ITEM 1. BUSINESS.
Corporate Overview and History of Evans Brewing Company, Inc. (Formerly ALPINE 3, Inc.).
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 will be 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 18th, 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.
EBC products are distributed to a variety of restaurants and retail outlets. With the anticipated opening of the Company’s first branded restaurant and taproom in the first half of 2016, the Company will sell food as well as its core beer products.
Seasonality of Business
EBC products are sold throughout the year with the summer and fall seasons of the year providing the largest volume of sales. With the anticipated opening of the Company’s first branded restaurant and taproom, The Public House by Evans Brewing Company, in the first half of 2016 and additional distribution in year-round retail outlets, the Company anticipates an increase in sales in the winter and spring seasons in proportion to the larger volume seasons of summer and fall.
Employees
As of the date of this Report, EBC had five full time and two part time employees.
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:
¡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.
ITEM 1A.
ITEM 1A. RISK FACTORS.
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, you may lose all or part of your investment.
RISKS ASSOCIATED WITH OUR COMPANY:
We are an “emerging growth company,” and the reduced disclosure requirements applicable to “emerging growth companies” could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we are an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more; (ii) the last date of the fiscal year following the fifth anniversary of the date of the first sale of common stock under the current registration (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We will be deemed a large accelerated filer on the first day of the fiscal year after the market value of our common equity held by non-affiliates exceeds $700 million, measured on October 31.
We cannot predict if investors will find our common stock less attractive to the extent we rely on the exemptions available to emerging growth companies. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
A Company that elects to be treated as an emerging growth company shall continue to be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year during which it had total annual gross revenues of $1,000,000,000 (as indexed for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common stock under the current registration; (iii) the date on which it has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (iv) the date on which is deemed to be a ‘large accelerated filer’ as defined by the SEC, which would generally occur upon it attaining a public float of at least $700 million.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
Management of EBC cannot guarantee that EBC will generate revenues which could result in a total loss of the value of your investment if it is unsuccessful in its business plans.
While Evans Brewing California, a California corporation which is a separate entity from EBC, and Bayhawk have generated revenues during their history, which are reported in the financial statements included in this current annual report, there can be no assurance that EBC will continue to generate revenues or that revenues will be sufficient to maintain its business following the Asset Purchase Transaction. As a result, you could lose all of your investment if EBC is not successful in its proposed business plans.
EBC’s needs could exceed the amount of time or level of experience our officers and directors may have. EBC will be dependent on key executives, and the loss of the services of the current officers and directors could severely impact EBC’s business operations.
EBC’s business plan does not provide for the hiring of any additional employees other than outlined in its plan of operations until sales will support the expense. Until that time the responsibility of developing EBC’s business, the offering and selling of the shares based on current filings and the reporting requirements of a public company will fall upon the two officers and the directors. In the event they are unable to fulfill any aspect of their duties to EBC, it may experience a shortfall or complete lack of sales resulting in little or no profits and eventual closure of our business.
Additionally, the management of future growth will require, among other things, continued development of EBC’s financial and management controls and management information systems, stringent control of costs, increased marketing activities, and the ability to attract and retain qualified management, research, and marketing personnel. The loss of key executives or the failure to hire qualified replacement personnel would compromise EBC’s ability to generate revenues or otherwise have a material adverse effect on EBC. There can be no assurance that EBC will be able to successfully attract and retain skilled and experienced personnel but every effort will be made to do so.
As of the date of this current annual report, Evans Brewing California had been operated previously as a private company. Additionally, Bayhawk previously filed public reports with the SEC, but ceased making the required filings in 1999. Current management of both of these entities has limited experience in complying with public company reporting and other obligations. Taking steps to comply with these requirements will increase our costs and require additional management resources, and does not ensure that we will be able to satisfy them.
Prior to the transactions described in this Annual Report, the operations of Evans Brewing California were conducted as a private company. Additionally, Bayhawk previously operated as a public company, and filed reports with the SEC. However, under prior management, Bayhawk ceased making the required filings in 1999, and has not filed any required public reports since 1999. Current Bayhawk management was not involved in the determination in 1999 to cease making the required filings, and has not filed periodic reports on behalf of Bayhawk since becoming involved with Bayhawk. (Bayhawk’s filing history is discussed in more detail below.) Upon the closing of the Asset Purchase Transaction, assuming the Bayhawk shareholders provide the required approval, EBC will acquire the assets and liabilities of Bayhawk (including the assets of Evans Brewing Calfornia), and EBC will become the operating company. EBC is a public reporting company. As a public company commencing commercial operations, we will be required to comply with applicable provisions of the Sarbanes-Oxley Act of 2002, as well as other federal securities laws, and rules and regulations promulgated by the SEC and the various exchanges and trading facilities where our common stock may trade, which will result in significant initial and continuing legal, accounting, administrative and other costs and expenses. These rules and requirements impose certain corporate governance requirements relating to director independence, filing and distributing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest, and codes of conduct, depending on where our shares trade. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all applicable requirements.
As we review our internal controls and procedures, we may determine that they are ineffective or have material weaknesses, which could impact the market’s acceptance of our filings and financial statements.
EBC’s annual report for 2014 was the first time EBC’s management was required to provide a report on its internal controls and procedures, including the internal controls over financial reporting, although management has conducted reviews of such internal controls and procedures in connection with the preparation and filing of its prior quarterly reports. As EBC continues as a publicly reporting company, EBC management will be required to continue to review our internal control over financial reporting for the purpose of providing the reports required by the SEC’s rules. As the Company grows, following the closing of the Asset Purchase Transaction (assuming Bayhawk shareholder approval is obtained), and during the course of our ongoing reviews and testing, we may identify deficiencies or our controls and procedures may no longer be deemed to be effective. Furthermore, if we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the trading price of our stock to fall. In addition, as a public company we are required to file in a timely manner accurate quarterly and annual reports with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from the market or trading facility where our shares may trade, or other adverse consequences that would materially harm our business.
Because EBC has shown a net loss since inception, ownership of EBC shares could result in a complete loss of the value of your investment if EBC is unsuccessful in its business plans.
Based upon current plans, EBC expects to incur operating losses in future periods as it incurs significant expenses associated with the growth of its business. Further, there is no guarantee that it will be successful in realizing future revenues or in achieving or sustaining positive cash flow at any time in the future. Any such failure could result in the possible closure of its business or force EBC to seek additional capital through loans or additional sales of its equity securities to continue business operations, which would dilute the value of any shares you purchase in this offering.
Growth and development of operations will depend on the acceptance of EBC’s proposed business. If EBC’s products are not deemed desirable and suitable for purchase and it cannot establish a customer base, it may not be able to generate future revenues, which would result in a failure of the business and a loss of the value of your investment.
The acceptance of EBC’s brewing products for its customers is critically important to its success. EBC cannot be certain that the services that it will be offering will be appealing and as a result there may not be any demand for these products and its sales could be limited and it may never realize any revenues. In addition, there are no assurances that if it alters or changes the products it offers in the future that the demand for these new products will develop and this could adversely affect our business and any possible revenues.
If demand for the products EBC plans to offer slows, then its business would be materially affected, which could result in the loss of your entire investment of EBC’s common stock.
Demand for products which we intend to sell depends on many factors, including:
● the number of customers EBC is able to attract and retain over time.
● the economy, and in periods of rapidly declining economic conditions, customers may defer products such as ours in order to pay secured debts or debts that must be paid in order to remain solvent.
● the competitive environment in the micro-brewery market may force it to reduce prices below its desired pricing level or increase promotional spending.
● the ability to anticipate changes in consumer preferences and to meet customers’ needs in a timely cost effective manner.
For the long term, demand for the products we plan to offer may be affected by:
● the ability to establish, maintain and eventually grow market share in a competitive environment.
● delivery of its information globally, geopolitical changes, changes in liquor regulations, currency fluctuations, natural disasters, pandemics and other factors beyond our control may increase the cost of items it purchases, create communication issues or render product delivery difficult which could have a material adverse effect on its sales and profitability.
All of these factors could result in immediate and longer term declines in the demand for the products it plans to offer, which could adversely affect its sales, cash flows and overall financial condition.
EBC has limited management resources, and will be dependent on key executives. The loss of the services of the current officers and directors could severely impact EBC’s business operations and future development, which could result in a loss of revenues and adversely impact the ability to ever sell any shares owned.
EBC is relying on a small number of key individuals to implement its business and operations and, in particular, the professional expertise and services of Michael J. Rapport, our President, Chief Executive Officer, Secretary, and Chairman of the Board of Directors; Kenneth Wiedrich, our Chief Financial Officer; and Evan Rapport, our Vice President and a member of the Board of Directors. Accordingly, EBC may not have sufficient managerial resources to successfully manage the increased business activity envisioned by its business strategy. In addition, EBC's future success depends in large part on the continued service of Mr. Michael Rapport and Mr. Evan Rapport. EBC has not entered into an employment agreement with Michael Rapport, and has an employment agreement with Evan Rapport that runs for three years. If either of these persons chooses not to serve as officers or if they are unable to perform their duties, this could have an adverse effect on Company business operations, financial condition and operating results if it is unable to replace them with other individuals qualified to develop and market its business. The loss of their services could result in a loss of revenues, which could result in a reduction of the value of any stock owned.
EBC’s industry requires attracting and retaining talented employees, and the inability to retain such talented employees could result in the loss of the value of your investment.
Success in the microbrew industry does and will continue to require the acquisition and retention of highly talented and experienced individuals. Due to the growth in the market segment targeted, such individuals and the talent and experience they possess is in high demand. There is no guarantee that we will be able to attract and maintain access to such individuals. If we fail to attract, train, motivate and retain talented personnel, our business, financial condition, and operating results may be materially and adversely impacted, which could result in the loss of your entire investment.
The speculative nature of our business could result in unpredictable results and a loss of the value of your investment.
The microbrewery and beer brewing industry is extremely competitive and the commercial success of any product is often dependent on factors beyond our control, including but not limited to market acceptance and retailers' prominently shelving and selling our products. We may experience substantial cost overruns in manufacturing and marketing our products, and may not have sufficient capital to successfully complete any of our projects. We may also incur uninsured losses for liabilities which arise in the ordinary course of business in the manufacturing industry, or which are unforeseen, including but not limited to trademark infringement, product liability, and employment liability.
Competition that EBC faces is varied and strong.
EBC’s products and industry as a whole are subject to extreme competition. There is no guarantee that we can sustain our market position or expand our business. We anticipate that the intensity of competition in the future will increase.
We compete with a number of entities in providing products to our customers. Such competitor entities include: (1) a variety of large nationwide corporations, including but not limited to public entities and companies that have established loyal customer bases over several decades; (2) local breweries and microbreweries that have the same or a similar business plan as we do; and (3) a variety of other local and national breweries and with which we either currently or may, in the future, compete.
Many of our current and potential competitors are well established and have longer operating histories, significantly greater financial and operational resources, and name recognition than we have. As a result, these competitors may have greater credibility with both existing and potential customers. They also may be able to offer more competitive products and services and more aggressively promote and sell their products. Our competitors may also be able to support more aggressive pricing than we will be able to, which could adversely affect sales, cause us to decrease our prices to remain competitive, or otherwise reduce the overall gross profit earned on our products.
Additionally, our third party providers themselves are subject to the intensely competitive market. We rely on such providers for underlying services and products that enable and/or facilitate the creation of our products. Competition or grain shortages may affect our suppliers’ ability to innovate and to continue existing product and service offerings, which could result in the loss of the value of your entire investment.
Our success in business and operations will depend on general economic conditions.
The success of EBC depends, to a large extent, on certain economic factors that are beyond its control. Factors such as general economic conditions, levels of unemployment, interest rates, tax rates at all levels of government, competition and other factors beyond EBC’s control may have an adverse effect on EBC’s ability to sell its products and to collect sums due and owing to it.
Changes in consumer preferences and discretionary spending may have a material adverse effect on our revenue, results of operations and financial condition.
Our success depends, in part, upon the popularity of our products and our ability to organically develop new brands or acquire the licensing or distribution rights to existing brands that appeal to consumers. Shifts in consumer preferences away from our products, our inability to develop new products that appeal to consumers, or changes in our product mix that eliminate items popular with some consumers could harm our business. Also, our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in revenue during economic downturns or during periods of uncertainty. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales, results of operations, business and financial condition.
EBC may not be able to successfully implement its business strategy, which could adversely affect its business, financial condition, results of operations and cash flows. If EBC cannot successfully implement its business strategy, it could result in the loss of the value of your investment.
Successful implementation of its business strategy depends on factors specific to the liquor industry and micro-breweries specifically, and the state of the financial industry and numerous other factors that may be beyond its control. Adverse changes in the following factors could undermine our business strategy and have a material adverse effect on its business, its financial condition, and results of operations and cash flow:
● The competitive environment in the micro-brew industry that may force us to reduce prices below the optimal pricing level or increase promotional spending;
● Its ability to anticipate changes in consumer preferences and to meet customers’ needs for our products in a timely cost effective manner; and
● Its ability to establish, maintain and eventually grow market share in a competitive environment.
There are no substantial barriers to entry into the industry, and because EBC has only limited copyright protection for the products it intends to sell, there is no guarantee someone else will not duplicate its ideas and bring them to market before it does, which could severely limit EBC’s sales and revenues. If EBC cannot generate sales and revenues, it could result in the loss of the value of your investment.
Because EBC has limited copyright and trademark protection, unauthorized persons may attempt to copy aspects of EBC’s business, including its product design or functionality, services or marketing materials. Any encroachment upon EBC’s corporate information, including the unauthorized use of its brand names, the use of a similar name by a competing company, or a lawsuit initiated against EBC for infringement upon another company's proprietary information or improper use of their copyright, may affect its ability to create brand name recognition, cause customer confusion and/or have a detrimental effect on its business. Litigation or proceedings before the U.S. or International Patent and Trademark Offices may be necessary in the future to enforce EBC’s intellectual property rights, to protect its trade secrets and domain name and/or to determine the validity and scope of the proprietary rights of others. Any such infringement, litigation or adverse proceeding could result in substantial costs and diversion of resources and could seriously harm its business operations and/or results of operations. As a result, an investment in the Company could result in the loss of the entire investment.
Failure of third-party distributors upon which we rely could adversely affect our business and result in the loss of your investment.
Like most craft brewers, EBC plans to rely heavily on third party distributors for the sale of their products to retailers. The loss of a significant distributor could have a material adverse effect on EBC’s business, financial condition and results of operations. EBC’s distributors often represent competing specialty beer brands, as well as national beer brands, and are to varying degrees influenced by their continued business relationships with other brewers. EBC’s independent distributors may be influenced by a large brewer if they rely on that brewer for a significant portion of their sales. While we believe that the relationships between EBC and its distributors are generally good, many of these relationships are relatively new and untested and there can be no assurance that EBC’s distributors will continue to effectively market and distribute EBC’s beer. The loss of any distributor or the inability to replace a poorly performing distributor in a timely fashion could have a material adverse effect on the business, financial condition and results of operations of EBC. Furthermore, no assurance can be given that EBC will successfully attract new distributors as they increase their presence in their existing markets or expand into new markets.
We likely will have limited market for the acquired brands in a concentrated geographic area.
Bayhawk Ales primarily has sold its products through different distributors across California, as well as through Prestige Imports, Mt Clemens, MI, which represents the Bayhawk products nationally. There is no assurance that Bayhawk’s brands will be as widely accepted, or that consumers in new geographic markets will be receptive to Bayhawks’s products. Management believes that California and Private Label Sales are likely to continue to be the largest market for its brands, and that regional identification may assist EBC’s competitors in other regions. Penetration of other regional markets is an important element of EBC’s expansion plan, and failure to accomplish this objective will hinder the success of the expansion plan and could have a material adverse impact on EBC’s business, financial condition, and results of operations.
EBC depends on a limited number of suppliers; cost and availability of raw materials.
EBC relies upon a limited number of suppliers for raw materials used to make and package EBC’s products, including, but not limited to, providers of hops, grains and other products necessary for us to manufacture our product. EBC’s success will depend in part upon our ability to successfully secure such materials from suppliers that are delivered with consistency and at a quality that meets our requirements. The price and availability of these materials are subject to market conditions. Increases in the price of our products due to the increase in the cost of raw materials could have a negative effect on our business.
If EBC is unable to obtain sufficient quantities or other raw materials, delays or reductions in product shipments could occur which would have a material adverse effect on the business, financial condition and results of operations of EBC. The costs of grains and hops are volatile and unpredictable. As with most agricultural products, the supply and price of raw materials used to produce EBC’s beer can be affected by a number of factors beyond EBC’s control, such as frosts, droughts, other weather conditions, economic factors affecting growing decisions, and various plant diseases and pests. If any of the foregoing were to occur, no assurance can be given that such condition would not have a material adverse effect on the business, financial condition and results of operations of EBC. In addition, the results of operations of EBC are dependent upon its ability to accurately forecast its requirements of raw materials. Any failure by EBC to accurately forecast its demand for raw materials could result in an inability to meet higher than anticipated demand for products or producing excess inventory, either of which may adversely affect results of operations of EBC.
While EBC believes that the relations of Bayhawk and Evans Brewing California with their suppliers are good, there can be no assurance that these suppliers will be able or willing to supply EBC with materials at the current pricing levels, or at all, or that it will be successful in engaging alternative suppliers on commercially reasonable terms which meet the quality or pricing levels currently experienced by EBC. As a result, should EBC’s costs increase and if those increases are unable to be passed on to its customers, our business, financial condition, and results of operations and cash flows may be materially adversely impacted, which could result in the loss of your entire investment.
Product Concentration; dependence on new product introductions.
EBC is dependent on three principal brands: the Bayhawk Brands; the Evans Brands; and the Pigs Eye Brands, to generate revenues. While we anticipate expanding our product offerings, we expect that these brands will continue to account for a large portion of our revenues for the foreseeable future. Therefore, EBC’s future operating results, particularly in the near term, are significantly dependent upon the continued market acceptance of these beer products. There can be no assurance that EBC's beer products will continue to achieve market acceptance. Initial sales for a new alcoholic beverage product may be caused by the interest of distributors and retailers to have the latest product on hand for potential future sale to consumers. As a result, initial stocking orders for, or sales of, a newly introduced alcoholic beverage product may not be indicative of market acceptance and long term consumer demand. A decline in the demand for any of EBC's beers as a result of competition, changes in consumer tastes and preferences, government regulation or other factors would have a material adverse effect on EBC's business, operating results and financial condition. In addition, there can be no assurance that EBC will be successful in importing, developing, managing, introducing and marketing additional new alcoholic beverage products that will sustain sales growth in the future.
Our revenue growth rate depends primarily on our ability to satisfy relevant channels and end-customer demands, identify suppliers of our necessary ingredients and to coordinate those suppliers, all subject to many unpredictable factors.
We may not be able to identify and maintain the necessary relationships with suppliers of product and services as planned. Delays or failures in deliveries could materially and adversely affect our growth strategy and expected results. As we supply more customers, our rate of expansion relative to the size of such customer base will decline. In addition, one of our biggest challenges is securing an adequate supply of suitable product. Competition for product is intense, and commodities costs subject to price volatility.
Our ability to execute our business plan also depends on other factors, including:
● there is no guarantee that we will enter into definitive agreements with distributors and on acceptable terms;
● hiring and training qualified personnel in local markets;
● managing marketing and development costs at affordable levels;
● cost and availability of labor;
● the availability of, and our ability to obtain, adequate supplies of ingredients that meet our quality standards; and
● securing required governmental approvals in a timely manner when necessary.
We lack sales, marketing and distribution capabilities and depend on third parties to market our products.
We have minimal personnel dedicated solely to sales and marketing of our products and therefore we must rely primarily upon third party distributors to market and sell our products. These third parties may not be able to market our product successfully or may not devote the time and resources to marketing our products that we require. We also rely upon third party carriers to distribute and deliver our products. As such, our deliveries are to a certain extent out of our control. If we choose to develop our own sales, marketing or distribution capabilities, we will need to build a marketing and sales force with technical expertise and with supporting distribution capabilities, which will require a substantial amount of management and financial resources that may not be available. If we or a third party are not able to adequately sell and distribute our product, our business will be materially harmed.
The manufacture and sale of alcoholic beverages is regulated by federal and state law; taxation.
The manufacture and sale of alcoholic beverages is a business that is highly regulated and taxed at the federal, state and local levels. EBC’s operations may be subject to more restrictive regulations and increased taxation by federal, state and local governmental agencies than are those of non-alcohol related businesses. For instance, operation of EBC’s breweries requires various federal, state and local licenses, permits and approvals. The loss or revocation of any existing licenses, permits or approvals, failure to obtain any additional or new licenses, permits or approvals or the failure to obtain approval for the transfer of any existing permits or licenses could have a material adverse effect on the ability of EBC to conduct its business. Certain states have laws restricting or forbidding a combined pub and brewery. Furthermore, U.S. Treasury Department, Bureau of Alcohol, Tobacco and Firearms ("BATF") regulations prohibit, among other things, the payment of beer slotting allowances to retailers. These regulations have the effect of preventing competitors with greater financial resources from excluding smaller brewers from retailers. Any repeal or substantial modification of these regulations or the enactment of any new legislation or regulations could have a material adverse effect on the business, financial condition and results of operations of EBC.
The distribution of alcohol-based beverages is also subject to extensive federal and state taxation. Our operations may be subject to increased taxation as compared with those of non-alcohol related businesses. In such event, we have to raise prices on our products in order to maintain profit margins. The effect of such an increase could negatively impact our sales or profitability.
We face various operating hazards, which if not addressed correctly, could result in the reduction of our operations and the loss of your investment.
EBC’s operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging. EBC’s products are not pasteurized. While EBC has never experienced a contamination problem in their products, the occurrence of such a problem could result in a costly product recall and serious damage to the reputation of EBC for product quality. EBC’s operations also subject employees and others to certain injury and liability risks normally associated with the operation and possible malfunction of brewing and other equipment. Although EBC maintains insurance against certain risks under various general liability and product liability insurance policies, no assurance can be given that EBC’s insurance will be adequate to fully cover any incidents of product contamination or injuries resulting from brewery operations. We cannot assure you that we will be able to continue to maintain insurance with adequate coverage for liabilities or risks arising from our business operations on acceptable terms. Even if the insurance is adequate, insurance premiums could increase significantly which could result in higher costs to us.
Litigation and publicity concerning product quality, health and other issues, which can result in liabilities and also cause customers to avoid our products, could adversely affect our results of operations, business and financial condition.
Beverage and food service businesses can be adversely affected by litigation and complaints from customers or government authorities resulting from food and beverage quality, illness, injury or other health concerns or operating issues stemming from consumption of products. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from buying our products. We could also incur significant liabilities, if a lawsuit or claim results in a decision against us, or litigation costs, regardless of the result. Further, any litigation may cause our key employees to expend resources and time normally devoted to the operations of our business.
The alcohol-based beverage industry also faces the possibility of class action or other similar litigation alleging that the continued excessive use or abuse of alcohol-based beverages has caused death or serious health problems. It is also possible that federal or state governments could assert that the use of alcohol-based beverages has significantly increased that portion of health care costs paid for by the government. Litigation or assertions of this type have adversely affected companies in the tobacco industry. It is possible, however, that our suppliers could be named in litigation of this type which could have a negative impact on their business and, in turn, could also have a significant negative impact on our business.
Risks Related to Our Common Stock and the Share Exchange
Investors who choose to purchase shares of EBC common stock if and when offered, may have difficulty in reselling their shares due to the lack of market or state Blue Sky laws.
As of the date of this Report, our common stock had been accepted for trading on the OTC Markets Pink Sheets, although there can be no guarantee that any market will ever develop for our common stock, or if developed, may not be sustained in the future. Investors should be aware that there might be additional significant state law restrictions upon the ability of investors to resell our shares. Accordingly, even if we are successful in having our shares available for trading on the OTC QB or QX markets, investors should consider any secondary market for our securities to be a limited one.
Sales of our common stock under Rule 144 could reduce the price of our stock.
None of our outstanding common shares are currently eligible for resale under Rule 144. In general, persons holding restricted securities in a publicly reporting company that is providing current public information meeting the requirements of Rule 144, including affiliates, must hold their shares for a period of at least six months. Because EBC was previously a “shell company” as defined in the rules of the SEC, Rule 144 is unavailable until one year from the date on which EBC filed “Form 10 information” with the SEC (namely, December 15, 2015), which was contained in this Proxy Statement/Registration Statement and was incorporated by reference into the Current Report on Form 8-K filed on December 15, 2015. Additionally, affiliates of EBC may not sell more than one percent of the total issued and outstanding shares in any 90-day period and must resell the shares in an unsolicited brokerage transaction at the market price. If substantial amounts of our common stock become available for resale under Rule 144 once a market has developed for our common stock, the then-prevailing market prices for our common stock may be reduced.
We may, in the future, issue additional securities, which would reduce our stockholders’ percent of ownership and may dilute our share value.
Our Certificate of Incorporation authorizes us to issue 100,000,000 shares of common stock. As of the date of this annual report, we had 4,469,863 shares of common stock outstanding. Accordingly, we may issue up to an additional 95,530,137 shares of common stock. The future issuance of common stock may result in additional dilution in the percentage of our common stock held by our then existing stockholders. We may value any common stock issued in the future on an arbitrary basis including for services or acquisitions or other corporate actions that may have the effect of diluting the value of the shares held by our stockholders, and might have an adverse effect on any trading market for our common stock. Additionally, our board of directors may designate the rights terms and preferences of one or more series of preferred stock at its discretion including conversion and voting preferences without prior notice to our stockholders. Any of these events could have a dilutive effect on the ownership of our shareholders, and the value of shares owned.
Raising additional capital may cause dilution to our existing stockholders.
We may seek additional capital through a combination of private and public equity offerings, debt financings, collaborations, and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, your ownership interest in EBC will be diluted.
Raising additional capital may restrict our operations or require us to relinquish rights.
We may seek additional capital through a combination of private and public equity offerings, debt financings, collaborations, and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, the terms of any such securities may include liquidation or other preferences that materially adversely affect your rights as a stockholder. Debt financing, if available, would increase our fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic partnerships and licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams or grant licenses on terms that are not favorable to us.
Market volatility may affect our stock price and the value of your shares.
Once a market for our common stock is established, the market price for our common stock is likely to be volatile, in part because our common stock has not been previously traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others:
● announcements of new products, brands, commercial relationships, acquisitions or other events by us or our competitors;
● regulatory or legal developments in the United States and other countries;
● fluctuations in stock market prices and trading volumes of similar companies;
● general market conditions and overall fluctuations in U.S. equity markets;
● variations in our quarterly operating results;
● changes in our financial guidance or securities analysts' estimates of our financial performance;
● changes in accounting principles;
● our ability to raise additional capital and the terms on which we can raise it;
● sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
● additions or departures of key personnel;
● discussion of us or our stock price by the press and by online investor communities; and
● other risks and uncertainties described in these risk factors.
An active public market for our common stock may not develop or be sustained. We will work to negotiate and determine the initial public sale price with our market makers, but this price may not be indicative of prices that will prevail in the trading market.
If securities or industry analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about us, our business or our market, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. We do not currently have and may never obtain research coverage by securities and industry analysts. If no or few securities or industry analysts cover our company, the trading price and volume of our stock would likely be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, or provides more favorable relative recommendations about our competitors, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.
Future sales of our common stock may cause our stock price to decline.
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.
We will be subject to penny stock regulations and restrictions, and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. We anticipate that our common stock will become a “penny stock”, and we will become subject to Rule 15g-9 under the Exchange Act, or the “Penny Stock Rule”. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers. For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
We do not anticipate that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
Our compliance with the Sarbanes-Oxley Act and SEC rules concerning internal controls may be time consuming, difficult and costly.
EBC’s executive officers do not have experience being an officer of a public company. It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by Sarbanes-Oxley. We may need to hire additional financial reporting, internal controls and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with Sarbanes-Oxley’s internal controls requirements, we may not be able to obtain the independent accountant certifications that Sarbanes-Oxley Act requires publicly-traded companies to obtain.
Due to the lack of a trading market for our securities, you may have difficulty selling any shares you purchase in this offering, which could result in the loss of your investment.
There is presently no demand for our common stock and only a limited public market exists for the shares.. We have worked with a market maker and our shares have been accepted for trading on the OTC Markets Pink Sheets. However, there is no guarantee that a trading market will ever develop. The OTC Markets are regulated quotation services that display real-time quotes, last sale prices and volume information in over-the-counter (OTC) securities. The services are not an issuer listing service, market or exchange. To be eligible for quotation on the OTC Markets OTCQB or OTCQX markets, issuers must remain current in their filings with the SEC or applicable regulatory authority. Market Makers are not permitted to begin quotation of a security whose issuer does not meet this filing requirement. If no market is ever developed for our common stock, it will be difficult or impossible for you to sell any shares you purchase in this offering. In such case, you may find that you are unable to achieve any benefit from your investment or liquidate your shares without considerable delay, if at all. In addition, if EBC fails to have its common stock quoted on a public trading market, your common stock will not have a quantifiable value and it may be difficult, if not impossible, to ever resell your shares, resulting in an inability to realize any value from your investment.
EBC may issue Preferred Stock with voting and conversion rights that could adversely affect the voting power of the holders of Common Stock.
Although EBC presently has no intention to do so without stockholder approval, which may be obtained solely through the votes of its management and board of directors, the Board may issue Preferred Stock with voting and conversion rights that could adversely affect the voting power of the holders of Common Stock. Any such provision may be deemed to have a potential anti-takeover effect, and the issuance of Preferred Stock in accordance with such provision may delay or prevent a change of control of EBC. The Board of Directors also may declare a dividend on any outstanding shares of Preferred Stock.
We may never pay dividends to shareholders, which could reduce the monetary gain you may realize on your investment.
We have not declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings, if any, to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. If EBC does not pay dividends, EBC’s common stock may be less valuable because a return on an investor’s investment will only occur if EBC’s stock price appreciates.
ITEM 1B.
ITEM 2. PROPERTIES.
Office Locations - The Company has office space at 3815 S. Main Street, Santa Ana, CA 92707 and warehouse space at 3815 S. Main Street, Santa Ana, CA 92707(2,000 square feet) and it rents space for its mill at 3859 S. Main Street, Santa Ana, CA 92707 (1,500 square feet). The combined rent for the office and warehouse space along with the mill is $3,944 a month, based on an annual lease that renews in August. Management believes that the office space that it has is adequate for now.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Evans Brewing Company Inc. (“EBC”), was incorporated under the laws of the State of Delaware on June 18, 2013, as ALPINE 3 Inc. On July 3, 2013, EBC filed a Registration Statement on Form 10 with the U.S. Securities and Exchange Commission (the “SEC”) to become a public company.
EBC was formed by Richard Chiang, who was the initial stockholder and the initial sole officer and director. On April 19, 2014, the Board of Director appointed Mr. Michael J. Rapport and Mr. Evan Rapport to the Board of Directors.
On April 4, 2014, Mr. Chiang entered into a Share Purchase Agreement pursuant to which he sold an aggregate of 10,000,000 shares of EBC’s common stock to The Michael J. Rapport Trust (the “Trust”) for a purchase price of $40,000. Pursuant to the Share Purchase Agreement, the Trust became the sole shareholder of EBC, owning 100% of the issued and outstanding shares of EBC’s common stock.
Immediately following the closing of the Share Purchase Agreement transaction, Mr. Chiang tendered his resignation as EBC’s President, Chief Executive Officer, Chief Financial Officer, Secretary and Chairman of the Board of Directors. Michael J. Rapport, acting as a member of the Registrant’s Board of Directors, accepted Mr. Chiang’s resignation. The resignations were in connection with the consummation of the Share Purchase Agreement with the Trust, and were not the result of any disagreement with EBC on any matter relating to EBC’s operations, policies, or practices. Following Mr. Chiang’s resignations, Michael Rapport appointed himself as President, Chief Executive Officer, Chief Financial Officer, Secretary and Chairman of the Board of Directors of EBC. Michael Rapport also appointed Evan Rapport as to serve as EBC's Vice President. Biographical Information for Michael J. Rapport and for Evan Rapport is included below. Michael Rapport is the father of Evan Rapport.
On October 15, 2014, Bayhawk (Ales, Inc. (“Bayhawk”) and the Company entered into an Asset Purchase and Share Exchange Agreement (the “Agreement”), subject to receiving approval of the independent Bayhawk shareholders who vote 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, the 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”). The transaction closed on December 10, 2015. 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 also 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.
Market Information
Our Common Stock has been accepted for trading on the OTC Pink Sheets.
Description of Securities
The Company’s authorized capital stock consists of 100,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, $0.0001 par value per share. As of December 31, 2015, after the exchange of shares there were 4,469,863 shares of common stock outstanding. As of December 31, 2014, an aggregate of 436,000 shares of our common stock were issued and outstanding and 0 shares of our preferred stock were outstanding.
Common Stock Each outstanding share of common stock entitles the holder thereof to one vote per share on all matters. Stockholders do not have preemptive rights to purchase shares in any future issuance of our common stock. Upon our liquidation, dissolution or winding up, and after payment of creditors and preferred stockholders, if any, our assets will be divided pro-rata on a share-for-share basis among the holders of the shares of common stock.
The holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a cash dividend and does not anticipate declaring any dividend in the foreseeable future. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net assets available to stockholders after payment of all creditors and preferred stockholders.
Preferred Stock. Our Articles of Incorporation also provide that we are authorized to issue up to 10,000,000 shares of preferred stock with a par value of $.0001 per share. As of the date of this report, there are 0 shares of preferred stock issued and outstanding. Our Board of Directors has the authority, without further action by the shareholders, to issue from time to time the preferred stock in one or more series for such consideration and with such relative rights, privileges, preferences and restrictions that the Board may determine. The preferences, powers, rights and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and purchase funds and other matters. The issuance of preferred stock could adversely affect the voting power or other rights of the holders of common stock.
Holders of Common stock
At March 30, 2016, there were 520 registered shareholders otherwise entitled to hold our common shares.
Transfer Agent and Registrar
Globex Transfer, LLC is currently the transfer agent and registrar for our common stock. Its address is 780 Deltona Blvd, suite 202, Deltona, FL 32725. Its phone number is (813) 344-4490.
Dividend Policy
There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends. The Delaware General Corporate Laws, however, do prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:
● we would not be able to pay our debts as they become due in the usual course of business; or
● our total assets would be less than the sum of our total liabilities, plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
We have not declared or paid cash dividends on our common stock since our inception, and our Board of Directors currently intends to retain all earnings for use in the business for the foreseeable future. Any future payment of dividends to holders of common stock will depend upon our results of operations, financial condition, cash requirements, and other factors deemed relevant by our Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
The Company has set up a compensation plan where each of the board members will receive 1,000 shares of the Company’s common stock annually for their services.
Recent Sales of Unregistered Securities
The only activity in the unregistered securities was on October 9, 2014, when The Michael J. Rapport Trust (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. The board also awarded 6,000 shares of common stock to its members for services and also issued 30,000 shares of common stock to Tech Associates, Inc. (a company owned by Richard Chiang) for services rendered pursuant to a consulting agreement. The Company’s total shares of common stock outstanding as of December 31, 2014 were 436,000.
In each of the transactions listed above, the securities were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, (the “Securities Act”) and rules and regulations promulgated thereunder. None of the transactions involved a public offering.
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 EBC shares issued in connection with the Share Exchange were issued pursuant to the effective registration statement on Form S-4.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not required for Smaller Reporting Companies.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
There are statements in this Annual Report on Form 10-K that are not historical facts. These “forward-looking statements” can be identified by use of terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. For a discussion of these risks, you should read this entire proxy statement/registration statement carefully, especially the risks discussed under “Risk Factors.” Although management believes that the assumptions underlying the forward looking statements included in this proxy statement/registration statement are reasonable, they do not guarantee our future performance, and actual results could differ from those contemplated by these forward looking statements. The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. In the light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained in this proxy statement/registration statement will in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We expressly disclaim any obligation to update or revise any forward-looking statements. The following discussion and analysis of the results of operations and financial condition of Evans Brewing Company, Inc (Formerly ALPINE 3, Inc.) should be read in conjunction with the Selected Combined Financial Data, Evans Brewing Company’s financial statements, and the notes to those financial statements that are included elsewhere in this Form 10-K.
Overview and Highlights
Company Background
Evans Brewing Company Inc. (“EBC”), was incorporated under the laws of the State of Delaware on June 18, 2013, as ALPINE 3,Inc. On July 3, 2013, EBC filed a Registration Statement on Form 10 with the U.S. Securities and Exchange Commission (the “SEC”) to become a public company.
EBC was formed by Richard Chiang, who was the initial stockholder and the initial sole officer and director. On April 19, 2014, the Board of Director appointed Mr. Michael J. Rapport and Mr. Evan Rapport to the Board of Directors.
On April 4 2014, Mr. Chiang entered into a Share Purchase Agreement pursuant to which he sold an aggregate of 10,000,000 shares of EBC’s common stock to The Michael J. Rapport Trust (the “Trust”) for a purchase price of $40,000. Pursuant to the Share Purchase Agreement, the Trust became the sole shareholder of EBC, owning 100% of the issued and outstanding shares of EBC’s common stock.
Immediately following the closing of the Share Purchase Agreement transaction, Mr. Chiang tendered his resignation as EBC’s President, Chief Executive Officer, Chief Financial Officer, Secretary and Chairman of the Board of Directors. Michael J. Rapport, acting as a member of the Registrant’s Board of Directors, accepted Mr. Chiang’s resignation. The resignations were in connection with the consummation of the Share Purchase Agreement with the Trust, and were not the result of any disagreement with EBC on any matter relating to EBC’s operations, policies, or practices. Following Mr. Chiang’s resignations, Michael Rapport appointed himself as President, Chief Executive Officer, Chief Financial Officer, Secretary and Chairman of the Board of Directors of EBC. Michael Rapport also appointed Evan Rapport as to serve as EBC's Vice President. Biographical Information for Michael J. Rapport and for Evan Rapport is included below. Michael Rapport is the father of Evan Rapport.
Pursuant to negotiations between EBC’s management and the management of Bayhawk Ales Inc. (“Bayhawk”), EBC and Bayhawk determined to enter into an Asset Purchase and Share Exchange Agreement (the “Agreement”), subject to the approval by the stockholders of Bayhawk, as discussed herein. Pursuant to the Agreement, EBC acquired the assets and operations of Bayhawk, including the assets and operations Evans Brewing Company, a California corporation (“Evans Brewing California”), but not including the owners of the outstanding shares of Evans Brewing California common stock, which Bayhawk retained.. Bayhawk and EBC are under common control by our majority shareholder at the time of the share exchange and as a result the transaction will be accounted for as a business combination under common control, a method similar to the pooling-of-interest method ("Pooling-of-Interest"). EBC will be the operating entity going forward. The financial statements reflect the combined operations and combined history of both companies.
Results of Operations for the twelve months ended December 31, 2015 and December 31, 2014.
Our operating results are summarized as follows:
Revenues
During the year ended December 31, 2015, the sales of Evans Brewing Company, Inc. were $1,952,301 compared $2,033,072 for the same period ending December 31, 2014. The decrease in sales for the current period compared to the prior period is due to a fire in the brewery that occurred in September of 2014. The brewery was shut down for three months and as a result lost many of its customers. It has taken almost all of 2015 to get back these customers.
Operating Expenses
Operating expenses for the year ended December 31, 2015, were $849,827 compared to $777,022 for the year ended December 31, 2014. The increase in operating expenses are largely attributable to legal, accounting and audit fees related to our S-4 registration statement to complete the asset purchase agreement with Bayhawk. There was an increase in professional services of approximately $209,000 offset by a decrease in general and administrative expense of approximately $150,000.
Interest Expense:
Interest expense for the year ended December 31, 2015, was $12,197, compared to $1,928, for the year ended December 31, 2014. This interest is mainly due to the related party note carried by EBC.
Other Income:
Other income for the year ended December 31, 2015, was $22,411 compared to $333,834 for the year ended December 31, 2014. Both amounts are associated with the claim receivable established by EBC in 2014 for the fire that damaged the brewery. EBC set up a claim receivable for $300,000 and treated the gain as other income. EBC was paid $322,410 by the insurance company in 2015, with $300,000 offsetting the receivable and the balance treated as other income.
Net Loss:
Net loss from operations for the year ended December 31, 2015, was $353,923, compared to a gain of $120,648 for the year ended December 31, 2014. The net loss for the fiscal year ended December 31, 2015, was made up of a loss from operations of $354,138, less other income of $14,210, plus a loss from taxes paid of $13,995. The gain of $120,648 for the year ended December 31, 2014, was made up of a net loss from operations of $184,488, plus a gain from other income of $333,834, less taxes paid of $25,395.
Liquidity and Capital Resources
Working Capital
Cash Flows
Cash Used In Operating Activities
For the year ended December 31, 2015, cash used in operating activities was made up mainly of the loss of $353,923 offset by the reduction in claims receivable of $300,000, reduction in deposits of $86,000, decrease in inventory and depreciation of $46,396. For the year ended December 30, 2014, cash used in operating activities was the made up mainly by a gain from operations of $120,648 plus $189,498 in depreciation and amortization and a decrease in inventory offset by the claim receivable of $300,000 and an increase in accounts receivable and prepaid expense.
Cash used in investing activities:
For the year ended December 31, 2015, cash used in investing activities was $337,844 used for the purchase of fixed assets. For the year ended December 31, 2014, cash used in investing activities was $170,377 used for the purchase of fixed assets offset by the disposal of property of $28,000 and the acquisition of Evans Brewing California.
Cash from Financing Activities
For the year December 31, 2015, cash provided by financing activities consisted of $274,042 received from issuance of notes offset by payments on leased equipment of $26,670. For the year ended December 31, 2014, cash used in financing activities consisted of $117,500 received from issuance of notes offset by lease equipment payment of $160,020 and payment on notes payable of $71,471.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between EBC 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 on the release of new/enhanced products into the market and 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. (“U.S GAAP”) 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.
EBC 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. EBC 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, EBC 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.
The FASB issued ASU 2014-15 on August 27, 2014, providing guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about [the] entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.
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.
Recent Events
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 Company, Inc., a California corporation (“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.
As noted above, 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 the Company’s Current Report on Form 8-K, filed with the SEC 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 in the Registration Statement, 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.
Pursuant to the terms of the Agreement, the Share Exchange offer was open for a period (the “Exchange Period”) of seventy-five (75) calendar days following the closing of the voting for the Asset Purchase Transaction. Bayhawk stockholders could tender shares of Bayhawk common stock for participation in the Share Exchange during the Exchange Period. Any Bayhawk stockholder who tendered Bayhawk shares in the Share Exchange had the right to withdraw any such shares tendered at any time until the closing of the Exchange Period. EBC agreed to use its best efforts to issue the EBC Exchange Shares within three (3) Business Days following the Close of the Exchange Period. EBC and Bayhawk agreed that upon the expiration of the Exchange Period, the Share Exchange offer would be terminated, and any Bayhawk shareholders who have not tendered their shares of Bayhawk’s common stock may not be entitled to participate in the Share Exchange. Additionally, any Bayhawk stockholders who elected to not participate in the Share Exchange would remain stockholders of Bayhawk.
On December 2, 2015, Premier Stock Transfer accepted on behalf of Evans Brewing Company, Inc., 4,033,863 Bayhawk Ales, Inc. shares and issued 4,033,863 shares of Evans Brewing Company, Inc. shares of 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.
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.
Michael J. Rapport owned, 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.
Plan and S-8 Registration Statement
EBC prepared and filed a Registration Statement in accordance with the requirements of Form S-8 under the Securities Act of 1933, as amended (the “Securities Act”), to register the issuance of up to 2,000,000 shares of its common stock, par value $0.0001 per share, that are reserved for issuance with respect to awards to be granted under the Company’s 2015 Stock Option and Stock Award Plan (the “2015 Plan”). EBC’s Board of Directors and Stockholders approved the adoption of the 2015 Plan in October 2015. As of the date of this Annual Report, no shares had been issued pursuant to the 2015 Plan or the Registration Statement.
Off Balance Sheet Arrangements
In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of December 31, 2015 or December 31, 2014.
In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the U.S., an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements.
Effects of Inflation
During the periods for which financial information is presented, the Company’s business and operations have not been materially affected by inflation.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for Smaller Reporting Companies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and footnotes thereto are set forth beginning on page of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
January 2015 Dismissal of Kenne Ruan, CPA, P.C.; Engagement of Anton & Chia, LLP
On January 21, 2015, EBC’s board of directors dismissed Kenne Ruan, CPA, P.C. (“KR”) as EBC’s independent registered public accounting firm effective immediately.
Other than an explanatory paragraph included in audit report of KR for the Company's fiscal year ended December 31, 2013, relating to the uncertainty of the Company's ability to continue as a going concern, the audit report of KR on the Company's financial statements for the fiscal year ended December 31, 2013, and through January 21, 2015, did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's 2013 and 2014 fiscal year and through the date of this Current Report on Form 8-K, (1) there were no disagreements with KR on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of KR, would have caused KR to make reference to the subject matter of the disagreements in connection with their report, and (2) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
Also on January 21, 2015, upon approval of EBC’s Board of Directors, EBC engaged Anton & Chia, LLP (“A&C”), as EBC’s independent registered public accounting firm to audit EBC’s financial statements and to perform reviews of interim financial statements. During the fiscal year ended December 31, 2013, through January 21, 2015, neither EBC nor anyone acting on its behalf consulted with A&C regarding (i) either the application of any accounting principles to a specific completed or contemplated transaction of the Company, or the type of audit opinion that might be rendered by A&C on the Company's financial statements; or (ii) any matter that was either the subject of a disagreement with KR or a reportable event with respect to KR; (iii) the type of audit opinion that might be rendered on the Company’s financial statements, and none of the following was provided to the Company: (a) a written report, or (b) oral advice that A&C concluded was an important factor considered by the Company in reaching a decision as to accounting, auditing or financial reporting issue; or (iv) Any matter that was the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K.
September 2015 Resignation of Anton & Chia; Engagement of Kenne Ruan, CPA, P.C.
On September 4, 2015, EBC’s Board of Directors accepted the resignation of A&C, dated the same date, from their engagement to be EBC’s independent certifying accountant. Other than an explanatory paragraph included in A&C’s audit report for EBC’s fiscal year ended December 31, 2014, relating to the uncertainty of BC’s ability to continue as a going concern, the audit report for fiscal year ended December 31, 2014, did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. As described below, the change in independent public accounting firms is not the result of any disagreement with A&C. The Board of Directors approved the acceptance of A&C’s resignation.
As noted above, A&C was appointed by the Board of Directors to be the auditor on January 21, 2015. There were no disagreements with A&C on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of A&C, would have caused A&C to make reference to the subject matter of the disagreements in connection with their report, and (2) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
On September 4, 2015, EBC’s Board of Directors approved the engagement of Kenne Ruan, CPA, PC (“KR”), as EBC’s independent registered public accounting firm.
By way of background, KR was the independent certifying accountant for EBC from its inception in June 2013, and provided an audit report dated July 3, 2013, with respect to EBC’s financial statements as of June 30, 2013; and an audit report dated February 7, 2014, for EBC’s financial statements as of December 31, 2013. Additionally, KR reviewed EBC’s financial statements provided in EBC’s quarterly reports for the quarters ended March 31, June 30, and September 30, 2014 (collectively, the “Prior Services”). EBC previously dismissed KR on January 21, 2015, in connection with the appointment of A&C noted above.
Other than with respect to the Prior Services outlined above, EBC has not consulted with KR during its two most recent fiscal years or during any subsequent interim period prior to its re-appointment as EBC’s auditor with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on EBC’s consolidated financial statements, or any other matters or reportable events as defined in Items 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
1. Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of December 31, 2015. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this Report, our disclosure controls and procedures were effective and were designed to provide reasonable assurance that information required to be included in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported as specified in the SEC’s rules and forms.
2. Changes in Internal Control Over Financial Reporting
During the most recent fiscal year, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.
3. Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
● pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles;
● provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "Internal Control-Integrated Framework" (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management determined that our internal controls over financial reporting were effective as of December 31, 2015, and designed to provide reasonable assurance that information required to be included in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported as specified in the SEC’s rules and forms.
4. Inherent Limitations on Effectiveness of Controls
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Nevertheless, an internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects the fact that there are resource constraints, and the benefits of controls are considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Directors, Executive Officers, Promoter and Control Persons
The table below lists all current officers and directors of EBC. All officers serve at the discretion of the Board of Directors. The term of office of each of our directors expire at our next Annual Meeting of Shareholders or until their successors are duly elected and qualified.
The business background descriptions of the director and officer are as follows:
Michael J Rapport, President/CEO and Director
Michael Rapport currently serves as the Chairman of the Board of Bayhawk Ales Inc., a position he has held since 2013. He also serves as President of Frontier Aluminum Corporation, an aluminum extruder company, since 1990. Additionally, Mr. Rapport is a Managing Partner of TresHermanos, LLC, and also holds a position as President of Evans Brewing Company. In 2011, Mr. Rapport and his son Evan Rapport started Evans Premium Lager, which has gained international attention, winning 15 awards for craft lagers. He received a B.A. degree in Psychology from Antioch West University in 1979.
Evan Rapport, Vice President and Director
Evan Rapport currently serves as the Vice President and a Director of Evans Brewing Company. He is also the President of Bayhawk Ales Inc., a position he has held since 2013. He also serves as a Managing Partner of TresHermanos, LLC. . In 2011, Mr. Rapport and his father, Michael Rapport, started Evans Premium Lager.
Kenneth C. Wiedrich, CFO
Mr. Wiedrich is a Senior level Executive with extensive hands-on experience in management, operational accounting, reporting for public companies, finance functions and in dealing with Board of Directors, Banks, Attorneys, Audit firms and the SEC. He has been the CFO of a number of small public companies, some of which were start-up companies, which he helped through the start-up phase of their operation. He also has experience with government cost accounting methods and all related government acquisition regulations.
Mark Lamb, Director
Mr. Lamb is a vice president of Double Diamond Financial a firm engaged in individual and business planning, where he has worked since February, 2003. Prior to his employment at Double Diamond Financial, Mr. Lamb was a registered representative with The Robert Driver Company, a financial services firm since October 1999. From October 1996 to October 1999, he was an account specialist with Liberty Mutual Group and from May 1994 to October 1996 he was an account executive with Paine Webber Inc. He began his career in financial services in June 1988 as an investment counselor with Western Financial Planning Corporation. Mr. Lamb holds a Series 7, Series 66, Series 63, and Series 6 licenses with FINRA. He also holds property, casualty, life, health and disability insurance licenses. Mr. Lamb attended San Diego State University.
Roy Roberson, Director
Mr. Roberson P.E. is a professional engineer in the land development industry. He manages real estate development projects and has held senior management positions at several public and private businesses that serve the land development industry. He is a post-graduate of development, real estate, investment, finance and strategic planning and management of technical professionals from the University of California, Irvine. He received his BS from Texas A&M University, in civic engineering, in 1982. He became a registered civil engineer in the State of California in 1989. Roy is also a founding member of Bayhawk Ales since 1994 through 2013. He has extensive corporate start up experience in the Southern California region and has also accomplished many real estate projects that include homes, golf courses, schools, churches, hospitals, offices, bridges, tunnels, habitat restoration flood control, water supply as well as for corporate companies such as Space X and Virgin Galactic.
Joe Ryan, Director
Mr. Ryan is responsible for business development, sales, marketing, and account management at the company he founded, Graphic Industries, a print and interactive production company providing end-to-end solutions for the marketing and communications industry. Mr. Ryan also founded Accomplice, a brand packing, logo design, website merchandising design, apparel, social marketing firm that provides expertise to clients such as Verizon Wireless, Grand Canyon Brewing Company, Los Angeles Dodgers, Warner Brothers Entertainment, and Kawasaki. From 2000 to present, Mr. Ryan is a founding partner and current sole proprietor of The Academy of Fine Beers, where he co-created and developed as well as marketed the Josef BIERBITZCH Golden Pilsner, Wing Man American Lager, Birra Bella and Shenanigans Irish Lager. Ryan recently conceived of and developed a Brewer Series titled Hail to Rock, which Bayhawk Ales will produce.
There are no arrangements or understandings between our officers and directors and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there are no arrangements, plans or understandings as to whether non-management shareholders will exercise their voting rights to continue to elect the current board of directors. There are also no arrangements, agreements or understandings to our knowledge between non-management shareholders that may directly or indirectly participate in or influence the management of our affairs.
Family Relationships
Michael J. Rapport is the father of Evan Rapport.
Other Directorships
Other than as indicated within this section none of the Company's directors hold or have been nominated to hold a directorship in any company with a class of securities registered pursuant to Section 12 of the Exchange Act (the "Act") or subject to the requirements of Section 15(d) of the Securities Act of 1933 or any or any company registered as an investment company under the Investment Company Act of 1940.
Involvement In Certain Legal Proceedings
During the past five years, the Company's officers and directors have not been involved in any of the following: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Committees of the Board
None
Board Meetings and Committees; Annual Meeting Attendance
During the year ended December 31, 2015, the Company had 3 formal board meetings and conducted other business through written actions.
During the year ended December 31, 2014, the Company 3 formal Board meetings and conducted other business through written actions.
Indemnification
The General Corporation Law of Delaware provides that directors, officers, employees or agents of Delaware corporations are entitled, under certain circumstances, to be indemnified against expenses (including attorneys' fees) and other liabilities actually and reasonably incurred by them in connection with any suit brought against them in their capacity as a director, officer, employee or agent, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. This statute provides that directors, officers, employees and agents may also be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by them in connection with a derivative suit brought against them in their capacity as a director, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made without court approval if such person was adjudged liable to the corporation.
Our Certificate of Incorporation provides that we shall indemnify any and all persons whom we shall have power to indemnify to the fullest extent permitted by the Delaware Corporate Law. Article VII of our By-Laws provides that we shall indemnify our authorized representatives to the fullest extent permitted by the Delaware Law. Our By-Laws also permit us to purchase insurance on behalf of any such person against any liability asserted against such person and incurred by such person in any capacity, or out of such person's status as such, whether or not we would have the power to indemnify such person against such liability under the foregoing provision of the by-laws.
The foregoing discussion of indemnification merely summarizes certain aspects of indemnification provisions and is limited by reference to the above discussed sections of the Delaware Corporation Law.
The Company's Articles of Incorporation and Bylaws provide that the Company may indemnify to the full extent of its power to do so, all directors, officers, employees, and/or agents. Insofar as indemnification by the Company for liabilities arising under the Securities Act may be permitted to officers and directors of the Company pursuant to the foregoing provisions or otherwise, the Company is aware that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following tables lists the compensation of the Company's principal executive officers for the years ended December 31, 2015 and 2014. The following information includes the dollar value of base salaries, bonus awards, the number of non-qualified Company Options granted and certain other compensation, if any, whether paid or deferred.
The following tables sets forth all cash compensation paid by Evans Brewing Company, Inc. (Formerly ALPINE 3, Inc.), for the year ended December 31, 2015 and December 31, 2014. The tables below sets forth the positions and compensations for each officer and director of Evans Brewing, Company, Inc.
(1) Stock award based on the award of 1,000 shares of common stock
Compensation of Directors
Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix the compensation of directors. On June 1, 2014, the board determined that members of the board will be granted a restricted stock award covering 1,000 shares of the Company’s common stock which will be vested over a period of one year. The 6,000 shares of restricted common shares were awarded to the six members of the board of directors (1,000 each) during the fiscal year ended December 31, 2014, and recorded as stock based compensation in the financial statements.
Option Grants Table
There were no individual grants of stock options to purchase our common stock made to the executive officer named in the Summary Compensation Table through to date.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
There were no stock options exercised during periods ending December 31, 2015 and December 31, 2014 by the executive officer named in the Summary Compensation Table.
Long-Term Incentive Plan (‘LTIP’) Awards Table
There were no awards made to a named executive officer in the last completed fiscal year under any LTIP.
Compensation Arrangements with Executive Management
There were no compensation contracts for any of the executives of the Company at the end of December 31, 2015. Members of the board of directors do have a contract to receive 1,000 shares of restricted common stock as compensation for board services.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Beneficial Ownership Table
As of the date of this Annual Report, the following table sets forth certain information with respect to the beneficial ownership of our Common Stock by (i) each shareholder known by us to be the beneficial owner of more than five percent (5%) of our Common Stock, (ii) by each of our current directors and executive officers as identified herein, and (iii) all of the Company’s directors and executive officers as a group. Each person has sole voting and investment power with respect to the shares of Common Stock, except as otherwise indicated. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock and non-qualified Company Options, Company Warrants, and convertible securities that are currently exercisable or convertible into shares of the Company's Common Stock within sixty (60) days of the date of this document, are deemed to be outstanding and to be beneficially owned by the person holding the Company Options, Company Warrants, or convertible securities for the purpose of computing the percentage ownership of the person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Except as set forth below, the address of each of the individuals listed is care of Evans Brewing Company, 3815 S Main Street, Santa Ana CA 92707.
* Less than one percent.
(1)Percentage of ownership is based on the 4,469,863 issued and outstanding shares of Common stock as of December 31, 2015. Duplicate entries have been omitted in calculating the shares and percentages as a group.
(2)Mr. Rapport owns and holds all of his shares through The Michael J. Rapport Trust, of which he is the Trustee. He owns no shares directly.
Under Rule 144 promulgated under the Securities Act, our officers, directors and beneficial shareholders may sell up to one percent (1%) of the total outstanding shares (or an amount of shares equal to the average weekly reported volume of trading during the four calendar weeks preceding the sale) every three months provided that (i) current public information is available about the Company, (ii) the shares have been fully paid for at least one year, (iii) the shares are sold in a broker’s transaction or through a market-maker, and (iv) the seller files a Form 4 with the SEC.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires directors and certain officers of the Company, as well as persons who own more than 10% of a registered class of the Company’s equity securities ("Reporting Persons"), to file reports with the Commission. The Company believes that during fiscal 2015, all Reporting Persons timely complied with all filing requirements applicable to them, except as follows:
Messrs. Michael Rapport (through the Trust), Evan Rapport, Lamb, Roberson, and Ryan all received shares of EBC common stock in connection with the share exchange, tendering their shares of Bayhawk common stock for shares of EBC common stock. The shares obtained should have been reported on Forms 4 filed within 2 days of the closing of the Share Exchange Transaction. Each of the Forms 4 were filed late.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Related Party Transactions
Michael Rapport, through The Michael J. Rapport Trust, is the majority shareholder of EBC. On October 9, 2014, the Trust agreed to the cancellation of 9,600,000 of the shares, and retained 400,000 shares. With the completion of the asset Purchase agreement, Michael Rapport owns 3,242,684 shares of the Company and Evan Rapport owns 621,458 shares of the Company.
Michael J. Rapport, through The Michael J. Rapport Trust, was a shareholder in Bayhawk Ales, Inc., and participated in the Share Exchange Transaction, which was open to all shareholders of Bayhawk. Mr. Rapport, through the Trust, tendered 2,841,684 shares of Bayhawk common stock, and received 2,841,684 shares of EBC common stock (on the same one-for-one terms as all other Bayhawk shareholders who elected to tender Bayhawk shares in the Share Exchange Transaction).
Michael Rapport is the father of Evan Rapport.
Director Independence
EBC is not required by any outside organization (such as a stock exchange or trading facility) to have independent directors.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Kenne Ruan, CPA, P.C. was the Company’s independent registered public accounting firm from inception through 2014, and through January 21, 2015. Set below are aggregate fees billed by Mr. Ruan for professional services rendered for the year ended December 31, 2014.
Anton & Chia, LLP was the Company’s independent registered public accounting firm from January 21, 2015 through September 4, 2015. Set below are aggregate fees billed by Anton & Chia for professional services rendered for the part of the 2015 fiscal year.
Audit Fees
The fees for the audit and review services billed and to be billed by Kenne Ruan CPA, P.C. for the period from January 1, 2014, to December 31, 2014 were $2,100. Audit fees paid to Kenne Ruan CPA, P.C. for the period September 4, 2015 through December 31, 2015 were $8,500.
The fees for the audit review services billed by Anton & Chia, LLP (“A&C”), for the fiscal year ended January 21, 2015, through September 4, 2015, were $100,000.
Audit Related Fees
None
Tax Fees
The Company has paid Lucas, Horsfall, Accountants $5,000 for preparation of taxes for the year ended December 31, 2015 and $7,000 for the year ended December 31, 2014.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15(a)(3). Exhibits.
EXHIBIT INDEX
15(a)(1). Financial Statements.
The following financial statements, and related notes and Report of Independent Registered Public Accounting Firm are filed as part of this Annual Report:
15(a)(2). Financial Statement Schedules.
None.
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
EVANS BREWING COMPANY INC.
Dated: April 19, 2016 By: /s/ Michael J. Rapport
Name: Michael J. Rapport
Title: Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors
By: /s/ Kenneth C. Wiedrich
Name: Kenneth C. Wiedrich
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Michael J. Rapport
Chief Executive Officer, Chairman of the Board
April 19, 2016
Michael J. Rapport
/s/ Evan Rapport
Vice President
April 19, 2016
Evan Rapport
/s/ Mark Lamb
Director
April 19, 2016
Mark Lamb
/s/ Roy Roberson
Director
April 19, 2016
Roy Roberson
/s/ Joseph Ryan
Director
April 19, 2016
Joseph Ryan
EVANS BREWING COMPANY INC.
Financial Statements
Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Evans Brewing Company Inc.
We have audited the accompanying consolidated balance sheet of Evans Brewing Company Inc. as of December 31, 2015, and the related statements of operations, stockholders’ equity, and cash flows for the year then ended. Evans Brewing Company Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evans Brewing Company Inc. as of December 31, 2015, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/Kenne Ruan, CPA, P.C.
Woodbridge, Connecticut
April 14, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Evans Brewing Company, Inc.
2000 Main Street
Irvine, CA 92614
We have audited the accompanying combined balance sheet of Evans Brewing Company, Inc. (Formerly Alpine 3, Inc.) and Bayhawk Ales, Inc. (the "Companies") as of December 31, 2014, and their related combined statements of operations, changes in stockholders' deficit and cash flows for the year then ended. These combined financial statements are the responsibility of the Companies’ management. Our responsibility is to express an opinion on these combined financial statements based on our audit
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Companies were not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companies’ internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Companies as of December 31, 2014, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/Anton & Chia, LLP
Newport Beach, CA
April 9, 2015
EVANS BREWING COMPANY, INC.
(Formerly ALPINE 3, INC.)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
EVANS BREWING COMPANY, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
EVANS BREWING COMPANY, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
EVANS BREWING COMPANY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
EVANS BREWING COMPANY, INC
(Formerly ALPINE 3, INC.)
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2015 AND DECEMBER 31, 2014
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Evans Brewing Company Inc. (formerly ALPINE 3 Inc.) (“EBC” or the “Company”) 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, from the founder of Alpine 3, and changed the name to Evans Brewing Company Inc. 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.
On October 15, 2014, the Company entered into an Asset Purchase and Share Exchange Agreement (the “Agreement”) with Bayhawk Ales, Inc., a Delaware corporation (“Bayhawk”), subject to receiving approval of the independent Bayhawk shareholders who vote 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 also 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
This summary of accounting policies for EBC is presented to assist in understanding the Company’s financial statements. The Company uses the accrual basis of accounting and accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied in the preparation of the financial statements.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates. Estimates are used when accounting for allowances for bad debts, collectability of accounts receivable, amounts due to service providers, depreciation and litigation contingencies, among others.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. The Company had no cash equivalents as of December 31, 2015 and 2014.
Accounts Receivable
Accounts receivable are customer obligations due under normal trade terms. EBC performs continuing credit evaluations of customers and allowances are maintained for potential credit losses. EBC determined an allowance for doubtful accounts of $6,950 at December 31, 2015 and $11,966 for December 31, 2014, to be appropriate.
Inventories
Inventories are valued at the lower of cost or market. EBC regularly reviews its inventories for the presence of obsolete product attributed to age, seasonality, and quality and reduces its cost basis when its review indicates a reduction in utility below the inventory's carrying value. Inventories consisted of the following at December 31, 2015 and 2014:
Insurance Claim Receivable
During the year ended December 31, 2014, a fire in the California brewery occurred resulting in a short-term stoppage in operations, lost profits, and direct repair expenses. Bayhawk was insured for these losses and estimated an insurance claim receivable earned as of December 31, 2014, of $300,000. Bayhawk received a payment of $25,000 from its insurance carrier as an advance on the insurance claim during the year ended December 31, 2014. The insurance claim receivable and payment from its insurance carrier is reflected in other income (expense) in the accompanying statement of operations. During the fiscal year ended December 31, 2015, the Company was paid $322, 410 on the claim. The claim receivable was offset and the additional funds of $22,410 were recorded as other income.
Deposits
For the year ended December 31, 2015, EBC had a can deposit of $135,000 with a third-party that cans its product. In the fiscal year ended December 31, 2014 EBC had a fully refundable deposits of $86,000 related to the keg lease referenced in Note 4 in addition to the can deposit of $135,000, In the year ended December 31, 2015, the Company purchased the kegs from the leasing company, applying the deposit amount of $86,000 to the purchase of the kegs. As of December 31, 2015 and 2014, deposits aggregated $135,000, and $221,000, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by using the straight-line method over the estimated useful lives:
EBC capitalizes significant capital expenditures. Ordinary maintenance and repairs are charged to operations as expenses when incurred. When assets are sold or retired, the costs and related accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is included in the income. For the year ended December 31, 2014, depreciation expense includes the depreciation of assets held under capital leases. The Company bought out the lease during the year ended December 31, 2015, and is depreciating the asset over a longer period of time. Total depreciation expense for the years ended December 31, 2015 and 2014, was $46,613 and $189,498, respectively.
Impairment of long-lived assets
EBC evaluates its long-lived assets by measuring the carrying amount of the asset against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. No adjustment to the carrying value of the assets has been made.
Accounts Payable
Accounts payable consists of unpaid expenses incurred in the normal course of business.
Refundable deposits
EBC distributes its draft beer in kegs that are owned by the Company. When a draft beer is shipped to the customer, the Company collects a refundable deposit and records a liability. Upon return of the keg, the deposit is refunded to the customer and the liability is reduced. As of December 31, 2015 and 2014, EBC had refundable deposits in the amounts of $107,574 and $120,613, respectively. EBC accounts for the loss, breakage, and deterioration of the kegs by crediting the customer’s deposits. The deposit approximates EBC’s cost of the keg. Any additional cost incurred for the loss, breakage, or deterioration of the kegs is then billed to the customer. Management periodically reviews its refundable deposits for any loss allowance on loss, breakage, or deterioration and has determined that no allowance was necessary as of December 31, 2015 and 2014.
Lease Accounting
The EBC lease that was in place in 2014 was accounted for under the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 840, Leases. Minimum base rent for operating leases, which generally have escalating rentals over the terms of the leases, are recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. As of December 31, 2014, there was no liability for deferred rent. The leased equipment under capital leases expired in 2015, and the Company purchased the asset. The assets and liabilities under capital leases were recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets were amortized over the lower of their related lease terms or their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense for 2014.
Revenue Recognition
Revenue from product sales, are recognized when the products are picked up by individual customers or shipped to wholesale customers. The following criteria are met before revenue is recognized: persuasive evidence of an arrangement exists, shipment of product or pickup has occurred, selling price is fixed or determinable and collection is reasonably assured. Product returns are allowed, but are rare according to historical records for past years. EBC continuously monitors and evaluates product returns. There was no allowance for product returns as of December 31, 2015 and 2014.
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Sales Tax
EBC excludes from its sales all sales taxes assessed to its customers. Sales taxes assessed are recorded as accrued liabilities on the balance sheet until remitted to the state agencies.
Excise Tax
The federal government levies excise taxes on the sale of alcoholic beverages, including beer. For brewers producing fewer than two million barrels of beer per calendar year, the federal excise tax is $7 per barrel on the first 60,000 barrels of beer removed for consumption or sale during the calendar year. The state of California imposes excise taxes on the sale and distribution of beer at a rate of $0.20 per gallon. Excise taxes due to federal and state agencies are not collected from customers. For the years ended December 31, 2015 and 2014, excise taxes amounted to approximately $71,534 and $99,000, respectively, which is treated as a Cost of Goods sold.
Uncertain Tax Positions
EBC utilizes the asset and liability method of accounting for income taxes in accordance with the provisions of the “Expenses - Income Taxes Topic” of the FASB ASC. Under the asset and liability method, deferred income tax assets and liabilities are recognized 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. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company considers certain tax planning strategies in its assessment as to the recoverability of its tax assets. Deferred income tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that the tax rate changes. EBC recognizes, in its financial statements, the impact of a tax position, if that position is more likely than not to be sustained on audit, based on technical merits of the position. There are no material unrecognized tax positions in the financial statements.
EBC accounts for uncertain tax positions in accordance with FASB ASC 740 (formerly Financial Accounting Standards Boards Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109). FASB ASC 740 prescribes a recognition threshold and measurement process for financial statement recognition of uncertain tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on recognition, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FASB ASC 740 and there was no impact on total liabilities or stockholder's equity as a result of the adoption of FASB ASC 740.
For federal tax purposes the Company’s 2012 through 2015 tax years remain open for examination by the tax authorities under normal three-year statute of limitations. Generally, for state tax purposes, the Company’s 2011 through 2015 tax years remain open for examination by the tax authorities under a four-year statute of limitations
Fair Value of Financial Instruments
Fair value of certain of the Company’s financial instruments including cash, account payable, accrued expenses, notes payables, and other accrued liabilities approximate cost because of their short maturities. The Company measures and reports fair value in accordance with ASC 820, “Fair Value Measurements and Disclosure” defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value investments.
Fair value, as defined in ASC 820, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, principal (or most advantageous) markets, and an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.
Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques may require significant judgment and are primarily dependent upon the characteristics of the asset or liability, and the quality and availability of inputs. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and resulting measurement as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities; The Company values it’s available for sale securities using Level 1.
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair values.
Fair value measurements are required to be disclosed by the Level within the fair value hierarchy in which the fair value measurements in their entirety fall. Fair value measurements using significant unobservable inputs (in Level 3 measurements) are subject to expanded disclosure requirements including a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earning are reported in the statement of income.
Basic Loss Per Share
Basic income (loss) per share is calculated by dividing the Company's net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company's net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity.
The Company has no dilutive debt instruments.
New Authoritative Accounting Guidance
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.
The FASB issued ASU 2014-15 on August 27, 2014, providing guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about [the] entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2015 and 2014:
NOTE 4 - CAPITAL LEASE PAYABLE
Capital lease payable consists of the following at June 30, 2015, and December 31, 2014:
The equipment held through capital lease agreements at December 31, 2015, and December 31, 2014 are as follows:
NOTE 5. NOTE PAYABLE
Note payable balance as of December 31, 2015, was $181,892, with $75,199 being the current obligation and $106,693 being the long term obligation. The balance as of December 31, 2014, was $7,941 which was paid during the current quarter. The breakdown of the notes is as follows:
NOTE 6 - NOTES PAYABLE- RELATED PARTY
On July 21, 2014, Michael J. Rapport, the Chief Executive Officer, sole director, and controlling shareholder of the Company, advanced the Company a $100,000 long term unsecured loan with a 1.5% interest rate per annum, due no later than July 21, 2017. The loan is convertible into common shares of the Company at any time after the second year’s anniversary at a price based upon either: a) The price of its most recent private placement offering, closest to the time of conversion; or b) if the Company’s common stock is then publicly-traded, the bid price of its common stock on the closing day of the conversion. For the period ended December 31, 2015, the Company accrued $1,500 of interest on this note. For the year ended December 31, 2014, the Company accrued $670 on this same note, which brings the total interest accrued on the note to $2,170 as of December 31, 2015. The accrued amount is included in accounts payable and accrued liabilities on the balance sheet. All interest is due no later than July 21, 2017.
Michael J. Rapport also advanced the Company $10,000 on April 21, 2014; $8,000 on June 13, 2014; $20,000 on June 2, 2015; $30,000 on July 2, 2015; and $40,000 on August 25, 2015. All of these payments are secured by 8% interest bearing notes that are due on April 21, 2015, June 13, 2015, June 2, 2016, July 2, 2016, and August 25, 2016, respectively. For the period ended December 31, 2015, the Company accrued a total of $4,675 interest for the notes. For December 31, 2014, the Company accrued $909 of interest on the notes. The total interest accrued on the notes as of December 31, 2015, is $5,584.
The notes that matured and became past due on April 21, 2015, and June 13, 2015, are scheduled to be paid by the end of June 2016, with proceeds from expected earnings. Mr. Rapport agreed to the extension of the maturity dates of the April 21 and June 13 notes.
Accrued Interest
For the year ended December 31, 2015, the Company accrued interest of $6,175 on the six notes due to Mr. Rapport. For the year ended December 31, 2014, the Company accrued interest of $1,579 pertaining to the same notes due to Mr. Rapport. The total interest accrued for the six notes $7,754 as of the period ending December 31, 2015.
NOTE 7 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2014, the Company incurred $20,255 for advisory services and SEC filing services, that were paid to Tech Associates, Inc., a company controlled by Richard Chiang, a director of the Company. The Company also compensated Tech Associates, Inc. with 30,000 shares of common stock during the year ended December 31, 2014. Tech Associates, Inc. incurred $2,833 for advisory services in the fiscal year ended December 31, 2013.
NOTE 8 - STOCKHOLDERS’ EQUITY
Preferred Stock
Preferred Stock - During the fiscal year ended December 31, 2015, the Company amended the certificate of incorporation and the Company is now authorized to issue 10,000,000 shares of $.0001 par value preferred stock. As of December 31, 2014, the Company was authorized to issue 5,000,000 shares of $.0001 par value preferred stock. No shares of preferred stock had been issued.
Common Stock
Common Stock - The Company is authorized to issue 100,000,000 shares of $.0001 par value common stock. As of December 31, 2015, and December 31, 2014, there are 4,469,863 and 4,884,624 shares issued and outstanding, respectively.
Upon formation of the Company on June 18, 2013, the Board of Directors issued 10,000,000 shares of common stock for $1,000 in services to the founding shareholder of the Company. In addition, the founding shareholder made a contribution of $3,050 in 2014 to the Company, which are recorded as additional paid-in capital.
On April 4 2014, the founding shareholder entered into a Share Purchase Agreement pursuant to which he sold an aggregate of 10,000,000 shares of EBC’s common stock to The Michael J. Rapport Trust (the “Trust”) for a purchase price of $40,000. Pursuant to the Share Purchase Agreement, The Trust became the sole shareholder of EBC, owning 100% of the issued and outstanding shares of EBC’s common stock. On September 22, 2014, the Company cancelled 9,600,000 shares of common stock for no consideration. On September 23, 2014, the Company issued 6,000 shares of common stock to directors of the Company for services valued at $600 ($0.10 per share). On September 23, 2014, the Company issued 30,000 shares of common stock for services to Tech Associates Inc., a company controlled by Richard Chiang, a director of the Company, valued at $3,000 ($0.10 per share) bringing the total shares outstanding to 436,000 shares of common.
Based on the completion of the asset purchase agreement and share exchange agreement by and between EBC and Bayhawk, 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 4,033,863 shares exchanged per the agreement along with the 436,000 shares that Evans Brewing Company held brings the total outstanding to 4,469,863. Bayhawk had a total of 4,884,624 shares of its common stock outstanding as of December 31, 2014, and as of the closing of the Share Exchange, but 414,761 shares were not tendered in the Share Exchange, so the total shares outstanding shares of EBC common stock at December 31, 2015, was 4,469,863.
NOTE 9 - EARNINGS PER SHARE
Basic net income (loss) per share was computed using the weighted-average number of shares of common stock outstanding during the period. The following summarized the earnings per share:
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following for the year ended December 31,
Deferred income taxes consist of the following for the year ended December 31,
Deferred income taxes are provided for the temporary differences between the carrying values of the Company’s assets and liabilities for financial reporting purposes and their corresponding income tax basis. The temporary differences give rise to either a deferred tax asset or liability in the consolidated financial statements, which is computed by applying current statutory tax rates to taxable and deductible temporary differences based upon the classification (i.e. current or non-current) of the asset or liability in the consolidated financial statements which relates to the particular temporary difference. Deferred taxes related to differences which are not attributable to a specific asset or liability are classified in accordance with the future period in which they are expected to reverse and be recognized for income tax purposes. The long-term deferred tax assets are fully valued as of December 31, 2015.
As of December 31, 2015 and 2014, the components of the Company’s deferred tax assets and liabilities primarily consist of temporary differences attributable to differing methods of depreciation, insurance claim receivables, net operating losses, allowances for obsolete inventory, and reserves for bad debt.
EBC’s management decided to use a federal rate of 34% so as to not overstate the deferred tax asset created from the significant federal net operating losses. This is also consistent with EBC’s prior year treatment to not overstate the deferred tax asset where the Company used a 25% tax rate. As of December 31, 2014, the Company had gross net operating losses of more than $380,000 and state net operating losses of more than $112,000. Also, in the year ended December 31, 2014, EBC had a profit of $146,043 but this included $300,000 for a claim receivable that is not taxable income. As such, excluding the $300,000, the Company had a net operating loss of $153,957 for the year ended December 31, 2014, which further adds to the net operating losses.
EBC’s management used 34% and 25% rate to calculate the deferred tax assets and the current tax provision. Because of the startup costs of EBC and the net operating losses earned by Bayhawk during the first few years in operation, the Company has had to pay very little federal income tax. In 2014 the Company paid no federal income tax and will have no tax obligation for 2015 as well. EBC management expects that the Company will not pay any federal income tax in 2016 as well, due to its significant net operating losses.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company operates out of three buildings in Irvine, California, and Santa Ana, California, under non-cancelable leases expiring between July 31, 2016, and January 31, 2019.
Total lease expense paid during the year ended December 31, 2015 and the year ended December 31, 2014, was $83,161 and $80,657, respectively.
Minimum future lease payments are as follows:
Notes payable commitment:
The Company purchased 4300 kegs that it had previously leased on a note payable with City National Bank.
Minimum future payments for keg assets note are as follows:
The Company purchased a truck for the business that was financed through an auto loan with Ford Motors financing.
Minimum future payments for the auto loan are as follows:
Litigation
The Company may be subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management the ultimate outcome of the claims and litigation, if any, will not have a material adverse effect on the Company’s financial position.
NOTE 12 - CONCENTRATIONS
Cash
The Company maintains cash balances at financial institutions insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures cash balances up to $250,000 per institution. As of December 31, 2015, the Company had no bank account that exceeded the insured amount. The Company normally has no problem with uninsured balances as its deposits are separated across financial institutions.
Accounts Receivable
At December 31, 2015, three customers accounted for approximately 54%, 16%, and 12%, respectively, of the Company’s accounts receivable. At December 31, 2014, three customers accounted for approximately 26%, 20%, and 12%, respectively, of the Company's accounts receivable.
Accounts Payable
At December 31, 2015, three vendors accounted for approximately 57%, 9%, and 6%, respectively, of the Company’s accounts payable. At December 31, 2014, three vendors accounted for approximately 47%, 22% and 13%, respectively, of the Company's accounts payable. For the year ended December 31, 2015, two vendors accounted for approximately 69% and 13% of total purchases. For the year ended December 31, 2014, two vendors accounted for approximately 71% and 24% of total purchases.
Sales
For the year ended December 31, 2015, three customers accounted for approximately 34%, 25%, and 16%, respectively, of the Company’s sales. For year ended December 31, 2014, three customers accounted for approximately 53%, 15%, and 11%, respectively, of the Company's sales.
NOTE 13 - SUBSEQUENT EVENTS
Subsequent events have been evaluated through March 30, 2016, which is the date the financial statements were available to be issued.
1.During the year ended December 31, 2015, the Company started the application process with FINRA to obtain its trading symbol and on February 24, 2016, FINRA assigned the Company ALES as its new trading symbol.