ITEM 1. FINANCIAL
STATEMENTS
ACOLOGY,
INC.
|
CONSOLIDATED
BALANCE SHEETS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2016
|
|
December
31, 2015
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,527
|
|
|
$
|
37,533
|
|
Accounts
Receivable
|
|
$
|
29,833
|
|
|
$
|
30,734
|
|
Inventories
|
|
|
101,702
|
|
|
|
79,941
|
|
Note
Receivable
|
|
|
163,336
|
|
|
|
155,835
|
|
Advance
to supplier
|
|
|
—
|
|
|
|
10,683
|
|
Total
Current Assets
|
|
|
296,398
|
|
|
|
314,726
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $45,573 and $31,773, respectively
|
|
|
60,041
|
|
|
|
54,982
|
|
Security
Deposits
|
|
|
7,489
|
|
|
|
7,489
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
363,928
|
|
|
$
|
377,197
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
52,092
|
|
|
$
|
45,760
|
|
Convertible
notes payable, net of debt discount of $44,212 and $226,186, respectively
|
|
$
|
455,788
|
|
|
$
|
326,314
|
|
Notes
Payable
|
|
|
577,500
|
|
|
|
607,000
|
|
Loan
Payable - stockholder
|
|
|
93,494
|
|
|
|
93,494
|
|
Accrued
expenses
|
|
|
185,407
|
|
|
|
102,908
|
|
Derivative
Liability
|
|
|
389,552
|
|
|
|
623,994
|
|
Total
Current Liabilities
|
|
|
1,753,833
|
|
|
|
1,799,470
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIENCY
|
|
|
|
|
|
|
|
|
Common
Stock, .001 par value, 6,000,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
5,164,134,794
and 4,974,621,214 shares issued and outstanding at
|
|
|
|
|
|
|
|
|
June
30, 2016 and December 31, 2015, respectively
|
|
|
51,641
|
|
|
|
49,745
|
|
Additional
Paid in Capital
|
|
|
252,572
|
|
|
|
102,857
|
|
Accumulated
Deficit
|
|
|
(1,694,118
|
)
|
|
|
(1,574,875
|
)
|
TOTAL
STOCKHOLDERS' DEFICIENCY
|
|
|
(1,389,905
|
)
|
|
|
(1,422,273
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
$
|
363,928
|
|
|
$
|
377,197
|
|
The
accompanying notes are an integral part of these financial statements.
ACOLOGY,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Six
Months Ended June 30,
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
962,328
|
|
|
$
|
712,672
|
|
|
$
|
427,026
|
|
|
$
|
412,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
266,165
|
|
|
|
232,614
|
|
|
|
179,595
|
|
|
|
135,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
696,163
|
|
|
|
480,058
|
|
|
|
247,431
|
|
|
|
277,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
567,678
|
|
|
|
551,231
|
|
|
|
177,139
|
|
|
|
320,224
|
|
Advertising
and marketing
|
|
|
196,585
|
|
|
|
47,975
|
|
|
|
115,752
|
|
|
|
27,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
764,263
|
|
|
|
599,206
|
|
|
|
292,891
|
|
|
|
347,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from operations
|
|
|
(68,100
|
)
|
|
|
(119,148
|
)
|
|
|
(45,460
|
)
|
|
|
(70,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expenses (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net of interest income of $7,501
|
|
|
163,234
|
|
|
|
28,028
|
|
|
|
79,725
|
|
|
|
14,014
|
|
Gain
on extinguishment of debt
|
|
|
(16,542
|
)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Gain
on change in fair value of derivative
|
|
|
(95,549
|
)
|
|
|
|
|
|
|
(34,571
|
)
|
|
|
|
|
Total
Other Expenses (Income)
|
|
|
51,143
|
|
|
|
28,028
|
|
|
|
45,154
|
|
|
|
14,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before income taxes
|
|
|
(119,243
|
)
|
|
|
(147,176
|
)
|
|
|
(90,614
|
)
|
|
|
(84,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(119,243
|
)
|
|
$
|
(147,176
|
)
|
|
$
|
(90,614
|
)
|
|
$
|
(84,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic & diluted
|
|
|
5,091,889,286
|
|
|
|
4,546,014,334
|
|
|
|
5,164,134,794
|
|
|
|
4,546,014,334
|
|
The
accompanying notes are an integral part of these financial statements.
ACOLOGY,
INC.
STATEMENTS
OF CASH FLOWS
(Unaudited)
|
|
Six
Month Ended
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(119,243
|
)
|
|
$
|
(147,176
|
)
|
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
12,800
|
|
|
|
8,606
|
|
Gain
on extinguishment of debt
|
|
|
(16,542
|
)
|
|
|
|
|
Gain
on changee in fair alue of derivative
|
|
|
(95,549
|
)
|
|
|
|
|
Non
cash interest expense
|
|
|
136,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
901
|
|
|
|
(20,570
|
)
|
Inventories
|
|
|
(21,761
|
)
|
|
|
(80,000
|
)
|
Accounts
Payable
|
|
|
6,332
|
|
|
|
(14,716
|
)
|
Advances
to supplier
|
|
|
10,683
|
|
|
|
28,421
|
|
Accrued
expenses
|
|
|
82,500
|
|
|
|
25,921
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(3,646
|
)
|
|
|
(199,514
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(17,860
|
)
|
|
|
(3,335
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(17,860
|
)
|
|
|
(3,335
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
15,000
|
|
|
|
—
|
|
Repayment
of notes payable
|
|
|
(29,500
|
)
|
|
|
—
|
|
NET
CASH USED IN FINANCING ACTIVITIES
|
|
|
(14,500
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
(36,006
|
)
|
|
|
(202,849
|
)
|
|
|
|
|
|
|
|
|
|
CASH
- BEGINNING OF PERIOD
|
|
|
37,533
|
|
|
|
261,233
|
|
|
|
|
|
|
|
|
|
|
CASH
- END OF PERIOD
|
|
$
|
1,527
|
|
|
$
|
58,384
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Non-cash
financing activities
|
|
|
|
|
|
|
|
|
Conversion
of convertible debt with derivative into common stock
|
|
$
|
168,153
|
|
|
$
|
—
|
|
Common
stock issued in connection with conversion
|
|
$
|
151,611
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
Acology,
Inc.
Notes to
Financial Statements
June 30,
2016
(Unaudited)
NOTE
1 – Business
Acology,
Inc. (the “Company”), through its wholly owned subsidiary, D&C Distributors LLC (“D&C”), is in
the business of designing, manufacturing, branding and selling proprietary plastic medical grade containers that can store Pharmaceuticals,
herbs, teas and other solids or liquids, some of which can grind solids and shred herbs, and through its wholly owned subsidiary,
D&C Printing LLC (“Printing”), is in the business of private labeling and branding for purchasers of containers
and other products.
D&C
and Printing were formed under the laws of the State of California on January 29, 2013, and April 14, 2015, respectively.
NOTE
2 – Summary of Significant Accounting Policies
Basis
of Presentation and Principals of Consolidation
The
accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information
and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.
In the opinion of the Company’s management, the accompanying unaudited financial statements contain all the adjustments
necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2016,
and the results of operations and cash flows for the periods presented. The results of operations for the three and six months
ended June 30, 2016, are not necessarily indicative of the operating results for the full fiscal year or any future period. These
unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto
included in the Form 10-K for the year ended December 31, 2015, filed with the SEC on April 14, 2016.
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances
and transactions have been eliminated.
Use
of Estimates
The
preparation of the financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates. Certain of the Company’s estimates could be affected by external
conditions, including those unique to its industry, and general economic conditions. It is possible that these external factors
could have an effect on the Company’s estimates that could cause actual results to differ from its estimates. The Company
re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
Revenue
Recognition
The
Company follows the guidance of the Accounting Standards Codification (“ASC”) Topic 605,
Revenue Recognition.
We
record revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the selling price to the customer
is fixed or determinable and collectability of the revenue is reasonably assured. The Company has not experienced any significant
returns from customers and accordingly, in management’s opinion, no reserve for returns has been provided.
Inventories
Inventories,
which consist of the Company’s product held for resale, are stated at the lower of cost, determined using the first-in first-out,
and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated
costs to complete and dispose of the product.
If the
Company identifies excess, obsolete or unsalable items, its inventories are written down to their realizable value in the period
in which the impairment is first identified. Shipping and handling costs incurred for inventory purchases and product shipments
are recorded in cost of sales in the Company’s statements of operations.
Fair
Value Measurements
The
Company adopted the provisions of ASC Topic 820,
Fair Value Measurements and Disclosures,
which defines fair value as used
in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature
of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective
yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances
of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC
820 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, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 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 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The
derivative liability in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, is
the only financial liability measure at fair value on a recurring basis.
The
change in the Level 3 financial instrument is as follows:
Balance, January 1, 2016
|
|
$
|
623,994
|
|
|
Less:
|
|
|
|
|
|
· Converted during the
Period
|
|
|
138,893
|
|
|
· Change in fair value
recognized in operations
|
|
|
95,549
|
|
|
Balance, June 30, 2016
|
|
$
|
389,552
|
|
|
Property and Equipment
Property
and equipment is stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the
useful lives of the assets. For furniture and fixtures the useful life is five years, Leasehold Improvements are depreciated over
the two year lease term. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as
incurred.
Convertible
Instruments
The
Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives
and Hedging Activities”.
Applicable
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The 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 other GAAP 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.
The
Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated
from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic
value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common
stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under
these arrangements are amortized over the term of the related debt to their stated date of redemption.
The
Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment
standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at
their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting
liabilities. During the six months ended June 30, 2016, the Company recognized a gain on extinguishment of $16,542 from the conversion
of convertible debt with a bifurcated conversion feature.
Advertising
Advertising
and marketing expenses are charged to operations as incurred.
Income
Taxes
The
Company use the asset and liability method of accounting for income taxes in accordance with ASC Topic 740,
Income Taxes.
Under
this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii)
deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial
statements or tax returns. 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. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment
date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive
and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
ASC
Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions.
Recent
accounting pronouncements
The
Company does not believe there are any recently issued, but not yet effective accounting standards that would have a significant
impact on the Company’s financial position or results of operations.
NOTE
3 – Going Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. At June 30, 2016, the Company had a stockholders’ deficit
of $1,389,905 and a working capital deficit of $1,457,435. In addition, the Company has generated operating losses since inception
and has notes payable that are in default. These factors, among others, raise substantial doubt about the ability of the Company
to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the successful execution
of its operating plan which includes increasing sales of existing products while introducing additional products and services,
controlling operation expenses, negotiating extensions of existing loans and raising either debt or equity financing. There is
no assurance that we will be able to increase sales or to obtain extend financing on terms acceptable to us or at all or successfully
execute any of the other measures set forth in the previous sentence.
NOTE
4 – Note Receivable
On August
11, 2015 the Company loaned $150,000 to an unrelated person who is one of the convertible noteholders referred to in Note 5. The
note accrues interest at the highest lawful rate, but not more the 20% per annum, the Company is accruing interest at 10% per
annum based on California usury rates. Upon an event of default, as defined in the note, interest will be compounded monthly.
The note matures August 11, 2016.
NOTE
5 – Convertible Notes Payable
The
following is a description of convertible notes payable at June 30, 2016:
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A convertible
promissory note dated September 14, 2015, in the original amount of $360,000. The note bears interest at 0.28% per annum and
is due September 14, 2016. The note is subject to acceleration in the event of certain events of default, contains certain
restrictive covenants and is secured by a pledge of all of the membership units in D&C. If an event of default occurs,
the unpaid principal amount and interest accrued thereon will be convertible into shares of the Company’s common stock
at a conversion price per share equal to 50% of the average daily closing price for three consecutive trading days ending
on the trading day immediately prior to the conversion date. During the year ended December 31, 2015, the holder converted
$50,000 of principal and during the three months ended March 31, 2016 converted an additional $60,000 of principal. The outstanding
principal balance at June 30, 2016, was $250,000.
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A convertible
promissory note, dated December 15, 2015, made in favor of the unrelated party referred to above in the principal amount of
$8,000. This note is convertible into shares of the Company’s common stock at a conversion price equal to the average
of the daily closing price for a share of Common Stock for the 3 consecutive trading days ending on the trading day immediately
prior to the day on which a notice of conversion is delivered. The note matures on December 27, 2016, and bears interest at
the highest lawful rate, but not more than 20% per annum.
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A
convertible promissory note, dated February 11, 2016, made in favor of the unrelated
party referred to above in the principal amount of $7,500. This note is convertible into
shares of the Company’s common stock at a conversion price equal to the average
of the daily closing price for a share of Common Stock for the 3 consecutive trading
days ending on the trading day immediately prior to the day on which a notice of conversion
is delivered. The note matures on February 11, 2017, and bears interest at the highest
lawful rate, but not more than 20% per annum.
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A convertible
promissory note, dated April 25, 2016, made in favor of the unrelated party referred to above in the principal amount of $7,500.
This note is convertible into shares of the Company’s common stock at a conversion price equal to the average of the
daily closing price for a share of Common Stock for the 3 consecutive trading days ending on the trading day immediately prior
to the day on which a notice of conversion is delivered. The note matures on April 25, 2017, and bears interest at the highest
lawful rate, but not more than 20% per annum.
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The
Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion
amount which constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding
discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately
to interest expense at inception. The above notes are presented net of a discount of $44,212 at June 30, 2016, on the accompanying
balance sheet.
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A series of promissory note conversion
agreements that the Company entered into during 2014 with ten unaffiliated individuals with a current balance in the aggregate
amount of $217,000. These notes are convertible into shares of the Company’s common stock at a conversion price of $.05
per share. The loans are non-interest bearing and have no stated maturity date.
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A promissory note conversion agreement
that the Company entered into with an unaffiliated individual in the amount of $10,000. This note is convertible into shares
of the Company’s common stock at a conversion price of $0.05 per share. The note bears interest at 15% per annum and
matured April 3, 2015. The Company is negotiating an extension of the maturity date.
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NOTE
6 – Notes Payable
During
2014, the Company entered into a series of promissory notes with four unaffiliated individuals in the aggregate amount of $457,000,
with a principal balance of $435,000 at March 31, 2016. These notes bear interest at rates ranging from 10% to 15% (with a weighted-average
rate of 11.7%). These notes are past due and the Company is negotiating an extension of their respective maturity dates.
On August
15, 2015, the Company issued a promissory note in the amount of $150,000 to an unrelated third party. The note bears interest
at .48% per annum provided that the note is paid on or before maturity date, or 2 percentage points over the Wall Street Journal
Prime rate, if not repaid on or before the maturity date. This note matures on August 11, 2016. Upon an event of default, as defined
in the note, interest shall be compounded daily.
NOTE
7 – Loan Payable - Shareholder
During
the years ended December 31, 2015, and 2014, the Company received advances from one of its stockholders to help finance its operations
in the amounts of $25,147 and $68,347, respectively. The loan is non-interest bearing and has not set maturity date. The Company
expects to repay the loan when cash flows become available. The balance due at June 30, 2016 aggregated $93,494.
NOTE
8 – Stockholders’ Deficiency
On March 10, 2016, the Company issued 189,513,58
shares of common stock in connection with the conversion of $60,000 of the principal amount of the $360,000 Convertible
Promissory Note described in Note 5.
NOTE
9 – Concentrations
For the six months ended June 30, 2016, one of our customer
accounted for 10% of sales.
For the three months ended June 30, 2016, the Company’s largest customer accounted for
approximately 11% of sales. No customer accounted for more than 10% of sales for the three and six months ended June 30,2015.
For the three and six month periods ended June 30,
2016 and 2015, the Company purchased approximately 95% and 99% of its products from one distributor.
NOTE
10 – Commitments
The Company is committed
under an operating lease for its premises. The lease calls for monthly payments of $7,500 plus 100% of operating expenses, until
the lease expires August 31, 2016.
NOTE
11 – Subsequent Events
Management
has evaluated subsequent events through the date which the financial statements were available to be issued.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY’S FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS
AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS REPORT.
Introduction
Acology
is the parent of D&C Distributors LLC (“Distributors”) and D&C Printing (“Printing”). Acology
has no material assets other than all of the outstanding membership units of Distributors and of Printing and has no plans to
conduct any business activities other than obtaining or guaranteeing financing for the businesses conducted by its subsidiaries
or assisting them in obtaining such financing.
Through
Distributors, we are in the business of designing, manufacturing, and selling containers that can store, grind and shred pharmaceuticals,
herbs, teas and other solids or liquids. Our principal product is the Medtainer®, which is described below under “Products.”
Through Printing, we are in the business or custom labeling our products and products manufactured by others.
We market
directly to businesses through our phone room, to the retail public through internet sales and, and to wholesalers and other businesses
who resell our products to other businesses and end users.
As indicated
above, our products can store and grind many substances. Our products are manufactured using medical grade resin because we intended
to market them for use in grinding pills for administration to children and other persons who have difficulty swallowing and to
pets. Our 20-dram Medtainer® has received child safety certification.
In light
of the facts that the possession and use of marijuana have been legalized, subject to varying restrictions, in at least 23 states
and that several other states are considering such legalization, we believe that our products may be of interest to a large number
of users of marijuana in and we advertise our products on our website and elsewhere as suitable for that purpose. However, since
we do not seek information from our customers who are end users as to how they intend to utilize our products and have no similar
knowledge respecting end users of products sold through our distributor, we are unable to determine the extent of its use in connection
with the storage and grinding of marijuana or any other purpose. We believe that marketing our products to users of marijuana
subject us to the risk of prosecution under federal law if law enforcement authorities were to determine that our products are
“drug paraphernalia” and by state or local authorities because our websites are visible in jurisdictions where medicinal
and/or recreational use of marijuana is not permitted and as a result we may be found to be violating the laws of those jurisdictions.
RESULTS
OF OPERATIONS
Three
Months Ended June 30, 2016 Compared with Three Months Ended June 30, 2016
Sales:
Our sales for the three months ended June 30, 2016, were $427,026, from which we earned a gross profit of $247,431. Our sales
for the three months ended June 30, 2015, were $412,997, from which we earned a gross profit of $277,741. The principal reason
for the increase in sales from the earlier to the later period was increased sales volume. However, our gross profit was lower
in the later period, because our cost of sales increased from $135,256 in the earlier period to $179,595 in the later period.
Operating Expenses:
For the three months ended
June 30, 2016, total operating expenses of $292,891 were incurred, including $177,139 for general and
administrative expenses, of which $68,717 was for compensation of our officers, and $115,752 for advertising and marketing.
For the three months ended June 30, 2015, total operating expenses of $347,780 were incurred, including $320,224 for general
and administrative expenses, of which $46,049 was for compensation of our officers, and $27,556 was for advertising and
marketing. The principal reasons for the decrease in general and administrative expense were a decrease in personnel costs,
which were $274,175 in the earlier period, compared with $90,791 in the later period. Advertising and marketing costs
increased principally because of our decision to market our products aggressively.
Loss
from Operations.
Loss from operations decreased from $70,039 for the three months ended June 30, 2015, to $45,460 for the
three months ended June 30, 2016, because sales increased substantially, while cost of sales and general and administrative expenses
were overall lower a percentage of sales in the later period than in the earlier period.
Other Expenses.
During the three months ended June
30, 2016, and 2015, we incurred interest expense of $79,725 and $14,014, respectively. We incurred a gain on change in fair value
of o
ur derivative resulting from the conversion feature on our convertible debt of $34,571 for the
three months ended June 30, 2016. We recorded no such gain or loss f
or the three months ended June 30, 2015.
Net
Loss:
Our net loss for the three months ended June 30, 2016, increased to $90,614 from $84,053 for the three months ended
June 30, 2015.
Six
Months Ended June 30, 2016 Compared with Six Months Ended June 30, 2016
Sales:
Our sales for the six months ended June 30, 2016, were $962,328, from which we earned a gross profit of $696,163. Our sales
for the six months ended June 30, 2015, were $712,672, from which we earned a gross profit of $480,058. The principal reason for
the increase in sales from the earlier to the later period was increased sales volume. Our cost of sales increased from $232,614
in the earlier period to $266,165 in the later period.
Operating Expenses:
For the six months ended June
30, 2016, total operating expenses of $764,263 were incurred, including $567,678 for general and administrative expenses, of which
$134,299 was for compensation of our officers, and $196,585 for advertising and marketing. For the six months ended June 30, 2015,
total operating expenses of $599,206 were incurred, including $551,231 for general and administrative expenses, of which $129,049
was for compensation of our officers, and $47,925 was for advertising and marketing. The principal reason for the increase in
general and administrative expense was an increase in personnel costs, which were $222,862 in the earlier period, compared with
$265,820 in the later period. Advertising and marketing costs increased principally because of our decision to market our products
aggressively.
Loss from Operations.
Loss from operations decreased
from $119,148 for the six months ended June 30, 2015, to $68,100 for the six months ended June 30, 2016, because sales increased
substantially, while cost of sales and general and administrative expenses were overall lower a percentage of sales in the later
period than in the earlier period.
Other Expenses.
During the six months ended June
30, 2016, and 2015, we incurred interest expense of $163,234 and $28,028, respectively. We recorded a gain on extinguishment of
debt of $16,542 and a gain on change in fair value of derivative resulting from the conversion feature on our convertible debt
of $95,549 for the six months ended June 30, 2016. We recorded no such gain or loss for the six months ended June 30, 2015.
Net Loss:
Our net loss for the six months ended
June 30, 2016, increased to $90,614 from $84,053 for the six months ended June 30, 2015.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
and Capital Resources
As of December 31, 2015, we had $37,533 in cash and
accounts receivable of $30,734, and as of June 30, 2016, we had $1,526 in cash and accounts receivable of $43,568. We
financed our operations from the inception of our business on January 19, 2013, through December 31, 2013, through capital
contributions of $141,986 made by our officers in 2013, a $40,000 private placement and loans of $759,847 during the year
ended December 31, 2014, and loans of $175,147 during the year ended December 31, 2015. During the six months ended June 30,
2016, we borrowed $15,000 and repaid $29,500 of notes payable.
We commenced business in January 2013. Our sales grew
over the course of 2013, averaging 11,500 units per month for 2013. During the year ended December 31, 2014, we sold approximately
180,000 units. During the year ended December 31, 2015, we sold an approximately 314,000 units. We sold approximately 95,000 units
during the three months ended June 30, 2016.
We have
a current inventory of approximately 122,000 containers, which we believe will be sold for approximately $549,000.
On April
14, 2015, Printing commenced operations.
The
Company believes that it will require approximately $1,500,000 in additional funding for the next 12 months, including $1,099,500
to repay loans that will become due during this period, assuming that the Company’s operating loss remains at the same level.
The Company plans to seek extensions of these loans, in which case the amount of such funding will be reduced, but cannot give
assurances as to the extent that it will be successful. The Company plans to fund its activities, during the balance of 2016 and
beyond through loans from banks and other financial institutions and the sale of debt or equity securities to private investors.
The Company can give no assurance that it will be successful in so doing or that such funding, if available, can be obtained on
acceptable terms.
The Company’s sales have grown every year since
it commenced business. In 2013, its sales were $254,992; in 2014, they were $460,756; and in 2015, were $1,441,441. For the three
months ended June 30, 2016, sales were $427,025 and for the six months then ended were $962,328. Operating expenses have also
increased in each year, and it has yet to become profitable. The Company has devoted, and Management believes that the Company
should continue to devote, manpower and capital to increasing its sales to the extent that it is available and prudent. For this
reason, it has increased its sales staff from two 2 in 2013 to 12 today and its advertising and marketing expenses from $51,476
in 2013 to $208,262 in 2015; it spent $115,752 for advertising and marketing expenses during the three months ended June 30, 2016
and $196,585 for the six month then ended. Management further believes that increased sales will ultimately exceed operating expenses.
However, as indicated in note 3 of the Notes to Financial Statements, there are substantial doubts as to the ability of the Company
to continue as a going concern. Management intends to address these doubts by successfully executing its operating plan, which
includes increasing sales of existing products while introducing additional products and services, controlling operation expenses,
negotiating extensions of existing loans and raising either debt or equity financing. Management recognizes that the Company can
take measures to increase sales only as permitted by these considerations. During the three months ended June 30, 2016, the Company
narrowed its loss from operations to $45,460 from $70,039 for the three months ended June 30, 2015, and for the six months ended
June 30, 2016, to $68,100 from $119,148 for the six months ended June 30, 2015. The Company increased its net loss to $90,614
for the three months ended June 30, 2016, from $84,053 for the three months ended June 30, 2015, as compared with a reduction
of net loss to $119,243 in the six month period ended June 30, 2016, from $147,176 in the six month period ended June 30, 2015.
No assurance can be given that the Company will be able to reduce its losses.
We can
give no assurance that any of the funding described above will be available on acceptable terms, or available at all. If we are
unable to raise funds in sufficient amount, when required or on acceptable terms, we may have to significantly reduce, or discontinue,
our operations. To the extent that we raise additional funds by issuing equity securities or securities that are convertible into
Acology’s equity securities, its shareholders may experience significant dilution.
Plan
of Operations
In August
2014, we announced our significant objectives. The following sets forth our progress in meeting those objectives:
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We planned to secure funding
of $1,500,000 to support our operations. Of that amount, we have obtained approximately $850,000. However, as indicated above,
we again need funding of $1,500,000. We can give no assurance that any or all of the remaining portion of such funding will
be available on acceptable terms, or available at all.
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We planned to hire additional personnel
and now have 18 employees. We plan to hire additional sales, administrative personnel and technical personnel as needed.
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Increasing sales volume to 50,000 containers
per month. During 2014, we sold an average of 10,250 units per month and in 2015, we sold an average of 26,000 units per month.
During the second quarter of 2016, we sold an average of 31,300 units per month. Our ability to reach this goal is limited
by the manufacturing capacity of Polymation.
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We announced that we intended to lease
a building for our operations, including administrative and warehouse space and acquire office furniture, equipment and materials
(forms, corporate stationary and business cards). We attained this objective and have leased additional space.
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We announced that we would seek additional
international distributors meeting certain criteria. In light of our decision to concentrate on direct sales to customers,
we have determined not to pursue this objective.
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We have attended trade shows, expos and
conferences and believe that this activity in part accounts for our increased sales.
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We have initiated a marketing and advertising
campaign, which includes maintaining and periodically updating our websites, brochures and other advertising materials and
attending industry events.
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We announced that we would attempt to pay
the convertible promissory note in the principal amount of $400,000. We have reduced the principal amount of this note to
$250,000 though conversions.
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We announced that we desired to pay salaries
of $10,000 per month to each of Messrs. Fairbrother and Heldoorn on a regular basis after the other goals are completed. We
are now doing so.
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We
cannot give firm dates for the attainment of any goal that depends on financing or a firm date for the receipt of revenues from
orders because these dates depend on our obtaining financing and we cannot predict when, if or in what amount we will obtain it.
We cannot fully implement our plan of operations until we raise $1,200,000.
Off-Balance
Sheet Arrangements
.
We currently
do not have any off-balance sheet arrangements.