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 Six 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 Six Months ended June 30, 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
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 amends previous guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company plans to adopt ASU No.2015-03 regarding the presentation of debt issuance cost from fiscal year 2016.
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 June 30, 2016 of $(3,139,218). 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
Related party notes payable as of June 30, 2016 and December 31, 2015 consists of the following:
Description
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Notes payable – officers and directors bearing interest at 12% per annum, unsecured, demand notes.
|
|
$
|
100,502
|
|
|
$
|
69,944
|
|
Note payable – other bearing interest at 12% per annum, unsecured, demand note.
|
|
|
37,200
|
|
|
|
-
|
|
Total
|
|
$
|
137,702
|
|
|
$
|
69,944
|
|
Officers, directors and other related individuals loans are demand notes totaling $137,702 as of June 30, 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 June 30, 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 June 30, 2016 and $16,246 accrued and unpaid at June 30, 2016.
The second note was increased by $30,557 during the current period, which increased the total note to $40,501 as of June 30, 2016. The note is a demand note, bears interest at 12% per annum and is unsecured. This note has accumulated and unpaid interest totaling $2,546 at June 30, 2016. The current period interest accrued on this note was $1,498.
A related party has made loans to the Company during the last fiscal year end and during the six months ended June 30, 2016. The balance on this note was $37,200 as of June 30, 2016 and $59,832 as of December 31, 2015. The loan is a demand note with an interest rate of 12% per annum. Subsequent to June 30, 2016, additional loans totaling $5,640 were made to the company by this party, which amount was added to the aforementioned demand note.
Note 5 Short Term Notes Payable
Description
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Note payable - Credit line, payable to Ascentium Capital, bearing interest at 24% per annum, unsecured, paid in full in February 2016.
|
|
$
|
-
|
|
|
$
|
6,706
|
|
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.
|
|
|
-
|
|
|
|
59,832
|
|
Merchant Note payable to Web Bank, borrowed 2-1-16, bearing interest at 23% per annum, unsecured, matures in March, 2017. (2)
|
|
|
100,293
|
|
|
|
-
|
|
Merchant Note payable to Quarterspot Lending, borrowed 6-27-16, bearing interest at 31% per annum, unsecured, matures in June, 2017. (3)
|
|
|
43,127
|
|
|
|
-
|
|
Total
|
|
$
|
143,420
|
|
|
$
|
111,778
|
|
During the quarter ended June 30, 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% maturing in March of 2017 and had a balance of $100,293 as of June 30, 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.
On June 28, 2016 the Company financed operations with a loan in the amount of $43,500 from Quarterspot, a lending institution. The note is an open line with interest rate of approximately 31% maturing in June of 2017 and had a balance of $43,127 as of June 30, 2016. This loan is not personally guaranteed by an Officer of the Company.
Note 6 Long term debt
Long term debt as of June 30, 2016 and December 31, 2015 consisted of the following:
Description
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Note payable to Ascentium Capital, secured by truck, bearing interest at 9% per annum, matures in September, 2017. (1)
|
|
$
|
6,932
|
|
|
$
|
9,341
|
|
Less current portion of truck loan
|
|
|
(5,114
|
)
|
|
|
(4,048
|
)
|
Total long term debt net of current portion
|
|
$
|
1,818
|
|
|
|
5,293
|
|
Note 7 – Convertible Debt
Description
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Six convertible promissory notes, in amount ranging from$27,777 to $55,000, maturing within from one year to two years, bearing interest ranging from 5% to 12% per annum, convertible into common stock at conversion prices ranging from 35% to 60% of the lowest price in the prior 20 to 25 trading days. The Company expects all debt will be converted to common shares.
|
|
$
|
234,777
|
|
|
$
|
-
|
|
Less: debt discount
|
|
|
(234,777
|
)
|
|
|
-
|
|
Less: conversions
|
|
|
-
|
|
|
|
-
|
|
Add: amortization of debt discount
|
|
|
52,573
|
|
|
|
-
|
|
Balance of convertible debt, net
|
|
|
52,573
|
|
|
|
-
|
|
Less: current portion
|
|
|
-
|
|
|
|
-
|
|
Long-term convertible debt, net
|
|
$
|
52,573
|
|
|
$
|
-
|
|
Debt Discount
By June 30, 2016, the Company recorded debt discounts totaling $234,777. The Company amortized debt discount of $52,573 by June 30, 2016. Debt discount consisted of the following at June 30, 2016:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Debt discount
|
|
$
|
234,777
|
|
|
$
|
-
|
|
Accumulated amortization of debt discount
|
|
|
(52,573
|
)
|
|
|
-
|
|
Debt discount - net
|
|
$
|
182,204
|
|
|
$
|
-
|
|
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.
On April 1, 2016, the Company issued a one 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.
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 Convertible Debentures for the derivative portion of the instruments. The Binomial model was used to value the derivative liability for the quarter ending June 30, 2016 at $677,726, with a derivative liability expense of $506,636. The total impact to the Consolidated Statement of Operations is a negative $(506,636) that is strictly related to the possibility of conversion. If the Company retires this debt prior to maturity, the effect will be income and addition to Paid in Capital in the amount of $608,924. If these loans are carried to maturity, they will result in the issuance of 18,836,119 shares of common stock and will require no payment in cash.
Note 8 Derivative Liabilities
The Company recognized that the conversion feature embedded within its convertible debts is a financial derivative. The Generally Accepted Accounting Principles (GAAP) required that the Company’s embedded conversion option be accounted for at fair value. The following schedule shows the change in fair value of the derivative liabilities by June 30, 2016:
Description
|
|
Amount
|
|
Derivative liabilities - December 31, 2015
|
|
$
|
-
|
|
Add fair value at the commitment date for convertible notes issued during the current year
|
|
|
743,467
|
|
Fair value mark to market adjustment for derivatives from the first quarter
|
|
|
(65,741
|
)
|
Derivative liabilities - June 30, 2016
|
|
|
677,726
|
|
Less: current portion
|
|
|
590,471
|
|
Long-term derivative liabilities
|
|
$
|
87,255
|
|
The Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded the gross proceeds of the notes. The Company recorded derivative interest expenses for the six months ended June 30, 2016 of $271,859, amortization of debt discount interest expense of $52,573 and the total derivative discount expense of 234,777. The total of these derivative calculations is recorded on the income statement as Derivative amortization expense of $559,209. The actual interest accrual on the convertible notes for the quarter ended June 30 2016 was $7,931.
The Company recorded as a liability the amount of $677,726 and the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded the gross proceeds of the note. The Company recorded change in fair value of derivative liabilities as an expense associated with financing for the three and six month periods ended June 30, 2016 of $456,921 and $559,209, respectively.
Derivative liabilities incurred during the period ended June 30, 2016 were valued based upon the following assumptions and key inputs:
|
|
Commitment
|
|
|
Re-measurement
|
|
Assumption
|
|
Date
|
|
|
Date
|
|
Expected dividends:
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility:
|
|
|
679%-783
|
%
|
|
|
398%-640
|
%
|
Expected term (years):
|
|
1-2 years
|
|
|
0.6-1.72 years
|
|
Risk free interest rate:
|
|
|
0.51%-0.87
|
%
|
|
|
0.36%-0.73
|
%
|
Note 9 Fair Value of Financial Instruments
The following is the major category of liabilities measured at fair value on a recurring basis as of June 30, 2016, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (level 3)
|
|
Fair Value Measurements at June 30,2016
|
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Total
Carrying Value
|
|
Derivative liabilities – debt
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
677,726
|
|
|
|
677,726
|
|
Less: current portion
|
|
|
-
|
|
|
|
-
|
|
|
|
590,471
|
|
|
|
590,471
|
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
87,255
|
|
|
|
87,255
|
|
Note 10 Stockholder’s Equity
Common Stock
During the Six Months period ended June 30, 2016, the Company issued 2,458,519 shares of common stock and received or credited gross proceeds of $283,660. The expenses of offering totaled $270,253. The net proceeds were used for working capital, corporate expenses, legal fees and public company expenses.
Options
The following table sets forth certain information regarding Option Awards as of June 30, 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
|
|
|
10,000,000
|
|
|
$
|
0.01
|
|
January 1, 2021
|
All Officers and Directors as a Group
|
|
|
10,000,000
|
|
|
$
|
0.01
|
|
January 1, 2021
|
(1) No Stock Awards have been issued into the Equity Incentive Plan.
(2) An aggregate of 450,000 Share Option Awards have been issued to 3 employees and 2 consultants of the Company at an exercise price of $0.01 per share expiring on 1/21/21.
Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period
The computation of basic and diluted loss per share at June 30, 2016 excludes the common stock equivalents from convertible debt of the following potentially dilutive securities because their inclusion would be anti-dilutive:
Common Stock Equivalents
|
|
30-Jun-16
|
|
Convertible debt
|
|
|
18,836,119
|
|
Total
|
|
|
18,836,119
|
|
Note 11 Subsequent Events
During the period from July 1, 2016 through August 22, 2016, the Company issued 1,940,000 shares of common stock and received or credited gross proceeds of $106,832. The expenses of the offering totaled $56,066. The net proceeds were used for working capital, corporate expenses, legal fees and public company expenses.