The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2018
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. and hereinafter 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.
|
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 June 30, 2018. 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, 2017, as reported in Form 10-K filed with the Securities and Exchange Commission.
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.
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 six months ended June 30, 2018 and 2017 as the effect of our potential common stock equivalents would be anti-dilutive.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU 201701, Business Combinations (Topic 805);
Clarifying the Definition of a Business
. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 201711,
Earnings Per Share
(Topic 260),
Distinguishing Liabilities from Equity
(Topic 480),
Derivatives and Hedging
(Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 47020,
Debt—Debt with Conversion and Other Options
), including related EPS guidance (in Topic 260). The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
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
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 market 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 year ended December 31, 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:
|
·
|
We accrued $4,924 in interest payable to the Trust and paid $0 of interest for both years.
|
|
|
|
|
·
|
The outstanding balance at December 31, 2017 to the 22
nd
Trust was $100,033 and $16,012 for principal and interest, respectively, after adjustments for foreign exchange effect.
|
For the six months ended June 30, 2018, we accrued $2,458 to the 22
nd
Trust. At June 30, 2018, we owed $99,989 and $18,386 in principal and interest to the Trust, respectively.
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%.
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 under which the Company may borrow such money from Jon as Jon in his sole discretion is willing to loan.
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 $3,976 was recorded as additional paid-in capital for the six months ended June 30, 2018. The Company evaluated Dr. Leonard’s note for the existence of a beneficial conversion feature and determined that none existed.
During the six months ended June 30, 2018, Dr. Leonard paid $1,830 of company expenses and this amount is included in our loan to him. Also during the six months ended June 30, 2018, we repaid Dr. Leonard $8,050 of principal on his loan. At June 30, 2018, we owed Dr. Leonard $94,940.
In addition, at June 30, 2018, we owed $14,735 of related-party accounts payable, mostly arising from Company expenses paid by related parties.
Note 5 – Capital
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. Additionally, Phases 2,3,4 and 5 were completed on January 16, 2018, February 26, 2018, March 8, 2018 and June 6, 2018, respectively. During the six months ended June 30, 2018, we accrued an additional 2,800,000 shares, charging general and administrative expenses with $33,460.
During the six months ended June 30, 2018, we issued 1,996,331 shares in conversion of an outstanding convertible promissory note. We recorded a reduction of the balance of this note of $10,000 and $1,155 of principal and interest, respectively. We recognized no gain or loss on their conversions as they were converted within the terms of conversion.
Also during the six months ended June 30, 2018, 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.
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).
Imputed Interest
Certain of our promissory notes bear no nominal interest. We therefore imputed interest expense and increase Additional Paid in Capital. For the six months ended June 30, 2018, we imputed $9,334 of such interest.
Note 6 – Debt
Loans from related parties
As is discussed in Note 4, at June 30, 2018 we owed $212,315 in related-party debts consisting of $98,989 and $18,386 in unpaid principal and interest, respectively, to the 22
nd
Trust and $94,940 owed to our CEO, Dr. Jon Leonard.
Convertible notes payable
During the year ended December 31, 2017 we issued seven convertible promissory notes in the aggregate amount of $213,040, receiving proceeds therefrom of the same amount. These convertible notes can convert to common stock at various 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.
At December 31, 2017, $95,798 of our convertible notes payable were in default.
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 six months ended June 30, 2018, we amortized an additional $17,846 of this discount to interest expense. Additionally, during the six months ended June 30, 2018, we accrued $2,834 of nominal interest.
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 six months ended June 30, 2018, we amortized an additional $20,472 of this discount to interest expense. Additionally, during the six months ended June 30, 2018, we accrued $1,748 of nominal interest.
The Company has prepayment rights as follows:
Days
|
|
%
|
|
1-30
|
|
|
115
|
%
|
31-60
|
|
|
120
|
%
|
61-90
|
|
|
125
|
%
|
91-120
|
|
|
130
|
%
|
121-150
|
|
|
135
|
%
|
151-180
|
|
|
140
|
%
|
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 matures nine months from the date of payment of each tranche (thus, the maturity date for the first tranche is November 9, 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 six months ended June 30, 2018, we amortized an additional $99,030 to interest expense and accrued $5,919 of nominal interest.
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 six months ended June 30, 2018, we amortized an additional $37,861 of this discount to interest expense. Additionally, during the six months ended June 30, 2018, we accrued $4,066 of nominal interest.
The Company has the option to prepay the outstanding interest at principal at any time prior to 180 days after issue, incurring the following additional interest expense: 0-90 days: 135%; 91-180 days 150%. After 180 days after issuance, no prepayment is allowed.
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 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 six months ended June 30, 2018, we amortized an additional $23,640 of this discount to interest expense. Additionally, during the six months ended June 30, 2018, we accrued $3,367 of nominal interest.
The Company has the option to prepay the outstanding interest at principal at any time prior to 180 days after issue, incurring the following additional interest expense: 0-90 days: 115%; 91-180 days 125%.
During the quarter ended June 30, 2018, we made principal and interest payments on existing convertible notes of $66,750 and $5,137, respectively, to Eric McRae with whom we are engaged in a lawsuit (see Note 7).
Convertible notes payable at June 30, 2018 and December 31, 2017 and their classification into long-term, short-term and in-default were as follows:
|
|
06/30/18
|
|
|
12/31/17
|
|
All convertible promissory notes
|
|
|
|
|
|
|
Unpaid principal
|
|
|
1,435,854
|
|
|
|
960,311
|
|
Discounts
|
|
|
(474,340
|
)
|
|
|
(146,297
|
)
|
Convertible notes payable, net
|
|
$
|
961,514
|
|
|
$
|
814,014
|
|
|
|
|
|
|
|
|
|
|
Classified as short-term
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
|
1,380,306
|
|
|
|
825,013
|
|
Discounts
|
|
|
(474,340
|
)
|
|
|
(119,710
|
)
|
Convertible notes payable - short-term, net
|
|
$
|
905,966
|
|
|
$
|
705,303
|
|
|
|
|
|
|
|
|
|
|
Classified as long-term
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
|
-
|
|
|
|
32,000
|
|
Discounts
|
|
|
-
|
|
|
|
(26,587
|
)
|
Convertible notes payable - short-term, net
|
|
$
|
-
|
|
|
$
|
5,413
|
|
|
|
|
|
|
|
|
|
|
Classified as in default
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
|
55,548
|
|
|
|
103,298
|
|
Discounts
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable - short-term, net
|
|
$
|
55,548
|
|
|
$
|
103,298
|
|
Derivative liabilities
The above-referenced convertible promissory notes issued during the six months ended June 30, 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 2017 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 the quarterly periods ended 3/31/18 and 6/30/18. The following assumptions were used for the valuation of the derivative liability related to the Notes:
|
·
|
The stock price of $0.011 to $0.0078 in this period would fluctuate with the Company projected volatility.
|
|
|
|
|
·
|
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.
|
|
|
|
|
·
|
The effective discounts rates estimated throughout the periods range from 35% to 42% with potentially an additional discount.
|
|
|
|
|
·
|
The Holder would automatically convert the note before maturity if the registration was effective and the company was not in default.
|
|
|
|
|
·
|
The projected annual volatility for each valuation period was based on the historic volatility of the company are 87.0% – 208.0% (annualized over the term remaining for each valuation).
|
|
|
|
|
·
|
An event of default would occur 0% of the time, increasing 1.00% per month to a maximum of 20%.
|
|
|
|
|
·
|
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%.
|
|
|
|
|
·
|
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.
|
|
|
|
|
·
|
The Holder would automatically convert the note based on ownership or trading volume limitations.
|
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 six months ended June 30, 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 June 30, 2018, we determined the fair value of these derivatives were $1,372,858.
Changes in outstanding derivative liabilities are as follows:
Balance, December 31, 2017
|
|
$
|
-
|
|
Changes due to new issuances
|
|
|
788,679
|
|
Changes due to extinguishments
|
|
|
(105,866
|
)
|
Changes due to adjustment to fair value
|
|
|
690,045
|
|
Balance, June 30, 2018
|
|
$
|
1,372,858
|
|
Note 7 – Litigation
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 entity 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, in Q3 2017 we 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.
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.
Although Tautachrome refutes each and every allegation made by McRae in the complaint and intends to vigorously defend against it, we have accrued $49,000 to expense against this contingency.
Note 8 – Income Taxes
Deferred income taxes reflect the tax consequences on future years of differences between the tax bases:
|
|
6/30/18
|
|
|
12/31/17
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
|
|
2,566,131
|
|
|
|
2,103,201
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset at 21% and 39%, respectively
|
|
$
|
538,888
|
|
|
$
|
820,248
|
|
Valuation allowance
|
|
|
(538,888
|
)
|
|
|
(820,248
|
)
|
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
Subsequent events were evaluated through the date of this report.