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 March 31, 2016

 

[ ]  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)

 

(844) 226-5649
 (Registrant’s telephone number, including area code)

 

 (Former Name, former address and former fiscal year, if changed since last report)

 

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 May 11, 2016, there were 5,164,134,794 shares of the Registrant's Common Stock outstanding.

 

ACOLOGY, INC.
For The Quarterly Period Ended March 31, 2016

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION				3
Item 1.	Financial Statements			3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			13
Item 4.	Controls and Procedures			13
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings			14
Item 1A.	Risk Factors			14
Item 2.	Unregistered Sales Of Equity Securities And Use Of Proceeds.			14
Item 4.	(Removed and Reserved).			14
Item 5.	Other Information			14

 

Item 6.	Exhibits			14
SIGNATURES				15

 

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.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
		March 31, 2016				December 31, 2015
ASSETS
CURRENT ASSETS:
Cash		$	53,360			$	37,533
Accounts Receivable			27,823				30,734
Inventories			83,267				79,941
Note Receivable			159,586				155,835
Advance to supplier			—				10,683
TOTAL CURRENT ASSETS			324,036				314,726
Property and equipment,  net of accumulated depeciation of $38,073 and $31,773, respectively			58,681				54,982
Security deposits			7,489				7,489
TOTAL ASSETS		$	390,206			$	377,197
LIABILITIES AND STOCKHOLDERS' DEFIT
CURRENT LIABILITIES:
Accounts payable		$	78,950			$	45,760
Convertible notes payable, net of debt discount of $121,687 and $226,186, respectively			378,313				326,314
Notes payable			585,000				607,000
Loan payable - stockholder			93,494				93,494
Accrued expenses			129,617				102,908
Derivative Liability			424,123				623,994
TOTAL CURRENT LIABILITIES			1,689,497				1,799,470
STOCKHOLDERS' DEFICIT
Common Stock, $.00001 par value, 6,000,000,000 shares authorized
5,164,134,794 and  4,974,621,214   shares issued and outstanding
at March 31, 2016 and December 31, 2015 , respectively			51,641				49,745
Additional Paid in Capital			252,572				102,857
Accumulated Deficit			(1,603,504	)			(1,574,875)
TOTAL STOCKHOLDERS' DEFICIT			(1,299,291	)			(1,422,273	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	390,206			$	377,197

 

The accompanying notes are an integral part of these financial statements 

ACOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
		Three months ended March 31,
		2016				2015
Sales		$	535,302			$	299,675
Cost of Sales			86,570				97,358
Gross Profit			448,732				202,317
Operating expenses:
General and administrative			390,539				231,007
Advertising and marketing			80,833				20,419
Total operating expenses			471,372				251,426
Loss from operations			(22,640	)			(49,109	)
Other expenses(income):
Interest expense, net of interest income of $3,751 and $0			83,509				14,014
Gain on extinguishment of debt			(16,542	)			—
Gain on change in fair value of derivative			(60,978	)			—
Total other expenses			5,989				14,014
Loss before income taxes			(28,629	)			(63,123	)
Income tax provision			—				—
Net Loss		$	(28,629	)		$	(63,123	)
Loss per common share, basic and diluted		$	(0.00	)		$	(0.00	)
Weighted average common shares outstanding, basic and diluted			5,018,841,049				4,546,014,334

 

The accompanying notes are an integral part of these financial statements 

ACOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
		Three months ended March 31,
		2016				2015
OPERATING ACTIVITIES:
Net loss		$	(28,629	)		$	(63,123	)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation expense			6,300				4,303
Gain on extinguishment of debt			(16,542	)			—
Gain on change in fair value of derivative			(60,978	)			—
Non cash interest expense			70,008				—
Changes in operating assets and liabilities
Accounts receivable			2,911				(19,985	)
Inventories			(3,326	)			(2,772	)
Accounts payable			33,191				(18,542	)
Advance to supplier			10,683				(17,141	)
Accrued expenses			26,709				16,391
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			40,327				(100,869	)
INVESTING ACTIVITIES:
Loan to non related party			—				—
Acqusition of property and equipment			(10,000	)			(1,062	)
Payment of security deposits			—				—
NET CASH USED IN INVESTING ACTIVITIES			(10,000	)			(1,062	)
FINANCING ACTIVITIES:
Proceeds from notes payable			7,500
Proceeds of loan from stockholder			—				3,500
Repayment of notes payable			(22,000	)			—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			(14,500	)			3,500
INCREASE (DECREASE) IN CASH			15,827				(98,431	)
CASH - BEGINNING OF PERIOD			37,533				261,233
CASH - END OF PERIOD		$	53,360			$	162,802
Supplemental disclosures of cash flow information:
Non-cash financing activities
Conversion of convertible debt with derivative into common stock		$	168,153			$	—
Common stock issued in connection with conversion		$	151,611			$	—

 

The accompanying notes are an integral part of these financial statements 

Acology, Inc.

Notes to Financial Statements

March 31, 2016

(Unaudited)

 

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.

 

D&C and Printing were formed under the laws of the State of California on January 29, 2013, and April 14, 2015, respectively.

 

NOTE 2 - Summary of Significant Accounting Policies

 

Basis of Presentation and Principals of Consolidation

 

The accompanying unaudited 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 financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2016, and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2016, 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 financial statements and related notes thereto included in the Form 10-K for the year ended December 31, 2015, filed with the SEC on April 14, 2016.

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of the 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 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 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, January 1, 2016		$	623,994
·      Converted during the Period			138,893
·      Change in fair value recognized in operations			60,978
Balance, March 31, 2016		$	424,123

 

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

 

The Company evaluates 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.

 

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. During the quarter ended March 31, 2016, the Company recognized a gain on extinguishment of $16,542 from the conversion of convertible debt with a bifurcated conversion option.

 

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 March 31, 2016, the Company had a stockholders’ deficit of $1,299,291 and a working capital deficit of $1,365,461. In addition, the Company has generated operating losses since inception and has notes payable that are in default. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the successful execution of its 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. There is no assurance that we will be able to increase sales or to obtain extend financing on terms acceptable to us or at all or successfully execute any of the other measures set forth in the previous sentence.

 

NOTE 4 –Note Receivable

 

On August 11, 2015 the Company loaned $150,000 to an unrelated person who is one of the convertible noteholders referred to in Note 5. The note accrues interest at the highest lawful rate, but not more the 20% per annum, the Company is accruing interest at 10% per annum based on California usury rates. Upon an event of default, as defined in the note, interest will be compounded monthly. The note matures August 11, 2016 or successfully to execute any of the other activities described in previous sentence.

 

NOTE 5 –Convertible Notes Payable

 

The following is a description of convertible notes payable at March 31, 2016:

 

•

A convertible promissory note dated September 14, 2015, in the original amount of $360,000. The note bears interest at 0.28% per annum and is due September 14, 2016. 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 of the membership units in D&C. If an event of default occurs, the unpaid principal amount and interest accrued thereon will 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 three consecutive trading days ending on the trading day immediately prior to the conversion date. During the year ended December 31, 2015, the holder converted $50,000 of principal and during the three months ended March 31, 2016 converted an additional $60,000 of principal. The outstanding principal balance at March 31, 2016 was $250,000.

•

A convertible promissory note, dated December 15, 2015, made 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 matures on December 27, 2016, and bears interest at the highest lawful rate, but not more than 20% per annum.

•

A convertible promissory note, dated February 11, 2016, made in favor of the unrelated party referred to above in the principal amount of $7,500. 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 matures on February 11, 2017, and bears interest at the highest lawful rate, but not more than 20% per annum.

 

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount which constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, 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 a discount of $121,687 at March 31, 2016, on the accompanying balance sheet.

 

•

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 are 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.

•

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 negotiating an extension of the maturity date.

 

NOTE 6 – Notes Payable

 

During 2014, the Company entered into a series of promissory notes with four unaffiliated individuals in the aggregate amount of $457,000, with a principal balance of $435,000 at March 31, 2016. These notes bear interest at rates ranging from 10% to 15% (with a weighted-average rate of 11.7%). These notes are past due and the Company is negotiating an extension of their respective maturity dates.

 

On August 15, 2015, the Company issued a promissory note in the amount of $150,000 to an unrelated third party. The note bears interest at .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 not repaid on or before the maturity date. This note matures on August 11, 2016. Upon an event of default, as defined in the note, interest shall be compounded daily.

 

NOTE 7 – Loan Payable - Shareholder

 

During the years ended December 31, 2015, and 2014, the Company received advances from one of its stockholders to help finance its operations in the amounts of $25,147 and $68,347, respectively. The loan is non-interest bearing and has not set maturity date. The Company expects to repay the loan when cash flows become available. The balance due at March 31, 2016, aggregated $93,494.

 

NOTE 8 – Stockholders’ Deficiency

 

On March 10, 2016, the Company issued 189,513,58 shares of common stock in connection with the conversion of $60,000 of the principal amount of the Convertible Promissory Note described in Note 5.

 

NOTE 9 – Concentrations

 

For the three months ended March 31, 2016, none of our customers accounted for more than 10% of sales. For the three months ended March 31, 2015, the Company’s largest customer accounted for approximately 12% of sales.

 

For the three month periods ended March 31, 2016 and 2015, the Company purchased approximately 95% and 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 plus 100% of operating expenses, until the lease expires August 31, 2016.

 

NOTE 11 – Subsequent Events

 

Management has evaluated subsequent events through the date which the financial statements were available to be issued.

 

On April 1, 2016, the Company issued 428,571,429 shares of common stock upon conversion of $50,000 of the principal amount of the convertible promissory note described in note 8.

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 (“Distributors”) and D&C Printing (“Printing”). Acology has no material assets other than all of the outstanding membership units of Distributors and of Printing 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 Distributors, we are in the business of designing, manufacturing, and selling containers that can store, grind and shred pharmaceuticals, herbs, teas and other solids or liquids. Our principal product is the Medtainer®, which is described below under “Products.” Through Printing, we are in the business or custom labeling our products and products manufactured by others.

 

We market directly to businesses through our phone room, to the retail public through internet sales and, and to wholesalers and other businesses who resell our products to other businesses and end users.

 

As indicated above, our products can store and grind many substances. Our products are manufactured 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. Our 20-dram Medtainer® has received child safety certification.

 

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.

 

Our History

 

Acology was incorporated on September 9, 1997, in the State of Florida.

 

On December 24, 2013, Acology, a wholly-owned subsidiary of Acology and Distributors entered into an Agreement and Plan of Merger under which Distributors became the wholly owned subsidiary of Acology on March 4, 2014. Prior to the merger, Acology was a shell company. As a result of the Merger, Acology became an operating 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 Distributors, who thereby became Acology’s controlling shareholders, in exchange for those units. Upon the closing of the Merger, the existing officer and sole director of Acology resigned and Messrs. Fairbrother and Heldoorn became its officers and directors.

 

RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2016
COMPARED TO THREE MONTHS ENDED MARCH 31, 2015

 

Three Months Ended March 31, 2016, Compared with Three Months Ended March 31, 2015

Sales: Our sales for the three months ended March 31, 2016, were $535,302, from which we earned a gross profit of $448,732. Our sales for the three months ended March 31, 2015, were $299,635, from which we earned a gross profit of $202,317. The principal reason for the increase in sales and gross profit from the earlier to the later period was increased sales volume combined with cost of sales that was reduced from $97,358 in the earlier period to $86,570 in the later period sales volume increased.

 

Operating Expenses: For the three months ended March 31, 2016, total operating expenses of $471,372 were incurred, including $390,539 for general and administrative expenses, of which $ 65,582 was for compensation of our officers, and $80,833 for advertising and marketing. For the three months ended March 31, 2015, total operating expenses of $251,426 were incurred, including $231,007 for general and administrative expenses, of which $47,000 was for compensation of our officers, and $20,419 was for advertising and marketing. The principal reasons for the increase in general and administrative expense were an increase in personnel costs, which were $101,841 in the earlier period, compared with $141,001 in the later period. Both general and administrative expenses and advertising costs increased principally because of our decision to market our products aggressively.

 

Loss from Operations. Loss from operations decreased from $49,109 for the three months ended March 31, 2015, to $22,640 for the three months ended March 31, 2016, because sales increased substantially, while cost of sales and general and administrative expenses, although higher for the later period, were each a lower percentage of sales in the later period than in the earlier period and Cost of Sales decreased slightly.

Other Expenses. During the three months ended March 31, 2016, and 2015, we incurred interest expense of $83,509 and $14,014, respectively. We also recognized a gain on the extinguishment of debt of $16,542 during the three months ended March 31, 2016, as the result of the conversion of convertible debt with a bifurcated conversion feature versus $0 during the quarter ended March 31, 2015. In addition, we recognized $60,978 of gain on change in fair value of derivative during the three months ended March 31, 2016, as the result of a change in the the fair value of the embedded conversion feature of a note over its principal amount, which excess is charged as interest upon inception, versus $0 during the three months ended March 31, 2015.

 

Net Loss: Our net loss for the three months ended March 31, 2016, decreased to $28,629 from $63,123 for the three months ended March 31, 2015. The principal reasons for this difference were the decrease in operating loss and the higher levels of interest expense, general and administrative expenses and advertising and marketing expenses during the latter period, which were offset by the gain on the extinguishment of debt, the gain on change in fair market value of derivative and increased sales.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity and Capital Resources

 

As of December 31, 2015, we had $37,533 in cash and accounts receivable of $30,734, and as of March 31, 2016, we had $53,360 in cash and accounts receivable of $27,823. We financed our operations from the inception of our business on January 19, 2013, through December 31, 2013, through capital contributions of $141,986 made by our officers in 2013, a $40,000 private placement and loans of $759,847 during the year ended December 31, 2014, and loans of $175,147 during the year ended December 31, 2015. During the three months ended March 31, 2016, we borrowed $7,500 and repaid $22,000.

 

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. We sold approximately 104,000 units during the three months ended March 31, 2016.

 

We have a current inventory of approximately 105,000 containers, which we believe will be sold for approximately $475,000.

 

On April 14, 2015, Printing commenced operations.

 

The Company believes that it will require approximately $1,500,000 in additional funding for the next 12 months, including $1,099,500 to repay loans that will become due during this period, assuming that the Company’s operating loss remains at the same level. The Company plans to seek extensions of these 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 2016 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.

The Company’s sales have grown every year since it commenced business. In 2013, its sales were $254,992; in 2014, they were $460,756; and in 2015, were $1,441,441. During the three months ended March 31, 2016, sales were $535,302. Its operating expenses have also increased in each year, and it has yet to become profitable. 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 12 today and its advertising and marketing expenses from $51,476 in 2013 to $208,262 in 2015; it spent $80,833 for advertising and marketing expenses during the three months ended March 31, 2016. Management further believes that increased sales will ultimately exceed operating expenses. 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. Management intends to address these doubts by successfully executing its 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. Management recognizes that the Company can take measures to increase sales only as permitted by these considerations. During the three months ended March 31, 2016, the Company narrowed its loss from operations to $22,640 from $49,109 for the three months ended March 31, 2015, and reduced its net loss to $28,629 for the three months ended March 31, 2016, from $63,123 for the three months ended March 31, 2015. No assurance can be given that the Company will be able to continue to reduce its losses.

 

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

 

In August 2014, we announced our significant objectives. The following sets forth our progress in meeting those objectives:

 

•

We planned to secure funding of $1,500,000 to support our operations. Of that amount, we have obtained approximately $850,000. However, as indicated above, we again need funding of $1,500,000. We can give no assurance that any or all of the remaining portion of such funding will be available on acceptable terms, or available at all.

•

We planned to hire additional personnel and now have 18 employees. We plan to hire additional sales, administrative personnel and technical personnel as needed.

•

Increasing sales volume to 50,000 containers per month. During 2014, we sold an average of 10,250 units per month and in 2015, we sold an average of 26,000 units per month. During the first quarter of 2016, we sold an average of 37,300 units per month. Our ability to reach this goal, as indicated above, is limited by the manufacturing capacity of Polymation.

•

We announced that we intended to lease a building for our operations, including administrative and warehouse space and acquire office furniture, equipment and materials (forms, corporate stationary and business cards). We attained this objective and have leased additional space.

•

We announced that we would seek additional international distributors meeting certain criteria. In light of our decision to concentrate on direct sales to customers, we have determined not to pursue this objective.

•

We have attended trade shows, expos and conferences and believe that this activity in part accounts for our increased sales.

•

We have initiated a marketing and advertising campaign, which includes maintaining and periodically updating our websites, brochures and other advertising materials and attending industry events.

•

We announced that we would attempt to pay the convertible promissory note in the principal amount of $400,000. We have reduced the principal amount of this note to $250,000 though conversions.

•

We announced that we desired to pay salaries of $10,000 per month to each of Messrs. Fairbrother and Heldoorn on a regular basis after the other goals are completed. We are now doing so.

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 March 15, 2016, management has not yet 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 

 

None.

 

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
	31.1			Certification pursuant to Sarbanes-Oxley Section 302
	32.1			Certification 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: May 16, 2016		Curtis Fairbrother
		Principal Executive Officer; Principal Accounting Officer