ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE
FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY’S FINANCIAL STATEMENTS AND THE NOTES THEREO, AND OTHER
FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS REPORT.
Introduction
Acology
has no material assets other than all of the outstanding membership units of its subsidiaries and has no plans to conduct any
business activities other than obtaining or guaranteeing financing for the businesses conducted by its subsidiaries or assisting
them in obtaining such financing.
Through
D&C Distributors LLC and D&C Printing LLC, we are in the business of selling and distributing patented containers that
can store, grind and shred pharmaceuticals, herbs, teas and other solids or liquids. We provide custom printing of labeling for
our products and products manufactured by others. We have commenced sales of humidity control inserts, hydroponic grow towers,
smell-proof bags and lighters and are actively developing markets for them. Our principal product is the “Medtainer®”.
Sales of our Medtainer® products accounted 68% of our revenue in 2017, as compared to 86% of our revenue in 2016 and 92% in
2015, 62% of our sales in the quarter ended June 30, 2018, as compared to 65% of our sales in the quarter ended June 30, 2017,
and 87% of our sales in the quarter ended June 30, 2016. The most significant components of revenues from our other products and
services were printing services, which comprised 6% of our revenue in 2016, and humidity control inserts, which we introduced
in 2016, comprised approximately about 3% of our revenue for that year. In the quarter ended June 30, 2018, sales of printing
services and humidity control inserts comprised 4% and 15% of our revenue, compared to 7% and 14%, respectively, of our revenue
the quarter ended June 30, 2017; in the quarter ended June 30, 2016, sales of printing services and humidity control were each
less than 5% of our revenue. During the month ended June 30, 2018, we obtained a U.S. Registered Trademark for our private-labeled
“Med X 2-Way Humidity Control® Pack.”
We market
directly to businesses through our phone room, retail public through internet sales and to wholesalers and other businesses who
resell our products to other businesses and end users.
Some
of our products can be utilized for marijuana-related purposes. In light of the facts that the possession and use of marijuana
have been legalized, subject to varying restrictions, in many states and that several other states are considering such legalization,
we believe that our products may be of interest to a large number of users of marijuana in and we advertise our products on our
website and elsewhere as suitable for that purpose. However, since we do not seek information from our customers who are end users
as to how they intend to utilize our products and have no similar knowledge respecting end users of products sold through our
distributor, we are unable to determine the extent of its use in connection with the storage and grinding of marijuana or any
other purpose.
Acology
was incorporated on September 9, 1997, in the State of Florida. Acology has two operating subsidiaries, D&C Distributors LLC,
which Acology acquired on March 28, 2014, and which commenced operations on January 29, 2013, and D&C Printing LLC, which
was formed and commenced operations on April 14, 2015.
RESULTS
OF OPERATIONS
Three
Months Ended June 30, 2018, Compared with Three Months Ended June 30, 2017
Sales:
Our sales for the three months ended June 30, 2018, were $552,147, from which we earned a gross profit of $346,595. Our sales
for the three months ended June 30, 2017, were $545,205, from which we earned a gross profit of $360,381.
Operating
Expenses:
For the three months ended June 30, 2018, total operating expenses of $441,507 were incurred, including $408,571
for general and administrative expenses, of which $34,140 was paid to each of Mr. Fairbrother and Mr. Heldoorn as officers’
compensation, $12,677 in amortization expense and $20,259 for advertising and marketing. For the three months ended June 30, 2017,
total operating expenses of $374,796 were incurred, including $365,070 for general and administrative expenses, of which $35,404
was paid to Mr. Fairbrother and Mr. Heldoorn, respectively, as officers’ compensation, and $9,726 for advertising and marketing.
The principal reasons for the increase in general and administrative expense of $66,711 in the later period were increases in
amortization expense, payroll and professional fees. Advertising and marketing increased by $10,533 in the later period due to
a temporary increase in social media ads.
Loss
from Operations:
Loss from operations increased from $14,415 for the three months ended June 30, 2017, to $94,912 for the
three months ended June 30, 2018, mainly due to the increase of cost of goods sold of $20,728, amortization expense of $12,677
and general and administrative costs of $43,501.
Other
Expenses:
During the three months ended June 30, 2018, and 2017, we incurred interest expense of $10,389 and $15,464, respectively.
Interest expense was lower in the later period because the accounting treatment of the excess of the fair value of the embedded
conversion feature of the note over its principal amount, which excess is charged as interest upon inception, was a higher amount
in 2016 than for the amount of convertible debt issued in 2017, which contained an embedded conversion feature. We incurred no
gain on extinguishment of debt during both three-month periods. We incurred $849 of loss on change in fair value of derivative
during the three months ended June 30, 2018, as the result of a change in the fair value of the embedded conversion feature of
a note over its principal amount, which excess is charged as interest upon inception, and a gain of $128,527 during the three
months ended June 30, 2017.
Net
Income (Loss):
For the reasons set forth above, we recorded net loss of $106,150 for the three months ended June 30, 2018,
as compared with a net income of $98,648 for the three months ended June 30, 2017.
Six
Months Ended June 30, 2018, Compared with Six Months Ended June 30, 2017
Sales:
Sales for the six months ended June 30, 2018, were $1,196,498, from which we earned a gross profit of $771,645. Sales for
the six months ended June 30, 2017, were $1,090,035, from which we earned a gross profit of $751,311.
Operating
Expenses:
For the six months ended June 30, 2018, total operating expenses of $846,995 were incurred, including $799,016 for
general and administrative expenses, of which $68,010 was paid to each of Mr. Fairbrother and Mr. Heldoorn as officers’
compensation, amortization expense of $12,677 and $35,302 for advertising and marketing. For the six months ended June 30, 2017,
total operating expenses of $775,421 were incurred, including $734,593 for general and administrative expenses, of which $69,305
was paid to Mr. Fairbrother and Mr. Heldoorn, respectively, as officers’ compensation, and $40,828 for advertising and marketing.
The principal reasons for the increase in general and administrative expense of $71,574 in the later period was due to an increase
in amortization expense, payroll and professional fees. Advertising and marketing decreased by $5,526 in the later period because
we have cut our advertising due to our increase in organic growth.
Loss
from Operations:
Loss from operations increased from $24,110 for the six months ended June 30, 2017, to $75,350 for the six
months ended June 30, 2018, mainly due to the increase of cost of goods sold of $86,129, amortization expense of $12,677and an
increase in general and administrative costs of $64,423.
Other
Expenses:
During the six months ended June 30, 2018, and 2017, we incurred interest expense of $19,943 and $33,880, respectively.
Interest expense was lower in the later period because the accounting treatment of the excess of the fair value of the embedded
conversion feature of the note over its principal amount, which excess is charged as interest upon inception, was higher in 2017
than in 2018, which contained an embedded conversion feature. We incurred no gain on extinguishment of debt during the six months
ended June 30, 2017. In addition, we recorded a gain of $2,131 on change in fair value of derivative during the six months ended
June 30, 2018, as the result of a change in the fair value of the embedded conversion feature of a note over its principal amount,
which excess is charged as interest upon inception, versus $164,151 during the six months ended June 30, 2017.
Net
Income (Loss):
For the reasons set forth above, we recorded net loss of $93,162 for the six months ended June 30, 2018, as
compared with net income of $106,525 for the six months ended June 30, 2017.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
and Capital Resources
As of
December 31, 2017, we had $22,656 in cash and accounts receivable of $87,962, and as of June 30, 2018, we had $12,948 in cash
and accounts receivable of $117,908. We commenced business in January 2013. Our sales grew over the course of 2013, averaging
11,500 units per month for 2013. During the year ended December 31, 2014, we sold approximately 180,000 units. During the year
ended December 31, 2015, we sold an approximately 314,000 units. During the year ended December 31, 2016, we sold approximately
419,000 units of our Medtainer® products and 160,000 units of our other products. We sold approximately 82,000 units of our
Medtainer® products and approximately 180,000 units of our other products during the three months ended June 30, 2018, compared
to 104,000 units of our Medtainer® products and approximately 147,000 units of our other products during the three months
ended June 30, 2017. Revenues from printing services were $112,208 in the year ended December 31, 2016, compared to $116,000 in
the year ended December 31, 2017; revenues were $21,633 during the three months ended June 30. 2017, compared to $38,300 during
the three months ended June 30. 2017. Sales of our Med X 2-Way Humidity Control® inserts and other humidity control products
were $83,000 during the three months ended June 30, 2018, compared with $76,500 in the three months ended June 30, 2017. During
the three months ended June 30, 2018, we did not borrow from outside sources.
We have
a current inventory of approximately 133,000 Medtainer® products, which we believe will be sold for approximately $530,000
and an inventory of 195,000 units of our other products, which we believe will be sold for approximately $390,000.
In July
2017, the Company exchanged $412,600 of its debt, including accrued interest, for 76,635,407 shares of Common Stock and retired
a convertible promissory note, on which $250,000 was outstanding, thereby reducing its obligations for borrowed money to $879,401,
of which $879,401 is past due, thereby reducing its funding requirements. As a result, the Company believes that it will require
approximately $1,000,000 in additional funding for the next 12 months, including $380,500 to repay loans that are past due, assuming
that the Company’s operating loss remains at the same level. The Company plans to seek extensions of overdue loans, in which
case the amount of such funding will be reduced, but cannot give assurances as to the extent that it will be successful. The Company
plans to fund its activities, during the balance of 2018 and beyond through loans from banks and other financial institutions
and the sale of debt or equity securities to private investors. While the Company believes that the reduction in debt makes it
more attractive to lenders and investors, it can give no assurance that it will be successful in so doing or that such funding,
if available, can be obtained on acceptable terms.
The
Company has devoted, and Management believes that the Company should continue to devote, manpower and capital to increasing its
sales to the extent that it is available and prudent. For this reason, it has increased its sales staff from two 2 in 2013 to
11 today. Management further believes that increased sales will ultimately exceed operating expenses. The Company expects the
reduction in indebtedness and the associated reduction in gain in fair value of derivative will improve its net income, but this
will be offset by a gain on extinguishment of debt associated with $250,000 of retired indebtedness. However, as indicated in
note 3 of the Notes to Financial Statements, there are substantial doubts as to the ability of the Company to continue as a going
concern and Management recognizes that the Company can take measures to increase sales only within the parameters set forth therein.
Our ability to continue as a going concern is dependent on the successful execution of our 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. During 2017 and during the six months ended June 30, 2018, we maintained
sales of our Medtainer® products at approximately the same level as for the six months ended June 30, 2018 (although the percentage
of our total sales attributable to these products decreased), increased sales of humidity control products and introduced new
products, resulting in increased revenues. On June 8, 2018, the Company acquired certain patents and patent applications, a trademark
and an internet domain, which are related to its Medtainer® products. The Company believes that this acquisition may enable
it to increase sales to an unknown extent because it will now have the ability to enforce the patents and trademark. Also, if
the Company can increase demand for Medtainers® beyond the number that it is required to purchase under its agreement to purchase
them from the former owner of the patents, or if the former owner is unable to meet its obligations under that agreement, the
Company believes that it will be able to manufacture them or purchase them from its licensees at a lower price per unit than it
is now paying, thereby increasing profits. However, the Company does not believe than the acquisition of this property will by
itself enable the Company to continue as a going concern.
The
Company’s revenues have grown every year since in commenced business. In 2013, our sales were $254,992; in 2014, they were
$460,756; in 2015, they were $1,441,441, in 2016, they were $1,975,923, in 2017 they were $2,210,470; and $1,196,498 for the six
months ended June 30, 2018. For the three months ended June 30, 2018, we recorded a net loss of $106,150 compared to a net profit
of $98,648 for the three months ended June 30, 2017. We hope that we can improve our results in the balance of 2018 and beyond
but cannot assure that we will be able to do so.
We can
give no assurance that any of the funding described above will be available on acceptable terms, or available at all. If we are
unable to raise funds in sufficient amount, when required or on acceptable terms, we may have to significantly reduce, or discontinue,
our operations. To the extent that we raise additional funds by issuing equity securities or securities that are convertible into
Acology’s equity securities, its shareholders may experience significant dilution.
Off-Balance
Sheet Arrangements.
We have
no off-balance sheet arrangements.