ITEM 1. FINANCIAL STATEMENTS
ACOLOGY, INC.
CONSOLIDATED BALANCE
SHEETS
(Unaudited)
|
|
September
30, 2016
|
|
December
31, 2015
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,862
|
|
|
$
|
37,533
|
|
Accounts Recievable
|
|
|
64,072
|
|
|
|
30,734
|
|
Inventories
|
|
|
109,818
|
|
|
|
79,941
|
|
Note Receivable
|
|
|
159,586
|
|
|
|
155,835
|
|
Advance
to supplier
|
|
|
—
|
|
|
|
10,683
|
|
Total
Current Assets
|
|
|
338,338
|
|
|
|
314,726
|
|
|
|
|
|
|
|
|
|
|
Property & equipment,
net of accumulated depreciation of $54,273 and $31,773 respectively
|
|
|
47,811
|
|
|
|
54,982
|
|
Security Deposits
|
|
|
7,489
|
|
|
|
7,489
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
393,638
|
|
|
$
|
377,197
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
71,552
|
|
|
$
|
45,760
|
|
Convertible notes payable,
net of debt discount of $0 and $226,186, respectively
|
|
|
500,000
|
|
|
|
326,314
|
|
Notes Payable
|
|
|
574,100
|
|
|
|
607,000
|
|
Loan Payable - stockholder
|
|
|
93,494
|
|
|
|
93,494
|
|
Accrued expenses
|
|
|
216,210
|
|
|
|
102,908
|
|
Derivative
Liability
|
|
|
324,483
|
|
|
|
623,994
|
|
Total
Current Liabilities
|
|
|
1,779,839
|
|
|
|
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
|
|
|
|
|
|
|
|
|
September 30, 2016 and December
31, 2015, respectively
|
|
|
51,641
|
|
|
|
49,745
|
|
Additional Paid in
Capital
|
|
|
252,572
|
|
|
|
102,857
|
|
Accumulated
Deficit
|
|
|
(1,690,414)
|
|
|
|
(1,574,875
|
)
|
TOTAL
STOCKHOLDERS' DEFICIENCY
|
|
|
(1,386,201
|
)
|
|
|
(1,422,273
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
$
|
393,638
|
|
|
$
|
377,197
|
|
The accompanying notes
are an integral part of these financial statements
ACOLOGY, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Nine
Months Ended September 30,
|
|
Three
Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,441,180
|
|
|
$
|
1,041,375
|
|
|
$
|
478,852
|
|
|
$
|
328,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
383,709
|
|
|
|
362,161
|
|
|
|
117,544
|
|
|
|
129,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
1,057,471
|
|
|
|
679,214
|
|
|
|
361,308
|
|
|
|
199,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
876,701
|
|
|
|
787,150
|
|
|
|
309,023
|
|
|
|
235,919
|
|
Advertising and marketing
|
|
|
248,773
|
|
|
|
73,991
|
|
|
|
52,188
|
|
|
|
26,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
1,125,474
|
|
|
|
861,141
|
|
|
|
361,211
|
|
|
|
261,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from operations
|
|
|
(68,003
|
)
|
|
|
(181,927
|
)
|
|
|
97
|
|
|
|
(62,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expenses (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net of interest income of $11,251
|
|
|
224,696
|
|
|
|
46,734
|
|
|
|
61,462
|
|
|
|
18,706
|
|
Gain on
extinguishment of debt
|
|
|
(16,542
|
)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Gain
on change in fair value of derivative
|
|
|
(160,618
|
)
|
|
|
|
|
|
|
(65,069
|
)
|
|
|
|
|
Total
Other Expenses (Income)
|
|
|
47,536
|
|
|
|
46,734
|
|
|
|
(3,607
|
)
|
|
|
18,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before income taxes
|
|
|
(115,539
|
)
|
|
|
(228,661
|
)
|
|
|
3,704
|
|
|
|
(81,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS (INCOME)
|
|
$
|
(115,539
|
)
|
|
$
|
(228,661
|
)
|
|
$
|
3,704
|
|
|
$
|
(81,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic & diluted
|
|
|
5,116,235,757
|
|
|
|
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)
|
|
Nine
Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(115,539
|
)
|
|
$
|
(228,661
|
)
|
Adjustments to reconcile
net loss to net
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
22,500
|
|
|
|
12,909
|
|
Gain on
extinguishment of debt
|
|
|
(16,542
|
)
|
|
|
|
|
Gain on
changee in fair alue of derivative
|
|
|
(160,618
|
)
|
|
|
|
|
Non cash
interest expense
|
|
|
184,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating
assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(33,338
|
)
|
|
|
(8,546
|
)
|
Inventories
|
|
|
(29,877
|
)
|
|
|
(63,104
|
)
|
Accounts Payable
|
|
|
25,792
|
|
|
|
3,919
|
|
Advances
to supplier
|
|
|
10,683
|
|
|
|
11,196
|
|
Accrued
expenses
|
|
|
113,302
|
|
|
|
36,606
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
559
|
|
|
|
(235,681
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(15,330
|
)
|
|
|
(7,798
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(15,330
|
)
|
|
|
(7,798
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
15,000
|
|
|
|
—
|
|
Repayment
of notes payable
|
|
|
(32,900
|
)
|
|
|
—
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
(17,900
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
(32,671
|
)
|
|
|
(243,479
|
)
|
|
|
|
|
|
|
|
|
|
CASH
- BEGINNING OF PERIOD
|
|
|
37,533
|
|
|
|
261,233
|
|
|
|
|
|
|
|
|
|
|
CASH
- END OF PERIOD
|
|
$
|
4,862
|
|
|
$
|
17,754
|
|
|
|
$
|
—
|
|
|
|
|
|
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
September
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 September 30, 2016, and the results
of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September
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 products 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
|
|
|
160,618
|
|
Balance, September 30, 2016
|
|
$
|
324,483
|
|
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 nine months ended September 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 September 30, 2016, the Company had a stockholders’
deficit of $1,386,201 and a working capital deficit of $1,441,501. 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 note holders 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 matured August 11, 2016.
NOTE
5 – Convertible Notes Payable
The
following is a description of convertible notes payable at September 30, 2016:
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A
convertible promissory note dated March 4, 2014, in the original amount of $400,000. The note bears interest at 0.28% per
annum and was due September 14, 2016; the holder has agreed to extend the due date to September 14, 2017. 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 nine months ended
September 30, 2016, converted an additional $60,000 of principal. The outstanding principal balance at September 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.
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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,
having an aggregate principal balance of $424,500 at September 30, 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. These loans are non-interest bearing and have no set maturity date. The Company
expects to repay the loans when cash flows become available. The balance due at September 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 three month period ended September 30, 2016, the Company’s largest customer accounted for approximately 20% of sales
and 14% of sales for the 9 month period ended September 30, 2016. For the three and nine month periods ended September 30, 2016,
the Company purchased respectively approximately 72% and 83% of its products from one manufacturer.
No
single customer accounted for more than 10% of sales for the three and nine month periods ended September 30, 2015. For the three
and nine month periods ended September 30, 2015, the Company purchased approximately 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. The lease has been renewed for 2 more years so at to expire on August 31, 2018.
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 SEPTEMBER 30, 2016
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2015
Sales
.
Sales
for the three months ended September 30, 2016, were $478,582, compared to $328,703 for the three months ended September 30, 2015,
and our gross profit for those periods was respectively $361,308 and $199,156. The increase in sales and gross profit in the later
period was due to increased sales as the result of the expansion of our product lines and a slight reduction in cost of sales.
Operating
Expenses
.
Total
operating expenses for the three months ended September 30, 2016, were $361,211, compared to $261,935 for the three months ended
September 30, 2016. These costs and expenses increased in the later period because general and administrative expenses increased
by $73,104, due to
higher commissions, payroll increase and additional
subcontractors ,
and advertising costs increased by $26,172.
Other
Expenses (Income)
.
Interest
expense for the three months ended September 30, 2016, was $61,462 compared to $18,706 for the three months ended September 30,
2015. We also recorded a gain on change in fair value of derivative of $65,069 for the later period, compared with $0 for the
earlier period.
Net
Loss
.
We
had a net profit of $3,704 for the three-month period ended September 30, 2016, as compared to a net loss of $81,485 for the three-month
period ended September 30, 2015. Our net loss during the later period decreased during the later period principally because operating
expenses increased at a substantially lower rate than sales.
NINE
MONTHS ENDED SEPTEMBER 30, 2016
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2015
Sales
.
Sales
for the nine months ended September 30, 2016, were $1,441,180, compared to $1,041,375 for the period ended September 30, 2015,
and our gross profit for those periods was respectively $1,051,471 and $679,214. The increase in sales and gross profit in the
later period was due to increased sales as the result of the expansion of our product lines.
Operating
Expenses
.
Total
operating expenses for the nine months ended September 30, 2016, were $1,125,474 compared to $861,141 for the period ended September
30, 2015. Total operating expenses increased in the later period because general and administrative expenses increased by $89,551
due to
higher commissions, payroll increase and additional subcontractors
and because advertising and marketing costs increased by $174,782.
Other
Expenses (Income)
.
Interest
expense for the nine months ended September 30, 2016, was $224,696, compared to $46,734 for the nine months ended September 30,
2015. We also recorded a gain on extinguishment of debt of $16,542 and a gain on change in fair value of derivative of $160,618
for the nine months ended September 30, 2016, as compared with $0 for each of these items for the nine months ended September
30, 2015.
Net
Loss
.
We
had a net loss of $115,539 for the nine-month period ended September 30, 2016, as compared to a loss of $228,661 for the nine
month period ended September 30, 2015.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
and Capital Resources
As
of December 31, 2015, and September 30, 2016, we had respectively $37,533 and $4,862 in cash. We financed our operations from
the inception of our business on January 19, 2013, through September 30, 2016, through capital contributions of $141,986 made
by our officers and loans of $691,500. During the nine-month period ended September 30, 2016, we financed our operating activities
by expending cash in the amount of $559, none of which was generated from financing activities. We also expended $15,330 for property,
plant and equipment and reduced our notes payable by a net amount of $17,900.
We
commenced business in January 2013. Our sales grew over the course of 2013, averaging 11,500 units per month for 2013 and ranging
from 8,000 units to 30,000 units for a total of 125,000 units. During the year ended December 31, 2014, we sold an average of
15,000 units per month, ranging from approximately 4,000 to 20,000 units per month, totaling approximately 180,000 units. During
the first three quarters of 2016, we sold
approximately 370,000 units,
which include newly added products
. Gross sales for 2015 were $1,441,441 and for the nine
months ended September 30, 2016, were 1,441,980. We have a current inventory of 155,000 units, which we believe will be sold over
our website and to our distributor for approximately $695,000.
The
Company believes that it will require approximately $1,200,000 in additional funding for the next 12 months, including $1,099,148
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.
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.
The
Company’s sales have grown every year since it commenced business. In 2013, its sales were $254,992; in 2014, were $460,756;
and in 2015, were $1,441,441. For the three months ended September 30, 2016, sales were $478,852 and for the nine months then
ended were $1,441,180. Operating expenses have also increased in each year, and, although the Company earned a small profit in
the quarter ended September 30, 2016, management can give no assurance that the Company will continue to be 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 doing so is possible and prudent. For this reason, it has increased its sales staff from two 2 in 2013 to 13
today and its advertising and marketing expenses from $51,476 in 2013 to $208,262 in 2015; it spent $52,188 for advertising and
marketing expenses during the three months ended September 30, 2016, and $248,773 for the nine months then ended. Management further
believes that increased sales will ultimately exceed operating expenses, as they narrowly did during the three months ended September
30, 2016. 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 nine months ended September
30, 2016, the Company earned income from operations of $97, compared with a loss of $62,779 for the three months ended September
30, 2015; for the nine months ended September 30, 2016, the Company lost $68,003 from operations, compared to $181,927 for the
nine months ended September 30, 2015. The Company earned a net profit of $3,704 for the three months ended September 30, 2016,
compared to a net loss of $81,485 for the three months ended September 30, 2015, and a net loss of $115,539 for the nine months
ended September 30, 2016, compared with a reduction of net loss of $228,661 for the nine month period ended September 30, 2015.
No assurance can be given that the Company will be able to continue to reduce its losses.
Plan
of Operations
Our
significant objectives for the next 12 months are as follows:
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Secure
funding of $1,200,000 to support our operations over the next 12 months. This activity
has commenced through personal contacts by our officers and will ongoing. As yet, we
have not been successful in obtaining any funding. We can give no assurance that funding
in this or any lesser amount will be available on acceptable terms, or available at all.
The costs associated with this activity, which would arise principally from travel and
legal expenses, are estimated to be $15,000. We cannot predict when we will obtain funding
in whole or in part, but as indicated below, we cannot begin to attain several of our
other objectives until we reach the levels of funding set forth below.
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We
now have 15 employees, including our officers. We plan to continue to hire sales, administrative
personnel and technical personnel as necessary in accordance with our ability to pay
salaries and benefits. The compensation and other costs associated with these personnel
are estimated to be $70,000 per month.
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Increasing
sales volume to 50,000 containers per month (600,000 units per year). Our ability to
reach this goal, as indicated above, is limited by the manufacturing capacity of our
sole supplier, which is only 30,000 units per month. Management does not yet have sufficient information to set sales goals
for its other products.
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Continue
to attend trade shows, expos and conferences with a view to increasing sales.
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Continue
our 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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Pay
our overdue indebtedness (see above).
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Continue
paying officers’ salaries of $10,000 per month to each of Messrs. Fairbrother and
Heldoorn on a regular basis after the other goals are completed.
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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.