on May 21, 2018. | |
| (2) | Resigned as Chief Financial Officer on December 6, 2019. | |
| (3) | Officer salary in the amount of $272,756 was deferred and is recorded in accrued expenses. | |
| (4) |
Reflects the issuance of 1,250,000 fully vested stock options |
Outstanding Equity Awards at Fiscal Year-End
During the year ended December 31, 2020, the Company issued 500,000 fully-vested stock options to members of its board of directors, 1,250,000 fully-vested stock options to its chief executive officer, and 170,000 stock options to others.
Employee Benefits
We currently offer group health insurance to our employees.
Director Compensation Policy
The board of directors of the Company does not have a compensation committee. The board of directors determines the amount and form of executive and director compensation.
As previously disclosed, the Company entered into Director Services Agreements with each of its non-employee directors, effective April 7, 2018 for Holly Ruxin, and June 7, 2018 for Anthony Strickland. Pursuant to the Director Service Agreements, each director is entitled to receive (i) a fee of $80,000 per annum, payable quarterly, and (ii) a ten-year option to purchase 100,000 shares of common stock of the Company at an exercise price of $10.00 per share, which option shall be fully vested on the six-month anniversary of the date of grants. In addition, Mr. Strickland received an additional option grant to purchase 150,000 shares of common stock of the Company at an exercise price of $7.00 per share, which option was fully vested on the grant date. Additionally, subject to certain exceptions, each director is entitled to receive reimbursement for reasonable expenses incurred for the benefit of the Company.
| 17 |
The table below summarizes the compensation earned or paid to our non-employee directors for the fiscal year ended December 31, 2019:
| Name |
Fees
Earned
or Paid in Cash ($) |
Stock
Awards ($) |
Total ($) | |||||||||
| Holly Ruxin | 80,004 | - | 80,004 | (1) | ||||||||
| Anthony Strickland | 80,004 | - | 80,004 | (1) | ||||||||
| (1) | As of December 31, 2020, $150,008 of each Director’s fee from prior periods was accrued and remains unpaid as of the date of this Report. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The disclosure in Item 5 under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” is hereby incorporated by reference.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of May 14, 2020 regarding the beneficial ownership of our common stock by the following persons:
| ● | each stockholder or group of stockholders who, to our knowledge, owns more than 5% of our common stock; | |
| ● | each of our named executive officers; | |
| ● | each director; and | |
| ● | all of our executive officers and directors as a group. |
Percentage ownership of our common stock is based on 21,417,841 shares of our common stock outstanding as of March 24, 2021.
Beneficial ownership is determined in accordance with the rules of the SEC, and thus represents voting or investment power with respect to our securities. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power. The address for each of our named executive officers and directors is c/o The Crypto Company, 23823 Malibu Road #50477, Malibu, California 90265. Shares of common stock subject to options, warrants or other rights currently exercisable or exercisable within 60 days of May 14, 2020, are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the stockholder holding the options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other stockholder.
| Name of Beneficial Owner |
and Nature of Beneficial Ownership |
Percentage of Common Stock Outstanding |
||||||
| Ron Levy (2) | 6,020,156 | 28.1 | % | |||||
| Anthony Strickland (3) | 500,000 | 2.3 | % | |||||
| Holly Ruxin (4) | 250,000 | 1.6 | % | |||||
| All Directors and Executive Officers as a Group | 6,220,156 | 29.1 | % | |||||
| Michael Poutre | 6,020,156 | 28.1 | % | |||||
| James Gilbert | 7,434,821 | 34.7 | % | |||||
| Rafael Furst | 3,032,309 | 14.2 | % | |||||
| Redwood Fund LP (1) (2) | 3,031,810 | 14.2 | % | |||||
| Imperial Strategies, LLC (1) (2) | 2,988,346 | 14.0 | % | |||||
| 18 |
| (1) | Redwood Fund LP is the direct beneficial owner of 3,031,810 shares of Common Stock of the Company. Ladyface Capital, LLC is the General Partner of Redwood Fund LP. Michael Poutre was the Chief Executive Officer and Director of the Company from June 7, 2017 until he resigned on May 14, 2018. Mr. Poutre is the sole owner of MP2 Ventures, LLC, which is a managing member of Ladyface Capital, LLC. Accordingly, Mr. Poutre may be deemed to have voting and investment power over the shares beneficially owned by Redwood Fund LP. Imperial Strategies, LLC is the direct beneficial owner of 2,988,346 shares of Common Stock of the Company. Michael Poutre is the sole owner of MP2 Ventures, LLC, which is a member of Imperial Strategies, LLC, and may be deemed to have voting and investment power over the shares beneficially owned by Imperial Strategies, LLC. | |
| (2) | Mr. Ron Levy is a beneficial owner of KOL Partners, LLC, which is a managing member of Ladyface Capital, LLC. Accordingly, Mr. Levy may be deemed to have voting and investment power over the shares beneficially owned by Redwood Fund LP. Imperial Strategies, LLC is the direct beneficial owner of 2,988,346 shares of Common Stock of the Company. Ron Levy is the beneficial owner of KOL Partners, LLC, which is a member of Imperial Strategies, LLC with a majority ownership interest and may be deemed may be deemed to have voting and investment power over the shares beneficially owned by Imperial Strategies, LLC. Includes fully vested options to purchase 1,250,000 shares of Common Stock. | |
| (3) |
Includes fully vested options to purchase 500,000 shares of common stock. |
|
| (4) |
Includes fully vested options to purchase 350,000 shares of common stock. |
Section 16(a) Beneficial Ownership Reporting Compliance
Our directors and executive officers and any beneficial owner of more than 10% of our common stock, as well as certain affiliates of those persons, must file reports with the SEC showing the number of shares of common stock they beneficially own and any changes in their beneficial ownership. Based on our review of these reports and written representations of our directors and executive officers, we believe that all required reports in 2020 were filed in a timely manner, except that, as a result of administrative errors, one Form 4 reporting one transaction was not timely filed on behalf of Mr. Strickland, Ms. Ruxin, and Mr. Levy, respectively.
Change in Control
As of the date of this report, we are not aware of any arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions, and Director Independence
SEC regulations define the related person transactions that require disclosure to include any transaction, arrangement, or relationship in which the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years in which we were or are to be a participant and in which a related person had or will have a direct or indirect material interest. A related person is: (i) an executive officer, director, or director nominee of the Company, (ii) a beneficial owner of more than 5% of our common stock, (iii) an immediate family member of an executive officer, director or director nominee or beneficial owner of more than 5% of our common stock, or (iv) any entity that is owned or controlled by any of the foregoing persons or in which any of the foregoing persons has a substantial ownership interest or control.
| 19 |
From January 1, 2020, through the date of this Annual Report on Form 10-K, described below are certain transactions or series of transactions between us and certain related persons. Information relating to employment agreements entered into by the Company and its executive officers and executive officer compensation can be found at Item 11 - Executive Compensation.
Policies and Procedures for Related Person Transactions
While our board of directors has not adopted a formal written related person transaction policy that sets forth the policies and procedures for the review and approval or ratification of related person transactions, it the Company’s practice and procedure to present all transactions arrangements, relationships or any series of similar transactions, arrangements or relationships, in which the Company was or is to be a participant and a related person had or will have a direct or indirect material interest, to the board of directors for approval.
Director Independence
Our determination of the independence of our directors is made using the definition of “independent” contained in the listing standards of the Nasdaq Stock Market. On the basis of information solicited from each director, the board has determined that each of Anthony Strickland and Holly Ruxin is independent within the meaning of such rules.
Item 14. Principal Accounting Fees and Services
The following table sets forth fees billed and to be billed to us by our independent registered public accounting firm for the years ended December 31, 2020 and 2019 for (i) services rendered for the audit of our annual consolidated financial statements and the review of our quarterly consolidated financial statements, (ii) services rendered that are reasonably related to the performance of the audit or review of our consolidated financial statements that are not reported as Audit Fees, and (iii) services rendered in connection with tax preparation, compliance, advice and assistance.
|
Year
Ended
December 31, |
||||||||
| 2020 | 2019 | |||||||
| Audit fees | $ | 58,600 | $ | 68,000 | ||||
| Total fees | $ | 58,600 | $ | 68,000 | ||||
Audit Fees: Represents fees for professional services provided for the audit of our annual consolidated financial statements, review of our consolidated financial statements included in our quarterly reports and services in connection with statutory and regulatory filings.
Audit-Related Fees: Represents the fees for audits of CoinTracking GmbH’s historical financial statements and review of correspondence with regulatory bodies.
The board of directors has an Audit Committee comprised of its two independent board members, Holly Ruxin and Anthony Strickland. Ms. Ruxin serves as the Chair of that committee. The Audit Committee oversees the accounting and financial reporting processes of the Company and the audits of the Company’s consolidated financial statements.
The Audit Committee of the Company oversees the accounting and financial reporting processes of the Company and approves all auditing services and the terms thereof and non-audit services (other than non-audit services published under Section 10A(g) of the Exchange Act or the applicable rules of the SEC or the Public Company Accounting Oversight Board) to be provided to us by the independent auditor; provided, however, the pre-approval requirement is waived with respect to the provisions of non-audit services for us if the “de minimis” provisions of Section 10A(i)(1)(B) of the Exchange Act are satisfied.
Tax Fees: Represents professional services rendered for tax compliance, tax advice and tax planning.
All Other Fees: Our independent registered public accounting firm was not paid any other fees for professional services during the fiscal years ended December 31, 2020 and 2019.
| 20 |
Item 15. Exhibits, Financial Statement Schedules
Financial Statements
See pages beginning with page F-1.
Exhibit Index
* Filed herewith
** Management contract or compensatory plan
None.
| 21 |
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized, on March 30, 2021.
|
THE CRYPTO COMPANY (Registrant) |
||
| By: | /s/ Ron Levy | |
| Ron Levy | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities indicated on the March 30, 2021.
| Signature | Title | |
| /s/ Ron Levy | Chief Executive Officer, Interim Chief Financial Officer and Chairman of the Board | |
| Ron Levy | (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | |
| /s/ Anthony Strickland | ||
| Anthony Strickland | Director | |
| /s/ Holly Ruxin | ||
| Holly Ruxin | Director |
| 22 |
THE CRYPTO COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| F-1 |
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of The Crypto Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Crypto Company as of December 31, 2020 and 2019, the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition — identification of contractual terms in certain customer arrangements
As described in Note 2 to the consolidated financial statements, management assesses relevant contractual terms in its customer arrangements to determine the transaction price and recognizes revenue upon transfer of control of the promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Management applies judgment in determining the transaction price which is dependent on the contractual terms. In order to determine the transaction price, management may be required to estimate variable consideration when determining the amount and timing of revenue recognition.
The principal considerations for our determination that performing procedures relating to the identification of contractual terms in customer arrangements to determine the transaction price is a critical audit matter are there was significant judgment by management in identifying contractual terms due to the volume and customized nature of the Company’s customer arrangements. This in turn led to significant effort in performing our audit procedures which were designed to evaluate whether the contractual terms used in the determination of the transaction price and the timing of revenue recognition were appropriately identified and determined by management and to evaluate the reasonableness of management’s estimates.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including those related to the identification of contractual terms in customer arrangements that impact the determination of the transaction price and revenue recognition. These procedures also included, among others, (i) testing the completeness and accuracy of management’s identification of the contractual terms by examining customer arrangements on a test basis, and (ii) testing management’s process for determining the appropriate amount and timing of revenue recognition based on the contractual terms identified in the customer arrangements.
| /S/ BF Borgers CPA PC |
We have served as the Company’s auditor since 2019
Lakewood, CO
March 30, 2021
| F-2 |
CONSOLIDATED BALANCE SHEETS
| December 31, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 26,326 | $ | 1,611 | ||||
| Accounts receivable, net | 3,900 | - | ||||||
| Total current assets | 30,226 | 1,611 | ||||||
| TOTAL ASSETS | $ | 30,226 | $ | 1,611 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 1,933,281 | $ | 1,576,214 | ||||
| Bank Overdraft | - | - | ||||||
| Income taxes payable | - | - | ||||||
| Notes Payable | 300,000 | 300,000 | ||||||
| Total current liabilities | 2,233,281 | 1,876,214 | ||||||
| Convertible debt | 125,000 | 75,000 | ||||||
| Notes Payable - Other | 67,592 | - | ||||||
| TOTAL LIABILITIES | 2,425,873 | 1,951,214 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value; 50,000,000 shares authorized, 21,417,841 and 21,400,591 shares issued and outstanding, respectively | 21,418 | 21,401 | ||||||
| Additional paid-in-capital | 30,665,823 | 28,294,167 | ||||||
| Accumulated deficit | (33,082,888 | ) | (30,265,171 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | (2,395,647 | ) | (1,949,603 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 30,226 | $ | 1,611 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the year ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Revenue: | ||||||||
| Services | $ | 14,400 | $ | 65,743 | ||||
| Total Revenue, net | 14,400 | 65,743 | ||||||
| Operating expenses: | ||||||||
| Cost of services | - | 30,500 | ||||||
| General and administrative expenses | 749,930 | 1,750,668 | ||||||
| Share-based compensation - employee | 175,018 | - | ||||||
| Share-based compensation - non-employee | 2,146,655 | - | ||||||
| Total Operating Expenses | (3,071,603 | ) | 1,781,168 | |||||
| Operating loss | (3,057,203 | ) | (1,715,425 | ) | ||||
| Other income/(expense) | 307,522 | (88,873 | ) | |||||
| Interest expense | (68,036 | ) | (87,573 | ) | ||||
| Loss before provision for income taxes | (2,817,717 | ) | (1,891,871 | ) | ||||
| Provision for income taxes | - | 1,600 | ||||||
| Loss from continuing operations | (2,817,717 | ) | (1,893,471 | ) | ||||
| Income (Loss) from discontinued operations attributable to the Crypto Company | - | 84,849 | ||||||
| Net loss attributable to the Crypto Company | (2,817,717 | ) | (1,808,622 | ) | ||||
| Net Income (loss) | $ | (2,817,717 | ) | $ | (1,808,622 | ) | ||
| Continuing operations: | ||||||||
| Net loss attributable to the Crypto Company per common share – basic and diluted | $ | (0.13 | ) | $ | (0.09 | ) | ||
| Income/(loss) attributable to the Crypto Company per common share – basic and diluted | $ | - | $ | 0.00 | ||||
| Net loss attributable to the Crypto Company per common share – basic and diluted | $ | (0.13 | ) | $ | (0.09 | ) | ||
| Weighted average common shares outstanding – basic and diluted | 21,401,204 | 21,219,382 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Twelve Months Ended December 31, 2020 and 2019
| Additional |
Accumulated
Other |
Total | ||||||||||||||||||||||||||
| Common stock | paid-in- | Accumulated | Comprehensive | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | Deficit | Income | Interest | Equity | ||||||||||||||||||||||
| Balance, December 31, 2018 | 21,212,860 | $ | 21,213 | $ | 28,219,355 | $ | (28,456,549 | ) | $ | (743,987 | ) | $ | 2,177,108 | $ | 1,217,140 | |||||||||||||
| Sale of CoinTracking GmbH | - | - | - | 743,987 | (2,177,108 | ) | (1,433,121 | ) | ||||||||||||||||||||
| Warrants issued in connection with Convertible Notes | - | - | 75,000 | - | - | - | 75,000 | |||||||||||||||||||||
| Stock compensation expense in connection with issuance of options | - | - | - | - | - | - | - | |||||||||||||||||||||
| To correct prior year share issuance | 187,731 | 188.00 | (188 | ) | ||||||||||||||||||||||||
| Net loss | - | - | - | (1,808,622 | ) | - | - | (1,808,622 | ) | |||||||||||||||||||
| Balance, December 31, 2019 | 21,400,591 | $ | 21,401 | $ | 28,294,167 | $ | (30,265,171 | ) | $ | - | $ | - | $ | (1,949,603 | ) | |||||||||||||
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
| Common stock | paid-in- | Accumulated | Comprehensive | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | Deficit | Income | Interest | Equity | ||||||||||||||||||||||
| Balance, December 31, 2019 | 21,400,591 | $ | 21,401 | $ | 28,294,167 | $ | (30,265,171 | ) | $ | - | $ | - | $ | (1,949,603 | ) | |||||||||||||
| Warrants issued in connection with Convertible Notes | - | - | 50,000 | - | - | - | 50,000 | |||||||||||||||||||||
| Stock compensation expense in connection with issuance of options | - | - | 1,976,673 | - | - | - | 1,976,673 | |||||||||||||||||||||
|
Stock compensation expense in connection with issuance of common stock |
17,250 |
17 |
344983 |
345,000 |
||||||||||||||||||||||||
| Net loss | - | - | - | (2,817,717 | ) | - | - | (2,817,717 | ) | |||||||||||||||||||
| Balance, December 31, 2020 | 21,417,841 | $ | 21,418 | $ | 30,665,823 | $ | (33,082,888 | ) | $ | - | $ | - | $ | (2,395,647 | ) | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Twelve Months Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (2,817,717 | ) | $ | (1,808,622 | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Net realized gain on investment in cryptocurrency | - | (72,634 | ) | |||||
| Impairment of investments in cryptocurrency | - | 1,951 | ||||||
| Impairment of intangible assets | - | 20,968 | ||||||
| Gain on sale on cryptocurrency | (208,964 | ) | (14,166 | ) | ||||
| Gain on sale of equipment | (971 | ) | (2,856 | ) | ||||
| Loss on fixed asset disposal | - | 64,731 | ||||||
| Depreciation and amortization | - | 22,557 | ||||||
| Share-based compensation | 2,321,673 | - | ||||||
| Financing costs associated with convertible debt | 50,000 | 75,000 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (3,900 | ) | - | |||||
| Prepaid expenses | - | 79,283 | ||||||
| Accounts payable and accrued expenses | 358,667 | 478,484 | ||||||
| Income taxes payable | (1,600 | ) | - | |||||
| Net cash used in operating activities | (302,812 | ) | (1,155,304 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Net cash from sale of CoinTracking GmbH | - | 1,000,000 | ||||||
| Proceeds from sales of equipment | 971 | 4,899 | ||||||
| Proceeds from sales of cryptocurrency | 208,964 | - | ||||||
| Purchase of investments in cryptocurrency | - | 74,568 | ||||||
| Capitalized software development | - | - | ||||||
| Net cash used in investing activities | 209,935 | 1,079,467 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from loans payable | 67,592 | - | ||||||
| Proceeds from issuance of convertible notes | 50,000 | 75,000 | ||||||
| Net cash provided by financing activities | 117,592 | 75,000 | ||||||
| Net (decrease) increase in cash and cash equivalents | 24,715 | (837 | ) | |||||
| Cash and cash equivalents at the beginning of the period | 1,611 | 2,448 | ||||||
| Cash and cash equivalents at the end of the period | $ | 26,326 | $ | 1,611 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | - | $ | 30,950 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
Notes to Consolidated Financial Statements
NOTE 1 – THE COMPANY
The Crypto Company was incorporated in the State of Nevada on March 9, 2017 (“Inception”). The Company is engaged in the business of providing consulting services and education for distributed ledger technologies (“blockchain”), for the building of technological infrastructure and enterprise blockchain technology solutions. The Company currently generates revenues and incurs expenses solely through these consulting operations.
Unless expressly indicated or the context requires otherwise, the terms “Crypto,” the “Company,” “we,” “us,” and “our” in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (this “Annual Report”) refer to The Crypto Company and, where appropriate, its wholly owned subsidiaries, Crypto Sub, Inc., a Nevada corporation (“Crypto Sub”); CoinTracking, LLC, a Nevada limited liability company (“CoinTracking”); and Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”).
During the year ended December 31, 2020, the Company generated revenues and incurred expenses primarily through the business of providing consulting services and education for distributed ledger technologies (“blockchain”), for the building of technological infrastructure and enterprise blockchain technology solutions, both of which have ceased operations as of the date of this Annual Report.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation – The company prepares its consolidated financial statements based upon the accrual method of accounting, recognizing income when earned and expenses when incurred.
Consolidation – The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Crypto Sub, CoinTracking, and Malibu Blockchain, as well as its 50.1% ownership of CoinTracking GmbH for the period ended January 2, 2019. On January 2, 2019, the Company sold its entire equity ownership stake in CoinTracking GmbH. All significant intercompany accounts and transactions are eliminated in consolidation.
Recent Developments
Going Concern – The Company’s consolidated financial statements are prepared using the accrual method of accounting in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred significant losses and experienced negative cash flows since Inception. As of December 31, 2020, the Company had cash of $26,326. In addition, the Company’s net loss was $2,472,717 for the year ended December 31, 2020. The Company’s working capital was negative $2,395,647 as of December 31, 2020.
| F-7 |
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management is evaluating different strategies to obtain financing to fund the Company’s expenses and achieve a level of revenue adequate to support the Company’s current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations. There can be no assurance that any of these future-funding efforts will be successful or that the Company will be able to replace the revenues lost as a result of the sale of CoinTracking GmbH, for 2020 and beyond. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Use of estimates – The preparation of these consolidated financial statements in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant estimates and assumptions include but are not limited to the recoverability and useful lives of long-lived assets, allocation of revenue on software subscriptions, valuation of goodwill from business acquisitions, valuation and recoverability of investments, valuation allowances of deferred taxes, and share-based compensation expenses. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating results.
Cash and cash equivalents – The Company defines its cash and cash equivalents to include only cash on hand and certain highly liquid investments with original maturities of ninety days or less. The Company maintains its cash and cash equivalents at financial institutions, the balances of which may, at times, exceed federally insured limits. Management believes that the risk of loss due to the concentration is minimal.
Investments in cryptocurrency – Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin, that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less impairment and are reported as long-term assets in the consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.
Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the Consolidated Statements of Operations.
Investments – non-cryptocurrency
During the year ended December 31, 2020, we received tokens from investments that were previously written down to -0- value. These tokens were immediately liquidated, and the total proceeds received from them was $247,392.
In May 2019, we received tokens (Cosmos) and immediately liquidated them for $70,634 in proceeds.
Equipment – Equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life ranging from three to five years. Normal repairs and maintenance are expensed as incurred. Expenditures that materially adapt, improve, or alter the nature of the underlying assets are capitalized. When equipment is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to income.
Impairment of long-lived assets – The Company analyzes its long-lived assets, including intangible assets with finite useful lives (subject to amortization) acquired in connection with the acquisition of CoinTracking GmbH, for potential impairment. Impairment losses are recorded on long-lived assets when indicators of impairment are present, and for intangible assets acquired in connection with acquisitions, the undiscounted cash flows estimated to be generated by those assets are less than the net carrying amount of the assets. In such cases, the carrying values of assets to be held and used are adjusted to their estimated fair value, less estimated selling expenses. For the year ended December 31, 2018, the Company recognized an impairment loss of $2,749,646 on its definite lived intangible assets related to CoinTracking GmbH, classified as Held for Sale. On January 2, 2019, the Company sold its entire equity ownership stake in CoinTracking GmbH.
Business combination – The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values with the residual of the purchase price recorded as goodwill. The results of operations of acquired businesses are included in our operating results from the dates of acquisition.
| F-8 |
Goodwill and indefinite lived intangible assets – The Company records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets are comprised of purchased customer relationships, trade names, and developed technologies. Intangible assets subject to amortization are amortized over the period of estimated economic benefit of five years. In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill and other intangible assets with indefinite lives are not amortized but tested annually, on December 31, or more frequently if the Company believes indicators of impairment exist. Indefinite lived intangible assets also include investments in cryptocurrency (see Investments in Cryptocurrency).
The Company assesses whether goodwill impairment and indefinite lived intangible assets exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed to determine whether a goodwill impairment exists at the reporting unit.
Foreign Currency Translation – Results of foreign operations are translated into USD using average rates prevailing throughout the period, while assets and liabilities are translated in USD at period end foreign exchange rates. Transactions gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency of the applicable subsidiary are included in the consolidated statements of operations, within other income, in the year in which the change occurs. The Company’s functional currency is USD while the functional currency for CoinTracking GmbH is in euros.
Income taxes – Deferred tax assets and liabilities are recognized for expected future consequences of events that have been included in the financial statements or tax returns. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
As of December 31, 2019, we are subject to taxation in the U.S., as well as state and German taxes. The Company has not been audited by the U.S. Internal Revenue Service, nor has the Company been audited by any states or in Germany. On January 2, 2019, we sold our entire equity ownership stake in CoinTracking GmbH.
Fair value measurements – The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level of input has different levels of subjectivity and difficulty involved in determining fair value.
| 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. |
| F-9 |
The carrying amounts of the Company’s financial assets and liabilities, including cash, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments.
Revenue recognition – The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
| ● | Step 1: Identify the contract with the customer | |
| ● | Step 2: Identify the performance obligations in the contract | |
| ● | Step 3: Determine the transaction price | |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract | |
| ● | Step 5: Recognize revenue when the Company satisfies a performance obligation |
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method for contracts as of the date of initial application. There 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.
| F-10 |
The Company accounts for its share-based compensation using the Black-Scholes model to estimate the fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non-employees are expected to hold their options prior to exercise, and (iii) risk-free interest rate.
Net loss per common share – The Company reports earnings per share (“EPS”) with a dual presentation of basic EPS and diluted EPS. Basic EPS is computed as net income divided by the weighted average of common shares for the period. Diluted EPS reflects the potential dilution that could occur from common shares issued through stock options, or warrants. For the year ended December 31, 2020 and the year ended December 31, 2019, the Company had no potentially dilutive common stock equivalents. Therefore, the basic EPS and the diluted EPS are the same.
Marketing expense – Marketing expenses are charged to operations, under general and administrative expenses. The Company incurred $-0- of marketing expenses for the year ended December 31, 2020, compared to $49,324 for year ended December 31, 2019.
Reclassifications – Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no effect on the Company’s financial position, results of operations or cashflows.
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS NTD: AUDITORS TO UPDATE NOTE 3
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. The amendments in this ASU clarify certain aspects of the guidance related to reporting comprehensive income, debt modification and extinguishment, income taxes related to stock compensation, income taxes related to business combinations, derivatives and hedging, fair value measurements, brokers and dealers liabilities, and plan accounting. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of ASU No. 2018-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, add, and modify certain disclosures. The ASU removes the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation process for Level 3 fair value measurements; and (4) certain other requirements for nonpublic entities. The ASU adds the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, disclosure of other quantitative information may be more appropriate if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU modifies disclosure requirements in Topic 820 relating to timing of liquidation of an investee’s assets, the disclosure of the date when restrictions from redemption might lapse, the intention of the measurement uncertainty disclosure, and certain other requirements for nonpublic entities. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software). The amendments in this ASU require an entity (customer) in a hosting arrangement that is a service to (1) determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense; (2) expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (3) apply the existing impairment guidance to the capitalized implementation costs as if the costs were long-lived assets; (4) present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting arrangements; and (5) present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-15 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
| F-11 |
In June 2018, FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. Management currently does not plan to early adopt this guidance. The new standard is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company is evaluating the effect that ASU No. 2018-07 will have on its consolidated financial statements and related disclosures.
In July 2017, the FASB issued No. ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Rounds and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments also require entities to recognize the effect of the down round feature on EPS when it is triggered. ASU 2017-11 should be adopted retrospectively or as a cumulative-effect adjustment as of the date of adoption, only to financial instruments outstanding as of the initial application date. ASU 2017-11 will be effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The adoption of ASU No. 2017-11 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The new standard became effective for us on January 1, 2018. Adoption of the ASU No. 2017-11 did not have a significant impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (Topic 805). The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606, Revenue from Contracts with Customers. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of ASU No. 2017-01 did not have a significant impact on our consolidated financial statements and related disclosures.
| F-12 |
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350) which removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard became effective for us on January 1, 2019. Early adoption is permitted. The amendments in this update should be applied under a modified retrospective approach. Adoption of ASU No. 2016-02 is not expected to have a significant impact on our consolidated financial statements and related disclosures.
NOTE 4 – INVESTMENTS, NON-CRYPTOCURRENCY:
The Company has invested $417,818 in non-tradeable token pre-sale and SAFT agreements, including $250,000 during the year ended December 31, 2018. In addition, the Company invested $250,000 during the year ended December 31, 2018 as part of a financing in accordance with a SAFE investment in a private enterprise. These investments are included as Level 3 investments as there was no active market as of December 31, 2018.
| F-13 |
The Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are fair, consistent, and verifiable. Non-cryptocurrency investments are carried at cost which approximates fair value at December 31, 2018. The Company considers the length of its investments, of which a majority were made during the current year, as well as its comprehensive investment process which includes reviews of white papers, preparation of either short or long forms analysis that is reviewed by the Company’s internal investment committee, among other factors in determining fair value. At the time that the investments are tokenized and available on active market exchanges, the investments will be reclassified to investments in cryptocurrency.
In April 2019, Cosmos tokens (ATOMs) were issued and listed and sold through an exchange. The Company promptly liquidated these on April 28, 2019.
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the year ended December 31, 2019:
| Level 3 | ||||
|
Non-
Cryptocurrency |
||||
| Balance at December 31, 2018 | $ | 2,005 | ||
| Transfers to investments in cryptocurrency | - | |||
| Purchases, sales, issuances, and settlement, net | - | |||
| Impairment | (2,005 | ) | ||
| Balance at December 31, 2019 | $ | - | ||
These investments are included in assets held for sale at December 31, 2018.
NOTE 5 – IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company’s goodwill balance is the result of the acquisition of CoinTracking GmbH in the current year (see Note 5 - Acquisition). Intangible assets include software development costs, related to the CoinTracking GMBH SaaS platform, customer base and trade name.
As of December 31, 2019, the balance of goodwill and intangible assets were $-0- due to the divestiture of CoinTracking GmbH on January 2, 2019.
| F-14 |
NOTE 6 – WARRANTS FOR COMMON STOCK
The warrants expire on the third anniversary of their issuance dates. The exercise price of the warrants is subject to adjustment from time to time, as provided therein, to prevent dilution of purchase rights granted thereunder. The warrants are considered indexed to the Company’s own stock and therefore no subsequent remeasurement is required.
NOTE 7 – SUMMARY OF STOCK OPTIONS
On July 21, 2017, the Company’s board of directors adopted The Crypto Company 2017 Equity Incentive Plan (the “Plan”), which was approved by its stockholders on August 24, 2017. The Plan is administered by the board of directors (the “Administrator”). Under the Plan, the Company may grant equity awards to eligible participants which may take the form of stock options (both incentive stock options and non-qualified stock options) and restricted stock awards. Awards may be granted to officers, employees, non-employee directors (as defined in the Plan) and other key persons (including consultants and prospective employees). The term of any stock option award may not exceed 10 years and may be subject to vesting conditions, as determined by the Administrator. Options granted generally vest over eighteen to thirty-six months. Incentive stock options may be granted only to employees of the Company or any subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Internal Revenue Code.
During the year ended December 31, 2020, the Company issued 500,000 stock options to members of its board of directors, 1,250,00 stock options to employees, and 170,000 stock options to non-employees. No stock options were issued in 2019.
5,000,000 shares of the Company’s common stock are reserved for issuance under the Plan. As of December 31, 2020, there are outstanding stock option awards issued from the Plan covering a total of 2,281,349 shares of the Company’s common stock and there remain reserved for future awards 2,718,651 shares of the Company’s common stock.
| Weighted | ||||||||||||
| Average | ||||||||||||
| Weighted | Remaining | |||||||||||
| Average | Contractual | |||||||||||
| Number | Exercise | Term | ||||||||||
| of Shares | Price | (years) | ||||||||||
| Options outstanding, at December 31, 2018 | 1,401,612 | $ | 5.83 | |||||||||
| Options granted | - | |||||||||||
| Options cancelled | (1,055,263 | ) | ||||||||||
| Options exercised | ||||||||||||
| Options outstanding, at December 31, 2019 | 346,349 | $ | 5.83 | 8.4 | ||||||||
| Options granted | 1,935,000 | $ | 1.10 | |||||||||
| Options cancelled | - | |||||||||||
| Options exercised | - | |||||||||||
| Options outstanding, at December 31, 2020 | 2,281,349 | $ | 2.26 | 5.25 | ||||||||
The Company recognized $1,976,673 and $-0- of compensation expense related to stock options for the years ended December 31, 2020 and 2019, respectively
During the years ended December 31, 2020 and December 31, 2019 the Company did not grant any restricted stock awards.
The determination of the fair value of share-based compensation awards utilizing the Black-Scholes model is affected by the Company’s stock price and a number of complex and subjective assumptions, including stock price, volatility, expected life of the equity award, forfeitures rates if any, risk-free interest rates and expected dividends. Volatility is based on the historical volatility of comparable companies measured over the most recent period, generally commensurate with the expected life of the Company’s stock options, adjusted for future expectations given the Company’s limited historical share price data.
| F-15 |
The risk-free rate is based on implied yields in effect at the time of the grant on U.S. Treasury zero-coupon bonds with remaining terms equal to the expected term of the stock options. The expected dividend is based on the Company’s history and expectation of dividend payouts. Forfeitures are recognized when they occur.
The range of assumptions used for the year ended December 31, 2020 was as follows:
|
Year
ended
December 31, 2020 |
||||
| Ranges | ||||
| Volatility | 36 – 115 | % | ||
| Expected dividends | 0 | % | ||
| Expected term (in years) | 5 – 10 years | |||
| Risk-free rate | 0.17 – 2.95 | % | ||
Stock options issued to nonemployees are revalued at each vesting tranche and/or reporting date in accordance with ASC 505.
NOTE 8 – RELATED PARTY TRANSACTIONS
There were no related party transaction in 2020.
The Company has a loan receivable from an officer of CoinTracking GmbH as of December 31, 2018 totaling $170,684. The loan is due upon demand and it bears interest at 2%. During the year ended December 31, 2018 and the period from Inception to December 31, 2017 interest income accrued for this loan was $3,300 and $0, respectively, which is included in other income/(expense) on the accompanying consolidated statements of operations. During the year ended December 31, 2018, the company sold $939,155 in cryptocurrency held by CoinTracking GmbH to an officer of CoinTracking GmbH, in accordance with a shareholder resolution entered into on September 21, 2018.
On April 3, 2018, CoinTracking entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, pursuant to which CoinTracking GmbH may provide a loan (the “CoinTracking Loan”) of up to $3,000,000 to CoinTracking, to be advanced to CoinTracking in one or more tranches, at such times and in such amounts as may be requested by CoinTracking from time to time, on or before the tenth anniversary of the Loan Agreement. The Company is deemed obligor of CoinTracking’s obligations under the Loan Agreement for United States Federal income tax purposes. Interest on the CoinTracking Loan will accrue at a rate per annum of the greater of (i) three percent (3%), or (ii) the interest rates published monthly by the United States Internal Revenue Service and in effect under section 1274(d) of the Internal Revenue Code in effect as of the date of issuance of any promissory note under the CoinTracking Loan, and will be payable quarterly. During the year ended December 31, 2018, pursuant to the Loan Agreement, CoinTracking GmbH advanced $1,500,000 to CoinTracking in exchange for three promissory notes (the “CoinTracking Note”) in the amounts of $300,000, $700,000, and $500,000, respectively, which is still outstanding as of December 31, 2018. The CoinTracking Note will mature on the second anniversary thereof. CoinTracking and CoinTracking GmbH are consolidated entities, as such, the loan and advances are intercompany transactions and are eliminated in consolidation. Subsequent to December 31, 2018, the Company sold its equity ownership stake in CoinTracking GmbH, and $1,200,000 of the sale proceeds were applied toward repayment of the $1,500,000 outstanding loan amount under the CoinTracking Note. See “Note 17 - Subsequent Events” for additional details.
Effective May 14, 2018, Michael Poutre, former Chief Executive Officer, and director of the Company resigned from all of his then-current roles with the Company. Mr. Poutre remained a consultant until November 2018. In connection with Mr. Poutre’s resignation, the Company entered into a Separation and Consulting Agreement and General Mutual Release (the “Separation and Consulting Agreement”), which was executed on May 9, 2018 and approved by the Board of Directors on May 14, 2018. The Separation and Consulting Agreement was not effective until May 17, 2018, following the end of the revocation period. The Separation and Consulting Agreement provides that the Company pays Mr. Poutre a lump-sum cash payment of (i) his earned but unpaid base salary, (ii) his accrued but unpaid vacation time, and (iii) any outstanding requests for expense reimbursements that are approved pursuant to Company policy. Mr. Poutre served as a consultant of the Company for six months at a rate of $30,000 per month, payable in two separate tranches. The Separation and Consulting Agreement contains other standard provisions contained in agreements of this nature including non-disparagement and a general release of any and all claims. During 2018, the Company paid Mr. Poutre $90,000 of the $180,000 due in connection with his Separation and Consulting Agreement. Subsequent to December 31, 2018, the Company reached a settlement with Mr. Poutre, reducing the final amount due to $40,000 (see Note 14 – Subsequent Events).
| F-16 |
NOTE 9 – BASIC AND DILUTED LOSS PER SHARE
The following is a reconciliation of the basic and diluted loss per share computations for the year ended December 31, 2020 and the period from Inception through December 31, 2019:
|
Year
ended
December 31, 2020 |
Year
ended
December 31, 2019 |
|||||||
| Numerator for basic and diluted income per share: | ||||||||
| Net loss from continuing operations attributable to the Company | (2,817,717 | ) | $ | (1.808.622 | ) | |||
| Discontinued operations: | ||||||||
| Income/(loss) attributable to the Company | - | 84,849 | ||||||
| Net loss per share attributable to the Company | (2,817,717 | ) | $ | (1,723,773 | ) | |||
| Denominator for basic and diluted income per share: | ||||||||
| Weighted average shares (basic) | 21,401,204 | 21,219,382 | ||||||
| Common stock equivalents | - | - | ||||||
| Weighted average shares (diluted) | 21,401,204 | 21,219,382 | ||||||
| Basic and diluted income (loss) per share: | ||||||||
| Net loss from continuing operations attributable to the Company | (0.13 | ) | $ | (0.09 | ) | |||
| Net loss from discontinued operations attributable to the Company | - | (0.00 | ) | |||||
| Net loss attributable to the Company | (0.13 | ) | $ | (0.09 | ) | |||
NOTE 10 - COMMITMENTS AND CONTINGENCIES
On November 1, 2018, the Company relocated its corporate office and entered into a month-to-month office agreement with Regus Management Group, LLC. Facility rent expense was $1,524 for the year ended December 31, 2020.
Legal Contingencies
As previously disclosed, we received a subpoena on May 15, 2018, from the SEC’s Division of Enforcement in connection with a formal investigation it is conducting involving us as well as other unrelated public issuers who are holders of or provide services related to digital assets. The subpoena requested that we produce certain documents to the SEC’s Division of Enforcement by May 30, 2018. In a letter to us dated as of November 22, 2019, the SEC’s Division of Enforcement advised us that the investigation has concluded and that the SEC will not seek to impose any fines or file any enforcement action against us.
Additionally, the Company may from time to time become subject to legal proceedings, claims, and litigation arising in the ordinary course of business.
Indemnities and guarantees - During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the Company’s officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their respective relationships. In connection with its facility lease, the Company has indemnified the lessor for certain claims arising from the use of the facility. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these indemnities and guarantees in the accompanying balance sheet.
| F-17 |
Note 11 – PROVISION FOR Income taxes
Income Tax – The components of the provision for income taxes are as follows:
|
For
the Year Ended
December 31, 2020 |
For
the Year Ended
December 31, 2019 |
|||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | 1,600 | ||||||
| Total current | $ | - | $ | 1,600 | ||||
The following is a summary of the deferred tax assets:
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Net operating loss carryforwards | $ | 0 | $ | 3,011,000 | ||||
| Deferred tax asset | 0 | 3,011,000 | ||||||
| Valuation allowance | (0 | ) | (3,011,000 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
As of December 31, 2019, we had a net operating loss carryforward for federal income tax purposes of approximately $10,564,000 portions of which will begin to expire in 2037. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization.
Note 12 - SUBSEQUENT EVENTS
Acquisition of Blockchain Training Alliance, Inc.
On March 24, 2021, the Company entered into a Stock Purchase Agreement (the “BTA SPA”) with Blockchain Training Alliance, Inc. (“BTA”) and its stockholders pursuant to which the Company will acquire all of the issued and outstanding stock of BTA (the “BTA Transaction”). The aggregate purchase price is $1,250,000, of which $600,000 will be delivered in cash at closing, $150,000 will be delivered through the issuance by the Company of a $150,000 promissory note that is payable on the twelve month anniversary of closing, and by the delivery of that number of shares of Company common stock valued at $500,000 divided by the lesser of 80% of the twenty day weighted average closing price for the Company’s common stock prior to closing or $10.00.
The BTA SPA contains customary representations and warranties and covenants, including provisions for indemnification, subject to the limitations described in the BTA SPA. The closing of the BTA Acquisition is subject to various closing conditions, including that BTA must obtain a 409A Valuation that results in an enterprise value of BTA within 10% of $1,250,000 and that BTA must be debt-free at or before closing. The parties may terminate the SPA if any of the closing conditions have not been satisfied or the transaction has not closed on or before April 30, 2021. There is no financing condition to our obligation to consummate the transaction.
Aedan Financial Corporation Asset Purchase Agreement
On March 24, 2021, the Company entered into an Asset Purchase Agreement (the “Aedan APA”) with Aedan Financial Corporation (“Aedan”) and Eric Fitzgerald pursuant to which the Company will acquire substantially all of the assets of Aedan (the “Aedan Transaction”). Mr. Fitzgerald is the majority stockholder of Aedan. The aggregate purchase price for the assets is $10,000,000, which will be paid through the delivery of: $100,000 in cash; 20,000 shares of restricted Company common stock; and that number of shares of Company common stock equal to $9,900,000 divided by the higher of 80% of the twenty day weighted average closing price for the Company’s common stock prior to closing or $5.00, whichever is higher.
The APA contains customary representations and warranties and covenants, including provisions for indemnification. The closing of the Aedan Acquisition is subject to various closing conditions, including that Aedan shall have re-launched its Aedan Safe application in the Android store and that certain defined milestones related to that application have been achieved. The APA may be terminated under certain circumstances, including by the Company if the closing conditions have not been achieved by April 30, 2021. There is no financing condition to our obligation to consummate the transaction.
Subsequent to December 31, 2020 we raised $825,000 from five accredited investors through the private placement of 550,000 common shares at $1.50 per shares along with a matching number of five year warrant exercisable at $0.50 per share.
| F-18 |
Exhibit 2.6
Exhibit 2.7
Exhibit 21.1
Subsidiaries
Crypto Sub
Exhibit 31
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Ron Levy, certify that:
1. I have reviewed this Annual Report on Form 10-K 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 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 registrant as of, and for, the period presented in this report;
4. The registrant’s other certifying officer(s) and I are 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 registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, 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 our 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 registrant’s disclosure controls and procedures and presented in this report our 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 registrant’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 registrant’s internal control over financial reporting.
| Date: March 30, 2021 | |
| /s/ Ron Levy | |
| Ron Levy | |
| Chief Executive Officer, Interim Chief Financial Officer and Chairman of the Board | |
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32
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 Annual Report on Form 10-K of The Crypto Company. (the “Company”) for the year ended December 31, 2020, 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 Section 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 results of operations of the Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of July 26, 2019.
| Date: March 30, 2021 | |
| /s/ Ron Levy | |
| Ron Levy | |
| Chief Executive Officer, Interim Chief Financial Officer and Chairman of the Board | |
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |