Notes to
Financial Statements
March 31,
2018
(Unaudited)
Note 1 –
Business
Acology,
Inc. (the “Company”), through its wholly owned subsidiary, D&C Distributors, LLC (“D&C”) is in
the business of wholesale distribution and retail sales of our signature product The Medtainer®, lighters, plastic storage
containers, humidity packs including our “MED X 2 Way Humidity Pack”® powered by Boost and other compliant packaging
items 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, 2018,
and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March
31, 2018, 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, 2017, filed with the SEC on March 30, 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
In
May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606),
which supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard
requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the
consideration that the company expects to receive for those goods or services. The FASB subsequently issued the following
amendments to ASU No.
2014-09 that have the same effective date and transition date: ASU No.
2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from
Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No.
2016-12, Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with
ASU 2014-09 (collectively, the new revenue standards).
The
new revenue standards became effective for the Company on January 1, 2018, and were adopted using the modified retrospective method.
The adoption of the new revenue standards as of January 1, 2018 did not change the Company's revenue recognition as the majority
of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any
accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained
earnings was required upon adoption.
Under
the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in
an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues
following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer;
(ii)
identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price
to the performance obligations in the contract; and (v) recognize revenues when (or
as)
we satisfy the performance obligation.
Revenues
from product sales are recognized when the customer obtains control of the Company's product, which occurs at a point in time,
typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if
the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
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, 2018
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$
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25,275
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|
·
Converted during the
Period
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|
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—
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·
Change
in fair value recognized in opearations
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(2,980
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)
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Balance,
March 31, 2018
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$
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22,295
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|
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, 2018, 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, 2018, the Company had a stockholders’ deficiency
of $583,138 and a working capital deficit of $675,167. 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
– Convertible Notes Payable
The
following is a description of convertible notes payable at March 31, 2018:
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·
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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 was subsequently reduced through payments and conversions to $250,000
at December 31, 2016. On July 5, 2017, the Company satisfied the principal of the note
and interest accrued therein in full for a payment of $100, resulting in a gain on extinguishment
of debt of $542,218, which included a removal of the associated derivative liability
relating to the conversion feature of $290,895.
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·
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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.
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·
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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.
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·
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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 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
121% and a discount rate of 1.29%.
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·
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During
2014, the Company entered into a series of promissory note conversion agreements 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 under these agreements are noninterest-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, and $10,000 during the year ending December
31, 2017. During the year ended December 31, 2017, the Company and the noteholders agreed
to exchange $148,100 of the above notes for 15,376,296 shares of common stock. The conversion
were accounted for as an extinguishment of debt resulting in a loss of $81,213. There
was a balance of $72,500 relating to these notes at March 31,2018.
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Note
5 – Notes Payable
During
2014, the Company 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%).
During
the year ended December 31, 2017, certain noteholders agreed to exchange $150,000 of principal and $73,027 of accrued interest
of the above notes for 20,000,000 shares of common stock. These exchanges were accounted for as an extinguishment of debt resulting
in a loss of $20,973. During the month ended March 31, 2018, the company paid a partial payment on the above mentioned notes of
$100,000. The Company had $200,000 of principal amount of these notes payable outstanding at March 31,2018, which are past due.
On August
15, 2015, the Company made a promissory note in the amount of $150,000 in favor of an unrelated 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 it is 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 for the balance. During the year ended December 31, 2017, the holder of this note agreed to exchange $75,000 of principal
of and $663 of accrued interest on the above mentioned notes for 50,000,000 shares of common stock. These exchanges were accounted
for as an extinguishment of debt resulting in a loss of $683,337. The Company had $75,000 relating to this payable outstanding
at March 31, 2018.
In each
of the years ended at December 31, 2017, and December 31, 2016, the Company entered into a capitalized equipment lease. Each of
these capital leases is payable in 24 monthly installments of $2,000, including interest at the rate of 19.87% per annum.
Note 6
– Loan Payable - Shareholder
The
Company has received advances from one of its shareholders, who is a related party, to help finance its operations. These advances
are non-interest-bearing and have no set maturity date. The balance of these advances at March 31, 2018, and March 31, 2017, was
$122,994 and $83,494, respectively. The Company expects to repay these loans when cash flows become available.
Note 7 – Concentrations
One
of our customers accounted for approximately 15% of sales for both periods ending March 31, 2018 and March 31, 2017.
For
the three months ended March 31, 2018, the Company purchased approximately 55% of its products from one distributor, as compared
with 49% for the three months ended March 31, 2017.
For
the three months ended March 31, 2018, two of our customers accounted for 50% and 12% of accounts receivable. For the three months
ended March 31, 2017, two of our customers accounted for 54% and 11% of accounts receivable.
Note 8
– Commitments
The
Company is committed under an operating lease for its premises, which 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. On October 1, 2017, the lease was amended to $7,892 per month without changing
its other terms.
Note
9 – Subsequent Events
On
April 26, 2018, the Company entered into an Asset Purchase Agreement, dated as of April 16, 2018, by and between the Company
and an independent third party, whereunder, among other things, the Company agreed to acquire from him and certain entities
that he controls, and he agreed to sell, assign and transfer to the Company, and to cause these entities to sell assign and
transfer to the Company, certain patents and a patent application, a trademark and an internet domain in consideration of the
delivery to him of 263,125,164 shares of the Company’s common stock, comprising approximately 5% of its outstanding
common stock. All of this property is related to the Company’s principal product, the Medtainer
®
, which,
in the fiscal year ended December 31, 2017, accounted for 78% of its operating revenue and in the three months ended March
31, 2018, accounted for 65% of its operating revenue.