AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
American Brewing Company, Inc. (the "Company") was formed under the laws of the State of Washington on April 26, 2010. Through September 30, 2015, the Company was a micro-brewing company and also manufactured and sold búcha® Live Kombucha, a gluten free, organic certified, sparkling kombucha tea. The Company acquired the búcha® Live Kombucha brand and the assets related to the production and sale of it pursuant to an agreement dated April 1, 2015 (see Note 4). The búcha® Live Kombucha brand is distributed in major health and grocery chains throughout North America.
On October 1, 2015 (the "Closing Date"), the Company entered into an Asset Purchase Agreement (the "APA") whereby the Company sold its assets and various liabilities related to its brewery and micro-brewing operations to AMBREW, LLC, a Washington limited liability company ("AMBREW"). On the closing date, the parties executed all documents related to the transaction. Under the terms of the APA, the assets sold consisted of accounts receivable, inventories, prepaid assets and property and equipment. The liabilities consisted of brewing-related contracts held by the Company, liabilities related to inventory as well as lease obligations. The Company recognized the sale of its brewery and micro-brewing operations as a discontinued operation, in accordance with ASU 2014-08,"Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity"(See Note 3).
Since October 1, 2015, the Company is focusing exclusively on its búcha® Live Kombucha business, which produces a gluten-free, organic certified sparkling kombucha tea.
Basis of Presentation
Theaccompanying financial statements have been presented on a comparative basis. For periods after the acquisition of thebúcha® Live Kombucha brand(see Note 4), the Company is referred to as the Successor and its results of operations combines the brewery operations and the kombucha tea operations. For periods prior to the acquisition of thebúcha® Live Kombucha brand,the Company is referred to as the Predecessor and its results of operations includes only thebúcha® Live Kombucha operations. A black line separates the Predecessor and Successor financial statements to highlight the lack of comparability between these two periods.
Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of $3,331,878 and $4,863,782 as of as of December 31, 2015 (Successor) and December 31, 2014 (Predecessor), respectively, had net losses of $1,031,311, $72,022 and $891,435 for the nine months ended December 31, 2015 (Successor), for the three months ended March 31, 2015 (Predecessor) and for the year ended 2014 (Predecessor), respectively, and had negative working capital of $45,138 as of December 31, 2015. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern.
While the Company is attempting to increase sales and generate additional revenues, the Company's cash position may not be significant enough to support the Company's daily operations. If the Company is unable to obtain additional financing through the issuance of debt or equity, the Company may be unable to continue as a going concern. While the Company believes in the viability of its strategy to generate additional revenues and in its ability to raise additional funds, there can be no assurances to that effect. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
F-6
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the Company's financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.
Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The more significant estimates and assumptions made by management include allowance for doubtful accounts, inventory valuation, provision for excess or expired inventory, depreciation of property and equipment, realizability of long-lived assets and fair market value of equity instruments issued for goods or services. The current economic environment has increased the degree and uncertainty inherent in these estimates and assumptions.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation.
Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2015 (Successor) and December 31, 2014 (Predecessor) included cash on-hand. Cash equivalents are considered all accounts with an originalmaturity date within 90 days.
Accounts Receivable and Allowance for Doubtful Accounts
The Company's accounts receivable primarily consists of trade receivables. The Company records an allowance for doubtful accounts that is based on historical trends, customer knowledge, any known disputes, and the aging of the accounts receivable balances combined with management's estimate of future potential recoverability. Receivables are written off against the allowance after all attempts to collect a receivable have failed. The Company's allowance for doubtful accounts was zero as of December 31, 2015 (Successor) and $13,638 as of December 31, 2014 (Predecessor).
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivables. The Company places its cash with high credit quality financial institutions. At times such amounts may exceed federally insured limits.
Receivables arising from sales of the Company's products are not collateralized. As of December 31, 2015 (Successor), three customers represented approximately 92.8% (59.0%, 22.9% and 10.9%) of accounts receivable. As of December 31, 2014 (Predecessor), four customers represented approximately 75.1% (25.4%, 24.0%, 13.5% and 12.1%) of accounts receivable.
For the nine months ended December 31, 2015 (Successor), three customers represented approximately 75.6% (32.7%, 24.2% and 18.6%) of total revenue. For the three months ended March 31, 2015 (Predecessor), three customers represented approximately 85.6% (30.2%, 29.4% and 26.0%) of total revenue. For the year ended December 31, 2014 (Predecessor), four customers represented approximately 84.5% (28.1%, 18.9%, 18.9% and 18.6%) of revenue.
F-7
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, accounts payable and accrued expenses and shareholder loans. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.
Accounting for Derivative Liabilities
The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40,Derivative Instruments and Hedging: Contracts in Entity's Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date. The Company determined that none of its financial instruments meet the criteria for derivative accounting as of December 31, 2015 (Successor) and December 31, 2014 (Predecessor).
Beneficial Conversion Features
The Company has from time to time issued convertible notes that may have conversion prices that create an embedded pursuant to accounting guidance. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of any attached equity instruments, if any related equity instruments were granted with the debt. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.
Accounts Receivable Factoring Arrangement with Recourse
In April 2015, the Company entered into a factoring agreement to sell, with recourse, certain receivables to an unrelated third-party financial institution. Under the terms of the factoring agreement, the Company receives an advance of 80% of qualified receivables and maximum amount of outstanding advances at any one time will not exceed $500,000. For the nine months ended December 31, 2015 (Successor), the Company received net advances from the factoring of accounts receivable of $110,663 and recognized factoring interest and fees of $34,069. The Company pays factoring fees associated with the sale of receivables at the rate of 0.67% of the gross face value of the receivable for every ten-day period or fraction thereof from the date of the advance until the receivable is paid in full. The outstanding factoring payable as of December 31, 2015 was $110,663.
F-8
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the identifiable net assets acquired.In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, goodwill and other intangibles with indefinite useful lives are not amortized but tested for impairment annually or more frequently when events or circ*mstances indicates that the carrying value of a reporting unit more likely than not exceeds its fair value.The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of goodwill for impairment would not be required. Otherwise, goodwill impairment is tested using a two-step approach.
The first step involves comparing the fair value of a company's reporting units to their carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit's carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded. The Company performed a qualitative assessment and determined there was no impairment of goodwill recognized during 2015.
The Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment losses are recognized is the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.
Share-Based Compensation
The Company accounts for stock-based compensation to employees in accordance with FASB ASC 718Compensation—Stock Compensation. Stock-based compensation to employees is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite employee service period. The Company accounts for stock-based compensation to other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments and is recognized as expense over the service period. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options and warrants and the latest fair market price of the Company's common stock for common share issuances.
Inventories and Provision for Excess or Expired Inventory
Inventories consist of tea ingredients, packaging and finished goods and are stated at the lower of cost (first-in, first-out basis) or market value. Provisions for excess inventory are included in cost of goods sold and have historically been immaterial but adequate to provide for losses on its raw materials. There was no reserve for obsolescence as of December 31, 2015 (Successor) and December 31, 2014 (Predecessor).
Property and Equipment
Property and equipment consists primarily of brewing equipment and are stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the underlying assets, generally five years. Major renewals and betterments that extend the life of the property are capitalized. Expenditures for repairs and maintenance are expensed as incurred.
F-9
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Long-lived Assets
The Company's long-lived assets consisted of property and equipment and customer relationships and are reviewed for impairment in accordance with the guidance of the FASB Topic ASC 360,Property, Plant, and Equipment. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circ*mstances indicate that the carrying amount of the asset may not be recoverable. Through December 31, 2015, the Company had not experienced impairment losses on its long-lived assets as management determined that there were no indicators that a carrying amount of the asset may not be recoverable.
Revenue Recognition
The Company's products are distributed in major health and grocery chains throughout North America. Revenue is recognized upon delivery of goods to the customer. An allowance for estimated returns is provided at the time of the sale. In accordance with the guidance in FASB Topic ASC 605,Revenue Recognition, the Company recognizes revenue when (a) persuasive evidence of an arrangement exists, (b) delivery has occurred or services have been rendered, (c) the fee is fixed or determinable, and (d) collectability is reasonable assured.
Cost of Goods Sold
Cost of goods sold mainly consisted of raw material costs, packaging costs, direct labor and certain overhead allocated costs. Costs are recognized when the related revenue is recorded. Shipping and handling costs for all wholesale sales transactions are billed to the customer and are included in costs of goods sold for all periods presented.
Advertising, Promotions and Sales
Advertising, promotional and selling expenses consisted of sales salaries, tap handles, media advertising costs, sales and marketing expenses, and promotional activity expenses and are recognized when incurred in the accompanying statement of operations.
General and Administrative Expenses
General and administrative expenses consisted of professional service fees, rent and utility expenses, meals, travel and entertainment expenses, and other general and administrative overhead costs. Expenses are recognized when incurred.
Customer Programs and Incentives
Customer programs and incentives, which include customer promotional discount programs and customer incentives, are a common practice in the alcohol beverage industry. The Company incurs customer program costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net revenue or as advertising, promotional and selling expenses in accordance with ASC Topic 605-50,Revenue Recognition—Customer Payments and Incentives, based on the nature of the expenditure.
F-10
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Income Taxes
Successor
The Company uses the liability method of accounting for income taxes under the asset and liability method prescribed underASC 740, Income Taxes. The liability method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. The resulting deferred tax assets or liabilities have been adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
The Company expects to recognize the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount to be recognized in the financial statements will be the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. As of December 31, 2015, the Company had no uncertain tax positions. The Company recognizes interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. The Company currently has no federal tax examinations nor has it had any federal income tax penalties since its inception.
Predecessor
The Predecessor is a limited liability corporation and is classified as a partnership for income tax purposes. The Predecessor profits and losses are reportable by the members on their respective income tax returns. Accordingly, no provision for income taxes has been reflected in these financial statements. The Predecessor has no unrecognized tax benefits as of December 31, 2014.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average common shares outstanding. Diluted net income per share is calculated by dividing net income by the weighted-average common shares outstanding during the period using the treasury stock method or the two-class method, whichever is more dilutive. As the Company incurred net losses for the years ended December 31, 2015 (Successor) and 2014 (Predecessor), no potentially dilutive securities were included in the calculation of diluted earnings per share as the impact would have been anti-dilutive. Therefore, basic and dilutive net income (loss) per share were the same. If the Company had net income, potential dilutive securities consists of warrants to purchase 1,127,000 and 875,042 shares of common stock as of December 31, 2015 (Successor) and December 31, 2014 (Predecessor), respectively.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
F-11
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – DISCONTINUED OPERATIONS – BREWERY AND MICRO-BREWING OPERATIONS
On October 1, 2015 (the "Closing Date"), the Company entered into an APA whereby it sold its assets and various liabilities related to its brewery and micro-brewing operations to AMBREW (the "Sale".) On the Closing Date, the parties executed all documents related to the Sale. Under the terms of the APA, the assets sold consisted of accounts receivable, inventories, prepaid assets and property and equipment. The liabilities consisted of brewing-related contracts held by the Company, liabilities related to inventory as well as lease obligations. The Sale price was paid in cash of $395,650 and assumed debt owed to a third party related to three equipment financing agreements and various capital lease arrangements (See Note 8.)
The Sale is subject to customary closing conditions, namely that the Washington State Liquor and Cannabis Board ("WSLCB") shall have approved AMBREW's assumption of the Company's WSLCB license and issued a corresponding license in AMBREW's name to operate the assets of the business from and after the Closing Date (the "WSLCB Condition"). The parties intend, to the maximum extent possible, provided that the conditions to Sale have occurred, including specifically the WSLCB Condition, that the benefits and obligations of ownership and operation of the assets of the business shall accrue to AMBREW beginning as of the Closing Date. As of April 5, 2016, the date these financial statements were available to be issued, the WSLCB has not issued a license to AMBREW.
The Company recognized the sale of its brewery and micro-brewing operations as a discontinued operation, in accordance with ASU 2014-08,"Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity."
Assets and Liabilities of Discontinued Operations
The following table provides the details of the assets and liabilities of our discontinued brewery and micro-brewing operations as of the Closing Date:
October 1, 2015 | ||||
Assets of discontinued operations: | ||||
Current: | ||||
Accounts receivable | $ | 62,588 | ||
Inventories | 85,493 | |||
Prepaid expenses and other current assets | 11,588 | |||
Noncurrent: | ||||
Property and equipment | 869,118 | |||
Other assets | 12,816 | |||
Total assets of discontinued operations | $ | 1,041,603 | ||
Liabilities of discontinued operations: | ||||
Current: | ||||
Accounts payable | $ | 18,907 | ||
Accrued expenses and other current liabilities | 46,874 | |||
Current portion of notes payable and capital leases | 93,953 | |||
Noncurrent: | ||||
Noncurrent portion of notes payable and capital leases | 229,446 | |||
Total liabilities of discontinued operations | $ | 389,180 | ||
Net assets sold | $ | 652,423 | ||
Cash received | 395,650 | |||
Loss on sale of discontinued operations | $ | 256,773 | ||
F-12
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Income and Expense of Discontinued Operations
The following table provides income and expense of discontinued operations for the nine months ended December 31, 2015 (Successor), the three months ended March 31, 2015 (Predecessor), and the year ended December 31, 2014 (Predecessor), respectively:
Nine Months | Three Months | Year | |||||||||||
Ended | Ended | Ended | |||||||||||
December 31, 2015 | March 31, 2015 | December 31, 2014 | |||||||||||
Successor | Predecessor | Predecessor | |||||||||||
Revenue | $ | 510,216 | $ | - | $ | - | |||||||
Less: Cost of Goods Sold | 366,852 | - | - | ||||||||||
Gross Profit | 143,364 | - | - | ||||||||||
Other expenses | 7,660 | - | - | ||||||||||
Interest expense | 9,550 | - | - | ||||||||||
Income from discontinued operations | $ | 126,154 | $ | - | $ | - | |||||||
NOTE 4 – ACQUISITION OF ASSETS OF B&R LIQUID ADVENTURE, LLC
On April 1, 2015, the Company acquired substantially all of the operating assets of B&R Liquid Adventure, LLC, a California Limited Liability Company ("B&R") (the "Acquisition"). B&R is engaged in the manufacture of búcha® Live Kombucha, a gluten free, organic certified, sparkling kombucha tea. On April 1, 2015, the parties executed all documents related to the Acquisition. Upon the closing of the Acquisition, the Company received substantially all of the operating assets of B&R, consisting of inventory, fixed assets and intellectual property.
Kombucha, a fermented, probiotic tea beverage, offers a myriad of health benefits. With the acquisition of the búcha® Live Kombucha brand, which features eight flavors, the Company plans to leverage its beer-making expertise to expand distribution in major health and grocery chains throughout North America.
The purchase price of the operating assets of B&R was a cash payment of $260,000, a secured promissory note in an amount of $140,000 and the issuance 1,479,290 shares of common stock valued at $500,000. In addition, the Company assumed $121,416 of scheduled liabilities.
The 1,479,290 shares of common stock were issued with "Price Protection" for a period of 18 months, meaning that on the date that is 18 months from the date of the Acquisition, if the market value of the common stock issued pursuant to the Acquisition is less than $500,000, the Company shall issue additional shares so the aggregate amount of shares held by B&R is equal to a market value of $500,000 based on the average closing bid price of the common stock for the five days prior thereto. The Company determined the fair value of the 1,479,290 shares issued as of December 31, 2015 to be higher than $500,000, and thus no additional shares were due as of December 31, 2015.
The Company accounted for its acquisition of the operating assets of B&R using the acquisition method of accounting. B&R's inventory, fixed assets and identifiable intangible assets acquired and liabilities assumed were recorded based upon their estimated fair values as of the closing date of the Acquisition. The excess of purchase price over the value of the net assets acquired was recorded as goodwill.
F-13
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Total Purchase Consideration: | ||||
Cash | $ | 260,000 | ||
Notes payable | 140,000 | |||
Common stock issued | 500,000 | |||
$ | 900,000 | |||
The following table summarizes the estimated fair values of the tangible and intangible assets acquired as of the date of acquisition:
Net assets acquired: | ||||
Inventories | $ | 328,802 | ||
Customer relationships | 250,000 | |||
Property and equipment, net | 53,600 | |||
Assumption of scheduled liabilities | (121,416 | ) | ||
510,986 | ||||
Goodwill | $ | 389,014 | ||
Goodwill is the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets. In accordance with applicable accounting standards, goodwill is not amortized but instead is tested for impairment at least annually or more frequently if certain indicators are present. The Company performed a qualitative assessment and determined there was no impairment of goodwill recognized during 2015.
NOTE 5 – INVENTORIES
Inventories consist of brewing materials, tea ingredients, bulk packaging and finished goods. The cost elements of work in process and finished goods inventory consist of raw materials and direct labor. Provisions for excess inventory are included in cost of goods sold and have historically been immaterial but adequate to provide for losses on its raw materials. Inventories are stated at the lower of cost, determined on the first-in, first-out basis, or market.
Inventories consisted of the following as of:
December 31, 2015 | December 31, 2014 | |||||||
Successor | Predecessor | |||||||
Raw materials | $ | 46,928 | $ | 83,892 | ||||
Work-in-process | 5,798 | - | ||||||
Finished goods | 143,494 | 202,178 | ||||||
$ | 196,220 | $ | 286,070 | |||||
F-14
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 – CUSTOMER RELATIONSHIPS
Customer relationships consisted of the following as of:
December 31, 2015 | December 31, 2014 | |||||||
Successor | Predecessor | |||||||
Customer relationships | $ | 250,000 | $ | - | ||||
Less: accumulated amortization | (62,500 | ) | - | |||||
$ | 187,500 | $ | - | |||||
Customer relationships were evaluated as part of the tangible and intangible assets acquired in the Acquisition (see Note 4) and recorded at their fair market value. Amortization expense is computed on a straight-line basis of three years determined to be the useful life. Amortization expense was $62,500, zero and zero for the nine months ended December 31, 2015 (Successor), the three months ended March 31, 2015 (Predecessor), and the year ended December 31, 2014 (Predecessor), respectively. Amortization expense is classified as cost of goods sold in the statements of operations.
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
December 31, 2015 | December 31, 2014 | |||||||
Successor | Predecessor | |||||||
Property and equipment | $ | 76,551 | $ | 101,994 | ||||
Less: accumulated depreciation | (10,215 | ) | (36,541 | ) | ||||
$ | 66,336 | $ | 65,453 | |||||
Depreciation expense is computed on the basis of three to five year useful lives for all property and equipment. Depreciation expense from continuing operations was $10,215, $5,100 and $19,926 for the nine months ended December 31, 2015 (Successor), the three months ended March 31, 2015 (Predecessor), and the year ended December 31, 2014 (Predecessor), respectively. Depreciation expense is classified as cost of goods sold in the statements of operations. Depreciation expense from discontinued operations was $115,441 for the nine months ended December 31, 2015 (Successor).
F-15
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 – NOTES PAYABLE AND CAPITAL LEASES
Notes payable and capital leases consisted of the following as of:
December 31, 2015 | December 31, 2014 | |||||||
Successor | Predecessor | |||||||
Notes payable, net of unamortizeddiscounts of $121,069 and zero | $ | 78,931 | $ | - | ||||
Capital lease obligations (Predecessor) | - | 3,689 | ||||||
78,931 | 3,689 | |||||||
Less: current portion | - | (3,689 | ) | |||||
Long-term portion, net of unamortizeddiscounts of $121,069 and zero | $ | 78,931 | $ | - | ||||
In March 2015, the Company entered into two 60-day promissory notes for cash proceeds of $50,000 each. Each note has a 1.5% loan fee and bears an interest rate of 8% per annum. The loan fees resulted in aggregate discounts to the notes of $2,250. The notes also included an equity payment totaling 30,000 shares of common stock that were issued with the debt. The Company has allocated the loan proceeds among the debt and the stock based upon relative fair value. The relative fair value of the stock was determined to be $9,020 and it was recorded as a debt discount. The two notes were fully paid off during the nine months ended December 31, 2015.
In March 2015, the Company borrowed $200,000 used for the Acquisition (see Note 4). The note bears interest at 10% per annum and is due and payable beginning December 31, 2015 maturing on March 31, 2020. Payments of interest are required quarterly. Should the Company be successful in raising $2,000,000 or more in funding, then the entire balance of the note will be due immediately. The note was issued in conjunction with an equity payment totaling 176,734 shares of Series B preferred stock that was issued with the debt. The Company has allocated the loan proceeds among the debt and the stock based upon relative fair value. The relative fair value of the stock was determined to be $142,434 and was recorded as a debt discount. The discount will be amortized over the life of the loans to interest expense. As of December 31, 2015, no payment has been made on this note and the remaining balance of this note is $200,000 ($78,931, net of the unamortized discount.)
On April 1, 2015, a promissory note in an amount of $140,000 was issued pursuant to the Acquisition (see Note 4). The note bears interest at 10% per annum and it matured on June 30, 2015. The note was fully paid off and the balance as of December 31, 2015 is zero.
In April 2015, the Company borrowed $50,000 under a 90-day promissory note. The note bears interest at 3% per month and was due on July 21, 2015. The note was fully paid off and the balance as of December 31, 2015 is zero.
Aggregate amortization of debt discounts on third party and related party debt was $68,466 during the nine months ended December 31, 2015.
F-16
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Obligations under Capital Leases (Predecessor)
In January 2013, the Predecessor entered into a lease agreement for the purchase of an Alcolyzer, a highly accurate analysis system which determines the alcohol content of its Kombucha products. The lease is for 24 months and requires monthly payments of $701, plus sales tax. The Predecessor paid a down payment on the equipment lease of $4,957. The lease is secured by the underlying leased asset. This arrangement was accounted for as a capital lease and capitalized the asset at $23,900. As of December 31, 2014, the outstanding balance under this capital lease was $3,689.
Notes payable and capitalized leases of discontinued operations
As discussed in Note 3, the Company sold its assets related to its brewery and micro-brewing operations. The Sale price was paid in cash of $395,650 and assumed debt owed to a third party related to three equipment financing agreements and various capital lease arrangements as described:
| · | an Equipment Financing Agreement dated January 2015 for $124,322. The note required 48 monthly payments of $3,218 each of which include $628 in interest. |
| · | an Equipment Financing Agreement dated June 2015 for $125,000. The note required 48 monthly payments of $3,236 each of which include $632 in interest. |
| · | an Equipment Financing Agreement dated June 2015 for $113,320. The note required 48 monthly payments of $2,934 each of which include $573 in interest. |
| · | various capital lease agreements ranging from two to three years with interest rates ranging from 5% to 6%. |
NOTE 9 – RELATED PARTY DEBT AND TRANSACTIONS
Related party debt consisted of the following as of:
December 31, | December 31, | ||||||||
2015 | 2014 | ||||||||
Successor | Predecessor | ||||||||
Related party debt, net of unamortizeddiscounts of $36,331 and zero | $ | 23,669 | $ | - | |||||
Promissory notes payable, convertible,interest at 10% per annum. Due onDecember 10, 2014 (Predecessor) | - | 120,000 | |||||||
23,669 | 120,000 | ||||||||
Less: current portion | - | (120,000 | ) | ||||||
Long-term portion, net of unamortizeddiscounts of $121,069 and zero | $ | 23,669 | $ | - | |||||
F-17
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
In March 2015, the Company entered into a 60 day-promissory note for cash proceeds of $50,000 with a member of management. The note has a 1.5% loan fee and bears an interest rate of 8% per annum. The loan fee resulted in a discount to the note of $750. The note also included an equity payment of 200,000 shares of common stock that were issued with the debt. The Company has allocated the loan proceed among the debt and the stock based upon relative fair value. The relative fair value of the stock was determined to be $29,420 and it was recorded as a debt discount. The note was fully paid off during the nine months ended December 31, 2015.
In March 2015, the Company borrowed $60,000 from a member of management used for the Acquisition (see Note 4). The note bears interest at 10% per annum and is due and payable beginning June 30, 2015 maturing on March 31, 2020. Payments of interest are required quarterly. Should the Company be successful in raising $2,000,000 or more in funding the entire balance of the note will be due immediately. The note was issued in conjunction with an equity payment totaling 53,073 shares of Series B preferred stock that was issued with the debt. The Company has allocated the loan proceeds among the debt and the stock based upon relative fair value. The relative fair value of the stock was determined to be $42,742 and was recorded as a debt discount. The discount will be amortized over the life of the loans to interest expense. As of December 31, 2015, no payment has been made on this note and the remaining balance of this note is $60,000 ($23,669, net of the unamortized discount.)
Convertible Notes Payable to Related Parties (Predecessor)
On September 10, 2014, in connection with new funding of $120,000, the Predecessor issued four promissory notes in the amounts of $50,000, $50,000, $10,000 and $10,000 to related party shareholders and officers of the Company. The promissory notes are unsecured, convertible, bear interest at 10% per annum and are due on or before December 10, 2014. The promissory notes are outstanding as of December 31, 2014 and are in default, bearing default interest at 15% per annum, or the maximum interest rate allowed by law if less. At any time before or at maturity, the lender shall have the right to convert the promissory note, including principal and unpaid interest, into shares of Series A Preferred of Predecessor stock at $0.375 per share.
In accordance with accounting guidance for beneficial conversion features, the Predecessor recorded a debt discount of $120,000, with a corresponding amount to additional paid-in capital, representing the intrinsic value of the beneficial conversion features. The entire debt discount was amortized to interest expense during the year ended December 31, 2014.
Accrued Officer Compensation and Gain on Forgiveness of Accrued Payroll
In April 2015, the Company and two officers agreed to forgive $500,000 of the $600,000 in accrued officer compensation. This resulted in the Company recognizing a gain of $500,000 on forgiveness of accrued payroll during the nine months ended December 31, 2015. No payments have been made on the remaining balance of $100,000, which is recorded as an accrued liability on the accompanying balance sheet as of December 31, 2015.
For the nine months ended December 31, 2015, the Company recorded an expense of approximately $10,800 for company-related expenses incurred on an officer's personal credit card. This amount was paid in full on October 5, 2015 from the proceeds from the sale of the brewery and micro-brewing operations. The Company had previously been making monthly installment payments of $1,000 on this credit card.
F-18
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 – RESERVE FOR LEGAL SETTLEMENT (PREDECESSOR)
The reserve for legal settlementconsisted of the following as of:
December 31, 2015 | December 31, 2014 | |||||||
Successor | Predecessor | |||||||
Award of attorneys' fees | $ | - | $ | 316,545 | ||||
Accrued interest to December 31, 2014 | 26,379 | |||||||
$ | - | $ | 342,924 | |||||
In May 2012, the Predecessor got in a dispute with Devil's Canyon Brewery ("DCB") over damage allegedly caused by the Predecessor to certain brewing tanks and related premises damage arising out of the Predecessor's use of DBC's facilities for brewing of its products. The Predecessor's insurance carrier paid for certain repairs which DCB subsequently contended were insufficient. Dissatisfied with the repairs, in September 2012, DCB filed a lawsuit against the Predecessor. The Predecessor vigorously defended the action while concurrently seeking to settle the action. Mediation and settlement conferences were unsuccessful and a jury trial commenced in October 2013. The jury found in favor of DCB's breach of contract claims and awarded damages in the amount of $130,700, which is recorded as reserve for legal settlement on the accompanying balance sheet as of December 31, 2013. The Predecessor's insurance carrier subsequently paid what it contended was its policy limits of $113,700 and the Predecessor paid the balance of the judgment in January 2014.
In December 2013, DCB filed a motion for attorneys' fees seeking approximately $355,000. In January 2014, the Predecessor filed its own motion seeking approximately $234,000 in attorneys' fees contending that it should be designated the prevailing party in this action. In March 2014, the court denied the Predecessor's motion for attorneys' fees and granted DCB's motion for approximately $268,000, which the court later modified increasing the award in favor of DCB to $316,545. The Predecessor appealed to the court and the appeal remained pending as of December 31, 2014.
During the three months ended March 31, 2015, the parties settled the case with the Predecessor agreeing to pay $275,000 in full and final settlement of the case. The Predecessor is indebted to its attorney for fees and costs in the amount of approximately $182,000 as of December 31, 2014, which is recorded as accounts payable on the accompanying balance sheets.
F-19
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – MEMBERS' CAPITAL(PREDECESSOR)
Members' Capital Accounts
The Predecessor's LLC Operating Agreement provides for the issuance of common stock and Class A shares. Members' capital accounts include the members' initial investment and allocated profit and losses incurred to date. As of December 31, 2014, the number of shares of common and Series A Preferred stock outstanding may not exceed 40,000,000 and 8,000,000, respectively.
Common Stock
During the three months ended March 31, 2015 (Predecessor) and during the year ended December 31, 2014 (Predecessor), there were no new issuances of shares of common stock.
Series A Preferred Stock
During the three months ended March 31, 2015 (Predecessor), there were no new issuances of shares of Series A Preferred stock, and during the year ended December 31, 2014 (Predecessor), there was 22,042 shares of Series A Preferred stock issued in settlement of trade accounts payable totaling $16,532.
NOTE 12 – STOCKHOLDER'S EQUITY
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock, each having a par value of $0.001, with voting, distribution, dividend and redemption rights, and liquidation preferences and conversions as designated by the board of directors.
The board of directors has designated 250,000 shares as Series A Preferred stock, par value $.001 per share ("Series A Preferred"). Each share of Series A Preferred shall have 500 votes for any election or other vote placed before the shareholders of the Company. As of December 31, 2015, 250,000 shares of Series A Preferred are issued and outstanding.
The board of directors has designated 300,000 shares as Series B Preferred stock, par value $.001 per shares ("Series B Preferred"). The Series B Preferred is non-voting, not eligible for dividends and ranks equal to common stock and below Series A preferred stock. Each share of Series B Preferred has a conversion rate into eight shares of common stock. During the nine months ended December 31, 2015, the Company sold 25,000 shares of Series B Preferred for $25,000 cash. As of December 31, 2015, 254,807 shares of Series B Preferred are issued and outstanding.
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock, $0.001 par value.
F-20
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Common stock issued in B&R Acquisition
During the nine months ended December 31, 2015 (Successor), 1,479,290 shares of common stock were issued pursuant to the Acquisition (see Note 4). The Company estimated the fair market value to be $0.338 per share at the time of issuance. These shares were issued with "Price Protection" for a period of 18 months. If the market value of the common stock issued pursuant to the Acquisition is less than $500,000, the Company shall issue additional shares so the aggregate amount of shares issued in the Acquisition is equal to a market value of $500,000 based on the average closing bid price of the common stock for the five days prior thereto.
Common stock issued for cash
During the nine months ended December 31, 2015 (Successor), 204,000 shares of common stock were sold to three investors for cash proceeds of $61,200, or $.30 per share, under a private placement offering (the "Offering"). The Offering provided for the issuance warrants to purchase 50% of the number of shares subscribed for, at a price of $.50 per share, expiring one year from the investment. A total of 102,000 warrants were issued and expire between April 13 and June 10, 2016 (see Note 13).
Common stock issued for services
During the nine months ended December 31, 2015 (Successor), 707,141 shares of common stock were issued to employees and consultants in connection with services rendered as follows:
| · | 52,000 shares were issued to employees for services rendered. The Company determine the fair market value (FMV) to be $0.44 per share at the time of issuance and recorded an expense of $22,880. |
| · | 85,714 shares were issued to employee pursuant to an employment contract whereby the employee would be granted shares valued at $30,000. The Company determined the FMV to be $0.35 per share at the time of issuance and recorded an expense of $30,000. |
| · | 64,427 shares were issued to employee pursuant to an employment contract whereby the employee would be granted shares equal to $6,500 at the end of each quarter effective with the three months ending March 31, 2015. The Company determined the per share FMV to be $0.35 as of March 31, $0.46 as of June 30, $0.42 as of September 30 and $.40 as of December 31. Accordingly, the employee received 18,571, 14,130. 15,476 and 16,250 shares of common stock, respectively, and the Company recorded an expense of $26,000. |
| · | 5,000 shares were issued to Stonefield Fund for services rendered. The Company determined the FMV to be $0.44 per share at the time of issuance and recorded an expense of $2,200. |
| · | 500,000 shares were issued to LP Funding, LLC for services rendered. The Company determined the FMV to be $0.46 per share at the time of issuance and recorded an expense of $230,000. |
As of December 31, 2015, 15,435,651 shares of common stock are issued and outstanding.
F-21
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 13 – COMMON STOCK WARRANTS
Successor
As of December 31, 2015, the Company had warrants to purchase 1,127,000 shares of common stock outstanding, with exercise prices between $0.50 and $1.00 and expiration dates between September 2016 and October 2019. A summary of common stock warrants activity for the nine months ended December 31, 2015 is as follows:
Weighted Average | ||||||||
Number | Exercise Price | |||||||
Warrants outstanding March 31, 2015 | 1,025,000 | $ | 0.99 | |||||
Granted | 102,000 | 0.50 | ||||||
Exercised | - | - | ||||||
Forfeited | - | - | ||||||
Warrants outstanding December 31, 2015 | 1,127,000 | $ | 0.94 | |||||
Warrants exercisable as of December 31, 2015 | 1,127,000 | $ | 0.94 | |||||
Predecessor
Common Stock Options
A summary of stock option activity for the three months ended March 31, 2015 (Predecessor) and the year ended December 31, 2014 (Predecessor) is as follows:
Number | Weighted Average Exercise price | |||||||
Options outstanding December 31, 2013 | 875,042 | $ | .16 | |||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Forfeited | - | - | ||||||
Options outstanding December 31, 2014 | 875,042 | $ | .16 | |||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Forfeited | - | - | ||||||
Options outstanding March 31, 2015 | 875,042 | $ | .16 | |||||
Options exercisable March 31, 2015 | 468,792 | $ | .16 | |||||
As of March 31, 2015 and December 31, 2014, the range of exercise prices of the outstanding options was $0.05 to $.25 per share. Of the total options outstanding, 375,042 options were granted at $0.05 per share and are fully vested as of December 31, 2014 and 500,000 options were granted at $.25 per share with a vesting rate of 6.25% per quarter from July 14, 2014. The relative fair value of the options was determined to be nominal.
F-22
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Common Stock Warrants
A summary of stock option warrants activity for the three months ended March 31, 2015 (Predecessor) and the year ended December 31, 2014 (Predecessor) is as follows:
Weighted Average | ||||||||
Number | Exercise price | |||||||
Warrants outstanding December 31, 2013 | - | $ | - | |||||
Granted | 60,000 | - | ||||||
Exercised | - | - | ||||||
Forfeited | - | - | ||||||
Warrants outstanding December 31, 2014 | 60,000 | $ | - | |||||
Granted | - | - | ||||||
Exercised | - | |||||||
Forfeited | - | - | ||||||
Warrants outstanding March 31, 2015 | 60,000 | $ | - | |||||
Warrants exercisable March 31, 2015 | 60,000 | $ | - | |||||
During the year ended December 31, 2014,the Predecessor issued an aggregate of 60,000 common stock warrants to purchase shares of common stock at $0.01in connection with borrowings from related party shareholders and officers of the Predecessor. The relative fair value of the common stock warrants was determined to be nominal.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Legal Matter (Predecessor)
As discussed in Note 10, during the year ended December 31, 2014, the Predecessor was involved in a lawsuitover damage allegedly caused by thePredecessorto certain brewing tanks and related premises damage. ThePredecessoreventually lost on the matter. During the three months ended March 31, 2015, the parties settled the case with thePredecessoragreeing to pay $275,000 in full and final settlement of the case.
Operating Lease Commitments
Effective April 1, 2015, the Company assumed a facilities lease with a third party for the manufacture of its búcha® Live Kombucha tea. This lease was executed in August 31, 2013 with a lease term of 31 months, expiring February 29, 2016. In September 2015, the Company extended the facilities lease for 39 months effective March 1, 2016 and expiring May 31, 2019. The monthly base rent is $2,795 for first 12 months, $2,879 for next 12 months, $2,965 for next 12 months, and $3.054 for the balance of the term. Monthly rent payments also include common area maintenance charges, taxes, and other charges.
Future minimum lease payments under this facilities lease are approximately as follows:
2016 | $ | 33,622 | ||
2017 | 34,379 | |||
2018 | 35,410 | |||
2019 | 15,093 | |||
2020 | - | |||
$ | 118,504 |
F-23
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Rent expense operations was $37,900, $8,250 and $32,800 for the nine months ended December 31, 2015 (Successor), the three months ended March 31, 2015 (Predecessor), and the year ended December 31, 2014 (Predecessor), respectively.
Legal
In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There are no such matters that are deemed material to the financial statements as of December 31, 2015.
NOTE 15 – SEGMENT INFORMATION
The Company follows segment reporting in accordance with FASB ASC Topic 280,Segment Reporting. Prior to October 1, 2015, the Company's brewery operations were classified into two operating segments; "retail," to retail customers through the Company's tasting room located in the greater Seattle, Washington area, and "wholesale," to distributors under various distributor agreements. Although both segments are involved in the sale and distribution of beer, they serve different customers and are managed separately, requiring specialized expertise. As discussed in Note 3, on October 1, 2015, the Company sold its assets and various liabilities related to its brewery and micro-brewing operations. The Company recognized the sale of its brewery and micro-brewing operations as a discontinued operation in the accompanying financial statements.
As discussed in Note 4, effective April 1, 2015, the Company also manufactures and sells búcha® Live Kombucha, a gluten free, organic certified, sparkling kombucha tea. The kombucha tea brand serves different customers and is managed separately, requiring specialized expertise. Prior to October 1, 2015, the Company also reported it kombucha tea business as an operating segment. However, with the sale of the Company's brewery and micro-brewing operations, the Company now operates in one segment, that of búcha® Live Kombucha tea business. Accordingly, no further segment reporting is required as of December 31, 2015 and for the period then ended.
F-24
AMERICAN BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 – INCOME TAXES
Successor
The Company net operating loss carry-forwards available to reduce future taxable income. Future tax benefits for these net operating loss carry-forwards are recognized to the extent that realization of these benefits is considered more likely than not. To the extent that we will not realize a future tax benefit, a valuation allowance is established. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
December 31, 2015 | ||||
Successor | ||||
Net operating loss carry forwards | $ | 728,000 | ||
| Intangible amortization difference | 18,000 | |||
Less valuation allowance | (746,000 | ) | ||
Net deferred tax asset | $ | - | ||
The approximate net operating loss carry forward was $2,079,000 as of December 31, 2015 (Successor) and will start to expire in 2028.
Predecessor
The Predecessor is a limited liability corporation and is classified as a partnership for income tax purposes. The Predecessor profits and losses are reportable by the members on their respective income tax returns. Accordingly, no provision for income taxes has been reflected in these financial statements. The Predecessor has no unrecognized tax benefits as of December 31, 2014 (Predecessor.)
NOTE 17 – SUBSEQUENT EVENTS
Sale of Convertible Promissory Note
On March 19, 2016, the Company entered into a Securities Purchase Agreement with an unaffiliated third party, whereby the Company sold a Convertible Promissory Note in an amount of $200,000. The purchaser also received a three-year Warrant to purchase 100,000 shares at an exercise price of $0.40 per share. The Convertible Promissory Note is convertible after 180 days into shares of the Company's common stock at a twenty-five percent (25%) discount to the Volume Weighted Average Price for the five (5) trading days prior to the date of conversion.The securities were sold in reliance upon exemptions from registration pursuant to Section 4(a)(2) and Section 4(6) under the Securities Act of 1933, as amended.
Management Changes
Effective March 24, 2016, our Chief Executive Officer and President, Neil Fallon, was promoted to serve as Executive Chairman of the board of directors of the Company. Also on that same date, Brent Willis was appointed to serve as interim Chief Executive Officer, interim Chief Financial Officer, and as a Director of the Company.
Name Change
On March 30, 2016, the board of directors recommended that the Company amend its articles of incorporation to change its name from American Brewing Company, Inc. to Búcha, Inc., and to effect a change to its public stock symbol. Also on March 30, 2016, the majority shareholders acting by majority consent approved the name change. The Company intends to file the necessary state and regulatory documents to effect the name change.
