The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
Note 1 – Organization and Nature of Business
History
Tautachrome, Inc. (formerly Roadships Holdings, Inc.) was formed in Delaware on June 5, 2006 as Caddystats, Inc. (Tautachrome, Inc. and hereinafter be collectively referred to as “Tautachrome”, the “Company”, “we’ or “us”).
The Company adopted the accounting acquirer’s year end, December 31.
Our Business
The Division operates in the internet applications space, a space uniquely able to embrace fast growing and novel business. The iPhone, Google, Facebook, Amazon, Twitter, Android, Uber and numerous other examples are reminders of the ability of the internet applications space to surprise us with the arrival –seemingly from out of nowhere- of wholly new business universes.
Click is developing a system branded “KlickZie” aimed at turning smartphones, including iPhones, Android phones and other smartphones, into trustable imagers and advanced communicators. Trustable imagers means that the pictures and videos can be trusted to be the original, untampered, un-Photoshopped pictures and videos made by the smartphone. Advanced communicators means that the pictures and videos can be used as living, trusted portals to communicate with others.
The KlickZie system concept consists of downloadable software able to securitize the imaging process in the smartphone, together with an advanced cloud system to authenticate KlickZie pictures and videos and to make possible imagery based communication among people who happen upon KlickZie pictures and videos.
Note 2 – Basis of Presentation and Summary of Significant Accounting Policies
Consolidated Financial Statements
In the opinion of management, the accompanying financial statements includes all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for the period ending September 30, 2016. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in our audited financial statements for the period ended December 31, 2015, as reported in Form 10-K filed with the Securities and Exchange Commission on July 5, 2016.
Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.
Principles of Consolidation
Our consolidated financial statements include the accounts of Tautachrome, Inc. and all majority-owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation.
Reverse Merger and Successor / Predecessor Presentation
On May 21, 2015, we acquired all the issued and outstanding shares of Click Evidence, Inc. (“Click”), an emerging growth company existing under the laws of the State of Arizona that has developed and owns a patent pending trustable imaging technology for smartphones (See Note 6). Because the shareholders of Click collectively control the Company immediately after the transaction, we deemed the transaction a reverse merger for accounting purposes. In a reverse merger, Click is considered the acquirer and Tautachrome is considered the acquiree. Therefore, financial history of Click is presented instead of that of Tautachrome, Inc. From May 21, 2015 forward, the financial statements are those of Tautachrome, Inc. with all previously reported subsidiary activity and including the activity of Click.
Property, Plant and Equipment
We record our property plant and equipment at historical cost. The estimated useful lives of these assets range from three to seven years and are depreciated using the straight-line method over the asset’s useful life.
Foreign Currency Risk
We currently have two subsidiaries operating in Australia. At September 30, 2016 and December 31, 2015, we had $0 and $3,648 Australian Dollars, respectively ($0 and $2,657 US Dollars, respectively) deposited into Australian banks.
Long-Lived Assets, Intangible Assets and Impairment
In accordance with U.S. GAAP, the Company’s long-lived assets and amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company assesses the recoverability of such assets by determining whether their carrying value can be recovered through undiscounted future operating cash flows, including its estimates of revenue driven by assumed market segment share and estimated costs. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Net Loss Per Share
Basic and diluted net loss per share calculations are calculated on the basis of the weighted average number of common shares outstanding during the year. The per share amounts include the dilutive effect of common stock equivalents in years with net income. Basic and diluted loss per share is the same for the nine months ended September 30, 2016 and 2015 as the effect of our potential common stock equivalents would be anti-dilutive.
Recent Accounting Pronouncements
In September, 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805) (“ASU 2015-16”). Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The adoption of ASU 2015-016 is not expected to have a material effect on the Company’s consolidated financial statements.
In August, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods with that reporting period.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest–Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-03 on its balance sheets.
Note 3 – Going Concern
We have not begun our core operations in the technology industry and have not yet acquired the assets to enter this markets and we will require additional capital to do so. There is no guarantee that we will acquire the capital to procure the assets to enter this markets or, upon doing so, that we will generate positive cash flows from operations. Substantial doubt exists as to Tautachrome’s ability to continue as a going concern. No adjustment has been made to these financial statements for the outcome of this uncertainty.
Note 4 – Related Party Transactions
For the nine months ended September 30, 2016, related parties paid $28,965 in expenses of the company and were reimbursed $15,529. At September 30, 2016 and December 31, 2015, unreimbursed expenses to related parties amounted to $13,814 and $0, respectively.
In addition, we had certain loans from related parties described in Note 7.
On September 18, 2015, we entered into an agreement with Novagen Ingenium Inc, a Nevada corporation (“Novagen”) under which we agreed to sell to Novagen all of the transportation assets of Roadships which had, at the time of the exchange, carrying values of zero, for 2,000,000 shares of Novagen common stock. Shares of Novagen’s common stock are quoted under the symbol “NOVZ” on the OTC Pink operated by OTC Markets Group, Inc. Novagen’s controlling shareholder is Micheal Nugent who is on our Board of Directors and is a major shareholder. Since the shares represent a transaction with a related party, we recorded the value of these shares at zero.
On August 9, 2015, we issued a $5,000 convertible promissory note to the brother of our Board Chairman and Chief Executive Officer in return for cash. The terms of this note are provided in Note 7, subheading “Convertible Notes Payable”.
Note 5 – Capital
At September 30, 2016 and December 31, 2015, we had 3,000,633,430 and 2,987,633,430 common shares issued and outstanding, respectively, from a total of four billion authorized.
On April 20, 2015, the Registrant and Tamara Nugent, as trustee for Twenty Second Trust, entered into a Common Stock Repurchase Agreement whereby the Trust agreed to sell 1,796,571,210 shares of the our common stock to the Company in exchange for the sum of $17,966 in the form a promissory note.
During the year ended December 31, 2015, we issued 6,156,179 shares for services to several consultants according to our agreements with them. We valued these shares at the pre-merger valuation which was based on private equity raises done in 2013 and 2014 ($0.012 per share) and recorded an increase in Capital Stock and Additional Paid in Capital of $73,601. Included in these shares were shares promised and accrued for before December 31, 2014. We therefore reduced Common Stock Payable by $26,667 to zero.
On May 21, 2015, we issued 1,796,571,210 common shares to the shareholders of Click Evidence, Inc. in exchange for all the issued and outstanding shares of that Company (see Note 6), effecting the merger between Click and Roadships.
As described in Note 6, on January 15, 2016 we issued 13,000,000 common shares to acquire all of the members’ interests in Photosweep, LLC. We valued the common stock at the grant date fair value, and included this amount in our acquisition cost of $353,600, or $0.027 per share.
As further discussed in Note 7, on January 1, 2016, we re-negotiated certain convertible promissory notes with certain creditors in order to remove the provisions in the notes which caused the derivative liability. We recorded this renegotiation by removing the derivative liability at December 31, 2015 and recording an increase to Additional Paid in Capital of $18,760.
Imputed Interest
Certain of our promissory notes bear no nominal interest. We therefore imputed interest expense and increase Additional Paid in Capital. For the nine months ended September 30, 2016, we imputed $10,655 of such interest. We imputed $7,504 of such interest during the year ended December 31, 2015.
Beneficial Conversion Features
As discussed in Note 7, we issued certain promissory notes in Australia and the United States containing beneficial conversion features, and we modified existing promissory notes in the United States which resulted in additional beneficial conversion features. These new issuances and modifications resulted in an increase to Additional Paid in Capital of $249,054. We recorded $405,954 of such beneficial conversion features during the year ended December 31, 2015.
Preferred Stock
On November 2, 2015, the Company amended its Articles of Incorporation to remove previously-existing Series A and Series B shares, and to increase the “blank check” authorized preferred shares to 100,000,000. There are no preferred shares issued or outstanding at September 30, 2016 or December 31, 2015.
Note 6 – Business Combination and Acquisitions
Acquisition of Click Evidence, Inc.
On May 21, 2015, we acquired all the issued and outstanding shares of Click Evidence, Inc. (“Click”), an emerging growth company existing under the laws of the State of Arizona that has developed and owns a patent pending trustable imaging technology for smartphones. Under the terms of the Acquisition, we issued 1,796,571,209 shares of our common stock from treasury in exchange for 14,239,705 shares of Click common stock. As a result of the Acquisition, Click has become a wholly-owned subsidiary of the Registrant.
The Roadships shares were issued by the Registrant at a deemed price of $0.0012 per share to 16 Click shareholders (the “Click Shareholders”) on the basis of 83.644 Roadships shares for each of the issued and then outstanding Click Shares. The number of Roadships shares issued for the Click Shares was determined by negotiation between the parties to the Acquisition and was approved by our board of directors as being fair and in the best interest of the Registrant.
As a result of the issuance of the Roadships shares, Dr. Jon N. Leonard, the President, Chief Executive Officer and a director of Click, has acquired sole voting and investment control over 1,387,829,545 shares of Roadships’ common stock, representing 46.4% voting control of the Registrant. At the time of the Acquisition, Dr. Leonard directly owned 10,000,000 Click Shares and had sole voting and investment control over a further 1,000,000 Click Shares.
We deemed the transaction a reverse merger and recorded no goodwill.
Assets and liabilities of Click Evidence are as follows:
Fair value of assets and liabilities obtained from Click Evidence
|
|
Cash
|
|
$
|
10,597
|
|
Other current assets
|
|
|
2,000
|
|
Shareholder note payable
|
|
|
(22,000
|
)
|
Net liabilities acquired
|
|
$
|
(9,403
|
)
|
Upon merging the two companies, we closed all historical operating results prior to the reverse merger date of May 21, 2015 of Roadships and consolidated subsidiaries to Additional Paid in Capital. Operating results and cash flows and historical equity presented in this report and subsequent reports will be that of Click Evidence, Inc.
Sale of Roadships Holdings’ Assets
On September 18, 2015, we entered into an agreement with Novagen Ingenium Inc, a Nevada corporation (“Novagen”) under which we agreed to sell to Novagen all of the transportation assets of Roadships which had, at the time of the exchange, carrying values of zero, for 2,000,000 shares of Novagen common stock. Shares of Novagen’s common stock are quoted under the symbol “NOVZ” on the OTC Pink operated by OTC Markets Group, Inc. Novagen’s controlling shareholder is Micheal Nugent who is on our Board of Directors and is a major shareholder. Since the shares represent a transaction with a related party, we recorded the value of these shares at zero.
The description of the terms and conditions of the Share Exchange Agreement set forth herein does not purport to be complete and is qualified in its entirety by reference to the terms of the Share Exchange Agreement, which to Form 8-K filed with Commission on September 21, 2015 and is herein incorporated by reference.
The sale of these assets to Novagen was completed on September 18, 2015. As a result, Novagen has acquired all of the Transport Assets and we have exited the transport and shipping business. Management intends to focus all the resources of the registrant on the development and commercialization of its smartphone imaging technology.
Acquisition of Photosweep, LLC.
On January 15, 2016, we acquired all of the members’ interests of Photosweep, LLC (“Photosweep”), an Arizona limited liability company.
Under the terms of the Acquisition, the Registrant paid $39,000 and issued 13,000,000 shares of its common stock to acquire all the members’ interests in Photosweep from Jeremy Snyder, Sara Snyder, Richard and Candice Snyder, Quazar Enterprises Limited and Carrington Capital Group Limited.
We valued the common stock at the grant date fair value, and recorded an acquisition cost of $353,600, or $0.027 per share. We are currently amortizing these costs and the cash paid (for a total of $392,600) over a three year period and will evaluate the asset for impairment at year end once we determine the nature and scope of the revenue-generation potential of Photosweep. For the nine months ended September 30, 2016, we amortized $92,862 of this intangible asset to expenses.
Note 7 – Debt
Our debt in certain debt categories went from $632,697 at December 31, 2015 to $908,335 at September 30, 2016 as follows:
|
|
12/31/15
|
|
|
9/30/16
|
|
|
|
|
|
|
|
|
Loans from related parties
|
|
$
|
80,108
|
|
|
$
|
98,171
|
|
Convertible notes payable, related party
|
|
|
22,160
|
|
|
|
69,160
|
|
Short-term convertible notes payable
|
|
|
409,456
|
|
|
|
746,207
|
|
Discounts on short-term convertible notes payable
|
|
|
-
|
|
|
|
(72,023
|
)
|
Short-term portion of long-term debt
|
|
|
-
|
|
|
|
10,897
|
|
Short-term notes payable
|
|
|
16,025
|
|
|
|
16,804
|
|
Long-term notes payable
|
|
|
-
|
|
|
|
22,469
|
|
Long-term convertible notes payable
|
|
|
110,000
|
|
|
|
16,650
|
|
Discounts on long-term convertible notes payable
|
|
|
(5,052
|
)
|
|
|
-
|
|
Totals
|
|
$
|
632,697
|
|
|
$
|
908,335
|
|
Imputed Interest
Certain of our promissory notes bear no nominal interest. We therefore imputed interest expense and increase Additional Paid in Capital. For the nine months ended September 30, 2016, we imputed $10,655 of such interest. We imputed $7,504 of such interest during the year ended December 31, 2015.
Loans from related parties
Loans from related parties went from $80,108 at December 31, 2015 to $98,171 at September 30, 2016, for an increase of $18,063. We borrowed $17,634 in cash from the 22
nd
Trust and we recorded a foreign exchange adjustment of $429 to that account as of September 30, 2016.
Loans from related parties consist of proceeds received either from the Twenty Second Trust (the “Trust”), the trustee of whom is Tamara Nugent, the wife of our major shareholder and former Chief Executive Officer, Micheal Nugent or from Dr. Jon Leonard our Chief Executive Officer and Board Chairman.
According to our agreement with Mr. Nugent on behalf of the Trust, we accrue interest on all unpaid amounts at 5%. Principal and interest are callable at any time. If principal and interest are called and not repaid, the loan is considered in default after which interest is accrued at 10%.
The outstanding balance due to the 22
nd
Trust at September 30, 2016 is $98,171 and $10,057, respectively, for principal and interest. At December 31, 2015, the outstanding balances were $80,108 and $6,637, respectively.
Convertible note payable, related party
On May 5, 2013 (and on August 8, 2013 with an enlargement amendment) the Company entered into a no interest demand-loan agreement with our current Chairman, Jon N Leonard (“Jon”) under which the Company may borrow such money from Jon as Jon in his sole discretion is willing to loan. During the nine months ended September 30, 2016, we borrowed $47,000 from Jon. At September 30, 2016 and December 31, 2015, principal due on this loan was $69,160 and $22,160, respectively. We evaluated this instrument for the existence of a beneficial conversion feature and determined that none existed.
The terms of the note provide that at the Company’s option, the Company may make repayments in stock, at a fixed share price of $1.00 per share. Also, because this loan is a no-interest loan an imputed interest expense of $2,879 was recorded as additional paid-in capital for the nine months ended September 30, 2016. The Company evaluated Dr. Leonard’s note for the existence of a beneficial conversion feature and determined that none existed.
Convertible notes payable
Convertible notes payable at December 31, 2015 and September 30, 2016 and their classification into long-term and short-term were as follows:
|
|
12/31/15
|
|
|
9/30/16
|
|
Long-term and short-term combined
|
|
|
|
|
|
|
Unpaid principal
|
|
$
|
519,456
|
|
|
$
|
762,857
|
|
Discounts
|
|
|
(5,052
|
)
|
|
|
(72,023
|
)
|
Convertible notes payable, net
|
|
$
|
514,404
|
|
|
$
|
690,834
|
|
|
|
|
|
|
|
|
|
|
Classified as short-term
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
409,456
|
|
|
$
|
746,207
|
|
Discounts
|
|
|
-
|
|
|
|
(72,023
|
)
|
Convertible notes payable - short-term, net
|
|
$
|
409,456
|
|
|
$
|
674,184
|
|
|
|
|
|
|
|
|
|
|
Classified as long-term
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
110,000
|
|
|
$
|
16,650
|
|
Discounts
|
|
|
(5,052
|
)
|
|
|
-
|
|
Convertible notes payable - long-term, net
|
|
$
|
104,948
|
|
|
$
|
16,650
|
|
Convertible promissory notes issued in Australia
During the nine months ended September 30, 2016, we received AU$246,600 (US$183,872) of proceeds upon the issuance of twenty two new promissory notes. We added these to the eighty seven already-existing promissory notes at December 31, 2015.
All one hundred nine of these convertible notes issued in Australia have the same provisions:
|
·
|
They convert to common stock at AU$0.01 per share
|
|
|
|
|
·
|
They are callable by the maker at any time
|
|
|
|
|
·
|
They bear interest at 5%.
|
We evaluated the new Australian notes for beneficial conversion features and calculated a value of $133,278, all of which has been immediately expensed as interest expense as the notes are due on demand. These Australian convertible notes can convert into an aggregate of 80,873,300 common shares. In addition, we accrued $21,229 of interest expense on the Australian convertible notes.
Convertible promissory notes issued in the United States
During the nine months ended September 30, 2016, we issued four new promissory notes in the United States with total proceeds of $35,150. We added this to the eight such notes existing at December 31, 2015. All twelve of the promissory notes written in the United States bear interest at 5%, and contain conversion privileges which vary depending upon the date issued, but they may convert to an aggregate of 65,247,217 common shares.
One of the convertible promissory notes issued in the United States is to one investor who has committed to funding $50,000, but as of September 30, 2016, had only contributed $16,650. We fully expect this investor to fund the remainder of the obligation under this note, but to date, we have only considered amounts actually contributed as liabilities subject to interest and beneficial conversion feature calculations. The note is due November 27, 2018, bears interest at 5% (with a rate due after maturity of 10%).
We evaluated the four new notes for beneficial conversion features and calculated a value of $5,776 which we are accounting for as debt discounts.
On January 1, 2016, we re-negotiated the eight U.S.-Dollar-denominated promissory notes that were outstanding at December 31, 2015, in order to remove the ratchet provisions which required that we account for those provisions as a derivative liability. The fair value of the derivative liability was the same at January 1, 2016 as it was on December 31, 2015 which was $23,812.
However, in so renegotiating, we granted the creditors new, lower conversion prices, which resulted in new debt discounts of $110,000.
During the nine months ended September 30, 2016, we amortized $43,752 of debt discounts to interest expense and accrued $4,811 of nominal interest.
The aggregate amount of shares that may be issued upon conversion for convertible notes issued in both the United States and in Australia is 146,120,517.
Convertible debt issued in the United States matures as follows:
Quarter ended:
|
|
|
|
March 31, 2017
|
|
$
|
60,000
|
|
June 30, 2017
|
|
|
50,000
|
|
September 30, 2017
|
|
|
18,500
|
|
December 31, 2017
|
|
|
-
|
|
March 31, 2018
|
|
|
-
|
|
June 30, 2018
|
|
|
-
|
|
September 30, 2018
|
|
|
-
|
|
December 31, 2018
|
|
|
16,650
|
|
Total
|
|
$
|
145,150
|
|
Short-term portion of long-term debt
As discussed in the Long-term notes payable section of this Note, we converted a trade account payable balance with a consultant in the amount of $34,250 to a three-year amortizing promissory note. The short-term portion of that note which is due in twelve months or less, is $10,897.
Short-term notes payable
Short-term notes payable increased from $16,025 to $16,804 which was all due to foreign exchange effect as of September 30, 2016.
Long-term notes payable
On August 9, 2016, we converted a trade account payable balance with a consultant in the amount of $34,250 to a three-year amortizing promissory note with interest at 5%, but accrues at 18% for amounts in default. As of September 30, 2016, we accrued and paid $143 in interest and paid $884 in principal. The remaining principal balance is presented on the balance sheet in two components: the portion that is due within twelve months ($10,897) and the portion which is due in periods after twelve months ($22,469).
Derivative liability
The above-referenced eight convertible promissory notes issued during the year ended December 31, 2015 (and which were re-negotiated on January 1, 2016) were analyzed in accordance with EITF 07–05 and ASC 815. EITF 07–5, which is effective for fiscal years beginning after December 15, 2009, and interim periods within those fiscal years. The objective of EITF 07–5 is to provide guidance for determining whether an equity–linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope exception under Paragraph 11(a) of ASC 815 which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non–derivative instrument that falls within the scope of EITF 00–19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s own stock. A non–derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must be accounted for as a liability.
Derivative financial instruments should be recorded as liabilities in the consolidated balance sheet and measured at fair value. For purposes of this engagement and report, we utilized fair value as the basis for formulating our opinion which has been defined by the Financial Accounting Standards Board (“FASB”) as “the amount for which an asset (or liability) could be exchanged in a current transaction between knowledgeable, unrelated willing parties when neither party is acting under compulsion”. The FASB has provided guidance that its definition of fair value is consistent with the definition of fair market value in IRS Rev. Rule 59–60.
In valuing the derivatives, the following inputs were assumed:
|
·
|
The underlying stock price was used as the fair value of the common stock $0.02 – as of 12/31/15;
|
|
|
|
|
·
|
The stock price projection was modeled such that it follows a geometric Brownian motion with constant drift and a constant volatility;
|
|
|
|
|
·
|
The stock projections are based on the Company historical annual volatilities using the term remaining for each Note and Valuation date and ranged from 311-338%.
|
|
|
|
|
·
|
An event of default would occur 0% of the time, increasing .50% per month to a maximum of 5.0%;
|
|
|
|
|
·
|
Capital raising events would occur quarterly at $150,000 per quarter through 2017 with potential dilutive resets for the Notes;
|
|
·
|
Discount rates were based on risk free rates in effect based on the remaining term and date of each valuation and instrument.
|
|
|
|
|
·
|
The Holder would redeem based on availability of alternative financing, 0% of the time increasing 0% monthly to a maximum of 0%;
|
|
|
|
|
·
|
The Holder would convert the note starting after 12 months to maturity (18 months from issuance) assuming the company was not in default subject to trading volume limits.
|
We recorded the initial derivative as both a derivative liability and a debt discount (or initial reduction in carrying value of the debt). We then amortized the debt discounts, through December 31, 2015, using the Effective Interest Method which recognizes the cost of borrowing at a constant interest rate throughout the contractual term of the obligation. The effective interest rates on these seven instruments range from 5.0% to 10.6%.
At each reporting date, we determine the fair market value for each derivative associated with each of the seven above instrument. At December 31, 2015, we determined the fair value of these derivatives were $23,812. We therefore included the difference in the Statement of Operations as “Change in Fair Value of Derivatives” for the year ended December 31, 2015.
On January 1, 2016, we re-negotiated these notes with the creditors in order to remove the provisions in the notes which caused the derivative liability, namely the ratchet provisions which stipulate that the creditor may adjust the conversion price based on prices granted in subsequent capital raises. In re-negotiating this contract provision, we granted the creditors new conversion prices instead of the ratchet provisions. We therefore removed the derivative liability at December 31, 2015 on January 1, 2016 (whose one-day difference did not result in a change in fair value), and recorded an increase to Additional Paid in Capital of $18,760.
Changes in derivative liabilities for the year ended December 31, 2015 and the nine months ended September 30, 2016 are as follows:
|
|
12/31/15
|
|
|
9/30/16
|
|
Beginning Balance
|
|
$
|
-
|
|
|
|
23,812
|
|
New issuances
|
|
|
5,930
|
|
|
|
-
|
|
Retirements
|
|
|
-
|
|
|
|
(23,812
|
)
|
Changes in fair value
|
|
|
17,882
|
|
|
|
-
|
|
Ending balance
|
|
$
|
23,812
|
|
|
$
|
-
|
|
Note 8 – Income Taxes
Deferred income taxes reflect the tax consequences on future years of differences between the tax bases:
|
|
9/30/16
|
|
|
12/31/15
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
|
|
1,739,880
|
|
|
|
1,109,259
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset at 39%
|
|
$
|
678,553
|
|
|
$
|
432,611
|
|
Valuation allowance
|
|
|
(678,553
|
)
|
|
|
(432,611
|
)
|
Net future income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of future tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Management has provided for a valuation allowance on all of its losses as there is no assurance that future tax benefits will be realized.
Our tax loss carry-forwards will begin to expire in 2030.
Note 9 – Subsequent Events
We have evaluated subsequent events through the date of this report.