REAC REAC Group Inc (CE)

Notes to the Financial Statements

For the years ended December 31, 2017 and 2016

1.   Background Information

REAC Group, Inc. ("The Company") was formed on March 10, 2005 under the name of Real Estate Contacts, Inc. as a Florida Corporation and is based in Pittsburgh, Pennsylvania. 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. The Company plans to provide a comprehensive online real estate search portal that consists of an advertising and marketing platform for real estate professionals.  The Company is in the final beta testing phase of development for our new national real estate website, ( https://realestatecontacts.com/ ).

The Company ’ s website offers exclusive cities to real estate professionals so they can grow their businesses online and have the opportunity to show their listings and reach consumers interested in buying or selling property in their respective exclusive geographic areas.

RealEstateContacts.com   is expected to   serve as an internet portal that will feature a real estate search engine and a media network that directs consumers to receive more detailed information about agents, offices, current listings, homes for sale, commercial properties, mortgages, and foreclosures.  We intend to provide a service that enables real estate professionals to capture, cultivate, and convert leads which cater to prospective home buyers and sellers.

The Company is seeking to bring additional value to its shareholders through acquisition, joint venture, or partnerships with other real estate related businesses.

2.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying audited financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-K and Regulation S-K.

All share and per share information contained in this report gives retroactive effect to a 1 for 10,000 reverse stock split of outstanding common stock, effective July 15, 2016.

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 most significant estimates are for stock based compensation, assumptions used in calculating derivative liabilities, deferred tax valuation allowances, and valuation of our investment in an affiliate. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

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 current assets and current liabilities approximate their fair value 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 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

19

Table of Contents

Financial Statements

· 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, 2017.

Derivative Liabilities

The Company assessed the classification of its derivative financial instruments as of December 31, 2017 and 2016, which consist of convertible instruments and rights to shares of the Company ’ s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815.

During the year ended December 31, 2017 and 2016, the Company had notes payable outstanding in which the conversion rate was variable and undeterminable. Accordingly, the Company has recognized a derivative liability in connection with such instruments for the year ended December 31, 2016. The Company uses judgment in determining the fair value of derivative liabilities at the date of issuance and at every balance sheet thereafter and in determining which valuation method is most appropriate for the instrument (e.g., Black-Scholes-Merton), the expected volatility, the implied risk-free interest rate, as well as the expected dividend rate, if any. The derivate liability that had previously been recognized was recorded as a gain through the change in fair value of derivative liability on the statement of operations as of December 31, 2017. During the year ended December 31, 2017, the Company determined that there was no active market for the Company ’ s common stock, and because of this lack of liquidity and market value, there was no derivative liability associated with these convertible notes.  As a result, the Company recognized a gain of $1,232,164 on the write-off of the derivative liability as of December 31, 2017.

Beneficial Conversion Features

ASC 470-20 applies to convertible securities with beneficial conversion features that must be settled in stock and to those that give the issuer a choice in settling the obligation in either stock or cash. ASC 470-20 requires that the beneficial conversion feature should be valued at the commitment date as the difference between the conversion price and the fair market value of the common stock into which the security is convertible, multiplied by the number of shares into which the security is convertible. This amount is recorded as a debt discount and amortized over the life of the debt. ASC 470-20 further limits this amount to the proceeds allocated to the convertible instrument.

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

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, 2017 or December 31, 2016.

20

Table of Contents

Financial Statements

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.

Long-Lived Assets

In accordance with ASC 350, the Company regularly reviews the carrying value of intangible and other long-lived assets for the existence of facts or circumstances, both internally and externally, that suggest impairment. If impairment testing indicates a lack of recoverability, an impairment loss is recognized by the Company if the carrying amount of a long-lived asset exceeds its fair value. The Company recorded an impairment loss on its long-lived assets in the amount of $162,000 and $0 for the years ended December 31, 2017 and 2016, respectively.

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 services are paid 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, net of any estimates for chargebacks or refunds. 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.

Stock Based Compensation

Under ASC 718,  Compensation – Stock Compensation,  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.

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 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.

21

Table of Contents

Financial Statements

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, 2017, tax years ended December 31, 2016, 2015, and 2014 are still potentially subject to audit by the taxing authorities.

The  Tax Cuts and Jobs Act of 2017   changed the top corporate tax rate from 35% to one rate of 21%. This rate will be effective for corporations whose tax year begins after January 1, 2018, and it is a permanent change. Under ASC 740, the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The resulting amendments to Internal Revenue Code S ection 172 disallow the carryback of net operating losses but allow for the indefinite carryforward of those net operating losses . Pursuant to S ection 172(e)(2) of the statute, the amended carryback and carryover rules apply to any net operating loss arising in a taxable year ending after Dec. 31, 2017.  In addition to the carryover and carryback changes, the Act also introduces a limitation on the amount of net operating losses that a corporation may deduct in a single tax year under section 172(a) equal to the lesser of the available net operating loss carryover or 80 percent of a taxpayer ’ s pre-NOL deduction taxable income (the “ 80-percent limitation ” ). This limitation applies only to losses arising in tax years that begin after Dec. 31, 2017 based upon section 172(e)(1) of the amended statute. For net operating losses generated in tax years ending before Jan. 1, 2018, historic al rules are applicable.

Earnings Per Share

Basic income per common share is computed based upon the weighted average common shares outstanding as defined by FASB ASC No. 260,  Earnings Per Share .

Diluted income per share includes 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. As of December 31, 2017, there were approximately 147,219,884 share equivalents, as calculated, for potential conversion demand of our outstanding convertible notes.

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 $822,873 during the year ended December 31, 2017 and had net cash used in operating activities of $303,209 for the same period. Additionally, the Company has an accumulated deficit of $22,684,069 and a working capital deficit of $1,200,880 at December 31, 2017.  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 issuance 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.

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.

22

Table of Contents

Financial Statements

In September 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2017-13 (ASU 2017-13) which addresses “ Revenue Recognition ” (Topic 605), "Revenue from Contracts with Customers" (Topic 606), and Leases (Topics 840 and 842). ASU 2017-13 requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued and amended, ASU 2017-13 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016. We have evaluated the impact of the adoption of ASU 2017-13 on our financial statements and determined that upon generating revenue, the Company will implement accounting system changes and provide the additional disclosure requirements related to the adoption.

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.

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.

Recently Issued Accounting Standards Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance can be adopted either retrospectively to each prior reporting period presented, or retrospectively with a cumulative-effect adjustment recognized as of the date of adoption. The original effective date of this guidance for public entities was for annual reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), to defer the effective date of this guidance by one year, to the annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. A reporting entity may choose to early adopt the guidance as of the original effective date.

5.  

Investment

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.  Pursuant to the Agreement, the Company issued 50,000 common shares which were valued at $142,500 based on the closing market price of the stock on the date of closing of the asset acquisition.  In addition, the Company paid expenses of Patriot totaling $19,500, resulting in a total investment of $162,000

The Company has requested accounting records relating to the assets purchased, but Patriot has provided no such records.  Accordingly, the Company cannot allocate the purchase price among any specific assets purchased.  As a result, On April 21, 2017, the Company cancelled and terminated the Asset Purchase Agreement with Patriot Bioenergy Corporation that was originally executed on January 4, 2017.  REAC terminated the APA due to Patriot ’ s refusal to provide any financial information to the Company necessary to prepare the financial statements and pro forma financial information required of a reporting company.  As of March 31, 2017, the Company was unable to re-acquire the 50,000 shares issued for the purchase transaction, along with an aggregate of 15,000,000 shares issued in November 2016 to five individuals currently employed by Patriot (see Note 11,  Stock Compensation ).  As a result, the Company deemed the entire investment to be impaired and recorded an impairment loss of $162,000 as of March 31, 2017.

23

Table of Contents

Financial Statements

In May 2017, the Company received and cancelled an aggregate of six million shares of common stock related to Patriot employment agreements. The Company recorded the cancelled shares at their par value. In July, 2017, the Company received and cancelled the 50,000 shares issued for the purchase transaction and an additional 3,000,000 shares were returned by an individual employed by Patriot. The Company recorded the cancelled shares at their par value. (see Note 11)

6.  

Website Development Costs

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 planned 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.  During April 2017, management determined that the service provider would be unable to meet the requirements of the engagement and on May 1, 2017, the 5,000,000 shares issued by Company were returned and cancelled. The Company recorded the cancelled shares at their par value.

7.  

Related Party Transactions

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, 2017 and 2016, the Company owed $47 and $90,151, respectively.  There are no repayment terms to these advances and deferrals and the Company has imputed interest at a nominal rate of 3%.

Additionally, the majority shareholder has advanced funds in the form of promissory notes. During the year ending December 31, 2017, the Company received an additional $39,000 and repaid $96,750, which included payment of $26,500 in accrued interest. These promissory notes matured and were payable in six months from the date issued and accrue minimal stated interest at 3%.  The balance as of December 31, 2016 was $31,250.  As of December 31, 2017, the principal balances on these notes were paid in full by the Company.

Total interest accrued on advances and loans in the aggregate as of December 31, 2017 was $6,837.

The Company has minimal needs for facilities and operates from office space provided by the majority shareholder.  There are no lease terms.  For the years ended December 31, 2017 and 2016, 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 twelve months ended December 31, 2017 and 2016, 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.

On July 3, 2017, the Company ’ s Board of Directors authorized the issuance of 30,000,000 shares to the Company ’ s Chief Executive Officer as a performance bonus pursuant to his employment agreement that automatically renewed on March 4, 2017.  The shares were valued at the quoted market price on the date of grant, or $900,000.

On March 4, 2013, we entered into an employment agreement with Robert DeAngelis, our Chief Executive Officer. The employment agreement is for an initial three-year and automatically renews for an additional twelve months upon expiration of the initial term.  The agreement 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, 2017 and 2016, the Company recorded compensation expense in the amount of $120,000 and $120,000, respectively.

8.  

Accrued Liabilities

Accounts Payable and Accrued Expenses :

(a) The Company has accrued compensation to its Chief Executive Officer totaling $120,000 and $120,000 during the years ended December 31, 2017 and 2016, 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 $853,011 and $793,998 at December 31, 2017 and 2016, respectively.

9.  

Debt Obligations

24

Table of Contents

Financial Statements

The Company owed an aggregate of $364,632 in principal and accrued interest at December 31, 2017; of which, $350,073 represents convertible notes payable and $14,559 represents accrued interest.  At December 31, 2016, the Company owed an aggregate of $203,170 in principal and accrued interest; of which, $128,528 represents convertible notes payable, $31,250 represents notes payable to the principal shareholder, and $43,395 represents accrued interest.

Convertible Notes Payable

During the year ended December 31, 2017 and 2016, the Company had notes payable outstanding in which the conversion rate was variable and undeterminable. Accordingly, the Company has recognized a derivative liability in connection with such instruments for the year ended December 31, 2016. During the year ended December 31, 2017, the Company determined that there was no active market for the Company ’ s common stock, and because of this lack of liquidity and market value, there was no derivative liability associated with these convertible notes. The Company uses judgment in determining the fair value of derivative liabilities at the date of issuance and at every balance sheet thereafter and in determining which valuation method is most appropriate for the instrument (e.g., Black-Scholes-Merton), the expected volatility, the implied risk-free interest rate, as well as the expected dividend rate, if any. During the year ended December 31, 2017, the Company recognized losses in the change in fair value of the derivative liability of $526,070. As of December 31, 2017, the derivate liability balance of $1,232,164 was recorded as a gain on the write-off of derivative liabilities on the statement of operations as of December 31, 2017.

On October 6, 2017, the Company entered into a Convertible Promissory Note with an accredited investor pursuant to which the Company received $150,000 in financing and an initial tranche of $20,000. Each tranche paid under the Note matures in 12 months and is convertible into shares of the Company ’ s common stock after a period of six months at a conversion price equal to 50% of the lowest trading price per share during the previous ten (10) trading days. The Company evaluated the terms of the convertible note 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 feature met the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability. During the year ended December 31, 2017, the Company determined that there was no active market for the Company ’ s common stock, and because of this lack of liquidity and market value, there was no derivative liability associated with these convertible notes. As of December 31, 2017, the Company owed $20,000 and accrued interest of $238.

_____

On October 2, 2017, the Company received $53,000 in financing through the execution of a Convertible Promissory Note associated with a Securities Purchase Agreement. The Note bears interest at a rate of 12% and matures 280 days from the purchase date.  The Note is convertible into shares of the Company ’ s common stock after a period of 180 days at a conversion price equal to 61% multiplied by the average of the lowest two trading prices during the previous fifteen (15) days.  After 180 days following the Issue Date, the Company will have no right of prepayment. The Company evaluated the terms of the convertible note 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 feature met the definition of a liability and therefore bifurcated the conversion

25

Table of Contents

Financial Statements

feature and accounted for it as a separate derivative liability. During the year ended December 31, 2017, the Company determined that there was no active market for the Company ’ s common stock, and because of this lack of liquidity and market value, there was no derivative liability associated with these convertible notes. As of December 31, 2017, the Company owed $53,000 and accrued interest of $1,587. As of December 31, 2017, the Company has reserved 162,185,792 shares.

_____

On July 8, 2017, the Company ’ s Board of Directors approved the assignment of a convertible note payable to a different third-party. The total amount assigned was $27,846 which includes principal of $20,775 and accrued interest of $7,087.  The terms of the original February 20, 2015 Convertible Promissory Note remain in effect and the note continues to accrue interest at a rate of 8% per annum until the note is paid in full. As of December 31, 2017, the Company has reserved 11,736,000 shares.

In connection with the assignment, the Company issued 3,350,000 common shares for a value of $3,350, which was applied against the balance of accrued interest on the note. Also, during the year ended December 31, 2017, the Company issued an aggregate of 12,760,000 common shares in payment of $7,750 in principle and $5,010 in accrued interest.  As of December 31, 2017, the Company owed $13,025 and accrued interest of $194.

_____

On July 5, 2017, the Company entered into a Securities Purchase Agreement and related documents with an institutional accredited investor. On the Closing Date, the Company issued to Investor a Convertible Promissory Note in the principal amount of $175,000 in exchange for payment by Investor of $157,500. The principal sum of the Note reflects the amount invested, plus a $17,500 “ Original Issue Discount ” . 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 Securities Purchase Agreement and the Secured Convertible Promissory Note, the Company issued a Warrant which grants the investor the right to purchase at any time on or after each tranche, and for a period of one year thereafter, a number of fully paid and non-assessable shares of the Company ’ s common stock equal to the amount of each tranche received under the Note divided by $0.05. (See Note 10)

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 ten (10) times the number of shares issuable on conversion of the Note.  As of December 31, 2017, the Company has reserved 75,000,000 shares.

Interest on the Note is accrued at a rate of 5% per annum and matures twelve months from the effective date of each payment.  The note holder has the right at any time to convert all or any part of unpaid principal and interest into common shares of the Company equal to 50% multiplied by the Market Price; that being the lowest (1) trading price for the common stock during the twenty-five trading days prior to the conversion date.  As of December 31, 2017, the Company owed $47,565 and accrued interest of $1,173.

_____

On May 5, 2017, the Company entered into a Securities Purchase Agreement ( “ SPA ” ) with an institutional accredited investor pursuant to which the Company received $165,000 in financing through the execution of a Convertible Promissory Note.  In addition, the Company issued 1,153,000 shares of common stock for a value of $63,415 as consideration for entering into the financing agreement.

The Note matures in 10 months and is convertible into shares of the Company ’ s common stock at a conversion price equal to 50% of the lowest trading price per share during the previous twenty-five (25) trading days. The Company may prepay the Note within 90 days by payment to Investor of 135% of the outstanding principal, interest and other amounts then due under the Note or within 180 days by payment to Investor of 150% of the outstanding principal, interest and other amounts then due under the Note.  After 180 days, the Company will have no right of prepayment.

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 and a half (3.5) times the number of shares issuable on full conversion of the Note. As of December 31, 2017, the Company has reserved 230,355,048 shares.

The Company determined that the conversion feature met the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability as of December 31, 2016. During the year ended December 31, 2017, the Company determined that there was no active market for the Company ’ s common stock, and because of this lack of liquidity and market value, there was no derivative liability associated with these convertible notes. 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.

During the twelve months ended December 31, 2017, the Company issued 3,114,800 common shares as payment of $461 in principle and $10,253 in accrued interest.  As of December 31, 2017, the Company owed $164,539 in principle and accrued interest of $2,802.

26

Table of Contents

Financial Statements

_____

On March 13, 2017, the Company entered into an Agreement with an institutional Lender.  On that date, the Company issued to the Lender a Secured Convertible Promissory Note in the principal amount of $230,000; of which, the Company has received $150,000 as of December 31, 2017.  The principal sum of the Note reflects the amount borrowed, plus a $20,000 “ Original Issue Discount ” and a $10,000 reimbursement of Lender ’ s legal fees.

In connection with the Financing, and in addition to the Securities Purchase Agreement and the Secured Convertible Promissory Note, the Company issued a Warrant which grants the right to purchase at any time on or after March 13, 2017 and for a period of three years, a number of fully paid and non-assessable shares of the Company ’ s common stock equal to $57,500 divided by the Market Price as of the issue date. (See Note 10)

The Secured Convertible Promissory 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. In the event the minimum market capitalization falls below $6,000,000, then the conversion price is the lesser of the stated price of $0.25 or the market price (as calculated pursuant to the Agreement). The Company may prepay the Note at any time by payment of 125% of the principal, interest and other amounts then due under the Note.

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. As of December 31, 2017, the Company has reserved 27,738,095 shares.

The Company determined that the conversion feature met the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability as of December 31, 2016. During the year ended December 31, 2017, the Company determined that there was no active market for the Company ’ s common stock, and because of this lack of liquidity and market value, there was no derivative liability associated with these convertible notes.  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.

On September 13, 2017, the Company issued 3,571,429 shares of common stock in satisfaction of $23,273 in principal and $6,727 in interest, for a total value of $30,000.

On September 29, 2017, the Company agreed to issue 3,690,476 shares of common stock in satisfaction of $30,519 in principal and $481 in interest, for a total value of $31,000.  As of September 30, 2017, the Company has recorded the conversion against the debt and interest and credited common stock payable for the total value of $31,000.

As of December 31, 2017, the Company owed $178,708 in principle and accrued interest of $10,066.

On January 13, 2017, the Company ’ s Board of Directors approved the assignment of a convertible note payable to a different third-party. On May 8, 2017, the third-party lender who accepted the assignment agreed to release the Company from all obligations under the note. As a result, the Company has recognized a gain on the extinguishment of debt in the amount of $51,821; which consisted of principal in the amount of $36,750 and $15,071 of interest.

On April 12, 2017, the Company was released from its obligation to pay the remaining balance of a convertible note payable and has recorded a gain on the extinguishment of debt in the amount of $76,777; which consisted of principal in the amount of $71,000 and $5,777 of interest.

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.

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.

27

Table of Contents

Financial Statements

10.  Warrant Liabilities

On July 5, 2017, the Company entered into a Securities Purchase Agreement and related documents with an institutional accredited investor. On the Closing Date, the Company issued to Investor a Convertible Promissory Note in the principal amount of $175,000 in exchange for payment by Investor of $157,500. (See Note 9) In connection with the Financing, and in addition to the Securities Purchase Agreement and the Secured Convertible Promissory Note, the Company issued a Warrant ( “ Warrant 1 ” ) which grants the investor the right to purchase at any time on or after each tranche, and for a period of one year thereafter, a number of fully paid and non-assessable shares of the Company ’ s common stock equal to the amount of each tranche received under the Note divided by $0.05. The conversion option and the outstanding common stock warrants on that date are classified as derivative liabilities at their fair value on the date of issuance.  During the year ended December 31, 2017, the Company received a tranche of $35,000; resulting in the issuance of a warrant to purchase 700,000 shares of the Company ’ s common stock. The relative fair value of the warrant at issuance was $12,565, which was recorded as a debt discount and amortized over the life of the note. The Company estimates the fair value at each reporting period using the Binomial Method.  The warrant derivative liability as of December 31, 2017 was $32,268.

On March 13, 2017, the Company entered into an Agreement with an institutional Lender.  On that date, the Company issued to the Lender a Secured Convertible Promissory Note in the principal amount of $230,000; of which, the Company has received $150,000 as of December 31, 2017. (See Note 9) In connection with the Financing, and in addition to the Securities Purchase Agreement and the Secured Convertible Promissory Note, the Company issued a Warrant ( “ Warrant 2 ” )which grants the right to purchase at any time on or after March 13, 2017 and for a period of three years, a number of fully paid and non-assessable shares of the Company ’ s common stock equal to $57,500 divided by the Market Price as of the issue date. The conversion option and the outstanding common stock warrants on that date are classified as derivative liabilities at their fair value on the date of issuance. Under ASC-815 the conversion options embedded in notes payable require liability classification because the note does not contain an explicit limit to the number of shares that could be issued upon settlement.

The Market Price, as calculated pursuant to the Warrant Agreement, was $0.1097 per share with 524,157 being the resulting number of warrant shares at issuance.  The relative fair value of the warrant at issuance was $0, resulting in no debt discount. The Company estimates the fair value at each reporting period using the Binomial Method. The warrant derivative liability as of December 31, 2017 was $2,779.

The following table indicates the fair value of the warrant recorded by the Company at issuance.