Attached files
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EX-31.1 - MENDOCINO BREWING CO INC | v193662_ex31-1.htm |
EX-32.1 - MENDOCINO BREWING CO INC | v193662_ex32-1.htm |
EX-32.2 - MENDOCINO BREWING CO INC | v193662_ex32-2.htm |
EX-31.2 - MENDOCINO BREWING CO INC | v193662_ex31-2.htm |
EX-10.102 - MENDOCINO BREWING CO INC | v193662_ex10-102.htm |
EX-10.100 - MENDOCINO BREWING CO INC | v193662_ex10-100.htm |
EX-10.101 - MENDOCINO BREWING CO INC | v193662_ex10-101.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
||
x
|
Quarterly report pursuant to
Section 13 or 15(d)
of the Securities Exchange Act
of 1934
|
For
the quarterly period ended June 30, 2010
OR
¨
|
Transition
report pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of
1934
|
For the
transition period from __________ to __________
Commission
file number 1-13636
Mendocino
Brewing Company, Inc.
(Exact
name of Registrant as Specified in its Charter)
California
|
68-0318293
|
|
(State
or Other Jurisdiction of
|
(IRS
Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
|
1601
Airport Road, Ukiah, CA 95482
(Address
of principal executive offices)
(707)
463-2087
(Registrant's
Telephone Number, Including Area Code)
Not
Applicable
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate
by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
(check
one)
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ý |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: The number of shares of the
issuer's common stock outstanding as of August 13, 2010 is
12,427,262.
PART
I
Item
1.
|
Financial
Statements.
|
MENDOCINO
BREWING COMPANY, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
June
30, 2010
(Unaudited)
|
December
31, 2009 (Audited)
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 104,700 | $ | 140,900 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $401,500 and
$504,900, respectively
|
5,376,900 | 11,267,700 | ||||||
Inventories
|
1,877,600 | 1,862,600 | ||||||
Prepaid
expenses
|
301,300 | 543,300 | ||||||
Total
Current Assets
|
7,660,500 | 13,814,500 | ||||||
Property
and Equipment (net of accumulated depreciation)
|
12,028,200 | 12,474,200 | ||||||
Other
Assets
|
||||||||
Deposits
and other assets
|
195,700 | 288,200 | ||||||
Intangibles,
(net of amortization)
|
47,600 | 47,600 | ||||||
Total
Other Assets
|
243,300 | 335,800 | ||||||
Total
Assets
|
$ | 19,932,000 | $ | 26,624,500 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Secured
lines of credit
|
$ | 3,069,600 | $ | 3,126,200 | ||||
Accounts
payable
|
6,155,800 | 12,088,200 | ||||||
Accrued
liabilities
|
1,420,800 | 1,504,100 | ||||||
Current
maturities of notes to related parties including accrued
interest of $1,263,500 and $0, respectively
|
3,268,600 | 97,000 | ||||||
Current
maturities of obligation under long-term debt
|
3,673,800 | 319,800 | ||||||
Current
maturities of obligation under capital lease
|
117,800 | 142,700 | ||||||
Total
Current Liabilities
|
17,706,400 | 17,278,000 | ||||||
Long-Term
Liabilities
|
||||||||
Notes
to related parties including accrued interest of $0 and $1,218,400,
respectively
|
89,700 | 3,327,800 | ||||||
Long
term debt, less current maturities
|
- | 3,509,500 | ||||||
Obligations
under capital leases, less current maturities
|
102,600 | 161,500 | ||||||
Total
Long-Term Liabilities
|
192,300 | 6,998,800 | ||||||
Total
Liabilities
|
17,898,700 | 24,276,800 | ||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, Series A, no par value, with liquidation preference of $1 per
share; 10,000,000 shares authorized, 227,600 shares issued and
outstanding
|
227,600 | 227,600 | ||||||
Common
stock, no par value 30,000,000 shares authorized, 12,427,262 shares issued
and outstanding
|
15,043,300 | 15,043,300 | ||||||
Accumulated
comprehensive income
|
565,400 | 436,800 | ||||||
Accumulated
deficit
|
(13,803,000 | ) | (13,360,000 | ) | ||||
Total
Stockholders' Equity
|
2,033,300 | 2,347,700 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 19,932,000 | $ | 26,624,500 |
See
accompanying notes to these condensed financial statements.
MENDOCINO
BREWING COMPANY, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
June 30
|
SIX MONTHS ENDED
June 30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales
|
$ | 8,591,900 | $ | 9,783,500 | $ | 17,195,200 | $ | 17,076,000 | ||||||||
Excise
taxes
|
231,700 | 272,900 | 399,900 | 428,300 | ||||||||||||
Net
sales
|
8,360,200 | 9,510,600 | 16,795,300 | 16,647,700 | ||||||||||||
Cost
of goods sold
|
6,221,000 | 6,945,900 | 12,511,000 | 12,319,700 | ||||||||||||
Gross
profit
|
2,139,200 | 2,564,700 | 4,284,300 | 4,328,000 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Marketing
and distribution
|
1,042,500 | 1,073,000 | 2,447,800 | 2,057,200 | ||||||||||||
General
and administrative
|
995,600 | 841,100 | 2,024,500 | 1,802,800 | ||||||||||||
Total
operating expenses
|
2,038,100 | 1,914,100 | 4,472,300 | 3,860,000 | ||||||||||||
Income from
operations
|
101,100 | 650,600 | (188,000 | ) | 468,000 | |||||||||||
Other
income (expense)
|
||||||||||||||||
Other
income
|
4,400 | 5,700 | 11,500 | 12,300 | ||||||||||||
Gain
on sale of equipment
|
8,200 | - | 8,200 | 6,500 | ||||||||||||
Interest
expense
|
(139,400 | ) | (147,100 | ) | (272,100 | ) | (269,900 | ) | ||||||||
Total
other expenses
|
(126,800 | ) | (141,400 | ) | (252,400 | ) | (251,100 | ) | ||||||||
Income
(loss) before income taxes
|
(25,700 | ) | 509,200 | (440,400 | ) | 216,900 | ||||||||||
Provision
for income taxes
|
- | 800 | 2,600 | 800 | ||||||||||||
Net
income (loss)
|
$ | (25,700 | ) | $ | 508,400 | $ | (443,000 | ) | $ | 216,100 | ||||||
Other
comprehensive income (loss), net of tax 1 Foreign
Currency Translation Adjustment
|
10,800 | (126,500 | ) | 128,600 | (114,800 | ) | ||||||||||
Comprehensive
income (loss)
|
$ | (14,900 | ) | $ | 381,900 | $ | (314,400 | ) | $ | 101,300 | ||||||
Net
income (loss) per common share – basic and diluted
|
$ | (0.00 | ) | $ | 0.04 | $ | (0.04 | ) | $ | 0.02 | ||||||
Weighted
average common shares outstanding - Basic
|
12,427,262 | 12,274,762 | 12,427,262 | 12,236,714 | ||||||||||||
Diluted
|
12,427,262 | 14,333,366 | 12,427,262 | 14,295,318 |
See
accompanying notes to these condensed financial statements.
2
MENDOCINO
BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Six
Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income (Loss)
|
$ | (443,000 | ) | $ | 216,100 | |||
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
||||||||
Depreciation
and amortization
|
534,800 | 523,000 | ||||||
Provision
for doubtful accounts
|
68,800 | 23,900 | ||||||
Interest
accrued on related party debt
|
45,100 | 45,100 | ||||||
Non
cash compensation
|
— | 61,000 | ||||||
(gain)
on sale of assets
|
(8,200 | ) | (6,500 | ) | ||||
Changes
in:
|
||||||||
Accounts
receivable
|
5,186,500 | (761,700 | ) | |||||
Inventories
|
(15,000 | ) | 171,900 | |||||
Prepaid
expenses
|
219,200 | (93,900 | ) | |||||
Deposits
and other assets
|
96,500 | 44,100 | ||||||
Accounts
payable
|
(5,246,000 | ) | (243,100 | ) | ||||
Accrued
liabilities
|
(37,700 | ) | 35,600 | |||||
Net
cash provided by operating activities
|
401,000 | 15,500 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases
of property, equipment, and leasehold improvements
|
(173,600 | ) | (153,600 | ) | ||||
Proceeds
from sale of fixed assets
|
8,200 | 9,300 | ||||||
Net
cash used in investing activities
|
(165,400 | ) | (144,300 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Net
borrowing on line of credit
|
53,700 | 287,800 | ||||||
Repayment
on long-term debt
|
(247,100 | ) | (242,500 | ) | ||||
Payments
on obligations under long term leases
|
(72,900 | ) | (61,200 | ) | ||||
Net
cash (used in) financing activities
|
(266,300 | ) | (15,900 | ) | ||||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
(5,500 | ) | (12,400 | ) | ||||
NET
CHANGE IN CASH
|
(36,200 | ) | (157,100 | ) | ||||
CASH,
beginning of period
|
140,900 | 273,700 | ||||||
CASH,
end of period
|
$ | 104,700 | $ | 116,600 | ||||
SUPPLEMENTARY
CASH FLOW INFORMATION
|
||||||||
Cash
paid during the period for:
|
||||||||
Income
taxes
|
$ | 2,600 | 800 | |||||
Interest
|
$ | 227,000 | $ | 224,800 |
See
accompanying notes to these condensed financial statements.
3
MENDOCINO
BREWING COMPANY, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010
(Unaudited)
1. Description of Operations
and Summary of Significant Accounting Policies
Description of
Operations
Mendocino
Brewing Company, Inc., (the "Company", “we” or "MBC"), has operating
subsidiaries, Releta Brewing Company, ("Releta"), and United Breweries
International, Limited (UK), ("UBIUK"). In the United States, MBC and
its subsidiary, Releta, operate two breweries that produce beer for the
specialty "craft" segment of the beer market. The breweries are
located in Ukiah, California and Saratoga Springs, New York. We also
own and operate a brewpub and gift store located in Hopland,
California. The majority of sales for MBC are in
California. We brew several brands, of which Red Tail Ale is our
flagship brand. In addition, we perform contract brewing for several
other brands, and we hold a license to brew and distribute Kingfisher Premium
Lager beer in the United States.
Our UK
subsidiary, UBIUK, holds an exclusive license to brew and distribute Kingfisher
Premium Lager beer from United Breweries Limited, an Indian Corporation. UBIUK
is a holding company for UBSN Limited (“UBSN”). UBSN distributes
Kingfisher Premium Lager beer in the United Kingdom and Europe. The
distributorship is located in Maidstone, Kent in the United
Kingdom.
Principles of
Consolidation
The
consolidated financial statements present the accounts of Mendocino Brewing
Company, Inc., and our wholly-owned subsidiaries, Releta and
UBIUK. All inter-company balances, profits and transactions have been
eliminated.
Basis of Presentation and
Organization
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with US generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by US generally accepted accounting principles for
complete annual financial statements. In the opinion of our management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, except as
otherwise indicated, considered necessary for a fair presentation of the
financial condition, results of operations and cash flows for the periods
presented. These condensed financial statements should be read in conjunction
with the audited consolidated financial statements included in our most recent
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission, which contains additional financial and operating information and
information concerning the significant accounting policies followed by us. The
financial statements and notes are representations of our management and our
Board of Directors, who are responsible for their integrity and
objectivity.
Operating
results for the six months ended June 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2010 or any future period.
4
SIGNIFICANT
ACCOUNTING POLICIES
There
have been no significant changes in our significant accounting policies during
the six months ended June 30, 2010 compared to what we previously disclosed
in our Annual Report on Form 10-K for the year ended December 31,
2009.
Cash and Cash Equivalents,
Short and Long-Term Investments
For
purposes of cash flows, we consider all highly liquid investments purchased with
original maturities of three months or less to be cash
equivalents. Other investments with maturities less than twelve
months from the balance sheet date are considered short-term investments, and
those with maturities greater than twelve months from the balance sheet date are
considered long-term investments.
Fair Value of Financial
Instruments.
The
levels of the fair value hierarchy established by ASC 820 are:
Level
1: inputs are quoted prices, unadjusted, in active markets for
identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
Level
2: inputs are other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or
indirectly. A Level 2 input must be observable for substantially the
full term of the asset or liability.
Level
3: inputs are unobservable and reflect the reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
the asset or liability.
At June
30, 2010 and December 31, 2009, respectively, we did not have any assets or
liabilities which are recorded at fair value on a recurring basis.
We
consider the recorded value of certain of our financial assets and liabilities,
which consist primarily of cash and cash equivalents, accounts receivable, other
current assets, accounts payable and accrued expenses, to approximate the fair
value of the respective assets and liabilities at June 30, 2010 and December 31,
2009, respectively based upon the short-term nature of such assets and
liabilities. Based on borrowing rates currently available to us for loans
with similar terms, the carrying value of short and long term notes payable
approximate fair value.
The
carrying value of certain of the financial instruments, of other current assets
and accrued expenses, approximate fair value due to their short
maturities.
Deferred Financing
Costs
Costs
relating to obtaining financing are capitalized and amortized over the term of
the related debt. Deferred financing costs were $311,300, and the related
accumulated amortization at June 30, 2010 was
$246,000. Amortization of deferred financing costs charged to
operations was $32,700 for the six months ended June 30, 2010 and 2009,
respectively. We will continue to amortize these fees until
2011. When a loan is paid in full, any unamortized financing costs
are removed from the related accounts and charged to operations.
5
Concentration of Credit
Risks
Financial
instruments that potentially subject us to credit risk consist principally of
trade receivables, cash deposits in excess of FDIC limits, and assets located in
the United Kingdom. Substantially all of the Company's cash deposits
are deposited with commercial banks in the US and the UK.
Wholesale
distributors account for substantially all accounts receivable; therefore, this
risk concentration is limited due to the number of distributors and the laws
regulating the financial affairs of distributors of alcoholic
beverages. We have approximately $52,300 in cash deposits and
$3,080,600 of accounts receivable due from customers located in the United
Kingdom as of June 30, 2010.
Income
Taxes
We
account for income taxes using the Financial Accounting Standards Board
Statements of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," codified within ASC 272, 740, 805, 830, 942, 958 and 995 which requires
the establishment of a deferred tax asset or liability for the recognition of
future deductible or taxable amounts and operating loss and tax credit
carryforwards. Deferred tax expense or benefit is recognized as a
result of timing differences between the recognition of assets and liabilities
for book and tax purposes during the year.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are
recognized for deductible temporary differences and operating loss, and tax
credit carryforwards. A valuation allowance is established to reduce
the deferred tax asset if it is "more likely than not" that the related tax
benefits will not be realized. Our Management believes that sufficient
uncertainty exists regarding the future realization of deferred tax assets and,
accordingly, we have provided for a full valuation allowance against net
deferred tax assets. In calculating tax expense, we take into account
any change in the valuation allowance for deferred tax assets where the
realization of various deferred tax assets is subject to
uncertainty.
There are
no changes in the carrying value of our tax assets or liabilities for any
unrecognized tax benefits.
Basic and Diluted Earnings
(Loss) per Share
In
accordance with SFAS No. 128, "Earnings Per Share," (ASC 260) we compute basic
earnings (loss) per share by dividing the earnings (loss) attributable to our
common stockholders by the weighted average number of common shares outstanding
during the period. Basic net earnings (loss) per share exclude the
dilutive effect of stock options or warrants and convertible
notes. If our operations result in net losses for any period, Diluted
net loss per share would be the same as basic net loss per share, since the
effect of any potentially dilutive securities would be excluded, as such
securities would be anti-dilutive due to the net loss. The
computation of the dilutive effect of our outstanding convertible notes for the
three and six month periods ended June 30, 2010 and 2009, respectively is shown
in the table below.
Three
months ended
|
Six
months ended
|
||||||||
6/30/2010
|
6/30/2009
|
6/30/2010
|
6/30/2009
|
||||||
Net
income (loss)
|
$
|
(25,700)
|
508,400
|
$
|
(443,000)
|
216,100
|
|||
Weighted
average common shares outstanding
|
12,427,262
|
12,274,762
|
12,427,262
|
12,236,714
|
|||||
Basic
net income (loss) per share
|
$
|
(0.00)
|
0.04
|
$
|
(0.04)
|
0.02
|
|||
Interest
expense on convertible notes
|
$
|
—
|
22,700
|
$
|
—
|
45,100
|
|||
Income
for purpose of computing diluted net income per share
|
$
|
(25,700)
|
531,100
|
$
|
(443,000)
|
261,200
|
|||
Incremental
shares from assumed exercise of dilutive securities
|
—
|
2,058,604
|
—
|
2,058,604
|
|||||
Dilutive
potential common shares
|
12,427,262
|
14,333,366
|
12,427,262
|
14,295,318
|
|||||
Diluted
net earnings per share
|
$
|
(0.00)
|
0.04
|
$
|
(0.04)
|
0.02
|
6
Foreign Currency
Translation
The
assets and liabilities of UBIUK were translated at the United Kingdom pound
sterling - US dollar exchange rates in effect at June 30, 2010 and
December 31, 2009, and the statements of operations were translated at the
average exchange rates for each of the six months ended June 30, 2010 and
2009. Gains and losses resulting from the translations were deferred
and recorded as a separate component of consolidated stockholders'
equity. Cash at UBIUK was translated at exchange rates in effect at
June 30, 2010 and December 31, 2009, and its cash flows were
translated at the average exchange rates for each of the six months ended
June 30, 2010 and 2009. Changes in cash resulting from the
translations are presented as a separate item in the statements of cash
flows.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America includes having our
management make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenues and expenses, and disclosure of contingent assets
and liabilities. The amounts estimated could differ from actual
results. Significant estimates include the allowance for bad debts,
depreciation and amortization periods, and the future utilization of deferred
tax assets. We have determined that deferred tax assets associated
with our net operating loss carryforwards in the US may expire prior to
utilization. We have placed a valuation allowance on these assets in
the US.
Comprehensive Income
(Loss)
Comprehensive
income (loss) is composed of our net income (loss) and changes in equity from
non-stockholder sources. The accumulated balances of these
non-stockholder sources are reflected as a separate item in the equity section
of the balance sheet.
7
The
components of other comprehensive income for the three and six months ended
June 30, 2010 and 2009, respectively, are reflected as a separate item in
the statement of operations.
Reportable
Segments
We manage
our operations through two business segments: brewing operations, including
tavern and tasting room operations (domestic) and distributor operations
(international). The international business segment sells our
products outside the United States.
We
evaluate performance based on net operating profit. Where applicable,
portions of the administrative function expenses are allocated between the
operating segments. The operating segments do not share manufacturing
or distribution facilities. In the event any materials and/or
services are provided to one operating segment by the other, the transaction is
valued according to the our transfer policy, which approximates market
price. The costs of operating the manufacturing plants are captured
discretely within each segment. Our property, plant and equipment,
inventory, and accounts receivable are captured and reported discretely within
each operating segment.
Reclassifications
Certain
amounts in the prior periods presented have been reclassified to conform to the
current period financial statement presentation. These
reclassifications have no effect on previously reported net losses or
accumulated deficit.
2. Liquidity and Management
Plans
At
June 30, 2010, we had cash and cash equivalents of $104,700 a working
capital deficit of $10,045,900 mainly due to credit facilities related to United
States operations maturing in June 2011 and an accumulated deficit of
$13,803,000. We have had a history of past losses as infrastructure
costs were incurred in advance of obtaining customers. Since March 31, 2009, we
have not been in compliance with two financial covenants contained in our
secured credit facility with Marquette Business Credit, Inc. As a
result a higher default interest rate has been assessed with effect on and from
April 1, 2009 until such time as the financial covenant violations are
cured. As of June 30, 2010, we are still not in compliance with such
financial covenants and the default interest rates remain in force.
Our
Management has taken several actions to ensure that we will have sufficient cash
for its working capital needs through June 30, 2011, including reductions in
discretionary expenditures, optimizing prices and discounts to increase margin,
acquisition of brands to augment volume, introduction of new products, new
packaging and securing additional brewing contracts. We will also actively
attempt to extend or refinance ourmaturing credit facilities. In addition, our
majority shareholder issued a letter of support to provide financial assistance
when required. We may also seek additional capital infusions to support
operations. Our Management believes that these actions will enable us to meet
our working capital needs through June 30, 2011.
3. Inventories
Inventories
are stated at the lower of average cost or market and consist of the
following:
June
30,
2010
|
December
31,
2009
|
|||||||
Raw
Materials
|
$ | 702,700 | $ | 591,600 | ||||
Beer-in-process
|
273,500 | 241,300 | ||||||
Finished
Goods
|
861,800 | 988,800 | ||||||
Merchandise
|
39,600 | 40,900 | ||||||
TOTAL
|
$ | 1,877,600 | $ | 1,862,600 |
8
4. Line of Credit and Note
Payable
In
November 2006, Marquette Business Credit, Inc. ("Marquette") provided a
line of credit drawable up to 85% of eligible receivables and 60% of eligible
inventory for a period up to June 2011. The borrowings are
collateralized, with recourse, by certain eligible trade receivables up to a
maximum percentage of 85% of the qualified net amounts of such receivables of
each of MBC and Releta and 60% of MBC's and Releta's eligible inventory located
in the US. This facility carries interest at a rate of one-month
LIBOR plus 4.25% and is secured by substantially all of the assets, excluding
real property, of Releta and MBC. The amount outstanding on this line of credit
as of June 30, 2010 was approximately $1,981,500. At June 30, 2010, we were
still not in compliance with two of the financial covenants under this facility,
and as such, default interest remains in effect.
We retain
the right to recall any of the collateralized receivables under the line of
credit, and the receivables are subject to recourse. Therefore, the
transaction does not qualify as a sale under the terms of Financial Accounting
Standards Board Statement No. 125 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (ASC
860). Included in our balance sheet as accounts receivable at
June 30, 2010, are account balances totaling $2,322,100 of uncollected
accounts receivables collateralized to Marquette under this
facility.
On
April 26, 2005, Royal Bank of Scotland Commercial Services Limited ("RBS")
provided an invoice discounting facility to UBSN Limited for a maximum amount of
£1,750,000 based on 80% prepayment against qualified accounts receivable related
to UBSN's United Kingdom customers. The initial term of the facility
was for a one year period after which time the facility could be terminated by
either party by providing the other party with six months notice. The
facility carries an interest rate of 1.38% above the RBS base rate and a service
charge of 0.10% of each invoice discounted. The amount outstanding on
this line of credit as of June 30, 2010 was approximately
$1,088,100.
5. Long-Term
Debt
Maturities
of long-term debt for succeeding years are as follows:
June
30,
2010
|
December
31,
2009
|
|||||||
Notes
to a financial institution, payable in monthly installments of $20,500,
plus interest at one month LIBOR plus 5.25% with a balloon payment of
$622,400 due in June 2011; secured by substantially all assets of
Releta Brewing Company and Mendocino Brewing Company, excluding real
property at Ukiah.
|
$ | 868,400 | $ | 991,400 | ||||
Note
to a financial institution, payable in monthly installments of $27,300
including interest at prime plus 1.75% with a balloon payment of
approximately $2,737,000 due in June 2011.
|
2,805,400 | 2,837,900 | ||||||
3,673,800 | 3,829,300 | |||||||
Less
current maturities
|
3,673,800 | 319,800 | ||||||
$ | — | $ | 3,509,500 |
9
6. Notes to Related
Party
Subordinated Convertible
Notes Payable
Notes
payable to a related party consist of unsecured convertible notes to one of our
shareholders, United Breweries of America ("UBA") with a total value of
$3,178,900 as of June 30, 2010, including interest at the prime rate plus 1.5%,
but not to exceed 10% per year. The UBA notes are convertible into
common stock at $1.50 per share. The UBA notes have been extended
until June 2011. UBA may demand payment within 60 days of the
end of the extension period but is precluded from doing so because the notes are
subordinated to long-term debt agreements with Grand Pacific Financing
Corporation and Marquette, both maturing in June 2011. The UBA notes
include $1,263,500 and $1,218,400 of accrued interest at June 30, 2010 and
December 31, 2009, respectively.
5% Notes
Payable
Notes
payable also include an unsecured loan from Shepherd Neame Limited to
UBSN payable in annual installments of $89,700 with interest at 5%
per year maturing in June 2013. The amounts outstanding under
this loan as of June 30, 2010 and December 31, 2009 were $179,400 and
$291,000 respectively, including current maturities of $89,700 and $97,000 on
those dates.
Capital Lease
Obligations
We lease
certain brewing equipment, vehicles and office equipment under agreements that
are classified as capital leases. The future minimum lease payments
required under our capital leases and the present value of the net minimum lease
payments as of June 30, 2010, are as follows:
Six
months ending December 31, 2010
|
$ | 73,100 | ||
Year
ending December 31, 2011
|
109,700 | |||
Year
ending December 31, 2012
|
63,200 | |||
246,000 | ||||
Less
amounts representing interest
|
(25,600 | ) | ||
Present
value of minimum lease payments
|
220,400 | |||
Less
current maturities
|
(117,800 | ) | ||
Non-current
leases payable
|
$ | 102,600 |
10
7. Commitments and
Contingencies
Legal
We are
periodically involved in legal actions and claims that arise as a result of
events that occur in the normal course of operations. We are not
currently aware of any legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our financial
position or results of operations.
Operating
Leases
We lease
many of our operating and office facilities for various terms under long-term,
non-cancelable operating lease agreements. The leases expire at
various dates through 2015 and provide for renewal options ranging from
month-to-month to five year terms. In the normal course of business,
it is expected that these leases will be renewed or replaced by leases on other
properties. The leases provide for increases in future minimum annual
rental payments based on defined increases which are generally meant to
correlate with the consumer price index, subject to certain minimum
increases. Also, the agreements generally require us to pay executory
costs (real estate taxes, insurance and repairs).
We and
our subsidiaries have various lease agreements for the brewpub and gift store in
Hopland, California; a sales office in Petaluma, California; land at our
Saratoga Springs, New York, facility; a building in the United Kingdom; and
certain personal property. The land lease includes a renewal option
for two additional five-year periods, which we intend to
exercise. Some leases are adjusted annually for changes in the
consumer price index. The leases began expiring this 2010 calendar
year.
Six
Months ended December 31, 2010
|
$ | 130,000 | ||
Year
2011
|
237,400 | |||
Year
2012
|
216,400 | |||
Year
2013
|
206,900 | |||
Year
2014
|
119,100 | |||
Thereafter
|
7,600 | |||
$ | 917,400 |
Keg Management
Agreement
In
September 2009, we renewed our keg management agreement with MicroStar Keg
Management LLC. Under this arrangement, MicroStar provides all kegs
for which we pay a service fee depending on the applicable
territory. The agreement is effective for five years ending in
September 2014. If the agreement is terminated, we are required to
purchase four times the average monthly keg usage for the preceding six-month
period from MicroStar. We expect to continue this
relationship.
8. Related-Party
Transactions
We and
our subsidiaries have entered into or amended several agreements with affiliated
and related entities. Among these were a Market Development Agreement, a
Distribution Agreement, and a Brewing License Agreement between MBC and UBSN; a
Distribution Agreement between UBI and UBSN; a Trademark Licensing Agreement
between MBC and Kingfisher of America, Inc.; and a License Agreement between UBI
and UB Limited. UBSN is a party to a brewing agreement and a loan agreement with
Shepherd Neame Limited ("Shepherd Neame"). Additional information about these
transactions may be found in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2009.
11
The
following table reflects the value of the related party transactions for the six
months ended June 30, 2010 and 2009 and the balances outstanding as of
June 30, 2010 and 2009.
2010
|
2009
|
|||||||
Sales
to Shepherd Neame
|
$ | 3,381,800 | $ | 2,548,200 | ||||
Purchases
from Shepherd Neame
|
$ | 3,454,500 | $ | 6,764,800 | ||||
Expense
reimbursement to Shepherd Neame
|
$ | 320,600 | $ | 559,700 | ||||
Interest
expense related to UBA convertible notes
|
$ | 45,100 | $ | 45,100 | ||||
Accounts
payable to Shepherd Neame
|
$ | 4,333,600 | $ | 5,103,800 | ||||
Accounts
receivable from Shepherd Neame
|
$ | 801,400 | $ | 1,961,100 |
9. Stockholders'
Equity
The
following table summarizes equity transactions during the six months ended
June 30, 2010.
Series
A
Preferred
Stock
|
Common
Stock
|
Other
Comprehensive
|
Accumulated
|
Total
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Income
/ (Loss)
|
Deficit
|
Equity
|
||||||||||||||||||||||
Balance,
December 31, 2009
|
227,600 | $ | 227,600 | 12,427,262 | $ | 15,043,300 | $ | 436,800 | $ | (13,360,000 | ) | $ | 2,347,700 | |||||||||||||||
Net
loss
|
- | - | - | - | - | (443,000 | ) | (443,000 | ) | |||||||||||||||||||
Currency
Translation Adjustment
|
- | - | - | - | 128,600 | - | 128,600 | |||||||||||||||||||||
Balance,
June 30, 2010
|
227,600 | $ | 227,600 | 12,427,262 | $ | 15,043,300 | $ | 565,400 | $ | (13,803,000 | ) | $ | 2,033,300 |
Preferred
Stock
Ten
million shares of preferred stock have been authorized, of which 227,600 are
designated as Series A preferred stock. Series A shareholders are entitled to
receive cash dividends and/or liquidation proceeds equal, in the aggregate, to
$1.00 per share before any cash dividends are paid on the common stock or any
other series of preferred stock. When the entire Series A
dividend/liquidation proceeds have been paid, the Series A shares are
automatically canceled and will cease to be outstanding. Only a
complete corporate dissolution will cause a liquidation preference to be
paid.
10. Equity
Issuances
12
Valuation
and Expense Information under SFAS 123(R)
We had no
stock based compensation related to employee stock options for the six months
ended June 30, 2010. During the six months ended June 30, 2009,
we issued stock valued at $80,000 as directors' compensation. During the six months ended June 30, 2010 and
2009, we did not issue any stock options.
Our
business presently consists of two segments. The first is brewing for
wholesale to distributors and other retailers including beer for sale along with
merchandise at the brewpub and retail merchandise store located at the Hopland
brewery and at the Saratoga Springs brewery. The second consists of
distributing alcoholic beverages to retail establishments and restaurants in the
United Kingdom, Europe and Canada. A summary of each segment is as
follows:
Six
months ended June 30, 2010
|
||||||||||||||||
Domestic
Operations
|
Foreign
Territory
|
Corporate
& Others
|
Total
|
|||||||||||||
Net
Sales
|
$ | 7,207,600 | $ | 9,587,700 | $ | - | $ | 16,795,300 | ||||||||
Operating
Income (Loss)
|
$ | 254,300 | $ | (442,300 | ) | $ | - | $ | (188,000 | ) | ||||||
Identifiable
Assets
|
$ | 12,530,700 | $ | 4,584,000 | $ | 2,817,300 | $ | 19,932,000 | ||||||||
Depreciation
& Amortization
|
$ | 301,400 | $ | 233,400 | $ | - | $ | 534,800 | ||||||||
Capital
Expenditures
|
$ | 32,200 | $ | 141,400 | $ | - | $ | 173,600 |
Six
months ended June 30, 2009
|
||||||||||||||||
Domestic
Operations
|
European
Territory
|
Corporate
& Others
|
Total
|
|||||||||||||
Net
Sales
|
$ | 7,426,200 | $ | 9,221,500 | $ | - | $ | 16,647,700 | ||||||||
Operating
Income
|
$ | 252,300 | $ | 215,700 | $ | - | $ | 468,000 | ||||||||
Identifiable
Assets
|
$ | 12,730,900 | $ | 7,738,600 | $ | 2,956,200 | $ | 23,425,700 | ||||||||
Depreciation
& Amortization
|
$ | 298,100 | $ | 224,900 | $ | - | $ | 523,000 | ||||||||
Capital
Expenditures
|
$ | 25,300 | $ | 128,300 | $ | - | $ | 153,600 |
13
12. Unrestricted Net
Assets
Our
wholly-owned subsidiary, UBIUK, has undistributed losses of approximately
$1,801,800 as of June 30, 2010. Under UBSN's line of credit
agreement with RBS, distributions and other payments to us from our subsidiary
are not permitted if retained earnings drop below approximately
$1,495,000. Condensed financial information of Mendocino Brewing
Company, Inc. together with our subsidiary, Releta Brewing Company, is as
follows:
June 30,
2010
|
December 31,
2009
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Assets
|
||||||||
Cash
|
$ | 52,400 | $ | 46,700 | ||||
Accounts
receivable
|
2,296,300 | 1,695,500 | ||||||
Inventories
|
1,877,600 | 1,862,600 | ||||||
Other
current assets
|
225,300 | 161,400 | ||||||
Total
current assets
|
4,451,600 | 3,766,200 | ||||||
Investment
in UBIUK
|
1,225,000 | 1,225,000 | ||||||
Property
and equipment
|
10,653,100 | 10,889,600 | ||||||
Other
assets
|
243,300 | 335,800 | ||||||
Total
assets
|
$ | 16,573,000 | $ | 16,216,600 | ||||
Liabilities
and Stockholders' Equity
|
||||||||
Line
of credit
|
$ | 1,981,500 | $ | 1,562,900 | ||||
Accounts
payable
|
1,508,000 | 1,546,900 | ||||||
Accrued
liabilities
|
1,040,600 | 831,400 | ||||||
Current
maturities of debt and leases
|
3,728,000 | 381,500 | ||||||
Notes
payable to related party
|
3,178,900 | |||||||
Total
current liabilities
|
11,437,000 | 4,322,700 | ||||||
Intercompany
payable to UBIUK
|
146,800 | 275,100 | ||||||
Long-term
debt and capital leases
|
62,000 | 3,594,800 | ||||||
Notes
payable to related party
|
— | 3,133,800 | ||||||
Total
long-term liabilities
|
208,800 | 7,003,700 | ||||||
Total
liabilities
|
$ | 11,645,800 | $ | 11,326,400 | ||||
Stockholders'
equity
|
||||||||
Preferred
stock
|
227,600 | 227,600 | ||||||
Common
stock
|
15,043,300 | 15,043,300 | ||||||
Accumulated
deficit
|
(10,343,700 | ) | (10,380,700 | ) | ||||
Total
stockholders' equity
|
4,927,200 | 4,890,200 | ||||||
Total
liabilities and stockholders' equity
|
$ | 16,573,000 | $ | 16,216,600 |
14
12. Unrestricted Net Assets
(continued)
Statements
of Operations
|
Quarter
ended
June
30
|
Six
months ended
June
30
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Net
sales
|
$ | 3,960,200 | $ | 4,254,400 | $ | 7,207,600 | $ | 7,426,200 | ||||||||
Cost
of goods sold
|
2,880,000 | 3,159,800 | 5,433,900 | 5,611,800 | ||||||||||||
Sales,
marketing, and retail expenses
|
337,500 | 315,200 | 657,200 | 619,800 | ||||||||||||
General
and administrative expenses
|
460,200 | 411,000 | 920,900 | 999,200 | ||||||||||||
Income
from operations
|
282,500 | 368,400 | 195,600 | 195,400 | ||||||||||||
Other
(income)
|
(35,600 | ) | (37,000 | ) | (74,000 | ) | (82,300 | ) | ||||||||
Interest
expense
|
116,800 | 124,900 | 230,000 | 226,700 | ||||||||||||
Provision
for taxes
|
— | 800 | 2,600 | 800 | ||||||||||||
Net
income
|
$ | 201,300 | $ | 279,700 | $ | 37,000 | $ | 50,200 |
Statements
of Cash Flows
|
Six
months ended June 30
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Cash
flows from operating activities
|
$ | (66,100 | ) | $ | 116,200 | |||
Purchase
of property and equipment
|
(32,200 | ) | (25,300 | ) | ||||
Proceeds
from sale of fixed assets
|
— | 9,300 | ||||||
Net
borrowing (repayment) on line of credit
|
418,600 | 148,200 | ||||||
Repayment
on long term debt
|
(155,500 | ) | (152,900 | ) | ||||
Payment
on obligation under capital lease
|
(30,800 | ) | (30,500 | ) | ||||
Net
change in payable to UBI
|
(128,300 | ) | (130,100 | ) | ||||
Increase
(decrease) in cash
|
5,700 | (65,100 | ) | |||||
Cash,
beginning of period
|
46,700 | 105,400 | ||||||
Cash,
end of period
|
$ | 52,400 | $ | 40,300 |
13. Income
Taxes
In the six
months ending June 30, 2010 and 2009, respectively, our only recorded tax
expense was for state franchise taxes. We did not report any income
tax expense due to the availability of deferred tax assets available to offset
our taxable income, if any, in the United States and the United
Kingdom. We have established a full valuation allowance against our
deferred tax assets based on our assessment that we do not yet meet the criteria
that deferred tax assets will more likely than not be
realized. During the six months ending June 30, 2010 and 2009, our
effective tax rates were de
minimus. The difference between our effective tax rates and
the 35% United States federal statutory tax rate and the United Kingdom's
statutory tax rate resulted primarily from a tax benefit related to a reduction
in the federal and state deferred tax asset valuation allowance.
Our major
tax jurisdictions are (i) United States (federal), (ii) California (state),
(iii) New York (state) and (iv) United Kingdom. Tax returns remain
open to examination by the applicable governmental authorities for tax years
2005 through 2009. The federal and state taxing authorities may
choose to audit tax returns for prior years due to significant tax attribute
carryforwards for those prior years. However, such audits will be
limited to adjustments to such carryforward tax attributes. We are
not currently being audited in any major tax jurisdiction.
15
14. Subsequent
Events
The
lease of the premises located in Hopland, California where our brewpub and gift
store is currently located expired on June 30, 2010 and was thereafter continued
on a month-to-month basis until August 31, 2010. We have received notice
that the landlord does not wish to extend the term of the lease nor to continue
the month-to-month tenancy and as a result we will be required to vacate the
premises prior to September 1, 2010. Therefore, we are in the process
of evaluating our options to relocate our brewpub and gift store to a different
location. Our Management anticipates that the financial impact of this
relocation shall not have a material to adverse affect on our results of
operations.
On July
30, 2010, our Board of Directors adopted an Amended and Restated Directors
Compensation Plan pursuant to which, among other items, the number of shares of
common stock available for issuance to non-employee directors as compensation
for their service on the Board of Directors was increased to 2,000,000 shares,
adjustments were made to the amount of compensation allocated to various types
of service on the Board, additional provisions were added to permit directors to
be compensated in case in the Board's discretion and the addition of performance
based stock bonuses for such directors were added. The Amended and
Restated Directors Compensation Plan will be submitted for a shareholder vote at
our Annual Meeting. We have evaluated and disclosed subsequent events
through the date of this filing and are not aware of any other subsequent event
that would have a material impact on the accompanying unaudited Condensed
Consolidated Financial Statements.
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following discussion summarizes the significant factors affecting our
consolidated operating results, financial condition and liquidity/cash flows for
the six months ended June 30, 2010, compared to the six months ended
June 30, 2009. This discussion should be read in conjunction with our
Consolidated Financial Statements and Notes included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009.
In this
Report, the terms "we", "us", "our", and "the Company" and its variants are
generally used to refer to Mendocino Brewing Company, Inc. and our subsidiaries,
while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an
individual entity standing alone.
Forward
Looking Statements
Various
portions of this Quarterly Report, including but not limited to the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain forward-looking information. Such information
involves risks and uncertainties that are based on current expectations,
estimates and projections about our business, Management's beliefs,
and assumptions made by Management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and variations of those
and similar words are intended to identify such forward-looking information. Any
forward-looking statements made by us are intended to provide investors with
additional information with which they may assess our future potential. All
forward-looking statements are based on assumptions about an uncertain future
and are based on information available at the date such statements are issued.
Actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking information due to numerous factors,
including but not limited to: changes in the pricing environment for our
products; changes in demand for malt beverage products in different geographical
markets; changes in distributor relationships or performance; changes in
customer preference for our malt beverage products; regulatory or legislative
changes; the impact of competition; changes in raw materials prices;
availability of financing for operations; changes in interest rates; changes in
our foreign beer and/or restaurant business, and other risks discussed elsewhere
in this Quarterly Report and from time to time in our Securities and Exchange
Commission (the "Commission") filings and reports. In addition, such statements
could be affected by general industry and market conditions and growth rates,
and in general domestic and foreign (specifically European) economic and
political conditions. We undertake no obligation to update these forward-looking
statements to reflect facts, circumstances, assumptions or events that occur
after the date the forward-looking statements are made or to publicly release
the results of any revision to these forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements.
16
Critical
Accounting Policies
There
have been no significant changes in our accounting policies during the six
months ended June 30, 2010 compared to what was previously disclosed in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
The
process of preparing financial statements, in accordance with generally accepted
accounting principles in the United States requires our management to make
estimates and judgments regarding certain items and
transactions. These judgments are based on historical experience,
current economic and industry trends, information provided by outside sources,
and management estimates. It is possible that materially different
amounts could be recorded if these estimates and judgments change or if our
actual results differ from these estimates and judgments. We consider
the following to be our most significant critical accounting policies which
involve the judgment of our management.
Revenue
Recognition
We
recognize revenue from sales upon the transfer of title for the
goods. We classify amounts billed to customers for shipping and
handling as revenues, with the related shipping and handling costs included in
cost of goods sold.
We
account for cash consideration paid to customers for services or product
placement fees as a reduction in revenue rather than as an expense.
Inventories
Consolidated
inventories are stated at the lower of cost or market. On a quarterly
basis, we evaluate the carrying costs of our inventory to ensure that it is
stated at the lower of cost or market. Our products are typically not
subject to obsolescence and consequently our reserves for slow moving and
obsolete inventory have historically been zero. Cash flows from the
sale of inventory are reported in cash flows from operations in our consolidated
statement of cash flows.
Income
Taxes
We
conduct operations in separate legal entities which are located in different tax
jurisdictions; as a result, income tax amounts are reflected in our consolidated
financial statements for each of such tax jurisdictions.
17
We record
net operating losses and credit carryforwards in the event we expect such
benefits to be realized. Deferred taxes result from differences
between the financial and tax bases of our assets and liabilities and are
adjusted for changes in tax rates and tax laws when changes are
enacted. We record valuation allowances to reduce our deferred tax
assets when it is more likely than not that a tax benefit will not be
realized.
In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. We consider the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making our assessment. Based upon the
level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, we believe it
is more likely than not that we will realize the benefits of these deductible
differences, net of our existing valuation allowances.
Segment
Information
Prior to
2001, our business operations were exclusively located in the United States, and
were divided into two segments, manufacturing and distribution of beer, which
accounted for the majority of the our gross sales, and retail sales (primarily
at the our tasting rooms and merchandise stores) which generally accounted for
less than 5% of gross sales (by revenue). With our acquisition of United
Breweries International (UK), Ltd. ("UBI") in August 2001, however, we
gained a new business segment, distribution of beer outside the United States,
primarily in the U.K. and Ireland, continental Europe, and Canada (the "Foreign
Territory"). This segment accounted for 56% and 53% of our gross sales during
the first six months of 2010 and 2009, respectively, with our United States
operations, including manufacturing and distribution of beer as well as retail
sales (the "Domestic Territory") accounting for the remaining 44% and 47% during
the first six months of 2010 and 2009, respectively. With expanded
wholesale distribution of beer and the closure of the restaurant at the Hopland
facility and the scheduled August 31, 2010 closure of the Hopland brewpub and
gift shop, Management anticipates that retail sales, as a percentage of total
sales, will decrease proportionally to the expected increase in the Company's
wholesale sales.
Seasonality
Sales of
our products are somewhat seasonal. Historically, sales volumes in all
geographic areas have been comparatively low during the first quarter of the
calendar year in both our Domestic Territory and Foreign Territory. In our
Domestic Territory, sales volumes have been stronger during the second and third
quarters and slower again during the fourth quarter, while in our Foreign
Territory the fourth quarter has generated stronger sales volume. The volume of
sales in any given area may also be affected by local weather conditions.
Because of the seasonality of our business, results for any one quarter are not
necessarily indicative of our results for the full fiscal year.
Summary
of Financial Results
We ended
the first six months of 2010 with a net loss of $443,000, as compared to a net
income of $216,100 for the same period in 2009. As set forth more
fully under "Results of Operations," below, during the first six months of 2010
we experienced an increase in net sales of $147,600 compared to the first six
months of 2009. However, costs of goods sold increased by $191,300, and
operating expenses increased by $612,300, all of which contributed to our
results for the period.
18
Results
of Operations
Three
Months Ended June 30, 2010 Compared To Three Months Ended June 30,
2009
Net
Sales
Our
overall net sales for the second quarter of 2010 were $8,360,200, a decrease of
$1,150,400, or 12.1%, compared to $9,510,600 for the second quarter of
2009. The decrease was mainly due to reductions in sales volume in
both our Domestic and Foreign territories.
Domestic
Territory: Our net sales for the second quarter of 2010 were
$3,960,200 compared to $4,254,400 for the same period in 2009, a decrease of
$294,200, or 6.9%, mainly due to lower sales volume. The sales volume
decreased to 20,100 barrels in the second quarter of 2010 from 21,700 barrels in
the second quarter of 2009; a net decrease of 1,600 barrels, or
7.4%. Of the numerical barrel decrease, sales of our brands decreased
by 600 barrels, Kingfisher sales decreased by 100 barrels and sales of contract
brands decreased by 900 barrels.
During
the second quarter of 2010, we acquired certain intellectual properties rights
for two separate additional brands (i) Butte Creek organic ales and (ii) Honey
Amber Rose Ale. Prior to the Butte Creek acquisition, we had already
been brewing Butte Creek on a contract basis since 2009. We
anticipate launching Honey Amber Rose Ale during the later part of this
year.
Foreign
Territory: Net sales for the second quarter of 2010 were
$4,400,000 (£ 2,956,900) compared to $5,256,200 (£ 3,415,100) during the
corresponding period of 2009, a decrease of $856,200, or 16.3% when measured in
US Dollars, mainly due to lower sales volume. When measured in
British Pounds, sales decreased £458,200 or 13.4%. During the second quarter of
2010, UBSN sold 15,000 barrels, compared to 17,500 barrels during the second
quarter of 2009, a decrease of 2,500 barrels or 14.3%.
Cost
of Goods Sold
Cost of
goods sold as a percentage of net sales during the second quarter of 2010 was
74.4%, as compared to 73% during the corresponding period of 2009.
Domestic
Territory: Cost of goods sold as a percentage of net sales in
the United States during the second quarter of 2010 was 72.7%, compared to 74.3%
during the corresponding period of 2009.
Foreign Territory:
Cost of goods sold as a percentage of net sales in the United Kingdom during the
second quarter of 2010 was 74.7%, as compared to 72.6% during the corresponding
period in 2009.
Gross
Profit
As a
result of our lower sales volume and higher cost of goods sold described above,
our gross profit for the second quarter of 2010 decreased to $2,139,200, from
$2,564,700 during the corresponding period of 2009, representing a decrease of
$425,500 or 16.6%. As a percentage of net sales, gross profit during
the second quarter of 2010 decreased to 25.6% from 27% for the second quarter of
2009.
Operating
Expenses
Operating
expenses for the second quarter of 2010 were $2,038,100, an increase of
$124,000, or 6.5%, as compared to $1,914,100 for the corresponding period of
2009. Operating expenses consist of marketing and distribution
expenses and general and administrative expenses.
19
Marketing and Distribution
Expenses: Our marketing and distribution expenses for the
second quarter of 2010 were $1,042,500, as compared to $1,073,000 for the second
quarter of 2009, representing a decrease of $30,500 or 2.8%.
Domestic
Operations: Expenses for the second quarter of 2010 were
$337,500 compared to $315,200 during the corresponding period of 2009,
representing an increase of $22,300 or 7.1%. As a percentage of net
sales in the United States, the expenses increased to 8.5% during the second
quarter of 2010, compared to 7.4% during the corresponding period of
2009. The increase was mainly due to increased costs of travel and
promotional expenses.
Foreign
Territory: Expenses for the second quarter of 2010 were
$705,000 compared to $757,800 during the corresponding period of 2009, (in each
case as calculated in U.S. dollars, after taking into account the effects of the
exchange rate calculation) representing an decrease of $52,800 or 7% mainly due
to reductions in freight rates. As a percentage of net sales in the
United Kingdom, the expenses increased to 16% during the second quarter of 2010
compared to 14.4% during the corresponding period of 2009.
General And Administrative
Expenses: Our general and administrative expenses were $995,600 for the
second quarter of 2010, representing an increase of $154,500 or 18.4%, from
$841,100 for the corresponding period in 2009.
Domestic
Operations: Domestic general and administrative expenses were
$460,200 for the second quarter of 2010, representing an increase of $49,200, or
12%, compared to $411,000 for the second quarter of 2009. The
increase was primarily due to timing differences which are expected to even out
during the remaining part of the year.
Foreign
Territory: General and administrative expenses related to the
Foreign Territory were $535,400 for the second quarter of the year 2010,
representing an increase of $105,300 or 24.5%, when compared to $430,100 for the
second quarter of 2009. The increase was mainly due to increased
salaries resulting from the hiring in the fourth quarter of 2009 of a Chief
Executive Officer for UBSN.
Other
Expenses
Other
expenses for the second quarter of 2010 totaled $126,800, representing a
decrease of $14,600, or 10.3%, when compared to $141,400 for the second quarter
of 2009 due to reduced interest expenses and profit from the sale of assets
during the second quarter of 2010.
Income
Taxes
We have
made no income tax provisions for the second quarter of 2010 compared to a
provision for income taxes of $800 for the second quarter of
2009. The provision for income taxes relates to the estimated amount
of income taxes that will be imposed by taxing authorities in the United
States.
Net
Profit / Loss
Our net
loss for the second quarter of 2010 was $25,700, compared to our net profit of
$508,400 for the second quarter of 2009. After providing for a
positive foreign currency translation adjustment of $10,800 during the second
quarter of 2009 (as compared to a negative currency translation adjustment of
$126,500 for the same period in 2009), our comprehensive loss for the second
quarter of 2010 was $14,900, compared to comprehensive income of $381,900 for
the same period in 2009.
20
Six
Months Ended June 30, 2010 Compared To Six Months Ended June 30,
2009
Net
Sales
Our
overall net sales for the first six months of 2010 were $16,795,300, an increase
of $147,600, or 0.9%, compared to net sales of $16,647,700 for the same period
in 2009.
Domestic
Operations: Domestic net sales for the first six months of
2010 were $7,207,600 compared to $7,426,200 for the same period in 2009, a
decrease of $218,600 or 2.9% due to lower sales volumes. Our domestic
sales volumes decreased to 36,200 barrels during the first six months of 2010
from 37,400 barrels in the first six months of 2009, representing a decrease of
1,200 barrels or 3.2% mainly due to decreases of contract brands by 1,800
barrels. Sales of our brands increased by 400 barrels and sales of
the Kingfisher brands increased by 200 barrels during the first six months of
2010 compared to the same period in 2009.
During
the second quarter of 2010, we acquired through two separate transactions
certain intellectual property rights of the Butte Creek brand of organic ales
and Honey Amber Rose Ale, respectively. Prior to the Butte Creek
acquisition, we had produced Butte Creek products on a contract basis since
2009. We anticipate launching Honey Amber Rose Ale during the later part of this
year.
Foreign
Territory: Net sales for the first six months of 2010 were
$9,587,700 (£ 6,280,000) compared to $9,221,500 (£ 6,178,200) during the
corresponding period of 2009. UBSN sold 32,300 barrels during the
first six months of both 2010 and 2009. During the first six months
of the year 2010, UBSN optimized product prices and sales discounts thereby
improving margins.
Cost
of Goods Sold
Cost of
goods sold as a percentage of net sales during the first six months of 2010 was
74.5%, as compared to 74% during the corresponding period of 2009.
Domestic
Operations: Cost of goods sold as a percentage of net sales in
the United States during the first six months of 2010 was 75.4%, as compared to
75.6%, during the corresponding period of 2009.
Foreign
Territory: Cost of goods sold as a percentage of net sales in
the United Kingdom during the first six months of 2010 was 74.4%, as compared to
73.4% during the corresponding period in 2009 due to product mix.
Gross
Profit
As a
result of the lower sales volume and higher cost of goods sold described above,
gross profit for the first six months of 2010 decreased to $4,284,300, from
$4,328,000 during the corresponding period of 2009. As a percentage
of net sales, the gross profit during the first six months of 2010 decreased to
25.5% from 26% during the corresponding period in 2009.
Operating
Expenses
Operating
expenses for the first six months of 2010 were $4,472,300, an increase of
$612,300, or 15.9%, as compared to $3,860,000 for the corresponding period of
the year 2009. Operating expenses consist of marketing and
distribution expenses and general and administrative expenses.
Marketing and Distribution
Expenses: Our marketing and distribution expenses for the
first six months of the year 2010 were $2,447,800, as compared to $2,057,200 for
the same period in 2009, representing an increase of $390,600 or
19%.
Domestic
Operations: Expenses for the first six months of 2010 were
$657,200 compared to $619,800 during the corresponding period of 2009,
representing an increase of $37,400 or 6%. As a percentage of net
sales in the United States, these expenses increased to 9.1% during the first
six months of the year 2010, compared to 8.4% during the corresponding period of
2009. The increase was mainly due to increases in travel, freight and
promotional expenses.
21
Foreign
Territory: Expenses for the first six months of 2010 were
$1,790,600 compared to $1,437,400 during the corresponding period of 2009,
representing an increase of $353,200 or 24.6%. As a percentage of net
sales in the United Kingdom, expenses increased to 18.7% during the first six
months of 2010 compared to 15.6% during the corresponding period of 2009 (in
each case as calculated in U.S. dollars, after taking into account the effects
of exchange rate fluctuations). The increase was mainly due to costs
incurred in connection with a media campaign launched in London and its
suburbs.
General And Administrative
Expenses: Our general and administrative expenses were
$2,024,500 for the first six months of the year 2010, representing an increase
of $221,700 or 12.3%, over $1,802,800 for the corresponding period in
2009.
Domestic
Operations: Domestic general and administrative expenses were
$920,900 for the first six months of 2010, representing a decrease of $78,300,
or 7.8%, from $999,200 for the same period in 2009. In the first
quarter of 2009, there was a onetime issuance of common stock as compensation to
the outside members of the Board of Directors for their services related to our
capital raising efforts as well as legal and professional expenses related
thereto.
Foreign
Territory: General and administrative expenses related to the
Foreign Territory were $1,103,600 for the first six months of 2010, representing
an increase of $294,400 or 36.4%, as compared to $809,200 for the same period in
2009 (in each case as calculated in U.S. dollars, after taking into account the
effect of exchange rate fluctuations). The increases were mainly due
to the appointment during the fourth quarter of 2009 of a new Chief Executive
Officer for UBSN and the addition of his salary to the Company's general and
administrative expense and onetime professional costs associated with the
conducting of a strategic review of the pricing, staffing and market research
capabilities of UBI(UK) and UBSN.
Other
Expenses
Other
expenses for the first six months of 2010 totaled $252,400 representing an
increase of $1,300 or 0.5% when compared to the same period in 2009 due to
increases in interest expenses.
Income
Taxes
We have a
provision for income taxes of $2,600 for the first six months of 2010 compared
to a provision of $800 for the corresponding period in 2009. The
provision for taxes is related to the estimated amount of taxes that will be
imposed on us by tax authorities in the United States.
Net
Income
Our net
loss for the first six months of 2010 was $443,000, as compared to an income of
$216,100 for the first six months of 2009. After providing for a
positive foreign currency translation adjustment of $128,600 during the first
six months of 2010 (as compared to a negative adjustment of $114,800 for the
same period in 2009), comprehensive loss for the first six months of 2010 was
$314,400, compared to an income of $101,300 for the same period in
2009.
LIQUIDITY
AND CAPITAL RESOURCES
Unused
capacity at our Ukiah and Saratoga Springs facilities has continued to place
demands on our working capital. Beginning approximately in the second
quarter of 1997, the time at which the Ukiah brewery commenced operations,
proceeds from our operations have not been able to provide us with sufficient
working capital.
22
We are a
party to several loans, lines of credit, other credit facilities and lease
agreements (collectively, "Indebtedness"). Certain of the agreements
governing our Indebtedness contain cross-default provisions which may cause an
event of default under one agreement to result in an event of default under a
separate agreement. In addition, certain of the agreements governing
our Indebtedness contain provisions pursuant to which a material adverse change
in our financial condition may result in an event of default under such
agreements. In case of an event of default, the agreements provide
the lenders with several rights and remedies, including, but not limited to,
acceleration and termination of the facility, implementation of default interest
rates, and secured party rights with respect to the collateral (including the
power to sell such collateral). Substantially all of our assets,
including the real property in Ukiah, are pledged as collateral pursuant to the
terms of the agreements governing our Indebtedness. (The agreements
relating to our Indebtedness are described in more detail below under
"Description of Our Indebtedness", "Long-Term Debt" and "Other Loans and Credit
Facilities".)
On May 8,
2009, we received written notice (the "Notice") from Marquette Business Credit,
Inc. ("Marquette") that as of March 31, 2009 an event of default relating to our
non-compliance with certain required financial covenants under the credit
facility had occurred and was continuing under the loan and security agreement
by and among Marquette (as lender) and MBC and Releta (as borrowers) dated
November 16, 2006 (the "Loan Agreement") which covers our revolving line of
credit, term loan and capex loan with Marquette. With retroactive
effect from and after April 1, 2009, we have been assessed with default interest
rates under such facility by Marquette which impacts the applicable interest
rates on the revolving line of credit, term loan and capex loan
. Although Marquette indicated in the Notice that it would not be
asserting its additional rights and remedies as of the date of the Notice, it
reserved the right to exercise its additional rights and remedies at any time in
the future. (For additional information relating to the event of
default under the Marquette Loan Agreement see "Description of Our Indebtedness
Marquette Business Credit, Inc. Facility" below.)
As of the
date of this filing, we have not received notice from any of our other lenders
of the occurrence of an event of default under the agreements governing our
remaining Indebtedness, and to the knowledge of our Management, no additional
events of default currently exist under any other agreements relating to our
Indebtedness. We are currently making timely payments of principal
and interest relating to our Indebtedness as such Indebtedness becomes due and
anticipate that we will continue to make such timely payments in the immediate
future. However, if we fail to maintain any of the financial
covenants under the various agreements governing our Indebtedness, fail to make
timely payments of amounts due under our Indebtedness, or commit any other
breach resulting in an event of default under the agreements governing our
Indebtedness, such events of default (including cross-defaults) could have a
material adverse effect on our financial condition. In case of the
acceleration and termination of our existing Indebtedness, we may need to obtain
replacement financing. If we are unable to obtain such replacement
financing, it may result in a material adverse effect on our financial condition
and our ability to continue operations. In addition, actions
available to secured parties relating to our assets that have been pledged as
collateral could have a material adverse effect on our financial conditions and
operations.
Management
has taken several actions to ensure that the Company will have sufficient cash
for our working capital needs through June 30, 2011, including reductions in
discretionary expenditures, optimizing prices and discounts to increase margin,
acquisition of brands to augment volume, introduction of new products, new
packaging and securing additional brewing contracts. In addition, our majority
shareholder issued a letter of support to provide financial assistance when
required. We may also seek additional capital infusions to support operations.
Management believes that these actions will enable us to meet our working
capital needs through June 30, 2011.
23
As of
June 30, 2010, we had cash and cash equivalents of $104,700, a working
capital deficit of $10,045,900 and an accumulated deficit of
$13,803,000. Additionally, we have a history of past losses as
infrastructure costs were incurred in advance of obtaining customers. As
discussed above, on June 30, 2010, we were not in compliance with two of the
financial covenants under our secured credit facility with Marquette. This
violation has resulted in Marquette assessing us with a higher rate of interest
until such violations are cured.
Net cash
provided by operating activities for the six months ended June 30, 2010 was
$401,000 compared to $15,500 for the six months ended June 30, 2009. We
generally do not require significant cash on hand to meet our operating
needs.
Net cash
used in investing activities totaled approximately $165,400 for the six months
ended June 30, 2010 compared to $144,300 for the corresponding period of 2009.
Net cash used for investing activities consists of purchases of capital
assets.
Net cash
used in financing activities totaled approximately $266,300 during the six
months ended June 30, 2010, compared to $15,900 during the corresponding period
of 2009. For the six months ended June 30, 2010, net cash used in financing
activities principally consisted of temporary reductions in the use of our
revolving line of credit, debt payments and lease installments.
DESCRIPTION
OF OUR INDEBTEDNESS:
Marquette
Business Credit Line of Credit
In
November 2006, Marquette provided us with a line of credit drawable up to
85% of eligible receivables and 60% of eligible inventory which terminates in
June 2011. The borrowings were collateralized, with recourse, by
certain eligible trade receivables up to a maximum percentage of 85% of the
qualified net amounts of such receivables of each of MBC and Releta and 60% of
MBC's and Releta's eligible inventory located in the US. This
facility accrues interest at a rate of one-month LIBOR plus 4.25% and is secured
by substantially all of the assets, excluding the real property of Releta and
MBC. On May 8, 2009, we received notification from Marquette of an event of
default under the Loan Agreement, as a result of which Marquette has increased
the interest rate under the facility to the default rate with retroactive effect
from and after April 1, 2009. (For additional information see
"Marquette Business Credit Inc. Facility".)
Master Line of Credit. On
August 31, 1999, MBC and United Breweries of America, Inc. ("UBA"), one of
our principal shareholders, entered into a Master Line of Credit Agreement,
which was subsequently amended in April 2000 and February 2001 (the
"Credit Agreement"). The terms of the Credit Agreement provide us with a line of
credit with a principal amount of up to $1,600,000. As of the date of this
filing, UBA has made thirteen (13) separate advances to us under the Credit
Agreement and one additional advance on substantially the same terms as those
under the Credit Agreement, pursuant to a series of individual eighteen-month
promissory notes issued by us to UBA (the "UBA Notes"). UBA has executed an
Extension of Term of Notes under Master Line of Credit Agreement (the "Extension
Agreement"). The Extension Agreement confirms UBA's extension of the terms of
the UBA Notes for a period ending on June 30, 2011. The
aggregate outstanding principal amount of the UBA Notes as of June 30, 2010
was $1,915,400, and the accrued but unpaid interest thereon was equal to
approximately $1,263,500, for a total amount outstanding of
$3,178,900.
The
outstanding principal amount of the notes and the unpaid interest thereon may be
converted, at UBA's discretion, into shares of our unregistered Common Stock at
a conversion rate of $1.50 per share. As of June 30, 2010, the outstanding
principal and interest on the notes was convertible into approximately 2,119,300
shares of our Common Stock. On December 28, 2001, we entered into a
Confirmation of Waiver with UBA which confirmed that as of August 13, 2001,
UBA waived its rights with regard to conversion rate protection as set forth in
the UBA Notes.
24
The UBA
Notes require us to make quarterly interest payments to UBA on the first day of
April, July, October, and January. To date, UBA has permitted us to capitalize
all accrued interest; therefore, we have borrowed the maximum amount available
under the facility. Upon maturity of any of the UBA Notes, unless UBA has given
us prior instructions to commence repayment of the outstanding principal
balance, the outstanding principal and accrued but unpaid interest on such Note
may be converted, at the option of UBA, into shares of our common stock. If UBA
does not elect to so convert any UBA Notes upon maturity, it has the option to
extend the terms of the UBA Notes for any period of time mutually agreed upon by
UBA and us. During the extended term of the UBA Notes, UBA has the right to
require us to repay the outstanding principal balance, along with the accrued
and unpaid interest thereon, to UBA within sixty (60) days.
The UBA
Notes are subordinated to our credit facilities with Grand Pacific Financing
Corporation and Marquette Business Credit, respectively, under subordination
agreements executed by UBA. As per the terms of the applicable subordination
agreements, UBA is precluded from demanding repayment of the UBA Notes unless
the Grand Pacific Financing Corporation and Marquette facilities have been
repaid in full.
LONG TERM DEBT:
Grand Pacific Financing Corporation
Loan: On July 3, 2006, we obtained a $3,000,000 loan from Grand
Pacific Financing Corporation ("Grand Pacific"), secured by a first priority
deed of trust on the Ukiah land, fixtures attached to the land, and
improvements. The loan is payable in partially amortizing monthly
installments of $27,261 including interest at
the rate of 1.75% over the prime rate published by The Wall Street Journal,
maturing June 28, 2011 with a balloon payment. The amount of the
balloon payment will vary depending on the change in interest rates over the
term of the loan. We used the proceeds of the loan to repay in full all of the
then outstanding loans owed to Savings Bank of Mendocino County. Grand Pacific
also collects on a monthly basis an amount of approximately $10,554 towards
property taxes payable on the Ukiah property and pays such taxes on our behalf
when they become due.
Marquette Business Credit Inc.
Facility: In November, 2006, Marquette extended a total facility of
$4,925,000 with a maturity date of June 27, 2011 consisting of a $2,750,000
revolving facility, a $1,525,000 term loan and a $650,000 capital expenditure
loan. The rate of interest on the term loan and capital expenditure loan is the
one-month LIBOR rate published in the Wall Street Journal plus a margin of 5.25%
and the rate of interest on the revolving facility is one-month LIBOR rate
published in the Wall Street Journal plus a margin of 4.25%. The facility is
subject to certain financial covenants including prescribed minimum fixed
charges coverage, maintaining prescribed minimum tangible net worth and minimum
earning before interest, depreciation and taxes. The facility also has a
prepayment penalty if settled prior to the maturity date. The facility is
secured by substantially all of the Company's assets located in the United
States excluding real property and fixtures located at our property in Ukiah,
California.
On May 8,
2009, we received written notice (the "Notice") from Marquette that an event of
default had occurred and was continuing under that certain Loan and Security
Agreement, dated as of November 16, 2006 by and among us and our subsidiary
Releta Brewing Company, LLC (as borrowers) and Marquette (as lender) (the "Loan
Agreement") relating to a revolving loan, a term loan and a capex loan provided
by Marquette to us.
Specifically,
the event of default was triggered by our failure to remain in compliance with a
financial covenant in the Loan Agreement relating to the maintenance of a fixed
charge coverage ratio of at least 1.05 to 1.0 for the period of twelve
consecutive calendar months ending on March 31, 2009.
25
In
addition, the Company has failed to maintain the net worth required by a
covenant in the Loan Agreement.
As of May
14, 2009, Marquette has elected to assess the default interest rates under the
Loan Agreement; these rates are as follows: (i) for the revolving loan, LIBOR
plus 7.125% per annum and (ii) for the capex loan, the term loan and any other
obligations owed by us to Marquette, LIBOR plus 8.125% per annum. The
default interest rates will apply to the outstanding balances under the
respective loans with retroactive effect from and after April 1,
2009.
Pursuant
to the terms of the Loan Agreement, in case of an event of default, Marquette is
also entitled in its sole and absolute discretion to (i) terminate its
commitment to us to make loans under the Loan Agreement, (ii) to declare all
outstanding amounts due under the Loan Agreement immediately due and payable
and/or (iii) exercise any or all other rights and remedies available to it under
the Loan Agreement or applicable law. To date, Marquette has not
exercised such additional rights. However, Marquette has not waived
its rights to pursue such remedies in the future. Notwithstanding the
failure to maintain the fixed charge coverage ratio, we have to date made every
scheduled payment of principal and interest under the Loan
Agreement.
OTHER
LOANS AND CREDIT FACILITIES.
Royal Bank Of Scotland
Facility: Royal Bank of Scotland ("RBS") provided UBSN with a
£1,750,000 maximum revolving line of credit with an advance rate based on 80% of
UBSN's qualified accounts receivable on April 26, 2005. This
facility originally had a maturity of twelve months, but has been automatically
extended and will continue in place unless terminated by either party upon six
months' written notice.
Shepherd Neame Loan: Shepherd
Neame has a contract with UBSN to brew Kingfisher Premium Lager for our European
and Canadian markets. As consideration for extending the brewing contract,
Shepherd Neame advanced a loan of £600,000 to UBSN, repayable in annual
installments of £60,000 per year, commencing in June 2003. The loan carries
a fixed interest rate of 5% per year.
Weighted Average Interest: The
weighted average interest rates paid on our indebtedness in the United States
was 6% for the first six months of 2010 and 6.2% for the corresponding period in
2009. For loans primarily associated with our Foreign territory, the weighted
average rate paid was 3% for the first six months of 2010 and 6.2% for the
corresponding period in 2009.
Keg
Management Arrangement: Effective September 1, 2009,
we entered into a five-year keg management agreement with MicroStar Keg
Management, LLC ("MicoStar"). Under this arrangement, MicroStar
provides us with half-barrel kegs for which we pay filling and usage
fees. Distributors return the kegs directly to
MicroStar. MicroStar then supplies us with additional
kegs. If the agreement is not extended and terminates, we are
required to purchase a certain number of kegs from MicroStar. We
anticipate that we would finance such purchase through debt or lease financing,
if available. However, there can be no assurance that we will be able
to finance the purchase of the required kegs. Our failure to purchase
the required kegs from MicroStar upon termination of the agreement would likely
have a material adverse effect on our operations.
Current Ratio: Our ratio of
current assets to current liabilities on June 30, 2010 was 0.43 to 1.0 and
its ratio of total assets to total liabilities was 1.1 to 1.0. Our ratio of
current assets to current liabilities on June 30, 2009 was 0.82 to 1.0 and
the ratio of total assets to total liabilities was 1.18 to 1.0.
26
Restricted Net Assets: The
Company's wholly-owned subsidiary, UBIUK, has undistributed losses of
approximately $1,801,800 as of June 30, 2010.
Under
UBSN's line of credit agreement with RBS, distributions and other payments to
the Company from its subsidiary are not permitted if retained earnings drop
below approximately $1,495,000.
Item
3.
|
Quantitative and
Qualitative Disclosures About Market
Risk
|
Not
required for smaller reporting company.
Item
4.
|
Controls and
Procedures
|
Evaluation
Of Disclosure Controls And Procedures
Our
Management team, under the supervision and with the participation of our chief
executive officer and our chief financial officer, evaluated the effectiveness
of the design and operation of our disclosure controls and procedures as such
term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of the last day of the
quarter ended June 30, 2010. The term disclosure controls and procedures
means our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to
management, including our chief executive and chief financial officer, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Based on this evaluation, our chief executive
officer and our chief financial officer concluded that, our disclosure controls
and procedures were effective as of June 30, 2010.
Changes
In Internal Control Over Financial Reporting
There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the most recent fiscal quarter (the three months ending
June 30, 2010) that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
27
PART
II
OTHER
INFORMATION
Item
3.
|
Default Upon Senior
Securities
|
An event of default has occurred and is
continuing under the Loan and Security Agreement by and among Marquette Business
Credit, Inc., MBC and Releta. Marquette is currently charging a
default interest rate. All scheduled payments of principal and
interest have been made. For additional information, see Item 2 of Part
I.
Item
6.
|
Exhibits
|
Exhibit
Number
|
Description of Document
|
||
3.1
|
(T)
|
Articles
of Incorporation of the Company, as amended.
|
|
3.2
|
(T)
|
Bylaws
of the Company, as amended.
|
|
10.1
|
[Intentionally
omitted]
|
||
10.2
|
[Intentionally
omitted]
|
||
10.3
|
(A)
|
Wholesale
Distribution Agreement between the Company and Bay Area
Distributing.
|
|
10.4
|
[Intentionally
omitted]
|
||
10.5
|
(B)
|
Liquid
Sediment Removal Services Agreement with Cold Creek Compost,
Inc.
|
|
10.6
|
[Intentionally
omitted]
|
||
10.7
|
(C)
|
Commercial
Real Estate Purchase Contract and Receipt for Deposit (previously filed as
Exhibit 19.2).
|
|
10.8
|
(D)
|
[Intentionally
omitted]
|
|
10.9
|
[Intentionally
omitted]
|
||
10.10
|
[Intentionally
omitted]
|
||
10.11
|
(G)
|
Agreement
to Implement Condition of Approval No. 37 of the Site Development Permit
95-19 with the City of Ukiah, California (previously filed as Exhibit
19.6).
|
|
10.12
|
[Intentionally
omitted]
|
||
10.13
|
[Intentionally
omitted]
|
||
10.14
|
[Intentionally
omitted]
|
||
10.15
|
[Intentionally
omitted]
|
||
10.16
|
[Intentionally
omitted]
|
||
10.17
|
[Intentionally
omitted]
|
||
10.18
|
[Intentionally
omitted]
|
||
10.19
|
(K)
|
Investment
Agreement with United Breweries of America, Inc.
|
|
10.20
|
[Intentionally
omitted]
|
||
10.21
|
[Intentionally
omitted]
|
||
10.22
|
(L)
|
Indemnification
Agreement with Vijay Mallya.
|
|
10.23
|
(L)
|
Indemnification
Agreement with Michael Laybourn.
|
|
10.24
|
(L)
|
Indemnification
Agreement with Jerome Merchant.
|
|
10.25
|
(L)
|
Indemnification
Agreement with Yashpal Singh.
|
|
10.27
|
(L)
|
Indemnification
Agreement with Robert Neame.
|
|
10.28
|
(L)
|
Indemnification
Agreement with Sury Rao Palamand.
|
28
Exhibit
Number
|
Description of Document
|
||
10.29
|
(L)
|
Indemnification
Agreement with Kent Price.
|
|
10.30
|
[Intentionally
omitted]
|
||
10.31
|
[Intentionally
omitted]
|
||
10.32
|
[Intentionally
omitted]
|
||
10.33
|
[Intentionally
omitted]
|
||
10.35
|
(O)
|
Master
Line of Credit Agreement between the Company and United Breweries of
America Inc. dated August 31, 1999.
|
|
10.36
|
(O)
|
Convertible
Note in favor of United Breweries of America Inc. dated September 7,
1999.
|
|
10.37
|
(P)
|
Convertible
Note in favor of United Breweries of America Inc. dated October 21,
1999.
|
|
10.38
|
(P)
|
Convertible
Note in favor of United Breweries of America Inc. dated November 12,
1999.
|
|
10.39
|
(P)
|
Convertible
Note in favor of United Breweries of America Inc. dated December 17,
1999.
|
|
10.40
|
(P)
|
Convertible
Note in favor of United Breweries of America Inc. dated December 31,
1999.
|
|
10.41
|
(P)
|
Convertible
Note in favor of United Breweries of America Inc. dated February 16,
2000.
|
|
10.42
|
(P)
|
Convertible
Note in favor of United Breweries of America Inc. dated February 17,
2000.
|
|
10.43
|
(P)
|
Convertible
Note in favor of United Breweries of America Inc. dated April 28,
2000.
|
|
10.44
|
(P)
|
First
Amendment to Master Line of Credit Agreement between the Company and
United Breweries of America Inc. dated April 28, 2000.
|
|
10.45
|
(Q)
|
Convertible
Note in favor of United Breweries of America Inc. dated September 11,
2000.
|
|
10.46
|
(Q)
|
Convertible
Note in favor of United Breweries of America Inc. dated September 30,
2000.
|
|
10.47
|
(Q)
|
Convertible
Note in favor of United Breweries of America Inc. dated December 31,
2000.
|
|
10.48
|
(Q)
|
Convertible
Note in favor of United Breweries of America Inc. dated February 12,
2001.
|
|
10.49
|
(R)
|
Convertible
Note in favor of United Breweries of America Inc. dated July 1,
2001.
|
|
10.50
|
(S)
|
Confirmation
of Waiver Between Mendocino Brewing Company, Inc. and United Breweries of
America Inc. dated as of December 28, 2001.
|
|
10.51
|
(S)
|
Extension
of Term of Notes Under Master Line of Credit Agreement between Mendocino
Brewing Company, Inc. and United Breweries of America Inc., dated February
14, 2002.
|
|
10.52
|
(T)
|
License
Agreement between United Breweries Limited and United Breweries
International (U.K.), Limited.
|
|
10.53
|
(T)
|
Supplemental
Agreement to License Agreement between United Breweries Limited and United
Breweries International (U.K.), Limited.
|
|
10.54
|
(T)
|
Distribution
Agreement between United Breweries International (U.K.), Limited and UBSN,
Ltd.
|
|
10.55
|
(T)
|
Supplemental
Agreement to Distribution Agreement between United Breweries International
(U.K.), Limited and UBSN, Ltd.
|
|
10.56
|
(T)
|
Market
Development, General and Administrative Services Agreement between
Mendocino Brewing Company, Inc. and UBSN, Ltd.
|
|
10.57
|
(T)
|
Contract
to Brew and Supply Kingfisher Products among Shepherd Neame, Limited,
United Breweries International (U.K.), Limited and UBSN,
Ltd.
|
29
Exhibit
Number
|
Description of Document
|
||
10.58
|
(T)
|
Supplemental
Agreement to Contract to Brew and Supply Kingfisher Products among
Shepherd Neame, Limited, United Breweries International (U.K.), Limited.
and UBSN, Ltd.
|
|
10.59
|
(T)
|
Loan
Agreement between Shepherd Neame, Limited and UBSN,
Ltd.
|
|
10.60
|
(T)
|
Brewing
License Agreement between UBSN, Ltd. and Mendocino Brewing Company,
Inc.
|
|
10.61
|
(T)
|
Kingfisher
Trade Mark and Trade Name License Agreement between Kingfisher of America,
Inc. and Mendocino Brewing Company, Inc.
|
|
10.62
|
(U)
|
First
Amendment to Extension of Term of Notes Under Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and United Breweries of
America Inc. dated November 13, 2002.
|
|
10.63
|
(U)
|
Second
Amendment to Extension of Term of Notes Under Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and United Breweries of
America Inc. dated March 31, 2003.
|
|
10.64
|
[Intentionally
omitted]
|
||
10.65
|
[Intentionally
omitted]
|
||
10.66
|
(W)
|
Third
Amendment to Extension of Term of Notes under Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and United Breweries of
America Inc. dated August 14, 2003.
|
|
10.67
|
[Intentionally
omitted]
|
||
10.68
|
(X)
|
Fourth
Amendment to Extension of Term of Notes Under Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and United Breweries of
America Inc. dated as of August 14, 2004.
|
|
10.69
|
[Intentionally
omitted]
|
||
10.70
|
(Z)
|
Second
Agreement dated October 9, 1998 between UBSN, Ltd. and Shepherd Neame,
Ltd.
|
|
10.71
|
[Intentionally
omitted]
|
||
10.72
|
[Intentionally
omitted]
|
||
10.73
|
[Intentionally
omitted]
|
||
10.74
|
(BB)
|
Convertible
Promissory Note of Mendocino Brewing Company, Inc. in favor of United
Breweries of America Inc. dated March 2, 2005.
|
|
10.75
|
[Intentionally
omitted]
|
||
10.76
|
(DD)
|
Invoice
Discounting Agreement between The Royal Bank of Scotland Commercial
Services Limited and UBSN Limited, dated April 26,
2005.
|
|
10.77
|
[Intentionally
omitted]
|
||
10.78
|
[Intentionally
omitted]
|
||
10.79
|
(EE)
|
Loan
Agreement by and between Mendocino Brewing Company, Inc. and Grand Pacific
Financing Corporation dated June 28, 2006.
|
|
10.80
|
(EE)
|
Promissory
Note of Mendocino Brewing Company, Inc. in favor of Grand Pacific
Financing Corporation, dated June 28, 2006.
|
|
10.81
|
[Intentionally
omitted]
|
||
10.82
|
(FF)
|
Loan
and Security Agreement by and among Marquette Business Credit Inc. and
Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC, dated
November 16, 2006.
|
|
10.83
|
(FF)
|
Revolving
Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in
favor of Marquette Business Credit Inc., dated November 16,
2006.
|
|
10.84
|
(FF)
|
Term
Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in
favor of Marquette Business Credit Inc., dated November 16,
2006.
|
30
Exhibit
Number
|
Description of Document
|
||
10.85
|
(FF)
|
CAPEX
Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in
favor of Marquette Business Credit Inc., dated November 16,
2006.
|
|
10.86
|
(FF)
|
Fifth
Amendment to Extension of Term of Notes Under Master Line of Credit
Agreement, effective August 31, 2005.
|
|
10.87
|
(FF)
|
Sixth
Amendment to Extension of Term of Notes under Master Line of Credit
Agreement, effective December 31, 2006.
|
|
10.88
|
(FF)
|
Second
Amendment to Convertible Promissory Note, effective December 31,
2006.
|
|
10.89
|
(GG)
|
Seventh
Amendment to Extension of Term of Notes under Master Line of Credit
Agreement, effective June 30, 2007
|
|
10.90
|
(GG)
|
Third
Amendment to Convertible Promissory Note, effective June 30,
2007
|
|
10.91
|
(HH)
|
Employment
Agreement of Yashpal Singh (Management Contract)
|
|
10.92
|
[II]
|
Eighth
Amendment to Extension of Term of Notes under Master Line of Credit
Agreement, effective June 30, 2008.
|
|
10.93
|
(II)
|
Fourth
Amendment to Convertible Promissory Note, effective June 30,
2008.
|
|
10.94
|
(JJ)
|
Directors'
Compensation Plan, as amended (Management Contract)
|
|
10.95
|
(KK)
|
Ninth
Amendment to Extension of Term Notes under Master Line of Credit
Agreement, effective June 30, 2009.
|
|
10.96
|
(KK)
|
Fifth
Amendment to Convertible Promissory Notes, effective June 30,
2009.
|
|
10.97
|
(LL)
|
Separation
and Severance Agreement by and between the Company and Yashpal Singh,
effective August 27, 2009 (Management Contract).
|
|
10.98†
|
(MM)
|
Keg
Management Agreement by and between MicroStar Keg Management, LLC and the
Company effective September 1, 2009.
|
|
10.99
|
(OO)
|
Commercial
Lease between Stewart's Shop Corporation and Relata Brewing Company
LLC.
|
|
14.1
|
(V)
|
Code
of Ethics
|
† Certain
portions have been omitted and have been filed separately with the SEC pursuant
to a request for confidential treatment under Rule 24b-2 as promulgated under
the Securities Exchange Act of 1934.
NOTES:
Each Exhibit listed above that is annotated with one or more of the following
letters is incorporated by reference from the following sources:
(A)
|
The
Company's Registration Statement dated June 15, 1994, as amended,
previously filed with the Commission, Registration No.
33-78390-LA.
|
(B)
|
The
Company's Annual Report on Form 10-KSB for the period ended December 31,
1995.
|
(C)
|
The
Company's Quarterly Report on Form 10-QSB for the period ended March 31,
1995.
|
(D)
|
The
Company's Quarterly Report on Form 10-QSB/A No. 1 for the period ended
September 30, 1997.
|
(F)
|
The
Company's Annual Report on Form 10-KSB for the period ended December 31,
1996.
|
(G)
|
The
Company's Quarterly Report on Form 10-QSB for the period ended September
30, 1995.
|
(I)
|
The
Company's Annual Report on Form 10-KSB for the period ended December 31,
1997.
|
(K)
|
Schedule
13D filed November 3, 1997, by United Breweries of America, Inc. and Vijay
Mallya.
|
(L)
|
The
Company's Quarterly Report on Form 10-QSB for the period ended June 30,
1998.
|
31
(N)
|
The
Company's Quarterly Report on Form 10-QSB for the period ended June 30,
1999.
|
(O)
|
Amendment
No. 5 to Schedule 13D filed September 15, 1999, by United Breweries of
America, Inc. and Vijay Mallya.
|
(P)
|
Amendment
No. 6 to Schedule 13D filed May 12, 2000, by United Breweries of America,
Inc. and Vijay Mallya.
|
(Q)
|
Amendment
No. 7 to Schedule 13D filed February 22, 2001, by United Breweries of
America, Inc. and Vijay Mallya.
|
(R)
|
Amendment
No. 8 to Schedule 13D filed August 22, 2001, by United Breweries of
America, Inc and Vijay Mallya.
|
(S)
|
The
Company's Current Report on Form 8-K filed as of February 19,
2002.
|
(T)
|
The
Company's Annual Report on Form 10-KSB for the period ended December 31,
2001.
|
(U)
|
Amendment
No. 9 to Schedule 13D filed March 31, 2003, by United Breweries of
America, Inc. and Vijay Mallya.
|
(V)
|
The
Company's Annual Report on Form 10-KSB for the year ended December 31,
2003.
|
(W)
|
Amendment
No. 10 to Schedule 13D filed August 18, 2003 by United Breweries of
America, Inc. and Dr. Vijay Mallya.
|
(X)
|
Amendment
No. 11 to Schedule 13D, jointly filed by United Breweries of America, Inc.
and Dr. Vijay Mallya on August 16,
2004.
|
(Z)
|
The
Company's Quarterly Report on Form 10-Q for the period ended September 30,
2004.
|
(BB)
|
The
Company's Current Report on Form 8-K filed as of March 8,
2005.
|
(DD)
|
The
Company's Quarterly Report on Form 10-Q for the period ended June 30,
2005.
|
(EE)
|
The
Company's Quarterly Report on Form 10-Q for the period ended June 30,
2006.
|
(FF)
|
The
Company's Annual Report on Form 10-K for the year ended December 31,
2006.
|
(GG)
|
The
Company's Quarterly Report on Form 10Q for the period ended June 30,
2007.
|
(HH)
|
The
Company's Annual Report on Form 10-QK/A for the period ended December 31,
2007.
|
(II)
|
The
Company's Quarterly Report on Form 10-Q for the period ended September 30,
2008.
|
(JJ)
|
The
Company's Annual Report on Form 10-K for the year ended December 31,
2008.
|
(KK)
|
The
Company's Quarterly Report on Form 10-Q for the period ended June 30,
2009.
|
(LL)
|
The
Company's Current Report on Form 8-K filed as of August 31,
2009.
|
(MM)
|
The
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2009.
|
(NN)
|
The
Company's Annual Report on Form 10-K for the year ended December 31,
2009.
|
(OO)
|
The
Company's Quarterly Report on Form 10-Q for the period ended March 31,
2010
|
(b)
|
Exhibits Attached The
following Exhibits are attached to this Quarterly Report on Form
10-Q:
|
10.100
|
Tenth
Amendment to Extension of Term Notes under Master Line of Credit
Agreement, effective June 30, 2010.
|
10.101
|
Sixth
Amendment to Convertible Promissory Notes, effective June 30,
2010.
|
|
10.102
|
Employment Agreement with Damon Swarbrick |
31.1
|
Certification
of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
32.1
|
Certification
of Chief Executive Officer Pursuant to U.S.C.
1350.
|
32.2
|
Certification
of Chief Financial Officer Pursuant to U.S.C.
1350.
|
(c)
|
Excluded Financial
Statements. None.
|
32
SIGNATURES
Pursuant
to the requirements 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.
MENDOCINO
BREWING COMPANY, INC.
|
|||
Dated:
August 14, 2010
|
By:
|
/s/ Yashpal Singh | |
Yashpal
Singh
|
|||
President
and Chief Executive Officer
|
|||
Dated:
August 14, 2010
|
By:
|
/s/ Mahadevan Narayanan | |
Mahadevan
Narayanan
|
|||
Chief
Financial Officer and Secretary
|
|||
33