TTCM Tautachrome Inc (CE)

Notes to Consolidated Financial Statements

Note 1 - Basis of Presentation and Summary of Significant Accounting Policies

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 patents and licensing in augmented reality, smartphone-image authentication and imagery-based social networking.

Tautachrome is currently pursuing four 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):

In the long term, we envision a KlickZie ARknet with billions of users and ARks connecting humanity, commerce, information, crypto currency, and innovation in economically useful ways. In the mid-term, we aim to achieve significant cash flow by coupling the KlickZie and PXR Platforms together to develop unique partnerships with a number of Fortune 50 corporations.

Basis of Presentation

The Company’s financial statements are presented in accordance with accounting principles generally accepted (GAAP) in the United States.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein.

Principles of Consolidation

Our consolidated financial statements include Tautachrome, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of these financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We regularly evaluate estimates and assumptions related to the recoverability of long-lived assets, valuation of convertible debentures, assumptions used to determine the fair value of stock-based compensation and derivative liabilities, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an initial maturity of 3 months or less to be cash equivalents.  The Company maintains its deposits with high quality financial institutions and, accordingly, believes its credit risk exposure associated with cash is remote.  

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.

At December 31, 2022 and 2021, we had total liabilities of $5,414,638 and $4,779,104, respectively.  Of this amount, only the derivative liabilities of $877,534 and 1,384,775, respectively ,were calculated using level 3 inputs.  All other liabilities were calculated using level 1 inputs.

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 6 for our reconciliation of income tax expense and deferred income taxes as of and for the years ended December 31, 2022 and 2021.

Note 2 – 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 $613,787 and $1,249,760 for the years ended December 31, 2022 and 2021, respectively, and have experienced recurring losses, and negative working capital at December 31, 2022 and 2021.  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 3 – Related Party Transactions

Accounts payable – related party consists of $130,000 accrued to our former CEO and Director, Dr. Jon Leonard for unpaid salary and $800,000 owed in accrued license fees to Arknet.

Loans from Related Parties consists of $97,480 owed to Michael Nugent, $5,000 owed to David LaMountain, our CEO, and $13,608 owed to various members of the Nugent family.  At December 31, 2021, we owed $103,640 to Michael Nugent and members of the Nugent family.

Convertible Notes Payable, Related Party, Net consists of $70,392 that are owed to officers and directors of the company and $38,400 due to Arknet.  The discount on this note has been fully amortized to interest expense.  At December 31, 2021, we owed $70,392 to officers and directors of the Company.

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%.

Certain of our promissory notes bear no nominal interest.  We therefore imputed interest expense and increased Additional Paid in Capital.  For the year ended December 31, 2022, we imputed $9,379 of such interest.  

We issued 3,000,000 shares to a Director pursuant to our agreement with him.  We valued the shares at the grant date fair value and charged general and administrative expenses with $2,700.

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 $17 was recorded as additional paid-in capital for the year ended December 31, 2022.  The Company evaluated Dr. Leonard’s note for the existence of a beneficial conversion feature and determined that none existed.

At December 31, 2022, the balanced owed Dr. Leonard is $419.

Common Stock

On December 29, 2021, Dr. Jon Leonard, our Chief Executive Officer, retired 150,000,000 shares of common stock.

Note 4 – Capital

Common Stock

During the year ended December 31, 2021, we issued

During the year ended December 31, 2022, we issued the following common shares:

Stock Payable

For the year ended December 31, 2022 we recorded stock payable to consultants of $87,175 pursuant to our contracts with them.

During the year ended December 31, 2022, we issued 98,896,076 shares to a consultant to extinguish a stock payable in the amount of $563,250.

Imputed Interest

Several of our loans were made without any nominal interest.  As such, we imputed interest at 8% to these loans, crediting Additional Paid in Capital and charging Interest Expense.  For the year ended December 31, 2022 and 2021, these amounted to  $9,379 and $10,701, respectively.

Preferred Stock

In October, 2016 we issued 13,795,104 shares of Series D preferred stock to our (then) directors in exchange for 1,379,510,380 shares of common stock.  This series of preferred stock was subject to two separate rights to convert to common stock.  The first could be elected by the shareholder  if the stock sold for greater than $3 per share.  The second was automatic and would not be trigger until October 5, 2021.  On that date, the original 1,379,510,380 common shares were issued retiring the Series D preferred stock.  There was no gain or loss on the conversion because the value of the common shares issued equaled the value of the Series D Preferred shares.

During the year ended December 31, 2018, we accrued $1,837,000 in costs related to the 40,000 Series E Preferred shares issued in accordance with our ARknet contract containing a par value of $0.0001.  This series of preferred shares have the following rights, limitations, restrictions and privileges:

In September, 2020 we issued 290,397 Series F Preferred shares in retirement of twelve convertible promissory notes to Arknet.  In so doing, we reduced our liability to them in the amount of $610,500 of principal and $14,735 in interest.  Each share of Series F preferred is convertible into 1,000 shares of common stock.  This series of preferred shares have the following rights, limitations, restrictions and privileges:

In October, 2016 we issued 13,795,104 shares of Series D preferred stock to our (then) directors in exchange for 1,379,510,380 shares of common stock.  This series of preferred stock was subject to two separate rights to convert to common stock.  The first could be elected by the shareholder  if the stock sold for greater than $3 per share.  The second was automatic and would not be trigger until October 5, 2021.  On that date, the original 1,379,510,380 common shares were issued retiring the Series D preferred stock.  There was no gain or loss on the conversion because the value of the common shares issued equaled the value of the Series D Preferred shares.

Loans from related parties

Loans from Related Parties consists of $97,480 owed to Michael Nugent, $5,000 owed to David LaMountain, our CEO, and $13,608 owed to various members of the Nugent family.  At December 31, 2021, we owed $103,640 to Michael Nugent and various members of the Nugent family.

Convertible notes payable – related party, net

At December 31, 2022, we owed $108,792 of related-party notes which are convertible into common stock, of which $69,973 is owed to David LaMountain, Our Chief Operating Officer and $419 to Dr. Jon Leonard, our former Chief Executive Officer.  

At December 31, 2021, we owed $70,392 of related-party notes which are convertible into common stock, of which $69,973 is owed to David LaMountain, Our Chief Operating Officer and $419 to Dr. Jon Leonard, our Chief Executive Officer.  As of December 31, 2021, all discounts on this items had been fully amortized.  During the year ended December 31, 2021, we amortized $26,316 of discounts to interest expense from this category.

As of December 31, 2022, all discounts on these items had been fully amortized.  

Additionally at December 31, 2022, we owed $38,400 to ArKnet.

Short-term convertible notes payable –  third-party, net

2021

Unpaid principal on short-term convertible notes payable at December 31, 2021 was $2,137,349, net of discounts of $499,537 (or $1,637,812).   

We have three convertible promissory notes which are in default at December 31, 2021 totaling $32,000.  There are no discount balances on these notes.

During the year ended December 31, 2021 we issued 220,978,521 shares to convert five outstanding convertible notes in their entirety and 220,978,521 shares to convert a portion of another.  We reduced unpaid principal by $1,045,000 and unpaid interest by $45,045.  There was no gain or loss related to the conversions.

During the year ended December 31, 2021, we issued the following promissory notes:

2022

During the year ended December 31, 2022:

Short-term notes payable

At December 31,2022, we owed AU$22,000 (US$14,989) to three Australian investors on promissory notes which contain no conversion privileges.

In addition, during the year ended December 31, 2022 we issued a promissory note in the amount of $54,000, receiving proceeds of $50,000 and incurring an original issue discount of $4,000. On this note, we also issued 1,600,000 common shares as an enticement for this loan which we valued at $3,200, also recorded as a debt discount (for a total initial discount of $7,200).  At December 31, 2022, we had unamortized discounts of $1,762 for a net balance ofr $52,238.

Imputed Interest

Certain of our promissory notes bear no nominal interest.  We therefore imputed interest expense and increased Additional Paid in Capital.  For the year ended December 31, 2022, we imputed $9,379 of such interest.  

Derivative liabilities

The above-referenced convertible promissory notes issued during the year ended December 31, 2022 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 December 31, 2022 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 December 31, 2022. 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 four instruments issued during the year ended December 31, 2022 range from 112% to 132%.

At each reporting date, we determine the fair market value for each derivative associated with each of the above instruments. At December 31, 2022, we determined the fair value of these derivatives were $877,534.

Changes in outstanding derivative liabilities are as follows:

Deferred taxes for 2022 and 2021 are calculated using a marginal tax rate of 21%.  

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.