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 September 30, 2012
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
|
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
|
Identification
No.)
|
|
|
|
1601
Airport Road, Ukiah, California
|
|
95482
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(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 [ ]
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 [ ]
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
|
[X]
|
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 November 13, 2012 is 12,611,133.
Table of Contents
PART I
|
|
|
|
|
|
|
|
Item 1.
|
|
Financial Statements
|
|
F-1
|
Item 2.
|
|
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
|
|
3
|
Item 3.
|
|
Quantitative and Qualitative Disclosures
About Market Risk
|
|
11
|
Item 4.
|
|
Controls and Procedures
|
|
11
|
|
|
|
|
|
PART II OTHER INFORMATION
|
|
|
|
|
|
|
|
Item 6.
|
|
Exhibits
|
|
12
|
|
|
|
|
|
SIGNATURES
|
|
13
|
PART
I
Item
1.
Financial Statements
.
MENDOCINO
BREWING COMPANY, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
139,000
|
|
|
$
|
312,200
|
|
Accounts receivable, net
|
|
|
5,160,500
|
|
|
|
5,338,700
|
|
Inventories
|
|
|
1,694,700
|
|
|
|
1,799,600
|
|
Prepaid expenses
|
|
|
582,700
|
|
|
|
412,800
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
7,576,900
|
|
|
|
7,863,300
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
11,237,900
|
|
|
|
11,391,900
|
|
Deposits and other assets
|
|
|
706,000
|
|
|
|
462,500
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
19,520,800
|
|
|
$
|
19,717,700
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Secured lines of credit
|
|
$
|
2,202,300
|
|
|
$
|
1,749,800
|
|
Accounts payable
|
|
|
5,905,600
|
|
|
|
6,705,900
|
|
Accrued liabilities
|
|
|
1,572,900
|
|
|
|
1,618,700
|
|
Current maturities of notes to related parties
|
|
|
-
|
|
|
|
93,200
|
|
Current maturities of long-term debt
|
|
|
450,000
|
|
|
|
423,600
|
|
Current maturities of obligations under capital leases
|
|
|
14,000
|
|
|
|
67,500
|
|
Total Current Liabilities
|
|
|
10,144,800
|
|
|
|
10,658,700
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Notes to related parties less current maturities
|
|
|
3,384,000
|
|
|
|
3,315,700
|
|
Long term debts, less current maturities
|
|
|
4,094,900
|
|
|
|
4,280,900
|
|
Total Long-Term Liabilities
|
|
|
7,478,900
|
|
|
|
7,596,600
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
17,623,700
|
|
|
|
18,255,300
|
|
|
|
|
|
|
|
|
|
|
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, 12,611,133 shares issued and outstanding
|
|
|
15,100,300
|
|
|
|
15,100,300
|
|
Accumulated comprehensive income
|
|
|
415,900
|
|
|
|
523,600
|
|
Accumulated deficit
|
|
|
(13,846,700
|
)
|
|
|
(14,389,100
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
1,897,100
|
|
|
|
1,462,400
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
19,520,800
|
|
|
$
|
19,717,700
|
|
See
accompanying notes to these condensed financial statements.
MENDOCINO
BREWING COMPANY, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
THREE MONTHS ENDED
September 30
|
|
|
NINE MONTHS ENDED
September 30
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Sales
|
|
$
|
10,277,700
|
|
|
$
|
10,700,100
|
|
|
$
|
30,495,500
|
|
|
$
|
30,824,600
|
|
Excise taxes
|
|
|
236,100
|
|
|
|
268,500
|
|
|
|
753,800
|
|
|
|
726,200
|
|
Net sales
|
|
|
10,041,600
|
|
|
|
10,431,600
|
|
|
|
29,741,700
|
|
|
|
30,098,400
|
|
Cost of goods sold
|
|
|
7,315,200
|
|
|
|
7,496,400
|
|
|
|
21,459,800
|
|
|
|
21,673,200
|
|
Gross profit
|
|
|
2,726,400
|
|
|
|
2,935,200
|
|
|
|
8,281,900
|
|
|
|
8,425,200
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
1,425,200
|
|
|
|
1,416,200
|
|
|
|
4,267,600
|
|
|
|
4,336,700
|
|
General and administrative
|
|
|
1,088,200
|
|
|
|
1,022,000
|
|
|
|
3,156,300
|
|
|
|
3,173,100
|
|
Total operating expenses
|
|
|
2,513,400
|
|
|
|
2,438,200
|
|
|
|
7,423,900
|
|
|
|
7,509,800
|
|
Income from operations
|
|
|
213,000
|
|
|
|
497,000
|
|
|
|
858,000
|
|
|
|
915,400
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
3,900
|
|
|
|
9,000
|
|
|
|
14,000
|
|
|
|
16,800
|
|
Profit on sale of asset
|
|
|
-
|
|
|
|
-
|
|
|
|
9,400
|
|
|
|
-
|
|
Interest expense
|
|
|
(112,200
|
)
|
|
|
(115,500
|
)
|
|
|
(337,300
|
)
|
|
|
(358,500
|
)
|
Total other expenses
|
|
|
(108,300
|
)
|
|
|
(106,500
|
)
|
|
|
(313,900
|
)
|
|
|
(341,700
|
)
|
Income before income taxes
|
|
|
104,700
|
|
|
|
390,500
|
|
|
|
544,100
|
|
|
|
573,700
|
|
Provision for income taxes
|
|
|
900
|
|
|
|
-
|
|
|
|
1,700
|
|
|
|
7,100
|
|
Net income
|
|
$
|
103,800
|
|
|
$
|
390,500
|
|
|
$
|
542,400
|
|
|
$
|
566,600
|
|
Foreign currency translation income (loss)
|
|
|
(74,100
|
)
|
|
|
80,900
|
|
|
|
(107,700
|
)
|
|
|
(32,000
|
)
|
Comprehensive income
|
|
$
|
29,700
|
|
|
$
|
471,400
|
|
|
$
|
434,700
|
|
|
$
|
534,600
|
|
Net income per common share –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Weighted average common shares outstanding –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,611,133
|
|
|
|
12,461,993
|
|
|
|
12,611,133
|
|
|
|
12,438,839
|
|
Diluted
|
|
|
14,883,814
|
|
|
|
14,673,325
|
|
|
|
14,883,814
|
|
|
|
14,650,171
|
|
See
accompanying notes to these condensed financial statements.
MENDOCINO
BREWING COMPANY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
542,400
|
|
|
$
|
566,600
|
|
Adjustments to reconcile net income to net cash from
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
771,200
|
|
|
|
889,000
|
|
Provision for doubtful accounts
|
|
|
(32,200
|
)
|
|
|
(357,300
|
)
|
Interest accrued on related party debt
|
|
|
68,300
|
|
|
|
68,000
|
|
(Profit) on sale of assets
|
|
|
(9,400
|
)
|
|
|
-
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
330,400
|
|
|
|
(57,200
|
)
|
Inventories
|
|
|
104,900
|
|
|
|
(440,200
|
)
|
Prepaid expenses
|
|
|
(155,600
|
)
|
|
|
99,300
|
|
Deposits and other assets
|
|
|
(296,600
|
)
|
|
|
(221,500
|
)
|
Accounts payable
|
|
|
(977,000
|
)
|
|
|
229,200
|
|
Accrued liabilities
|
|
|
(72,100
|
)
|
|
|
358,100
|
|
Net cash provided by operating activities
|
|
|
274,300
|
|
|
|
1,134,000
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(546,200
|
)
|
|
|
(680,500
|
)
|
Proceeds from sale of fixed assets
|
|
|
12,200
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(534,000
|
)
|
|
|
(680,500
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net borrowing (repayment) on line of credit
|
|
|
415,900
|
|
|
|
(1,494,300
|
)
|
Borrowing on long-term debt
|
|
|
184,700
|
|
|
|
4,881,000
|
|
Repayment on long-term debt
|
|
|
(439,000
|
)
|
|
|
(3,685,200
|
)
|
Payments on obligations under long term leases
|
|
|
(53,800
|
)
|
|
|
(71,500
|
)
|
Net cash provided by (used in) financing activities
|
|
|
107,800
|
|
|
|
(370,000
|
)
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(21,300
|
)
|
|
|
10,300
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
|
(173,200
|
)
|
|
|
93,800
|
|
|
|
|
|
|
|
|
|
|
CASH, beginning of period
|
|
|
312,200
|
|
|
|
69,200
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
139,000
|
|
|
$
|
163,000
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
1,700
|
|
|
$
|
7,100
|
|
Interest
|
|
$
|
269,000
|
|
|
$
|
290,500
|
|
See
accompanying notes to these condensed financial statements.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Description of Operations and Summary of Significant Accounting Policies
Description
of Operations
Mendocino
Brewing Company, Inc. (the “Company” or “MBC”), was formed in 1983 in California, has operating subsidiaries,
Releta Brewing Company, LLC (“Releta”), and United Breweries International (UK) Limited (“UBIUK”). In
the United States (the “US”), MBC and its subsidiary, Releta, operate two breweries that produce beer and malt beverages
for the specialty “craft” segment of the beer market. The breweries are located in Ukiah, California and Saratoga
Springs, New York. The majority of sales for MBC in the US are in California. The Company brews several brands, of which Red Tail
Ale is the flagship brand. In addition, the Company performs contract brewing for several other brands, and MBC holds the license
to distribute Kingfisher Premium Lager in the US. Generally, product shipments are made directly from the breweries to the wholesalers
or distributors in accordance with state and local laws.
The
Company’s United Kingdom (“UK”) subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe, Limited
(“KBEL”), a distributor of alcoholic beverages, mainly Kingfisher Premium Lager, in the UK and Europe. The distributorship
is located in Maidstone, Kent in the UK.
Principles
of Consolidation
The
consolidated financial statements present the accounts of Mendocino Brewing Company, Inc., and its 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. These condensed financial statements should be read in conjunction with the audited consolidated financial
statements included in the Company’s most recent Annual Report on Form 10-K, as filed with the Securities and Exchange Commission
(the “SEC”), which contains additional financial and operating information and information concerning the significant
accounting policies followed by the Company. The financial statements and notes are representations of the Company’s management
(“Management”) and its board of directors (the “Board of Directors”), who are responsible for their integrity
and objectivity.
Operating
results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2012 or any future period.
SIGNIFICANT
ACCOUNTING POLICIES
There
have been no significant changes in the Company’s significant accounting policies during the nine months ended September
30, 2012 compared to what was previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December
31, 2011.
Cash
and Cash Equivalents, Short and Long-Term Investments
For
purposes of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
Revenue
Recognition
The
Company recognizes revenue from brewing and distribution operations through product sales, net of discounts.
Revenue
is recognized only when all of the following criteria have been met:
|
●
|
Persuasive
evidence
of
an
arrangement
exists;
|
|
●
|
Delivery
has
occurred
or
services
have
been
rendered;
|
|
●
|
The
fee
for
the
arrangement
is
fixed
or
determinable;
and
|
|
●
|
Collectability
is
reasonably
assured.
|
“Persuasive
Evidence of an Arrangement” – The Company documents all terms of an arrangement in a written contract or purchase
order signed by the customer prior to recognizing revenue.
“Delivery
Has Occurred or Services Have Been Performed” – The Company delivers the products prior to recognizing revenue or
performs services as per contractual terms. Product is considered delivered upon delivery to a customer’s designated carrier
or location and services are considered performed upon completion of Company’s contractual obligations.
“The
Fee for the Arrangement is Fixed or Determinable” – Prior to recognizing revenue, an amount is either fixed or determinable
under the terms of the written contract. The price is negotiated at the outset of the arrangement and is not subject to refund
or adjustment during the initial term of the arrangement.
“Collectability
is Reasonably Assured” – The Company determines that collectability is reasonably assured prior to recognizing revenue.
Collectability is assessed on a customer-by-customer basis based on criteria outlined by Management. The Company does not enter
into arrangements unless collectability is reasonably assured at the outset. Existing customers are subject to ongoing credit
evaluations based on payment history and other factors. If it is determined during the arrangement that collectability is not
reasonably assured, revenue is recognized on a cash basis.
The
Company records certain consideration paid to customers for services or placement fees as a reduction in revenue rather than as
an expense. The Company reports these items on the income statement as a reduction in revenue and as a corresponding reduction
in marketing and selling expenses.
Revenues
from the Company’s brewpub and gift store are recognized when sales have been completed.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments. Management considers the following factors when determining the collectability of specific customer accounts:
customer credit-worthiness, past transaction history with the customer, current economic and industry trends and changes in customer
payment terms. Balances over 90 days past due and other higher risk amounts are reviewed individually for collectability. If the
financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments,
additional allowances would be required. Based on Management’s assessment, the Company provides for estimated uncollectible
amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company
has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
Inventories
Inventories
are stated at the lower of average cost, which approximates the first-in, first-out method, or market (net realizable value).
The Company regularly reviews its inventories for the presence of obsolete product attributed to age, seasonality and quality.
Inventories that are considered obsolete are written off or adjusted to carrying value.
Deferred
Financing Costs
Costs
relating to obtaining financing are capitalized and amortized over the term of the related debt. When a loan is paid in full,
any unamortized financing costs are removed from the related accounts and charged to operations. Deferred financing costs related
to borrowing made in June 2011 were $225,000. Amortization of deferred financing costs charged to operations was $33,800 and $43,900
for the nine months ended September 30, 2012 and 2011, respectively. Amortization of deferred financing costs charged to operations
was $11,300 for the three months ended September 30, 2012 and 2011.
Concentration
of Credit Risks
Financial
instruments that potentially subject the Company to credit risk consist principally of trade receivables, cash deposits in excess
of FDIC limits, and assets located in the UK. 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. The Company has approximately
$14,900 in cash deposits in the UK and $2,426,500 of accounts receivable due from customers located in the UK as of September
30, 2012.
Income
Taxes
The
Company accounts for income taxes using the asset and liability approach. Under the asset and liability approach, deferred taxes
are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. 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. Accordingly, the Company provided for a full valuation allowance against its net deferred tax
assets at September 30, 2012 and December 31, 2011.
Basic
and Diluted Earnings (Loss) per Share
The
basic earnings (loss) per share is computed by dividing the earnings (loss) attributable to common stockholders by the weighted
average number of common shares outstanding during the period. The computations for basic and dilutive net earnings per share
are as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
9/30/2012
|
|
|
9/30/2011
|
|
|
9/30/2012
|
|
|
9/30/2011
|
|
Net income
|
|
$
|
103,800
|
|
|
|
390,500
|
|
|
$
|
542,400
|
|
|
|
566,600
|
|
Weighted average common shares outstanding
|
|
|
12,611,133
|
|
|
|
12,461,993
|
|
|
|
12,611,133
|
|
|
|
12,438,839
|
|
Basic net income per share
|
|
$
|
0.01
|
|
|
|
0.03
|
|
|
$
|
0.04
|
|
|
|
0.05
|
|
Interest expense on convertible notes
|
|
$
|
22,900
|
|
|
|
22,900
|
|
|
$
|
68,300
|
|
|
|
68,000
|
|
Income for computing diluted net income per share
|
|
$
|
126,700
|
|
|
|
413,400
|
|
|
$
|
610,700
|
|
|
|
634,600
|
|
Incremental shares from assumed exercise of dilutive securities
|
|
|
2,272,681
|
|
|
|
2,211,332
|
|
|
|
2,272,681
|
|
|
|
2,211,332
|
|
Dilutive potential common shares
|
|
|
14,883,814
|
|
|
|
14,673,325
|
|
|
|
14,883,814
|
|
|
|
14,650,171
|
|
Diluted net earnings per share
|
|
$
|
0.01
|
|
|
|
0.03
|
|
|
$
|
0.04
|
|
|
|
0.04
|
|
Foreign
Currency Translation
The
Company has subsidiaries located in the UK, where the local currency, UK Pound Sterling, is the functional currency. Financial
statements of these subsidiaries are translated into US dollars using period-end exchange rates for assets and liabilities and
average exchange rates during the period for revenues and expenses. Cumulative translation adjustments associated with net assets
or liabilities are reported in non-owner changes in equity. Any exchange rate gains or losses related to foreign currency transactions
are recognized in the income statement as incurred, in the same financial statement caption as the underlying transaction, and
are not material for any period.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the US includes having the
Company 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.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is composed of the Company’s net income 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.
Reportable
Segments
The
Company manages its operations through two business segments: (i) brewing operations and tasting room operations in the US and
distributor operations in Canada (the “North American Territory”) and (ii) distributor operations in Europe, including
the UK (the “Foreign Territory”). The Company evaluates 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 Company’s transfer policy, which approximates market price. The costs
of operating the manufacturing plants are captured discretely within each segment. The Company’s property, plant and equipment,
inventory, and accounts receivable are captured and reported discretely within each operating segment.
2.
Liquidity
and Management Plans
On
June 23, 2011, MBC and Releta entered into a Credit and Security Agreement (the “Agreement”) with Cole Taylor Bank,
an Illinois banking corporation (“Cole Taylor”). The Agreement provides a credit facility with a maturity date of
June 23, 2016 of up to $10,000,000 consisting of a $4,119,000 revolving facility, a $1,934,000 machinery and equipment term loan,
a $2,947,000 real estate term loan and a $1,000,000 capital expenditure line of credit. Convertible promissory notes issued to
United Breweries of America, Inc. (“UBA”), one of the Company’s principal shareholders, are subordinated to
the Cole Taylor facility.
At
September 30, 2012, the Company had cash and cash equivalents of $139,000, an accumulated deficit of $13,846,700 and a working
capital deficit of $2,567,900 due to losses incurred since 2005 in connection with KBEL’s operations in the UK. (For additional
information, see Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources.”)
On
March 2, 2012, United Breweries (Holdings) Limited (“UBHL”), MBC’s indirect majority shareholder, issued a letter
of financial support on behalf of KBEL (the “Letter of Support”), to KBEL’s accountants, to confirm that UBHL
had agreed to provide funding on an as needed basis to KBEL to ensure that KBEL is able to meet its financial obligations as and
when they become due. There is no maximum dollar limit on the amount of funds which UBHL will provide to KBEL specified in the
Letter of Support. The type of financial support provided by UBHL and the terms of such financial support are not specified in
the Letter of Support. UBHL’s financial support to KBEL is contingent upon compliance with any applicable exchange control
requirements and other applicable laws and regulations relating to the transfer of funds from India to the UK. The Letter of Support
dated March 2, 2012 was issued for a 12 month minimum period. Management intends to seek UBHL’s consent to keep the current
Letter of Support in force beyond the minimum period, if necessary, or request that UBHL issue a new letter of support for periods
after such minimum period. UBHL controls the Company’s two largest shareholders, UBA and Inversiones Mirabel S.A., and as
such, UBHL is the Company’s indirect majority shareholder. UBHL represented in the Letter of Support that it has the requisite
financial resources to meet its commitment to KBEL under the Letter of Support. The Chairman of the Company’s Board of Directors,
Dr. Vijay Mallya, is also the chairman of the board of directors of UBHL.
Management
has taken several actions to enable the Company to meet its working capital needs through September 30, 2013, including reducing
discretionary expenditures, exploring expansion of business in new territories and pursuing additional brewing contracts in an
effort to utilize a portion of excess production capacity. The Company may also seek additional capital infusions to support its
operations.
If
it becomes necessary to seek UBHL’s financial assistance under the current Letter of Support and UBHL is either unable or
unwilling to fulfill its commitment to KBEL under the current Letter of Support or to extend the time period of such commitment
if necessary, it may result in a material adverse effect on KBEL’s, UBIUK’s and the Company’s financial position
and on their ability to continue operations. In addition, if the Company is in default under its secured credit facilities, its
lenders may seek to satisfy any outstanding obligations through recourse against the applicable pledged collateral which may include
the Company’s real property and fixed and current assets. The loss of any material pledged asset would likely have a material
adverse effect on the Company’s financial position and results of operations.
UBIUK
and KBEL hold the exclusive brewing and distribution rights for Kingfisher Premium Lager in the UK, Ireland, continental Europe,
and Canada through a licensing agreement with United Breweries Limited, an Indian corporation (“UB”). Under its terms,
this licensing agreement is currently scheduled to expire in October 2013. We are in discussions with UB to renew this agreement.
If we are unable to renew this licensing agreement on commercially reasonable terms, our results of operations, cash flows and
financial position may be materially adversely affected.
In
July 2001, we entered into the Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., pursuant to
which we obtained a royalty-free, exclusive license to use the Kingfisher trademark and trade name in connection with the brewing
and distribution of beer in the US. Under its terms, this agreement is currently scheduled to expire in October 2013. If we are
unable to renew this license agreement on commercially reasonable terms, our results of operations, cash flows and financial position
may be materially adversely affected.
Since
1998, UBIUK and KBEL have licensed to Shepherd Neame the exclusive right to brew, keg, bottle, can, label, and package all beers
and related products sold under the Kingfisher trademark in the UK, Ireland, and continental Europe. This agreement will expire
in October 2013. We are in discussion with Shepherd Neame and other potential parties to negotiate a new agreement. If we are
unable to renew this agreement on commercially reasonable terms or enter into a new agreement for brewing for distribution in
the Foreign Territory, our results of operations, cash flows and financial position may be materially adversely affected.
3.
Inventories
Inventory
is stated at the lower of cost or market using the average-cost method. Cost includes the acquisition cost of raw materials and
components, direct labor, and manufacturing overhead.
Inventories
consist of the following:
|
|
September 30,
2012
|
|
|
December 31, 2011
|
|
Raw Materials
|
|
$
|
772,000
|
|
|
$
|
851,000
|
|
Beer-in-process
|
|
|
343,800
|
|
|
|
325,100
|
|
Finished Goods
|
|
|
517,300
|
|
|
|
582,200
|
|
Merchandise
|
|
|
61,600
|
|
|
|
41,300
|
|
TOTAL
|
|
$
|
1,694,700
|
|
|
$
|
1,799,600
|
|
4.
Secured
Lines of Credit
In
June 2011, Cole Taylor provided a line of credit, from which may be drawn up to 85% of eligible receivables and 60% of eligible
inventory for a period up to June 2016. The borrowings are collateralized, with recourse, by MBC’s and Releta’s trade
receivables and inventory located in the US. This facility carries interest at a rate of prime plus 1% and is secured by substantially
all of the assets of Releta and MBC. The amount outstanding on this line of credit as of September 30, 2012 was $1,131,000. Included
in the Company’s balance sheet as at September 30, 2012 are account balances totaling $2,734,000 of accounts receivable
and $1,694,700 of inventory collateralized to Cole Taylor under this facility.
On
April 26, 2005, Royal Bank of Scotland Commercial Services Limited (“RBS”) provided an invoice discounting facility
to KBEL for a maximum amount of £1,750,000 based on 80% prepayment against qualified accounts receivable related to KBEL’s
UK customers. The initial term of the facility was one year, after which time the facility could be terminated by either party
upon 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 September 30, 2012 was $1,071,300. Included
in the Company’s balance sheet at September 30, 2012 are account balances totaling $2,426,500 of accounts receivable collateralized
to RBS under this facility.
5.
Long-Term
Debt
Maturities
of long-term debt for succeeding years are as follows:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Loans from Cole Taylor, payable in monthly installments of $12,300, including interest at prime plus 2% with a balloon payment of approximately $2,202,500 in June 2016; secured by real property at Ukiah, California
|
|
|
2,755,100
|
|
|
|
2,885,600
|
|
|
|
|
|
|
|
|
|
|
Loans from Cole Taylor, payable in monthly installments of
$25,200, including interest at prime plus 1.5% with a balloon payment of approximately $654,800 in June 2016; secured by all
assets of Releta and MBC
|
|
|
1,789,800
|
|
|
|
1,818,900
|
|
|
|
|
4,544,900
|
|
|
|
4,704,500
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
450,000
|
|
|
|
423,600
|
|
|
|
$
|
4,094,900
|
|
|
$
|
4,280,900
|
|
Payments due during –
|
|
|
|
|
Three months ending December 31, 2012
|
|
$
|
112,500
|
|
Year ending December 31, 2013
|
|
|
450,000
|
|
Year ending December 31, 2014
|
|
|
450,000
|
|
Year ending December 31, 2015
|
|
|
450,000
|
|
Year ending December 31, 2016
|
|
|
3,082,400
|
|
|
|
$
|
4,544,900
|
|
6.
Notes
to Related Parties
Subordinated
Convertible Notes Payable
Notes
payable to related parties includes unsecured convertible notes to UBA of a total value, including interest at the prime rate
plus 1.5%, but not to exceed 10% per year, of $3,384,000 as of September 30, 2012. Thirteen of the UBA notes are convertible into
shares of the Company’s common stock at a conversion price of $1.50 per share and one UBA note is convertible into shares
of the Company’s common stock at a conversion price of $1.44 per share. The issuance of shares of the Company’s common
stock to non-employee directors on September 14, 2011 triggered an adjustment to the conversion price with respect to the UBA
note that now converts at a conversion price of $1.44 per share from $1.50 per share to $1.44 per share. As of September 30, 2012,
the outstanding principal and interest on the notes issued to UBA were convertible into 2,272,681 shares of the Company’s
common stock.
The
UBA notes were automatically extended until June 2012 with automatic renewals after such maturity date for successive one year
terms, provided that either the Company or UBA may elect not to extend the term upon written notice given to the other party no
more than 60 days and no fewer than 30 days prior to the expiration of the applicable term. Under the terms of the UBA notes,
UBA may demand payment within 60 days following the end of the extension period, but UBA has agreed to subordinate the UBA notes
to the Company’s long-term debt agreements with Cole Taylor. Therefore, the Company will not require the use of working
capital to repay any of the UBA notes until the Cole Taylor facilities are repaid. The UBA notes include $1,468,600 and $1,400,300
of accrued interest at September 30, 2012 and December 31, 2011, respectively.
5%
Notes Payable
Included
in current maturities of notes payable to related parties as of December 31, 2011 was $93,200 related to a note bearing annual
interest at 5% issued by Shepherd Neame in favor of KBEL, which was paid in full as of June 30, 2012.
7.
Commitments
and Contingencies
Purchase
of raw materials
Production
of the Company’s beverages requires quantities of various processed agricultural products, including malt and hops for beer.
The Company fulfills its commodities requirements through purchases from various sources, some through contractual arrangements
and others on the open market. Future payments under existing contractual arrangements are as follows:
|
Three months ending December 31, 2012
|
|
|
$
|
745,300
|
|
|
Year ending December 31, 2013
|
|
|
|
801,700
|
|
|
Year ending December 31, 2014
|
|
|
|
126,200
|
|
|
Year ending December 31, 2015
|
|
|
|
126,200
|
|
|
Year ending December 31, 2016
|
|
|
|
64,700
|
|
|
|
|
|
$
|
1,864,100
|
|
Legal
The
Company is periodically involved in legal actions and claims that arise as a result of events that occur in the normal course
of operations. Management and the Company’s legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment.
The
Company is not currently aware of any legal proceedings or claims that the Company believes will have, individually or in the
aggregate, a material adverse effect on the Company’s financial position or results of operations.
Operating
Leases
The
Company leases some of its 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 years. In
the normal course of business, it is expected that these leases will be renewed or replaced by leases on similar 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 the Company
to pay certain costs (real estate taxes, insurance and repairs).
MBC
and its subsidiaries have various lease agreements for the brewpub and gift store in Ukiah, California, the brewery at Releta’s
Saratoga Springs, New York facility, a building in the UK, and certain equipment. The New York lease includes a renewal option
for three additional five-year periods, which Releta intends to exercise, and some leases are adjusted annually for changes in
the consumer price index. The leases begin expiring in 2014.
Keg
Management Agreement
In
September 2009, the Company renewed the keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar
provides all kegs for which the Company pays a service fee depending on the applicable territory. The agreement is effective for
five years ending in September 2014. If the agreement is terminated, the Company is required to purchase four times the average
monthly keg usage for the preceding six-month period from MicroStar. The Company expects to continue this relationship.
8.
Related-Party
Transactions
The
Company and its subsidiaries have entered into or amended several agreements with affiliated and related entities. Among these
are a Market Development Agreement, a Distribution Agreement and a Trademark Licensing Agreement between MBC and Kingfisher of
America, Inc., and a License Agreement between UBIUK and UBHL. KBEL is a party to a brewing agreement with Shepherd Neame, which
is discussed in Note 2, and has issued a note in favor of Shepherd Neame, which is discussed in Note 6.
The
following tables reflect the value of the transactions during the nine months ended September 30, 2012 and 2011 and the balances
outstanding as of September 30, 2012 and December 31, 2011.
TRANSACTIONS
|
|
Nine months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2011
|
|
Sales to Shepherd Neame
|
|
$
|
2,846,100
|
|
|
$
|
3,989,300
|
|
Purchases from Shepherd Neame
|
|
$
|
11,953,000
|
|
|
$
|
12,837,800
|
|
Expense reimbursement to Shepherd Neame
|
|
$
|
797,500
|
|
|
$
|
849,800
|
|
Interest expense related to UBA convertible notes
|
|
$
|
68,300
|
|
|
$
|
68,000
|
|
ACCOUNT BALANCES
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Accounts payable to Shepherd Neame
|
|
$
|
3,924,100
|
|
|
$
|
4,856,900
|
|
Accounts receivable from Shepherd Neame
|
|
$
|
501,100
|
|
|
$
|
344,700
|
|
9.
Segment
Information
Our
business presently consists of two segments. The first is brewing for wholesale to distributors and other retailers, which includes
beer and merchandise sales at the Company’s ale house in Ukiah, California and the brewery in Saratoga Springs, New York.
The second consists of distributing alcoholic beverages to retail establishments and restaurants in the UK and Europe.
A
summary of the first segment is provided in the column labeled “North American Territory Operations” in the tables
below and a summary of the second segment is provided in the column labeled “Foreign Territory Operations” below:
Nine months ended September 30, 2012
|
|
|
North American Territory Operations
|
|
|
Foreign Territory
Operations
|
|
|
Corporate and Others
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
12,816,800
|
|
|
$
|
16,924,900
|
|
|
$
|
-
|
|
|
$
|
29,741,700
|
|
Operating Income
|
|
$
|
486,600
|
|
|
$
|
371,400
|
|
|
$
|
-
|
|
|
$
|
858,000
|
|
Identifiable Assets
|
|
$
|
11,843,700
|
|
|
$
|
3,984,400
|
|
|
$
|
3,692,700
|
|
|
$
|
19,520,800
|
|
Depreciation & Amortization
|
|
$
|
457,500
|
|
|
$
|
313,700
|
|
|
$
|
-
|
|
|
$
|
771,200
|
|
Capital Expenditures
|
|
$
|
223,700
|
|
|
$
|
322,500
|
|
|
$
|
-
|
|
|
$
|
546,200
|
|
Nine months ended September 30, 2011
|
|
|
North American Territory Operations
|
|
|
Foreign Territory
Operations
|
|
|
Corporate and Others
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
12,349,900
|
|
|
$
|
17,748,500
|
|
|
$
|
-
|
|
|
$
|
30,098,400
|
|
Operating Income
|
|
$
|
854,100
|
|
|
$
|
61,300
|
|
|
$
|
-
|
|
|
$
|
915,400
|
|
Identifiable Assets
|
|
$
|
12,492,300
|
|
|
$
|
3,967,500
|
|
|
$
|
3,012,000
|
|
|
$
|
19,471,800
|
|
Depreciation & Amortization
|
|
$
|
484,600
|
|
|
$
|
404,400
|
|
|
$
|
-
|
|
|
$
|
889,000
|
|
Capital Expenditures
|
|
$
|
316,700
|
|
|
$
|
363,800
|
|
|
$
|
-
|
|
|
$
|
680,500
|
|
10.
Unrestricted
Net Assets
The
Company’s wholly-owned subsidiary, UBIUK, has undistributed losses of $2,622,800 as of September 30, 2012. Under KBEL’s
line of credit agreement with RBS, distributions and other payments to MBC from KBEL are not permitted if retained earnings drop
below $1,613,200. Condensed financial information of the parent company, MBC, together with its other subsidiary, Releta is as
follows:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
124,100
|
|
|
$
|
187,200
|
|
Accounts receivable, net
|
|
|
2,734,000
|
|
|
|
2,308,400
|
|
Inventories
|
|
|
1,694,700
|
|
|
|
1,799,600
|
|
Prepaid expenses
|
|
|
128,600
|
|
|
|
126,800
|
|
Total current assets
|
|
|
4,681,400
|
|
|
|
4,422,000
|
|
|
|
|
|
|
|
|
|
|
Investment in UBIUK
|
|
|
1,225,000
|
|
|
|
1,225,000
|
|
Property and equipment
|
|
|
10,149,000
|
|
|
|
10,349,000
|
|
Intercompany receivable
|
|
|
409,100
|
|
|
|
231,400
|
|
Other assets
|
|
|
706,000
|
|
|
|
462,500
|
|
Total assets
|
|
$
|
17,170,500
|
|
|
$
|
16,689,900
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
1,131,000
|
|
|
$
|
895,300
|
|
Accounts payable
|
|
|
1,555,300
|
|
|
|
1,511,400
|
|
Accrued liabilities
|
|
|
943,500
|
|
|
|
824,300
|
|
Current maturities of debt and leases
|
|
|
461,700
|
|
|
|
473,100
|
|
Total current liabilities
|
|
|
4,091,500
|
|
|
|
3,704,100
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases
|
|
|
4,094,900
|
|
|
|
4,280,900
|
|
Notes to related parties
|
|
|
3,384,000
|
|
|
|
3,315,700
|
|
Total liabilities
|
|
$
|
11,570,400
|
|
|
$
|
11,300,700
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
227,600
|
|
|
|
227,600
|
|
Common stock
|
|
|
15,100,300
|
|
|
|
15,100,300
|
|
Accumulated deficit
|
|
|
(9,727,800
|
)
|
|
|
(9,938,700
|
)
|
Total stockholders’ equity
|
|
|
5,600,100
|
|
|
|
5,389,200
|
|
Total liabilities and stockholders’ equity
|
|
$
|
17,170,500
|
|
|
$
|
16,689,900
|
|
Statements of Operations
|
|
Three months ended September 30
|
|
|
Nine months ended September 30
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net sales
|
|
$
|
4,247,700
|
|
|
$
|
4,385,800
|
|
|
$
|
12,816,800
|
|
|
$
|
12,349,900
|
|
Cost of goods sold
|
|
|
3,252,000
|
|
|
|
3,141,300
|
|
|
|
9,609,700
|
|
|
|
8,927,900
|
|
Sales, marketing, and retail expenses
|
|
|
433,400
|
|
|
|
440,300
|
|
|
|
1,305,500
|
|
|
|
1,202,700
|
|
General and administrative expenses
|
|
|
549,300
|
|
|
|
475,300
|
|
|
|
1,517,900
|
|
|
|
1,457,700
|
|
Income from operations
|
|
|
13,000
|
|
|
|
328,900
|
|
|
|
383,700
|
|
|
|
761,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income)
|
|
|
(35,100
|
)
|
|
|
(40,200
|
)
|
|
|
(112,700
|
)
|
|
|
(110,500
|
)
|
Interest expense
|
|
|
94,700
|
|
|
|
90,400
|
|
|
|
283,800
|
|
|
|
289,300
|
|
Provision for taxes
|
|
|
900
|
|
|
|
—
|
|
|
|
1,700
|
|
|
|
7,100
|
|
Net income (loss)
|
|
$
|
(47,500
|
)
|
|
$
|
278,700
|
|
|
$
|
210,900
|
|
|
$
|
575,700
|
|
Statements of Cash Flows
|
|
Nine months ended September 30
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash flows from operating activities
|
|
$
|
295,000
|
|
|
$
|
693,600
|
|
Purchase of property and equipment
|
|
|
(223,700
|
)
|
|
|
(316,700
|
)
|
Proceed from sale of assets
|
|
|
5,000
|
|
|
|
—
|
|
Net borrowing (repayment) on line of credit
|
|
|
235,700
|
|
|
|
(1,391,700
|
)
|
Borrowing on long term debt
|
|
|
184,700
|
|
|
|
4,881,000
|
|
Repayment on long term debt
|
|
|
(344,300
|
)
|
|
|
(3,588,300
|
)
|
Payment on obligation under capital lease
|
|
|
(37,800
|
)
|
|
|
(35,200
|
)
|
Net change in payable to UBIUK
|
|
|
(177,700
|
)
|
|
|
(188,000
|
)
|
(Decrease) increase in cash
|
|
|
(63,100
|
)
|
|
|
54,700
|
|
Cash, beginning of period
|
|
|
187,200
|
|
|
|
64,900
|
|
Cash, end of period
|
|
$
|
124,100
|
|
|
$
|
119,600
|
|
11.
Income
Taxes
In
the nine months ended September 30, 2012 and 2011, the Company only recorded tax expense related to state franchise taxes and
the Company did not report income tax expense due to the availability of deferred tax assets to offset any taxable income in the
US and the UK. The Company has established a full valuation allowance against the Company’s deferred tax assets based on
an assessment that the criteria that deferred tax assets will more likely than not be realized is not yet met. During the nine
months ended September 30, 2012 and 2011, the Company’s effective tax rates were
de minimus
. The difference between
the Company’s effective tax rates and the 35% US federal statutory tax rate and the UK’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) US (federal), (ii) California (state), (iii) New York (state) and (iv) UK. Tax returns remain
open to examination by the applicable governmental authorities for tax years 2006 through 2011. 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. The Company is not currently being audited in
any major tax jurisdiction.
12.
Subsequent
Events
The
Company evaluates events that occur subsequent to the balance sheet date of periodic reports, but before financial statements
are issued for periods ending on such balance sheet dates, for possible adjustment to such financial statements or other disclosure.
This evaluation generally occurs through the date at which the Company’s financial statements are electronically prepared
for filing with the SEC.
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
cash flows for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011.
This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in our Annual Report
on Form 10-K for the year ended December 31, 2011.
The
terms “we”, “us”, “our”, and “the Company” and its variants are generally used
to refer to Mendocino Brewing Company, Inc. and its 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 the Company’s 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 the
Company are intended to provide investors with additional information with which they may assess the Company’s 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 the
Company’s products; changes in demand for malt beverage products in different Company markets; changes in distributor relationships
or performance; changes in customer preference for the Company’s malt beverage products; regulatory or legislative changes;
the impact of competition; changes in the prices of raw materials; availability of financing for operations; changes in interest
rates; changes in the company’s European beer and/or restaurant business, and other risks discussed elsewhere in this Quarterly
Report and from time to time in the Company’s SEC filings and reports. In addition, such statements could be affected by
general industry and market conditions and growth rates, and general North American and European economic and political conditions.
The Company undertakes 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 revisions to
these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.
Segment
Information
Prior
to 2001, the Company’s business operations were exclusively located in the US, and consisted of the manufacture and distribution
of beer. With the Company’s acquisition of United Breweries International (UK), Ltd. (“UBIUK”) in August 2001,
however, the Company gained a new business segment, distribution of beer outside the US, primarily in the UK and continental Europe,
(collectively, the “Foreign Territory”). This segment accounted for 55% and 58% of the Company’s gross sales
during the first nine months of the years 2012 and 2011, respectively, with the US and Canada (the “North American Territory”)
accounting for the remaining 45% and 42% during the first nine months of the years 2012 and 2011, respectively.
Seasonality
Sales
of the Company’s 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 the Company’s North American and Foreign Territories. In the North
American Territory, sales volumes have generally been higher during the second and third quarters and slower during the fourth
quarter. In the Foreign Territory, the fourth quarter has generally generated higher sales volume compared to the other three
quarters. The volume of sales in any given area may also be affected by local weather conditions. Because of the seasonality of
the Company’s business, results for any one quarter are not necessarily indicative of the results that may be achieved for
the full fiscal year.
Summary
of Financial Results
The
Company ended the first nine months of 2012 with net income of $542,400, as compared to $566,600 for the same period in 2011.
As set forth more fully under “Results of Operations” below, the decrease in net income during the first nine months
of the year 2012 was mainly attributable to a reduction in sales volume.
Results
of Operations
Three
months ended September 30, 2012 Compared To
Three months ended September 30, 2011
Net
Sales
Our
overall net sales for the third quarter of 2012 were $10,041,600, a decrease of $390,000, or 3.7%, compared to $10,431,600 for
the third quarter of 2011. The decrease was due to reduced sales volume.
North
American Territory
: Our net sales for the third quarter of 2012 were $4,247,700 compared to $4,385,800 for the same period
in 2011, a decrease of $138,100, or 3.1%, mainly due to reduced sales volume. The sales volume decreased to 21,500 barrels in
the third quarter of 2012 from 22,200 barrels in the third quarter of 2011; a net decrease of 700 barrels, or 3.3%, due to lower
sales of MBC brands.
Foreign
Territory
: Net sales for the third quarter of 2012 were $5,793,900 compared to $6,045,800 during the corresponding period
of 2011, a decrease of $251,900, or 4.2%, when measured in US Dollars, mainly due to reduced sales volume as a result of fewer
sales in supermarkets and chain stores in 2012 compared to 2011.
Cost
of Goods Sold
Cost
of goods sold as a percentage of net sales during the third quarter of 2012 was 72.8%, as compared to 71.9% during the corresponding
period of 2011.
North
American Territory
: Cost of goods sold as a percentage of net sales in the North American Territory during the third quarter
of 2012 was 76.6%, compared to 71.6% during the corresponding period of 2011 mainly due to increases in the prices of malt and
glass.
Foreign
Territory
: Cost of goods sold as a percentage of net sales in the Foreign Territory during the third quarter of 2012 was 70.7%,
as compared to 72.6% during the corresponding period in 2011 due to increases in the prices at which we sell our products.
Gross
Profit
Lower
sales volumes and increases in the cost of goods in the North American Territory resulted in gross profit for the third
quarter of 2012 of $2,726,400 compared to $2,935,200 during the corresponding period of 2011, a decrease of $208,800, or
7.1%. As a percentage of net sales, gross profit during the third quarter of 2012 decreased to 27.2% from 28.1% for the third
quarter of 2011.
Operating
Expenses
Operating
expenses for the third quarter of 2012 were $2,513,400, an increase of $75,200, or 3.1%, as compared to $2,438,200 for the corresponding
period of 2011. Operating expenses consist of marketing and distribution expenses and general and administrative expenses.
Marketing
and Distribution Expenses
: Our marketing and distribution related expenses for the third quarter of 2012 were $1,425,200,
as compared to $1,416,200 for the third quarter of 2011, representing an increase of $9,000, or 0.6%.
North
American Territory
: Marketing and distribution related expenses for the third quarter of 2012 were $433,400 compared to $440,300
during the corresponding period of 2011, representing a decrease of $6,900, or 1.6%. As a percentage of net sales in the US, such
expenses increased to 10.2% during the third quarter of 2012, compared to 10.0% during the corresponding period of 2011.
Foreign
Territory
: Marketing and distribution related expenses, as calculated in US dollars after taking into account the effects
of the exchange rate calculation, for the third quarter of 2012 were $991,800 compared to $975,900 during the corresponding period
of 2011, representing an increase of $15,900, or 1.6%. As a percentage of net sales in the UK, marketing and distribution related
expenses increased to 17.1% during the third quarter of 2012 compared to 16.1% during the corresponding period of 2011.
General
And Administrative Expenses
: Our general and administrative expenses were $1,088,200 for the third quarter of 2012, representing
an increase of $66,200, or 6.5%, from $1,022,000 for the corresponding period in 2011.
North
American Territory
: General and administrative expenses related to the North American Territory were $549,300 for the third
quarter of 2012, representing an increase of $74,000, or 15.6%, compared to $475,300 for the third quarter of 2011 mainly due
to increase in manpower and salary costs.
Foreign
Territory
: General and administrative expenses related to the Foreign Territory were $538,900 for the third quarter of 2012,
representing a decrease of $7,800, or 1.4%, when compared to $546,700 for the third quarter of 2011.
Other
Expenses
Net
other expenses for the third quarter of 2012 totaled $108,300, representing an increase of $1,800, or 1.7%, when compared to $106,500
for the third quarter of 2011.
Income
Taxes
Provision
for taxes made during the third quarter of 2012 was $900. We made no income tax provisions for the third quarter of 2011.
Net
Income
Our
net income for the third quarter of 2012 was $103,800, compared to $390,500 for the third quarter of 2011. After providing for
a negative foreign currency translation adjustment of $74,100 during the third quarter of 2012 (as compared to a positive adjustment
of $80,900 for the same period in 2011), our comprehensive income for the third quarter of 2012 was $29,700, compared to $471,400
for the same period in 2011.
Nine
months ended September 30, 2012 Compared To
Nine months ended September 30, 2011
Net
Sales
Our
overall net sales for the first nine months of 2012 were $29,741,700, a decrease of $356,700, or 1.2%, compared to net sales of
$30,098,400 for the same period in 2011.
North
American Territory
: Net sales for the first nine months of 2012 were $12,816,800 compared to $12,349,900 for the same period
in 2011, an increase of $466,900, or 3.8%, due to higher sales volume. Our North American sales volumes increased to 65,800 barrels
during the first nine months of 2012 from 62,600 barrels in the first nine months of 2011, representing an increase of 3,200 barrels,
or 5.1%. Sales of MBC’s brands decreased by 800 barrels, sales of Kingfisher brands increased by 1,700 barrels and sales
of contract brands increased by 2,300 barrels during the first nine months of 2012 compared to the same period in 2011.
Foreign
Territory
: Net sales for the first nine months of 2012 were $16,924,900, compared to $17,748,500 during the corresponding
period of 2011, a decrease of $823,600, or 4.6%. KBEL increased product prices during the first quarter of 2012 due to an increase
in excise duty. KBEL sold 49,000 barrels during the first nine months of 2012 compared to 52,900 barrels in the first nine months
of 2011 due to fewer sales in supermarkets and chain stores in 2012 compared to 2011.
Cost
of Goods Sold
Cost
of goods sold as a percentage of net sales during the first nine months of 2012 was 72.2%, as compared to 72.0% during the corresponding
period of 2011.
North
American Territory
: Cost of goods sold as a percentage of net sales in the North American Territory during the first nine
months of 2012 was 75.0%, as compared to 72.3% during the corresponding period of 2011 mainly due to an increase in prices of
malt and glass.
Foreign
Territory
: Cost of goods sold as a percentage of net sales in the Foreign Territory during the first nine months of 2012 was
70.6%, as compared to 72.3% during the corresponding period in 2011 due to increases in the prices charged by the Company for
its products without a corresponding increase in the cost of goods.
Gross
Profit
As
a result of a decrease in sales in Foreign Territory and increase in cost of goods in the North American Territory, gross profit
for the first nine months of 2012 decreased to $8,281,900, from $8,425,200 during the corresponding period of 2011. As a percentage
of net sales, the gross profit during the first nine months of 2012 decreased to 27.8% from 28.0% during the corresponding period
in 2011.
Operating
Expenses
Operating
expenses for the first nine months of 2012 were $7,423,900, a decrease of $85,900, or 1.1%, as compared to $7,509,800 for the
corresponding period of 2011. 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 nine months of 2012 were $4,267,600, as compared
to $4,336,700 for the same period in 2011, representing a decrease of $69,100, or 1.6%.
North
American Territory
: Marketing and distribution related expenses for the first nine months of 2012 were $1,305,500 compared
to $1,202,700 during the corresponding period of 2011, representing an increase of $102,800, or 8.5%. As a percentage of net sales
in the US, these expenses increased to 10.2% during the first nine months of 2012, compared to 9.7% during the corresponding period
of 2011. The increase was mainly due to higher freight and travel costs and the operational expenses of the Company’s alehouse
located in Ukiah, California, which opened in June 2011.
Foreign
Territory
: Marketing and distribution related expenses for the first nine months of 2012 were $2,962,100 compared to $3,134,000
during the corresponding period of 2011, representing a decrease of $171,900, or 5.5%. As a percentage of net sales in the UK,
marketing and distribution expenses decreased to 17.5% during the first nine months of 2012 compared to 17.7% during the corresponding
period of 2011 (in each case as calculated in US dollars, after taking into account the effects of exchange rate fluctuations).
The decrease in expenses was mainly due to a decrease in sales commissions paid by the Company (as a result of fewer commissionable
sales), and a decrease in advertising and promotion costs in 2012 compared to 2011.
General
And Administrative Expenses
: Our general and administrative expenses were $3,156,300 for the first nine months of 2012, representing
a decrease of $16,800, or 0.5%, from $3,173,100 for the corresponding period in 2011.
North
American Territory
: General and administrative expenses related to the North American Territory were $1,517,900 for the first
nine months of 2012, representing an increase of $60,200, or 4.1%, from $1,457,700 for the same period in 2011 due to increase
in manpower and salary costs.
Foreign
Territory
: General and administrative expenses related to the Foreign Territory were $1,638,400 for the first nine months
of 2012, representing a decrease of $77,000, or 4.5%, as compared to $1,715,400 for the same period in 2011 (in each case as calculated
in US dollars, after taking into account the effect of exchange rate fluctuations). The decreases were mainly due to a reduction
in depreciation of beer dispensing equipment and a decline in other miscellaneous administrative costs.
Other
Expenses
Net
other expenses for the first nine months of 2012 totaled $313,900, representing a decrease of $27,800, or 8.1%, when compared
to $341,700 for the same period in 2011 due to reduced interest expenses and profit on sale of fixed assets.
Income
Taxes
We
have a provision for income taxes of $1,700 for the first nine months of 2012 compared to a provision of $7,100 for the corresponding
period in 2011. The provision for taxes is related to the estimated amount of taxes that will be imposed on us by tax authorities
in the US.
Net
Income
Our
net income for the first nine months of 2012 was $542,400, as compared to $566,600 for the first nine months of 2011. After providing
for a negative foreign currency translation adjustment of $107,700 during the first nine months of 2012 (as compared to $32,000
for the same period in 2011), comprehensive income for the first nine months of 2012 was $434,700, compared to $534,600 for the
same period in 2011.
LIQUIDITY
AND CAPITAL RESOURCES
Unused
capacity at our Ukiah, California and Saratoga Springs, New York facilities has continued to place demands on our working capital.
Beginning approximately in the second quarter of 1997, the time at which our Ukiah brewery commenced operations, proceeds from
our operations have not been able to provide us with sufficient working capital.
At
September 30, 2012, we had cash and cash equivalents of $139,000, an accumulated deficit of $13,846,700 and a working capital
deficit of $2,567,900 due to losses incurred since 2005 in connection with the operation of our indirect subsidiary, KBEL, in
the UK. In response to the losses incurred in connection with KBEL’s international operations,
UBHL, our indirect majority shareholder, issued a letter of financial support on KBEL’s behalf
on
March 2, 2012
(the “Letter of Support”) in replacement of a prior letter of support issued on February 15,
2011. Under the terms of the Letter of Support, UBHL has agreed to provide funding to KBEL on an as needed basis to enable KBEL
to meet its financial obligations as they become due. There is no maximum limit on the amount of funding to be provided by UBHL
to KBEL under the terms of the Letter of Support, however, such funding is subject to compliance with applicable exchange control
regulations and other applicable laws and regulations regarding the transfer of funds from India to the UK. The Letter of Support
issued on March 2, 2012 was issued for a twelve month minimum period. The type of financial support to be provided by UBHL and
the terms of such financial support is not specified in the Letter of Support. Our Management intends to seek UBHL’s consent
to keep the current Letter of Support in force beyond the minimum period, if necessary, or request that UBHL issue a new letter
of support for periods after such minimum period. If UBHL were unable or unwilling to meet its current obligations under the Letter
of Support or, if requested, UBHL does not agree to keep the Letter of Support in force following the minimum specified period,
it could result in a material adverse effect on KBEL’s and UBIUK’s financial condition and thus on our consolidated
results of operations and could affect KBEL’s, UBIUK’s and potentially our ability to continue operations.
Our
Chairman of the Board of Directors, Dr. Vijay Mallya, is also the Chairman of the board of directors of UBHL.
Our
Management has taken several actions to enable us to meet our working capital needs through September 30, 2013, including a policy
of reducing discretionary expenditures to the extent feasible and optimizing pricing and discounts to increase margins where possible.
Further, we have secured and will continue to pursue additional brewing contract opportunities in an effort to utilize a portion
of our excess production capacity. We may also seek additional capital infusions to support our operations.
We
have several loans, lines of credit, other credit facilities and lease agreements which are currently outstanding (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 real property in Ukiah, are pledged as collateral pursuant to the terms of the agreements governing
our Indebtedness. If we are in default under our secured credit facilities, our lenders may seek to satisfy any outstanding obligations
through recourse against the applicable pledged collateral which may include our real property, fixed and current assets. The
loss of any material pledged asset would likely have a material adverse effect on our financial position and results of operations.
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 will need to obtain replacement financing. If we are unable
to obtain such replacement financing, it will result in a material adverse effect on our financial condition and our ability to
continue operations.
We
continue to explore new contract brewing opportunities in the North American Territory to increase revenue. However, there can
be no assurance that we will be able to increase sales to provide cash for operating activities. Our future working capital requirements
will depend on many factors, including the rates of our revenue growth, our introduction of new products and our expansion of
sales and marketing activities. To the extent our cash and cash equivalents and cash flow from operating activities are insufficient
to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity
or debt financings. We also may want to raise additional funds to acquire other businesses or products. If additional funding
is required, we may not be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable
to us or at all.
UBIUK
and KBEL hold the exclusive brewing and distribution rights for Kingfisher Premium Lager in the UK, Ireland, continental Europe,
and Canada through a licensing agreement with United Breweries Limited, an Indian corporation (“UB”). Under its terms,
this licensing agreement is currently scheduled to expire in October 2013. We are in discussions with UB to renew this agreement.
If we are unable to renew this licensing agreement on commercially reasonable terms, our results of operations, cash flows and
financial position may be materially adversely affected.
In
July 2001, we entered into the Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., pursuant to
which we obtained a royalty-free, exclusive license to use the Kingfisher trademark and trade name in connection with the brewing
and distribution of beer in the US. Under its terms, this agreement is currently scheduled to expire in October 2013. If we are
unable to renew this license agreement on commercially reasonable terms, our results of operations, cash flows and financial position
may be materially adversely affected.
Since
1998, UBIUK and KBEL have licensed to Shepherd Neame the exclusive right to brew, keg, bottle, can, label, and package all beers
and related products sold under the Kingfisher trademark in the UK, Ireland, and continental Europe. This agreement will expire
in October 2013. We are in discussion with Shepherd Neame and other potential parties to negotiate a new agreement. If we are
unable to renew this agreement on commercially reasonable terms or enter into a new agreement for brewing for distribution in
the Foreign Territory, our results of operations, cash flows and financial position may be materially adversely affected.
Cash
Flow Results:
Net
cash provided by operating activities for the nine months ended September 30, 2012 was $274,300, compared to $1,134,000 for the
nine months ended September 30, 2011. We generally do not require significant cash on hand to meet our operating needs.
During
the first nine months of 2012 improved collection in Foreign Territory increased cash flow from accounts receivable which was
used to pay down accounts payable in that territory. Our inventory decreased by $104,900 between December 31, 2011 and September
30, 2012. Fluctuations in inventory are normal for our operations and industry and are typically not indicators of any material
contributing cause. Our accrued liabilities consisted primarily of payroll costs, excise taxes, future payments of credits extended
on our insurance premiums, estimated allowances for customer rebates, and deposits from customers to secure the return of kegs.
Our accrued liabilities for the first nine months of 2012 decreased by $72,100 mainly due to decreases in future payments of credits
extended on our insurance premiums, and a decrease in provisions for customer rebates associated with decreased sales.
Net
cash used in investing activities totaled $534,000 for the first nine months of 2012 compared to $680,500 for the first nine months
of 2011. Net cash used for investing activities consists of purchases of machinery and equipment in the North American and Foreign
Territories.
Net
cash provided by financing activities totaled $107,800 during the first nine months of 2012, compared to cash used in financing
activities of $370,000 during the first nine months of 2011. Financing activities principally consisted of a temporary increase
or decrease in the Company’s use of a revolving line of credit and borrowing on long term debt and payments on other debt
and lease payments.
DESCRIPTION
OF OUR INDEBTEDNESS:
Cole
Taylor Facility
On
June 23, 2011, MBC and Releta entered into a Credit and Security Agreement (the “Agreement”) with Cole Taylor. The
Agreement provides a credit facility of up to $10,000,000 with a maturity date of June 23, 2016, consisting of a $4,119,000 revolving
facility, a $1,934,000 machinery and equipment term loan, a $2,947,000 real estate term loan and a $1,000,000 capital expenditure
term loan. At the time that any applicable loan or advance is made, the Company may choose, subject to certain contingencies,
an interest rate based on either LIBOR or the Wall Street Journal prime rate as follows: (a) with respect to the revolving facility,
either LIBOR plus a margin of 3.50% or the Wall Street Journal prime rate plus a margin of 1.00%, (b) with respect to the machinery
and equipment term loan or the capital expenditure term loan, either LIBOR plus a margin of 4.25% or the Wall Street Journal prime
rate plus a margin of 1.50%, and (c) with respect to the real estate term loan, either LIBOR plus a margin of 4.75% or the Wall
Street Journal prime rate plus a margin of 2.00%. The Agreement binds us to certain financial covenants including maintaining
prescribed minimum tangible net worth and prescribed minimum fixed charges coverage. There is a prepayment penalty if we prepay
all of our obligations prior to the maturity. The credit facility is secured by a first priority interest in all of MBC’s
and Releta’s personal property and a first mortgage on our Ukiah, California property, among other MBC and Releta assets.
Our obligations under the Agreement are subject to acceleration upon the occurrence of an event of default under the Agreement.
Master
Line of Credit
On
August 31, 1999, MBC and 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 in the principal amount of up to $1,600,000. As of September 30, 2012, UBA has made thirteen separate advances
to us under the Credit Agreement and one additional advance on March 2, 2005 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 and an amendment to the March 2, 2005 note
(together, the “Extension Agreements”). The Extension Agreements, as amended, confirm UBA’s extension of the
terms of the UBA Notes for a period ending on June 30, 2012, with automatic renewals after such maturity date for successive one
year terms, provided that either MBC or UBA may elect not to extend a term upon written notice given to the other party no more
than 60 days and no fewer than 30 days prior to the expiration of the applicable term. Neither the Company nor UBA issued a notice
of election not to extend the term of the UBA Notes prior to June 2012 and hence the maturity dates of the UBA Notes have been
automatically extended until June 30, 2013.
The
aggregate outstanding principal amount of the UBA Notes as of September 30, 2012 was $1,915,400, and the accrued but unpaid interest
thereon was equal to approximately $1,468,600, for a total amount outstanding of $3,384,000.
The
outstanding principal amount of the UBA Notes and the unpaid interest thereon may be converted, at UBA’s discretion, into
shares of our unregistered common stock at a conversion price of approximately $1.50 per share for the UBA Notes issued pursuant
to the Credit Agreement. 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 all conversion rate protection as set forth in the UBA Notes issued by us up to
that date.
On
September 14, 2011, the Company’s Board of Directors approved the issuance (the “Issuance”) of our unregistered
common stock to certain of our independent non-employee directors as compensation. The Issuance triggered an adjustment in the
conversion rate of the convertible promissory note dated March 2, 2005 (the “Note”) issued by us in favor of UBA which
was not covered by the Confirmation of Waiver. Prior to the Issuance, the principal and interest owed pursuant to the Note would
have converted into shares of our Common Stock at a per share price of $1.50. After the Issuance, the principal and interest outstanding
under the Note will convert at a per share price of approximately $1.44. As of September 30, 2012, the outstanding principal and
interest on the UBA Notes was convertible into 2,272,681 shares of our common stock.
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 Notes may be converted, at the option of UBA, into
shares of our Common Stock. 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 credit facilities extended to us by Cole Taylor pursuant to a subordination agreement executed by
UBA. Per the terms of the subordination agreement, UBA is precluded from demanding repayment of the UBA Notes unless the Cole
Taylor facilities are repaid in full.
OTHER
LOANS, CREDIT FACILITIES AND COMMITMENTS
Royal
Bank of Scotland Facility
Royal
Bank of Scotland (“RBS”) provided KBEL with a revolving line of credit up to a maximum of £1,750,000 on April
26, 2005 with an advance rate based on 80% of KBEL’s qualified accounts receivable. 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 KBEL to brew Kingfisher Premium Lager for the European and Canadian markets. As consideration for extending
the brewing contract, Shepherd Neame advanced a loan of £600,000 to KBEL, repayable in annual installments of £60,000
per year, ending in June 2012. The loan carried a fixed interest rate of 5% per year. This loan was paid in full as of June 30,
2012.
Keg
Management Arrangement
Effective
September 1, 2009, we entered into a five-year keg management agreement with MicroStar Keg Management, LLC (“MicroStar”).
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.
Weighted
Average Interest
The
weighted average annual interest rate paid on our US debts was 5% for the first nine months of 2012 and 5.4% for the corresponding
period in 2011. For loans primarily associated with our Foreign Territory, the weighted average annual rate paid was 3% for the
first nine months of 2012 and 2011.
Current
Ratio
Our
ratio of current assets to current liabilities on September 30, 2012 was 0.75 to 1.0 and our ratio of total assets to total liabilities
was 1.1 to 1.0. Our ratio of current assets to current liabilities on September 30, 2011 was 0.76 to 1.0 and our ratio of total
assets to total liabilities was 1.1 to 1.0.
Restricted
Net Assets
The
Company’s wholly-owned subsidiary, UBIUK, has undistributed losses of $2,622,800 as of September 30, 2012. Under KBEL’s
line of credit agreement with RBS, distributions and other payments to MBC from KBEL are not permitted if retained earnings drop
below $1,613,200.
Item
3.
Quantitative and Qualitative Disclosures About Market Risk
Not
required for smaller reporting companies.
Item
4.
Controls and Procedures
Disclosure
Controls And Procedures
Our
Management team, under the supervision and with the participation of our chief executive officer (our principal executive officer)
and our chief financial officer (our principal 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 September 30, 2012. 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 officer 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 September 30, 2012.
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 September 30, 2012) that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART
II
OTHER
INFORMATION
Item 6.
Exhibits
Exhibit
Number
|
|
Description
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
|
31.2
|
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
|
32.1
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.**
|
32.2
|
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.**
|
101.INS
|
|
XBRL
Instance Document†
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document†
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document†
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document†
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document†
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document†
|
______________________
*
Filed herewith.
**
Furnished herewith.
†
Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these
sections.
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:
November 13, 2012
|
By:
|
/s/
Yashpal Singh
|
|
|
Yashpal
Singh
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
Dated:
November 13, 2012
|
By:
|
/s/
Mahadevan Narayanan
|
|
|
Mahadevan
Narayanan
|
|
|
Chief
Financial Officer and Secretary
|
|
|
(Principal Financial and Accounting Officer)
|
Mendocino Brewing (CE) (USOTC:MENB)
Graphique Historique de l'Action
De Mai 2024 à Juin 2024
Mendocino Brewing (CE) (USOTC:MENB)
Graphique Historique de l'Action
De Juin 2023 à Juin 2024