TTCM Tautachrome Inc (CE)

NOTES TO UNAUDITED FINANCIAL STATEMENTS

MARCH 31, 2020

Note 1 – Organization and Nature of Business

History

Tautachrome, 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, uniquely exploiting the technologies of the Augmented Reality sector, the blockchain/cryptocurrency sector and the smartphone picture and video technology sector. We have high-speed blockchain concepts under development aiming to couple with the Company’s revolutionary patents and licensing in augmented reality, smartphone-image authentication and imagery-based social networking interaction.

Tautachrome is currently pursuing three main avenues of business activity based on our patented activated imaging technology, our blockchain cryptocurrency products, and our licensing of the patent pending ARk technology (together banded “KlickZie” technology):

Since its public announcement on September 25, 2017 (via SEC form 8-K) that it would be using its Twitter site (@Tautachrome_Inc) (https://twitter.com/tautachrome_inc) to post important Company information, and finding this method of publicizing important Company information both fast and effective, the Company has continued to use this means of public communication almost exclusively, supplemented occasionally with Current Reports via SEC Form 8-Ks. Shareholders are advised to follow us on Twitter to be current on the Company’s disclosures in conformity with Regulation FD.

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 ended March 31, 2020. 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, 2019, as reported in Form 10-K filed with the SEC filed on March 30, 2020.

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.

Revenue Recognition

The Company sells credits in exchange for cash. These credits can be redeemed for ARks which are geo-location objects downloadable into various digital devices. We recognize revenues once the customer has redeemed previously-purchased credits in exchange for ARks. Until that point, any cash received in exchange for credits is accounted for as liabilities.

The company recognizes revenues in accordance with ASC 606 – Revenue From Contracts with Customers which proscribes a five-step process in evaluating the revenue recognition process:

Step 1: Identify the contract with a customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

The company has determined that the performance obligations are satisfied once the purchased credits are exchanged for ARks. As of March 31, 2020, we have recorded $2,616 in liabilities.

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 three months ended March 31, 2020 as the effect of our potential common stock equivalents would be anti-dilutive.

Recent Accounting Pronouncements

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard was effective for us on January 1, 2019 and we have adopted and implemented it. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

Note 3 – Going Concern

In the third quarter 2019, we began operations with our ARknet platform, and in October we acquired assets to enter the business ARk vertical in our market. We will require additional capital to exploit this vertical and to commercialize others. There is no guarantee that we will be able acquire the capital to exploit and commercialize the ARknet markets we envision so as to generate positive cash flows from operations. For these reasons, 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.

Management intends to raise additional capital, partly through convertible debt, partly through the direct sale of equity and partly through partnerships with businesses with whom we will provide exclusive use of ARknet techniques in their arenas of operation. We will commit those funds to further refine and develop our ARknet platform. In addition, we intend to market our products through Google and Facebook.

Note 4 – Related Party Transactions

For the three months ended March 31, 2020, we accrued $1,198 of interest to the 22^nd Trust (the “Trust”), the trustee of whom is Sonny Nugent, the son of our major shareholder and former Chief Executive Officer, Micheal Nugent. The outstanding balances of unpaid principal and interest at March 31, 2020 were $95,765 and $26,205, respectively. The outstanding balances of unpaid principal and interest at December 31, 2019 were $98,032 and $25,361, 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%.

On July 11, 2019, our CEO and Board Chairman contributed $13,750 to the company which was accounted for as additional paid in capital.

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 Dr. Leonard as Dr. Leonard 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 $1,529 was recorded as additional paid-in capital for the three months ended March 31, 2020. The Company evaluated Dr. Leonard’s note for the existence of a beneficial conversion feature and determined that none existed.

During the three months ended March 31, 2020, we repaid $23,918 to Dr. Leonard. At March 31, 2020, the balanced owed Dr. Leonard is $55,256.

We also owe $33,801 to a Board member for convertible notes payable for loans he made to the company of which $27,825 is in default at March 31, 2020. The notes bear interest at 5% (10% after maturity) and may convert at $0.0025 per share. We originally recorded a discount of $755 in 2019, amortizing $59 and $75 during 2019 and 2020, respectively. The unamortized discount and net liabilities at March 31, 2020 are $621 and $33,180, respectively.

On February 2, 2020, a related-party convertible note in the amount of $27,825 became due and was not paid. We are presenting this note on the balance sheet as “Related-party convertible note payable in default” and are currently renegotiating this note with the related party.

On October 10, 2019, we issued a convertible promissory note in the amount of $62,500 to Arknet in exchange for that amount of proceeds. The note bears interest at 5% (10% after maturity), matures 18 months from the date of the note and can covert to common stock at $0.005 per share. We originally recorded a discount of $19,278 in 2019, amortizing $2,701 and $2,831 during 2019 and 2020, respectively. The unamortized discount and net liabilities at March 31, 2020 are $13,746 and $48,754, respectively.

On December 19, 2019, we issued a convertible promissory note in the amount of $60,000 to Arknet in exchange for that amount of proceeds. The note bears interest at 5% (10% after maturity), matures 18 months from the date of the note and can covert to common stock at $0.004 per share. We originally recorded a discount of $24,123 in 2019, amortizing $2,010 and $4,038 during 2019 and 2020, respectively. The unamortized discount and net liabilities at March 31, 2020 are $18,075 and $41,925, respectively.

During the three months ended March 31, 2020, we issued four promissory notes to Arknet in the aggregate amount of $285,000. The notes mature between June 24, 2021 and August 10, 2021, bear interest at 5% (10% after maturity) and can convert to common stock between $0.0025 and $0.0040 per common share. We originally recorded discounts on these notes in the aggregate of $25,761, amortizing $1,924 during the three months ended March 31, 2020. The unamortized discount and net liabilities at March 31, 2020 for these four notes are $23,837 and $261,163, respectively.

Note 5 – Capital

During the year ended December 31, 2019 we issued 1,571,976,979 shares as follows:

During the three months ended March 31, 2020, we issued 4,652,089 shares to a creditor in Australia to convert an outstanding convertible note in the amount of US$2,331 of principal and US$460 of accrued interest. We recognized a loss on the conversion of this debt in the amount of $27,448 and retired $173 of derivative liabilities.

During the three months ended March 31, 2020, we recorded stocks payable to two suppliers in the amount of $22,412.

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 containing a par value of $0.0001. This series of preferred shares have the following rights, limitations, restrictions and privileges:

These shares were recorded as issued on January 31, 2020.

Imputed Interest

Certain of our promissory notes bear no nominal interest. We therefore imputed interest expense and increased Additional Paid in Capital. For the three months ended March 31, 2020, we imputed $3,839 of such interest.

Note 6 – Debt

Loans from related parties

At March 31, 2020 we owed $102,880 in related-party loans consisting of $95,765 respectively, to the 22^nd Trust and $7,115 owed to a related-party Board member .

We also owe $33,801 of convertible notes payable to a Board member for loans he made to the company. The additional $7,115 is treated as an advance. The notes bear interest at 5% and may convert at $0.0025 per share.

On October 10, 2019, we issued a convertible promissory note in the amount of $62,500 to Arknet in exchange for that amount of proceeds. The note bears interest at 5% (10% after maturity), matures 18 months from the date of the note and can covert to common stock at $0.005 per share. We originally recorded a discount of $19,278 in 2019, amortizing $2,701 and $2,831 during 2019 and 2020, respectively. The unamortized discount and net liabilities at March 31, 2020 are $13,746 and $48,754, respectively.

On December 19, 2019, we issued a convertible promissory note in the amount of $60,000 to Arknet in exchange for that amount of proceeds. The note bears interest at 5% (10% after maturity), matures 18 months from the date of the note and can covert to common stock at $0.004 per share. We originally recorded a discount of $24,123 in 2019, amortizing $2,010 and $4,038 during 2019 and 2020, respectively. The unamortized discount and net liabilities at March 31, 2020 are $18,075 and $41,925, respectively.

During the three months ended March 31, 2020, we issued four promissory notes to Arknet in the aggregate amount of $285,000. The notes mature between June 24, 2021 and August 10, 2021, bear interest at 5% (10% after maturity) and can convert to common stock between $0.0025 and $0.0040 per common share. We originally recorded discounts on these notes in the aggregate of $25,761, amortizing $1,924 during the three months ended March 31, 2020. The unamortized discount and net liabilities at March 31, 2020 for these four notes are $23,837 and $261,163, respectively.

Convertible notes payable

On January 29, 2019, we issued 3,623,055 to a certain Australian individual who made baseless claims against the Company other than two existing convertible promissory notes which the Company acknowledged. Rather than engage in a prolonged international legal matter, we issued these shares in complete satisfaction of any and all claims against the Company. We valued the shares at their grant date fair values, reduced unpaid principal and interest in the amount of $4,258 and $695, respectively, and recorded a $1,330 gain on this settlement.

During the three months ended March 31, 2020, we amortized $128,166 of debt discounts to interest expense, accrued $22,491 of interest on existing notes. Additionally during the three months ended March 31, 2020, we issued 4,652,089 common shares to extinguish a note payable in the amount of $2,331 and $460 of unpaid principal and interest, respectively, and recorded a loss on conversion of $27,448 in so doing.

At March 31, 2020, $32,000 of our third-party convertible notes payable and $27,825 of related-party convertible notes were in default.

Convertible notes payable (excluding related-party convertible notes which is discussed in Note 4) at March 31, 2020 and December 31, 2019 and their classification into long-term, short-term and in-default were as follows:

On May 2, 2019, the company entered into an amendment to one of the convertible promissory notes issued during 2018. The company allowed the creditor to own a larger percentage of the company’s total shares outstanding in exchange for a waiver of all default interest. As a result, we recorded a reduction of interest payable to this creditor and interest expense of $140,491. On July 19, 2019, we issued 30,414,329 shares to this creditor extinguishing all principal and interest owed to them.

Imputed Interest

Certain of our promissory notes bear no nominal interest. We therefore imputed interest expense and increased Additional Paid in Capital. For the three months ended March 31, 2020, we imputed $3,839 of such interest. Of this amount, $1,529 is imputed on amounts owed to Jon Leonard, our Chief Executive Officer, and $2,310 was imputed on twenty eight outstanding loans in Australia.

Derivative liabilities

The above-referenced convertible promissory notes issued during the three months ended March 31, 2020 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 certain fixed-rate convertible Subscription Notes from 2015 through March 31, 2020 in the United States and Australia 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 each quarterly period from March 31, 2018 through March 31, 2020. The following assumptions were used for the valuation of the derivative liability related to the Notes:

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 the instruments issued during the year ended December 31, 2019 range from 11% to 564%. The effective interest rates for the instruments issued during the three months ended March 31, 2020 range from 7% to 14%.

At each reporting date, we determine the fair market value for each derivative associated with each of the above instruments. At March 31, 2020, we determined the fair value of these derivatives were $1,152,642.

Changes in outstanding derivative liabilities are as follows:

Note 7 – Litigation

McRae Lawsuit

On October 10, 2017, the Company received a letter from the lawyer of Eric L McRae (“McRae”) a person whose association with the Company was terminated by the Company on June 16, 2017. The letter demanded payment of 850,000,000 unrestricted Tautachrome common shares to forestall his filing a laundry list of complaints in a variety of government agencies including with the US District Court in Kansas with complaints of contract breaches and fraud by silence, with the EEOC with complaints of termination by racial discrimination, with the OSHA with complains of termination for reasons of his being a whistleblower under Sarbanes-Oxley provisions, and with various regulatory agencies with accusations of an unspecified nature.

This history of the legal proceedings in this case are described in Note 7 to the financial statements filed with Form 10-K on March 30, 2020 and are herewith included by reference.

On May 5, 2020 the Company settled with the McRae estate in principle for 50 million shares. We valued the shares at the settlement date (May 5, 2020 on which date our closing price was $0.0029) and recorded a Gain on Litigation in the amount of $105,000, a reduction of the amount of the liability to $145,000 as a result of that revaluation and reclassified the remaining liability into Stock Payable. As of the date of this report, the shares have not been issued.

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.