Notes to the Financial Statements
For the years ended December 31, 2015 and 2014
1.
Background Information
Real Estate Contacts, Inc. ("The Company") was formed on March 10, 2005 as a Florida Corporation and is based in Parrish, Florida. The Company engages in the ownership and operation of a real estate advertising portal website. Real Estate Contacts, Inc. provides 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
Real Estate Contacts, Inc. provides 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 Companys business is conducted solely within the Internet.. Our company matches buyers, sellers, and real 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 current real estate search website enables 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 Companys management has elected to utilize a different developer to build a more functional 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).
For further information, refer to Real Estate Contacts, Inc.s (the Company) audited financial statements and notes thereto included in the year ended December 31, 2014 Form 10K filed with the Securities and Exchange Commission.
All share and per share information contained in this report gives retroactive effect to a 1 for 1,000 reverse stock split of our outstanding common stock, effective June 10, 2014, a 1 for 10 reverse stock split, effective January 21, 2015 and a 1 for 100 reverse stock split effective June 15, 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, derivative liabilities, valuation of stock based compensation, 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 2015 and 2014. These reclassifications had no effect on reported losses.
Financial Instruments
20
The Companys 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 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 entitys 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, 2015. 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, 2015, 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, 2015 or December 31, 2014.
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
21
costs associated with these websites are subject to straight-line amortization over there 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.
Property and Equipment
Costs incurred in the planning stage of a website are expensed, while costs incurred in the development stage are capitalized and amortized over the estimated five year life of the asset. In accordance with FASB ASC No. 350,
Intangibles, Goodwill and Other
, the Company requires that intangible assets with a finite life be amortized over their life and requires that goodwill and intangible assets be reviewed for impairment annually or more frequently if impairment indicators arise.
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.
Due to multiple issues with our programmer, who hosts our website, management believes that the website may not be functional to the required specification. Management believes that significant modifications may be necessary. Based on the information available to management, in consideration of all issues, an impairment loss has been recognized for the carrying value of the website development costs. For the twelve months ended December 31, 2015 and 2014, the Company incurred impairment losses of $92,449 and $0, 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 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.
22
Advertising Costs
The costs of advertising are expensed as incurred. Advertising expense was $6,158 and $11,362 for the years ended December 31, 2015 and 2014, respectively.
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.
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, 2015, tax years ended December 31, 2014, 2013, and 2012 are still potentially subject to audit by the taxing authorities, along with December 31, 2015 (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, 2015 and 2014 there were 4,840,407,000 and 10,126,578 (adjusted for three (3) reverse stock splits) potential common shares from convertible notes, respectively. For December 31, 2015 and 2014, 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 a net loss of $1,396,800 during the year ended December 31, 2015 and had net cash used in operating activities of $65,595 for the same period. Additionally, the Company has an accumulated deficit of $16,395,223 and a working capital deficit of $1,442,355 at December 31, 2015. These conditions raise substantial doubt about the Companys ability to continue as a going concern. 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.
23
While the Company is attempting to commence operations and produce revenues, the Companys cash position may not be significant enough to support the Companys 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
In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction-and industry-specific revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue recognition. Public entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2016, and interim and annual reporting periods thereafter. Early adoption is not permitted for public entities. The Company has reviewed the applicable ASU and has not, at the current time, quantified the effects of this pronouncement, however it believes that there will be no material effect on the financial statements.
In June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-12
Compensation Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.
A performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition under Accounting Standards Codification (ASC) 718,
Compensation Stock Compensation
. As a result, the target is not reflected in the estimation of the awards grant date fair value. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. Management has reviewed the ASU and believes that they currently account for these awards in a manner consistent with the new guidance, therefore there is no anticipation of any effect to the financial statements.
In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15
Preparation of Financial Statements Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern.
Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entitys liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entitys liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30,
Presentation of Financial StatementsLiquidation Basis of Accounting
. Even when an entitys liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entitys ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will evaluate the going concern considerations in this ASU and future reports will include any additional disclosures required.
We have reviewed the 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 corporations 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.
5.
Related Party Transactions
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, 2015 and 2014, the Company recorded compensation expense in the amount of $120,000 and $120,000, respectively.
24
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, 2015, the Company owed $101,440. There are no repayment terms to these advances and deferrals. The Company has accrued interest at a minimal variable rate, currently 3%. Management will periodically adjust this rate following guidelines of applicable federal rates.
Additionally, the majority shareholder has advanced funds, in the form of promissory notes, in the amount of $20,250 and $0 as of December 31, 2015 and December 31, 2014, respectively. These promissory notes mature and are payable in six months from the date issued and have a minimal stated interest. Interest is accrued at 3% on these notes.
Total interest accrued on these advances and notes is $5,799 as of December 31, 2015.
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, 2015 and 2014, 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, 2015 and 2014, respectively. The rental value provided 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.
During the years ended December 31, 2015 and 2014, the Company issued 648,500,000 and 1,499,650 shares, respectively, of common stock to the Chief Executive Officer in exchange for services. These shares were valued at the closing market prices of the stock at the date of grant, resulting in the recognition of $879,000 and $4,162,400 in compensation expense.
6.
Website Development Costs
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Website Development Costs
|
|
$
|
148,792
|
|
|
$
|
148,792
|
|
Less accumulated amortization and impairment loss
|
|
|
(148,792
|
)
|
|
|
(34,908
|
)
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
113,884
|
|
Amortization of website was $21,435 and $23,055 for the years ended December 31, 2015 and 2014, respectively. The Company incurred an impairment loss of $92,449 during the year ending December 31, 2015.
7.
Accrued Liabilities
Accrued expenses
:
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31, 2014
|
Accrued professional fees
|
$
|
24,500
|
|
$
|
-
|
Accrued interest
|
|
71,675
|
|
|
26,148
|
Accrued payroll taxes, penalties and interest
(a)
|
|
537,171
|
|
|
479,567
|
Total accrued expenses, payroll taxes, and related expenses
|
$
|
633,346
|
|
$
|
505,715
|
(a) The Company has paid or accrued compensation to its Chief Executive Officer totaling $999,000 and $4,291,550 during the years ended December 31, 2015 and 2014, 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 related taxes, along with the estimated interest and penalties, of $537,171 and $479,567 at December 31, 2015 and 2014, respectively.
8.
Notes Payable
The notes outstanding are summarized by their terms below:
25
Schedule of Debt
|
|
|
|
|
|
|
|
December 31,
|
|
|
2015
|
|
|
2014
|
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, including delinquency penalties of $24,979 and $9,735, respectively, net of unamortized debt discounts, attributable to derivative liabilities, and deferred financing costs in the amount of $0 and $145,584, respectively. All of these notes are in default as of December 31, 2015.
|
|
196,865
|
|
|
277,153
|
Total
|
$
|
196,865
|
|
$
|
277,153
|
Summary of Convertible Note Transactions
|
|
|
|
|
|
Convertible notes, January 1
|
$
|
277,153
|
|
$
|
345,500
|
Additional notes, face value
|
|
20,775
|
|
|
372,500
|
Addition due to debt agreement default provisions
|
|
24,979
|
|
|
9,635
|
Payments and adjustments
|
|
(16,830)
|
|
|
-
|
Conversions of debt
|
|
(140,943)
|
|
|
(419,001)
|
Financing costs, amortized in 2015
|
|
2,256
|
|
|
(2,256)
|
Debt discounts, amortized in 2015
|
|
29,475
|
|
|
(29,475)
|
Convertible notes, December 31
|
$
|
196,865
|
|
$
|
277,153
|
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 Entitys Own Stock
and determined that the underlying is indexed to the Companys 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 $485,142 and $1,016,112 has been recorded, as of December 31, 2015 and 2014, respectively, related to the above notes. The derivative value was calculated using the Black-Scholes method. Assumptions used in the derivative valuation were as follows:
|
|
|
|
|
|
December 31,
|
|
|
2015
|
2014
|
Weighted Average:
|
|
|
|
Dividend rate
|
|
0.00%
|
0.00%
|
Risk-free interest rate
|
0.49%
|
0.12%
|
Expected lives (years)
|
.736
|
.563
|
Expected price volatility
|
507.8%
|
254.8%
|
Forfeiture Rate
|
|
0.00%
|
0.00%
|
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,
26
discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Companys Level 3 liabilities consist of the derivative liabilities associated with the convertible notes. At December 31, 2015, all of the Companys 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 Companys 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, 2015:
|
|
|
|
|
|
|
As of December 31, 2015
|
|
Carrying Value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Derivative Liabilities
|
$ 485,142
|
$
|
$
|
$ 485,142
|
$ 485,142
|
Total Derivative Liabilities
|
$ 485,142
|
$
|
$
|
$ 485,142
|
$ 485,142
|
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, 2015
|
|
December 31, 2014
|
Balance, December 31, 2014
|
$
|
1,016,112
|
$
|
1,092,030
|
Derivative liability expense
|
|
46,076
|
|
-
|
Losses realized and included in net loss
|
|
8,052
|
|
1,053,288
|
Purchases, issuances and settlements
|
|
(585,098)
|
|
(1,129,206)
|
Transfers in (out)
|
$
|
-
|
$
|
-
|
Balance, December 31, 2015
|
|
485,142
|
|
1,016,112
|
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 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,
|
|
2015
|
|
2014
|
Income tax provision (benefit) at statutory rate
|
$
|
(489,000)
|
|
$
|
(2,262,000)
|
State taxes, net of federal benefit
|
|
(49,000)
|
|
|
(226,000)
|
Nondeductible items
|
|
438,000
|
|
|
2,171,100
|
Subtotal
|
|
(100,000)
|
|
|
(316,900)
|
Change in valuation allowance
|
|
100,000
|
|
|
316,900
|
Income Tax Expense
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities were comprised of the following:
|
|
|
|
|
|
Net Operating Losses
|
$
|
1,283,000
|
|
$
|
1,183,000
|
|
|
|
|
|
|
Valuation allowance
|
|
(1,283,000)
|
|
|
(1,183,000)
|
Deferred tax asset, net
|
$
|
-
|
|
$
|
-
|
As of December 31, 2015, the Company has estimated tax net operating loss carryforwards of approximately $3.33 million, which can be utilized or expire through tax year 2035. 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, 2015 and 2014 was $100,000 and $316,900, respectively.
11.
Equity
Stock Compensation
The Company issued 648,500,000 shares of common stock to the 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.
The Company issued 1,499,650 shares of common stock to the Chief Executive Officer in exchange for services during the year ended December 31, 2014. These shares were valued at the closing market prices of the stock at the date of grant, resulting in the recognition of $4,162,400 in compensation expense.
Conversions of debt
During the year ended December 31, 2015, the Company converted notes of $140,493 and accrued interest of $7,729 into 416,272,138 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 Company recorded the exchange at the fair market value of the shares converted, the excess of which was charged against the derivative liability. The fair market value of the stock was $299,932, of which $157,770 off-set the established derivative liability.
During the year ended December 31, 2014, the Company converted notes of $445,101 and accrued interest of $20,459 into 959,774 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 Company recorded the exchange at the fair market value of the shares converted, the excess of which was charged against the derivative liability. The fair market value of the stock was $1,936,561, of which $1,471,001 off-set the established derivative liability.
Other
During the years ended December 31, 2015 and 2014 the Company recorded in-kind contributions for rent expense in the amount of $1,200 and $1,200, respectively.
The Companys Board of Directors approved reverse stock splits of: 1 for 1,000 on June 10, 2014; 1 for 10 on January 21, 2015; and 1 for 100 on June 15, 2015. All shares have been retroactively restated for this reverse stock split.
There are no warrants or options currently outstanding.
Amendment to the Articles of Incorporation
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. The financial statements have retroactively presented the authorized shares, per this amendment.
The total number of shares this corporation is authorized to issue is 1,500,000,000 (one billion five hundred million), allocated as follows among these classes and series of stock:
|
|
|
Designation
|
Par value
|
Shares
|
Common
|
$0.00001
|
1,499,000,000
|
Preferred Stock Class, Series A
|
$0.0001
|
500,000
|
Preferred Stock Class, Series B
|
$0.001
|
500,000
|
28
No preferred shares have been issued and have not been defined for the preferences.
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 Companys financial position or results of operations.
The Companys 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, 2015 and 2014.
13.
Subsequent Events
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 $21,342.
29
EXHIBIT C
Real Estate Contacts, Inc.
Our unaudited financial statements for the period ended June 30, 2016
Contents
30
|
Real Estate Contacts, Inc.
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(unaudited)
|
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
$
|
170
|
|
$
|
280
|
Total current assets
|
|
170
|
|
|
280
|
|
|
|
|
|
|
|
Total assets
|
$
|
170
|
|
$
|
280
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts payable
|
$
|
9,789
|
|
$
|
5,592
|
|
Accrued expenses
|
|
131,165
|
|
|
96,175
|
|
Accrued salaries, payroll taxes and related expenses
|
|
601,850
|
|
|
537,171
|
|
Derivative liability
|
|
368,405
|
|
|
485,142
|
|
Due to principle shareholder, related party
|
|
134,660
|
|
|
101,440
|
|
Notes payable, principle shareholder, related party
|
|
31,250
|
|
|
20,250
|
|
Convertible notes payable
|
|
154,613
|
|
|
196,865
|
Total current liabilities
|
|
1,431,732
|
|
|
1,442,635
|
Total liabilities
|
|
1,431,732
|
|
|
1,442,635
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
Preferred Stock A $.0001 par value, 500,000 shares authorized; none issued and outstanding
|
|
-
|
|
|
-
|
|
Preferred Stock B $.001 par value, 500,000 shares authorized; none issued and outstanding
|
|
-
|
|
|
-
|
|
Common Stock, $0.00001 par value, 249,000,000 shares authorized; 106,724 shares issued and outstanding
|
|
1
|
|
|
1
|
|
Additional paid-in capital
|
|
14,976,981
|
|
|
14,952,867
|
|
Accumulated deficit
|
|
(16,408,544)
|
|
|
(16,395,223)
|
Total stockholders' deficit
|
|
(1,431,562)
|
|
|
(1,442,355)
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit
|
$
|
170
|
|
$
|
280
|
The accompanying notes are an integral part of these unaudited financial statements.
31
|
Real Estate Contacts, Inc.
Statements of Operations
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
-
|
|
|
3,232
|
|
|
-
|
|
|
5,738
|
|
Compensation and related costs
|
|
32,087
|
|
|
32,340
|
|
|
64,680
|
|
|
1,263,766
|
|
Professional
|
|
10,389
|
|
|
4,000
|
|
|
12,989
|
|
|
13,236
|
|
General and administrative
|
|
5,605
|
|
|
3,538
|
|
|
6,637
|
|
|
18,125
|
|
Amortization
|
|
-
|
|
|
7,350
|
|
|
-
|
|
|
13,893
|
|
Total operating expenses
|
|
48,081
|
|
|
50,460
|
|
|
84,306
|
|
|
1,314,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations
|
|
(48,081)
|
|
|
(50,460)
|
|
|
(84,306)
|
|
|
(1,314,559)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(18,788)
|
|
|
(20,978)
|
|
|
(58,461)
|
|
|
(100,117)
|
|
Change in fair value of derivative liability
|
|
192,099
|
|
|
8,650
|
|
|
93,223
|
|
|
326,972
|
|
Gain on extinguishment of debt
|
|
16,317
|
|
|
-
|
|
|
36,223
|
|
|
-
|
|
Total other income (expense)
|
|
189,628
|
|
|
(12,328)
|
|
|
70,985
|
|
|
226,855
|
Net gain/(loss) before provision for income taxes
|
|
141,547
|
|
|
(62,788)
|
|
|
(13,321)
|
|
|
(1,087,704)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain/(loss)
|
$
|
141,547
|
|
$
|
(62,788)
|
|
$
|
(13,321)
|
|
$
|
(1,087,704)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) per share, basic and dilutive
|
$
|
1.33
|
|
$
|
(10.18)
|
|
$
|
(0.12)
|
|
$
|
(280.70)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and dilutive
|
|
106,720
|
|
|
6,167
|
|
|
106,720
|
|
|
3,875
|
The accompanying notes are an integral part of these unaudited financial statements.
32
|
Real Estate Contacts, Inc.
Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
|
|
2016
|
|
|
|
2015
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
Net loss
|
$
|
(13,321)
|
|
$
|
(1,087,704)
|
|
Adjustment to reconcile net loss to net
|
|
|
|
|
|
|
cash provided by operations:
|
|
|
|
|
|
|
Amortization
|
|
-
|
|
|
13,893
|
|
Stock based compensation
|
|
-
|
|
|
1,140,000
|
|
In kind contribution of rent
|
|
600
|
|
|
-
|
|
Amortization of debt discounts and financing costs
|
|
-
|
|
|
57,610
|
|
Change in fair value of derivative liability
|
|
(93,223)
|
|
|
(326,972)
|
|
Gain on extinguishment of debt
|
|
(36,223)
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
4,197
|
|
|
(40,214)
|
|
Accrued expenses
|
|
34,990
|
|
|
135,549
|
|
Accrued salaries, payroll taxes and related expenses
|
|
64,679
|
|
|
-
|
|
Due to principal shareholder
|
|
32,191
|
|
|
33,750
|
|
Net Cash Used in Operating Activities
|
|
(6,110)
|
|
|
(74,088)
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
Proceeds from notes and advances, principal shareholder
|
|
11,000
|
|
|
5,000
|
|
Repayments of notes payable
|
|
(5,000)
|
|
|
-
|
|
Net Cash Provided by Financing Activities
|
|
6,000
|
|
|
5,000
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
(110)
|
|
|
(69,088)
|
Cash at beginning of period
|
|
280
|
|
|
71,378
|
Cash at end of period
|
$
|
170
|
|
$
|
2,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
Interest paid
|
$
|
-
|
|
$
|
-
|
|
Taxes paid
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
Non-cash disclosures
|
|
|
|
|
|
|
Reclassification to additional paid in capital upon settlement of notes payable
|
$
|
23,514
|
$
|
|
-
|
|
Settlement of convertible notes in exchange for common shares
|
$
|
-
|
|
$
|
90,830
|
|
Settlement of accrued interest in exchange for common shares
|
$
|
-
|
|
$
|
4,641
|
|
Settlement of accounts payable in exchange for convertible notes
|
$
|
-
|
|
$
|
20,775
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited financial statements.
33
REAL ESTATE CONTACTS, INC.
Notes to the Financial Statements
(Unaudited)
For the six months ended June 30, 2016
1.
Background Information
Real Estate Contacts, Inc. ("The Company") was formed on March 10, 2005 as a Florida Corporation and is based in Parrish, Florida. The Company engages in the ownership and operation of a real estate advertising portal website. Real Estate Contacts, Inc. provides 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. We enable real estate professionals to better promote themselves and their listings and connect with transaction-ready consumers through our online website. Our current real estate search website will enable real estate professionals to increase their visibility and promote their listings.
Real Estate Contacts, 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 is in the first stage of development for our new national real estate website, (
www.realestatecontacts.com
). We plan to build, design and launch a real estate website that will consist of local community city pages that feature real estate agents, brokers, and offices on an exclusive basis. Each one of our Real Estate Contacts would be featured exclusively in the city that they work and include a profile page and a community page.
The Companys business is conducted solely within the Internet.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2016 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2016.
For further information, refer to Real Estate Contacts, Inc.s (the Company) audited financial statements and notes thereto included in the year ended December 31, 2015 Form 10K filed with the Securities and Exchange Commission.
All share and per share information contained in this report gives retroactive effect to a 1 for 1,000 reverse stock split, effective June 10, 2014, a 1 for 10 reverse stock split, effective January 21, 2015, a 1 for 100 reverse stock split effective June 15, 2015, and 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, and derivative assumptions used in calculating derivative liabilities and valuation and estimated useful life of website. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Reclassifications
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, which were retroactively adjusted to presentations of the 2016 and 2015 balance sheet. Additional reclassifications were made to accrued interest and the convertible note principal balances to reclassify interest default penalties incurred from convertible note payable balances to accrued interest. These reclassifications had no effect on reported losses.
34
Financial Instruments
The Companys 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 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 entitys 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 June 30, 2016.
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 June 30, 2016 or as of 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. All costs associated with these websites are subject to straight-line amortization over there 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.
Intangible Assets
35
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:
4.
Significant underperformance compared to historical or projected future operating results;
5.
Significant changes in the manner or use of the acquired assets or the strategy for the overall business; and
6.
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.
Due to multiple issues with our programmer, who hosts our website, management believes that the website may not be functional to the required specification. Management believes that significant modifications may be necessary. Based on the information available to management, in consideration of all issues, an impairment loss of $92,449 was recognized in the quarter ended December 31, 2015 for the carrying value of the website development costs.
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
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 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
36
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, 2015, tax years ended December 31, 2014, 2013, and 2012 are still potentially subject to audit by the taxing authorities.
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 June 30, 2016 there were approximately 585,400 share equivalents, as calculated, for potential conversion demand of our outstanding convertible notes.
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 corporations 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.
3.
Going Concern
The accompanying unaudited 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 has a history of losses and has an accumulated deficit from inception of approximately $16 million. Additionally, the Company has negative working capital of approximately $1.4 million at June 30, 2016, a stockholders deficit of approximately $1.4 million, and negative operating cash flows of approximately $6,110 for the six months ended June 30, 2016. These conditions raise substantial doubt about the Companys ability to continue as a going concern. The Company depends upon capital to be derived from future financing activities such as subsequent offerings of its common stock or debt financing in order to operate and grow the business. There can be no assurance that the Company will be successful in raising such capital. 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.
Related Party Transactions
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 six months ending June 30, 2016 and 2015, the Company recorded compensation expense in the amount of $60,000 and $60,000, respectively.
37
The majority shareholder has advanced funds or deferred contractual salaries since inception, for the purpose of financing working capital and product development. As of June 30, 2016, the Company owed $134,660. There are no repayment terms to these advances and deferrals. The Company has accrued interest at a minimal variable rate, currently 3%. Management will periodically adjust this rate following guidelines of applicable federal rates.
Additionally, the majority shareholder has advanced funds, in the form of promissory notes, in the amount of $31,250 as of June 30, 2016. These promissory notes mature and are payable in six months from the date issued and have a minimal stated interest. Interest is accrued at 3% on these notes.
Total interest accrued on these advances and notes is $15,728 as of June 30, 2016.
The Company has minimal needs for facilities and operates from office space provided by the majority shareholder. There are no lease terms. For the six months ended June 30, 2016 and 2015, rent has been calculated based on the limited needs at a fair market value of the space provided. Rent expense was $600 and $0 for the six months ended June 30, 2016 and 2015, respectively. The rental value provided 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.
During the six months ended June 30, 2016 and 2015, the Company issued nil and 48,500,000 shares, respectively, of common stock to the Chief Executive Officer in exchange for services. These shares were valued at the closing market prices of the stock at the date of grant, resulting in the recognition of $0 and $1,140,000 in compensation expense.
5.
Accrued Liabilities
Accrued expenses consist of:
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Accrued professional fees
|
|
$
|
9,789
|
|
$
|
5,592
|
Accrued interest
|
|
|
131,165
|
|
|
96,175
|
Accrued salaries, payroll taxes, and related expenses(a)
|
|
|
601,850
|
|
|
537,171
|
Total accrued expenses
|
|
$
|
742,804
|
|
$
|
638,938
|
(a) The Company has paid or accrued compensation to its Chief Executive Officer totaling $60,000 and $1,200,000 during the six month periods ending June 30, 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 compensation and related taxes, along with the estimated interest and penalties of $601,850 and $537,171 at June 30, 2016 and December 31, 2015, respectively.
Deferred Revenue
:
Deferred revenues are derived from the unearned portion of advertising subscriptions. Advertising revenue is generated primarily from annual subscription transactions. Revenue is earned ratably over the expired portion of the subscription term. The unearned portion is deferred until earned through the passage of time based on the subscription term. As of June 30, 2016 and December 31, 2015, there was no deferred revenue.
7.
Debt Obligations
The notes outstanding are summarized by their terms below:
Schedule of Debt
|
|
|
|
|
June 30, 2016
|
|
December 31, 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 $0, respectively. Notes in default as of June 30, 2016 totaled $53,409 and *delinquency penalties have been assessed accordingly.
|
154,613
|
|
171,964
|
Total
|
$ 154,613
|
|
$ 171,964
|
*Delinquency Penalties
Under the terms of the convertible debt agreements there are certain default provisions related to timely financial filings and insufficiency of authorized shares available to be issued. The default provisions may or may not be enforced
at the discretion of the
38
lender. The Company has recognized additional interest expense and increased accrued interest for the potential interest penalty clauses available to the lenders.
Summary of convertible note transactions:
|
|
|
|
|
June 30, 2016
|
Convertible notes, December 31
|
$
|
171,964
|
|
Payments and adjustments
|
|
(17,351
|
)
|
Convertible notes, June 30
|
$
|
154,613
|
|
8.
Derivative Liability
The Company evaluated the terms of the convertible notes, in accordance with ASC Topic No. 815 - 40,
Derivatives and Hedging - Contracts in Entitys Own Stock
and that the underlying common stock is indexed to the Companys 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 Company recognized a debt discount on the notes for the derivatives 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 cost over the life of the loan.
A derivative liability, in the amount of $368,405 has been recorded as of June 30, 2016, related to the above convertible notes. The derivative value was calculated using the Black-Scholes method. Assumptions used in the derivative valuation were as follows:
|
|
Weighted Average:
|
|
Dividend rate
|
0.0%
|
Risk-free interest rate
|
.45%
|
Expected lives (years)
|
1.561
|
Expected price volatility
|
140,6%
|
Forfeiture Rate
|
0.0%
|
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 Companys Level 3 liabilities consist of the derivative liabilities associated with the convertible notes. At June 30, 2016, all of the Companys 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
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivative Liabilities
|
$
|
368,405
|
$
|
-
|
$
|
-
|
$
|
368,405
|
Total Derivative Liabilities
|
$
|
368,405
|
$
|
-
|
$
|
-
|
$
|
368,405
|
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
39
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 Companys 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 June 30, 2016.
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 six month period ending June 30, 2016:
|
|
|
Balance, December 31, 2015
|
$
|
485,142
|
Reclassification to additional paid in capital upon settlement of notes payable
|
|
(23,514)
|
Total gains realized and included in net income
|
|
(93,223)
|
Balance, June 30, 2016
|
$
|
368,405
|
9.
Equity
Stock Compensation
During the six months ended June 30, 2016, the Company did not issue stock in the form of compensation.
The Company issued 4,850,000,000 shares of common stock to the Chief Executive Officer in exchange for services during the six months ended June 30, 2015. These shares were valued at the fair market value of the stock at the date of grant, resulting in the recognition of $1,140,000 in compensation expense.
Conversions of debt
During the six months ended June 30, 2016, the Company did not issue shares in connection with its convertible notes.
On March 11, 2016, the Company settled a convertible note payable carrying a principal balance of $19,397 and accrued interest of $7,795 for consideration of $2,000, resulting in a gain on settlement of $25,192.
In the three month period ending March 31, 2015, the Company converted notes of $81,518 and accrued interest of $4,565 into 994,327,859 common shares, in accordance with terms of the agreements. The conversion price, per agreement, was discounted to the fair market trading value. The Company recorded the exchange at the fair market value of the shares converted, the excess of which was charged against the derivative liability. The fair market value of the stock was $180,551, of which $94,468 off set the established derivative liability.
Other
During the six month periods ended June 30, 2016 and 2015 the Company recorded in-kind contributions for rent expense in the amount of $600 and $0, respectively.
The Companys Board of Directors approved reverse stock splits of: 1 for 1,000 on June 10, 2014; 1 for 10 on January 21, 2015; and 1 for 100 on June 15, 2015, and a 1 for 10,000 reverse stock split of your outstanding common stock, effective July 15, 2016. All shares have been retroactively restated for this reverse stock split.
There are no warrants or options currently outstanding.
Amendment to the Articles of Incorporation
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.
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 shares. 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.
40
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 (see Note 11).The financial statements for all periods presented have been retroactively adjusted to reflect this recapitalization.
As of June 30, 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 (see note 11):
|
|
|
Designation
|
Par value
|
Shares
|
Common
|
$0.00001
|
249,000,000
|
Preferred Stock Class, Series A
|
$0.0001
|
500,000
|
Preferred Stock Class, Series B
|
$0.001
|
500,000
|
No preferred shares have been issued.
10.
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 Companys financial position or results of operations.
The Companys 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 June 30, 2016 and June 30, 2015.
11.
Subsequent Events
The Company has evaluated all events that occur after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The Management of the Company determined that there were no reportable subsequent events to be disclosed except as described below.
On July 20, 2016, the Company increased its authorized capital (see Note 9).
On August 15, 2016, 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 Companys Preferred Stock titled as Series A. They were effective on August 15, 2016. Pursuant to the Articles, no shareholder vote was required for this designation. A Preliminary Schedule 14C Information Statement was filed with the SEC on July 26, 2016.
41