NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2017
(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 Photovoltaic (PV) solar systems industry and is an electrical product and services supplier.
ABCO Solar, Inc
. is an Arizona corporation and a wholly owned subsidiary of ABCO Energy. Inc. ABCO Solar is the wholly owned operating subsidiary of the company and does the sales and installation of all of its contracting business. ABCO Solar also sells and installs commercial lighting and energy conservation equipment like generators and energy efficient air conditioning for commercial and residential customers.
Alternative Energy Finance Corporation (AEFC)
AEFC is a wholly owned subsidiary of ABCO Energy. AEFC provides financing for solar systems for customers and finances its company owned systems from its own cash. Long term leases recorded on the consolidated financial statements were $11,689 and $11,984 at June 30, 2017 and December 31, 2016 respectively. On July 26, 2017, AEFC filed a Regulation D offering with the Securities and Exchange Commission to begin the sale of shares for investor participation in a newly formed Limited Liability Company Alternative Energy Solar Fund #1, LLC (AESF). AESF is an Arizona LLC and the Fund has filed Blue Sky registrations in Arizona, Nevada, California and Colorado and intends to file in several other states.
The AESF Offering
The Fund offers sophisticated investors the opportunity to participate in a strategic solar investment in the ownership of projects installed on commercial, industrial, residential, non-profit and governmental buildings and land portfolios to be developed or acquired for the Fund by the Solar Project Developer (AEFC) (the “Portfolio” as defined herein). The Solar Project Developer, AEFC, has identified several solar projects that it intends to place under contract for development which are intended to provide long term investment cash returns and significant short term tax benefits to tax equity investors. These projects are currently available for transferring into the Fund. The Solar Project Developer has also solicited and found several projects that have become available from non-affiliated developers that would become investment candidates for the Fund.
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 2017. 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, 2016.
Note 2 Summary of Significant Accounting Policies
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.
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 there 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, 2017 of $(3,881,915), which raises substantial doubt about the Company’s ability to continue as a going concern.
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 Inventory
Inventory of construction supplies not yet charged to specific projects was $43,914 and $46,701 as of June 30, 2017 and December 31, 2016, respectively. The Company values items of inventory at the lower of cost or market and uses the first in first out method to charge costs to jobs.
Note 5 Note Payable – Officers, Directors and Related Parties
Related party loans are demand notes totaling $179,100 and $177,347, respectively, as of June 30, 2017 and December 31, 2016. These notes provide for interest at 12% per annum and are unsecured. Other related party notes totaled $61,399 at June 30, 2017 for loans from a person who is neither an officer or director.
Related party notes payable as of June 30, 2017and December 31, 2016 consists of the following:
Description
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Notes payable – Director bearing interest at 12% per annum, unsecured, demand notes.
|
|
$
|
60,000
|
|
|
$
|
60,000
|
|
Note payable - Officer bearing interest at 12% per annum, unsecured, demand note
|
|
|
57,701
|
|
|
|
53,501
|
|
Note payable – other bearing interest at 12% per annum, unsecured, demand note.
|
|
|
61,399
|
|
|
|
63,846
|
|
Total
|
|
$
|
179,100
|
|
|
$
|
177,347
|
|
The first note in the amount of $60,000 provides for interest at 12% per annum and is unsecured. This note has an accrued and unpaid interest charge of $23,472 and $19,876 at June 30, 2017 and December 31, 2016 respectively.
The second note was increased by another loan in February 2017 in the amount of $4,200. The note is an unsecured demand note and bears interest at 12% per annum. This note has an accrued and unpaid interest charge of $9,143 and $5,812 at June 30, 2017 and December 31, 2016 respectively.
.
The third note is from a related party and has a current balance of $61,399 as of June 30, 2017 which changes with credit card transactions during each period. The note is an unsecured demand note and bears interest at 12% per annum. This note has an accrued and unpaid interest charge of $8,997 and $5,254 at June 30, 2017 and December 31, 2016 respectively.
Note 6 Short Term Notes Payable
Description
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Merchant Note payable to Web Bank, borrowed 2-1-16, bearing interest at 23% per annum, unsecured. (1)
|
|
$
|
80,632
|
|
|
$
|
82,323
|
|
Merchant Note payable to Quarterspot Lending, borrowed 6-27-16, bearing interest at 31% per annum, unsecured. (2)
|
|
|
32,760
|
|
|
|
40,474
|
|
Merchant note payable to Premier Capital Funding, borrowed 7-12-16, bearing interest at 29% per annum, unsecured. (3)
|
|
|
23,460
|
|
|
|
27,545
|
|
Total
|
|
$
|
136,852
|
|
|
$
|
150,342
|
|
(1) On February 1, 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. A portion of the loan was used to pay off a credit loan from Orchard Street Funding in the amount of $44,061. On August 22, 2016, the Company ceased making payments on this loan and at June 30, 2017 the Company owed $80,632 in principal and accrued interest. This loan is personally guaranteed by an Officer of the Company. On March 20, 2017, the Company and WebBank agreed to a monthly payment schedule with payment of $2,508 per month until June 20, 2017, paid biweekly. No arrangements have been made for the final payment schedule on this loan beyond that date. No default notice has been received by the Company on the loan as of June 30, 2017. Payments on this account have been made for the past few months but most of the sums have been applied to interest.
(2) 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 September of 2017. On August 22, 2016, the Company ceased making payments on this loan. As of June 30, 2017, the Company owed $32,760 in principal and accrued interest. This loan is not personally guaranteed by an Officer of the Company. On November 30, 2016, the Company and Quarterspot agreed to a monthly payment schedule with payment of $1,500 per month until January 31, 2017. On March 27, 2017, the Company agreed to begin payments of $3,010 per month for twelve months until paid in full. No arrangements have been made for the final payment schedule on this loan beyond that date. No default notice has been received by the Company on the loan as of June 30, 2017. Payments on this account have been made for the past few months but most of the sums have been applied to interest.
(3) On July 12, 2016, the Company financed operations with a loan in the amount of $45,000 from Premier Capital Funding, LLC, a lending
institution. The note is an open line with interest rate of approximately 29% maturing in November 28, 2016. On August 22, 2016, the Company ceased making payments on this loan. On October 17, 2016, the Company agreed to pay Premier $4,000 per month for ten months to pay this loan in full. The Company had a total balance of $23,460 as of June 30, 2017. This loan is personally guaranteed by an Officer of the Company. No default notice has been received by the Company on the loan as of June 30, 2017. Payments on this account have been made for the past few months but most of the sums have been applied to interest. This loan was paid in full at July 31, 2017.
The Company has been negotiating more favorable payment and payoff arrangements for these debts. If the Company is not successful in this process the note holders may take legal action to collect their respective debt against the Company and/or its officers.
Note 7 Long Term Debt
Long term debt as of June 30, 2017 and December 31, 2016 consisted of the following:
Description
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Note payable to Ascentium Capital, secured by truck, bearing interest at 9% per annum, matures on September 20, 2017. This loan has payments of $469 per month.
|
|
$
|
1,819
|
|
|
$
|
4,400
|
|
Less current portion of truck loan
|
|
|
(1,819
|
)
|
|
|
(4,400
|
)
|
Total long term debt net of current portion
|
|
$
|
0
|
|
|
$
|
0
|
|
Note 8 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, 2017, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Derivative Liabilities from Convertible Notes (Level 3)
|
|
$
|
275,766
|
|
|
$
|
397,722
|
|
Note 9 Stockholder’s Equity
From October 7, 2016 through December 31, 2016, the Company issued an aggregate of 19,872,739 shares of its common stock upon conversions of six different convertible notes at conversion prices ranging from $0.0015 to $0.0047 per share. All share figures contained in this filing have been adjusted to reflect Post Reverse Stock Split numbers. As a result of such issuances, all six [6] of the notes have paid in full as of that date. The Company recorded $424,878 for the equity infusion provided by these notes.
During the six-month period ended June 30, 2017 the Company sold an aggregate of 33,143,250 shares of common stock and received or credited gross proceeds of $280,871. Of such shares, 26,362,000 were not issued because of the lack of a sufficient number of authorized shares. The Company’s Articles of Incorporation were amended on August 17, 2017 to increase the authorized shares from 50,000,000 shares to 1,000,000,000 shares after the Company Shareholders authorized such Amendment at a Special Meeting held on August 17, 2017. Expenses of this offering totaled $162,855. The net proceeds of $118,016 were used for working capital, corporate expenses, legal fees and public company expenses. The unissued shares with equity valuation of $178,169 will be issued after the special meeting.
The Board of Directors of the Company approved a reverse stock split of its common stock, at a ratio of 1-for-10 (the “Reverse Stock Split”) in November of 2016. The Reverse Stock Split became effective with FINRA (the Financial Industry Regulatory Authority) and in the marketplace on January 13, 2017 (the “Effective Date”), whereupon the shares of common stock began trading on a split adjusted basis. On the Effective Date, the Company’s trading symbol was changed to “ABCED” for a period of 20 business days, after which the “D” was removed from the Company’s trading symbol, and it reverted to the original symbol of “ABCE”. In connection with the Reverse Stock Split, the Company’s CUSIP number changed to 00287V204. On the Effective Date, the total number of shares of the Company’s Common Stock held by each stockholder was converted automatically into the number of whole shares of Common Stock equal to (i) the number of issued and outstanding shares of Common Stock held by such stockholder immediately prior to the Reverse Stock Split, divided by (ii) 10. No fractional shares were issued, and no cash or other consideration was paid. The Company issued one whole share of the post-Reverse Stock Split Common Stock to all stockholders who otherwise would have received a fractional share because of the Reverse Stock Split.
As a result of the Reverse Stock Split the number of authorized shares of common stock was reduced to 50,000,000 from 500,000,000
shares. At a Special Meeting of Stockholders held on August 17, 2017 , Company shareholders authorized an amendment to the Articles of Incorporation to increase the authorized capital to 1,000,000,000 common shares and 100,000,000 preferred shares. The Amendment was filed with the Nevada Secretary of State on August 17, 2017.
Note 10 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 $11,900 for the six months ended June 30, 2017 and $126,315 during the year ended December 31, 2016.
During the fiscal year ended December 31, 2016 the Company sold 2,486,382 shares in Regulation S offerings to non-US investors. The total proceeds from the offering was $767,234. Commission and expense reimbursements totaled $441,170. The Company recorded net proceeds totaling $326,064.
Stock subscriptions executed under an earlier offering included a provision whereby ABCO agrees to pay a dividend (defined as interest) of from 6% to 12% of the total amount invested for a period of one year from receipt of the invested funds. This dividend (defined as interest) is allocated between the broker and the investor with amounts paid to the broker treated as a cost of the offering and netted against additional paid in capital and amounts paid to the investor treated as interest expense. The balance of accrued interest at June 30, 2017 and December 31, 2016 amounted to $49,290 and no payments have been made during the current period.
ABCO has evaluated these agreements under ASC 480-10: Certain Financial Instruments with Characteristics of Both Liabilities and Equity and determined that the capital contributions made under these subscription agreement more closely resemble equity than liabilities as they can only be settled through the issuance of shares and although they have a stated cost associated with them which accrues in the same manner as interest, the cost is only incurred in the first twelve months after placement as is more closely associated with a cost of raising funds than interest expense.
During November, 2016, the Company issued an aggregate of 1,449,649 shares to financial consulting entities for services relating to fund raising activities. The total issuance was valued at $103,400 for fair market value as negotiated and that amount is charged to additional paid in capital.
Effective June 30, 2016, the Company entered into a Consulting Agreement (“CA”) with Joshua Tyrell (“Tyrell”) which provided for Tyrell to assist in various business development activities on behalf of the Company, including but not limited to realizing new business opportunities. In consideration for rendering such services, Tyrell was issued 150,000 free trading shares of Company common stock. The CA had a six month term expiring on June 30, 2017. On November 7, 2016 and on November 30, 2016, the CA was amended to provide for the payment of an additional 630,000 and an additional 500,000 free-trading shares, respectively to Tyrell for services rendered due to the huge trading volume of the derivative conversions and to extend the term of the CA to twelve (12) months ending November 7, 2017. The consultant received a total of 1,430,000 shares of free trading and restricted common stock valued at $91,600.
The Company has entered into Securities Purchase Agreement with Blackbridge Capital, LLC, a Delaware limited liability company [“SPA”], operating out of New York, New York (“Blackbridge”) whereby Blackbridge has agreed to purchase up to $5,000,000 worth of shares of the Company’s common stock. The Company has agreed to file a Registration Statement to register such shares for sale to Blackbridge. In addition, the Company has issued [i] a convertible promissory note to Blackbridge pursuant to the Securities Purchase Agreement equal to $150,000 as a commitment fee, that is currently charged to prepaid expenses until services are provided (the “Blackbridge Note”), [ii] and a $100,000 Convertible Note to cover the expenses to be incurred for the preparation and filing of the Registration Statement and related matters (“Expenses Note”).
On March 13, 2017, the Company and Blackbridge, entered into an Agreement, effective as of March 1, 2017, terminating the SPA. The Registration Statement on Form S-1 filed by the Company pursuant to the SPA could not be processed because of technical issues raised by the SEC and was withdrawn on February 28, 2017. In addition, the Blackbridge Note issued by the Company as a commitment fee remains, by its express terms, in full force and effect notwithstanding the termination of the SPA as does the Expenses Note.
Note 11 Income Tax
The company has net operating loss carryforwards as of June 30, 2017 totaling approximately $3,877,821. A deferred tax benefit of approximately $1,318,459 has been offset by a valuation allowance of the same amount as its realization is not assured.
Note 12 Subsequent Events
During the period July 1, 2017 through August 17, 2017 the Company sold 20,803,570 shares of restricted common stock for gross proceeds of $160,852 and net proceeds of $61,797. These shares will be issued in the near future as the authorized number of shares was increased to one billion shares at the August 17, 2017 special meeting. See Note 9 above relating to such increase. As discussed in Note 9, the Company sold an additional 33,143,250 restricted shares of common stock between January 1, 2017 and June 30, 2017.
The AESF Offering
On July 26, 2017, AEFC filed a Regulation D
offering Statement
with the Securities and Exchange Commission in order to begin the sale of shares for investor participation in a newly formed Limited Liability Company Alternative Energy Solar Fund #1, LLC (AESF). AESF is an Arizona LLC and the Fund has filed Blue Sky registration in Arizona, Nevada, California and Colorado and intends to file in several other states.
The Fund offers sophisticated investors the opportunity to participate in a strategic solar investment in the ownership of projects installed on commercial, industrial, residential, non-profit and governmental buildings and land portfolios to be developed or acquired for the Fund by the Solar Project Developer (AEFC) (the “Portfolio” as defined herein). The Solar Project Developer, AEFC, has identified several solar projects that it intends to place under contract for development which are intended to provide long term investment cash returns and significant short term tax benefits to tax equity investors. These projects are currently available for transferring into the Fund. The Solar Project Developer has also solicited and found several projects that have become available from non-affiliated developers that would become investment candidates for the Fund.