NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016
(UNAUDITED
)
Note 1 Overview and Description of the Company
ABCO Energy, Inc. was organized on July 29, 2004 and operated until July 1, 2011 as Energy Conservation Technologies, Inc. (ENYC). On July 1, 2011 ENYC entered into a share exchange agreement (SEA) with ABCO Energy and acquired all of the assets of ABCO. ENYC changed its name to ABCO Energy, Inc. on October 31, 2011. The Company is in the Photo Voltaic (PV) solar systems industry and is an electrical product and services supplier.
The Company prepared these financial statements according to the instructions for Form 10-Q. Therefore, the financial statements do not include all disclosures required by generally accepted accounting principles in the United States. However, the Company has recorded all transactions and adjustments necessary to fairly present the financial statements included in this Form 10-Q. The adjustments made are normal and recurring. The following notes describe only the material changes in accounting policies, account details or financial statement notes during the first Three Months of 2016. Therefore, please read these financial statements and notes to the financial statements together with the audited financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2015. The income statement for the Three Months ended March 31, 2016 cannot necessarily be used to project results for the full year.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to the estimated useful lives of equipment for purposes of depreciation and the valuation of common shares issued for services, equipment and the liquidation of liabilities.
Income (Loss) per Share
Basic earnings per share amounts are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is based on the weighted average numbers of shares of common stock outstanding for the periods, including dilutive effects of stock options, warrants granted and convertible preferred stock. Dilutive options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported. Since ABCO Energy has incurred losses for all periods except the current period, the impact of the common stock equivalents would be anti-dilutive and therefore are not included in the calculation. In addition, there are no common stock equivalents outstanding at the time of this report.
Effects of Recently Issued Accounting Pronouncements
The Company has reviewed all recently issued accounting pronouncements noting that they do not affect the financial statements.
Note 2 Summary of Significant Accounting Policies
Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale date of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts payable and accrued expenses, approximate their fair values because of the current nature of these instruments. Debt approximates fair value based on interest rates available for similar financial arrangements. Derivative liabilities which have been bifurcated from host convertible debt agreements are presented at fair value.
Derivative Financial Instruments
Fair value accounting requires bifurcation of embedded derivative instruments such as convertible features in convertible debts or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the binomial option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if these is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments, such as warrants, are also valued using the binomial option-pricing model.
Note 3 Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and marketing. As a result, the Company incurred accumulated net losses from inception through the period ended March 31, 2016 of $2,296,816. In addition, the Company's development activities since inception have been financially sustained through capital contributions from shareholders.
The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock or through debt financing and, ultimately, the achievement of significant operating revenues. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
Note 4 Note Payable – Officers and Directors
Officers and Directors loans are demand notes totaling $100,502 as of March 31, 2016 and $69,944 as of December 31, 2015. The total consists of two notes from Officer/Directors. The first note in the amount of $60,000 as of March 31, 2016 provides for interest at 12% per annum and is unsecured. Notes payable to the Director resulted in an interest charge of $1,796 for the period ended March 31, 2016 and $14,450 accrued and unpaid at March 31, 2016.
The second note was increased by $30,502 during the current period, which increased the total note to $40,502 as of March 31, 2016. The note is a demand note, bears interest at 12% per annum and is unsecured. This note has accumulated and unpaid interest totaling $1,334 at March 31, 2016. The current period interest accrued on this note was $584.
Note 5 Short Term Note Payable
During the quarter ended March 31, 2016 the Company financed operations with a loan in the amount of $150,000 from WebBank. The note is an open credit line with interest rate of 23% percent maturing in March of 2017 and had a balance of $130,907 as of March 31, 2016. A portion of the loan was used to pay off a credit loan from Orchard Street Funding in the amount of $$44,061. This loan is personally guaranteed by an Officer of the Company.
An unrelated party has made loans to the Company in the amount of $60,762 during the last fiscal year and during the three months ended March 31, 2016. The loan is a demand note with an interest rate of 12% per annum.
Note 6 Notes and Loans Payable
Notes and Loans Payable as of March 31, 2016 and December 31, 2015 consisted of the following:
Description
|
|
31-Mar-16
|
|
|
31-Dec-15
|
|
Note payable - Credit line, payable to Ascentium Capital, bearing interest at 24% per annum, unsecured, matures in February 2016
|
|
$
|
-
|
|
|
$
|
6,705
|
|
Note payable to Ascentium Capital, secured by truck, bearing interest at 9% per annum, matures in September, 2017*
|
|
|
8,151
|
|
|
|
9,341
|
|
Less current portion truck loan
|
|
|
-4,983
|
|
|
|
-4,048
|
|
Note payable – Orchard Street Funding – This loan was paid off in January, 2016
|
|
|
-
|
|
|
|
45,240
|
|
Note payable – other bearing interest at 12% per annum, unsecured, demand note.
|
|
|
60,762
|
|
|
|
59,832
|
|
Note payable to Web Bank, borrowed 2-1-16, bearing interest at 23% per annum, unsecured, matures in March, 2017*
|
|
|
130,907
|
|
|
|
-
|
|
Convertible note payable - EMA Financial, borrowed 3-16-16, due 3-16-17 with interest at 8% per annum - convertible into common stock
|
|
|
40,000
|
|
|
|
-
|
|
Convertible note payable - JMJ Financial, borrowed 3-23-16, due 3-23-18 with interest at 12% per annum - convertible into common stock
|
|
|
27,777
|
|
|
|
-
|
|
Original issue discounts and points on loans - less amortization of $1,768 for the quarter ended March 31, 2016
|
|
|
-21,009
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
241,605
|
|
|
|
117,070
|
|
Long term debt - net of current portion
|
|
|
3,168
|
|
|
|
5,292
|
|
Total other notes and loans payable
|
|
$
|
238,437
|
|
|
$
|
111,778
|
|
Maturity of notes and loans payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period Ending March 31,
|
Amount
|
|
Amount
|
|
2016
|
|
$
|
151,481
|
|
|
$
|
111,178
|
|
2017
|
|
|
62,347
|
|
|
|
|
|
2018
|
|
|
27,777
|
|
|
|
|
|
Total
|
|
$
|
241,605
|
|
|
$
|
111,178
|
|
*This debt is collateralized by the specific asset in the case of the truck loan and the WebBank loans is personally guaranteed by an officer of the Company.
On March 23, 2016, the Company issued a two year $250,000 convertible promissory note to JMJ Financial, a Nevada sole proprietorship which bears interest at the rate of 12% per annum on the principal sum of the outstanding (“JMJ Note”). The JMJ Note is payable in installments of a minimum of $25,000 per drawdown. The Company drew down $25,000 on March 23, 2016. Under the terms of the JMJ Note; the current balance is now $31,111, which includes an original issue interest of $2,777.00, plus interest at the rate of 12% per annum. The JMJ Note is convertible at any time into shares of common stock at a conversion price equal to 60% of the lowest trade price in the 25 trading days previous to the conversion date.
On March 25, 2016, the Company received net proceeds of $35,000 after expenses, for a one (1) year $40,000 face amount of 8% Convertible Note in favor of EMA Financial, LLC (“EMA Note”). The EMA Note is convertible at any time into common stock at a conversion price equal to the lower of (i) the closing sale price on the day immediately preceding the date of funding and (ii) 50% of the lowest closing sale price for the 25 consecutive trading days immediately preceding the conversion date.
In accordance with the Statement of Financial Accounting Standard ASC 820-10-35-37 Fair Value in Financial Instruments, Statement of Financial Accounting Standard ASC 815 Accounting for Derivative Instruments and Hedging Activities require that instruments with embedded derivative features be valued at their market values. The Company hired a valuation consultant to value the JMJ Note and the EMA Note for the derivative portion of the instruments. The Binomial model was used to value the derivative liability for the quarter ending March 31, 2016 at $102,288, with a derivative liability
expense of $102,288.
Note 7 Fair Value of Financial Instruments
The following is the major category of liabilities measured at fair value on a recurring basis as of March 31, 2016, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
|
|
|
|
Derivative Liabilities from Convertible Notes (Level 3)
|
|
$
|
102,288
|
|
Note 8 Stockholder’s Equity
During the Three Months period ended March 31, 2016, the Company issued 1,164,436 shares of common stock and received or credited gross proceeds of $159,173. The expenses of offering totaled $102,732. The net proceeds were used for working capital, corporate expenses, legal fees and public company expenses.
Note 9 Other matters
Legal fees relating to financing activities, blue sky registrations with states and other fund raising expenses were charged to additional paid in capital in the amount $14,065 for the Three Months ended March 31, 2016 and $58,616 during the year ended December 31, 2015.
Our business is affected by some seasonality but this is not a material concern of our Company. Most reduction in sales due to seasonality take place during the major winter holidays and the first quarter of the year. We adjust automatically to this effect by stretching our workloads and other activities into the slow periods and therefore have not been concerned by seasonality.
On March 15, 2015 the Company entered into a consulting contract with Adamas Fund, LLC (AFL), a Chicago based investment banking group providing for the issuance of a Regulation 144A bond offering that will be sold to QIBs (qualified institutional buyers) with a minimum raise of $5,000,000 USD on a best efforts basis. The bond will be sold by several broker dealers globally and will be used in the implementation of ABCO’s future growth plans and for future acquisitions. The ABCO bond will not require interest payments for years 1-3 and a low annual coupon rate of 6.5% for years 4-10 with a 10 year maturity date. The bond may be convertible into common stock under certain circumstances. Rule 144A Securities Act of 1933 provides an exemption from the registration requirements of the Securities Act of 1933 for certain private transactions of minimum $100,000 units of restricted securities to qualified investors which generally are large institutional investors that own at least $100 million in investable assets. AFL will receive an aggregate advisory fee of $130,000 in connection with the issuance of the bonds. The first $75,000 has been be paid by the issuance of 375,000 shares of registered common stock on or about November 19, 2015. The remaining $55,000 has been paid with $20,000 in cash, $1,000 which was paid in this reporting period and $19,000 paid April 7, 2016. The balance will be paid in cash or common stock at the Company’s option upon receipt of funds from the bonds.
Note 10 Income Tax
The company has net operating loss carryforwards as of March 31, 2016 totaling approximately $2,194,528. A deferred tax benefit of approximately $746,000 has been offset by a valuation allowance of the same amount as its realization is not assured.
Note 11 Subsequent Events
During the period from April 1, 2016 through May 20, 2016, Company issued 765,033 shares of common stock and received or credited gross proceeds of $72,877. The expenses of offering totaled $47,037. The net proceeds were used for working capital, corporate expenses, legal fees and public company expenses.
On November 6, 2015, the Securities and Exchange Commission declared effective the Company’s registration statement on Form S-1, relating to the sale of up to 33,600,856 shares of common stock, of which the Company is selling 10,000,000 new shares. Certain selling shareholders will be offering for sale up to 23,600,856 shares owned by them. The Company will only receive proceeds from the sale of the 10,000,000 new shares. If all of these shares are sold in this offering, the gross proceeds to the Company will be $4,200,000. The Company will not receive any proceeds from the sale of the shares offered by the selling shareholders.
On April 1, 2016, the Company issued a two year $55,000 convertible promissory note to Essex Global Investment Corp. (“Essex”) which bears interest at the rate of 10% per annum on the principal sum of the outstanding (“Essex Note”). The Company received net proceeds of $50,000 after deductions for expenses, from the Essex Note. The Essex Note is convertible at any time after the six (6) month anniversary of the Note into shares of common stock at a conversion price equal to 55% of the lowest trade price in the 20 trading days previous to the conversion date.
On April 5, 2016, the Company received net proceeds of $33,300 after expenses, from a one (1) year $42,000 face amount of 5% Convertible Note in favor of Crown Bridge Partners, LLC (“CBP Note”). The CBP Note is convertible at any time after the six (6) month anniversary of the Note into common stock at a conversion price equal to 52% of the lowest closing sale price for the 25 consecutive trading days immediately preceding the conversion date.
On May 4, 2016, the Company received net proceeds of $33,750 after expenses, from a nine [9] month $40,000 face amount of 10% Convertible Note in favor of Auctus Fund, LLC (“AFL Note”). The AFL Note is convertible after the six (6) month anniversary of the Note into common stock at a conversion price equal to 60% of the lowest closing sale price for the 20 consecutive trading days immediately preceding the conversion date.
On May 9, 2016, the Company entered into an agreement with Adar Bays, LLC a Florida Limited Company (Adar), with respect to a private investment up to $60,000 of the convertible debt securities with a 9 month term. The $60,000 convertible debt is comprised of a $30,000 front-end note and one $30,000 back-end note. The principal and accrued interest under the notes will be convertible into shares of common stock of the Company at a 50% discount to the lowest closing bid price with a 20 day look back. Adar will deduct legal fees of $2,000 on the funding of each of the notes, as well as on the cash funding on the back-end note, as well as making deductions of $2,800 to Almorli Advisors on the cash funding of each of those notes. The notes shall bear interest at 8%. The Company is not required to take down the back end note. As of May 20, 2016, the Company borrowed $30,000 against the front end note.
The provisions of each of the [four] foregoing Notes contain embedded derivative features which are required to be valued at their fair market value. These valuations are in process but as of the date of this Report, the results thereof are not available. Management believes that the final valuations, taken as a whole, will not have a material adverse effect on the results of future operations.
OUTSTANDING OPTION AWARDS
The following table sets forth certain information regarding Option Awards as of March 31, 2016 for each executive officer of the Company who received such awards and all officers and directors as a group. None were outstanding as of the fiscal year ended December 31, 2015 (1)(2)
Name
|
|
Number of securities underlying unexercised option exercisable
|
|
|
Option Exercise Price
|
|
Option Expiration Date
|
Charles O’Dowd
|
|
|
5,000,000
|
|
|
$
|
0.01
|
|
January 1, 2021
|
All Officers and Directors as a Group
|
|
|
5,000,000
|
|
|
$
|
0.01
|
|
January 1, 2021
|
(1)
|
No Stock Awards have been issued into the Equity Incentive Plan.
|
(2)
|
An aggregate of 200,000 Share Option Awards have been issued to 3 employees and one consultant of the Company at an exercise price of $0.01 per share expiring on 1/21/21.
|