UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------------------------
FORM 10-Q
--------------------------------

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For The Quarterly Period Ended September 30, 2015

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For The Transition Period from __________ to _________ 

Commission file number:  000-29381

ACOLOGY, INC.
(Exact name of registrant as specified in its charter)

Florida		65-0207200
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

1620 Commerce St., Corona, CA		92880
(Address of principal executive offices)		(zip code)

 
(661) 510-0978
 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[ ]	Smaller reporting company	[X]

(Do not check if a smaller reporting company)

 

 Indicate by check mark whether the issuer is a shell company (as defined in rule 12b-2 of the Exchange Act) Yes [ ] No [X]

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
 PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Check whether the registrant filed all documents and reports required by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court  Yes [ ] No [ ]

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of November 11, 2015, there were 4,974,621,214 shares of the Registrant’s Common Stock outstanding. 

 

ACOLOGY, INC.
For The Quarterly Period Ended September 30, 2014

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION				1
Item 1.	Financial Statements			1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			13
Item 4.	Controls and Procedures			13
PART II - OTHER INFORMATION				15
Item 1.	Legal Proceedings			15
Item 1A.	Risk Factors			15
Item 2.	Unregistered Sales Of Equity Securities And Use Of Proceeds.			15
Item 4.	(Removed and Reserved).			15
Item 5.	Other Information			15
Item 6.	Exhibits			15
SIGNATURES				16

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY AND ITS INDUSTRY. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE, ACHIEVEMENTS AND PROSPECTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

  

ACOLOGY, INC.
CONSOLDIATED BALANCE SHEETS
(Unaudited)
		September 30, 2015				December 31, 2014
ASSETS
CURRENT ASSETS:
Cash		$	17,754			$	261,233
Accounts Recievable			30,557				22,011
Inventories			114,591				51,487
Advance to supplier			54,932				66,128
TOTAL CURRENT ASSETS			217,834				400,859
Property and equipment,  net of accumulated depeciation of $19,405 and $6,576			27,268				32,380
Security deposits			7,489				7,489
TOTAL ASSETS		$	252,591			$	440,728
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable		$	22,461			$	18,543
Convertible notes payable			234,500				234,500
Notes payable			457,000				457,000
Note payable - related party			360,000				360,000
Loan payable - stockholder			68,347				68,347
Accrued expenses			68,729				32,123
TOTAL CURRENT LIABILITIES			1,211,037				1,170,513
STOCKHOLDERS' DEFICIENCY
Common Stock, $00001 par value, 6,000,000,000 shares authorized
4,546,014,334 and 3,846,000,000  shares issued and outstanding
September 30, 2015 and December 31, 2014, respectively			45,460				45,460
Additional Paid in Capital			—				—
Accumulated Deficit			(1,003,906	)			(775,245	)
TOTAL STOCKHOLDERS' DEFICIENCY			(958,446	)			(729,785	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY		$	252,591			$	440,728

 

The accompanying notes are an integral part of these financial statements.

 

 

ACOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
		Nine months ended September 30,								Three months ended September 30,
		2015				2014				2015				2014
Sales		$	1,041,375			$	264,312			$	328,703			$	95,765
Cost of Sales			362,161				85,578				129,547				29,119
Gross Profit			679,214				178,734				199,156				66,646
Operating expenses:
General and administrative			787,150				355,707				235,919				197,806
Advertising and marketing			73,991				32,745				26,016				6,648
Total operating expenses			861,141				388,452				261,935				204,454
Income (Loss) from operations			(181,927	)			(209,718	)			(62,779	)			(137,808	)
Other expenses:
Interest expense			46,734				2,501				18,706				2,501
Income (Loss) before income taxes			(228,661	)			(212,219	)			(81,485	)			(140,309	)
Income tax provision			—				—				—				—
Net Income (Loss)		$	(228,661	)		$	(212,219	)		$	(81,485	)		$	(140,309	)
Income (Loss) per common share		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted average common shares outstanding			4,546,014,334				4,386,452,243				4,546,014,334				4,546,014,334

 

The accompanying notes are an integral part of these financial statements.  

 

ACOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
		Nine months ended September 30,
		2015				2014
OPERATING ACTIVITIES:
Net loss		$	(228,661	)		$	(212,219	)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense			12,909				876
Changes in operating assets and liabilities
Accounts receivable			(8,546	)			(16,556	)
Inventories			(63,104	)			(7,327	)
Accounts payable			3,919				—
Advance to supplier			11,196				(41,423	)
Accrued expenses			36,606				2,500
NET CASH USED IN OPERATING ACTIVITIES			(235,681	)			(274,149	)
INVESTING ACTIVITIES:
Acqusition of property and equipment			(7,798	)			(1,910	)
NET CASH USED IN INVESTING ACTIVITIES			(7,798	)			(1,910	)
FINANCING ACTIVITIES:
Proceeds from issuance of private placement			—				40,000
Repayment of related party loan			—				(40,000	)
Proceeds from notes payable			—				232,000
Proceeds of loan from related party							132,869
NET CASH PROVIDED BY FINANCING ACTIVITIES			—				364,869
INCREASE (DECREASE) IN CASH			(243,479	)			88,810
CASH - BEGINNING OF PERIOD			261,233				1,759
CASH - END OF PERIOD		$	17,754			$	90,569
		$	—
Supplemental disclosures of cash flow information:
Non-cash financing activities
Note issued to prior shareholder in connection with reverse merger		$	—			$	400,000

 

The accompanying notes are an integral part of these financial statements.  

 

Acology, Inc.

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

NOTE 1 – Basis of Presentation and Business

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2015, and the results of operations and cash flows for the periods presented. The results of operations for the nine and three months ended September 30, 2015, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on April 15, 2015.

 

Acology, Inc. (“the Company”), through its wholly owned subsidiary D&C Distributors, LLC (“D&C”), is a wholesaler of proprietary polypropylene containers used for controlled dispensing and storage of pharmaceuticals and medicine. The Company sells its products principally through its website to end users.

 

D&C was formed under the laws of the State of California on January 29, 2013.

 

On March 4, 2014, the Company completed an agreement and plan of merger with D&C. In connection with the merger the stockholders of the D&C received 3,846,000,000 shares of the Company’s common stock in exchange for their membership units in D&C. The merger was accounted for as a reverse merger, whereby D&C was the accounting acquirer.

 

NOTE 2 - Summary of Significant Accounting Policies

 

Principals of Consolidation

 

The consolidated financial statements represent the historical financial statement of D&C, which was considered the accounting acquirer in the reverse merger with Acology.

 

Acology is an inactive company and there have been no intercompany transactions or balances in any of the periods presented.

 

Use of Estimates

 

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“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 re-evaluates 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.”

 

We record 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 product 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 product.

 

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 consolidated statements of operations.

 

Fair Value Measurements

 

The Company 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 our 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 Company does not have any assets or liabilities measured at fair value on a recurring basis.

 

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 five years, Leasehold improvements are depreciated over the two year lease term. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as incurred.

 

Convertible Instruments

 

We evaluate and account 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 re-measured 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.

 

Advertising

 

Advertising and marketing expenses are charged to operations as incurred.

 

Income Taxes

 

The Company uses 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.

 

NOTE 3 – Going Concern

 

The accompanying consolidated 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. The Company had a stockholders’ deficiency of $958,446 and a working capital deficiency of $993,203 at September 30, 2015, and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital from third parties.

 

NOTE 4 –Convertible Notes payable

 

At September 30, 2015, convertible notes payable consisted of:

 

•

a series of promissory note conversion agreements that the Company entered into during 2014 with ten unaffiliated individuals in the aggregate amount of $224,500. These notes were initially convertible into shares of the Company’s common stock at a conversion price of $.05 per share. The loans are non-interest bearing and have no stated maturity date. On February 15, 2015, the Company and these noteholders entered into agreements to change the conversion price for conversion of the notes into shares of the Company’s common stock to the current market price at the conversion date plus a twenty percent increase in the number of shares

•

a promissory note conversion agreement that the Company entered into with an unaffiliated individual in the amount of $10,000. This note is convertible into shares of the Company’s common stock at a conversion price of $.05 per share. The note bears interest at 15% per annum and matured April 3, 2015. The Company is currently negotiating an extension of the maturity date.

 

NOTE 5 – Notes payable

 

During 2014, the Company entered into a series of promissory notes with four unaffiliated individuals in the aggregate amount of $457,000. These notes bear interest at rates ranging from 10% to 15% (with a weighted-average rate of 11.7%) and matured as follows:

  

	April 10, 2015			$	300,000
	May 19, 2015				150,000
	September 30, 2015				7,000

 

These notes are currently past due and the Company is negotiating an extension of their respective maturity dates.

 

NOTE 6 – Note payable – Related Party

 

In connection with the merger referred to in Note 1, the Company issued a promissory note in the amount of $400,000 to Acology’s former president and sole director. The note bears interest at 0.28% per annum and was due on March 4, 2015. 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 membership units in D&C. The unpaid principal amount and interest accrued thereon is 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 three consecutive trading days ending on the trading day immediately prior to the conversion date. On August 20, 2015, the holder of the note assigned it to an unrelated third party, and on September 14, 2015, the maturity of the note was extended to September 14, 2016, all events of default were waived, the holder waived any right to received interest at the default rate and the holder may convert the principal and interest of the note into common stock, notwithstanding the cure of defaults.

 

NOTE 7 – Loan payable - stockholder

 

Since its inception, the Company received advances from one of its stockholders to help finance its operations. The loan is non-interest bearing and has no set maturity date. The Company expects to repay the loan when cash flows become available.

 

NOTE 8 – Stockholders’ Deficiency

 

On January 9, 2014, Acology amended its Articles of Incorporation to raise its authorized common stock to 6 billion shares with a par value of $.00001 per share.

 

In connection with the merger referred to in Note 1, the members of D&C received 3,846,000,000 shares of the common stock of Acology in exchange for their membership units in D&C.

In connection with the merger, the former president and sole director of the Acology exchanged 35,000,000 shares of common stock of Acology owned by him and indebtedness owed to him for a convertible promissory note in the amount of $400,000 and the proceeds from the private placement referred to below.

 

In connection with the merger, the Company completed a private placement in which 700,000,000 shares of common stock were issued for proceeds of $40,000.

 

NOTE 9 – Concentrations

 

For the nine months ended September 30, 2014, the Company’s largest customer accounted for approximately 58% of sales. No single customer accounted for more than 10% of sales for the nine months ended September 30, 2015.

 

For the nine months ended September 30, 2015, and 2014, the Company purchased approximately 99% of its products from one distributor.

 

NOTE 10 – Commitments

 

The Company is committed under an operating lease for its premises. The lease calls for monthly payments of $7,500.00 plus 55% of the operating expenses, as defined in the lease. The lease expires on August 31, 2016.

 

NOTE 11 – Subsequent events

 

Management has evaluated subsequent events through the date which the consolidated financial statements were available to be issued. Based on the evaluation no material events have occurred that require recognition or disclosure therein.

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 TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS REPORT. 

 

Introduction

 

Acology is the parent of D&C Distributors LLC (“D&C”). Acology has no material assets other than all of the outstanding membership units in D&C and has no plans to conduct any business activities other than obtaining or guaranteeing financing for the business conducted by D&C or assisting D&C in obtaining such financing.

 

As a result of the merger described below, we are in the business of designing, manufacturing, branding and selling proprietary plastic medical grade containers that can store, and grind and shred, pharmaceuticals, herbs, teas and other solids or liquids. Our sole product is the “TSOS Container.”

 

We currently offer 99% of our products on our retail website, www.themedtainer.com and sell the remainder to wholesale and retail companies for resale.

 

Our products can store and grind many substances. We have manufactured our products using medical-grade resin because we intended to market them for use in grinding pills for administration to children and other persons who have difficulty swallowing and to pets. We were unable to market for these purposes because we did not have child safety certification and because of limitations in manpower. We recently received such certification and can devote more time to marketing. Accordingly, we intend to focus on marketing our products for the foregoing purposes.

 

In light of the facts that the possession and use of marijuana have been legalized, subject to varying restrictions, in at least 23 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. We believe that marketing our products to users of marijuana subject us to the risk of prosecution under federal law if law enforcement authorities were to determine that our products are “drug paraphernalia and by state or local authorities because our websites are visible in jurisdictions where medicinal and/or recreational use of marijuana is not permitted and as a result we may be found to be violating the laws of those jurisdictions 

 

Acology was incorporated on September 9, 1997, in the State of Florida under the name of Synthetic Flowers of America, Inc. (“Synthetic Flowers”).

 

The Merger 

 

December 24, 2013, Acology, PNCR, Acquisition, LLC, a California limited liability company and the wholly-owned subsidiary of Acology (“Merger Sub”), and D&C entered into an Agreement and Plan of Merger under which, among other things, Merger Sub would be merged with and into D&C, with the result that D&C would be the surviving entity and become the wholly owned subsidiary of Acology.

 

On March 4, 2014, the closing under the Merger Agreement took place and on March 28, 2014, D&C and Merger Sub filed the merger certificate with the Secretary of State of the State of California. As a result of the Merger, Acology ceased to be a shell company. In connection with the Merger, Acology issued 3,846,000,000 shares of Common Stock to Curtis Fairbrother and Douglas Heldoorn, the holders of all of the membership units in D&C, who thereby became Acology’s controlling shareholders. Upon the closing of the Merger, the board of directors and officers of Acology resigned and Messrs. Fairbrother and Heldoorn became its officers and directors. Immediately prior to the Merger, Acology was a nonreporting shell company.

 

Also in connection with the Merger:

 

•

On March 4, 2014, Acology completed a private placement with 3 investors (the “Private Placement”) of 700,000,000 shares of Common Stock for proceeds of $40,000 in cash. The price paid by each investor was $0.000571429 per share. Acology also entered into Registration Rights Agreements with these investors, under which Acology was obligated to file, and did file, a registration statement under the Securities Act of 1933 (the “Securities Act”) relating to the shares issued in the Private Placement (the “Registration Statement”) and to use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible. The Registration Statement was made effective on August 6, 2014.

•

Prior to the Merger, Acology’s former president and sole director entered into an Exchange Agreement with Acology, under which 35,000,000 shares of the Common Stock owned by Green Fusion Corp. and $151,269 of Acology’s indebtedness to him were exchanged for the proceeds of the Private Placement and a secured convertible promissory note of Acology payable to him in the principal amount of $400,000 and bearing interest at the rate of 0.28% per annum. The convertible promissory note was due March 4, 2015, subject to acceleration in the event of certain events of default, contains certain restrictive covenants and secured by a pledge of all of the shares of common stock of D&C. If an event of default, including failure to pay the convertible promissory note when due, occurs, the unpaid principal amount of the convertible promissory note and the interest accrued thereon would be convertible as a whole or in part from time to time into an indeterminate number of shares of Common Stock at a conversion price per share equal to 50% of the average of the daily closing prices for a share of Common Stock for the three (3) consecutive trading days ending on the trading day immediately prior to the day on which the convertible promissory note is delivered for conversion. See “Liquidity and Capital Resources” for information respecting extension of the maturity date of the note and certain other matters.

•

On January 9, 2014, Acology amended its Articles of Incorporation (i) to change its corporate name to Acology, Inc., (ii) to increase the number of the authorized shares of common stock to 6,000,000,000 and (iii) to reverse split its common stock on the basis of 1 new share for 1,000 existing shares. The reverse stock split was applicable to shares held by shareholders of record on February 14, 2014, and was implemented on that date.

 

RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2015
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2014

 

Sales. 

 

Sales for the three months ended September 30, 2015, were $328,703 compared to $95,765 for the three months ended September 30, 2014, and our gross profit for those periods was respectively $199,156 and $66,646. The increase in sales and gross profit in the later period was due to increased sales, although the cost of sales rose more steeply than did sales.

 

Operating Expenses. 

 

Total operating expenses for the three months ended September 30, 2015, were $261,935 compared to $204,454 for the three months ended September 30, 2014. These costs and expenses increased in the later period because general and administrative expenses increased by $38,118 and advertising costs increased by $19,368.

 

Interest.

 

Interest expense for the three months ended September 30, 2015, was $18,706 compared to $2,501 for the three months ended September 30, 2014.

 

Net Loss.

We had a net loss of $81,485 for the three-month period ended September 30, 2015, as compared to $140,309 for the three-month period ended September 30, 2014. Our net loss during the later period decreased during the later period principally because operating expenses increased at a substantially lower rate than sales.

 

NINE MONTHS ENDED SEPTEMBER 30, 2015
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2014

 

Sales. 

 

Sales for the nine months ended September 30, 2015, were $1,041,375 compared to $264,312 for the period ended September 30, 2014, and our gross profit for those periods was respectively $679,214 and $174,734. The increase in revenues and gross profit for the later period was due to increased sales.

 

Operating Expenses. 

 

Total operating expenses for the nine months ended September 30, 2015, were $861,141 compared to $388,452 for the period ended September 30, 2014. Total operating expenses increased in the later period because general and administrative expenses increased by $431,443 because of increased salaries due to the hiring of additional sales and marketing personnel and because advertising and marketing costs increased by $41,246.

 

Interest.

 

Interest expense for the nine months ended September 30, 2015, was $46,734 compared to $2,501 for the nine months ended September 30, 2014.

 

Net Loss.

 

We had a net loss of $228,661 for the nine-month period ended September 30, 2015, as compared to a loss of $212,219 for the nine month period ended September 30, 2014.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity and Capital Resources

 

As of December 31, 2014, and September 30, 2015, we had respectively $261,233 and $17,754 in cash. We financed our operations from the inception of our business on January 19, 2013, through September 30, 2015, through capital contributions of $141,986 made by our officers and loans of $691,500. During the nine-month period ended September 30, 2015, we financed our operating activities by expending cash in the amount of $243,479, none of which was generated from financing activities.

 

We commenced business in January 2013. Our sales grew over the course of 2013, averaging 11,500 units per month for 2013 and ranging from 8,000 units to 30,000 units for a total of 125,000 units. During the year ended December 31, 2014, we sold an average of 15,000 units per month, ranging from approximately 4,000 to 20,000 units per month, totaling approximately 180,000 units. During the first three quarters of 2015, we sold 288,290 units. Gross sales for 2014 were $460,756 and for the nine months ended September 30, 2015, were $712,762. We have a current inventory of approximately 104,000 containers, which we believe will be sold for approximately $570,000.

 

The Company believes that it will require approximately $1,200,000 in additional funding for its operations for the next 12 months. The Company plans to fund its activities during the balance of 2015 and beyond through loans from banks and other financial institutions and the sale of debt or equity securities to private investors. The Company can give no assurance that it will be successful in so doing or that such funding, if available, can be obtained on acceptable terms. Because of the rate at which we are expending cash to meet expenses that exceed our revenues, it is important for us to find additional funding in the near future.

 

On March 4, 2014, the Company issued a convertible promissory note payable to our former president and sole director, in the principal amount of $400,000, which was reduced to $360,000 by virtue of a prepayment of $40,000 on that date; this note has been assigned to an independent investor. This convertible promissory note was due on March 4, 2015. It bore interest at the rate of 0.28% per annum until its due date and now bears interest at a floating rate of interest which is ten (10) percentage points over the rate of interest announced from time to time by Citibank, N.A. as the rate of interest that it charges to its most creditworthy commercial customers. It is secured by a Pledge Agreement, dated as of March 4, 2014, between the Company and the holder, under which the Company pledged all of its membership interests in D&C to the holder. We are in default under the convertible promissory note and we do not presently have funds available to pay it. On September 14, 2015, the Company and the holder entered into a Convertible Note Modification Agreement under which the maturity date of the convertible promissory note has been extended to September 14, 2016, all events of default were waived, the holder waived any right to receive interest at the default rate and the holder may convert the principal and interest of the note into shares of common stock, notwithstanding the cure of defaults.

 

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 were initially convertible into shares of the Company’s common stock at a conversion price of $.05 per share; on February 15, 2015, the Company and these noteholders entered into agreements to change the conversion price for conversion of the notes into shares of the Company’s common stock to the current market price at the conversion date plus a 20 percent increase in the number of shares. The loans are non-interest bearing and have no stated maturity date.

 

In October 2014, the Company entered into a promissory note conversion agreement with an unaffiliated individual in the amount of $10,000. This note is convertible into shares of the Company’s common stock at a conversion price of $.05 per share. The loan bears interest at 15% per annum and matured on April 3, 2015. During 2014 the Company entered into a series of promissory notes with four unaffiliated persons in the aggregate principal amount of $457,000.

 

These notes bear interest at rates ranging from 10% to 15% (with a weighted-average rate of 11.7%) and have matured as follows:

 

	April 10, 2015			$	300,000
	May 19, 2015				150,000
	September 30, 2015				7,000

 

We do not presently have funds available to pay the above mentioned notes, the principal amount of which totals $1,051,500. The amount of the funds required to pay them is included in the $1,200,000 that we will require to fund our operations for the next 12 months. We plan to obtain such funds through the sale of debt or equity securities.

 

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.

 

Plan of Operations

 

Our significant objectives for the next 12 months are as follows:

 

•

Secure funding of $1,200,000 to support our operations over the next 12 months. This activity has commenced through personal contacts by our officers and will ongoing. As yet, we have not been successful in obtaining any funding. We can give no assurance that funding in this or any lesser amount will be available on acceptable terms, or available at all. The costs associated with this activity, which would arise principally from travel and legal expenses, are estimated to be $15,000. We cannot predict when we will obtain funding in whole or in part, but as indicated below, we cannot begin to attain several of our other objectives until we reach the levels of funding set forth below.

•

We now have 19 employees, including our officers. We plan to continue to hire sales, administrative personnel and technical personnel as necessary in accordance with our ability to pay salaries and benefits. The compensation and other costs associated with these personnel are estimated to be $80,000 per month.

•

Increasing sales volume to 50,000 containers per month (600,000 units per year). Our ability to reach this goal, as indicated above, is limited by the manufacturing capacity of our sole supplier, which is only 30,000 units per month.

•

Continue to attend trade shows, expos and conferences with a view to increasing sales.

•

Continue our marketing and advertising campaign, which includes maintaining and periodically updating our websites, brochures and other advertising materials and attending industry events.

•

Pay our overdue indebtedness (see above).

•

Continue paying officers’ salaries of $10,000 per month to each of Messrs. Fairbrother and Heldoorn on a regular basis after the other goals are completed.

We cannot give firm dates for the attainment of any goal that depends on financing or a firm date for the receipt of revenues from orders because these dates depend on our obtaining financing and we cannot predict when, if or in what amount we will obtain it. We cannot fully implement our plan of operations until we raise $1,200,000.

 

Off-Balance Sheet Arrangements.

 

We currently do not have any off-balance sheet arrangements. 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES 

 

Evaluation of Internal Controls.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that there was a material weakness in our disclosure controls and procedures as of the end of the period covered by this report because the information required to be disclosed by us in reports filed under the Exchange Act was not being (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure. We are a growing company and we currently lack documented procedures included documentation related to testing of processes, data validation procedures from the systems into the general ledger, testing of systems, validation of results, disclosure review, and other analytics. Furthermore, we lacked sufficient personnel to properly segregate duties. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Remediation Plan.

 

Management has been actively engaged in developing a remediation plan to address the above mentioned material weakness. Implementation of the remediation plan is in process and consists of establishing a formal review process As of September 30, 2015, management had not completed these remediation efforts. Management believes the foregoing efforts will effectively remediate the material weakness. As we continue to evaluate and work to improve our internal control over financial reporting, management may execute additional measures to address potential control deficiencies or modify the remediation plan described above. Management will continue to review and make necessary changes to the overall design of our internal control.

 

Changes in Internal Control over Financial Reporting.

 

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS 

 

We received a threat of litigation by Nam Tran dba Life of Leisure LLC (“Tran”) against Acology, D&C and Curtis Fairbrother for an unspecified amount for damages, fraud and other related claims under a Brand Activation Agreement, dated September 1, 2013, between Tran and “Medtainer.” We believe that the claims are without merit, that if any were found meritorious, we have meritorious defenses against them and that if Tran were to prevail on any claim, the damages would not be material. The claim has not been pursued since received.

 

We are not a party to nor do we expect the institution of any other litigation by or against us.

 

ITEM 1A. RISK FACTORS 

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item. 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

None. 

 

ITEM 4. (REMOVED AND RESERVED). 

 

ITEM 5. OTHER INFORMATION 

 

None.

 

ITEM 6. EXHIBITS

 

EXHIBIT NUMBER		DESCRIPTION
10.1		Convertible Note Modification Agreement, dated September 14, 2015, by and between the Registrant and Toby Smith.
31.1		Certification of Principal Executive Officer pursuant to Sarbanes-Oxley Section 302
32.1		Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Section 906

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	By:	/s/ Curtis Fairbrother
Date: November 12, 2015		Name: Curtis Fairbrother
		Title: Chief Executive Officer, Principal Accounting Officer, Director