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, 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)

 

(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 [ ]   No  [X]

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 17, 2016, there were 5,164,134,794 shares of the Registrant’s Common Stock outstanding. 

 

 

ACOLOGY, INC.
For The Quarterly Period Ended September 30, 2016

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements			1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			15
Item 4.	Controls and Procedures			16
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings			17
Item 1A.	Risk Factors			17
Item 2.	Unregistered Sales Of Equity Securities And Use Of Proceeds.			17
Item 4.	(Removed and Reserved).			17
Item 5.	Other Information			17
Item 6.	Exhibits			17
SIGNATURES				18

 

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)

		September 30, 2016				December 31, 2015
ASSETS
CURRENT ASSETS:
Cash		$	4,862			$	37,533
Accounts Recievable			64,072				30,734
Inventories			109,818				79,941
Note Receivable			159,586				155,835
Advance to supplier			—				10,683
Total Current Assets			338,338				314,726
Property & equipment, net of accumulated depreciation of $54,273 and $31,773 respectively			47,811				54,982
Security Deposits			7,489				7,489
TOTAL ASSETS		$	393,638			$	377,197
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable		$	71,552			$	45,760
Convertible notes payable, net of debt discount of $0 and $226,186, respectively			500,000				326,314
Notes Payable			574,100				607,000
Loan Payable - stockholder			93,494				93,494
Accrued expenses			216,210				102,908
Derivative Liability			324,483				623,994
Total Current Liabilities			1,779,839				1,799,470
STOCKHOLDERS' DEFICIENCY
Common Stock, .001 par value, 6,000,000,000 shares authorized
5,164,134,794 and 4,974,621,214  shares issued and outstanding
September 30, 2016 and December 31, 2015, respectively			51,641				49,745
Additional Paid in Capital			252,572				102,857
Accumulated Deficit			(1,690,414)				(1,574,875	)
TOTAL STOCKHOLDERS' DEFICIENCY			(1,386,201	)			(1,422,273	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY		$	393,638			$	377,197

 

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,
		2016				2015				2016				2015
Sales		$	1,441,180			$	1,041,375			$	478,852			$	328,703
Cost of Sales			383,709				362,161				117,544				129,547
Gross Profit			1,057,471				679,214				361,308				199,156
COSTS AND EXPENSES:
General and administrative			876,701				787,150				309,023				235,919
Advertising and marketing			248,773				73,991				52,188				26,016
Total Operating Expenses			1,125,474				861,141				361,211				261,935
Income (Loss) from operations			(68,003	)			(181,927	)			97				(62,779	)
Other Expenses (Income):
Interest expense, net of interest income of $11,251			224,696				46,734				61,462				18,706
Gain on extinguishment of debt			(16,542	)							—
Gain on change in fair value of derivative			(160,618	)							(65,069	)
Total Other Expenses (Income)			47,536				46,734				(3,607	)			18,706
Income (Loss) before income taxes			(115,539	)			(228,661	)			3,704				(81,485	)
Income tax provision			—				—				—				—
NET LOSS (INCOME)		$	(115,539	)		$	(228,661	)		$	3,704			$	(81,485	)
Loss per common share, basic and diluted			(0.00	)			(0.00	)			0.00				(0.00	)
Weighted average common shares outstanding, basic & diluted			5,116,235,757				4,546,014,334				5,164,134,794				4,546,014,334

 

 

The accompanying notes are an integral part of these financial statements

ACOLOGY, INC.

 STATEMENTS OF CASH FLOWS

 (Unaudited)

 

		Nine Months Ended September 30,
		2016				2015
OPERATING ACTIVITIES:
Net loss		$	(115,539	)		$	(228,661	)
Adjustments to reconcile net loss to net
Depreciation expense			22,500				12,909
Gain on extinguishment of debt			(16,542	)
Gain on changee in fair alue of derivative			(160,618	)
Non cash interest expense			184,196
Changes in operating assets and liabilities
Accounts receivable			(33,338	)			(8,546	)
Inventories			(29,877	)			(63,104	)
Accounts Payable			25,792				3,919
Advances to supplier			10,683				11,196
Accrued expenses			113,302				36,606
NET CASH USED IN OPERATING ACTIVITIES			559				(235,681	)
INVESTING ACTIVITIES:
Acquisition of property and equipment			(15,330	)			(7,798	)
NET CASH USED IN INVESTING ACTIVITIES			(15,330	)			(7,798	)
FINANCING ACTIVITIES:
Proceeds from notes payable			15,000				—
Repayment of notes payable			(32,900	)			—
NET CASH PROVIDED BY FINANCING ACTIVITIES			(17,900	)			—
INCREASE (DECREASE) IN CASH			(32,671	)			(243,479	)
CASH - BEGINNING OF PERIOD			37,533				261,233
CASH - END OF PERIOD		$	4,862			$	17,754
		$	—
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

September 30, 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 September 30, 2016, and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 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.

 

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 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 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
Less:
·      Converted during the Period			138,893
·      Change in fair value recognized in operations			160,618
Balance, September 30, 2016		$	324,483

 

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 nine months ended September 30, 2016, the Company recognized a gain on extinguishment of $16,542 from the conversion of convertible debt with a bifurcated conversion feature.

 

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 September 30, 2016, the Company had a stockholders’ deficit of $1,386,201 and a working capital deficit of $1,441,501. 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 note holders 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 matured August 11, 2016.

 

NOTE 5 – Convertible Notes Payable

 

The following is a description of convertible notes payable at September 30, 2016:

 

•

A convertible promissory note dated March 4, 2014, in the original amount of $400,000. The note bears interest at 0.28% per annum and was due September 14, 2016; the holder has agreed to extend the due date to September 14, 2017. 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 nine months ended September 30, 2016, converted an additional $60,000 of principal. The outstanding principal balance at September 30, 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.
•		A convertible promissory note, dated April 25, 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 April 25, 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.

 

•		A series of promissory note conversion agreements that the Company entered into during 2014 with ten unaffiliated individuals with a current balance in the aggregate amount of $217,000. 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 $0.05 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, having an aggregate principal balance of $424,500 at September 30, 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. These loans are non-interest bearing and have no set maturity date. The Company expects to repay the loans when cash flows become available. The balance due at September 30, 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 $360,000 Convertible Promissory Note described in Note 5.

 

NOTE 9 – Concentrations

 

For the three month period ended September 30, 2016, the Company’s largest customer accounted for approximately 20% of sales and 14% of sales for the 9 month period ended September 30, 2016. For the three and nine month periods ended September 30, 2016, the Company purchased respectively approximately 72% and 83% of its products from one manufacturer.

 

No single customer accounted for more than 10% of sales for the three and nine month periods ended September 30, 2015. For the three and nine month periods ended September 30, 2015, 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 plus 100% of operating expenses, until the lease expires August 31, 2016. The lease has been renewed for 2 more years so at to expire on August 31, 2018. 

 

NOTE 11 – Subsequent Events

 

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

 

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 

 

RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2016
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2015

 

Sales. 

 

Sales for the three months ended September 30, 2016, were $478,582, compared to $328,703 for the three months ended September 30, 2015, and our gross profit for those periods was respectively $361,308 and $199,156. The increase in sales and gross profit in the later period was due to increased sales as the result of the expansion of our product lines and a slight reduction in cost of sales.

 

Operating Expenses. 

 

Total operating expenses for the three months ended September 30, 2016, were $361,211, compared to $261,935 for the three months ended September 30, 2016. These costs and expenses increased in the later period because general and administrative expenses increased by $73,104, due to higher commissions, payroll increase and additional subcontractors , and advertising costs increased by $26,172.

 

Other Expenses (Income).

 

Interest expense for the three months ended September 30, 2016, was $61,462 compared to $18,706 for the three months ended September 30, 2015. We also recorded a gain on change in fair value of derivative of $65,069 for the later period, compared with $0 for the earlier period.

 

Net Loss.

 

We had a net profit of $3,704 for the three-month period ended September 30, 2016, as compared to a net loss of $81,485 for the three-month period ended September 30, 2015. 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, 2016
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2015

 

Sales. 

 

Sales for the nine months ended September 30, 2016, were $1,441,180, compared to $1,041,375 for the period ended September 30, 2015, and our gross profit for those periods was respectively $1,051,471 and $679,214. The increase in sales and gross profit in the later period was due to increased sales as the result of the expansion of our product lines.

 

Operating Expenses. 

 

Total operating expenses for the nine months ended September 30, 2016, were $1,125,474 compared to $861,141 for the period ended September 30, 2015. Total operating expenses increased in the later period because general and administrative expenses increased by $89,551 due to higher commissions, payroll increase and additional subcontractors and because advertising and marketing costs increased by $174,782.

 

Other Expenses (Income).

 

Interest expense for the nine months ended September 30, 2016, was $224,696, compared to $46,734 for the nine months ended September 30, 2015. We also recorded a gain on extinguishment of debt of $16,542 and a gain on change in fair value of derivative of $160,618 for the nine months ended September 30, 2016, as compared with $0 for each of these items for the nine months ended September 30, 2015.

 

Net Loss.

 

We had a net loss of $115,539 for the nine-month period ended September 30, 2016, as compared to a loss of $228,661 for the nine month period ended September 30, 2015.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity and Capital Resources

 

As of December 31, 2015, and September 30, 2016, we had respectively $37,533 and $4,862 in cash. We financed our operations from the inception of our business on January 19, 2013, through September 30, 2016, through capital contributions of $141,986 made by our officers and loans of $691,500. During the nine-month period ended September 30, 2016, we financed our operating activities by expending cash in the amount of $559, none of which was generated from financing activities. We also expended $15,330 for property, plant and equipment and reduced our notes payable by a net amount of $17,900.

 

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 2016, we sold approximately 370,000 units, which include newly added products. Gross sales for 2015 were $1,441,441 and for the nine months ended September 30, 2016, were 1,441,980. We have a current inventory of 155,000 units, which we believe will be sold over our website and to our distributor for approximately $695,000.

 

The Company believes that it will require approximately $1,200,000 in additional funding for the next 12 months, including $1,099,148 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. 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.

 

The Company’s sales have grown every year since it commenced business. In 2013, its sales were $254,992; in 2014, were $460,756; and in 2015, were $1,441,441. For the three months ended September 30, 2016, sales were $478,852 and for the nine months then ended were $1,441,180. Operating expenses have also increased in each year, and, although the Company earned a small profit in the quarter ended September 30, 2016, management can give no assurance that the Company will continue to be 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 doing so is possible and prudent. For this reason, it has increased its sales staff from two 2 in 2013 to 13 today and its advertising and marketing expenses from $51,476 in 2013 to $208,262 in 2015; it spent $52,188 for advertising and marketing expenses during the three months ended September 30, 2016, and $248,773 for the nine months then ended. Management further believes that increased sales will ultimately exceed operating expenses, as they narrowly did during the three months ended September 30, 2016. 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 nine months ended September 30, 2016, the Company earned income from operations of $97, compared with a loss of $62,779 for the three months ended September 30, 2015; for the nine months ended September 30, 2016, the Company lost $68,003 from operations, compared to $181,927 for the nine months ended September 30, 2015. The Company earned a net profit of $3,704 for the three months ended September 30, 2016, compared to a net loss of $81,485 for the three months ended September 30, 2015, and a net loss of $115,539 for the nine months ended September 30, 2016, compared with a reduction of net loss of $228,661 for the nine month period ended September 30, 2015. No assurance can be given that the Company will be able to continue to reduce its losses.

 

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 15 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 $70,000 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. Management does not yet have sufficient information to set sales goals for its other products.

·

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, 2016, 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 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
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 18, 2016		Name: Curtis Fairbrother
		Title: Chief Executive Officer, Principal Accounting Officer, Director