Notes
to Financial Statements
June
30, 2017
(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 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.
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 30,2017,
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, 2017, 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, 2016, filed with the SEC on April 14, 2017.
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 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, 2017
|
|
$
|
481,767
|
|
●
Converted during the Period
|
|
|
0
|
|
●
Change in fair value recognized in operations
|
|
|
(164,515
|
)
|
Balance,
June 30, 2017
|
|
$
|
317,252
|
|
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 six months ended June 30, 2017, there were no conversions of convertible debt.
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, 2017, the Company had a stockholders’ deficiency
of $1,484,909 and a working capital deficit of $1,560,451. 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 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
6. 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. The principal amount was repaid on February 16, 2017, but accrued interest of $20,836
remains unpaid at June 30, 2017.
Note
5 – Convertible Notes Payable
The
following is a description of convertible notes payable at June 30, 2017:
On
August 20, 2015, the Company entered into 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 September 14, 2016, the maturity of this
note was extended to September 14, 2017. 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.
During
the three months ended June 30, 2017, there were no conversions of this note. The principal balance of the note at June 30, 2017,
was $250,000.
The
Company entered into 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 is currently negotiating an extension of the maturity dates.
The
Company has determined that the conversion feature embedded in the notes described above 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 a discount of $493 at June
30, 2017, on the accompanying balance sheet. The Company used the Black-Scholes-Merton valuation model to value the conversion
features using the expected life of each note, average volatility rate of approximately 396% and a discount rate of 0.52%
A
series of promissory note conversion agreements that the Company entered into during 2014 with 10 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 repaid $25,900 during the
year ended December 31, 2016, and $0 during the three months ended June 30, 2017. There was a balance of $220,600 for all 10 of
these notes at June 30, 2017.
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
6 – Notes Payable
During
2014, the Company entered into 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 entered into a promissory
note in the amount of $150,000 to an unrelated third party. The note bears interest at 0.48% 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% per annum.
Note
7 – 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 June 30, 2017, and December
31, 2016, was $83,494. The Company expects to repay these loans when cash flows become available.
Note
8 – Concentrations
For the
six months ended June 30, 2017, one of our customers accounted for approximately 17% of sales. During the six months ended June
30, 2016, one of our customers accounted for 10% of sales.
For the
six months ended June 30, 2017 and 2016, the Company purchased approximately 63% and 95% of its products from one distributor.
Note
9 – 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
10 – Subsequent Events
In
July 2017, the Company exchanged $412,600 of its debt, including interest, for 76,635,407 shares of Common Stock and retired
a convertible promissory note, of which $250,000 was outstanding.