Notes to the Financial Statements
For the years ended December 31, 2016 and 2015
1.
Background Information
Real Estate Contacts, Inc. ("The Company") was formed on March 10, 2005 as a Florida Corporation and is based in Pittsburgh, PA. . The company changed its name to REAC Group, Inc., effective February 16, 2017. The Company engages in the ownership and operation of a real estate advertising portal website. REAC Group, Inc. intends to provide a comprehensive online real estate search portal that consists of an advertising and marketing platform for real estate professionals.
The company provides consumers the opportunity to view real estate listings and homes for sale in their local markets.
The company provides real estate professionals the opportunity to reach consumers interested in buying or selling property in their respective geographic area and in most markets and cities throughout the United States.
Business Operations
REAC Group, Inc. intends to provide a service that enables real estate professionals to capture, cultivate, and convert leads which cater to prospective home buyers and sellers from our Real Estate Search engine website (
www.realestatecontacts.com
).
The Company’s business is conducted solely within the Internet. Our company’s new website will match buyers, sellers, and real estate brokers and agents anywhere in the world.
We enable real estate professionals to better promote themselves and their listings and connect with transaction-ready consumers through our online websites and marketing products. Our new real estate search website will enable real estate professionals to increase their visibility and promote their listings.
The Company has earned little revenues to date due to issues, problems, and the eventual shut-down of its website and video website channel by the developer. The Company’s management has elected to utilize a different developer to restore, further develop, and add functionality to this website.
2. Summary of Significant Accounting Policies
The significant accounting policies followed are:
Basis of Presentation
The Financial Statements and related disclosures have been prepared pursuant to the rules and regulations of the SEC. The Financial Statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States (See Note 3 regarding the assumption that the Company is a “going concern”).
All share and per share information contained in this report gives retroactive effect to a
reverse stock split
of our outstanding common stock
of 1;10,000 on July 15, 2016; 1:100 on June 15, 2015 and 1:10 on January 21, 2015.
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Our significant estimates include valuation of website development costs, valuation of derivative liabilities, valuation of stock based compensation, interest and penalties recorded on payroll tax liabilities, and deferred tax asset valuation allowances. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Our reclassifications were made to common stock and additional paid in capital due to reverse splits in 2016 and 2015. These reclassifications had no effect on reported losses.
Financial Instruments
The Company’s balance sheets include the following financial instruments: cash, accounts payable, accrued expenses, notes payable and payables to a stockholder. The carrying amounts of cash, accounts payable and accrued expenses approximate their fair value
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because of the relatively short period of time between the origination of these instruments and their expected realization. The carrying values of the notes payable and amounts due to stockholder approximates fair value based on borrowing rates currently available to the Company for instruments with similar terms and remaining maturities. The derivative liability has been valued at fair market value, in consideration of the fair value of the potential future consideration that may be required upon settlement under the terms of the convertible debt instruments.
FASB Accounting Standards Codification (ASC) topic, “Fair Value Measurements and Disclosures”, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
·
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
·
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
·
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments.
At December 31, 2016, the company performed a Level 3 non-recurring valuation of its website development costs, resulting in an impairment loss that reduced the net carrying value of this asset to zero.
Cash Flow Reporting
The Company follows ASC 230,
Statement of Cash Flows
, for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“indirect method”) as defined by ASC 230,
Statement of Cash Flows
, to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments.
Cash and Cash Equivalents
All cash is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed on demand and, therefore, bear minimal risk. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at either December 31, 2016 or December 31, 2015.
Accounts Receivable
The Company currently does not issue credit on services provided, therefore there are no accounts receivable. No allowance for doubtful accounts is considered necessary to be established for amounts that may not be recoverable, since there has been no credit issued.
Website Development Costs
The Company accounts for website development costs in accordance with Accounting Standards Codification 350-50 “Website Development Costs”. Accordingly, all costs incurred in the planning stage are expensed as incurred, costs incurred in the website application and infrastructure development stage that meet specific criteria are capitalized and costs incurred in the day to day operation of the website are expensed as incurred.
The Company placed its main website (
www.realestatecontacts.com
) into service prior to 2008, with a redesign of the website in 2015. Our video website channel (www.realestatevideochannels.com) and our other website (www.realestatevideowebsites.com) were shut down in September 2015 by the website hosting company as a result of disputes over fees charged by the website developer. All costs associated with these websites are subject to straight-line amortization over there expected useful life, a five year period. As of
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December 31, 2015, the Company impaired the carrying value of capitalized costs associated with our websites and recognized an impairment loss in the amount of $92,449.
Intangible Assets
In accordance with ASC 350-30-65 “Goodwill and Other Intangible Assets", the Company assesses the impairment of identifiable intangible assets, including website development costs, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important, which could trigger an impairment review include the following:
1. Significant underperformance compared to historical or projected future operating results;
2. Significant changes in the manner or use of the acquired assets or the strategy for the overall business; and
3. Significant negative industry or economic trends.
When the Company determines that the carrying value of an intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent to the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.
For the twelve months ended December 31, 2016 and 2015, the Company incurred impairment losses of $0 and $92,449, respectively. Due to multiple issues with our previous programmer who hosted our website during the year ended December 31, 2015, management believed that the website would not be functional to the required specification and deemed significant modifications would be necessary. Based on the information available to management, in consideration of all issues, an impairment loss was recognized for the carrying value of the website development costs. During the year ended December 31, 2016, the Company engaged a new programmer to determine the specific performance requirements necessary to further develop and install software to its existing website.
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with FASB ASC No. 605,
Revenue Recognition.
In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability is reasonably assured.
Consideration for future advertising is generally received by customers in advance of those services being provided. Advertising revenue is recognized ratably over the period that the services are subscribed, generally a one year period. The unearned portion of the advertising revenue is deferred until future periods in which the subscription is earned.
The Company has not issued guarantees or other warrantees on the advertising subscription success or results. The Company has not experienced any refund requests or committed to any adjustments for terminated subscriptions. The Company does not believe that there is any required liability.
Share-based Compensation
In December 2004, the FASB issued FASB ASC No. 718,
Compensation – Stock Compensation
(“ASC 718”). Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.
Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB ASC 718. FASB ASC No. 505,
Equity Based Payments to Non-Employees
(“ASC 505”) defines the measurement date and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the ASC 505.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of ASC 740-10, “Accounting for Income Taxes,” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the
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carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provisions of the ASC 740 -10 related to,
Accounting for Uncertain Income Tax Positions.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
The Company has adopted ASC 740-10-25
Definition of Settlement,
which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of December 31, 2016, tax years ended December 31, 2015, 2014, and 2013 are still potentially subject to audit by the taxing authorities, along with December 31, 2016 (although the tax return has not yet been filed).
Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed based upon the weighted average common shares outstanding as defined by FASB ASC No. 260,
Earnings Per Share
.
Diluted earnings (loss) per share include the dilutive effects of stock options, warrants, and stock equivalents. To the extent stock options, stock equivalents and warrants are anti-dilutive they are excluded from the calculation of diluted income per share. For the years ended December 31, 2016 and 2015 there were 7,438,346 and 484 (adjusted for three (3) reverse stock splits) potential common shares from convertible notes, respectively. For December 31, 2016 and 2015, the Company incurred net operating losses and, thus, anti-dilution issues are not considered in the calculation of loss per share.
Commitments and Contingencies
The Company follows ASC 450-20, Loss Contingencies, to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
3. Going Concern
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.
The Company incurred net losses of $5,465,973 and $1,396,800 during the years ended December 31, 2016 and 2015, and had net cash used in operating activities of $11,175 and $65,595, respectively, for the same periods. Additionally, the Company has an accumulated deficit of $21,861,196 and a working capital deficit of $1,832,770 at December 31, 2016. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months after the date of the report on these financial statements. In view of these matters, the Company's ability to continue as a going concern is dependent upon the Company's ability to achieve a level of profitability and/or to obtain adequate financing through the issuance of debt or equity in order to finance its operations.
While the Company is attempting to commence operations and produce revenues, the Company’s cash position may not be significant enough to support the Company’s operations. While the Company believes in the viability of its strategy to increase revenues and in its ability to raise additional funds, there can be no assurances to that effect.
The key factors that are not within the Company's control and that may have a direct bearing on operating results include, but are not limited to, acceptance of the Company's business plan, the ability to raise capital in the future, the ability to expand its customer base, and the ability to hire key employees to build and maintain websites and to provide services and support to its customers and users. There may be other risks and circumstances that management may be unable to predict.
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Financial Statements
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
4. Recently Issued Accounting Pronouncements
We have reviewed all FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. Management believes that this ASU will not have a significant impact on its financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases. This ASU is based on the principle that entities should recognize assets and liabilities arising from leases. The ASU does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Leases are classified as finance or operating. The ASU’s primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting under the ASC is largely unchanged from the previous accounting standard. In addition, the ASU expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The effective date will be the first quarter of fiscal year 2020 with early adoption permitted. Management believes that this ASU will not have a significant effect on its financial statements.
In November 2015 the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which changes how deferred taxes are classified on the Company’s balance sheets and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. Management does not believe that this ASU will have a significant impact on its financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
5. Related Party Transactions
In August 2016, the Company entered into a Preferred Stock Purchase Agreement with its Chief Executive Officer whereby the Company issued 50,935 Series A Preferred Shares in exchange for the cancellation of 60,000 common shares held by him and the retirement of $165,500 in debt owed by the Company for operating loans and advances. (See Note 11)
The majority shareholder has advanced funds or deferred contractual salaries since inception, for the purpose of financing working capital and product development. As of December 31, 2016, the Company owed $90,151. There are no repayment terms to these advances and deferrals.
Additionally, the majority shareholder has advanced funds, in the form of promissory notes, in the amount of $31,250 and $20,250 as of December 31, 2016 and December 31, 2015, respectively. These promissory notes mature and are payable in six months from the date issued and accrue minimal stated interest at 3%. Total interest accrued as of December 31, 2016 and 2015 was $23,606 and $5,799, respectively.
The Company has minimal needs for facilities and operates from office space provided by the majority shareholder. There are no lease terms. For the year ended December 31, 2016 and 2015, rent has been calculated based on the limited needs at a fair market value of the space provided. Rent expense was $1,200 and $1,200 for the years ended December 31, 2016 and 2015, respectively. The rental value has been recognized as an operating expense and treated as a contribution to capital.
The amounts and terms of the above transactions may not necessarily be indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent third parties.
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During the years ended December 31, 2016 and 2015, the Company issued 20,000,000 and 64,850 shares, respectively, of common stock to the Chief Executive Officer in exchange for services. The resulting compensation expense for the years ended December 31, 2016 and 2015 was $1,200,000 and $879,000, respectfully.
On March 4, 2013, we entered into an employment agreement with Robert DeAngelis, our Chief Executive Officer. The employment agreement is for a period of three years and can be cancelled upon written notice by either employee or employer (if certain employee acts of misconduct are committed). The total minimum aggregate annual amount due under the employment agreement is $120,000 plus bonuses. For the years ended December 31, 2016 and 2015, the Company recorded compensation expense in the amount of $120,000 and $120,000, respectively.
6.
Website Development Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
Website Development Costs
|
|
$
|
---
|
|
$
|
148,792
|
|
Less accumulated amortization and impairment loss
|
|
|
---
|
|
|
(148,792)
|
|
Property and equipment, net
|
|
$
|
---
|
|
$
|
---
|
Amortization of the Company’s website was $0 and $21,435 for the years ended December 31, 2016 and 2015, respectively.
The Company placed its main website (
www.realestatecontacts.com
) into service prior to 2008, with a redesign of the website in 2015. Our video website channel (www.realestatevideochannels.com) and our other website (www.realestatevideowebsites.com) were shut down in September 2015 by the website hosting company as a result of disputes over fees charged by the website developer. All costs associated with these websites are subject to straight-line amortization over the expected useful life, a five year period. As of December 31, 2015, the Company impaired the carrying value of capitalized costs associated with our websites and recognized an impairment loss in the amount of $92,449.The Company incurred impairment losses of $0 and $92,449 for the years ending December 31, 2016 and 2015, respectively.
During the twelve months ended December 31, 2016, the Company issued 5,000,000 shares of its common stock to an outside web service provider for a value of $550,000. In exchange for the consideration paid, the Company plans to use the provider to determine the specific performance requirements necessary to further develop and install software to its existing website to meet its intended use. Due to the Company’s inability to determine feasibility at the date of issuance, these costs were expensed as stock based compensation.
7. Accrued Liabilities
Accrued expenses
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Accounts payable
|
$
|
46,466
|
|
$
|
5,592
|
|
Accrued interest
|
|
43,395
|
|
|
96,175
|
|
Accrued salaries, payroll taxes, penalties and interest
(a)
|
|
793,998
|
|
|
537,171
|
|
Total accrued expenses, payroll taxes, and related expenses
|
$
|
883,859
|
|
$
|
638,938
|
(a) The Company has paid or accrued compensation to its Chief Executive Officer totaling $2,520,000 and $999,000during the years ended December 31, 2016 and 2015, respectively. However, the Company has not paid the related payroll taxes, consisting primarily of Social Security and Medicare taxes. As a result, the Company has established an accrued liability for the unpaid salaries along with related taxes and estimated interest and penalties of $793,998 and $537,171 at December 31, 2016 and 2015, respectively.
8. Notes Payable
The Company owed an aggregate of $203,170 in principal and accrued interest at December 31, 2016; of which, $128,528 represents convertible notes payable, $31,250 represents notes payable to the principal shareholder, and $43.395 represents accrued interest. At December 31, 2015, the Company owed an aggregate of $288,791 in principal and accrued interest; of which, $196,865 represents convertible notes payable, $20,250 represents notes payable to the principal shareholder, and $96,175 represents accrued interest.
Convertible Notes Payable
On December 30, 2016, the Company converted principal in the amount of $16,659 and accrued interest of $6,076 through the issuance of 139,906 common shares. The shares were converted at the contract rate of $0.01625 per share.
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On June 10, 2016, the Company settled a convertible note payable carrying a principal and interest balance of $14,031 for consideration of $3,000, resulting in a gain on settlement of $11,031.
On April 21, 2016 and on November 28, 2016, the Company’s Board of Directors approved the assignments of a convertible note payable to different third-parties. The aggregate balance assigned consisted of $80,429 in principal and $66,571 in interest. On November 7, 2016, the Company’s Board of Directors approved a second assignment of the same note. The balance assigned consisted of $80,429 in principal and $66,619 in accrued interest. On November 28, 2016, the Company issued 7,600,000 common shares valued at a contract value of $0.01 per share, for a total value of $76,000; converting $9,429 in principal $66,571 in interest against the balance of this Note.
On March 11, 2016, the Company settled a convertible note payable carrying a principal balance of $23,342 for consideration of $2,000, resulting in a gain on settlement of $25,192.
During the year ended December 31, 2015, the Company converted notes of $140,493 and accrued interest of $7,729 into 41,627 common shares, in accordance with terms of the agreements. The conversion price, per agreement, was discounted to percentages between 40% and 75% of the fair market trading value.
The notes outstanding are summarized by their terms below:
Schedule of Convertible Debt
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|
December 31,
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2016
|
|
|
2015
|
|
Convertible promissory notes, various lending institutions, maturing at variable dates ranging from 180 days to one year from origination date, 8-10% interest and in default interest of 12-22%, convertible at discount to trading price (25-50%) based on various measurements of prior trading, at face value of remaining original note principal balance, net of unamortized debt discounts, attributable to derivative liabilities, and deferred financing costs in the amount of $0 and $112,269, respectively. All of these notes are in default as of December 31, 2016.
|
|
128,525
|
|
|
196,865
|
|
Total Principal
|
$
|
128,525
|
|
$
|
196,865
|
Summary of Convertible Note Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes, January 1
|
$
|
196,865
|
|
$
|
277,153
|
|
Additional notes, face value
|
|
---
|
|
|
20,775
|
|
Addition due to debt agreement default provisions
|
|
---
|
|
|
24,979
|
|
Payments and adjustments
|
|
(42,252)
|
|
|
(16,830)
|
|
Conversions of debt
|
|
(26,088)
|
|
|
(140,943)
|
|
Amortization of finance costs
|
|
---
|
|
|
2,256
|
|
Amortization of debt discounts
|
|
---
|
|
|
29,475
|
|
Convertible notes, December 31
|
$
|
128,525
|
|
$
|
196,865
|
9. Derivatives and Fair Value
The Company evaluated the terms of the convertible notes, in accordance with ASC Topic No. 815 - 40,
Derivatives and Hedging - Contracts in Entity’s Own Stock
and determined that the underlying is indexed to the Company’s common stock. The Company determined that the conversion features meet the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability. The Company evaluated the conversion feature for the embedded conversion option. Since these notes contain conversion price adjustment provisions (i.e. down round, or ratchet provisions), the Company determined that the embedded conversion options met the definition of a derivative. The effective conversion price was compared to the market price on the date of the note and was deemed to be less than the market value of underlying common stock at the inception of the note. The Company recognized a debt discount on the notes as a reduction (contra-liability) to the Convertible Notes Payable. The debt discounts are being amortized over the life of the notes. The Company recognized financing costs for charges by the lender for original issue discounts and other applicable administrative costs, normally withheld from proceeds, which are being amortized as finance costs over the life of the loan.
A derivative liability in the amount of $699,090 and $485,142 has been recorded, as of December 31, 2016 and 2015, respectively, related to the above notes. The derivative value was calculated using the Binomial method. Assumptions used in the derivative valuation were as follows:
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December 31,
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2016
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2015
|
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Weighted Average:
|
|
|
|
|
|
Dividend rate
|
|
0.00%
|
|
0.00%
|
|
Risk-free interest rate
|
0.62%
|
|
0.49%
|
|
Expected lives (years)
|
.563
|
|
.736
|
|
Expected price volatility
|
776.6%
|
|
507.8%
|
ASC 825-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 825-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 describes three levels of inputs that may be used to measure fair value:
Level 1
– Quoted prices in active markets for identical assets or liabilities;
Level 2
– Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3
– Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s Level 3 liabilities consist of the derivative liabilities associated with the convertible notes. At December 31, 2016, all of the Company’s derivative liabilities were categorized as Level 3 fair value liabilities. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Level 3 Valuation Techniques
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. At the date of the original transaction, we valued the convertible note that contains down round provisions using a Black-Scholes model, with the assistance of a valuation consultant, for which management understands the methodologies. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior. Using assumptions, consistent with the original valuation, the Company has subsequently used the Black-Scholes model for calculating the fair value, as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Carrying Value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Derivative Liabilities
|
$ 699,090
|
$ ---
|
$ ---
|
$ 699,090
|
$ 699,090
|
|
Total Derivative Liabilities
|
$ 699,090
|
$ ---
|
$ ---
|
$ 699,090
|
$ 699,090
|
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the twelve months of fiscal year 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements using inputs
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Balance, January 1,
|
$
|
485,142
|
$
|
1,016,112
|
|
Derivative liability expense
|
|
---
|
|
46,076
|
|
Losses on change in fair value realized and included in net loss
|
|
269,071
|
|
8,052
|
|
Purchases, issuances and settlements
|
|
(55,123)
|
|
(585,098)
|
|
|
|
|
|
|
|
Balance, December 31,
|
$
|
699,090
|
$
|
485,142
|
10. Income Tax
The Company accounts for income taxes under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 740,
Income Taxes
(“ASC 740”). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
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Financial Statements
income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Income tax provision (benefit) at statutory rate of 35%
|
$
|
(1,913,000)
|
|
$
|
(489,000)
|
|
State taxes at 3.3%, net of federal benefit
|
|
(180,000)
|
|
|
(49,000)
|
|
Nondeductible items
|
|
478,000
|
|
|
438,000
|
|
Subtotal
|
|
(1,615,000)
|
|
|
(100,000)
|
|
Change in valuation allowance
|
|
1,615,000
|
|
|
100,000
|
|
Income Tax Expense
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities were comprised of the following:
|
|
|
|
|
|
|
Net Operating Losses
|
$
|
2,898,000
|
|
$
|
1,283,000
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
(2,898,000)
|
|
|
(1,283,000)
|
|
Deferred tax asset, net
|
$
|
-
|
|
$
|
-
|
As of December 31, 2016, the Company has estimated tax net operating loss carryforwards of approximately $7.57 million, which can be utilized or expire through tax year 2036. Utilization of these losses may be limited in accordance with IRC Section 382 in the event of certain ownership shifts. The change in the valuation allowance for the years ended December 31, 2016 and 2015 was $1,615,000 and $100,000, respectively.
11. Equity
Stock Subscriptions
In September, 2016, the Company issued 200,000 shares of common stock to two individuals for cash. The shares were valued at $0.025 per share, or $5,000.
Stock Compensation
In November, 2016, the Company entered into two-year Employment Agreements with five individuals in exchange for agricultural management services related to our acquisition of Patriot Biofuels in January 2017 (see Note 13). An aggregate of 15,000,000 shares of common stock was issued and immediately vested, for an aggregate value of $1,800,000, which is included in compensation expense. The shares were valued at the quoted market price on the date of issuance.
Also in November, 2016, the Company issued 20,000,000 shares of common stock to its Chief Executive Officer for a value of $2,400,000, which is included in compensation expense, in exchange for services during the year ended December 31, 2016. These shares were valued at the quoted market price on the date of issuance.
The Company issued 64,850 shares of common stock to its Chief Executive Officer in exchange for services during the year ended December 31, 2015. These shares were valued at the closing market prices of the stock at the date of grant, resulting in the recognition of $879,000 in compensation expense. These shares were valued at the quoted market price on the date of issuance.
Preferred Stock
In August, 2016, the Company’s Board of Directors agreed to exchange $165,500 in debt owed to our Chief Executive Officer for 50,935 shares of Series A Preferred stock and the cancellation of 60,000 shares of common stock held by him. Due to the related party nature of this transaction, any gain was recorded as a credit to stockholders’ deficit.
Other
During the years ended December 31, 2016 and 2015 the Company recorded in-kind contributions for rent expense in the amount of $1,200 and $1,200, respectively.
The Company’s Board of Directors approved reverse stock splits of:
1:10,000 on July 15, 2016; 1:100 on June 15, 2015; and 1:10 on January 21, 2015
. All shares have been retroactively restated for this reverse stock split.
There are no warrants or options currently outstanding.
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Financial Statements
Amendment to the Articles of Incorporation
On July 29, 2016, the Board of Directors, filed amended and restated articles of incorporation to designate the voting privileges, preferences, limitations, and relative rights of the Company’s Preferred Stock titled as Series A. On August 15, 2016, the Amended and Restated Articles of Incorporation became effective. The Board of Directors recommended and the majority shareholder (holding 61% of the voting shares) voted in favor of amending and restating the Articles of Incorporation to designate the voting privileges, preferences, limitations, and relative rights of the Company’s Preferred Stock titled as Series A. Pursuant to the Articles, no shareholder vote was required for this designation. Accordingly, As of August 15, 2016, th
e total authorized capital stock of the corporation is Two Hundred Fifty Million shares (250,000,000), consisting of 249,000,000 shares of common stock, par value $0.00001 per share (the “common stock”) and 1,000,000 shares of Preferred Stock, of which 500,000 shares have been designated as Series A Preferred Stock, par value $0.0001 per share (“Series A”). The Series A preferred stock are “super voting” stock, with each Series A share being entitled to vote as five thousand (5,000) shares of Voting Stock.
On July 20, 2016, the Board of Directors recommended and the majority shareholder (holding 61% of the voting shares) voted in favor of increasing the authorized capital of the Company from One Million One Hundred Forty-Nine Thousand Nine Hundred (1,149,900) Shares to Two Hundred Fifty Million (250,000,000) shares, to be effective July 20, 2016. No change was made to the number of preferred shares authorized. Accordingly, as of July 20, 2016, the total authorized capital of the Company will be comprised of Two Hundred Forty Nine Million (249,000,000) shares of common stock, par value $0.00001 per share; 500,000 (Five Hundred Thousand) shares of Preferred Stock, Series A, par value $0.0001 per share; and 500,000 (Five Hundred Thousand) shares of Preferred Stock, Series B, par value $0.001 per share. The financial statements for all periods presented have been retroactively adjusted to reflect this recapitalization.
On January 14, 2016, the Company filed Articles of Amendment with the Secretary of State of Florida decreasing the authorized capital of the Company from One Billion Five Hundred Million (1,500,000,000) Shares to One Million One Hundred Forty-Nine Thousand Nine Hundred (1,149,900) shares. This consisted of 500,000 shares of preferred stock, Series A, par value $0.0001per share; 500,000 shares of preferred stock, Series B, par value $0.001 per share, and 149,900 shares of Common Stock, par value $0.00001 per share. This was done in anticipation of a 1 for 10,000 reverse stock split which became effective July 15, 2016. The financial statements for all periods presented have been retroactively adjusted to reflect this stock split.
On August 19, 2015, the Board of Directors recommended and the majority shareholder (holding 56% of the voting shares) voted in favor of increasing the authorized capital of the Company to One Billion Five Hundred Million (1,500,000,000) shares. Accordingly, the total authorized capital of the Company is comprised of One Billion Four Hundred Ninety Nine Million (1,499,000,000) shares of common stock, par value $0.00001 per share; 500,000 (five hundred thousand) shares of Preferred Stock, Series A, par value $0.0001 per share; and 500,000 (five hundred thousand) shares of Preferred Stock, Series B, par value $0.001 per share.
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Financial Statements
As of December 31, 2016, the total number of shares this corporation is authorized to issue is 250,000,000 (two hundred fifty million), allocated as follows among these classes and series of stock:
|
|
|
|
|
|
|
|
Designation
|
Par value
|
Shares
|
|
Common
|
$0.00001
|
249,000,000
|
|
Preferred Stock Class, Series A
|
$0.0001
|
500,000
|
12. Commitments and Contingencies
From time to time the Company may be a party to litigation matters involving claims against the Company. Management believes that there are no known or potential matters that would have a material effect on the Company’s financial position or results of operations.
The Company’s operations are subject to significant risks and uncertainties including financial, operational and regulatory risks, including the potential risk of business failure.
There were no operating or capital lease commitments as of December 31, 2016 and 2015.
13. Subsequent Events
On January 4, 2017, the Company executed an Asset Purchase Agreement with Patriot Bioenergy Corporation, a Kentucky corporation, for the purchase of all of the assets related to the business of operating a hemp processing and growth operation and selling hemp related products. The Company is evaluating whether the conditions for closing have been met. This transaction was the subject of the Letter of Intent disclosed in our Form 8-K filed on November 15, 2016. The LOI was amended on December 6, 2016, and an amendment to our November 15 Form 8-K was filed on the same date. Pursuant to the Agreement, the Company issued 50,000 common shares for a value of $200,000, based on the closing market price of the stock on the date of issuance.
The assets to be purchased under the above agreement included the “Southern Hemp Company” brand name and related website owned by Patriot. On February 9, 2017, we filed a Report on Form 8-K reporting the signing of a non-binding Letter of Intent for the sale of our Southern Hemp Company brand to Hemp Inc., a Nevada corporation. On March 31, 2017, and pursuant to its terms, the LOI expired with no definitive or ancillary agreements being executed.
The Company has requested accounting records relating to the assets purchased, in accordance with the conditions for closing, but Patriot has provided no such records. Accordingly, the Company cannot allocate the purchase price among any specific assets purchased. As a result, the Company is considering its options at this point. However, in any event, the Company may be unable to re acquire the 50,000 shares issued for the purchase transaction, along with the 15,000,000 shares issued in November 2016 to five individuals currently employed by Patriot (see Note 11).
On January 13, 2017, the Company issued 5,000 common shares for cash. Consideration to the Company was $5,000.
On January 18, 2017, the Company issued 10,000 shares pursuant to a Consulting Agreement entered into on that date. The consultant was engaged to perform research related to hemp processing in the State of Florida. The shares will be valued at the closing market price on the date of issuance.
On January 20, 2017, the Company entered into a Promissory Note with its controlling shareholder in the amount of $20,000.
On January 26, 2017, upon written consent of the board of directors and the majority shareholder, who holds enough common and preferred shares to create a greater than 80% voting position, Article I of the Articles of Incorporation was amended to change the corporate name to REAC Group, Inc.
The effective date of the Amendment to the Articles of Incorporation is February 16, 2017
.
On March 13, 2017 (the “Closing Date”), REAC Group, Inc. (the “Company”) entered into a Securities Purchase Agreement (“SPA”) with an institutional accredited investor (“Investor”) pursuant to which Investor invested $200,000 (the “Financing”). On the Closing Date, the Company issued to Investor a Secured Convertible Promissory Note (the “Note”) in the principal amount of $230,000, in exchange for payment by Investor of $200,000. The principal sum of the Note reflects the amount invested, plus a $20,000 “Original Issue Discount” (“OID”) and a $10,000 reimbursement of Investor’s legal fees. There is no material relationship between the Company or its affiliates and the Investor and the Company paid no commissions or other placement agent fees.
In connection with the Financing, and in addition to the SPA and the Note, on the Closing Date, the Company issued the Investor a Warrant, pursuant to which the Company granted the right to purchase at any time on or after Closing Date until the date which is the last calendar day of the month in which the third anniversary of the Closing Date occurs, a number of fully paid and non-assessable
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Financial Statements
shares (the “Warrant Shares”) of Company’s common stock equal to $57,500 divided by the Market Price (as of the Closing Date). The SPA, the Note and the Warrant are collectively referred to herein as the “Transaction Documents.”
The Note matures in 10 months and is convertible into shares of the Company’s common stock at a conversion price equal to $0.25 per share (or market price if less than the conversion price). The Company may prepay the Note at any time by payment to Investor of 125% of the principal, interest and other amounts then due under the Note.
The Company is currently evaluating the accounting treatment for the transactions referenced in the above three paragraphs, including the effect of any beneficial conversion features or potential derivative liabilities.
Pursuant to the terms of the SPA and the Note, the Company is required to reserve and keep available out of its authorized and unissued shares of common stock a number of shares of common stock at least equal to three (3) times the number of shares issuable on conversion of the Note.
