ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion and analysis provides information which management of the Company believes to be relevant to an assessment
and understanding of the Company’s results of operations and financial condition. This discussion should be read together
with the Company’s financial statements and the notes to the financial statements, which are included in this report.
Forward-Looking
Statements
This
Report contains forward-looking statements that relate to future events or our future financial performance. Some discussions
in this report may contain forward-looking statements that involve risk and uncertainty. A number of important factors could cause
our actual results to differ materially from those expressed in any forward-looking statements made by us in this Report. Forward-looking
statements are often identified by words like “believe,” “expect,” “estimate,” “anticipate,”
“intend,” “project” and similar words or expressions that, by their nature, refer to future events.
In
some cases, you can also identify forward-looking statements by terminology such as “may,” “will,” “should,”
“plans,” “predicts,” “potential,” or “continue,” or the negative of these terms
or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, or achievements. You should not place undue certainty on these forward-looking statements, which apply only
as of the date of this Report. These forward-looking statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or our predictions. Except as required by applicable law, including
the securities laws of the United States, we do not intend to update any of the forward-looking statements in an effort to conform
these statements to actual results.
Business
History of Company
Evans
Brewing Company, Inc. (formerly ALPINE 3 Inc.) was incorporated under the laws of the State of Delaware on June 18, 2013. Alpine
3 Inc. was set up to serve as a vehicle to effect an asset acquisition, merger, exchange of capital stock or other business combination
with a domestic or foreign business. ALPINE 3 did not undertake any effort to cause a market to develop in its securities, either
debt or equity, before it successfully concluded a business combination. On April 4, 2014, The Michael J. Rapport Trust (the “Trust”)
purchased 10,000,000 shares of common stock which was all of the outstanding shares of Alpine 3, Inc., and subsequently changed
the name to Evans Brewing Company Inc. (“EBC”) on May 29, 2014. On October 9, 2014 the Trust agreed to the cancellation
of 9,600,000 of the shares of common stock that it had acquired and retained 400,000 shares of common stock. From April 2014 through
December 2015, EBC has been in the process of acquiring the Bayhawk brands and related assets, as discussed in more detail below.
On
October 15, 2014, Bayhawk and EBC entered into an Asset Purchase and Share Exchange Agreement (the “Agreement”), subject
to receiving approval of the independent Bayhawk shareholders who voted on the transaction. On September 17, 2015, the independent
Bayhawk shareholders approved the agreement by a vote of 251,212 shares for and 1,600 shares against. As such, Bayhawk sold to
EBC, and EBC purchased from Bayhawk, assets of Bayhawk, including but not limited to: (A) all assets, including personal property,
intellectual property, inventory, contracts, websites, documents, and all other assets however delineated relating to the Bayhawk
Ales label (as defined in the Agreement and discussed in more detail below); and (B) all assets, including personal property,
intellectual property, inventory, contracts, websites, documents, and all other assets however delineated relating to the Evans
Brands (as defined in the Agreement and discussed in more detail below) (collectively, the “Transferred Assets”).
Bayhawk retained ownership of 100% of the stock in Evans Brewing Co. (CA) (“Evans Brewing California”) which has the
brewers license at City Brewery in Lacrosse, WI (where the non-craft brands will be brewed, with the balance of the craft brands
being brewed in Irvine, California). Based on the affirmative vote by the independent Bayhawk shareholders to approve the Asset
Purchase transaction, EBC proceeded with the share exchange and tender offer to the Bayhawk shareholders, pursuant to which EBC
offered to exchange shares of EBC common stock for shares of Bayhawk common stock, on a one-for-one basis (the “Exchange
Offer”). Bayhawk shareholders had until December 2, 2015, to tender their Bayhawk shares in the share exchange. Bayhawk
shareholders also had until December 2, 2015, to rescind the exchange of shares. There was no minimum number of shares of Bayhawk
common stock that must be tendered for the Exchange Offer to close. At the close of the share exchange on December 2, 2015, Premier
Stock Transfer accepted on behalf of EBC 4,033,863 Bayhawk shares and issued 4,033,863 shares of EBC common stock upon the terms
and subject to the conditions set forth in the Asset Purchase and Share Exchange Agreement by and between EBC and Bayhawk, dated
October 15, 2014, as amended (the “Asset Purchase Agreement”). EBC filed a copy of the Asset Purchase Agreement as
an annex to a combination registration statement and proxy statement on Form S-4. The Bayhawk shares were validly tendered pursuant
to the Exchange Offer and not withdrawn. The asset purchase and share exchange has been treated as business combination as both
companies are controlled by the same management.
Overview
EBC
produces and sells premium craft beer including a variety of ales and lagers distributed to restaurants and other retail outlets
in 6 states. EBC’s beers are produced in its 17-barrel brewery in Irvine, California, the oldest microbrewery in Orange
County and one of the oldest in all of Southern California. The brewery was established in 1994 in a leased building in the McCormick
& Schmick’s Seafood Restaurant, and the first beers were produced there in January1995.
EBC
products include four packaged year-round beers: Pollen Nation Honey Blonde Ale, The KrHOPen India Pale Ale, Oaklore Brown Ale,
and ChocōLatté Chocolate Porter; draft-only offerings include The Joaquin Dead Mexican Red Ale, OC Pale Ale, Son of
a Beach Blonde Ale; and seasonals include Approachable Bastard Session IPA, Stout at the Devil Russian Imperial Stout, crHOP Dust
Hefeweizen, and Oktoberfest.
EBC
also owns the assets of Pig’s Eye Brewing Company, LLC, (the “Pig’s Eye Assets”) including the intellectual
property and trademarks relating to original beers, lagers, and ales, including Milwaukee Select and Pig’s Eye (the “Pig’s
Eye Brands”). Additionally, EBC has the exclusive rights to make, manufacture, produce, market, sell, and distribute original
beers, lagers, and ales known as Evans Lager Original, Evans Lager Black, Evans Lager Light, Bad Kat Ice, and Dead Presidents.
Distribution
includes restaurant and other retail outlets.
In
addition to beer production and sales, EBC also produces and offers for sale Evans Brewing Company branded merchandise including
apparel, glassware and other beer accessories.
EBC
has also entered into a Stock Purchase Agreement with The Public House SPA for the acquisition of a restaurant business located
in the downtown SOCO District of Fullerton, California as the venue for the Company’s first branded restaurant and taproom,
under the trade name The Public House by Evans Brewing Company. Additional details of the Stock Purchase Agreement, which is expected
to close following completion of due diligence and certain other conditions, are outlined in the “RECENT DEVELOPMENTS, Public
House Stock Purchase Agreement” section below.
As
Evans Brewing Company’s first official tasting room and restaurant, The Public House will feature the Company’s beers
– as well as beers from other selected local Orange County, California breweries, as well as food and, potentially, occasional
entertainment. Work is underway to renovate and remodel the restaurant, with plans to open to the public in the first half of
2016.
Background
EBC
and Bayhawk filed a registration statement on Form S-4 with the U.S. Securities and Exchange Commission (the “Registration
Statement”), which went effective on August 10, 2015. The Registration Statement included a proxy statement seeking the
votes of the Bayhawk shareholders on the Asset Purchase Transaction by written consent. On September 17, 2015, the voting period
closed, and EBC announced that approximately 99% of the shares that were voted had voted in favor of the Asset Purchase Transaction.
In
connection with the Asset Purchase Transaction, EBC and Bayhawk entered into a General Assignment and Bill of Sale agreement (the
“Bill of Sale”) which outlined the specific assets purchased, as well as an Assignment and Assumption of Liabilities
agreement (the “Assumption Agreement) which outlined the specific liabilities of Bayhawk assumed by EBC.
In
connection with the closing of the Asset Purchase Transaction and the entry into the Bill of Sale and the Assumption Agreement,
EBC acquired the assets (other than the ownership of Evans Brewing California), the liabilities, and the operations of Bayhawk.
As such, on December 10, 2015, in connection with this acquisition, EBC ceased to be a shell company as defined in Rule 12b-2,
in that it had assets consisting of more than cash and cash equivalents, and has a business plan and operations.
Bayhawk
Ales
Bayhawk
Ales, Inc. (formerly Orange County Brewing Company) (“Bayhawk”) was formed in February 1994 for the purpose of developing
and operating one or more breweries in California for the production of high quality, hand-crafted ales for sale in bottle and
draft. The Company built a 17-barrel showcase brewery (the "Southern California Brewery") in a leased building in the
McCormick & Schmick’s Seafood Restaurant in Irvine, California. The Southern California Brewery, located in the central
business district of Irvine near John Wayne International Airport, began brewing beer in January 1995. Irvine is south of Los
Angeles and is adjacent to Newport Beach. It is a suburban city of the greater Los Angeles metropolitan area and the location
of numerous businesses. At the time of the construction of the Southern California Brewery, the Los Angeles metropolitan area
was the largest single market for beer in the United States. The products produced by Bayhawk are 90% private labeled. The business
has only recently in the last few years become profitable.
Evans
Brewing Company, Inc. (Formerly ALPINE 3, Inc.) was incorporated in Delaware in June 18
th
, 2013 with a fiscal year
ending on December 31st.
Principal
Products
EBC
products include four packaged year-round beers: Pollen Nation Honey Blonde Ale, The KrHOPen India Pale Ale, Oaklore Brown Ale,
and ChocōLatté Chocolate Porter; draft-only offerings include The Joaquin Dead Mexican Red Ale, OC Pale Ale, Son of
a Beach Blonde Ale; and seasonals include Approachable Bastard Session IPA, Stout at the Devil Russian Imperial Stout, crHOP Dust
Hefeweizen, and Oktoberfest.
EBC
also produces malt liquor at a third party site in Lacrosse, Wisconsin. By way of background, in August 2013, Evans Brewing California
had acquired from City Brewing Company, LLC (“City Brewing”) the assets of Pig’s Eye Brewing Company, LLC, (the
“Pig’s Eye Assets”) including the intellectual property and trademarks relating to original beers, lagers, and
ales, including Milwaukee Select and Pig’s Eye (the “Pig’s Eye Brands”). Additionally, Evans Brewing California
had the exclusive rights to make, manufacture, produce, market, sell, and distribute original beers, lagers, and ales known as
Evans Lager Original, Evans Lager Black, Evans Lager Light, Bad Kat Ice, and Dead Presidents.
RECENT
DEVELOPMENTS
Closing
of Asset Purchase Transaction
On
December 10, 2015, EBC completed the previously announced acquisition of the assets and liabilities of Bayhawk, pursuant to an
Asset Purchase and Share Exchange Agreement between EBC and Bayhawk, dated October 15, 2014 (subsequently amended and restated
on August 6, 2015 (as amended, the “Agreement”)).
Pursuant
to the Agreement, Bayhawk had agreed to sell, and EBC had agreed to purchase, substantially all of Bayhawk’s assets, as
well as its liabilities (collectively, the “Asset Purchase Transaction”). The assets and liabilities of Bayhawk include
personal property, intellectual property, inventory, selected distribution contracts, websites, documents, and all other assets
however delineated relating to the Bayhawk Ales labels; and (B) all assets, including personal property, intellectual property,
inventory, contracts, websites, documents, and all other assets however delineated relating to the Evans Brands (collectively,
the “Transferred Assets”), and the assumption by EBC, pursuant to the terms and conditions set forth in the Agreement,
of all of the liabilities of Bayhawk (the “Assumed Liabilities”). (The “Evans Brands” include the former
assets of Pig’s Eye Brewing Company, including its original beers, lagers and ales (“Pig’s Eye Brands”),
as well as Evans Lager Original, Evans Lager Black, Evans Lager Light, Bad Kat Ice, and Dead Presidents.) Pursuant to the Agreement,
EBC has the right to purchase from Bayhawk 100% ownership in Evans Brewing California.
Pursuant
to the Agreement, EBC and Bayhawk agreed to seek approval of the shareholders of Bayhawk relating to the Asset Purchase Transaction.
Because the principal majority stockholders of Bayhawk are also significant stockholders of EBC, Bayhawk and EBC agreed to proceed
with the Asset Purchase Transaction if it was approved by the holders of at least a majority of the Independent Shares (i.e. shares
not held by Bayhawk’s majority shareholder, The Michael J. Rapport Trust, or by Evan Rapport, who is an officer of EBC and
the son of Michael Rapport) that actually vote on the Asset Purchase Transaction proposal.
EBC
and Bayhawk filed a registration statement on Form S-4 with the U.S. Securities and Exchange Commission (the “Registration
Statement”), which went effective on August 10, 2015. The Registration Statement included a proxy statement seeking the
votes of the Bayhawk shareholders on the Asset Purchase Transaction by written consent. On September 17, 2015, the voting period
closed, and EBC announced that approximately 99% of the shares that were voted had voted in favor of the Asset Purchase Transaction.
In
connection with the Asset Purchase Transaction, EBC and Bayhawk entered into a General Assignment and Bill of Sale agreement (the
“Bill of Sale”) which outlined the specific assets purchased, as well as an Assignment and Assumption of Liabilities
agreement (the “Assumption Agreement) which outlined the specific liabilities of Bayhawk assumed by EBC.
Equipment
Lease to Bayhawk
Following
the closing of the Asset Purchase Transaction, EBC entered into an equipment lease (the “Equipment Lease”) with Bayhawk
pursuant to which EBC leased the brewing equipment to Bayhawk. The Equipment Lease was effective as of December 1, 2015, and continues
month to month. Bayhawk agreed to pay a minimum of $15,000 per month or net profits from operations, whichever is greater. The
title to the leased equipment will remain with EBC, and EBC has the right to inspect the equipment and its usage.
The
foregoing summaries of the terms and conditions of the Bill of Sale, the Assumption Agreement, and the Equipment Lease (collectively,
the “Ancillary Agreements”) do not purport to be complete, and are qualified in their entirety by reference to the
full text of the specific Ancillary Agreement, each of which was attached as an exhibit to a Current Report on Form 8-K, filed
by EBC on December 15, 2015.
Change
in Shell Company Status
In
connection with the closing of the Asset Purchase Transaction and the entry into the Bill of Sale and the Assumption Agreement,
EBC acquired the assets (other than the ownership of Evans Brewing California), the liabilities, and the operations of Bayhawk.
As such, on December 10, 2015, in connection with this acquisition, EBC ceased to be a shell company as defined in Rule 12b-2,
in that it has assets consisting of more than cash and cash equivalents, and has a business plan and operations.
Share
Exchange
As
discussed in more detail above and below in this Annual Report, as partial consideration for the purchase of the Transferred Assets
and the assumption of the Assumed Liabilities, EBC agreed to offer to exchange shares of EBC common stock for all shares of Bayhawk
common stock that were tendered in connection with such offer, the transaction being referred to as the “Share Exchange.”
The ratio of the share exchange is one (1) share of EBC common stock for each one (1) share of Bayhawk common stock.
Based
on the affirmative vote by the independent Bayhawk shareholders to approve the Asset Purchase transaction, EBC proceeded with
the share exchange and tender offer to the Bayhawk shareholders, pursuant to which EBC offered to exchange shares of EBC common
stock for shares of Bayhawk common stock, on a one-for-one basis (the “Exchange Offer”). Bayhawk shareholders had
until December 2, 2015, to tender their Bayhawk shares in the share exchange. Bayhawk shareholders also had until December 2,
2015, to rescind the exchange of shares. There was no minimum number of shares of Bayhawk common stock that must be tendered for
the Exchange Offer to close. At the close of the share exchange on December 2, 2015, Premier Stock Transfer accepted on behalf
of EBC 4,033,863 Bayhawk shares and issued 4,033,863 shares of EBC common stock upon the terms and subject to the conditions set
forth in the Asset Purchase and Share Exchange Agreement by and between EBC and Bayhawk, dated October 15, 2014, as amended (the
“Asset Purchase Agreement”). EBC filed a copy of the Asset Purchase Agreement as an annex to a combination registration
statement and proxy statement on Form S-4. The Bayhawk shares were validly tendered pursuant to the Exchange Offer and not withdrawn.
The asset purchase and share exchange will be treated as business combination as both companies are controlled by the same management.
No
Change of Control
In
connection with the Asset Purchase Transaction, there was no change in control of EBC. The officers and directors of EBC did not
change, and the majority ownership of EBC did not change.
As
noted, prior to the closing of the Share Exchange, there was no way to determine how many shares of Bayhawk common stock will
be exchanged for shares of EBC common stock. Nevertheless, Michael J. Rapport owns, through The Michael J. Rapport Trust, a majority
of the outstanding common stock of both EBC and Bayhawk. As such, following the closing of the Share Exchange, Mr. Rapport continued
to own a majority of the common stock of EBC, and as such, there was no change in control of EBC.
Public
House Stock Purchase Agreement
Additionally
on December 10, 2015, EBC entered into a Stock Purchase Agreement (the “Public House SPA”) with Michael J. Rapport,
as the sole shareholder of EBC Public House, Inc., a California corporation (“Public House”), for the purchase by
EBC of 100% of the outstanding shares of Public House from Mr. Rapport, with the transaction to be closed following completion
of due diligence and certain other conditions outlined below.
By
way of background, Mr. Rapport formed Public House to purchase a restaurant business located in Fullerton, California (previously
operated as Steamers Jazz Club). Public House is working to renovate and remodel the restaurant, with plans to open in the first
half of 2016. Mr. Rapport was the sole shareholder of Public House.
Pursuant
to the Public House SPA, EBC agreed to issue 1,000,000 shares of its Series A Preferred Stock (see description below) in exchange
for 100% of the outstanding stock of Public House (the “Public House Shares”). The parties anticipate the closing
of the transaction once the following conditions, among others, have been met:
|
-
|
Public
House shall have received all food and beverage licenses, including California Alcoholic Beverage Control licenses, required
for the operation of the business;
|
|
|
|
|
-
|
The
renovations and remodeling of the restaurant shall have been completed and the restaurant shall be open for business; and
|
|
|
|
|
-
|
Other
standard closing conditions.
|
The
foregoing summary of the terms and conditions of the Public House SPA does not purport to be complete, and is qualified in its
entirety by reference to the full text of the Public House SPA, was attached as an exhibit to a Current Report on Form 8-K, filed
by EBC on December 15, 2015.
EBC
will provide additional information relating to EBC Public House and the restaurant business, including disclosures required by
SEC rules and regulations, upon the closing of the purchase of the Public House Shares.
Certificate
of Designation – Series A Convertible Preferred Stock
In
connection with the Public House SPA, on December 10, 2015, the Company’s Board of Directors approved and adopted a Certificate
of Designation of Rights and Preferences for Series A Convertible Preferred Stock (the “Certificate of Designation”).
On December 11, 2015, the Company filed with the State of Delaware the Certificate of Designation, which became part of the Company’s
Certificate of Incorporation, as amended to date.
Pursuant
to the Certificate of Designation, the Company is authorized to issue up to 2,000,000 shares of the Company’s Series A Convertible
Preferred Stock (the “Preferred Stock”). As noted above, the Company agreed to issue 1,000,000 shares of the Preferred
Stock to Mr. Rapport upon the closing of the purchase of the Public House Shares. The rights and preferences of the Preferred
Stock include the following:
|
-
|
Stated
Value: The Preferred Stock has a stated value (the “Stated Value”) of $1.00 per share.
|
|
-
|
Dividends:
Holders of the Preferred Stock are entitled to receive dividends equal to five percent (5%) per annum, payable quarterly in
arrears. The dividends may be paid in cash or shares of the Company’s common stock, at the option of the holder.
|
|
-
|
Voting
Rights: The holder of the Preferred Stock has the right to one vote for each share of common stock into which the Preferred
Stock could be converted.
|
|
-
|
Conversion:
The Preferred Stock is convertible at the option of the holder into shares of the Company’s common stock. The number
of shares of common stock issuable upon conversion shall be determined by dividing the number of shares of Preferred Stock
by the applicable Conversion Price, which is defined as follows:
|
|
○
|
If
the Common Stock of the Company has been listed for trading on a public exchange or trading facility, the conversion price
for each share of Preferred Stock on any conversion date shall be the lower of (I) seventy percent (70%) of the two (2) lowest
closing bid prices over the sixty trading days prior to the conversion date, or (II) the Stated Value of the Preferred Stock.
|
|
○
|
If
the Common Stock of the Company is not trading on the conversion date, the conversion price shall be the Stated Value of the
Preferred Stock.
|
|
-
|
Redemption:
The Company has the obligation to redeem the unconverted shares of Preferred Stock from the holder as follows:
|
|
○
|
The
Company shall have the obligation, as set forth herein, to redeem the unconverted shares of the Preferred Stock at a price
equal to the Redemption Price (defined below) as follows:
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■
|
The
Company shall pay to the holder of the Preferred Stock, on a quarterly basis, within thirty (30) days of the end of each fiscal
quarter, an amount equal to twenty percent (20%) of the excess revenues, as determined by the Board of Directors on a quarterly
basis, to redeem shares of Preferred Stock.
|
|
■
|
The
Company shall also pay to the holder of the Preferred Stock, an amount equal to 20% of any capital raised by the Company in
connection with offerings of the Company’s securities (whether private offerings or public offerings), within ten (10)
days of the closing of each such offering, to redeem shares of Preferred Stock.
|
|
○
|
The
“Redemption Price” shall be equal to the Stated Value of such shares of Preferred Stock, plus all accrued and
unpaid dividends on the shares to be redeemed.
|
|
-
|
Liquidation:
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”),
the holders of the Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are
capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid dividends
per share, and all other amounts in respect thereof then due and payable before any distribution or payment shall be made
to the holders of any Junior Securities.
|
EBC
anticipates that its issuances of shares of Preferred Stock in connection with the purchase of the Public House Shares, which
will occur upon closing of that transaction, will be made without registration under the securities Act of 1933 (the “1933
Act”) in reliance on Section 4(a)(2) of the 1933 Act and the rules and regulations promulgated thereunder.
The
foregoing summary of the terms and conditions of the Certificate of Designation does not purport to be complete, and is qualified
in its entirety by reference to the full text of the Certificate of Designation, was attached as an exhibit to a Current Report
on Form 8-K, filed by EBC on December 15, 2015.
Results
of Operations for the three months ended June 30, 2016 and the three months ended June 30, 2015
Our
operating results are summarized as follows:
|
|
Six Months
Ended
June 30,
2016
|
|
|
Six Months
Ended
June 30,
2015
|
|
Revenue
|
|
$
|
841,224
|
|
|
$
|
1,103,220
|
|
Cost of sales
|
|
$
|
688,470
|
|
|
$
|
864,715
|
|
Operating expenses
|
|
$
|
412,126
|
|
|
$
|
369,883
|
|
Other income (expenses)
|
|
$
|
(8,411
|
)
|
|
$
|
6,485
|
|
Net loss
|
|
$
|
(268,362
|
)
|
|
$
|
(125,143
|
)
|
Revenues
During
the quarter ended June 30, 2016, the Company had sales of $383,927 compared to $581,399, for the quarter ended June 30, 2015.
The decrease in sales for the current quarter compared to the quarter ended June 30, 2015 is due mainly to the fact that the Evans
Brewing Company was not able to fulfill its normal Malt liquor sales for the month of June due to a lack of cans to package the
malt liquor. The company that supplies the aluminum cans ran into a production problem and was not able to deliver the normal
supply of cans that were needed to meet the production and sales needs of the Company in June. During the six months ended June
30, 2016, the Company had sales of $841,224 compared to sales of $1,103,220 for the six months ended June 30, 2015. The reason
for the large decrease in sales again was due to the lack of cans available to package the Company’s malt liquor production
to meet sales delivery requirements.
Operating
Expenses
The
operating expenses for the quarter ended June 30, 2016, were $228,939 compared to $184,666 for the quarter ended June 30, 2015.
The increase in operating expenses for the quarter ended June 30, 2016, compared the quarter ended June 30, 2015, is due mainly
to an increase in professional expenses of $54, 261. Most of the increase was attributable to costs associated with the annual
shareholders meeting in June and legal expenses associated with filings and work associated with the raising of funds through
an equity purchase agreement. The operating expenses for the six months ended June 30, 2016, were $412,704 compared to $369,883
for the six months ended June 30, 2015. The increase in expenses for the current six-month period compared to the same six-month
period last year was aging due to the increase in professional expenses attributable to costs for the annual shareholders meeting
and legal expenses associated with the raising of funds through an equity purchase agreement.
Net
Loss from Operations:
The
net loss from operations for the quarter ended June 30, 2016, was $161,662 compared to a net loss from operations of $72,061 for
the quarter ended June 30, 2015. The increase in the net loss from operations for current quarter compared to the same quarter
last year is due to a decrease in sales and an increase in professional expenses as outlined above. The net loss from operations
for the six months ended June 30, 2016, was $259,950 compared to a net loss from operations of $131,378 for the same period last
year. Again the increase in net loss from operations for this six month period ended on June 30, 2016, compared to the same period
last year is due to a decrease in sales and an increase in professional services.
Interest
Expense
:
Interest
expense for the quarter ended June 30, 2016, was $4,708, compared to $1,809 for the quarter ended June 30, 2015. The increase
in interest expense for the current quarter compared to the same quarter last year is due to an increase in the total notes outstanding
from a related party. Interest expense for the six months ended June 30, 2016, was $9,3432 compared to $2,534 for six months ended
June 30, 2015. Again the increase in interest expense for the six-month period ended June 30, 2016, compared to the same six-month
period last year is due to an increase in the amount of the notes payable held by a related party.
Other
Income (Expense
):
Other
income for the three months ended June 30, 2016 was $1,021, compared to other income of $11,060 for the period ended June 30,
2015. The $11,060 of other income for the period ended June 30, 2015, was a one-time insurance payment in excess of the insurance
claim recorded by the Company. Other Income for the six months ended June 30, 2016, was $1,021 compared to $9,019 for the six-month
period ended June 30, 2015. Again it was the insurance payment offset by other expenses not attributable to operations.
Net
Loss:
Net
loss for the quarter ended June 30, 2016, is $165,350 compared to a loss of $62,810 for the quarter ended June 30, 2015. The increase
in net operating loss for the quarter ended June 30, 2016, compared to the same period last year was due as noted above to mainly
a decrease in sales and an increase in professional services. Net Loss for the six-month period ended June 30, 2016, is $268,362
compared to a loss of $124,893 for the six-month period ended June 30, 2015. Again this net loss for the current six-month period
compared to the same period last year is mainly attributable to a decrease in sales and an increase in professional services as
noted above.
Liquidity
and Capital Resources
Working
Capital
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Current Assets
|
|
$
|
471,007
|
|
|
$
|
737,564
|
|
Current Liabilities
|
|
$
|
511,816
|
|
|
$
|
479,010
|
|
Working Capital (Deficit)
|
|
$
|
(40,809
|
)
|
|
$
|
258,554
|
|
Cash
Flows
|
|
For the six
months
ended
June 30,
2016
|
|
|
For the six months
ended
June 30,
2015
|
|
Cash used (in) by Operating Activities
|
|
$
|
(157,190
|
)
|
|
$
|
(4,108
|
)
|
Cash provided in Investing Activities
|
|
$
|
(24,520
|
)
|
|
$
|
(355,694
|
)
|
Cash provided in Financing Activities
|
|
$
|
(7,379
|
)
|
|
$
|
245,016
|
|
Increase (Decrease) in Cash
|
|
$
|
(189,089
|
)
|
|
$
|
(114,786
|
)
|
Cash
Used In Operating Activities
Our
net loss for the period ended June 30, 2016, was the main contributing factor for our negative operating cash flow.
Cash
from Financing Activities
As
of June 30, 2016, we have insufficient cash to operate our business at the current level for the next twelve months and to achieve
our business goals. Subsequent to the end of the six-month period ended June 30, 2016, the Company executed a note in favor of
Michael J Rapport for a loan of $250,000 to the Company. This loan will provide the needed working capital until the Equity purchase
agreement with Kodiak is implemented. Future profits will provide additional working capital.
Off-Balance
Sheet Arrangements
There
are no off-balance sheet arrangements between the Company and any other entity that have, or are reasonably likely to have, a
current or future effect on the financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to stockholders.
Impact
of Inflation
The
business will have to absorb any inflationary increases on development costs in the short-term, with the expectation that it will
be able to pass inflationary increases on costs on to customers through price increases hence management does not expect inflation
to be a significant factor in our business.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
Management
believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information
about our operating results and financial condition. Some of the critical accounting estimates are detailed below.
Critical
Accounting Estimates and New Accounting Pronouncements
Critical
Accounting Estimates
The
preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management
to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management
considers an accounting estimate to be critical if:
●
|
it
requires assumptions to be made that were uncertain at the time the estimate was made, and
|
●
|
changes
in the estimate or different estimates that could have been selected could have a material impact on our results of operations
or financial condition.
|
The
Company bases its estimates and judgments on our experience, our current knowledge, and our beliefs of what could occur in the
future, our observation of trends in the industry, information provided by our customers and information available from other
sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following
accounting policies and estimates as those that we believe are most critical to our financial condition and results of operations
and that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties:
share-based compensation expense, income taxes, and derivative financial instruments.
Share-Based
Compensation Expense
.
The Company plans to calculate share-based compensation expense for option awards and warrant issuances
("Share-based Awards") based on the estimated grant/issue-date fair value using the Black-Scholes-Merton option pricing
model ("Black-Sholes Model"), and recognize the expense on a straight-line basis over the vesting period, net of estimated
forfeitures. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the
weighted average risk-free interest rate, and the vesting period of the Share-based Award in determining the fair value of Share-based
Awards. Although we believe our assumptions used to calculate share-based compensation expense are reasonable, these assumptions
can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant
changes to our assumptions could significantly impact the amount of expense recorded in a given period.
Income
Taxes
.
As part of the process of preparing our financial statements, the Company will be required to estimate income taxes
in each of the jurisdictions in which we operate. Our provision for income taxes is determined using the asset and liability approach
to account for income taxes. A current liability is recorded for the estimated taxes payable for the current year. Deferred tax
assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using the enacted tax rates in effect for the year in which the timing differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of changes in tax rates or tax laws are recognized in the provision
for income taxes in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount more-likely-than-not to be realized. Changes in valuation allowances will flow through the statement
of operations unless related to deferred tax assets that expire unutilized or are modified through translation, in which case
both the deferred tax asset and related valuation allowance are similarly adjusted. Where a valuation allowance was established
through purchase accounting for acquired deferred tax assets, any future change will be credited or charged to income tax expense.
The
determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and
application of complex tax laws. In the ordinary course of our business, there are transactions and calculations for which the
ultimate tax determination is uncertain. In spite of our belief that we have appropriate support for all the positions taken on
our tax returns, we acknowledge that certain positions may be successfully challenged by the taxing authorities. We determine
the tax benefits more likely than not to be recognized with respect to uncertain tax positions. Although we believe our recorded
tax assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty; therefore,
our assessments can involve both a series of complex judgments about future events and rely on estimates and assumptions. Although
we believe these estimates and assumptions are reasonable, the final determination could be materially different than that which
is reflected in our provision for income taxes and recorded tax assets and liabilities.
New
Accounting Pronouncements
The
FASB issued ASU 2015-11 in July, 2015, to provide guidance on how an entity should measure inventory within the scope of this
Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update more
closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards
(IFRS). For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective
for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.
The amendments in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim
or annual reporting period.
In
June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements.
ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the
elimination of inception-to-date information on the statements of operations, cash flows and stockholders' equity. The amendments
in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods
within those annual periods, however early adoption is permitted. The Company adopted ASU 2014-10 during the quarter ended December
31, 2014, thereby no longer presenting or disclosing any information required by Topic 915.
Management
does not believe there would be a material effect on the accompanying financial statements had any other recently issued but not
yet effective accounting standards been adopted in the current period.