Notes to Consolidated Financial Statements
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
Tautachrome operates in the internet applications space, a large space we believe to be uniquely able to make possible 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 new business universes out of nowhere. A recent surprise was the arrival in the internet applications space of blockchain technology, which is empowering enterprises of all sizes to create ecosystems of trade based on self-introduced and globally useable cryptocurrencies. The arrival of blockchain technology has added a significant new and leading element to Tautachrome’s business plans and activities.
Tautachrome is currently pursuing two main avenues of business activity based on our patented imaging technology (branded “
KlickZie
” technology):
|
1.
|
KlickZie’s blockchain cryptocurrency based ecosystem:
our recently added activity to create our own KlickZie blockchain and cryptocurrency to incentivize user download of KlickZie products and to provide a crypto based monetary stream to the Company, and
|
|
|
|
|
2.
|
KlickZie technology-based business
: our longstanding flagship activity to develop and monetize downloadable apps based on our patented KlickZie trusted imaging technology and based on our patented trusted image-based social interactions using the pictures and videos that smartphone users generate on the web using their KlickZie imaging app.
|
We were informed by the SEC in January of 2017 that the Tautachrome KLK20 token is considered to be a security by virtue of the fact that the Company will have to do work for the token to have value. We understand the law and that interpretation of the law, and we agree. This means that the token may only be sold to persons under which the sale would qualify under an available exemption from registration or an available exclusion from registration.
Our current offering of our KLK20 tokens are being made only to Non-US Persons under an exclusion from registration, and to US Persons who are accredited investors under an exemption from registration.
For US Persons, the Offering is being made only to accredited investors pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), Regulation D and Rule 506 promulgated thereunder.
The Offering is being made available to Non-US Persons pursuant to an exclusion from registration under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), Regulation S and Rules 901 through 905 promulgated thereunder.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The Company’s financial statements are presented in accordance with accounting principles generally accepted (GAAP) in the United States. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein.
Principles of Consolidation
Our consolidated financial statements include Tautachrome, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of these financial statements in conformity with generally accepted accounting principles in the United States requires us 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. We regularly evaluate estimates and assumptions related to the recoverability of long-lived assets, valuation of convertible debentures, assumptions used to determine the fair value of stock-based compensation and derivative liabilities, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial maturity of 3 months or less to be cash equivalents. The Company maintains its deposits with high quality financial institutions and, accordingly, believes its credit risk exposure associated with cash is remote. There were no cash equivalents as of December 31, 2018 and 2017.
Earnings Per Share
Basic earnings per common share is computed by dividing net earnings or loss (the numerator) by the weighted average number of common shares outstanding during each period (the denominator). Diluted earnings per common share is similar to the computation for basic earnings per share, except that the denominator is increased by the dilutive effect of stock options outstanding and unvested restricted shares and share units, computed using the treasury stock method. There are currently no common stock equivalents.
Fair Value of Financial Instruments
We adopted the Financial Accounting Standards Board’s (FASB) Accounting Codification Standard No. 820 (“ASC 820),
Fair Value Measurements and Disclosures
. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. ASC 820 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable inputs such as quoted prices in active markets;
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The following table presents assets and liabilities that were measured and recognized at fair value as of December 31, 2018 on a recurring basis:
|
|
Level 1
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|
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Level 2
|
|
|
Level 3
|
|
|
Total Gains
(Losses)
|
|
Accounts payable and accrued expenses
|
|
$
|
615,847
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts payable - related party
|
|
|
114,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans from related parties
|
|
|
103,074
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable - related party
|
|
|
81,340
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term convertible notes payable, net
|
|
|
627,928
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable in default
|
|
|
422,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes payable
|
|
|
15,501
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
365,497
|
|
|
|
|
|
Court judgment liability
|
|
|
250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(256,000
|
)
|
Long-term convertible notes payable, net
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term convertible notes payable – related party, net
|
|
|
32,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crypto-currency notes payable
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL LIABILITIES
|
|
$
|
2,388,132
|
|
|
$
|
-
|
|
|
$
|
365,497
|
|
|
$
|
(256,000
|
)
|
The following table presents assets and liabilities that were measured and recognized at fair value as of December 31, 2017 on a recurring basis:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Gains
(Losses)
|
|
Accounts payable and accrued expenses
|
|
$
|
356,213
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts payable - related party
|
|
|
15,515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans from related parties
|
|
|
100,033
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable - related party
|
|
|
118,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term convertible notes payable, net
|
|
|
687,863
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable in default
|
|
|
103,298
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term notes payable
|
|
|
17,191
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Court judgment liability
|
|
|
54,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,372,668
|
|
Long-term convertible notes payable – related party, net
|
|
|
5,413
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL LIABILITIES
|
|
$
|
1,458,126
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,372,668
|
|
Income Taxes
We recognize deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates that are expected to be in effect when the differences are expected to be recovered. We provide a valuation allowance for deferred tax assets for which we do not consider realization of such assets to be more likely than not.
See Note 9 for our reconciliation of income tax expense and deferred income taxes as of and for the years ended December 31, 2018 and 2017.
Recent Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07,
Compensation-Stock Compensation
(Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
There are no other recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows.
Note 3 – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, we had negative cash flows from operations of $635,027 and $159,416 for the years ended December 31, 2018 and 2017, respectively, recurring losses, and negative working capital at December 31, 2018 and 2017. These conditions raise substantial doubt as to our ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
The Company may raise additional capital through the sale of its equity securities, through an offering of debt securities, or through borrowings from financial institutions or related parties. Management believes that actions presently being taken to obtain additional funding may provide the opportunity for the Company to continue as a going concern. There is no guarantee the Company will be successful in achieving these objectives.
Note 4 – Related Party Transactions
For the years ended December 31, 2018 and 2017, we had the following transactions with the Twenty Second Trust (the "Trust"), the trustee of whom is Sonny Nugent, the son of our major shareholder and former Chief Executive Officer, Micheal Nugent:
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·
|
We received $0 and $0, respectively, in cash loans to pay operating expenses and repaid $0 in principal for both years.
|
|
|
|
|
·
|
We accrued $4,672 and $4,924, respectively, in interest payable to the Trust and paid $0 of interest for both years.
|
|
|
|
|
·
|
The outstanding balance at December 31, 2018 to the 22
nd
Trust was $98,074 and $20,517 for principal and interest, respectively, after adjustments for foreign exchange effect.
|
According to our agreement with Mr. Nugent, 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 to the 22
nd
Trust at December 31, 2017 was $100,033 and $16,012 in principal and interest, respectively.
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 under which the Company may borrow such money from Mr. Leonard as he, in his sole discretion, is willing to loan. During the years ended December 31, 2018 and 2017, the Company borrowed $2,130 and $53,000, respectively, repaid principal of $21,950 and owed to Dr. Leonard $81,240 and $101,160 at December 31, 2018 and 2017, respectively.
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 $7,489 and $5,023 was recorded as additional paid-in capital for the years ended December 31, 2018 and 2017, respectively. The Company evaluated Dr. Leonard’s note for the existence of a beneficial conversion feature and determined that none existed.
On August 2, 2018, we issued a promissory note for $27,825 to a related party. In return, we received $10,000 in cash and the benefit of $17,825 of payments made by the creditor on the company’s behalf. The note matures on February 2, 2020, and bears interest at 5%. Any unpaid interest and principal at maturity bears interest at 10%. During the year ended December 31, 2018, we accrued $1,149 of interest. After twelve months, this note may be converted into common shares at $0.0025 per share (or 11,129,880 shares).
Also on August 2, 2018, we issued 43,177,151 to a related party, converting $102,000 of principal and $6,376 of interest to equity.
On December 12, 2018, we received $5,000 from a related party as an advance towards a convertible promissory note to be executed during 2019. This $5,000 is included in Loans from Related Parties on the balance sheet.
On October 17, 2018, we executed a License Agreement with ArKnet, Inc., a company owned by our CEO, Dr. Leonard and another related party. We received certain technologies aimed at the global household goods and services market in exchange for on-going cash payments and 40,000 shares of Convertible Preferred Series E Stock, issuable on or before April 17, 2020. We recorded an accrual of $1,837,000 for the cost of these shares during 2018 (See Note 5).
The cash consideration is:
|
·
|
$100,000 License Issuance Fee which we have accrued into the financial statements
|
|
·
|
Annual License Maintenance Fee
|
|
·
|
$200,000 for the calendar years 2020 and 2021
|
|
·
|
$300,000 for the calendar years 2022 and 2023
|
|
·
|
$400,000 for each calendar year after 2023
|
In addition to the above, the Company is to pay a 7.5% royalty on net sales. During 2018, there were no revenues on which to pay this royalty.
Note 5 – Capital Structure
Common Stock
At December 31, 2016, we had 1,672,789,717 common shares issued and outstanding from a total of four billion authorized.
During the year ended December 31, 2017, we issued 8,493,243 common shares to convert $49,249 of convertible notes payable, and $4,916 in accrued interest, to common stock.
Also during the year ended December 31, 2017, we issued 6,700,000 common shares to four consultants for services. We valued the shares at their grant date fair values, charging general and administrative expenses with $84,329.
On October 5, 2017, we received 2,041,324 shares back into the treasury from a consultant. These shares were gifted to the consultant by a major shareholder. We recorded the receipt of these shares at par value.
On October 16, 2017, we signed a consulting agreement to aide us in developing our blockchain-based cryptotokens in five stages, with 700,000 shares accruing at the completion of each stage. Phase 1 was completed on December 12, 2017. We therefore accrued those 700,000 shares at the date they were earned, charging general and administrative expense $12,600.
During the year ended December 31, 2018 we issued 246,542,274 shares as follows:
|
·
|
We settled our lawsuit with Richard Morgan (see Note 7) in full by issuing 10 million shares. We valued the shares at their grant date fair values, removing the judgment liability of $5,000 and recording a $55,000 loss on litigation.
|
|
|
|
|
·
|
We issued 15,000,000 shares as an equity incentive to a creditor (see Note 6) . We valued the shares at their grant-date fair values and recorded a discount on that debt of $127,500.
|
|
|
|
|
·
|
We issued 221,542,274 shares in conversion of outstanding convertible promissory notes. We recorded a reduction of the balance of these notes of $306,623 and $27,728 of principal and interest, respectively and recorded a loss on conversion of $41,278. As part of these conversions, we retired $326,339 of associated derivative liabilities which we included in Additional Paid in Capital.
|
Imputed Interest
Several of our loans were made without any nominal interest. As such, we imputed interest at 8% to these loans, crediting Additional Paid in Capital and charging Interest Expense. For the year ended December 31, 2018 and 2017, these amounted to $17,931 and $18,678, respectively.
Beneficial Conversion Features of Convertible Promissory Notes
During the year ended December 31, 2017, we borrowed $213,040 from five accredited investors in the United States (see Note 6). These notes contain features which allow the holder to convert the principal and interest into common stock at various negotiated rates. We evaluated these notes for beneficial conversion features and calculated a value of $209,040, which is accounted for as debt discounts.
Preferred Stock
During the year ended December 31, 2018, we accrued $1,837,000 in costs related to the 40,000 Series E Preferred shares promised in our ArKnet contract (see Note 4) containing a par value of $0.0001. This series of preferred shares have the following rights, limitations, restrictions and privileges:
|
·
|
They are not entitled to dividends,
|
|
·
|
They are entitled to no liquidations rights,
|
|
·
|
Each share has the voting rights of all other voting shares combined, multiplied by 0.00001,
|
|
·
|
They have no conversion or redemption rights.
|
Note 6 - Debt
Our debt in certain categories went from $1,086,398 at December 31, 2017 to $1,822,730 at December 31, 2018 as follows:
|
|
12/31/18
|
|
|
12/31/17
|
|
Loans from related parties
|
|
$
|
103,074
|
|
|
$
|
100,033
|
|
Convertible notes payable, related party
|
|
|
114,165
|
|
|
|
118,600
|
|
Short-term convertible notes payable, net
|
|
|
627,928
|
|
|
|
687,863
|
|
Convertible notes payable in default
|
|
|
422,565
|
|
|
|
103,298
|
|
Short-term notes payable
|
|
|
15,501
|
|
|
|
17,191
|
|
Court Judgment liability
|
|
|
250,000
|
|
|
|
54,000
|
|
Derivative liability
|
|
|
365,497
|
|
|
|
-
|
|
Long-term convertible notes payable
|
|
|
25,000
|
|
|
|
5,413
|
|
Crypto currency notes payable
|
|
|
100,000
|
|
|
|
-
|
|
Totals
|
|
$
|
2,023,730
|
|
|
$
|
1,086,398
|
|
See Note 4 for a discussion of our related-party debts, including the first two entries in the above table.
Convertible notes payable
During the year ended December 31, 2017 we issued seven new convertible promissory notes in the amount of $213,040, receiving proceeds therefrom of the same amount. These convertible notes can convert to common stock at various different prices. We evaluated these convertible notes for beneficial conversion features and calculated a collective value of $209,040 which we are accounting for as debt discounts.
During the year ended December 31, 2017, we amortized $138,668 of debt discounts to interest expense.
Also during the year ended December 31, 2017, we converted two outstanding convertible notes payable to common stock, reducing principal owed by $49,249.
During the year ended December 31, 2018, we issued eight new convertible promissory notes in the amount of $633,000, containing original issue discounts totaling $71,688, for net proceeds of $561,313). These convertible notes can convert to common stock at various different prices. We evaluated these convertible notes for beneficial conversion features and calculated a collective value of $209,040 which we are accounting for as debt discounts. The notes are individually discussed below:
On December 27, 2017, we issued a convertible promissory note which was not funded until January 2, 2018. The note nominal amount was $78,000 and we received proceeds of $75,000, recording an original issue discount in the amount of $3,000. The note matures on September 30, 2018 and bears interest at 12% with any unpaid interest and principal at maturity bearing interest at 22%. The note could be converted at 58% of the lowest two trading prices during the twenty days prior to conversion. We initially recorded a discount on this note in the amount of $95,816 which included the $3,000 original issue discount and an initial derivative of $92,816 (see Derivative section below), but immediately amortized $17,816 to interest expense.
This note allowed the debtor certain prepayment rights, but incurring an interest penalty upon doing so. On February 14, 2018, we paid $94,923 to the creditor to pay this note in its entirety. During the period from issuance to retirement, we accrued $1,118 in interest and, upon paying the note, incurred additional interest expense of $15,805.
On February 1, 2018, we issued a promissory note in the amount of $60,000 and received $58,000 in proceeds, recording an original issue discount in the amount of $2,000. The note matures on February 1, 2019 and bears interest at 12%, with any unpaid principal and interest at maturity bearing interest at 18%. At any time 180 days after the issuance (or June 30, 2018) the lender may convert at a 40% discount of the three lowest trading prices during the previous twenty trading days prior to the notice of conversion. We initially recorded a discount on this note in the amount of $68,286 including the $2,000 original issue discount and an initial derivative of $66,286 (see Derivative section below), but immediately amortized $8,286 to interest expense. During the year ended December 31, 2018, we amortized the entire discount of $68,286 to interest expense. Additionally, during the year ended December 31, 2018, we accrued $5,195 of nominal interest. During 2018, we issued 23,084,728 shares, converting $40,000 of principal to equity.
The Company has certain prepayment rights and may prepay any outstanding interest or principal at the following rates: 0-90 days, 135%; 91-180 days:150%.
On February 12, 2018, we issued a promissory note in the amount of $55,125 and received proceeds of $50,000, recording an original issue discount in the amount of $5,125 . The note matures on February 5, 2019 and bears interest at 8%, with any unpaid principal and interest at maturity bearing interest at 16%. The lender may convert any outstanding principal and interest at 60% of the lowest trading price for twenty days prior to the notice of conversion. We initially recorded a discount on this note in the amount of $72,868 including the $5,125 original issue discount and an initial derivative of $67,743 (see Derivative section below), but immediately amortized $17,743 to interest expense. During the year ended December 31, 2018, we amortized the entire $72,868 of discount to interest expense. Additionally, during the year ended December 31, 2018, we accrued $3,112 of nominal interest. During 2018, we issued 44,543,712 shares, converting the entire principal and interest balances of $55,125 and $3,112, respectfully, to equity.
On February 7, 2018, we issued a convertible promissory note in the amount of $465,000. The first tranche of proceeds in the amount of $220,000 was received on February 12, 2018. The agreement calls for proceeds, original issue discounts and nominal liabilities as follows:
|
|
Proceeds
|
|
|
Original Issue Discount
|
|
|
Total Nominal Liability
|
|
Tranche 1
|
|
|
220,000
|
|
|
|
41,563
|
|
|
|
261,563
|
|
Future tranche(s)
|
|
|
180,000
|
|
|
|
23,438
|
|
|
|
203,438
|
|
Total
|
|
|
400,000
|
|
|
|
65,000
|
|
|
|
465,000
|
|
The note matured nine months from the date of payment of each tranche (therefore, the remaining unpaid principal is in default at December 31, 2018). The note bears interest at 6%, with any unpaid principal and interest at maturity bearing interest at 18%.
After 180 days, the lender has the right to convert any and all principal and interest to common stock at 65% of the lowest trading price over the twenty trading days prior to the notice of conversion. At any time during default, the lender may apply an additional market discount of 15%.
We originally recorded a discount on this note of $446,400 consisting of the original issue discount of $41,563, the initial derivative (see Derivative section below) of $277,337, and an equity incentive of $127,500 in the form of 15,000,000 shares which we valued on the fair value grant date. Of the $446,400 recorded as a discount, we immediately amortized $184,837 to interest expense. During the year ended December 31, 2018, we amortized the remaining $261,563 to interest expense and accrued $146,533 of nominal interest. During 2018, we issued 32,222,223 shares in conversion of $45,000 of principal.
On February 26, 2018, we issued a convertible promissory note in the amount of $100,000. We received the proceeds of $90,000 on the same date, recording an original issue discount of $10,000. The note matures on October 30, 2018 and bears interest at 12%, with any unpaid principal and interest at maturity bearing interest at 18%. The lender may convert any outstanding principal and interest at 60% of the average of the four lowest trading price for twenty five days prior to the notice of conversion. We initially recorded a discount on this note in the amount of $173,273 consisting of the $10,000 original issue discount and an initial derivative of $163,273 (see Derivative section below), but immediately amortized $73,273 to interest expense. During the year ended December 31, 2018, we amortized the entire remaining discount of $100,000 to interest expense. Additionally, during the year ended December 31, 2018, we accrued $10,574 of nominal interest. During 2018, we issued 46,700,000 shares, converting $14,498 of principal and $8,374 of interest to equity.
On March 9, 2018, we issued a convertible promissory note in the amount of $110,000. We received the proceeds of $100,000 on March 13, 2018, recording an original issue discount of $10,000. The note matures on March 5, 2019 and bears interest at 8%, with any unpaid principal and interest at maturity bearing interest at 16%. The lender may convert any outstanding principal and interest at 63% of lowest closing price for twenty trading days prior to the notice of conversion. We initially recorded a discount on this note in the amount of $131,224 consisting of the $10,000 original issue discount and an initial derivative of $121,224 (see Derivative section below), but immediately amortized $21,224 to interest expense. During the year ended December 31, 2018, we amortized an additional $64,250 of this discount to interest expense. At December 31, 2018, the unamortized discount on this note amounted to $45,750. Additionally, during the year ended December 31, 2018, we accrued $6,598 of nominal interest. During 2018, we issued 29,818,129 shares converting $40,000 and $2,011 of principal and interest, respectively.
On October 19, 2018, we issued a promissory note in the amount of $30,000, receiving proceeds of that amount. The note matures on April 19, 2020 and bears interest at 4%. Any unpaid principal and interest at maturity bears interest at 10%. During the year ended December 31, 2018, we accrued $245 in interest. After twelve months, the note may be converted into common shares at $0.004 per share (or 7,575,758 shares).
During the year ended December 31, 2018, we made principal and interest payments on existing convertible notes of $81,798 and $6,625, respectively, to Eric McRae with whom we are engaged in a lawsuit (see Note 7).
At December 31, 2018, $627,928 or our convertible notes payable were classified as short-term, $422,565 as in default and $25,000 as long term.
Crypto-currency notes payable
We were informed by the SEC in January of 2017 that the Tautachrome KLK20 token is considered to be a security by virtue of the fact that the Company will have to do work for the token to have value. We understand the law and that interpretation of the law, and we agree. This means that the token may only be sold to persons under which the sale would qualify under an available exemption from registration or an available exclusion from registration.
Our current offering of our KLK20 tokens are being made only to Non-US Persons under an exclusion from registration, and to US Persons who are accredited investors under an exemption from registration.
For US Persons, the Offering is being made only to accredited investors pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), Regulation D and Rule 506 promulgated thereunder.
The Offering is being made available to Non-US Persons pursuant to an exclusion from registration under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), Regulation S and Rules 901 through 905 promulgated thereunder.
On August 7, 2018, we issued a Crypto Exchange Promissory Note (“the Crypto Note”) in exchange for $100,000 in cash. The Crypto Note accrues interest at 4% until maturity which is 18 months from issue and 10% after maturity. The holder can convert unpaid principal and accrued interest into KLK20 tokens at any time at the rate of $0.25 per token. The holder may, for up to nine months after issuance, participate in a price guarantee: if the Company offers the tokens at less than $0.25 per token at any point for up to nine months after issuance, then the holder has the option of participating in the offer at the lower price.
During the year ended December 31, 2018, we accrued $1,667 of interest on this note.
Derivative liabilities
The above-referenced convertible promissory notes issued during the year ended December 31, 2018 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. The EITF reached a consensus that would establish a two–step approach in determining whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed by an evaluation of the instrument’s settlement provisions.
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.
The Company issued Subscription Notes from 2015 through 2018 in the United States and Australia which are convertible at discounted market rates and market prices based on the average of 5 trading day closing bids. The notes are convertible after 1 year from issuance; mature in 18 months from issuance; accrued at 5% interest; and a 10% default rate. These convertible notes have become tainted (“The Tainted Notes”) as a result of the issuance of convertible promissory notes issued in the United States since there is a possibility (however remote) that the Company would not have enough shares in the Treasury to satisfy all possible conversions.
The Convertible Note derivatives were valued as of issuance; conversion; redemption/settlement; and at the end of each quarterly period during 2018. The following assumptions were used for the valuation of the derivative liability related to the Notes:
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·
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The stock price of $0.084 to $0.0048 in this period would fluctuate with the Company projected volatility.
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·
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The notes convert with variable conversion prices based on the percentages of the low or average trades or bids over 20 to 25 trading days.
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·
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The effective discounts rates estimated throughout the periods range from 35% to 42% with potentially an additional discount.
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·
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The Holder would automatically convert the note before maturity if the registration was effective and the company was not in default.
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·
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The projected annual volatility for each valuation period was based on the historic volatility of the company are 96.1% – 270.6% (annualized over the term remaining for each valuation).
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·
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An event of default would occur 0% of the time, increasing 1.00% per month to a maximum of 20%.
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·
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The Holders would redeem the notes (with penalties up to 50% depending on the date and full–partial redemption) based on availability of alternative financing of 0% of the time, increasing 1.00% per month to a maximum of 5%.
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·
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The Holder would automatically convert the note at the maximum of 2 times the conversion price or the stock price on the date of valuation.
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·
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The Holder would automatically convert the note based on ownership or trading volume limitations.
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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 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 six instruments issued during the year ended December 31, 2018 range from 243% to 289%.
At each reporting date, we determine the fair market value for each derivative associated with each of the above instruments. At December 31, 2018, we determined the fair value of these derivatives were $365,497.
Changes in outstanding derivative liabilities are as follows:
Balance, December 31, 2017
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$
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-
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|
Changes due to new issuances
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788,679
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Changes due to extinguishments
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|
|
(326,339
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)
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Changes due to adjustment to fair value
|
|
|
(96,843
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)
|
Balance, December 31, 2018
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|
$
|
365,497
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Court Judgment Liability
Our Court Judgment Liability was increased to $250,000 from $54,000 as a result of the settlement on the McRae matter, a reduction of $5,000 and an additional accrual of $201,000 to state the liability at the amount of our 50 million-share offer to McRae (See Note 7).
Short-Term Notes Payable
Short-term notes payable went from $17,191 at December 31, 2017 to $15,501 at December 31, 2018 owing entirely to exchange rate fluctuations.
Note 7 – Litigation Gains and Losses
Morgan Lawsuit
Background
The May 21, 2015 merger of the Company with Click Evidence, Inc. (“Click”) resulted in the transfer of Click’s assets and interests from Click to the Company and in Click becoming an asset-less shell inside the Company and then being disposed of on November 25, 2015. In the November 25, 2015 conveyance of the Click to the new owner, its name was changed to BH Trucking, Inc. (“BH”).
Filing and service
A first lawsuit was filed in the Superior Court of the State of Arizona, Pima County, by a former consultant to Click, Richard Morgan (“Morgan”). This lawsuit was served on December 2, 2015, against Click/BH, with the Company also named in the lawsuit, but not served by it or effectively made aware of it until 2017.
Allegation
The lawsuit claimed that the consultant’s agreement with Click/BH permitted him to recover a finder’s fee for the cashless stock swap that achieved the merger on May 21, 2015. The new owner of Click/BH, the only party served, declined to defend the lawsuit allowing it to go to default.
Default judgment
On December 16, 2016, the Court issued a default judgment for the plaintiff and against the defendants in the amount of $2,377,915. The Company believes that having not been served or made aware of the lawsuit, it is not a target of the judgment.
Second Lawsuit
On January 23, 2017, the Company and its CEO were served in a second lawsuit by Morgan alleging that the Company’s intellectual property assets that were transferred to it by Click under the May 21, 2015 merger of the Company with Click, were fraudulently removed from Click/BH, and seeks to have them returned to Click/BH.
Charge to the Financial Statements
The Company believes that the second lawsuit is baseless, and is defending itself vigorously against it. The Company also believes that being named but not served, the default judgment in Morgan’s first lawsuit does not apply to the Company. Nevertheless, out of an abundance of caution, we have included in liabilities the default amount of $2,377,915 plus $4,459 interest at 4.5% from December 16, 2016, the date of the judgment, to December 31, 2016.
On August 29, 2017, the Court set aside the judgment in the First Lawsuit resulting in the removal of the liability of $2,377,915 and accrued interest of $4,459 at December 31, 2016, as well as the additional accrued interest recorded during 2017 of $44,294, for a total gain of $2,426,668.
On August 14, 2018, we settled this lawsuit in full by issuing 10 million shares. We valued the shares at their grant date fair values, removing the judgment liability of $5,000 and recording a $55,000 loss on litigation.
McRae Lawsuit
On October 7, 2017, Eric L. McRae of Sedgwick County, Kansas (“McRae”) filed a complaint against the Company in the United States District Court for the District of Kansas asserting a claim that Tautachrome breached a written agreement for the employment of McRae and seeking an award of damages in excess of $75,000.
On October 17, 2018, we offered McRae 50 million shares in settlement of all outstanding legal actions against us. McRae declined the offer. However, we re-evaluated the liability on these lawsuits from $49,000 to $250,000 based on the closing price of our common stock on the date of the offer. We recognized a loss on litigation of $201,000 in so doing.
Note 8 – Income Taxes
Deferred income taxes reflect the tax consequences on future years of differences between the tax bases:
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|
12/31/18
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|
|
12/31/17
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Net operating loss carry-forward
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$
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3,380,285
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|
|
$
|
2,103,201
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|
|
|
|
|
|
|
|
|
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Deferred tax asset
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|
$
|
709,860
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|
|
$
|
820,248
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|
Valuation allowance
|
|
|
(709,860
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)
|
|
|
(820,248
|
)
|
Net future income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred taxes for 2018 and 2017 are calculated using a marginal tax rate of 21% and 39%, respectively.
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 2022.
Note 9 – Subsequent Events
On April 1, 2019, we issued 40,000 shares of Series E Convertible Preferred Stock as consideration to ArkNet, Inc. pursuant to our License Agreement with that Company (see Note 4).
As of April 10, 2019, we issued 939,263,152 shares in conversion of convertible promissory notes.