Crypto Co - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2018

OR

For the transition period from ______________ to _______________

Commission File Number: 000-55726

THE CRYPTO COMPANY

(Exact name of registrant as specified in its charter)

23805 Stuart Ranch Road, Suite 235

Malibu, California 90265

(Address of principal executive offices)

(424) 228-9955

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

As of July 26, 2019, the issuer had 21,212,860 shares of common stock, par value $0.001 per share, outstanding.

TABLE OF CONTENTS

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the period from March 9, 2017 (“Inception”), through December 31, 2017, as filed on April 2, 2018 with the U.S. Securities and Exchange Commission (“SEC”), as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on September 14, 2018, as further amended by Amendment No. 2 on Form 10-K/A filed with the SEC on April 4, 2019 (the “2017 Annual Report”) and in any subsequent filings with the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless expressly indicated or the context requires otherwise, the terms “Crypto”, the “Company”, “we”, “us” and “our” in this Quarterly Report refer to The Crypto Company, a Nevada corporation, and, where appropriate, its wholly owned subsidiaries, Crypto Sub, Inc., a Nevada corporation; CoinTracking, LLC, a Nevada limited liability company (“CT”); Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”); and, where applicable, CT’s former majority-owned subsidiary, CoinTracking GmbH. Subsequent to September 30, 2018, on January 2, 2019, CT sold to Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany, CT’s entire equity ownership stake in CoinTracking GmbH, consisting of 12,525 shares representing 50.1% of the outstanding equity interests in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

THE CRYPTO COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE CRYPTO COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE CRYPTO COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE CRYPTO COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE CRYPTO COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – THE COMPANY

The Crypto Company was incorporated in the State of Nevada on March 9, 2017 (“Inception”) and is engaged in the business of building technological infrastructure. We are also engaged in the business of building strategic alliances to assist third parties in the exchange of value in the digital asset market, solely by providing such third parties with tools, computer software/programming and educational material that may prove useful to them as they independently invest in, trade and manage their own digital assets. We also seek to build strategic alliances with other companies and from time to time may seek strategic acquisitions of entities or technologies that we believe may aid our development of proprietary products and tools designed to help third parties to independently invest in, trade and manage their own digital assets.

Unless expressly indicated or the context requires otherwise, the terms “Crypto,” the “Company,” “we,” “us,” and “our” in this Quarterly Report refer to The Crypto Company and, where appropriate, its wholly owned subsidiaries, Crypto Sub, Inc., a Nevada corporation (“Crypto Sub”); CoinTracking, LLC, a Nevada limited liability company (“CT”); Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”); and, where applicable, CT’s majority-owned subsidiary, CoinTracking GmbH, which was sold subsequent to September 30, 2018. See “Note 16 - Subsequent Events” for additional details.

Technology

The Company is developing proprietary technology and source code to create products and services that will assist third parties by providing them with the tools, computer programming and training to independently invest in, trade and manage their own digital assets, including trading management and auditing software, tools and processes to assist in the operations of companies, from start-up businesses to well-established companies. We do not provide, and do not intend to provide, any functionality that allows a subscriber to make any form of cryptocurrency trade. A subscriber must go to an unrelated third-party website or exchange in order to enter into a virtual currency purchase or sale transaction. We may consider using our technology or license technology from third parties to build additional units around our existing platform, or we may consider selling or licensing our technology to third-party institutions for a fee.

NOTE 2 – Restatement of the Consolidated Financial Statements

The purpose of restatement is to correct errors in the Company’s previously issued financial statements, as disclosed in the Company’s Current Report on Form 8-K filed subsequent to September 30, 2018, on January 3, 2019. The restatement is in connection with the accounting for investments in cryptocurrency at fair value as opposed to intangible assets with indefinite lives and record such investments in cryptocurrency at historical cost less impairment, if any. Management previously reported its investments in cryptocurrency at fair value, with changes in fair value reported as unrealized gains and losses in its condensed consolidated statements of operations. The Company has corrected the error in this Quarterly Report for its prior periods. The Company’s investment in cryptocurrency for the comparative nine-months ended September 30, 2017 were accounted for in error and were overstated from their historical cost by $85,266. In addition, the Company is correcting the classification of its net realized gain/loss on investments in cryptocurrency in this Quarterly Report by reclassifying them from revenue to other income(expense).

The Company has also determined that its classification and disclosures of $367,639 in investments, as of June 30, 2018, were incorrectly described as investments in Initial Coin Offerings and included as investments in cryptocurrency in its condensed consolidated balance sheets. The investments were made in accordance with token pre-sale and simple agreement for tokens agreements (“SAFT”), and should be included as investments, non-cryptocurrency in the Company’s condensed consolidated balance sheets. The Company is reclassifying the balance and changing the related disclosures in this current filing. Management believes the reclassification is material to the Company’s condensed consolidated financial statements in prior periods.

Finally, in connection with the acquisition of CoinTracking GmbH, the Company has completed its preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed based on the information available and preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed. The result is the recording of intangible assets of $7,726,356, noncontrolling interest of $9,434,984, and a reduction of $43,348 to net assets acquired, resulting in a preliminary adjustment to increase goodwill of $1,665,279. The Company recorded additional amortization expense of $757,923 relating to certain intangible assets acquired of which $211,153 and $486,176 have been restated for the three and six months ended March 31 and June 30, 2018, respectively. As a result of these changes, the Company is restating its condensed consolidated balance sheet and condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018 and June 30, 2018, as noted below. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.

The Company’s originally disclosed accounting policy, from the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2018 regarding investments in cryptocurrency stated that:

“Investments in cryptocurrency - Investments are comprised primarily of two types of cryptocurrency investments. The Company owns several cryptocurrencies, of which a majority is Bitcoin, which are actively traded on exchanges and are reported at fair value as determined by digital asset markets with realized gains and losses calculated on a trade date basis as the difference between the fair value and cost of cryptocurrencies transferred. Management believes that measuring cryptocurrencies at fair value, consistent with the accounting for trading investments in commodities and securities with changes in fair value recognized on both the balance sheet and profit and loss statements, best reflects the Company’s financial position and the economics and characteristics of its cryptocurrency investments. The Company recognizes the fair value changes in unrealized gains and losses on investment through the accompanying Statement of Operations. For the six-month period ended June 30, 2018, the Company had a consolidated balance of $2,200,449 in investments in cryptocurrencies. The Company believes that it would be able to liquidate a majority of its portfolio into cash within one to seven days, if needed. As of June 30, 2018, the Company’s holdings represent on average 1.3% of the daily volume of total trades on the specific exchanges where it would be able to convert its holdings to cash. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp. These exchanges, in the aggregate, account for approximately $168,000,000 in Bitcoin/U.S. dollars (“USD”) trades per day globally.

In addition, the Company’s cryptocurrency investments include Initial Coin Offerings (“ICOs”), which primarily consist of tokens that are not currently traded on an exchange. The Company records these investments at cost, as there is no active market. As of June 30, 2018, ICOs represent $367,639 of the Company’s investments in cryptocurrencies. For the six-month period ended June 30, 2018, the Company recognized no impairment losses on investments in ICOs.

Investments – non-cryptocurrency – During the six months ended June 30, 2018, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”), representing 4% interest, at the time of the investment, in a private enterprise. The Company’s investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful ICO by the enterprise. The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for the investment using the cost method since the equity securities are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment to date due to the recent nature of the investment and the early stage development of the platform and has included such asset as a level 3 investment.”

The Company’s updated accounting policy regarding investments in cryptocurrency transactions and remeasurement states that:

“Investments in cryptocurrency – Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin, that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less impairment and are reported as long-term assets in the condensed consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.

Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statement of operations and comprehensive income.

Investments – non-cryptocurrency – As of September 30, 2018, the Company has invested $667,818 as part of nine financings, including $500,000 during the nine months ended September 30, 2018. The investments include $417,818 invested in accordance with eight token pre-sale and simple agreement for future tokens (“SAFT”) agreements. The agreements provide for the issuance of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established in each respective agreement. In addition, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”) agreement, representing 4% interest, at the time of the investment, in a private enterprise. The Company’s SAFE investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful Initial Coin Offering (“ICO”) by the enterprise.

The Company has received tokens for $250,189 of its investments, at cost, which have been transferred to an active exchange and included in Investment in cryptocurrency, net in the condensed consolidated balance sheet, during the nine months ended September 30, 2018.

The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment for its token pre-sale or SAFT investments as of September 30, 2018 as a majority were entered into in the last twelve months and progress has been demonstrated toward tokenization.

During the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment loss of $250,000, representing the full value of its investment.”

The Company has determined that its previously issued financial statements should be restated on a prospective basis. Accordingly the Company is not amending and re-filing the financial statements included in its prior quarterly reports on Form 10-Q, nor in its Annual Report for the period from March 9, 2017 (“Inception”), through December 31, 2017. Management believes the errors are material when considering quantitative materiality. Management does not believe it is probable that the judgment of a reasonable person relying upon its prior filings would have been changed or influenced by the inclusion or correction of the item, nor is there a substantial likelihood that a reasonable person would consider it important.

The effect of the restatement on the Company’s condensed consolidated balance sheet as of September 30, 2017 is as follows:

The effect of the restatement on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2017, are as follows:

The effect of the restatement on the Company’s consolidated statement of cash flows for the nine months ended September 30, 2017 are as follows:

The effect of the restatement on the Company’s net loss, net loss attributable to The Crypto Company, comprehensive income and per-share amounts for the prior interim periods of 2018 are as follows:

The effect of the restatement on the Company’s net loss, per-share amounts, and selected balance sheet amounts for the year ended December 31, 2017 are as follows:

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation – The included condensed consolidated balance sheet as of December 31, 2017, was derived from audited financial statements (as restated) and the accompanying unaudited condensed consolidated financial statements as of September 30, 2018 and September 30, 2017 (as restated) of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated financial statements have been included.

The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report for the period from March 9, 2017 (“Inception”), through December 31, 2017.

Consolidation – The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Crypto Sub, CT, and Malibu Blockchain, as well as its 50.1% ownership of CoinTracking GmbH. All significant intercompany accounts and transactions are eliminated in consolidation. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.

Liquidity and Going Concern - The Company’s condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with US GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred significant losses and experienced negative cash flows since Inception. As of September 30, 2018, the Company had cash of $387,287, a decline of $8,562,957 from the December 31, 2017 balance of $8,950,244. This decline is due, in part, to the acquisition of CoinTracking GmbH in January 2018, which included $3,189,303 of cash consideration, net of acquired cash. The Company’s working capital was ($1,582,593) as of September 30, 2018, which includes a contract liability of $2,122,316, representing advanced payments from customers for subscription service, which is initially deferred and recognized on a straight-line method over the terms of the applicable subscription period. Management does not anticipate settling this liability in cash. After June 30, 2018, the Company liquidated the majority of tradeable cryptocurrency held in its cryptocurrency investment segment, which had a balance of $1,007,753 at June 30, 2018, to help fund its operations. As of September 30, 2018, the accumulated deficit amounted to $20,656,840. As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.

The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management is evaluating different strategies to obtain financing to fund the Company’s expenses and achieve a level of revenue adequate to support the Company’s current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations. There can be no assurance that any of these future-funding efforts will be successful or that the Company will achieve its projected level of revenue in 2019 and beyond. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Use of estimates - The preparation of these condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant estimates and assumptions include but are not limited to the recoverability and useful lives of long-lived assets, allocation of revenue on software subscriptions, valuation of goodwill from business acquisitions, valuation and recoverability of investments, valuation allowances of deferred taxes, and share-based compensation expenses. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating results.

Cash and cash equivalents - The Company defines its cash and cash equivalents to include only cash on hand and certain highly liquid investments with original maturities of ninety days or less. The Company maintains its cash and cash equivalents at financial institutions, the balances of which may, at times, exceed federally insured limits. Management believes that the risk of loss due to the concentration is minimal.

Investments in cryptocurrency - Investments are comprised of several cryptocurrencies the Company owns, of which a majority is Bitcoin, that are actively traded on exchanges. The Company records its investments as indefinite lived intangible assets at cost less impairment and are reported as long-term assets in the condensed consolidated balance sheets. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The primary exchanges and principal markets the Company utilizes for its trading are Kraken, Bittrex, Poloniex and Bitstamp.

Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statement of operations and comprehensive income.

The following table presents additional information about investments in cryptocurrency, as of September 30, 2018:

The following table summarizes the historical cost of cryptocurrencies, held as of September 30, 2018:

Investments – non-cryptocurrency – As of September 30, 2018, the Company has invested $667,818 as part of nine financings, including $500,000 during the nine months ended September 30, 2018. The investments include $417,818 invested in accordance with eight token pre-sale and simple agreement for future tokens (“SAFT”) agreements. The agreements provide for the issuance of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established in each respective agreement. In addition, the Company invested $250,000 as part of a financing in accordance with a simple agreement for future equity (“SAFE”) agreement, representing 4% interest, at the time of the investment, in a private enterprise. The Company’s SAFE investment may take the form of equity in the future, relating to a potential equity financing or initial public offering and a token grant in the event of a successful Initial Coin Offering (“ICO”) by the enterprise.

The Company has received tokens for $255,763 of its investments, at cost, which have been transferred to an active exchange and included in Investment in cryptocurrency, net in the condensed consolidated balance sheet, during the nine months ended September 30, 2018.

The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for its investments, non-cryptocurrency using the cost method since the investments are not marketable and do not give the Company significant influence. The Company has determined that there is no impairment of its token pre-sale or SAFT investments as of September 30, 2018 as a majority were entered into in the last twelve months and progress has been demonstrated toward tokenization.

During the third quarter of 2018, the Company determined that its SAFE investment is impaired as the enterprise changed its primary business model and requires additional financing to bring its products to market. Therefore, the Company has recorded an impairment loss of $250,000, representing the full value of its investment.

Equipment - Equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life ranging from three to five years. Normal repairs and maintenance are expensed as incurred. Expenditures that materially adapt, improve, or alter the nature of the underlying assets are capitalized. When equipment is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to income.

Impairment of long-lived assets - The Company analyzes its long-lived assets, including indefinite lived intangible assets which include investments in cryptocurrency (see Investments in Cryptocurrency) and intangible assets acquired in connection with the acquisition of CoinTracking GmbH, for potential impairment. Subsequent to September 30, 2018, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. Impairment losses are recorded on long-lived assets when indicators of impairment are present, and for intangible assets acquired in connection with acquisitions, the undiscounted cash flows estimated to be generated by those assets are less than the net carrying amount of the assets. In such cases, the carrying values of assets to be held and used are adjusted to their estimated fair value, less estimated selling expenses. For the nine-month period ended September 30, 2018, the Company recognized impairment losses of $1,869,241 on its indefinite lived intangible assets. There was no impairment in the period from Inception to September 30, 2017.

Business combination - The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values with the residual of the purchase price recorded as goodwill. The results of operations of acquired businesses are included in our operating results from the dates of acquisition.

Goodwill and indefinite lived intangible assets - The Company records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. Goodwill and intangible assets with indefinite lives are tested for impairment at least annually on December 31, and whenever events or circumstances occur indicating that a possible impairment may have been incurred. Intangible assets with finite lives are amortized over their useful lives.

The Company assesses whether goodwill impairment and indefinite lived intangible assets exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed to determine whether a goodwill impairment exists at the reporting unit.

Based on its analysis, the Company’s management believes that no impairment of the carrying value of its goodwill existed at September 30, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products and services will continue which could result in impairment of goodwill in the future.

Based on its analysis of its indefinite lived intangible assets, which are valued using a discounted cash flow model, the Company’s management believes there is no impairment of the carrying value of its indefinite lived intangible assets as of September 30, 2018. There can be no assurance however, that market conditions will not change or demand for the Company’s products and services will continue which could result in impairment in the future.

In addition, we capitalized certain costs incurred with developing our CT SaaS platform in accordance with ASC 985-20, Software — Costs of Software to be Sold, Leased, or Marketed once technological feasibility has been established. Capitalized software costs primarily include (i) external direct costs of services utilized in software development and (ii) compensation and related benefits for employees who are directly associated with software development. We amortized our capitalized software costs over a five-year period, reflecting the estimated useful lives of the assets.

Foreign Currency Translation - Results of foreign operations are translated into USD using average rates prevailing throughout the period, while assets and liabilities are translated in USD at period end foreign exchange rates. Transactions gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency of the applicable subsidiary are included in the consolidated statements of operations, within other income, in the year in which the change occurs. The Company’s functional currency is USD while the functional currency for CoinTracking GmbH is in euros.

Income taxes - Deferred tax assets and liabilities are recognized for expected future consequences of events that have been included in the financial statements or tax returns. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. For the nine-month period ended September 30, 2018, the income tax payable of $800 reflects the minimum franchise tax for the State of California.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

As of September 30, 2018, we are subject to taxation in the U.S., as well as state and German taxes. The Company has not been audited by the U.S. Internal Revenue Service, nor has the Company been audited by any states or in Germany. Subsequent to September 30, 2018, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.

Fair value measurements - The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level of input has different levels of subjectivity and difficulty involved in determining fair value.

The carrying amounts of the Company’s financial assets and liabilities, including cash, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments.

Revenue recognition – The Company had two streams of principal revenue segments as of September 30, 2018, software subscription and cryptocurrency investments. The cryptocurrency investment segment primarily consisted of amounts earned through trading activities of cryptocurrencies. The Company recorded its investments in cryptocurrency as indefinite lived intangible assets, at cost less impairment, and are reported as long-term assets in the condensed consolidated balance sheets. Realized gains and losses on sales of investments in cryptocurrency, and impairment losses, are included in other income/(expense) in the condensed consolidated statements of operations and comprehensive income. As of September 30, 2018, the Company liquidated substantially all of the tradeable cryptocurrency held by its cryptocurrency investment segment, although the Company continues to hold a small amount of tradeable cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and simple agreement for tokens agreements investments.

The Company also generated subscription revenues through its majority-owned subsidiary CoinTracking GmbH and generates minimal amounts of consulting revenue. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 supersedes nearly all existing revenue recognition guidance under US GAAP. The Company adopted ASU No. 2014-09 as of January 1, 2018 using the modified retrospective transition method for contracts as of the date of initial application. There is no cumulative impact to the Company’s retained earnings at January 1, 2018. See “Note 6 – Subscription Revenue Recognition” for additional information on the impact to the Company.

Share-based compensation - In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company measures the compensation costs of share-based compensation arrangements based on the grant date fair value of granted instruments and recognizes the costs in financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options.

Equity instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The compensation cost is remeasured at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees can result in significant volatility in compensation expense.

The Company accounts for its share-based compensation using the Black-Scholes model to estimate the fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non-employees are expected to hold their options prior to exercise, and (iii) risk-free interest rate.

Net loss per common share - The Company reports earnings per share (“EPS”) with a dual presentation of basic EPS and diluted EPS. Basic EPS is computed as net income divided by the weighted average of common shares for the period. Diluted EPS reflects the potential dilution that could occur from common shares issued through stock options, or warrants. For the three- and nine-month periods ended September 30, 2018, the Company had no potentially dilutive common stock equivalents. Therefore, the basic EPS and the diluted EPS are the same.

Marketing expense - Marketing expenses are charged to operations, under general and administrative expenses. The Company incurred $48,460 and $333,969 of marketing expenses for the three and nine months ended September 30, 2018, respectively, compared to $21,968 and $35,468 for the three months ended September 30, 2017 and for the period from Inception through September 30, 2017, respectively.

NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. The amendments in this ASU clarify certain aspects of the guidance related to: reporting comprehensive income, debt modification and extinguishment, income taxes related to stock compensation, income taxes related to business combinations, derivatives and hedging, fair value measurements, brokers and dealers liabilities, and plan accounting. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of ASU No. 2018-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, add, and modify certain disclosures. The ASU removes the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation process for Level 3 fair value measurements; and (4) certain other requirements for nonpublic entities. The ASU adds the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, disclosure of other quantitative information may be more appropriate if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU modifies disclosure requirements in Topic 820 relating to timing of liquidation of an investee’s assets, the disclosure of the date when restrictions from redemption might lapse, the intention of the measurement uncertainty disclosure, and certain other requirements for nonpublic entities. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software). The amendments in this ASU require an entity (customer) in a hosting arrangement that is a service to (1) determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense; (2) expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (3) apply the existing impairment guidance to the capitalized implementation costs as if the costs were long-lived assets; (4) present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting arrangements; and (5) present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. This new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU No. 2018-15 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. Management currently does not plan to early adopt this guidance. The new standard is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company is evaluating the effect that ASU No. 2018-07 will have on its consolidated financial statements and related disclosures.

In July 2017, the FASB issued No. ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Rounds and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments also require entities to recognize the effect of the down round feature on EPS when it is triggered. ASU 2017-11 should be adopted retrospectively or as a cumulative-effect adjustment as of the date of adoption, only to financial instruments outstanding as of the initial application date. ASU 2017-11 will be effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The adoption of ASU No. 2017-11 did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The new standard became effective for us on January 1, 2018. Adoption of the ASU No. 2017-11 did not have a significant impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (Topic 805). The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606, Revenue from Contracts with Customers. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of ASU No. 2017-01 did not have a significant impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350) which removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. The amendments in this update should be applied under a modified retrospective approach. Adoption of ASU No. 2016-02 is not expected to have a significant impact on our consolidated financial statements and related disclosures.

NOTE 5 - ACQUISITION

On January 26, 2018, CT, a wholly-owned subsidiary of the Company, acquired 50.1% of the equity interest in CoinTracking GmbH, for (i) $4,736,400 in cash and (ii) 473,640 shares of common stock of the Company at $10 per share for a total purchase price valued at $9,472,800. On the acquisition date, the fair market value of $10 per share for the Company’s common stock was determined using a trading range from November 2017, discounted further due to lack of marketability. The Company used this approach due to the lack of trading volume since (i) the stock trading was suspended by the SEC in December 2017 and was moved to OTC Grey market by the OTC Markets Group, Inc. on January 3, 2018, (ii) stock sales to accredited investors on December 12, 2017, at $7 per share, and (iii) a valuation performed as of March 31, 2018. The equity purchase agreement between the Company and CoinTracking GmbH included a purchase price adjustment pursuant to which the consideration would increase if the share price of the Company’s common stock closed below $10 per share on July 2, 2018. No adjustment was required. CoinTracking GmbH provides its customers with the ability to view and monitor their own cryptocurrency portfolios as well as tax calculation and reporting services. Customers may not make trades through the CoinTracking GmbH platform. The purpose of the acquisition was to increase the Company’s presence in the digital asset industry and build strategic alliances.

The consolidated financial statements were prepared using the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations, and have been included in the Company’s consolidated results as of the acquisition date with the Company considered as the accounting acquirer and CoinTracking GmbH as the accounting acquiree.

Accordingly, consideration paid by the Company to complete the acquisition was allocated to the identifiable assets and liabilities of CoinTracking GmbH based on estimated fair values as of the closing date. We made a preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed based on the information available and preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed. Acquisition-related costs were expensed as incurred and were not considered to be significant. We expect to complete the final purchase price allocation related to this acquisition and included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Subsequent to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details. Therefore, the valuation of certain assets and liabilities in the CoinTracking GmbH acquisition is preliminary and subject to change.

The table below summarizes the fair values of the assets acquired and liabilities assumed, translated from euros to USD, at the date of acquisition:

The purchase price was based on the expected financial performance of CoinTracking GmbH and not on the value of the net identifiable assets at the time of acquisition. This resulted in a significant portion of the purchase price being attributed to goodwill. As a result, the Company recognized $11,990,910 of goodwill on the date of acquisition.

Unaudited pro forma financial information

The unaudited pro forma financial information in the table below presents the combined results of the Company and CoinTracking GmbH as if these acquisitions had occurred on January 1, 2018. The unaudited pro forma financial information includes adjustments required under the acquisition method of accounting and is presented for informational purposes only and is not necessarily indicative of the results that would have been achieved had the acquisitions actually occurred on January 1, 2018.

For the three and nine months ended September 30, 2018:

Subsequent to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.

NOTE 6 – SUBSCRIPTION REVENUE RECOGNITION

CoinTracking GmbH accounts for a contract when it has approval and commitment from all parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue was recognized when control of the promised services was transferred to the Company’s customers over time, and in an amount that reflects the consideration the Company was contractually due in exchange for those services. Most of the Company’s contracts with customers were single, or had few distinct performance obligations, and the transaction price was allocated to each performance obligation using the stand-alone selling price.

CoinTracking GmbH’s revenue is primarily derived directly from users in the form of subscriptions. Subscription revenue is presented net of credits and credit card chargebacks. Subscribers pay in advance, primarily by PayPal or cryptocurrencies, subject to certain conditions identified in our terms and conditions. Revenue is initially deferred and recognized using the straight-line method over the term of the applicable subscription period, which primarily range from annual to perpetual.

Transaction Price

The objective of determining the transaction price was to estimate the amount of consideration the Company was due in exchange for services, including amounts that are variable. CoinTracking GmbH has a standalone sales price for its subscription service, which varies based on length of subscription. Further, the Company excluded from the measurement of transaction price all taxes assessed by governmental authorities that were both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts were not included as a component of revenue or cost of revenue.

Estimates of certain revenue

Revenue collected in advance for subscriptions ranging from annual to perpetual packages were deferred and recognized as revenue on a straight-line basis over the terms of the applicable subscription period or performance obligation period. For “lifetime” revenue packages, where the customer had access to the website for an unlimited length of time, the Company elected to recognize revenue on a straight-line basis over three years. We believe that based on the short history of customer data, customer relationship period, and number of available alternative providers, and anticipation of future changes to the blockchain industry, a measure of three years of performance obligation to customers was appropriate.

Net Revenue and Charge-back Reserves

CoinTracking GmbH does not maintain an allowance for doubtful accounts because the customer prepays for subscription in advance before access is provided to CoinTracking GmbH’s website. The Company maintained a reserve for potential credits issued to consumers or other revenue adjustments. In addition, as of September 30, 2018, PayPal withheld $36,583 for potential credits issued to customers, which is included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet.

Contract Liabilities

Contract liabilities were recorded when payments were received or due in advance of performing CoinTracking GmbH’s service obligations and was recognized over the service period, which primarily related to prepayments of subscription revenue. At the acquisition date of January 26, 2018, CoinTracking GmbH’s total contract liabilities were $3,616,724, and we recognized revenue of $2,570,795 for the nine months ended September 30, 2018. As of September 30, 2018, $2,122,316 of current contract liabilities were recorded and $1,173,531of long-term contract liabilities were recorded. As of December 31, 2017, we did not have consolidated contract liabilities.

Assets Recognized from the Costs to Obtain a Contract with a Customer

CoinTracking GmbH has determined that certain costs associated with affiliate payments paid to customers pursuant to certain sales incentive programs, meet the requirements to be capitalized as a cost of obtaining a contract. Affiliates are paid in Bitcoins and expense is amortized over the applicable subscription period.

During the three and nine months ended September 30, 2018, the Company recognized expense of $87,520 and $150,274, respectively, related to the amortization of affiliate payments. The aggregate contract asset balance at September 30, 2018 was $146,071.

Subsequent to September 30, 2018 and the 2018 fiscal year end, we sold our entire equity ownership stake in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.

NOTE 7 - SEGMENT INFORMATION

The Company organized its operations into two segments: a software subscription segment and a cryptocurrency investment segment.

The software subscription segment primarily consisted of amounts earned through subscriptions to the CoinTracking GmbH website. Among other features, the CoinTracking GmbH website offers subscriptions, ranging from annual to perpetual, that allow individuals and entities to record exactly when and where they acquired virtual currencies of any variety, as well as their acquisition prices. Operating expense related to this segment was technology infrastructure and general administrative costs primarily incurred in Germany. Subsequent to September 30, 2018, we sold to Kachel Holding GmbH our entire equity ownership stake in CoinTracking GmbH, consisting of 12,525 shares representing 50.1% of the outstanding equity interests in CoinTracking GmbH. See “Note 16 - Subsequent Events” for additional details.

The cryptocurrency investment segment primarily consisted of amounts earned, if any, through proprietary trading activities of cryptocurrencies, and costs were operating expenses that consists of general and administrative costs in North America. The Company did not trade or manage other individuals’ or entities’ funds and has no current plans to do so. As of September 30, 2018, the Company liquidated substantially all of the tradeable cryptocurrency held in this segment, although the Company continues to hold a small amount of tradeable cryptocurrency and is invested in non-tradeable cryptocurrency in the form of token pre-sale and SAFT investments.

There are no intercompany internal revenue transactions between our reportable segments. These segments reflected the way our chief operating decision maker evaluated the Company’s business performance and managed its operations.

The following table summarizes the Company’s operating income by segment for the three months ended September 30, 2018 and 2017:

The following table summarizes the Company’s operating income by segment for the nine months ended September 30, 2018:

The following table summarizes the Company’s operating income by segment for the period from Inception to September 30, 2017:

NOTE 8 – INVESTMENTS, NON-CRYPTOCURRENCY

The Company invested $362,055 in non-tradeable token pre-sale and SAFT agreements. In addition, the Company invested $250,000 as part of a financing in accordance with a SAFE investment in a private enterprise. These investments are included as Level 3 investments as there was no active market as of September 30, 2018.

The Company establishes processes and procedures to ensure that the valuation methodologies that are categorized within Level 3 are fair, consistent and verifiable. Non-cryptocurrency investments are carried at cost which approximates fair value at September 30, 2018. The Company considers the length of its investments, of which a majority were made during the current year, as well as its comprehensive investment process which includes reviews of white papers, preparation of either short or long forms analysis that is reviewed by the Company’s internal investment committee, among other factors in determining fair value. At the time that the investments are tokenized and available on active market exchanges, the investments will be reclassified to investments in cryptocurrency

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 investments for the nine months ended September 30, 2018:

NOTE 9 - EQUIPMENT

Equipment consists of the following:

NOTE 10 – GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company’s goodwill balance is the result of the acquisition of CoinTracking GmbH in the current year (see footnote 5). Intangible assets include software development costs, related to the CoinTracking GMBH SaaS platform.

The carrying amount of goodwill for the nine months ended September 30, 2018 was as follows:

The Company evaluates the recoverability of goodwill annually as of December 31, and whenever events or changes in circumstances indicate to us that the carrying amount may not be recoverable. There were no conditions that indicated any impairment of goodwill as of September 30, 2018.

The carrying amounts of intangible assets for the nine months ended September 30, 2018 were as follows:

Intangible assets with finite useful lives are amortized over their respective estimated useful lives. Amortization expense related to intangible assets was $772,745 and $241,767 for the three and nine months ended September 30, 2018, respectively. There was not any amortization expense related to intangible assets in the respective prior year periods.

Amortization expense for intangible assets is included in general and administrative expenses. The following table provides estimated future amortization expense related to intangible assets as of September 30, 2018:

NOTE 11 – WARRANTS FOR COMMON STOCK

As of September 30, 2018, outstanding warrants to purchase shares of the Company’s common stock were as follows:

The warrants expire on the third anniversary of their issuance dates. The exercise price of the warrants is subject to adjustment from time to time, as provided therein, to prevent dilution of purchase rights granted thereunder. The warrants are considered indexed to the Company’s own stock and therefore no subsequent remeasurement is required.

NOTE 12 - SUMMARY OF STOCK OPTIONS

On July 21, 2017, the Company’s board of directors adopted The Crypto Company 2017 Equity Incentive Plan (the “Plan”), which was approved by its stockholders on August 24, 2017. The Plan is administered by the board of directors (the “Administrator”). Under the Plan, the Company may grant equity awards to eligible participants which may take the form of stock options (both incentive stock options and non-qualified stock options) and restricted stock awards. Awards may be granted to officers, employees, non-employee directors (as defined in the Plan) and other key persons (including consultants and prospective employees). The term of any stock option award may not exceed 10 years and may be subject to vesting conditions, as determined by the Administrator. Options granted generally vest over eighteen to thirty-six months. Incentive stock options may be granted only to employees of the Company or any subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Internal Revenue Code.

During the nine months ended September 30, 2018, the Company issued an additional 450,000 stock options to members of our board of directors, 1,957,062 stock options to employees, and 400,000 stock options to non-employees.

5,000,000 shares of the Company’s common stock are reserved for issuance under the Plan. As of the nine-month period ended September 30, 2018, there are outstanding stock option awards issued from the Plan covering a total of 2,144,492 shares of the Company’s common stock and there remain reserved for future awards 2,855,508 shares of the Company’s common stock.