UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to __________
Commission file number 000-51808
GOLDEN WEST BREWING COMPANY, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware | 90-0158978 |
945 West 2nd Street, Chico, CA 95928
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (530) 894-7906
__________________________________________________________________
Former name, former address, and former fiscal year, if changed since last report
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ].
As of November 17, 2006, the Registrant had 2,408,000 shares of its Common Stock outstanding.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [ X ]
INDEX
PART I -- FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | |
Consolidated Balance Sheet as of December 31, 2005 and September 30, 2006 (unaudited) | 4 | |
Consolidated Statements of Operations for the three months ended September 30, 2006 and September 30, 2005 (unaudited) and for the nine months ended September 30, 2006 and September 30, 2005 | 5 | |
Consolidated Statement of Stockholders’ Equity September 30, 2006 (unaudited) | 6 | |
Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and September 30, 2005 (unaudited) | 7 | |
Notes to Consolidated Financial Statements (unaudited) | 8 | |
Item 2. | Management's Discussion And Analysis Of Financial Condition And Results Of Operations | |
Plan of Operations | 19 | |
Liquidity and Capital Resources | 27 | |
Item 3. | Controls & Procedures | 31 |
PART II - OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 31 |
Item 2. | Unregistered Sale of Equity Securities and Use of Proceeds | 32 |
Item 3. | Defaults Upon Senior Securities | 34 |
Item 4. | Submission of Matters to a Vote of Security Holders | 34 |
Item 5. | Other Information | 34 |
Item 6. | Exhibits and Reports on Form 8-K | 34 |
2
PART 1. FINANCIAL INFORMATION
Item 1.
Financial Statements
The consolidated financial statements included herein have been prepared by Golden West Brewing Company, Inc. (the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such SEC rules and regulations. In the opinion of management of the Company the accompanying statements contain all adjustments necessary to present fairly the financial position of the Company as of December 31, 2005 and September 30, 2006, and its results of operations for the three and nine month periods ended September 30, 2006 and 2005 and its cash flows for the nine month periods ended September 30, 2006 and 2005 and the statement of stockholder’s equity as of September 30, 2006. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto filed as a part of the Company's annual report on Form 10-KSB.
3
GOLDEN WEST BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF ASSETS | ||
(unaudited) | ||
Current Assets: | December 31, 2005 | September 30, 2006 |
Cash and cash equivalents | $ 10,837 | $ 1,199 |
Accounts receivable, net of allowance for doubtful |
|
|
Inventory (Note 1 ) | 118,773 | 157,794 |
Prepaid Expenses | 8,833 | 15,230 |
Total current assets | 247,611 | 324,208 |
Fixed Assets: |
| |
Property and equipment, net of accumulated depreciation of $8,722 and $28,351 December 31,2005 and September 30, 2006, respectively |
|
|
Other Assets: | ||
Deferred Offering Costs (Note 6 ) | 150,000 | - |
Goodwill (Notes 1 & 9 ) | 472,503 | 472,503 |
Intangibles, net of accumulated amortization of $1,742 and $5,523 |
|
|
Other assets | 947 | 7,305 |
Total other assets | 650,535 | 497,378 |
Total Assets | $1,178,510 | $1,110,573 |
LIABILITIES AND STOCKHOLDERS' EQUITY | ||
Current Liabilities: | ||
Accounts payable | $ 222,188 | $ 248,668 |
Accrued expenses | 196,740 | 198,300 |
Checks written in excess of funds available | 4,943 | |
Lines of credit payable (Note 2) | 36,447 | 35,022 |
Notes payable - other, current portion (Note 2) | 4,434 | 4,743 |
Notes payable, related party, current portion (Note 2) | 26,984 | 221,994 |
Total current liabilities | $ 486,793 | $ 713,670 |
Long-term liabilities: | ||
Notes payable, net of current portion (Note 2) | 17,492 | 38,895 |
Notes payable - related party, net of current portion (Note 2) | 405,000 | 380,000 |
Total long-term liabilities | 422,492 | 418,895 |
Common stock issued subject to rescission (Notes 5 & 7) | 10,000 | 10,000 |
Total Liabilities | $ 919,285 | $1,142,565 |
Commitments and Contingencies (Notes 1,2,3,4, 5, 6,7, 8, 10 and 11) | ||
Stockholders' Equity |
| |
Preferred stock, $.0001 par value, 5,000,000 shares |
| |
- | ||
Common Stock, $.0001 par value, 20,000,000 shares |
|
|
Additional paid-in capital | 449,800 | 575,511 |
Accumulated (Deficit) | (190,775) | (607,744) |
Total Stockholders' Equity | 259,225 | (31,992) |
Total Liabilities and Stockholders' Equity | $1,178,510 | $1,110,573 |
4
GOLDEN WEST BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
5
GOLDEN WEST BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SEPTEMBER 30, 2006 (UNAUDITED)
6
GOLDEN WEST BREWING COMPANY AND SUBSIDARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
7
GOLDEN WEST BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
1. Nature of Business and Significant Accounting Policies:
This summary of significant accounting policies of is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of management who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States of America and have been consistently applied in preparation of the financial statements. The Company has selected December 31 as its year end.
Description of Business - Golden West Brewing Company, Inc., a Delaware Corporation, and its wholly-owned California subsidiary Golden West Brewing Company (hereinafter referred to as “The Company” on a consolidated basis) were formed in 2003 for the purpose of acquiring Butte Creek Brewing Company, LLC ("Butte Creek"). The acquisition of Butte Creek was completed on August 31, 2005.
In the opinion of management of the Company the accompanying statements contain all adjustments necessary to present fairly the financial position of the Company as of December 31, 2005 and September 30, 2006, and its results of operations for the three and nine month periods ended September 30, 2006 and 2005 and its cash flows for the nine month periods ended September 30, 2006 and 2005 and the statement of stockholders' equity as of September 30, 2006. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto filed as a part of the Company's annual report on Form 10-KSB. All inter-company account balances and transactions are eliminated in consolidation.
Accounts Receivable - Accounts receivable are reported at net realizable value. The Company has established an allowance for doubtful accounts based on factors pertaining to the credit risk of specific customers, historical trends and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible.
Inventory - Inventory is stated at the lower-of-average cost or market computed on a first-in first-out basis.
Income Recognition - The Company recognizes revenues at the point of sale when title to the product changes hands to the buyer.
Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. The actual results could differ from those estimates. The Company's financial statements are based upon a number of significant estimates including the allowance for doubtful accounts. Due to the uncertainties inherent in the estimation process, it is at least reasonably possible that the estimates for these items could be further revised in the near term and such revisions could be material.
8
Financial Instruments - The Company discloses fair value information about financial instruments when it is practicable to estimate that value. The carrying value of the Company's cash, cash equivalents, and accounts payable approximate their estimated fair values due to their short-term maturities.
Concentrations of Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and advances. At December 31, 2005 and September 30, 2006, the Company had no amounts of cash or cash equivalents in financial institutions in excess of amounts insured by agencies of the U.S. Government.
Valuation of Long-Lived Assets - The Company evaluates the carrying value of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of a long-lived asset is considered impaired when the projected undiscounted future cash flows are less than its carrying value. The Company measures impairment based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined primarily using the projected cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
Income Taxes - The Company recognizes deferred tax assets and liabilities for temporary differences between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements, the effect of net operating losses, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
Intangibles - Intangibles consists of goodwill, trade names and trademarks. Intangibles other than goodwill are amortized using the straight-line method over the estimated useful life of the intangibles. The $25,000 of acquired intangible assets relate to tradenames and trademarks that had an expected remaining useful life of approximately five years at the time of their purchase and are being amortized over a 5-year period. Assets determined to have indefinite lives are no longer amortized in accordance with SFAS No. 142, "Goodwill and Other Intangibles," but are tested for impairment on an annual basis.
Recent Accounting Pronouncements - There were various accounting standards and interpretations issued during 2006, 2005 and 2004, none of which are expected to have a material impact on the Company's consolidated financial position, operations or cash flows.
Development Stage Enterprise - Until August 31, 2005, the Company was a development stage enterprise since planned principal operations had not yet commenced. As a result of the acquisition of Butte Creek on August 31, 2005, the Company is no longer considered a development stage enterprise (Note 9).
Per Share Information - Per share information is computed by dividing the net income or loss by the weighted average number of shares outstanding during the period.
Cash and Cash Equivalents - The Company considers cash and cash equivalents to consist of cash on hand and demand deposits in banks with an initial maturity of 90 days or less.
Risks and Uncertainties - The Company is subject to substantial business risks and uncertainties inherent in starting a new business. There is no assurance that the Company will be able to generate sufficient revenues or obtain sufficient funds necessary for launching a new business venture.
9
Basis of Presentation - Going Concern - Generally accepted accounting principles in the United States of America contemplates the continuation of the Company as a going concern. However, the Company has sustained losses from operations, and has net working capital deficit, which raise substantial doubt about the Company's ability to continue as a going concern. Management of the Company believes that the additional capital from the proposed public offering and improved results from operations will be sufficient for the continued viability of the company, however there can be no assurance that either will occur.
In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financial requirements, raise additional capital, and the success of its future operations.
Stock Based Compensation - We adopted the provisions of, and account for stock-based compensation in accordance with, the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment” which replaced` Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the period during which the holder is required to provide services in exchange for the award, i.e., the vesting period. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified
For the three and nine months ended September 30, 2006 we recorded compensation expense of $71,752 under the requirements as discussed above. No such expense was recorded for the three or nine months ended September 30, 2005.
2. Advances and Notes Payable:
On November 1, 2004, J. Andrew Moorer, a Director of the Company, made an uncollateralized advance of $8,750. The advance continues to be uncollateralized and due on demand. This advance started to accrue interest at 8% on January 1, 2006 and had accrued interest as of September 30, 2006 of $525.
Between March and September 2005, the Company borrowed a total of $125,000 from three lenders: $50,000 in July 2005 from Power Curve, Inc. (a company controlled by John Power); $50,000 in May 2005 from Lone Oak Vineyards, Inc. (a company controlled by Brian Power); and $25,000 in March 2005 from Tiffany Grace, an unaffiliated party. The loans were used to payoff Butte Creek's loans to Tri County Economic Development Corporation, purchase additional equipment and provide working capital. The Tiffany Grace note, which was executed on September 9, 2005 accrues interest at the rate of 9% per annum, is payable in monthly payments of principal and interest based upon a five year amortization, and is due in full March 2008. As of September 30, 2006, the Tiffany Grace note had current maturities of $3,525 and a long-term maturity of $15,121 The Power Curve and Lone Oak notes were executed in September, 2005, accrue interest at the rate of 9% per annum, and are payable in full in 2008. The loans are collateralized by a security interest covering all of our tangible and intangible assets. As of September 30, 2006, the Power Curve and Lone Oak notes had accrued interest of $4,759 and ($1,386)
10
respectively and long-term maturities of $75,000 as the result of the sale of $25,000 of the Lone Oak Vineyards note to an unrelated third party on September 15, 2006.
On December 30, 2005, John Power and Power Curve, Inc. converted $215,000 and $90,000, respectively, in outstanding advances into collateralized long-term debt. The notes bear interest at 9% and mature December 31, 2008 and are collateralized by a security interest covering all of our tangible and intangible assets but are junior to the security interest granted to Power Curve, Inc., ($50,000), Lone Oak Vineyards, Inc.($25,000) , Dayton Misfeldt Trust ($25,000) and Tiffany Grace ($25,000) in September 2005 described above. As of September 30, 2006, these notes had current maturities of $0 and $0 respectively and long-term maturities of $215,000 and $90,000 respectively and had accrued interest of $14,513 and $6,075 respectively.
As part of the acquisition of Butte Creek, the Company assumed an $8,136 note payable to Bruce Detweiler, a member of Butte Creek, and a $10,098 note payable to Richard Atmore, Jr., a member of Butte Creek and the brother of Tom Atmore, a managing member of Butte Creek. As of September 30, 2006 the note to Richard Atmore, Jr. was paid in full.
The Company has pledged substantially all of its assets to secure some of the notes. Should the Company default in the payment of these secured notes, the collateral could be subject to forfeiture.
In the nine months ended September 30, 2006, John Power and Power Curve, Inc. have made advances to the Company of $95,800 and $ 109,308 respectively. The advances are uncollateralized and due on demand
Lines of Credit
The Company assumed a $25,000 balance on a credit card issued by Wells Fargo Bank, with interest at the rate of 17.25%. The card is uncollateralized and guaranteed by Tom Atmore, Butte Creek's Managing Member and former general manager. The outstanding balance as of September 30, 2006 was $24,188. Under our separation agreement with Atmore, we were obligated to pay this indebtedness prior to September 30, 2006 but did not have the resources to pay this obligation.
The Company assumed a $15,400 line of credit on a Butte Creek credit card with MBNA with interest at the rate of 29.98%. The debt on the credit card is uncollateralized but guaranteed by Tom Atmore, Butte Creek's managing member and our former general manager. The outstanding balance as of September 30, 2006 was $10,834. Under our separation agreement with Atmore, we were obligated to pay this indebtedness prior to September 30, 2006 but did not have the resources to pay this obligation.
Notes Payable September 30, 2006 | Current | LT | Interest | Maturity | |||||||
| Portion | Portion | Rate | Date | Collateralized | ||||||
Lines of Credit | |||||||||||
Atmore - MBNA | $10,834 | 29.98% | Demand | No | |||||||
Atmore - Wells Fargo | 24,188 |
| 17.25% | Demand | No | ||||||
11
Total | $35,022 | ||||||||||
Notes Payable - Related Parties | |||||||||||
Power Curve, Inc. | $109,308 | $50,000 | 9% | Sep-08 | Yes | ||||||
Power Curve, Inc. | 90,000 | 9% | Dec-08 | Yes | |||||||
John C. Power | 95,800 | 215,000 | 9% | Dec-08 | Yes | ||||||
Lone Oak Vineyards, Inc. | 25,000 | 9% | Sep-08 | Yes | |||||||
J. Andrew Moorer | 8,750 |
| 8% | Demand | No | ||||||
B. Detweiler | 8,136 |
| 8% | Demand | No | ||||||
Total | $221,994 | $380,000 | |||||||||
Notes Payable - Unaffiliated | |||||||||||
Tiffany Grace | $4,743 | $13,895 | 9% | Mar-08 | Yes | ||||||
Dayton Misfeldt Trust | 25,000 | 9% | Sep-08 | Yes | |||||||
TOTALS | $261,759 | $418,895 | |||||||||
3. Related Party Transactions
(a) At inception, the Company issued 400,000 shares valued at $60,000 to five investors in exchange for certain assets the investors had acquired from the Alta Group (see below).
The assets acquired had been sold by Alta California Broadcasting, Inc. and its affiliates Nova Redwood, LLC and Four Rivers Broadcasting, Inc. (hereinafter referred to as the "Alta group"). John C. Power, an officer, director and founder of the Company, is also a former officer and director of all three entities that comprise the Alta group.
Alta California Broadcasting, Inc. had acquired the domain name www.ales.com. On September 29, 2002, Four Rivers Broadcasting, Inc. filed a trademark application number 78169062 with the Unites States Patent and Trademark Office ("USPTO") for Mount Shasta Ale™ based on its intent to use the proposed mark. In 2003, Nova Redwood, LLC had advanced $59,500 to Butte Creek Brewing Company, LLC as part of a planned acquisition. In October 2003, the Alta Group decided to not pursue the acquisition of Butte Creek and sold the domain name www.ales.com, all rights to the Federal Trademark application for Mount Shasta Ale™ and the advances to Butte Creek for $60,000 to a group of five investors who became founding shareholders of the Company. Subsequently, the Company abandoned the trademark application pending with the USPTO for “Mount Shasta Ale”, and rather will rely upon common law trademark principles to protect its use of the mark.
(b) On December 1, 2003, an officer and director of the Company purchased a delivery vehicle (2003 Ford Van) for the purposes of assisting Butte Creek Brewing Company, LLC ("Butte Creek") maintain and expand its self-distribution capabilities. The vehicle is 100% utilized by Butte Creek as a delivery vehicle. The purchase price of the vehicle was $22,920.70 and was financed for 60 months with Ford Credit at an annual percentage rate of 5.99%. The payments on the vehicle are paid and expensed by the Company. The liability to Ford Credit is in the name of the officer and director of Golden West Brewing company, Inc. and is not recorded as a liability on these financial statements. There are no written agreements between the Company and the officer and director memorializing this transaction. The balance owing as of September 30, 2006 was $11,684.
(c) In July 2004, an officer and director of the Company purchased a delivery vehicle (2004 Ford Van) for the purpose of assisting Butte Creek maintain and expand its self-distribution capabilities. The vehicle is 100% utilized by Butte Creek as a delivery vehicle. The purchase price was $26,155.91 and was financed for 60 months with Ford Credit at an annual percentage rate of 0.90%. The payments on the vehicle are paid and expensed by the Company. The liability to Ford Credit is the name of the officer and director of the Company and is not recorded as a liability on these financial statements. There are no written agreements between the Company and the officer and director memorializing this transaction. The balance owing as of September 30, 2006 was $15,883.
(d) In 2003, an officer and director of the Company guaranteed a $25,000 line of credit for Butte Creek with one of its key suppliers. No compensation has been paid by either the Company or Butte Creek for the guarantee.
(e) In 2004, the Company purchased certain hops rhizomes for research and development purposes. The rhizomes were planted on the property of a former director of the Company. The rhizomes were expensed as research and development expense in 2004. The value of the personal real property used by the former director to farm the hops was an insignificant portion of his property.
(f) On November 1, 2004, J. Andrew Moorer, a Director of the Company, made an uncollateralized advance of $8,750. The advance continues to be uncollateralized and due on demand. This advance started to accrue interest at 8% on January 1, 2006.
(g) In January 2005, John Power converted $22,500 in outstanding advances to the Company into 90,000 shares of common stock.
(h) Between March and September 2005, the Company borrowed a total of $125,000 from three lenders: $50,000 in July 2005 from Power Curve, Inc. (a company controlled by John Power); $50,000 in May 2005 from Lone Oak Vineyards, Inc. (a company controlled by Brian Power); and $25,000 in March 2005 from Tiffany Grace, an unaffiliated party. The loans were used to payoff Butte Creek's loans to Tri County Economic Development Corporation, purchase additional equipment and provide working capital. The Tiffany Grace note, which was executed on September 9, 2005 accrues interest at the rate of 9% per annum, is payable in monthly payments of principal and interest based upon a five year amortization, and is due in full March 2008. As of September 30, 2006, the Tiffany Grace note had current maturities of $3,525 and a long-term maturity of $15,121. The Power Curve and Lone Oak notes were executed in September, 2005, accrue interest at the rate of 9% per annum, and are payable in full in 2008. The loans are collateralized by a security interest covering all of our tangible and intangible assets. As of September 30, 2006, the Power Curve and Lone Oak notes had accrued interest of $4,759 and ($1,386) respectively and long-term maturities of $50,000 and $25,000 respectively after the sale by Lone Oak of $25,000 of its note to an unrelated third party on September 15, 2006.
(i) On December 30, 2005, John Power converted $10,000 in outstanding advances to the Company into 40,000 shares of common stock.
(j) On December 30, 2005, John Power and Power Curve, Inc. converted $215,000 and $90,000, respectively, in outstanding advances into collateralized long-term debt. The notes bear interest at 9% and mature December 31, 2008 and are collateralized by a security interest covering all of our tangible and intangible assets but are junior to the security interest granted to Power Curve, Inc. ($50,000), Lone Oak Vineyards, Inc.($25,000), Dayton Misfeldt Trust ($25,000) and Tiffany Grace ($25,000) in September 2005 described above. As of September 30, 2006, these notes had accrued interest of $14,513 and $6,075 with no current maturities and long-term maturities of $215,000 and $90,000 respectively.
(k) Effective December 30, 2005, our attorney Clifford Neuman converted $25,000 in accrued fees payable into 100,000 shares of common stock at a conversion price of $.25 per share. The accrued fees were incurred in connection with this offering. Mr. Neuman immediately gifted the shares to his two children equally.
(l) In the nine months ended September 30, 2006, John Power and Power Curve, Inc. have made advances to the Company of $95,800 and $109,308 respectively. The advances are uncollateralized and due on demand.
(m) John Power and Power Curve, Inc. have made advances to one of our distributor/customers. This distributor accounted for 7% and 5.4% of our gross sales in the three and nine month periods ending September 30, 2006.
4. Operating Leases
Effective July 1, 2005, the Company entered into a five year lease for office and warehouse space in Chico, California for Butte Creek. The lease provided for initial monthly rent of $3,150, which increased to $3,726 in July 2006 and is subject to annual increases every year starting in July 2007 based on the Consumer Price Index, and expires in 2010.
Future minimum lease payments under this lease are as follows:
Year Ending December 31,
2006 | $41,256 | |
2007 | $44,712 | |
2008 | $44,712 | |
2009 | $44,712 | |
2010 | $44,712 |
5. Commitments & Contingencies
A. On December 30, 2005, an unsecured outstanding advance to the Company by an unaffiliated party at that time in the amount of $10,000 was converted into 40,000 shares of common stock. In February 2006, the Company was notified by the SEC that this conversion of $10,000 into 40,000 shares of common stock to an unaffiliated third party might have been a violation of Section 5 of the Securities Act of 1933 (the "33 Act"). While Management disagrees with this view, if it is determined that this transaction constituted a primary offering by or on behalf of the Company in violation of Section 5 of the 33 Act, then the Company may be subject to remedial sanctions. Such sanctions may include the payment of disgorgement, prejudgment interest and civil or criminal penalties. Management of the Company is not aware of any pending claims for sanctions against it based on Section 5 of the 33 Act, and intends to vigorously defend against any such claims if they arise. However, due to the notification by the SEC, the Company has classified the advance, amounting to $10,000 as of September 30, 2006, as a liability under amounts subject to rescission in the accompanying September 30, 2006 balance sheet. The shares issued are included in our total number of shares outstanding as of September 30, 2006. A contingency exists with respect this matter, the ultimate resolution of which cannot be determined at this time.
B. Delinquent Taxes & Rent
At September 30, 2006 the Company had outstanding payroll tax liabilities of $50,507. Of these amounts $41,009 are considered delinquent.
California Redemption Value (CRV) is a tax collected on all package sales to retailers, processed through the California Department of Conservation and refunded through the State's recycling program. The United States Bureau of Alcohol, Tobacco and Firearms ("BATF"), now the (“TTB”), and various state agencies collect excise taxes often referred to as "excise taxes" with the amount based on the volume of beer sold. At September 30, 2006, the Company had alcohol related taxes payable to federal and state taxing authorities of $42,021. Of this amount $25,927 are considered delinquent. The detail of all taxes payable is as follows:
September 30, 2006 | |||||||
Tax Agency | Due | Delinquent | |||||
Internal Revenue Service | $37,782 | $30,900 | Payroll Taxes | ||||
CA Employment Development Department | $12,725 | $10,109 | Payroll Taxes | ||||
Bureau of Alcohol, Tobacco and Firearms | $8,845 | $0 | Excise Tax | ||||
CA Board of Equalization | $4,347 | $2,142 | Excise & Sales Tax | ||||
CA Department of Conservation | $28,829 | $23,785 | CRV Tax | ||||
Butte County & CA Franchise Tax Board | $20,959 | $20,959 | Property & Franchise Taxes | ||||
Most of these delinquent payables have been assumed by the Company in connection with our acquisition of Butte Creek as the continuation of regulatory compliance is material to the Company's ability to continue as a going concern. Both the IRS and EDD have made demands either on the Company or its predecessor for immediate payment of the delinquent taxes. The Company will attempt to negotiate payment plans for the delinquent amounts. Continued operations could be severely impaired should the IRS or any other governmental agency seek to collect any of the delinquent payables before we are able to pay them.
At September 30, 2006 the Company had outstanding rent obligations assumed from Butte Creek on our operating facility of $17,950. The Landlord made demand for payment before November 1, 2006. The Company was unable to make this payment requested and is continuing discussions with the landlord regarding this matter.
6. Deferred Offering Costs:
As of June 30, 2006, the Company had incurred $232,089 related to the now completed public offering of its securities. The Company carried $150,000 of the costs as deferred offering costs and has expensed $11,295 in fiscal 2005 and $70,794 in the 6 months ended June 30, 2006. The deferred offering costs were charged against the proceeds of the offering. All offering costs incurred in excess of $150,000 were expensed in the period incurred.
The Company's SB-2 registration statement and a post-effective amendment was declared effective by the Securities and Exchange Commission on February 14, 2006 and June 30, 2006, respectively. The offering consisted of a minimum of 400,000 shares at $0.50 per share and a maximum of 1,000,000 shares at $0.50 per share. The Company completed this offering on August 3, 2006 having sold 408,000 shares and received gross proceeds of $204,000.
7. Common Stock:
At inception, the Company issued 400,000 shares of its common stock at $0.15 per share for assets valued at $60,000. During the period ended December 31, 2003, the Company issued 300,000 shares of its common stock at $0.25 per share for cash of $75,000.
During the period ended December 31, 2004, the Company issued 800,000 shares of its common stock at $0.25 per share for cash of $200,000.
In January, 2005, the Company issued 90,000 shares of its common stock at $0.25 per share for conversion of advances payable of $22,500, and 30,000 shares of common stock in conversion of outstanding indebtedness in the amount of $7,500.
In connection with the acquisition of Butte Creek on August 31, 2005, the Company issued 200,000 shares of common stock to Butte Creek.
Effective December 30, 2005, John Power converted $10,000 in accrued advances payable into 40,000 shares of common stock, at a conversion price of $.25 per share.
Effective December 30, 2005, our attorney Clifford Neuman converted $25,000 in accrued fees payable into 100,000 shares of common stock at a conversion price of $.25 per share. The accrued fees were incurred in connection with our public offering. Mr. Neuman immediately gifted the shares to his two adult children equally.
On December 30, 2005, an uncollateralized outstanding advance to the Company by an unaffiliated party in the amount of $10,000 was converted into 40,000 shares of common stock. In February 2006, the Company was notified by the SEC that this conversion of $10,000 into 40,000 shares of common stock to an unaffiliated third party might have been a violation of Section 5 of the Securities Act of 1933 (the "33 Act"). While Management disagrees with this view, if it is determined that this transaction constituted a primary offering by or on behalf of the Company in violation of Section 5 of the 33 Act, then the Company may be subject to remedial sanctions. Such sanctions may include the payment of disgorgement, prejudgment interest and civil or criminal penalties. Management of the Company is not aware of any pending claims for sanctions against it based on Section 5 of the 33 Act, and intends to vigorously defend against any such claims if they arise. However, due to the notification by the SEC, the Company has classified the advance, amounting to $10,000 as of September 30, 2006, as a liability under amounts subject to rescission in the accompanying September 30, 2006 balance sheet. The 40,000 shares issued are included in our total number of shares outstanding as of September 30, 2006. A contingency exists with respect this matter, the ultimate resolution of which cannot be determined at this time.
The Company's SB-2 registration statement and a post-effective amendment was declared effective by the Securities and Exchange Commission on February 14, 2006 and June 30, 2006, respectively. The offering consisted of a minimum of 400,000 shares at $0.50 per share and a maximum of 1,000,000 shares at $0.50 per share. The Company completed this offering on August 3, 2006 having sold 408,000 shares and received gross proceeds of $204,000.
8. Income Taxes
The Company has an estimated net operating loss carry forward of approximately $63,000 and $191,000 at December 31, 2004 and December 31, 2005, respectively, to offset future taxable income. The net operating loss carry forward, if not used, will expire in various years through 2025, and may be restricted if there is a change in ownership. No deferred income taxes have been recorded because of the uncertainty of future taxable income to be offset.
Significant components of the Company's net deferred income tax asset are as follows:
| September 30, 2006 | December | December |
Net operating losses carry forward | $ 356,507 | $ 191,000 | $ 63,000 |
Deferred income tax allowance | (65,954) | (35,335) | (11,700) |
Net deferred income tax asset | $ - | $ - | $ - |
The reconciliation of income tax (benefit) computed at the federal statutory rate to income tax expense (benefit) for all periods presented is as follows:
Tax (benefit) at Federal statutory rate |
| (15.00)% |
State tax (benefit) net of Federal benefit |
| (3.50) |
Valuation allowance |
| 18.50 |
Tax provision (benefit) |
| - |
9. Acquisition
On August 31, 2005, the Company acquired all the assets and certain liabilities of Butte Creek Brewing Company, LLC (Butte Creek). The results of Butte Creek's operations have been included in the consolidated financial statements since that date. Butte Creek was a manufacturer of craft beers, specializing in organic beers. The Company made the acquisition to become an organic craft brewer and expects to continue to produce organic craft beers and to market them strategically in niche markets to capitalize on dedication to the use of organic ingredients.
This business combination was accounted for as a purchase of Butte Creek by the Company under the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Under the purchase method of accounting, the total purchase price, including transaction costs, is allocated to the net tangible and intangible assets acquired by the Company in connection with the transaction, based on their fair values as of the completion of the transaction. The aggregate purchase price was $983,084, including $567,400 cash, $365,684 assumed liabilities, and common stock valued at $50,000. The $567,400 cash consisted of advances to Butte Creek of $215,035 and $134,965 during the years ended December 31, 2004 and 2003, respectively, and advances of $217,400 during the eight months ended August 31, 2005. These advances were prepayments on the purchase of assets and were uncollateralized. The value of the 200,000 common shares issued was determined based on the offering price of the Company's common shares in its prospectus, which management believes to be the fair value.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.
At August 31, 2005
| Current assets | $197,612 |
| Property, plant and equipment | 287,969 |
| Intangible assets | 25,000 |
| Goodwill | 472,503 |
| Total assets acquired | 983,084 |
| Current liabilities | 365,684 |
| Total liabilities assumed | 365,684 |
| Net assets acquired | $617,400 |
The $25,000 of acquired intangible assets relate to tradenames and trademarks that had an expected remaining useful life of approximately five years at the time of their acquisition and are being amortized on a 5-year schedule.
During the quarter ended September 30, 2006 the Company made efforts to resolve old outstanding obligations assumed in its acquisition of Butte Creek on August 31, 2005.
In connection with the payment of certain delinquent taxes assumed in the Butte Creek acqusition, the Company negotiated a discount of $11,291 resulting in a gain of $11,291 in both the three and nine month periods ended September 30, 2006.
10. STOCK OPTIONS
On August 21, 2006 The Company granted 400,000 non-qualified stock options to various directors, officers and employees. The fair value of the option grants is estimated on the date of grant utilizing the Black-Scholes option pricing model with the following weighted average assumptions for our grants during the quarter ended September 30, 2006: expected life of options of 6.3 years, expected volatility of 75%, risk-free interest rate of 4.85% and no dividend yield. The weighted average fair value at the date of grant for options granted during the quarter ended September 30, 2006 approximated $0.50 per option. During the three and nine month period ended September 30, 2006, the Company granted 400,000 options, respectively, to various directors, officers and employees resulting in stock based compensation expense of $71,752 in the three and nine month period ended September 30, 2006.
11. Subsequent Events:
Subsequent to September 30, 2006, John Power and Power Curve, Inc. have made advances to the Company in the amount of $10,600 and $30,300 respectively. The advances are uncollateralized and due on demand.
12
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Plan of Operations
Golden West Brewing Company, Inc. (the "Company" or "Golden West") was formed in December 2003 to acquire substantially all of the business assets of Butte Creek Brewing Company, LLC ("Butte Creek" or "Butte"). We are currently a holding company for our wholly-owned subsidiary Golden West Brewing Company, a California corporation, which acquired all of the assets and certain liabilities of Butte Creek on August 31, 2005. Butte Creek has been operating as a craft brewery in Chico, California since 1996. It specializes in brewing certified organic craft beers. In 2005, we doubled our production capacity from 4,000 barrels per year to approximately 8,000 barrels per year with the acquisition of two 80 barrel fermentation tanks and one 80 barrel conditioning or "brite" tank. We still face operational challenges as our sales and production levels increase. The following are the key issues and challenges facing the Company:
* | Sales. We believe that our minimum level of sales for our operating subsidiary, Butte Creek, to break-even is an average of at least $130,000 per month. Butte Creek has never achieved this level of sales during a month in its history. It is critical for us to improve our sales so that we can achieve at least a break-even operating level. There is no assurance that we will be able to achieve this level of sales, or if we achieve it, that we will be able to maintain it. Our sales enhancement plan is to (a) introduce new products (b) add new sales territories and (c) increase our penetration in existing territories. |
* | Increase Gross Profit Margin. In addition, our gross profit margin must be increased to at least 30% of sales. Our plan is to take advantage of our increased production capacity and increase our production which should lower our average cost per barrel of beer produced. Also, we are trying to improve our product mix with higher margin products including more draft beer sales. We also are raising our prices for contract brewing. Finally, we raised our prices in early 2006 and notified most of our distributors of a price increase effective January 2007. There is no assurance that we will be successful in implementing our plan to increase our gross profit margin. Many of these strategies have contributed to an improvement in our gross profit margin but have been outweighed by negative contributing factors including rising raw material costs, contract brewing increasing as a percentage of total sales, inventory adjustments and shortages and packaging inefficiencies caused by an equipment problem. As a result, we have reduced our short-term target gross profit margin to 30% from 35% and have raised our target break-even monthly sales level to $130,000 from $120,000. |
* | Control Selling, General & Administrative Expenses. In addition to raising sales, we must control our expenditures to achieve a break-even operating level. We have taken steps to reduce our monthly operating expenses by reducing our employee head-count. These savings have been off-set by wage increases for other remaining employees. In addition, we have reduced our direct sales effort in California during 2006 and are considering eliminating all direct sales during 2007. Our Direct sales effort consisted of three delivery vans selling directly from our brewery in Chico. Two of the three vans and drivers had been eliminated as of September 30, 2006. We believe the costs of our direct sales may outweigh the sales volume derived from this effort. We continue to operate our highest volume direct sales route and will analyze the viability of our Direct Sales efforts on a quarterly basis. |
* | Working Capital Shortage. Our history of working capital deficiencies make it difficult to build finished inventory. We owe delinquent taxes to several Federal and State agencies. In addition, we have increased our production capacity and launched new products that have increased inventory levels and further impacted our working capital. Finally, our ability to maintain our equipment has been challenging with our shortage of working capital. |
* | Lack of Marketing Materials. We have very limited marketing budgets and are not competitive with other breweries of our size in the amount and quality of marketing materials needed to support our distribution network. |
* | Continued Operating Losses. Our history of operating losses makes it difficult to raise capital for our working capital needs. |
* | Lack of Inventory Controls. We need to improve our control and management of our finished inventory to reduce the amount of shrinkage we have experienced due, we believe, to unsupervised employees. We do not believe our lack of inventory control has materially impacted our business. We conduct physical inventories on a monthly basis and upgraded our accounting software to improve our inventory control. If these measures do not provide improved inventory controls, we would expect our margins to erode and our sales to decline. |
Both Golden West and Butte Creek which we acquired on August 31, 2005 have sustained losses from operations. Golden West has a working capital deficit which raises substantial doubts about their ability to continue as a going concern. Our audited financial statements have received going concern qualifications from our Independent Registered Public Accounting Firm.
The following discussion and analysis is for the three and nine month periods ended September 30, 2006 and should be read in conjunction with the Notes thereto of Golden West Brewing Company, Inc. financial statements. We were a development stage entity prior to our acquisition of Butte Creek on August 31, 2005.
Possible Section 5 Violation
It is possible that it may be determined that we violated Section 5 of the Securities Act. Section 5 of the Securities Act prohibits the use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell a security unless a registration statement is in effect as to such security. Section 5(c) of the Securities Act prohibits the use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy a security unless a registration statement has been filed as to such security.
The transaction that may have caused such a violation of Section 5 is as follows: In December, 2004, we made the initial filing of the registration statement of which this prospectus forms a part. In June 2005, an unaffiliated third-party at that time, Bob Vogt, loaned us the sum of $10,000. The loan was unsecured and undocumented. It was our intention to repay the loan in a short period of time; however, we were unable to do so due to our lack of working capital. In December 2005, in an effort to improve our balance sheet, we offered Mr. Vogt an opportunity to convert his $10,000 loan into shares of our common stock. In December 2005, we effected the conversion of Mr. Vogt's loan into shares of our common stock in a transaction in which we relied upon an exemption from the registration requirements of the Securities Act contained in Section 4(2), which exempts transactions not involving a public offering.
Under the principals of integration, two or more offerings of securities may be integrated and deemed to be one offering under certain circumstances. Factors considered in determining whether offers and sales of securities should be integrated are:
* | Whether the sales are part of a single plan of financing; |
* | Whether the sales involve the issuance of the same class of securities; |
* | Whether the sales have been made at or about the same time; |
* | Whether the same type of consideration is being received; and, |
* | Whether the sales were made for the same general purpose. |
If it were to be determined that the conversion of Mr. Vogt's note payable into shares of common stock is integrated with the offering covered by the registration statement and this prospectus, then we could not rely upon the exemption contained in Section 4(2) of the Securities Act for the Vogt conversion, and as a result, it may be determined that the conversion of the Vogt loan into shares of common stock constituted a violation of Section 5 of the Securities Act. If this were to occur, we would become subject to remedial actions, which would include the payment of disgorgement, pre-judgment interest and civil or criminal penalties pursuant to Sections 12(a)(1), 8A and 24 of the Securities Act. We are not aware of any pending claims for sanctions against us based upon a Section 5 violation and we intend to vigorously defend any such claim should it arise. However, in our financial statements, we have classified the advance payable to Mr. Vogt as subject to rescission. A rescission offer would require that we file a registration statement covering the offer and, once the registration statement has been declared effective by the Securities and Exchange Commission, redeeming the shares of common stock and repaying the loan to Mr. Vogt. In addition, we could face possible civil penalties in an undetermined amount. This could have a significant impact on our working capital and impair our ability to continue as a going concern.
Furthermore, any claim for rescission would make it difficult for us to raise additional debt or equity financing needed to run our business, and would not be viewed favorably by analysts or investors.
Critical Accounting Policies And Estimates
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. The actual results could differ from those estimates. Our financial statements are based upon a number of significant estimates, the allowance for doubtful accounts, obsolescence of inventories and the estimated useful lives selected for property and equipment. Due to the uncertainties inherent in the estimation process, it is at least reasonably possible that the estimates for these items could be further revised in the near term and such revisions could be material.
Overview - Factors Affecting Results of Operations
Sales in the craft beer industry generally reflect a degree of seasonality, with the first and fourth quarters historically being the slowest and the rest of the year typically demonstrating stronger sales. We have historically operated with little or no backlog and, therefore, our ability to predict sales for future periods is limited.
Our sales are affected by several factors, including consumer demand, price discounting and competitive considerations. We compete in the craft brewing market as well as in the much larger specialty beer market, which encompasses producers of import beers, major national brewers that produce fuller-flavored products, and large spirit companies and national brewers that produce flavored alcohol beverages. Beyond the beer market, craft brewers also face competition from producers of wines and spirits. The craft beer segment is highly competitive due to the proliferation of small craft brewers, including contract brewers, and the large number of products offered by such brewers. Imported products from foreign brewers have enjoyed resurgence in demand since the mid-1990s. Certain national domestic brewers have also sought to appeal to this growing demand for craft beers by producing their own fuller-flavored products. The wine and spirits market has experienced a surge in the past several years, attributable to competitive pricing, increased merchandising, and increased consumer interest in spirits. Because the number of participants and number of different products offered in this segment have increased significantly in the past ten years, the competition for bottled product placements and especially for draft beer placements has intensified.
Operating and Financial Review and Prospects
Operating Results
For the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005:
SALES. Gross Sales were $297,750 for the quarter ended September 30, 2006. Sales net of excise taxes (“Net sales”) for the quarter ended September 30, 2006 were $284,597 compared to $75,536 in Gross Sales and $71,193 in net sales for the quarter ended September 30, 2005. The increase was due to our acquisition of Butte Creek which occurred on August 31, 2005 and therefore the prior period included only one month of operations. Our sales by segment consisted of:
Case Beer Sales 79.5%
Draft Beer Sales 9%
Contract Brewing 11.5%
COST OF GOODS SOLD. Cost of goods sold for the quarter ended September 30, 2006 was $206,266 or 72.4% of net sales compared to $47,790 or 67.1% for the quarter ended September 30, 2005 which included only one month of operations after our acquisition of Butte Creek on August 31, 2005. Our cost of goods sold for the current period for each segment was:
Case Beer Sales 68.0%
Draft Beer Sales 51.16%
Contract Brewing 74.7%
In addition we had $4,509 in freight and other costs that were not allocated to any segment but was part of our total cost of goods sold.
Our cost of goods sold is the best in our draft beer sales and the worst in contract brewing. Our cost of goods sold was negatively impacted in the quarter by (a) increases in the cost of certain raw materials (b) contract brewing as a percentage of total sales (c) inventory adjustments and shortages and (d) packaging inefficiencies caused by an equipment problem.
GROSS PROFIT. Gross profit for the quarter ended September 30, 2006 was $78,331 or 27.5% of net sales compared to $23,403 or 32.8% of net sales in the quarter ended September 30, 2005 which included only one month of operations after our acquisition of Butte Creek on August 31, 2005. Our goal is to increase our gross profit to at least 30% of net sales.
OPERATING EXPENSES. Total operating expenses were $227,709 for of the quarter ended September 30, 2006 compared to $54,050 in the quarter ended September 30, 2005. The increase was primarily due to our acquisition of Butte Creek on August 31, 2005 and as a result the quarter ended September 30, 2005 had only one month of operations from that acquisition.
Components of operating expenses were:
* | Depreciation & Amortization expense was $7,793 for the quarter ended September 30, 2006 compared to $2,590 for the comparable quarter in 2005. The increase was the result of tangible and intangible assets acquired from Butte Creek on August 31, 2005 and additional brewing equipment acquired in 2005 and 2006. |
* | Management compensation was $21,500 for the quarter ended September 30, 2006 compared to $3,000 in the corresponding quarter ended September 30, 2005. The increase was related to the acquisition of Butte Creek on August 31, 2005 resulting in a full three months of operations in the current quarter versus only one month in corresponding quarter from 2005. |
* | Rent expense was $11,178 for the quarter ended September 30, 2006 compared to $3,150 in the corresponding quarter in 2005. The increase was the rent paid for our Chico, California brewery during the period which we did not operate until our acquisition of Butte Creek on August 31, 2005 and a rent increase that was effective in July 2006. |
* | Selling expense was $20,083 for the quarter ended September 30, 2006 compared to $6,097 for the quarter ended September 30, 2005. The increase was due to our acquisition of Butte Creek on August 31, 2005 resulting in a full three months of operations in the current quarter versus only one month in corresponding quarter from 2005. |
* | Outside Sales Compensation was $12,329 for the quarter ended September 30, 2006 compared to $7,446 in the prior fiscal year. The increase was the result of purchase of Butte Creek on August 31, 2005.resulting in a full three months of operations in the current quarter versus only one month in corresponding quarter from 2005. |
* | Stock Based Compensation was $71,752 for the quarter ended September 30, 2006 compared to $0 in the prior fiscal year. The increase was the result of the granting of 400,000 options, to various directors, officers and employees resulting in stock based compensation expense of $71,752. |
* | Other General & Administrative Operating Expenses were $83,074 for quarter ended September 30, 2006 compared to $31,767 for the quarter September 30, 2005. The increase was a result of our acquisition on August 31, 2005 of Butte Creek resulting in a full three months of operations in the current quarter versus only one month in corresponding quarter from 2005. This category's primary components are legal, accounting, insurance, certain payroll and payroll related expenses. |
OPERATING LOSS. The operating loss for the quarter ended September 30, 2006 increased $118,731 or 387% to $149,378 from $30,647 compared to the corresponding quarter ended September 30, 2005 as a result of our acquisition of Butte Creek on August 31, 2005 and the granting of stock options. The quarter ended September 30, 2006 included three months of operations versus only one full month of operations in the quarter ended September 30, 2005.
OTHER INCOME & EXPENSE. Total other income and expense was $2,863 for the quarter ended September 30, 2006 compared to $4,328 for the corresponding quarter ended September 30, 2005. The primary components were other income in the form of debt forgiveness of $11,291 associated with some of the debt acquired in the purchase of Butte Creek and interest expense of $13,534 related to debt assumed as part of the Butte Creek acquisition on August 31, 2005 and incurred to purchase equipment and sustain operations.
NET LOSS. Net loss increased $117,266 or 335% to $91,780 for the quarter ended September 30, 2006 compared to $34,975 for the quarter ended September 30, 2005. The increase in our net loss was a result of the operating losses incurred by Butte Creek in the third quarter of 2006. We only owned Butte Creek for one month in the third quarter of 2005.
For the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005:
SALES. Gross Sales for the nine months ended September 30, 2006 were $775,281 compared to $75,536 for the nine month period ended September 30, 2005. Sales net of excise taxes (“Net Sales”) were $738,631 compared to $71,193 in the nine months ended September 30, 2005. The increase was due to our acquisition of Butte Creek which occurred on August 31, 2005. Therefore, the corresponding nine-month period in 2005 had only one month of sales compared to nine months of sales in the nine-month period in 2006.
Our sales by segment consisted of:
Case Beer Sales 80.03%
Draft Beer Sales 9.71%
Contract Brewing 10.26%
COST OF GOODS SOLD. Cost of goods sold for the nine months ended September 30, 2006 was $529,156 or 71.6% of net sales compared to $47,790 or 67.12% of sales for the nine month period ended September 30, 2005. We were still a development stage company and generated no revenues for the first eight months of the corresponding period nine month period of 2005. . Our cost of goods sold for each segment was:
Case Beer Sales 67.82%
Draft Beer Sales 49.02%
Contract Brewing 76.37%
In addition we had $10,690 in freight and other that were not allocated to any segment but were part of our cost of goods sold.
Our cost of good sold was negatively impacted in the nine month period ended September 30, 2006 by (a) increases in the cost of raw materials (b) inventory adjustments and shortages and (c) packaging inefficiencies caused by an equipment problem.
GROSS PROFIT. Gross profit for the nine months ended September 30, 2006 was $209,475 or 28.35% of net sales compared to $23,403 or 32.8% of sales in the nine month period ended September 30, 2005. The corresponding period in 2005 consisted of only one month of operations compared to nine months of operations in the current period Our goal is to increase our gross profit to at least 30% of net sales.
OPERATING EXPENSES. Total operating expenses were $595,036 for of the nine months ended September 30, 2006 compared to $67,343 in the nine months ended September 30, 2005. The increase was primarily due to our acquisition of Butte Creek on August 31, 2005 and the granting of stock options. In addition, we had over $90,000 in legal and accounting costs that were expensed in 2006 related to our public offering that commenced on February 14, 2006 and ended on August 3, 2006.
OPERATING LOSS. The operating loss for the nine months ended September 30, 2006 was $385,561 compared to $43,940 for the corresponding period ended September 30, 2005. The significant increase can be attributed to our acquisition of Butte Creek on August 31, 2005, the granting of stock options and as a result a full nine months of operations in the current year compared to only one month of operations in the 2005 period. In addition, we have incurred substantial legal and accounting expense in 2006 related to our public offering as described above.
OTHER INCOME & EXPENSE. Total other income and expense was $31,407 for the nine month period ended September 30, 2006 compared to $6,845 for the corresponding nine-month period ended September 30, 2005. The primary components were other income in the form of debt forgiveness of $11,291 associated with some of the debt acquired in the purchase of Butte Creek and interest expense of $42,965 on debt assumed as part of the Butte Creek acquisition on August 31, 2005 or incurred subsequent to the acquisition to purchase equipment and sustain operations.
NET LOSS. Net loss increased $366,183 or 721% to $416,968 for the nine months ended September 30, 2006 compared to $50,785 for the corresponding period of 2005. The increase in our net loss was a result of the operating losses incurred by Butte Creek in the first nine months of 2006 and the granting of stock options. We did not own Butte Creek in eight of the first nine months of 2005. In addition, we incurred over $90,000 in legal and accounting costs during this period related to our public offering that was completed in August 2006.
Liquidity and Capital Resources
We have required capital principally for the purchase of Butte Creek and the funding of operating losses, capital expenditures and working capital. To date, we have financed our capital requirements through the sale of equity and short and long-term borrowings primarily from related parties. We expect to meet our future financing needs and working capital and capital expenditure requirements through cash on hand, borrowings and offerings of debt or equity securities, although there can be no assurance that our future financing efforts will be successful The terms of future financings could be highly dilutive to existing shareholders.
We have no commitments, understandings or arrangements for any additional working capital. If we are unable to secure additional financing to cover our operating losses until break-even operations can be achieved, we may not be able to continue as a going concern.
We had $1,199 cash and cash equivalents and a negative working capital of $389,462 at September 30, 2006. Our long-term debt was $418,895 at September 30, 2006. We do not have sufficient cash on hand or available credit facilities to continue operations and are dependent upon securing loans or the sale of equity to provide adequate working capital to continue operations. We have raised capital through the sales of unregistered securities and advances and/or loans from its officers and directors to acquire Butte Creek, and fund its operations after its acquisition. There are no assurances that we will be able to secure additional capital to maintain operations.
During the quarter ended September 30, 2006, the Company's capital expenditures totaled $2,360.
Lines of Credit
The Company assumed a $25,000 balance on a credit card issued by Wells Fargo Bank, with interest at the rate of 17.25%. The card is uncollateralized and guaranteed by Tom Atmore, Butte Creek's former general manager. The outstanding balance as of September 30, 2006 was $24,188. Under our separation agreement with Atmore, we were obligated to pay this indebtedness prior to September 30, 2006 but did not have the resources to pay this obligation.
The Company assumed a $15,400 line of credit on a Butte Creek credit card with Bank of America/MBNA with interest at the rate of 29.98%. The debt on the credit card is uncollateralized but guaranteed by Tom Atmore, Butte Creek's former general manager. The outstanding balance as of September 30, 2006 was $10,834. Under our separation agreement with Atmore, we were obligated to pay this indebtedness prior to September 30, 2006 but did not have the resources to pay this obligation.
Notes Payable
On November 1, 2004, J. Andrew Moorer, a Director of the Company, made an uncollateralized advance of $8,750. This advance started to accrue interest at 8% on January 1, 2006 and has accrued interest of $525 as of September 30, 2006. Between March and September 2005, the Company borrowed a total of $125,000 from three lenders: $50,000 in July 2005 from Power Curve, Inc. (a company controlled by John Power); $50,000 in May 2005 from Lone Oak Vineyards, Inc. (a company controlled by Brian Power); and $25,000 in March 2005 from Tiffany Grace, an unaffiliated party. The loans were used to payoff Butte Creek's loans to Tri County Economic Development Corporation, purchase additional equipment and provide working capital. The Tiffany Grace note, which was executed on September 9, 2005 accrues interest at the rate of 9% per annum, is payable in monthly payments of principal and interest based upon a five year amortization, and is due in full March 2008. As of September 30, 2006, the Tiffany Grace note had current maturities of $3,525 and a long-term maturity of $15,121. The Power Curve and Lone Oak notes were executed in September, 2005, accrue interest at the rate of 9% per annum, and are payable in full in 2008. The loans are collateralized by a security interest covering all of our tangible and intangible assets. As of September 30, 2006, the Power Curve and Lone Oak notes had accrued interest of $4,759 and ($1,386) respectively and long-term maturities of $75,000 after the sale of $25,000 of the Lone Oak note to an unrelated third party.
On December 30, 2005, John Power and Power Curve, Inc. converted $215,000 and $90,000, respectively, in outstanding advances into collateralized long-term debt. The notes bear interest at 9% and mature December 31, 2008 and are collateralized by a security interest covering all of our tangible and intangible assets but are junior to the security interest granted to Power Curve, Inc. ($50,000), Lone Oak Vineyards, Inc. ($50,000) and Tiffany Grace ($25,000) in September 2005 described above. As of September 30, 2006, these notes had accrued interest of $14,513 and $6,075respectively and long-term maturities of $215,000 and $90,000 respectively.
As part of our acquisition of Butte Creek, the Company assumed an $8,136 note payable to Bruce Detweiler, a member of Butte Creek, and a $10,098 note payable to Richard Atmore, Jr., a member of Butte Creek and the brother of Tom Atmore, a managing member of Butte Creek. The note to Atmore was repaid in the quarter ended September 30, 2006.
The Company has pledged substantially all of our assets to secure some of the notes. Should the Company default in the payment of these secured notes, the collateral could be subject to forfeiture.
In the nine months ended September 30.2006, John Power and Power Curve, Inc. have made advances to the Company of $95,800 and $109,308 respectively. The advances are uncollateralized and due on demand.
Delinquent Taxes & Rent
At September 30, 2006 the Company had outstanding payroll tax liabilities of $50,507. Of these amounts $41,009 are considered delinquent.
California Redemption Value (CRV) is a tax collected on all package sales to retailers, processed through the California Department of Conservation and refunded through the State's recycling program. The United States Bureau of Alcohol, Tobacco and Firearms ("BATF"), now the (“TTB”), and various state agencies collect excise taxes often referred to as "excise taxes" with the amount based on the volume of beer sold. At September 30, 2006, the Company had alcohol related taxes payable to federal and state taxing authorities of $11,050. The detail of all taxes payable is as follows:
September 30, 2006 | ||||
Tax Agency | Due | Delinquent | ||
Internal Revenue Service | $37,782 | $30,900 | Payroll Taxes | |
CA Employment Development Department | $12,725 | $10,109 | Payroll Taxes | |
Bureau of Alcohol, Tobacco and Firearms | $8,845 | $ 0 | Excise Tax | |
CA Board of Equalization | $2,205 | $ 0 | Excise & Sales Tax | |
CA Department of Conservation | $28,829 | $23,785 | CRV Tax | |
Butte County & CA Franchise Tax Board | $20,959 | $20,959 | Property & Franchise Taxes | |
Most of these delinquent payables have been assumed by the Company in connection with our acquisition of Butte Creek as the continuation of regulatory compliance is material to the Company's ability to continue as a going concern. Both the IRS and EDD have made demands either on the Company or its predecessor for immediate payment of the delinquent taxes. The Company will attempt to negotiate payment plans for the delinquent amounts. Continued operations could be severely impaired should the IRS or any other governmental agency seek to collect any of the delinquent payables before we are able to pay them.
At September 30, 2006 the Company had outstanding rent obligations assumed from Butte Creek on our operating facility of $17,950. The Landlord has made demand for payment before November 1, 2006. The Company was unable to make this payment requested and is continuing discussions with the landlord regarding this matter.
Off Balance Sheet Arrangements
The Company does not have and has never had any off-balance sheet arrangements.
Overview of Product Distribution
Our products are available for sale directly to consumers in draft and bottles at restaurants, bars and liquor stores, as well as in bottles at supermarkets, warehouse clubs and convenience stores. Like substantially all craft brewers, our products are delivered to these retail outlets through a network of local distributors whose principal business is the distribution of beer and, in some cases, other alcoholic beverages, and who traditionally have local distribution relationships with one or more national beer brand.
Sales in the craft beer industry generally reflect a degree of seasonality, with the first and fourth quarters historically being the slowest and the rest of the year typically demonstrating stronger sales. We have historically operated with little or no backlog and, therefore, our ability to predict sales for future periods is limited.
Certain Considerations: Issues and Uncertainties
We do not provide forecasts of future financial performance or sales volume, although this prospectus contains certain other types of forward-looking statements that involve risks and uncertainties. Those risks and uncertainties are discussed more fully in the section of this prospectus titled "Risk Factors." While we are optimistic about our long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its business prospects and any forward-looking statements.
In light of uncertain contingencies relating to our acquisition of Butte Creek, we anticipate that a material impairment charge is reasonably likely to occur in the future, resulting in a material impact on our financial statements and results of operations. Since the acquisition has been consummated, we will be required to determine if a valuation allowance with respect to our investment in Butte Creek. Based upon the financial history of Butte Creek, it appears to us that a valuation allowance is reasonably likely.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued during 2006, 2005, 2004 and 2003, none of which are expected to have a material impact on the Company's consolidated financial position, operations or cash flows.
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ITEM 3. | CONTROLS AND PROCEDURES |
The Company's Principal Executive Officer and Principal Financial Officer, John C. Power, has established and is currently maintaining disclosure controls and procedures for the Company. The disclosure controls and procedures have been designed to provide reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.
The Principal Executive Officer and Principal Financial Officer conducted an update review and evaluation of the effectiveness of the Company's disclosure controls and procedures and have concluded, based on his evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures are not effective to provide reasonable assurance that information required to be disclosed in the reports that you file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure and we refer you to Exchange Act Rule 13a-15(e). We initially became subject to the reporting requirements of Section 13a of the Exchange Act on February 16, 2006. The principal deficiency in our disclosure controls and procedures is our lack of a dedicated Chief Financial Officer who is primarily responsible for our public disclosures and financial reporting. We intend to retain a qualified Chief Financial Officer if available working capital permits. There have been no material changes in our internal controls or in other factors that could materially affect these controls subsequent to the date of the previously mentioned evaluation.
OTHER INFORMATION | ||
Item 1. | Legal Proceedings | |
On March 15, 2006, we were notified that the California Department of Alcoholic Beverage Control had filed an Accusation alleging that we had violated California regulations by participating in a beer tasting at the Mt. Shasta Board & Ski Park, not sponsored by a non-profit. As a result, we entered into a consent sanction consisting of a temporary suspension of ten days of our manufacturing license which was automatically stayed. There are no material legal proceedings in which either we or any of our affiliates are involved which could have a material adverse effect on our business, financial condition or future operations. | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities | |
The following information is being provided pursuant to Item 701(f) of Regulation SB under the Securities Act of 1933, as amended (the “Securities Act”): | ||
1. The Company’s registration statement on Form SB-2, SEC File No. 333-121351 (the “Registration Statement”) was declared effective by the Securities and Exchange Commission on February 14, 2006. Post Effective Amendment No. 1 to the Registration Statement on Form SB-2 was declared effective by the Securities and Exchange Commission on June 30, 2006. The Registration Statement registered for sale an aggregate of 1,000,000 shares of common stock to be offered by the Company to the public in a direct public offering, without the use of an underwriter, on a 400,000 share minimum, all or none (the “minimum offering”), 1,000,000 share maximum-basis (the “maximum offering”). 2. The Offering commenced on February 14, 2006. 3. Not applicable 4. (i) The Offering terminated on August 3, 2006 with the Company having sold an aggregate of 408,000 shares of common stock, 592,000 shares of common stock fewer than the maximum offering of 1,000,000 shares. (ii) There was no managing underwriter. (iii) The Registration Statement registered a maximum of 1,000,000 shares of common stock, $.0001 par value. (iv) The Registration Statement registered for sale to the public a maximum of 1,000,000 shares of common stock at a public offering price of $.50 per share. The offering terminated on August 3, 2006, with the Company having sold an aggregate of 408,000 shares of common stock at a price of $.50 per share, or gross proceeds of $204,000. (v) As of June 30, 2006, the Company had incurred expenses totaling $232,089 related to the public offering of its securities. The Company has carried $150,000 of the costs as deferred offering costs and has expensed the balance ($11,295 in fiscal 2005 and $70,794 in the six months ended June 30, 2006) as a current expense. All legal and accounting costs incurred in excess of $150,000 have been charged as a current expense, and not an expense related to the public offering. (A). No expense payments were made, directly or indirectly to directors, officers, general partners of the issuer or their associates; to persons owning 10% or more of any class of equity securities of the issuer, or to affiliates of the issuer, except that $9,426.40 was paid to a director and officer for reimbursement of expenses. (B). The following offering expenses were paid to others: Legal Counsel: $100,000; Independent Registered Public Accountants: $5,000; Printing, Mailing, Travel: $6,700; Transfer Agent: $4,300. (vi) The net offering proceeds to the issuer after deducting total expenses described in paragraph (f)(4)(v) of this Item were $84,000. (vii) The amount of net offering proceeds to the issuer have been expended for the following purposes: Construction of plant-building facilities: $0; Purchase and Installation of Machinery and Equipment $0; Purchases of Real Estate: $0; Acquisition of Other Businesses: $0; Repayment of Indebtedness: $50,000; Working Capital: $34,000; Temporary Investments: $0; and, Other Purposes (at least 5% of total offering proceeds or, $100,000 whichever is less). Of the foregoing use of proceeds, the following amounts were paid to: (A) Direct or indirect payments to officers, general partners of the issuer or their affiliates; to persons owning 10% or more of any class of equity securities of the issuer, and to affiliates of the issuer: $0. (B) Direct or indirect payments to others: $84,000. | ||
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Item 3. | Defaults Upon Senior Securities | ||
None, except as previously disclosed. | |||
Item 4. | Submission of Matters to a Vote of Security Holders | ||
None, except as previously disclosed. | |||
Item 5. | Other Information | ||
None, except as previously disclosed. | |||
Item 6. | Exhibits and Reports on Form 8-K | ||
Exhibits | |||
31 | Certification | ||
32 | Certification pursuant to 18 U.S.C. Section 1350 | ||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
GOLDEN WEST BREWING COMPANY, INC. | |
Date: November 20, 2006 | By: /s/John C. Power John C. Power, President, Chief Financial Officer, Principal Accounting Officer |
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