Notes
to Financial Statements
December
31, 2017
Note
1 – Business
Acology,
Inc. (the “Company”), through its wholly owned subsidiary, D&C Distributors, LLC (“D&C”), is in
the business of designing, manufacturing, branding and selling proprietary plastic medical grade containers that can store pharmaceuticals,
herbs, teas and other solids or liquids, some of which can grind solids and shred herbs, and through its wholly owned subsidiary,
D&C Printing LLC (“Printing”), is in the business of private labeling and branding for purchasers of containers
and other products.
Note
2 - Summary of Significant Accounting Policies
Principals
of Consolidation
The
consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”)
and include the accounts of the Company and its 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 reevaluates 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
The
Company follows the guidance of the Accounting Standards Codification (“ASC”) Topic 605,
Revenue Recognition.
The Company records revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the selling price
to the customer is fixed or determinable and collectability of the revenue is reasonably assured. The Company has not experienced
any significant returns from customers and accordingly, in management’s opinion, no reserve for returns has been provided.
Inventories
Inventories,
which consist of the Company’s products 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 products.
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 has 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 the Company’s 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, December 31, 2015
|
|
$
|
623,994
|
|
· Issued during
the Year ended December 31, 2016
|
|
|
27,328
|
|
·
Converted during the Year
|
|
|
(138,892
|
)
|
·
Change in fair value recognized in operations
|
|
|
(30,663
|
)
|
Balance, December 31, 2016
|
|
$
|
481,767
|
|
·
Extinguished during the Year
|
|
|
(290,895
|
)
|
·
Change in fair value recognized in operations
|
|
|
(165,597
|
)
|
Balance, December 31, 2017
|
|
$
|
25,275
|
|
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 two year lease term, expenditures for additions and improvements are capitalized and 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 remeasured 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.
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 December 31, 2017, the Company had a shareholders’
deficit of $716,126 and a working capital deficit of $799,664. 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 Company plans to continue as a going concern by successfully executing
its operating plan, which includes increasing sales of existing products while introducing additional products and services, controlling
operating expenses, negotiating extensions of existing loans and raising either debt and/or equity financing.
During 2017, the
Company increased its sales and introduced new products, which resulted in additional revenue; however, it was unable to borrow
money or raise equity capital sufficient to meet its needs and it continued to show an operating loss and a net loss. The Company
was able to reduce its advertising costs substantially. After December 31, 2017, the Company sold 12,000,000 shares of Common
Stock to an investor in a private placement for $120,000. The Company plans to continue to increase revenues, reduce operating
expenses, extend existing loans and seek equity and financing and loans. There is no assurance that it will be able to increase
revenues, reduce operating expenses or extend existing loans, or that it will be able to obtain equity or debt financing on satisfactory
terms or at all.
Note
4 –Note Receivable
On
August 11, 2015, the Company loaned $150,000 to an unrelated person who is one of the holders of convertible notes referred to
in Note 6 and that person made a promissory note in a like principal amount in favor of the Company. The note accrued interest
at the highest lawful rate, but not more the 20% per annum. The principal amount of this note was repaid on February 16, 2017,
and the accrued interest of $20,836 was written off as bad debt during the year ended December 31, 2017.
Note
5 –Property and Equipment
Property
and equipment consist of:
|
|
December 31,
|
|
|
2017
|
|
2016
|
Furniture and Fixtures
|
|
$
|
8,693
|
|
|
$
|
4,793
|
|
Machinery and Equipment
|
|
|
103,591
|
|
|
|
101,813
|
|
Leasehold Improvements
|
|
|
27,873
|
|
|
|
27,871
|
|
|
|
|
140,157
|
|
|
|
134,477
|
|
Accumulated Depreciation
|
|
|
(64,108
|
)
|
|
|
(59,319
|
)
|
|
|
$
|
76,049
|
|
|
$
|
75,160
|
|
Note
6 –Convertible Notes Payable
The
following is a description of convertible notes payable at December 31, 2017:
|
|
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 bears interest at 0.28% per annum. It originally matured
on March 4, 2015, but its maturity was extended to September 14, 2016, as described below. The note is subject to acceleration
in the event of certain events of default, contains certain restrictive covenants, and is secured by a pledge of all the membership
units in D&C. The note provided that if an event of default were to occur, the unpaid principal amount and interest accrued
thereon would be convertible into shares of the Company’s 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 note was in default when it was not paid on March 4, 2015. On August 20, 2015, the holder of the note assigned it
to an unrelated party and on September 14, 2015, the maturity of the note was extended to September 14, 2016, the holder waived
all events of default and any right to receive interest at the default rate, and the Company agreed that the holder could
convert the principal and interest of the note into common stock, notwithstanding the cure of defaults. On August 28, 2015,
the holder converted $50,000 of principal of the note into 428,571,429 shares of common stock and on March 10, 2016, the holder
converted $60,000 of principal of the note into 189,513,580 shares of common stock. 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.
|
|
|
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.
|
|
|
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. These notes are overdue and the Company is negotiating an extension of the maturity
dates.
|
|
|
The
Company has determined that the conversion feature embedded in the notes described in the preceding paragraphs 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 above notes are presented net
of discounts of $0 and $3,205 at December 31, 2017, and December 31, 2016, respectively, on the accompanying consolidated
balance sheets. The Company has used the Black-Scholes-Merton valuation model to value the conversion features using the expected
life of each note, average volatility rate of approximately 159% and a discount rate of 1.29%.
|
|
|
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 non-interest-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 December 31, 2017.
|
Note
7 – 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. The Company had $300,000 of principal amount of these notes payable outstanding at December 31, 2017, 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 December 31, 2017.
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
8 – Loan Payable - Shareholder
The
Company has received advances from one of its shareholders, who is a related party, to help finance its operations. During the
year ended December 31, 2017, the Company received advances of $39,500 from this shareholder. These advances are non-interest-bearing
and have no set maturity date. The balance of these advances at December 31, 2017, and December 31, 2016, was $122,994 and $83,494,
respectively. The Company expects to repay these loans when cash flows become available.
Note
9 – Shareholders’ Deficiency
On
March 10, 2016, the Company issued 189,513,580 shares of common stock in connection with the conversion of $60,000 of the principal
amount of the $400,000 Convertible Promissory Note described in Note 6.
During
the year ended December 31, 2017, the Company issued 85,376,296 shares of common stock to certain noteholders, as described in
notes 6 and 7.
Note
10 – Income Taxes
The
reconciliation of the effective income tax rate to the federal statutory rate is as follows:
|
|
December 31, 2017
|
|
December 31, 2016
|
US Federal statutory rate
|
|
|
(35
|
%)
|
|
|
(35
|
%)
|
State income tax, net of federal benefit
|
|
|
(5
|
%)
|
|
|
(5
|
%)
|
Change in valuation allowance
|
|
|
40
|
%
|
|
|
40
|
%
|
|
|
|
---%
|
|
|
|
---%
|
|
The
components of deferred tax assets comprise:
|
|
December 31,
|
|
|
2017
|
|
2016
|
Net operating loss
|
|
$
|
626,000
|
|
|
$
|
758,000
|
|
Valuation allowance
|
|
|
(626,000
|
)
|
|
|
(758,000
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company has approximately $2,088,000 net operating loss carryforwards that are available to reduce future taxable income. Those
NOLs begin to expire in 2034. In assessing the realization of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred
tax assets for every period because it is more likely than not that all of the deferred tax assets will not be realized.
The Company’s
deferred tax assets and liabilities have been remeasured to reflect the reduction in the U.S. corporate income tax rate from 35%
to 21%, resulting in a deferred tax expense of $188,000 for the year ended December 31, 2017, that is still fully valued against
as of December 31, 2017. This expense is attributable to the Company’s being in a net deferred tax asset position at the
time of remeasurement. As the Company maintains fully valuation allowance, this amount can be seen on the rate reconciliation
as an adjustment to deferred tax asset and corresponding valuation allowance.
On December
22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law, making significant changes to
the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for
tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial
system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has estimated its provision
for income taxes in accordance with the 2017 Tax Act and the guidance available as of the date of March 30, 2018, but has kept
the full valuation allowance. As a result, the Company has recorded no income tax expense in the fourth quarter of 2017, the period
in which the 2017 Tax Act was enacted.
On December 22, 2017, the Securities and Exchange Commission published
Staff Accounting Bulletin No. 118 (“SAB 118”), which addressed the application of GAAP in situations where the Company
does not have the necessary information (including computations) available, prepared, or analyzed in reasonable detail to complete
the accounting for certain income tax effects of the 2017 Tax Act. The deferred tax expense to be recorded in connection with the
remeasurement of deferred tax assets is to be a provisional amount and a reasonable estimate at December 31, 2017, based upon the
best information currently available. The ultimate result may differ from these provisional amounts, possibly materially, due to,
among other things, additional analysis, changes in the interpretations and assumptions that the Company has made, additional regulatory
guidance that may be issued, and actions that the Company may take as a result of the 2017 Tax Act. Any subsequent adjustment to
these amounts will be recorded in current tax expense in the quarter of 2018 when the analysis is complete. The accounting is expected
to be complete when the Company’s 2017 federal corporate income tax return is filed in 2018.
Note
11 – Concentrations
For
the year ended December 31, 2017, one of the Company’s customers accounted for approximately 17% of sales. For the year
ended December 31, 2016, one of its customers accounted for approximately 16% of sales.
For
the year ended December 31, 2017, the Company purchased approximately 39% of its products from one distributor, as compared with
83% in 2016.
For
the year ended December 31, 2017, three of the Company’s customers accounted for 30%, 16% and 11% of accounts receivable.
For the year ended December 31, 2016, two of its customers accounted for 28% and 16% of accounts receivable.
Note
12 – 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
13 – Subsequent Events
Management
has evaluated events occurring after the date of these financial statements through the date that these financial statements were
issued.
On
February 17, 2018, the Company received $120,000 for 12,000,000 shares of Common Stock sold to an investor in a private placement.