The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these financial
statements.
Notes to Financial Statements
December 31, 2016
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 D&C’s 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.
On March 4, 2014, the Company completed
an agreement and plan of merger in connection with which the holders of the membership units in D&C received 3,846,000,000
shares of the Company in exchange for these units. The merger was accounted for as a reverse merger in which D&C was the accounting
acquirer.
Note 2 - Summary of Significant Accounting
Policies
Principals of Consolidation
The consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). 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.
Cash
The Company considers all short-term
highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents.
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, 2015
|
|
$
|
-
|
|
·
Issued during the Year ended December 31, 2015
|
|
|
902,434
|
|
·
Converted during the Year
|
|
|
(123,189
|
)
|
·
Change in fair value recognized in operations
|
|
|
(155,251
|
)
|
Balance,
December 31, 2015
|
|
$
|
623,994
|
|
·
Issued during the Year ended December 31, 2016
|
|
|
27,328
|
|
·
Converted during the Year
|
|
|
(138,892
|
)
|
·
Change in fair value recognized in operations
|
|
|
(30,663
|
)
|
Balance, December 31, 2016
|
|
$
|
481,767
|
|
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 5 years, Leasehold Improvements are depreciated over the 2 year
lease term. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as
incurred.
Convertible Instruments
The Company evaluates and accounts
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 year ending December 31, 2015, the Company recognized a gain on extinguishment of $16,365 from the
conversion of convertible debt with a bifurcated conversion option. During the year ending December 31, 2016, and 2015, the
Company recognized a gain on extinguishment of $16,542 and $16,365, respectively, from the conversion of convertible debt
with a bifurcated conversion option.
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 December 31, 2016, the Company had a stockholders’ deficiency of $1,591,434 and a working
capital deficit of $1,674,083. In addition, the Company has generated operating losses since inception and has notes payable that
are currently 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 or extend financing on terms acceptable to us or at all.
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 6 and that person made a
promissory note in a like principal amount in favor of the Company. 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 maturity of the note has been extended from August 11,
2016, to August 11, 2017. The amount presented on the consolidated balance sheet includes accrued interest of $20,836.
Note 5 –Property and
Equipment
Property and equipment consist
of:
|
|
December 31,
|
|
|
2016
|
|
2015
|
Furniture and Fixtures
|
|
$
|
4,793
|
|
|
$
|
4,973
|
|
Machinery and Equipment
|
|
|
101,813
|
|
|
|
54,489
|
|
Leasehold Improvements
|
|
|
27,871
|
|
|
|
27,472
|
|
|
|
|
134,477
|
|
|
|
86,754
|
|
Accumulated Depreciation
|
|
|
(59,319
|
)
|
|
|
(31,772
|
)
|
|
|
$
|
75,160
|
|
|
$
|
54,982
|
|
Note 6 –Convertible
Notes Payable
The following is a description
of convertible notes payable at December 31, 2016:
|
·
|
On
August 20, 2015, the Company made a convertible promissory note in the principal amount
of $400,000 to a then-related party, which was reduced to $360,000 as the result of a
prepayment. The note bears interest at 0.28% per annum. It originally matured on March
4, 2015, but its maturity was extended to September 14, 2016, as described below. 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 the membership units in D&C.
The note provided that if an event of default were to occur, the unpaid principal amount
and interest accrued thereon would 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 3 consecutive trading days ending on the trading day immediately prior to the
conversion date. The note was in default when it was not paid on March 4, 2015. On August
20, 2015, the holder of the note assigned it to an unrelated third party and on September
14, 2015, the maturity of the note was extended to September 14, 2016, the holder waived
all events of default and any right to receive interest at the default rate, and the
Company agreed that the holder could convert the principal and interest of the note into
common stock, notwithstanding the cure of defaults. On August 28, 2015, the holder converted
$50,000 of principal of the note into 428,571,429 shares of common stock and on March
10, 2016, the holder converted $60,000 of principal of the note into 189,513,580 shares
of common stock. The principal balance of the note at December 31, 2016 was $250,000.
On September 14, 2016, the maturity of this note was extended to September 14, 2017.
|
|
·
|
The
Company made a convertible promissory note, dated December 15, 2015, 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 matured on December 27, 2016, and bears interest at the highest
lawful rate, but not more than 20% per annum. The Company is currently negotiating an
extension of the maturity date.
|
|
·
|
The
Company made two convertible promissory notes, one dated February 11, 2016, and the other
dated April 25, 2016, in favor of the unrelated party referred to above, each in the
principal amount of $7,500. Each note is due 1 year after the date on which it was made, bears simple interest at the rate
of 20 percent per
annum and is convertible into shares of Common Stock at a conversion price per share equal to 50% of the average daily
closing price for 3 consecutive trading days ending on the trading day immediately prior to the conversion date.
|
|
·
|
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 at fair
value, 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 discounts of $3,205 and$226,186
at December 31, 2016, and 2015, respectively, on the accompanying consolidated balance
sheets. The Company used the Black Scholes Merton valuation model to value the conversion
features using an expected life of 1 year, average volatility rate of approximately 453%
and 396% and a discount rate of 0.35%
|
|
·
|
A
series of promissory note conversion agreements that the Company entered into during
2014 with ten unaffiliated persons in the aggregate amount of $224,500. These notes are
convertible into shares of the Company’s common stock at a conversion price of
$0.05 per share. The loans are non-interest bearing and have no stated maturity date. During the year ended December 31,
2016, the Company entered into agreements with four of the individuals in which the Company agreed to pay to them an
additional amount
equal to the current principal balance (which aggregated $32,000), which was recorded as interest expense. The notes
were amended such that the Company agreed to repay the new balance over 10 monthly equal installments. The Company made
payments of $25,900 during the year ended December 31, 2016, leaving a balance of $230,600 for all ten of these notes at
December 31,
2016.
|
|
·
|
A
promissory note conversion agreement that the Company entered into with an unaffiliated
persons 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 currently negotiating an extension
of the maturity date.
|
Note 7 – Notes Payable
During 2014, the
Company entered made a series of promissory notes with four unaffiliated persons in the original aggregate amount of
$457,000. During the year ended December 31, 2016, the Company repaid one of these notes in the original principal amount
of $7,000. These notes bear interest at rates ranging from 10% to 15% (with a weighted-average rate of 11.7%) and matured as
follows:
|
|
April 10, 2015
|
|
$ 300,000
|
|
|
|
May 19, 2015
|
|
150,000
|
|
These notes are currently past
due and the Company is negotiating an extension of their respective maturity dates.
On August 15, 2015, the Company
made 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 matured on August 11, 2016. Upon an event of default, as defined in the note, interest
shall be compounded daily. The Company is currently negotiating an extension of the maturity date.
During the year ended December
31, 2016 the Company entered into a capitalized equipment lease. The capital lease is payable in 24 monthly installments of $2,000,
including interest at the rate of 19.87 percent per annum.
Note 8 – Loan Payable
- Shareholder
During the year ended December
31, 2015, the Company received advances from one of its stockholders, who is a related party, to help finance its operations.
These advances are non-interest bearing and have no set maturity date. The balance at December 15, 2016, and 2015, aggregated
$83,494 and $93,494, respectively. The Company expects to repay these loans when cash flows become available.
Note 9 – Stockholders’
Deficiency
On August 28, 2015, the Company
issued 428,571,429 shares of common stock in connection with the conversion of $50,000 of the principal amount of the $400,000
Convertible Promissory Note described in Note 6. On March 10, 2016, the Company issued 189,513,580 shares of common stock in connection
with the conversion of $60,000 of the principal amount of that Convertible Promissory Note.
Note 10 – Income
Taxes
The reconciliation of the effective
income tax rate to the federal statutory rate is as follows:
|
|
December 31, 2016
|
|
December 31, 2015
|
US Federal statutory rate
|
|
|
(35
|
%)
|
|
|
(35
|
%)
|
State income tax, net of federal benefit
|
|
|
(5
|
%)
|
|
|
(5
|
%)
|
Change in valuation allowance
|
|
|
40
|
%
|
|
|
40
|
%
|
|
|
|
-%
|
|
|
|
-%
|
|
The
Components of deferred tax assets consist of:
|
|
December 31,
|
|
|
2016
|
|
2015
|
Net operating loss
|
|
$
|
758,000
|
|
|
$
|
630,000
|
|
Valuation allowance
|
|
|
(758,000
|
)
|
|
|
(630,000
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company has approximately
$1,900,000 net operating loss carryforwards that are available to reduce future taxable income. Those NOLs begin to expire in
2034. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based
on the assessment, management has established a full valuation allowance against all of the deferred tax assets for every period
because it is more likely than not that all of the deferred tax assets will not be realized.
Note 11 – Concentrations
For the year ended December
31, 2016, one of our customers accounted for approximately 16% of sales. For the year ended December 31, 2015, none of our
customers accounted for more than 10% of sales.
For the year ended December 31,
2016, the company purchased approximately 83% of its products from one distributor, as compared with 95% in 2015.
For the year ended December 31,
2016, two of our customers accounted for 28% and 16% of accounts receivable. For the year ended December 31, 2015, four of our
customers accounted for 32%, 14%, 13%, and 12% of accounts receivable.
Note 12
–
Commitments
The
Company is committed under an operating
lease for its premises. The lease originally called for monthly payments of $6,300 plus 55% of operating expenses until May
31, 2015. The lease was amended to provide for monthly payments of $7,500 plus 100% of operating expenses thereafter, until
the lease was to have expired June 30, 2016. On June 1, 2016, the lease was amended to extend its term until June 30, 2018,
without changing its other terms.
Note 13 –
Subsequent Events
Management has evaluated events
occurring after the date of these financial statements through the date that these financial statements were issued.