The accompanying
notes are an integral part of these financial statements.
Notes to Financial Statements
March 31, 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 March 31, 2017, and the results of operations and cash flows
for the periods presented. The results of operations for the three months ended March 31, 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
|
|
|
—
|
|
·
Change in fair value recognized in operations
|
|
|
(35,988
|
)
|
Balance, March 31,
2017
|
|
$
|
445,779
|
|
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 three
months ended March 31, 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 March 31, 2017, the Company had a stockholders’ deficiency
of $1,583,557 and a working capital deficit of $1,663,109. 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.
Note 5 – Convertible Notes
Payable
The following is a description of convertible
notes payable at March 31, 2017:
|
|
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 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 March 31, 2017, there were no conversions
of this note. The principal balance of the note at December 31, 2016, was $250,000.
|
|
·
|
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 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 March 31, 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 $10,000 during the three months ended
March 31, 2017. There was a balance of $220,600 for all 10 of these notes at March 31, 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 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 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 March 31, 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 three months ended March 31,
2017, one of our customers accounted for approximately 15% of sales. During the three months ended March 31, 2016, none of our
customers accounted for more than 10% of sales.
For the three months ended March 31,
2017, the Company purchased approximately 49% of its products from one distributor, as compared with 95% for the three months
ended March 31, 2016.
For the three months ended March 31,
2017, two of our customers accounted for 54% and 11% of accounts receivable. For the three months ended March 31, 2016, four of
our customers accounted for 46%, 14%, 7%, and 3% of accounts receivable.
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
Management has evaluated events occurring after the date of these financial statements
through the date that these financial statements were issued.