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
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
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 financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual amounts could differ significantly from these estimates.
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, 2016 and 2015.
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 December 31, 2016 and 2015, we had $603 and $3,648 Australian Dollars, respectively ($434 and $2,657 US Dollars, respectively) deposited into Australian banks.
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, 2016 on a recurring basis:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Gains
(Losses)
|
|
Accounts payable and accrued expenses
|
|
$
|
275,760
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts payable - related party
|
|
|
25,486
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans from related parties
|
|
|
99,434
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable - related party
|
|
|
49,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term convertible notes payable, net
|
|
|
583,674
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term notes payable
|
|
|
15,858
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Court judgment liability
|
|
|
2,382,374
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term portion of long-term debt
|
|
|
11,034
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term convertible notes payable, net
|
|
|
87,528
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term notes payable
|
|
|
19,659
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL LIABILITIES
|
|
$
|
3,549,967
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table presents assets and liabilities that were measured and recognized at fair value as of December 31, 2015 on a recurring basis:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Gains
(Losses)
|
|
Accounts payable and accrued expenses
|
|
$
|
181,364
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts payable - related party
|
|
|
7,359
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans from related parties
|
|
|
80,108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible note payable, related party
|
|
|
22,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term convertible notes payable
|
|
|
409,456
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term notes payable
|
|
|
16,025
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
23,812
|
|
|
|
(17,882
|
)
|
Long-term convertible notes payable
|
|
|
104,948
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL LIABILITIES
|
|
$
|
821,420
|
|
|
$
|
-
|
|
|
$
|
23,812
|
|
|
$
|
(17,882
|
)
|
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 8 for our reconciliation of income tax expense and deferred income taxes as of and for the years ended December 31, 2016 and 2015.
Recent Accounting Pronouncements
Income Taxes
In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory ("ASU 2016-16"), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06 will be effective for the Company in its first quarter of 2019.
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company beginning in its first quarter of 2018.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning in its first quarter of 2020, and early adoption is permitted.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for the Company beginning in its first quarter of 2019.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 will be effective for the Company beginning in its first quarter of 2021 and early adoption is permitted. The Company does not believe the adoption of ASU 2016-13 will have a material impact on its consolidated financial statements.
The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company currently expects to adopt the new revenue standards in its first quarter of 2018 utilizing the full retrospective transition method. The Company does not expect adoption of the new revenue standards to have a material impact on its consolidated financial statements.
The adoption of these standards is not expected to have a material impact on our financial position or results of operations.
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 $320,156 and $366,403 for the years ended December 31, 2016 and 2015, respectively, recurring losses, and negative working capital at December 31, 2016 and 2015. 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, 2016 and 2015, we had the following transactions with 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:
·
|
·
|
We received $18,331 and $5,408, respectively, in cash loans to pay operating expenses and repaid $0 and $162,918, respectively, in principal.
|
|
|
|
|
·
|
We accrued $4,400 and $4,329, respectively, in interest payable to the Trust and paid $0 and $1,571, respectively, in interest payments.
|
|
|
|
|
·
|
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.
|
|
|
|
|
·
|
The outstanding balance at December 31, 2016 to the 22
nd
Trust was $98,344 and $11,035 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, 2015 was $80,107. During the year ended December 31, 2016, we received $18
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 was, until November 14, 2016, on our Board of Directors and remains 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".
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. The outstanding loan amount at December 31, 2015 was $22,160. During the year ended December 31, 2016, the Company borrowed $27,000 leaving an ending balance owed to Jon of $49,160.
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 $3,199 and $1,767 was recorded as additional paid-in capital for the years ended December 31, 2016 and 2015, respectively. The Company evaluated Dr. Leonard's note for the existence of a beneficial conversion feature and determined that none existed.
All other related party balances relate to certain officers and directors who paid expenses on behalf of the company and were reimbursed for a portion of those expenses. Balances owed at December 31, 2015 were $686. During the year ended December 31, 2016, these related parties paid $30,007 of expenses on behalf of the Company and were reimbursed $16,259, leaving a balance of $14,361 after adjustment for foreign exchange effect.
On October 20, 2016, the Company filed a Certificate of Designations with the State of Delaware creating 13,795,104 shares of Series D Preferred Stock (the “Preferred Shares”) to effect the exchange. On October 27, 2016, the Company redeemed 1,379,510,380 common shares by issuing 13,795,104 Preferred Stock Series D Shares to three major shareholders (see Note 5).
Note 5 – Capital Structure
Common Stock
At December 31, 2015, we had 2,987,633,430 common shares issued and outstanding from a total of four billion authorized.
As described in Note 5, 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.
In October, 2016, we issued 51,666,667 common shares to convert $60,000 of convertible notes payable, and $604 in accrued interest, to common stock.
In November, 2016, we received a Notice of Conversion from a holder of a US Dollar denominated convertible promissory note requesting a conversion of the outstanding principal and interest into the convertible amount of 2,142,857 common shares . We recorded a reduction of principal and interest of $10,000 and $586 of accrued interest, respectively, and we recorded an offsetting common stock payable in the amount of $10,586.
Preferred Stock
On September 29, 2016, the Company’s principal shareholders (“Principals”), Dr. Jon N. Leonard, Micheal P. Nugent, and Matthew W. Staker, offered to retire 1,379,510,380 of their common shares in exchange for a new series of non-trading preferred shares.
On October 5, 2016, the Board of Directors voted to accept the share retirement offer, and on October 20, 2016, the Company filed a Certificate of Designations with the State of Delaware creating 13,795,104 shares of Series D Preferred Stock (the “Preferred Shares”) to effect the exchange.
Share Exchange ratio and Preservation of Voting Rights
In the share exchange, each principal received 1 Preferred Share for each 100 common shares retired Each share of Preferred Shares entitles the holder to 100 votes (and each 1/100
th
of a Preferred Share entitles the holder to one vote).
Conversion Rights
A holder may convert Preferred Shares to common under the following conditions:
Automatic conversion – each Preferred Share automatically converts to 100 common shares upon the earlier of
|
·
|
The end of 5 years (5:00 PM EST, October 5, 2021), or
|
|
|
|
|
·
|
A change of control
|
Optional conversion - After October 5, 2017, each holder may convert each share into 100 shares of common stock immediately following a period of ten consecutive trading days during which the average closing or last sale price exceeds $3.00 per share. Also, each holder may convert into 110 shares of common stock at any time that the shares are listed on a National exchange (for example, the NYSE or NASDAQ).
Related-Party Stock Exchange
On October 27, 2016, the Company entered into the above outlined Share Exchange Agreement with related-parties
Common stock ownership structure immediately before and after execution of the Share Exchange Agreement was as follows:
|
|
Common Stock Ownership
|
|
|
|
Immediately Before
|
|
|
Effect of
|
|
|
Immediately After
|
|
|
|
Shares
|
|
|
%
|
|
|
Agreement
|
|
|
Shares
|
|
|
%
|
|
Jon Leonard, PhD
|
|
|
1,387,829,545
|
|
|
|
46.5
|
%
|
|
|
(1,009,330,578
|
)
|
|
|
378,498,967
|
|
|
|
23.5
|
%
|
Micheal Nugent
|
|
|
620,756,473
|
|
|
|
20.8
|
%
|
|
|
(92,613,893
|
)
|
|
|
528,142,580
|
|
|
|
32.8
|
%
|
Matthew Staker
|
|
|
346,957,386
|
|
|
|
11.6
|
%
|
|
|
(277,565,909
|
)
|
|
|
69,391,477
|
|
|
|
4.3
|
%
|
Robert McClelland
|
|
|
8,403,524
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
8,403,524
|
|
|
|
0.5
|
%
|
Patrick Greene
|
|
|
2,093,080
|
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
2,093,080
|
|
|
|
0.1
|
%
|
Non Affiliates
|
|
|
621,593,422
|
|
|
|
20.8
|
%
|
|
|
-
|
|
|
|
621,593,422
|
|
|
|
38.7
|
%
|
Totals
|
|
|
2,987,633,430
|
|
|
|
100.0
|
%
|
|
|
(1,379,510,380
|
)
|
|
|
1,608,123,050
|
|
|
|
100.0
|
%
|
Fair Values
The closing price of the common stock on the date of the Share Exchange Agreement was $0.019, resulting in a valuation of the common stock of $26,210,697. We determined that the fair value of the Series D Preferred Shares was $27,299,028 using the following inputs:
|
1.
|
The common stock price was $0.019;
|
|
|
|
|
2.
|
A change of control having a 20% likelihood in 2018 and 2019 each, triggering an automatic conversion of 100 common shares per Series D preferred shares;
|
|
|
|
|
3.
|
The Company obtaining a NASDAQ/NYSE listing estimated at 10% in 2017, 50% in 2018 and 50% in 2019 triggering a conversion at 110 common shares per Series D preferred share;
|
|
|
|
|
4.
|
The Company’s stock price was modeled using geometric Brownian motion with a volatility of 279% volatility (based on the Company’s historical volatility);
|
|
|
|
|
5.
|
The common shares exchanged for the Series D preferred were valued based on the quoted market price on the date of exchange;
|
We therefore recorded a loss on the exchange of $1,088,331 computed as the difference between the value of the common and preferred shares.
Imputed Interest
Several of our loans made in our Australian subsidiary 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, 2016 and 2015, these amounted to $13,274 and $7,501, respectively.
Beneficial Conversion Features of Convertible Promissory Notes
During the year ended December 31, 2016, we borrowed $193,164 from 26 accredited investors in Australia (see Note 7) which contained features allowing the holder to convert the principal and accumulated interest into common stock. We evaluated these notes for beneficial conversion features and calculated a value of $147,965, all of which has been immediately expensed as interest expense as the notes are due on demand.
At December 31, 2016, all outstanding convertible promissory notes issued in Australia can convert to an aggregate of 82,873,300 shares of common stock.
Also during the year ended December 31, 2016, we borrowed $109,758 from four accredited investors in the United States (see Note 7). 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 $187,851, which is accounted for as debt discounts. During the year ended December 31, 2016,we amortized $106,628 of debt discounts to interest expense.
At December 31, 2016, all outstanding convertible promissory notes issued in the United States can convert to an aggregate of 28,473,915 shares of common stock.
Note 6 – Asset Acquisition
Acquisition of Photosweep, LLC
On January 15, 2016, we acquired the Photosweep asset (“Photosweep”), which we accounted for as an asset purchase. Photosweep’s assets at the point of purchase consisted only of a business plan.
Under the terms of the Acquisition, the Registrant paid $39,000 and issued 13,000,000 shares of its common stock to acquire 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.
As of December 31, 2016, we amortized $92,862 to expense and at December 31, 2016 we recorded an asset impairment of $299,738 as a result of the Company’s annual impairment review.
Note 7 - Debt
Our debt in certain categories went from $632,697 at December 31, 2015 to $861,050 at December 31, 2016 as follows:
|
|
12/31/16
|
|
|
12/31/15
|
|
Loans from related parties
|
|
$
|
99,434
|
|
|
$
|
80,108
|
|
Convertible notes payable, related party
|
|
|
49,160
|
|
|
|
22,160
|
|
Short-term convertible notes payable, net
|
|
|
583,674
|
|
|
|
409,456
|
|
Short-term notes payable
|
|
|
15,858
|
|
|
|
16,025
|
|
Court Judgment liability
|
|
|
2,382,374
|
|
|
|
-
|
|
Long-term notes payable (short term portion)
|
|
|
11,034
|
|
|
|
-
|
|
Long-term notes payable (long term portion)
|
|
|
19,659
|
|
|
|
-
|
|
Long-term convertible notes payable
|
|
|
82,231
|
|
|
|
104,948
|
|
Totals
|
|
$
|
3,248,721
|
|
|
$
|
632,697
|
|
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, 2016, we borrowed $193,164 from 26 accredited investors in Australia. These promissory notes can be converted into shares of our common stock at the rate of AU$0.01 per share (the aggregate of which shares convertible for all outstanding Australian convertible notes at December 31, 2016 is 82,873,300). These notes are callable by the makers at any time and accrue interest at 5%. For the year ended December 31, 2016, we accrued $29,343 of interest on these notes and made no interest payments. We evaluated these notes for beneficial conversion features and calculated a value of $147,965, all of which has been immediately expensed as interest expense as the notes are due on demand.
Also during the year ended December 31, 2016, we issued four convertible promissory notes to four accredited investors in exchange for $109,758 in cash. These promissory notes can be converted into shares of our common stock at various separately-negotiated rates (the aggregate of which shares convertible for all outstanding USA convertible notes at December 31, 2016 is 28,473,915).
We evaluated these notes for beneficial conversion features and calculated a value of $77,852 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 beneficial conversion features of $110,000.
During the year ended December 31, 2016, we amortized $106,628 of debt discounts on convertible promissory notes originating in the United States to interest expense.
The aggregate amount of shares that may be issued upon conversion for convertible notes issued in both Australia and the Unites States is 111,347,215.
One of the eight accredited investors included in the above paragraph is the brother of our Board Chairman and Chief Executive Officer, Dr. Jon Leonard. This $5,000 related-party convertible promissory note is dated August 9, 2015, matures on February 26, 2017, pays interest at 5%, and may convert into 1,020,408 common shares.
Derivative liability
The eight convertible promissory notes issued in the United States 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 years ended December 31, 2016 and 2015 are as follows:
|
|
12/31/16
|
|
|
12/31/15
|
|
Beginning balances
|
|
$
|
23,812
|
|
|
$
|
-
|
|
New issuances
|
|
|
-
|
|
|
|
5,930
|
|
Retirements
|
|
|
(23,812
|
)
|
|
|
-
|
|
Changes in Fair value
|
|
|
-
|
|
|
|
17,882
|
|
Ending balances
|
|
$
|
-
|
|
|
$
|
23,812
|
|
In addition to the above, we recorded a liability in the amount of $2,382,374 due to a Court Judgment explained in Note 8.
Note 8 – Litigation Loss
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 Financials
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.
Note 9 – Income Taxes
Deferred income taxes reflect the tax consequences on future years of differences between the tax bases:
|
|
12/31/16
|
|
|
12/31/15
|
|
Net operating loss carry-forward
|
|
$
|
4,048,660
|
|
|
$
|
1,109,259
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset at 39%
|
|
$
|
1,578,977
|
|
|
$
|
432,611
|
|
Valuation allowance
|
|
|
(1,578,977
|
)
|
|
|
(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 2022.
Note 10 – Subsequent Events
During the first quarter of 2017, we issued an additional 3,243,243 shares for conversion of principal and interest on convertible promissory notes issued in the United States.
We have evaluated subsequent events through the date of this report.