Crypto Co - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2019

OR

For the transition period from ______________ to _______________

Commission File Number: 000-55726

THE CRYPTO COMPANY

(Exact name of registrant as specified in its charter)

22809 Pacific Coast Highway

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 [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 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 November 12, 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 year ended December 31, 2018 (the “2018 Annual Report”), as filed with the U.S. Securities and Exchange Commission (“SEC”) 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 (“CoinTracking”); Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”); and, where applicable, CoinTracking’s former majority-owned subsidiary, CoinTracking GmbH. On January 2, 2019, CoinTracking sold to Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany, CoinTracking’s entire equity ownership stake in CoinTracking GmbH, consisting of 12,525 shares representing 50.1% of the outstanding equity interests in CoinTracking GmbH.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

THE CRYPTO COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

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 COMPREHENSIVE LOSS

(unaudited)

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

THE CRYPTO COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited)

For the Three Months Ended September 30, 2019 and 2018

For the Nine Months Ended September 30, 2019 and 2018

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

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”). 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (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 (“CoinTracking”); Malibu Blockchain, LLC, a Nevada limited liability company (“Malibu Blockchain”); and, where applicable, CoinTracking’s majority-owned subsidiary, CoinTracking GmbH, which was sold on January 2, 2019.

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 Quarterly report:

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.

The Company also generated software subscription revenues through CoinTracking GmbH and generates minimal amounts of consulting revenue. The software subscription segment consisted primarily of amounts earned through subscriptions to the CoinTracking GmbH website. Operating expenses related to this segment consisted primarily of technology infrastructure and general administrative costs primarily incurred in Germany.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation – The company prepares its condensed consolidated financial statements based upon the accrual method of accounting, recognizing income when earned and expenses when incurred.

Consolidation – The condensed 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 September 30, 2018. 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 – On December 28, 2018, CoinTracking entered into an agreement on the purchase and assignment of shares, agreements on a purchase price of loan agreement, and a compensation agreement (collectively, the “Agreement”), pursuant to the laws of the Republic of Germany, with Kachel Holding GmbH, an entity formed under the laws of the Republic of Germany (“Kachel Holding”), and CoinTracking GmbH. On January 2, 2019, pursuant to the Agreement, CoinTracking sold 12,525 shares of equity interest in CoinTracking GmbH, representing 50.1% of the equity interests in CoinTracking GmbH and 100% of CoinTracking’s holdings 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 in the amount of $1,500,000 from CoinTracking GmbH to CoinTracking.

As a result of the pending sale as of December 31, 2018, of CoinTracking’s entire equity ownership stake in CoinTracking GmbH, and a strategic shift in the Company’s business in the fourth quarter of 2018 away from cryptocurrency investing to blockchain consulting and education, the assets and liabilities to be sold or disposed of other than by sale were reported in assets and liabilities held for sale in the condensed consolidated balance sheets as of December 31, 2018. Additionally, the current operating results associated with these assets and liabilities were reclassified to give effect to these changes and were reported as discontinued operations in the condensed consolidated statements of operations for 2018. In 2019, the Company has holdings of cryptocurrency from its investment segment, and therefore has classified those assets as assets held for sale in its condensed consolidated balance sheets, and reports current operating results as discontinued operations in the condensed consolidated statements of operations for the current year.

Liquidity and Going Concern – The Company’s condensed 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 September 30, 2019, the Company had cash of $6,219. In addition, the Company’s net loss was $927,091 for the nine months ended September 30, 2019. The Company’s working capital was negative $1,449,633 as of September 30, 2019. During 2018, the Company liquidated a majority of its investments in cryptocurrency. In addition, on January 2, 2019, the Company sold its equity interest in CoinTracking GmbH for $2,200,000, of which (i) $1,000,000 was received in cash and (ii) $1,200,000 was applied toward the repayment of an outstanding loan in the amount of $1,500,000 from CoinTracking GmbH. The cash received from the liquidation of the Company’s investment in cryptocurrency helped fund the Company’s operations during 2018, and the funds received from the sale of CoinTracking GmbH have been used to fund operations in 2019. As of September 30, 2019, the accumulated deficit amounted to $29,383,641. 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 be able to replace the revenues lost as a result of the sale of CoinTracking GmbH, for the remaining quarter of 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 were actively traded on exchanges. During 2018, the Company sold most of its investments, and is on longer actively trading.

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 statements of operations. For the nine months ended September 30, 2019, realized gains and losses are included in discontinued operations. See “Note 15 – Discontinued Operations” for additional details.

The following table summarizes the historical cost of cryptocurrencies held, less impairment, as of September 30, 2019:

The investments in cryptocurrency are included in assets held for sale at September 30, 2019.

Investments – non-cryptocurrency – The Company has historically invested in simple agreement for future tokens (“SAFT”) and a simple agreement for future equity (“SAFE”) agreements. The SAFT agreements provide for the issuance of tokens in anticipation of a future token generation event, with the number of tokens predetermined based on the price established in each respective agreement. The SAFE investment included provisions that provide for either equity or tokens, or both. As of December 31, 2018, the Company’s investment in SAFT and SAFE agreements was $2,005, net of impairment, representing a single investment which was sold during the nine months ended September 30, 2019.

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 impaired the remaining $160,050 of its token pre-sale or SAFT investments as of December 31, 2018 as the Company determined that a token generation event and trading on an active change were remote.

During the year ended December 31, 2018, the Company wrote-off its SAFE investment as the enterprise shut down its operations.

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.

Most of the Company’s long-lived assets, including all of its goodwill and a majority of its intangibles, were held by CoinTracking GmbH, which was reclassified to Assets Held for Sale at December 31, 2018, and sold on January 2, 2019. Therefore, as of September 30, 2019, the Company has no impairment losses.

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

Goodwill and indefinite lived intangible assets – The Company records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets are comprised of purchased customer relationships, trade names, and developed technologies. Intangible assets subject to amortization are amortized over the period of estimated economic benefit of five years. In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill and other intangible assets with indefinite lives are not amortized but tested annually, on December 31, or more frequently if the Company believes indicators of impairment exist. Indefinite lived intangible assets also include investments in cryptocurrency (see Investments in Cryptocurrency).

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

In addition, the Company capitalized certain costs incurred with developing its CoinTracking 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.

The Company’s goodwill and a majority of its indefinite lived intangible assets were held by CoinTracking GmbH and were reclassified to Assets Held for Sale as of December 31, 2018 and sold on January 2, 2019. Therefore, the Company has no goodwill, and $20,968 of indefinite lived intangible assets as of September 30, 2019, included in other assets on its condensed consolidated balance sheets.

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 condensed 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 September 30, 2019, we are subject to federal taxation in the U.S, as well as state taxes. For 2018, we were subject to taxation in Germany as well. 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, the Company sold its 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.

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 5 – Subscription Revenue Recognition” for additional information on the impact to the Company.

During 2019, the Company’s main source of revenue is consulting and development services for a single customer. The Company has determined that revenue should be recognized over time, as the service is provided. The Company considered the criteria in ASC 606 in reaching this determination, specifically:

The consulting arrangement meet more than one of the criteria above.

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.

On January 1, 2019, the Company adopted ASC No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Previously, share based payments to nonemployees was accounted for in accordance with ASC No. 505, Equity Based Payments to Non-Employees, which required compensation cost to be remeasured at fair value at each reporting period when the award vests. As a result, stock option-based payments to non-employees resulted in significant volatility in compensation expense in prior years.

The Company accounts for its share-based compensation using the Black-Scholes model to estimate the fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s common stock price, (ii) expected life of the award, which for options is the 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 months ended September 30, 2019 and 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 marketing expenses of $529 and $17,364 for the three and nine months ended September 30, 2019, respectively, and $48,460 and $333,969 for the three and nine months ended September 30, 2018, respectively.

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

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 adoption of ASU No. 2018-07 did not have a material impact on the Company’s 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. The adoption of ASU No. 2017-11 did not have a material impact on the Company’s consolidated financial statements and related disclosures.

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

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

NOTE 4 - ACQUISITION

On January 26, 2018, the Company, through its wholly owned subsidiary, CoinTracking, 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 condensed consolidated financial statements were prepared using the acquisition method of accounting in accordance with 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. Acquisition-related costs were expensed as incurred and were not considered to be significant.

In the fourth quarter of the year ended December 31, 2018, the Company completed its allocation of the consideration transferred to the assets acquired and liabilities assumed based on the fair value of tangible and intangible assets acquired and liabilities assumed. The result was the recording of intangible assets of $7,726,356, noncontrolling interest of $9,434,984, and an additional adjustment of $267,401 to net assets acquired, resulting in an adjustment to increase goodwill of $1,976,029, from $10,014,881 to $11,990,910.

The table below summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition, as of December 31, 2018:

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 the acquisition 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 acquisition actually occurred on January 1, 2018.

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

On January 2, 2019, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 15 – Discontinued Operations” for additional details.

NOTE 5 – SUBSCRIPTION REVENUE RECOGNITION

CoinTracking GmbH accounted for a contract when it had approval and commitment from all parties, the rights of the parties and payment terms were identified, the contract had commercial substance and collectability of consideration was probable. Revenue was recognized when control of the promised services were transferred to the Company’s customers over time, and in an amount that reflected the consideration the Company was contractually due in exchange for those services. Most of the Company’s contracts with customers were single, or have 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 had a standalone sales price for its subscription service, which varied 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 has 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 did not maintain an allowance for doubtful accounts because the customer prepaid for the subscription in advance before access was provided to CoinTracking GmbH’s website. The Company maintained a reserve for potential credits issued to consumers or other revenue adjustments when necessary. In addition, as of December 31, 2018, PayPal withheld $47,872 for potential credits issued to customers, which was included in assets held for sale on the Company’s condensed consolidated balance sheets.

Contract Liabilities

Contract liabilities were recorded when payments were received or due in advance of performing CoinTracking GmbH’s service obligations and were 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 $3,553,979 for the year ended December 31, 2018. As of December 31, 2018, $1,750,465 of current contract liabilities and $847,461 of long-term contract liabilities were included in liabilities held for sale.

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

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

The aggregate contract asset balance at December 31, 2018 was $106,026, included in assets held for sale. On January 2, 2019, the Company sold its entire equity ownership stake in CoinTracking GmbH. See “Note 15 – Discontinued Operations” for additional details.

NOTE 6 – INVESTMENTS, NON-CRYPTOCURRENCY

The Company has $160,050 in non-tradeable token pre-sale and SAFT agreements, as of September 30, 2019, of which the entire balance has been impaired.

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, 2019. The Company considers the length of its investments, as well as its comprehensive investment process which includes reviews of white papers, preparation of either short or long form analysis that is reviewed by the Company’s internal investment committee, as well as periodic status updates from its investees, 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 three months ended September 30, 2019:

These investments are included in assets held for sale at December 31, 2018 and September 30, 2019.

 NOTE 7 - EQUIPMENT

Equipment consists of the following:

Depreciation expense for equipment was $5,573 and $16,985 for the three and nine months ended September 30, 2019, respectively, and $5,706 and $16,225 for the three and nine months ended September 30, 2018, respectively. Depreciation expense is included in selling, general and administrative expenses.

Equipment, net of accumulated depreciation of $10,369 was included in assets held for sale as of December 31, 2018.

NOTE 8 – 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 4 – Acquisition”). Intangible assets include software development costs, related to the CoinTracking GMBH SaaS platform, customer base and trade name.

The carrying amount of goodwill at December 31, 2018 was as follows:

The carrying amounts of intangible assets at December 31, 2018 was as follows:

The Company’s goodwill and intangible assets relate to CoinTracking GmbH and are therefore included as held for sale on the condensed consolidated balance sheets, and amortization expense is included in loss from discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2018.

Intangible assets with finite useful lives are amortized over their respective estimated useful lives. Amortization expense related to intangible assets was $241,767 and $772,745 for the three and nine months ended September 30, 2018, respectively. There was no amortization expense related to intangible assets for the three and nine months ended September 30, 2019.

Amortization expense for intangible assets is included in general and administrative expenses in discontinued operations (see “Note 15 – Discontinued Operations” for additional information).

Impairment of goodwill and indefinite lived intangible assets

The Company performed its annual impairment test at December 31, 2018. Based on the guidance in ASC 350 – Intangibles – Goodwill and Other, management of the Company elected to bypass the qualitative assessment of goodwill and proceeded directly to performing the first step of the goodwill impairment test. The first step of the goodwill impairment test indicated that the fair value of goodwill was below its carrying value, indicating impairment. The Company then performed the second step of the goodwill impairment test, comparing the implied fair value of goodwill to its carrying value, resulting in an impairment charge of $9,356,105. In addition, the Company recognized an impairment charge of $998,833 related to the Trade Name indefinite lived intangible asset and $2,749,646 on its definite lived intangible assets related to CoinTracking GmbH, which are both classified as assets held for sale. There was no impairment for the three and nine months ended September 30, 2019.

CoinTracking GmbH was acquired in the first quarter of 2018, shortly after bitcoin and other cryptocurrencies reached their highest market values, resulting in significant customer signups for CoinTracking GmbH’s software subscription service. Beginning in early 2018, the market value of cryptocurrencies declined sharply, resulting in a steady decline in new customer signups. While software subscription revenues for 2018 were in line with the Company’s projections, the Company reduced its projected revenue expectations for future years in line with the decline in new customer signups. On January 2, 2019, the Company agreed to sell the software subscription business back to the noncontrolling shareholder at a sales price of $2,200,000, significantly below the $9,472,800 purchase price paid by the Company in January 2018.

The Company estimates the fair value of its reporting units using a weighting of fair values derived from both the income approach and the market approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business’s ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit. The weighting of the fair value derived from the market approach ranges from 0% to 50% depending on the level of comparability of these publicly traded companies to the reporting unit. The Company used a 50% weighting of these two approaches in determining the fair value of CoinTracking GmbH, which fair value approximated the Company’s sales price.

NOTE 9 – NOTE PAYABLE

In 2018, CoinTracking entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, which provided for total borrowings of up to $3,000,000. During 2018, CoinTracking borrowed $1,500,000 in exchange for three promissory notes (the “CoinTracking Note”) in the amounts of $300,000, $700,000 and $500,000, respectively. At December 31, 2018, the CoinTracking Note was still outstanding. On January 2, 2019 the Company sold its equity ownership stake in CoinTracking GmbH, and $1,200,000 of the sales proceeds were applied toward repayment of the $1,500,000 outstanding loan amount under the CoinTracking Note. The remaining balance of $300,000 is outstanding as of September 30, 2019, with a due date of May 28, 2020. The Note bears interest at 3%, which is payable quarterly, in arrears. See “Note 13 – Related Party Transactions” for additional information.

Interest expense was $2,250 and $6,575 for the three and nine months ended September 30, 2019, respectively.

NOTE 10 – CONVERTIBLE NOTES

On September 23, 2019, the Company issued two Convertible Notes (“Notes”) to two accredited investors for an aggregate amount of $75,000, of which $50,000 was funded after September 30, 2019. The Notes mature on September 23, 2024, unless earlier converted. The Notes bear interest at a rate of 5% per year. The Notes will automatically convert into shares of common stock on the earlier to occur of a) a qualified equity financing, with the conversion price equal to 50% of the common stock price paid by the purchasers of the equity, or b) on the maturity date, at a price per share equal to the fair market value of the Company’s common stock on that date. If a change in control occurs prior to either of the automatic conversion events, the holders of the Notes will have the option to convert the Notes at a price per share equal to the fair market value of the common stock at the time of such conversion. The Company can prepay the principal and interest, in cash, at any time without any premium or penalty. The Notes have no voting rights, do not participate in dividends, and are unsecured. The Company believes it is more likely than not that the Notes will not be automatically converted in connection with a qualified equity financing prior to either prepayment or automatic conversion on maturity.

The Company reviewed ASC 815 – Derivatives and Hedging, to determine if the embedded feature in the Notes, specifically the equity conversion feature, should be accounted for as a derivative instrument. The Company considered whether the Notes included net settlement, either explicitly by the terms of the Notes or by other means, such as through the resale of the shares obtained on conversion in the public markets. The Company determined that the Notes do not contain a net settlement option. In addition, conversion to cash through the public markets is unlikely, as only 3% of the Company’s outstanding shares are in public float, and the Company’s shares are listed on the OTC grey market, resulting in limited trades of insignificant volume. The Company cannot determine when, or if, its shares will be listed on an active exchange, and if shares available to trade will increase.

In connection with the Notes, the Company issued 75,000 warrants to purchase the Company’s common stock at a warrant price of $0.01 per share. The warrants expire in three years. The Company determined the fair value of the warrants utilizing the Black-Scholes model, resulting in an expense of $1,196, included in interest expense in the company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2019.

NOTE 11 – WARRANTS FOR COMMON STOCK

As of September 30, 2019, outstanding warrants to purchase shares of the Company’s common stock were as follows:

The warrants issued in 2017 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. See “Note 10 – Convertible Notes” for further information of the warrants issued in 2019.

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 three and nine months ended September 30, 2019, the Company did not issue any options.

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, 2019, there are outstanding stock option awards issued from the Plan covering a total of 915,364 shares of the Company’s common stock and there remain reserved for future awards 4,084,636 shares of the Company’s common stock. 

The Company recognized a reduction in expense of $2,000 and $241,485 for share-based compensation related to stock options for the three and nine months ended September 30, 2019, respectively, compared to an expense of $512,648 and $4,562,089 for the three and nine months ended September 30, 2018, respectively. See “Note 15 – Discontinued Operations” for share-based compensation related to our former cryptocurrency investment segment and CoinTracking GmbH for the three and nine months ended September 30, 2018.

The total intrinsic value for options exercised, determined using the market price of our common stock on the date of exercise, was $0 and $295,762 for the nine months ended September 30, 2018. There were no options exercised for the three and nine months ended September 30, 2019.

The Company did not grant any restricted stock awards during the nine months ended September 30, 2019 and 2018, respectively.

As of September 30, 2019, there was less than $1,000 of unrecognized compensation costs related to stock options issued to employees and nonemployees.

The determination of the fair value of share-based compensation awards utilizing the Black-Scholes model is affected by the Company’s stock price and a number of complex and subjective assumptions, including stock price, volatility, expected life of the equity award, forfeitures rates if any, risk-free interest rates and expected dividends. Volatility is based on the historical volatility of comparable companies measured over the most recent period, generally commensurate with the expected life of the Company’s stock options, adjusted for future expectations given the Company’s limited historical share price data.

The range of assumptions used for the nine months ended September 30, 2018 are as follows:

NOTE 13 - RELATED PARTY TRANSACTIONS

The Company has a services agreement with Full Stack Finance for chief financial officer and accounting outsource services. Ivan Ivankovich, the Company’s CFO, is the Co-Managing Director of Full Stack Finance. The Company expensed $87,150 and $454,199 in fees to Full Stack Finance during the three and nine months ended September 30, 2018, respectively, included in general and administrative expenses in the condensed consolidated statements of operations. The Company did not incur expenses in the current year. As of September 30, 2019, and December 31, 2018, there was a balance due to Full Stack Finance of $78,130 and $133,834, respectively, which is included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets.

On April 3, 2018, CoinTracking entered into a Loan Agreement (the “Loan Agreement”) with CoinTracking GmbH, pursuant to which CoinTracking GmbH was to 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 requested by CoinTracking from time to time, on or before the tenth anniversary of the Loan Agreement. The Company was deemed obligor of CoinTracking’s obligations under the Loan Agreement for United States Federal income tax purposes. Interest on the CoinTracking Loan accrued 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 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 were still outstanding as of December 31, 2018. CoinTracking and CoinTracking GmbH are consolidated entities, as such, the loan and advances are intercompany transactions and are eliminated in consolidation. On January 2, 2019, 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, leaving a remaining balance of $300,000. See “Note 9 – Note Payable” 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 provided that the Company pay 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 contained 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.

On January 15, 2019, the Company entered into a settlement agreement with Mr. Poutre, whereby the Company agreed to pay Mr. Poutre $40,000 as settlement of all amounts outstanding in connection with his Separation and Consulting Agreement. In connection with the settlement the Company reduced its accounts payable and accrued expenses to $40,000 as of December 31, 2018.

NOTE 14 - BASIC AND DILUTED LOSS PER SHARE

The following is a reconciliation of the basic and diluted loss per share computations for the three and nine months ended September 30, 2019 and 2018:

Common stock equivalents include warrants issued on September 23, 2019 in connection with the Convertible Note. See “Note 10 – Convertible Notes” for additional information. The terms of the warrants include an exercise price of $0.01 per share and are therefore included as outstanding shares on the date of issuance.

NOTE 15 – DISCONTINUED OPERATIONS

On December 28, 2018, the Company entered into the Agreement with Kachel Holding and CoinTracking GmbH to sell its controlling interest in CoinTracking GmbH. CoinTracking GmbH was acquired by the Company on January 26, 2018. On January 2, 2019, pursuant to the Agreement, the Company sold 12,525 shares of equity interest in CoinTracking GmbH, representing 50.1% of the equity interests in CoinTracking GmbH and 100% of CoinTracking’s holdings 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 in the amount of $1,500,000 from CoinTracking GmbH to CoinTracking under the CoinTracking Note.

In addition, during the fourth quarter of 2018, there was a strategic shift in the Company’s business away from cryptocurrency investing to blockchain consulting and education. As a result of the sale of CoinTracking GmbH and the shift in the Company’s operations, the Company reclassified the assets and liabilities divested as held for sale as of December 31, 2018 and September 30, 2019. The Company retained no ownership in CoinTracking GmbH and has no continuing involvement with CoinTracking as of the date of the sale.

A reconciliation of the operations of the cryptocurrency investment segment and CoinTracking GmbH to the condensed consolidated statements of operations is shown below: