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EX-31.1 - MENDOCINO BREWING CO INCv193662_ex31-1.htm
EX-32.1 - MENDOCINO BREWING CO INCv193662_ex32-1.htm
EX-32.2 - MENDOCINO BREWING CO INCv193662_ex32-2.htm
EX-31.2 - MENDOCINO BREWING CO INCv193662_ex31-2.htm
EX-10.102 - MENDOCINO BREWING CO INCv193662_ex10-102.htm
EX-10.100 - MENDOCINO BREWING CO INCv193662_ex10-100.htm
EX-10.101 - MENDOCINO BREWING CO INCv193662_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
 
No stock options were outstanding as of June 30, 2010 and June 30, 2009.
 
12

 
Valuation and Expense Information under SFAS 123(R)
 
 
 
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