NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 – NATURE OF BUSINESS
Ecolocap Solutions, Inc. ("we", "our", and "the Company") is an integrated and complementary network of environmentally focused technology that utilize advanced nanotechnology to design, develop and sell cleaner alternative energy products. Our business approach combines science, innovation, and market-ready solutions to achieve environmentally sustainable and economically advantageous, power and energy management practices in the following areas:
M-Fuel
The Company, through its subsidiary Micro Bubble Technologies Inc. (MBT), developed M-Fuel, an innovative suspension fuel that is designed to offer fully scalable and customizable fuel solutions that will increase efficiency, lower operating costs, and reduce emissions. M -Fuel is a suspension mixture of 60% heavy oil, 40% H plus O2 molecules, and a 0.3% stabilizing additive. The production of M-Fuel takes place in our Nano Processing Units (NPU), a self-contained device that is sized for output. The NPU's can be configured to operate in conjunction with an engine or burner to sully M-Fuel on demand, or pre-manufactured for delivery.
ECOS/BIO-ART
ECOS/Bio-ART is a patented air injected high-speed aerobic biological fermentation technology, utilizing uniquely cultured Bacillus, and incorporated into a specifically designed in-vessel unit. The remediation process takes seven days and reduces moisture content to an average between 12%-25% on an output equal to 1/3 the input. The output can be used as organic fertilizer, animal feed, animal bedding or biomass. The computer controlled process monitors the temperature on 3 different levels. The technology reduces the costs associated with food waste disposal and in the process reduces the environmental impact or methane greenhouse gas production.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiary Micro Bubble Technologies Inc. All significant inter-company accounts and transactions have been eliminated.
CASH
The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company's accounts at these institutions may, at times, exceed the federally insured limits. The Company has not experienced any losses in such accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
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, accrued expenses and sundry current liabilities, notes payable and convertible notes payable are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
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. 820 describes three levels of inputs that may be used to measure fair value:
-
|
level l - 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)
|
INCOME TAXES
We 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. We have no material uncertain tax positions for any of the reporting periods presented.
USE OF ESTIMATES
In preparing financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and revenue and expenses in the income statement. Actual results could differ from those estimates.
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.
We account for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record 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.
LOSS PER COMMON SHARE
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding.
Diluted net loss per common share is computed by dividing the net loss, adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended December 31, 2016 and 2015, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
STOCK BASED COMPENSATION
We recognize compensation expense for stock-based compensation for employees in accordance with ASC Topic 718 and ASC 505 for non-employees. For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares; the expense is recognized over the service period over which the awards are expected to vest. For non-employee stock-based awards, we calculate the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient's performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company's results of operation, financial position or cash flows.
NOTE 3 – GOING CONCERN
The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $9,274,543 for the year ended December 31, 2016.The Company has negative working capital of $15, 238,249 and a stockholders' deficit of $15,238,249 at December 31, 2016. These factors among others raise substantial doubt about the Company's ability to continue as a going concern.
Management's plans for the Company's continued existence include selling additional stock and borrowing additional funds to pay overhead expenses.
With the opportunities
created by the ECOS BIO-ART and M Fuel, management has b
egun
the process of redeploying its assets, identifying business strategies that offers above average profit potential and identifying the resources necessary to successfully execute it new strategic direction.
Recognizing the opportunity this new market represents, the Company has developed an integrated development approach that focuses upon both existing and needed infrastructure facilities to produce substantial new value.
The Company's future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares of common stock or borrow additional funds.
The Company's inability to obtain additional cash could have a material adverse effect on its financial position, results of operations and its ability to continue in existence. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 4
–
ACCRUED EXPENSES AND SUNDRY CURRENT LIABILITIES
Accrued expenses and sundry current liabilities consisted of the following at December 31:
|
|
2016
|
|
|
2015
|
|
Accrued interest
|
|
$
|
545,378
|
|
|
$
|
290,114
|
|
Accrued interest-related parties
|
|
|
185,401
|
|
|
|
131,543
|
|
Accrued compensation-related parties
|
|
|
652,844
|
|
|
|
502,844
|
|
Accounts payable
|
|
|
240,000
|
|
|
|
240,000
|
|
Accrued operating expenses-related parties
|
|
|
340,166
|
|
|
|
250,166
|
|
Accrued operating expenses
|
|
|
328,509
|
|
|
|
306,812
|
|
|
|
$
|
2,292,298
|
|
|
$
|
1,721,479
|
|
NOTE 5
– CONVERTIBLE
NOTES PAYABLE
During the years ended December 31, 2016 and 2015, the Company is in default of its convertible notes due to non-repayment which triggered a 50% increase of the outstanding balances. Loans are convertible at amounts of 40% to 60% of the market price of the common shares of the Company at the time of conversion and bear interest rates ranging between 8% and 22% per annum. The increases during the years ended December 31, 2016 and 2015 of $14,653 and $18,500 in non-cash borrowings are related to the default penalty on Tonaquint loans, respectively.
The convertible feature of these loans, due to their potential settlement in an indeterminable number of shares of the Company's common stock has been identified as a derivative. The derivative component is fair valued at the date of issuance of the obligation and this amount is marked to market at each reporting period. All of the convertible notes are in default as of December 31, 2016.
There were no conversions of convertible debts in 2016. During the year ended December 31, 2015 note payable of $1,973 plus accrued interests of $0 were converted into 393,000 shares.
A summary of the amounts outstanding as of December 31, 2016 and 2015 is as follows:
|
|
Balance
|
|
|
Balance
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Tonaquint
|
|
$
|
585,846
|
|
|
$
|
571,193
|
|
Redwood Management, LLC
|
|
|
372,992
|
|
|
|
372,992
|
|
Proteus Capital Corp.
|
|
|
32,500
|
|
|
|
32,500
|
|
LG Capital
|
|
|
19,500
|
|
|
|
19,500
|
|
GSM Capital Group LLC
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
$
|
1,040,838
|
|
|
$
|
1,026,185
|
|
NOTE 6 – NOTES PAYABLE – RELATED PARTIES
During the year ended December 31, 2016 notes payable to related parties increased by $457,000, of which $450,000 resulted from conversion of accrued salaries, net of payments made during the year to notes payable and $7,000 from cash proceeds. The amount owed to stockholders at December 31, 2016 is $1,853,679. These loans are non interest bearing but interest is being imputed at 5.00% per annum and are payable on demand. Amounts of $71,201 and 66,280 has been imputed in 2016 and 2015 respectively. During the years ended December 31, 2016 and 2015, total loan conversions of $0 and $274,500 were made into 0 and 2,745,000,000 shares respectively.
The amount owed to Hanscom K. Inc. at December 31, 2016 is $453,780. During 2016, the Company received loans of $142,293 from Hanscom K. Inc. These loans are non-interest bearing and are payable on demand. Hanscom K Inc. is acting as a consultant for the Company.
During 2016, the Company did not receive any loans from RCO Group Inc. The amount owed to RCO Group Inc. at December 31, 2016 is $28,500. These loans are non-interest bearing and are payable on demand. These loans bear interest at 8.00% per annum and are payable on demand. RCO Group Inc. is acting as a financial consultant for the Company.
A summary of the amounts outstanding as of December 31, 2016 and 2015 is as follows:
|
|
Balance
|
|
|
Balance
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Stockholders
|
|
$
|
1,853,679
|
|
|
$
|
1,396,679
|
|
Hanscom K. Inc.
|
|
|
453,780
|
|
|
|
311,487
|
|
RCO Group Inc.
|
|
|
28,500
|
|
|
|
28,500
|
|
|
|
$
|
2,335,959
|
|
|
$
|
1,736,666
|
|
NOTE 7 – DERIVATIVE LIABILITIES
During the years ended December 31, 2016 and 2015, the Company recorded various derivative liabilities associated with the convertible debts discussed in Notes 5. The Company computes the value of the derivative liability at the issuance of the related obligation and at each reporting period using the Black Scholes Method which includes the following assumptions: a risk free rate of 0.14%, volatility rates ranging between 401.00% and 1,319.00% and a forfeiture rate of 0.00%. The derivative liability at December 31, 2016 and 2015 is as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Tonaquint
|
|
$
|
4,799,461
|
|
|
$
|
815,979
|
|
Proteus Capital Group LLC
|
|
|
356,835
|
|
|
|
72,221
|
|
GSM Capital Group LLC
|
|
|
324,662
|
|
|
|
66,162
|
|
LG Capital
|
|
|
231,059
|
|
|
|
48,221
|
|
Redwood Management, LLC
|
|
|
3,682,835
|
|
|
|
372,994
|
|
Total
|
|
$
|
9,394,852
|
|
|
$
|
1,375,577
|
|
Financial assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
Fair Value of Financial Instruments
Level 1— Quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level 2— Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.
Level 3— Inputs reflecting management's best estimates and assumptions of what market participants would use in pricing assets or liabilities at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below for the year ended December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,394,852
|
|
|
$
|
9,394,852
|
|
Financial assets and liabilities measured at fair value on a recurring basis are summarized below for the year ended December 31, 2015
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,375,577
|
|
|
$
|
1,375,577
|
|
The following table summarizes the change in the fair value of the derivative liability during the year ended December 31, 2016
|
|
Derivative liabilities
|
|
|
|
|
|
Balance December 31, 2015
|
|
$
|
1,375,577
|
|
Loss on change in fair value of the derivative
|
|
|
8,019,275
|
|
Balance December 31, 2016
|
|
$
|
9,394,852
|
|
NOTE 8 – CAPITAL STOCK
The Company is authorized to issue 10,000,000,000 shares of common stock (par value $0.00001) of which 3,249,327,026 were issued and outstanding as of December 31, 2016 and 2015.
During 2016, there were no conversions of convertible debts and no shares were issued.
During 2015, the following convertible debt owners converted loans plus accrued interests into common shares of the Company
|
|
Loans
converted
|
|
|
Interests
converted
|
|
|
Common shares
of the Company
|
|
|
|
|
|
|
|
|
|
|
|
Tonaquint (Note 5)
|
|
$
|
1,973
|
|
|
$
|
-
|
|
|
|
393,000
|
|
Accrued compensation
|
|
|
50,000
|
|
|
|
-
|
|
|
|
500,000,000
|
|
Stockholders (Note 6)
|
|
|
274,500
|
|
|
|
-
|
|
|
|
2,745,000,000
|
|
Total
|
|
$
|
326,473
|
|
|
$
|
-
|
|
|
|
3,245,393,000
|
|
NOTE 9 – INCOME TAXES
The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement and income tax purposes under enacted tax laws and rates.
The tax effects of temporary differences that give rise to deferred tax assets are presented below:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Net operating loss carryforwards
|
|
|
(34.0
|
%)
|
|
|
(34.0
|
%)
|
Income tax provision
|
|
|
0
|
%
|
|
|
0
|
%
|
Components of the Company's deferred tax liabilities and assets are as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
14,592,447
|
|
|
$
|
11,439,102
|
|
Valuation allowance
|
|
|
(14,592,447
|
)
|
|
|
(11,439,102
|
)
|
Deferred tax asset net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
Changes in valuation allowance
|
|
$
|
0
|
|
|
$
|
0
|
|
The income tax provision (benefit) consists of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
3,153,345
|
|
|
|
380,573
|
|
|
|
|
|
|
|
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
3,153,345
|
|
|
|
380,573
|
|
Change in valuation allowance
|
|
|
(3,153,345
|
)
|
|
|
(380,573
|
)
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2016 the Company had net operating loss carry forwards of approximately $
14,592,447
which are being carried forward for subsequent years. Such net operating loss carry forwards expire as follows;
|
2024-2028
|
|
|
$
|
3,401,000
|
|
|
2029-2031
|
|
|
$
|
5,717,000
|
|
|
2032-2036
|
|
|
$
|
5,474,447
|
|
The Company's federal and state income tax returns for the tax years 2013 and forward remain subject to examination.
NOTE 10
–
COMMITMENTS AND CONTINGENCIES
The Company was party to a lease for its Barrington office, at a minimum annual rent of approximately $24,000 per year. The Barrington lease expired in May 2013 and the Company remains in these premises on a month to month basis. The rent expense charged to operations for the year ended December 31, 2016 and 2015 was $26,012 and $24,012, respectively.
NOTE 11
–
RELATED PARTIES TRANSACTIONS
During the year ended December 31, 2016 notes payable to stockholders increased by $457,000, of which $450,000 resulted from conversion of accrued salaries, net of payments made during the year to notes payable and $7,000 from cash proceeds. The amount owed to stockholders at December 31, 2016 is $1,853,679. These loans are non interest bearing but interest is being imputed at 5.00% per annum and are payable on demand.
For the years ended December 31, 2016 and 2015, interest accrued to related parties totaled $125,059 and $111,498.
During the year ended December 31, 2015, the Company settled loans with stockholders and accrued compensation totaling $324,500 through issuance of 3,245,000,000 shares. The Company recognized settlement expense for the loss incurred of $19,145,500.
During 2016, the Company received loans of $142,293 from Hanscom K. Inc. These loans are non-interest bearing and are payable on demand. The amount owed to Hanscom K. Inc. at December 31, 2016 is $453,780. Hanscom K Inc. is acting as a consultant for the Company.
On December 19, 2016,
the Company
entered into a Limited Liability Company Agreement (the "Agreement") with Lakeshore Recycling Systems LLC located in Morton Grove, Illinois ("Lakeshore"), creating ECOS BIO-ART LLC, a Delaware Limited Liability Company ("LLC"). ECOS BIO-ART LLC will sell biofermentation systems. The biofermentation systems turn organic waste into a byproduct which can be processed into a high quality organic fertilizer.
On the same date,
the Company
entered into a Supply Agreement (the "Supply Agreement") with LLC wherein we agreed to manufacture and supply equipment and products to LLC for resale or lease to Lakeshore and LLC's customers.
NOTE 12 – SUBSEQUENT EVENTS
During the first two quarters of 2017, the following convertible debt owners converted loans plus accrued interests into common shares of the Company
|
|
Loans
|
|
|
Interest
|
|
|
Common shares
|
|
|
|
converted
|
|
|
converted
|
|
|
of the Company
|
|
|
|
|
|
|
|
|
|
|
|
Tonaquint (Note 4)
|
|
$
|
96,311
|
|
|
$
|
85,939
|
|
|
|
2,157,581,572
|
|
GSM Capital Group LLC (Note 4)
|
|
|
28,790
|
|
|
|
-
|
|
|
|
436,527,302
|
|
LG Capital (Note 4)
|
|
|
19,500
|
|
|
|
7,444
|
|
|
|
197,116,728
|
|
Total
|
|
$
|
144,601
|
|
|
$
|
93,383
|
|
|
|
2,791,225,602
|
|
In February 2017, the Company and Hanscom K Inc. jointly and severally entered into a loan agreement for an amount of $485,000 which is subject to annual interest of 16% and matures on November 1, 2017.
During May 2017, an aggregate of $108,220 in loans from stockholders were converted into 541,100,000 shares of the common stock.