MENB Mendocino Brewing Inc (CE)

 

 

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, 2015

 

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:

 

The number of shares of Mendocino Brewing Company, Inc.’s common stock outstanding as of November 13, 2015 was 12,611,133.

 

 

 

MENDOCINO BREWING COMPANY, INC.

 

INDEX

 

				Page
PART I. FINANCIAL INFORMATION
	ITEM 1.	Financial Statements		F-1
		Condensed consolidated balance sheets as of September 30, 2015 (unaudited) and December 31, 2014		F-1
		Condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended September 30, 2015 and 2014 (unaudited)		F-2
		Condensed consolidated statements of cash flows for the six ended September 30, 2015 and 2014 (unaudited)		F-3
		Notes to condensed consolidated financial statements (unaudited)		F-4
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		14
	ITEM 4.	Controls and Procedures		14
PART II. OTHER INFORMATION
	ITEM 1.	Legal Proceedings		15
	ITEM 1A.	Risk Factors		16
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		16
	ITEM 3.	Defaults Upon Senior Securities		16
	ITEM 4.	Mine Safety Disclosures		16
	ITEM 5.	Other Information		16
	ITEM 6.	Exhibits		16
SIGNATURES				17

  

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

MENDOCINO BREWING COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30, 2015				December 31, 2014
		(Unaudited)
ASSETS
Current Assets
Cash		$	92,300			$	145,100
Accounts receivable, net			3,614,700				4,384,500
Inventories			1,798,800				2,117,900
Prepaid expenses			623,000				632,900
Total Current Assets			6,128,800				7,280,400
Property and Equipment, net			10,696,400				11,087,800
Deposits and other assets			265,400				310,400
Total Assets		$	17,090,600			$	18,678,600
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Secured lines of credit		$	1,131,600			$	2,156,900
Accounts payable			4,410,300				4,860,800
Accrued liabilities			2,013,700				1,768,600
Notes payable to related party			2,095,400				1,038,700
Subordinated convertible notes to related party			3,657,000				-
Current maturities of secured notes payable			3,512,300				3,913,300
Current maturity of long-term debt to related party			503,900				519,300
Current maturity of obligations under capital lease			21,500				5,600
Current maturity of severance payable			114,000				-
Total Current Liabilities			17,459,700				14,263,200
Long-Term Liabilities
Subordinated convertible notes to related party			-				3,588,900
Long term debt to related party, less current maturity			126,000				519,300
Long term lease, less current maturity			78,800				12,100
Severance payable, less current maturity			646,100				760,100
Total Long-Term Liabilities			850,900				4,880,400
Total Liabilities			18,310,600				19,143,600
Commitments and contingencies			-				-
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			449,300				454,200
Accumulated deficit			(16,997,200	)			(16,247,100	)
Total Stockholders’ Deficit			(1,220,000	)			(465,000	)
Total Liabilities and Stockholders’ Deficit		$	17,090,600			$	18,678,600

 

See accompanying notes to these condensed consolidated financial statements.

 

 

MENDOCINO BREWING COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		THREE MONTHS ENDED September 30,								NINE MONTHS ENDED September 30,
		2015				2014				2015				2014
Sales		$	8,539,300			$	9,339,900			$	23,611,400			$	26,405,800
Excise taxes			140,100				179,800				379,500				483,000
Net sales			8,399,200				9,160,100				23,231,900				25,922,800
Cost of goods sold			5,620,700				6,240,300				15,868,400				17,883,900
Gross profit			2,778,500				2,919,800				7,363,500				8,038,900
Operating expenses
Marketing			1,511,500				1,479,300				4,371,500				4,614,500
General and administrative			1,111,600				1,202,200				3,327,000				3,467,600
Total operating expenses			2,623,100				2,681,500				7,698,500				8,082,100
Income (loss) from operations			155,400				238,300				(335,000	)			(43,200	)
Other income (expense)
Other income			7,400				21,400				51,000				32,100
Profit on sale of asset			-				600				-				16,900
Interest expense			(153,200	)			(177,500	)			(462,300	)			(528,600	)
Total other expenses			(145,800	)			(155,500	)			(411,300	)			(479,600	)
Income (loss) before income taxes			9,600				82,800				(746,300	)			(522,800	)
Provision for income taxes			-				-				3,800				-
Net income (loss)		$	9,600			$	82,800			$	(750,100	)		$	(522,800	)
Foreign currency translation income (loss)			(2,000	)			54,400				(4,900	)			14,100
Comprehensive income (loss)		$	7,600			$	137,200			$	(755,000	)		$	(508,700	)
Net income (loss) per common share –
Basic		$	0.00			$	0.01			$	(0.06	)		$	(0.04	)
Diluted		$	0.00			$	0.01			$	(0.06	)		$	(0.04	)
Weighted average common shares outstanding –
Basic			12,611,133				12,611,133				12,611,133				12,611,133
Diluted			15,067,357				15,006,176				12,611,133				12,611,133

 

See accompanying notes to these condensed consolidated financial statements.

 

 

MENDOCINO BREWING COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended
		September 30,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(750,100	)		$	(522,800	)
Adjustments to reconcile net loss to net cash used in  operating activities:
Depreciation and amortization			889,200				845,000
Provision for doubtful accounts			13,000				(38,300	)
Interest accrued on related party debt			124,800				94,800
Profit on sale of assets			-				(17,000	)
Changes in operating assets and liabilities:
Accounts receivable			716,000				(532,400	)
Inventories			316,600				310,200
Prepaid expenses			(2,900	)			(147,800	)
Deposits and other assets			(30,900	)			(3,700	)
Accounts payable			(389,800	)			(225,900	)
Accrued liabilities			269,300				613,000
Net cash provided by operating activities			1,155,200				375,100
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(403,800	)			(642,700	)
Proceeds from sale of fixed assets			-				17,000
Net cash used in investing activities			(403,800	)			(625,700	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment on lines of credit			(998,400	)			(216,200	)
Borrowing on note payable			1,000,000				1,000,000
Repayment on long-term debt			(784,100	)			(818,300	)
Payments on obligations under long term leases			(12,200	)			(3,700	)
Net cash (used in) financing activities			(794,700	)			(38,200	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(9,500	)			11,200
NET CHANGE IN CASH			(52,800	)			(277,600	)
CASH, beginning of period			145,100				324,800
CASH, end of period		$	92,300			$	47,200
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes		$	3,800			$	-
Interest		$	337,500			$	433,800
NON CASH INVESTING AND FINANCING ACTIVITIES
Seller financed asset		$	96,000			$	-

 

See accompanying notes to these condensed consolidated financial statements.

 

 

MENDOCINO BREWING COMPANY, INC.

NOTES TO CONDENSED 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, and has two operating subsidiaries: Releta Brewing Company, LLC (“Releta”), and United Breweries International (UK) Limited (“UBIUK”). In the United States (the “US”), MBC and 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. Generally, product shipments are made directly from the breweries to the wholesalers or distributors in accordance with state and local laws.

 

MBC’s United Kingdom (the “UK”) subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe Limited (“KBEL”). KBEL is a distributor of alcoholic beverages, mainly Kingfisher Lager Beer, in the UK and Europe. The offices of KBEL are located in Maidstone, Kent in the UK. In addition, during the period covered by this quarterly report (the “Quarterly Report”), through UBIUK, the Company had production and distribution rights to Kingfisher Premium Lager in Canada and the United States. The Company has the right to use the Kingfisher mark and the name “Kingfisher Brewing Company” in connection with the brewing and distribution of assorted beers in the United States pursuant to an agreement with Kingfisher America, Inc. Generally, sales are made through distributors.

 

All of the Company’s beers sold in Europe (except for beers sold in Germany) are procured under a contract with Heineken UK Limited (“HUK”). This contract expires in October 2018. KBEL is the distributor of Kingfisher Premium Lager to specialty restaurant trade distributors, liquor and convenience stores in the United Kingdom, Ireland, and continental Europe, but does not physically distribute the Company’s products to customers. KBEL relies on HUK for distribution of the product in Europe in exchange for a fee paid to HUK, except for in Germany where beers are manufactured and distributed pursuant to a separate contract with a different entity. In addition, HUK has the exclusive right to sell Kingfisher Premium Lager, for a royalty fee payable to KBEL, to certain large retail customers, including, but not limited to, Sainsbury’s, Asda, and Tesco.

 

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 on which the Company’s financial statements are electronically prepared for filing with the Securities and Exchange Commission (“SEC”).

 

Principles of Consolidation

 

The consolidated financial statements present the accounts of MBC and its wholly-owned subsidiaries, Releta and UBIUK. All material intracompany and inter-company balances, profits and transactions have been eliminated.

 

 

Basis of Presentation and Organization

 

The accompanying unaudited condensed consolidated financial statements for the nine months ended September 30, 2015 and 2014 have been prepared in accordance with accounting principles generally accepted in the US. 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 SEC, which contains additional financial and operating information and information concerning 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 from the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or any future period.

 

Reclassifications

 

Certain items in the financial statements for the prior year have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income or equity.

 

SIGNIFICANT ACCOUNTING POLICIES

 

There have been no significant changes in the Company’s significant accounting policies during the nine months ended September 30, 2015 compared to what was previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

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 the brewing and distribution operations in accordance with Accounting Standards Codification 605 of the Financial Accounting Standards Board. The Company recognizes revenue from product sales, net of discounts.

 

The Company recognizes revenue 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 location and services are considered performed upon completion of the 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 a borrowing made in June 2011 were $225,000. Amortization of deferred financing costs charged to operations was $33,800 for the nine months ended September 30, 2015 and 2014.

 

Concentration of Credit Risks

 

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, and accounts receivable. Substantially all of the Company’s cash and cash equivalents are deposited with commercial banks in the US and the UK that have minimal credit risk. Accounts receivable are generally unsecured and customers are subject to an initial credit review and ongoing monitoring. 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 $800 in cash deposits and $2,444,500 of accounts receivable due from customers located in the UK as of September 30, 2015.

 

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 750 which requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. 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. The Company periodically assesses uncertain tax positions that the Company has taken or expects to take on a tax return, including a decision whether to file or not to file a return in a particular jurisdiction. The Company evaluated its tax positions and determined that there were no uncertain tax benefits as of September 30, 2015 and December 31, 2014.

 

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. Basic net earnings (loss) per share exclude the dilutive effect of stock options or warrants and convertible notes. If the Company’s operations result in net loss 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 anti-dilutive. Therefore, the conversion of the related party convertible notes (see “Subordinated Convertible Notes Payable” below) has been excluded from the Company’s calculation of net loss per share. The computations of basic and dilutive net loss per share are as follows:

 

		Three months ended								Nine months ended
		9/30/2015				9/30/2014				9/30/2015				9/30/2014
Net income ( loss)		$	9,600				82,800			$	(750,100	)			(522,800	)
Weighted average common shares outstanding			12,611,133				12,611,133				12,611,133				12,611,133
Basic net income (loss) per share		$	0.00				0.01			$	(0.06	)			(0.04	)
Interest expense on convertible notes		$	22,900				22,900			$	-				-
Income (loss) for computing diluted net income per share		$	32,500				105,700			$	(750,100	)			(522,800	)
Incremental shares from assumed exercise of dilutive securities			2,456,224				2,395,043				-				-
Dilutive potential common shares			15,067,357				15,006,176				12,611,133				12,611,133
Diluted net income (loss) per share		$	0.00				0.01			$	(0.06	)			(0.04	)

 

Foreign Currency Translation

 

The Company has subsidiaries located in the UK, where the local currency, the 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 year shown. Cash flows are translated at the average exchange rates for the nine months then ended. 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 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 (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.

 

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 (as amended, the “Credit and Security Agreement”) with Cole Taylor Bank, an Illinois banking corporation (“Cole Taylor”). Cole Taylor merged into MB Financial Bank, an Illinois banking corporation (“MB Financial”) on August 18, 2014. As used in this Quarterly Report, “Lender” shall refer to Cole Taylor prior to August 18, 2014 and to MB Financial, as successor in interest to Cole Taylor, on or after August 18, 2014. The Credit and Security Agreement provided 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 (the “Revolver”), 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 Lender’s credit facility.

 

The Credit and Security Agreement requires MBC and Releta to maintain certain minimum fixed charge coverage ratios for trailing twelve month periods and minimum tangible net worth. The minimum tangible net worth MBC and Releta are required to maintain is subject to increase based on the net income of MBC and Releta. On March 29, 2013, MBC, Releta, and Lender entered into a First Amendment to the Credit and Security Agreement to clarify the method by which the fixed charge coverage ratio is calculated, with retrospective application.

 

The required fixed charge coverage ratio for the trailing twelve month periods ended March 31, 2013 onwards fell short of the required ratio. The tangible net worth fell short of the required amount for the period beginning June 1, 2013 onwards.

 

 

On September 18, 2013, MBC and Releta received a notice (the “Default Notice”) from Lender regarding its intention to exercise certain rights with respect to events of default of the Company pursuant to the Credit and Security Agreement.

 

The Credit and Security Agreement provides that the failure of MBC and Releta to observe any covenant will constitute an event of default under the Credit and Security Agreement. Under the Credit and Security Agreement, upon the occurrence of an event of default, all of MBC’s and Releta’s obligations under the Credit and Security Agreement may, at the option of the Lender, be declared, and immediately shall become, due and payable, without notice of any kind. The event of default shall be deemed continuing until waived in writing by the Lender. The Default Notice states that Lender has elected, effective September 1, 2013, to charge a default interest rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement. The Company estimates that the increased rate currently results in approximately $120,000 additional annual interest expense.

 

On April 18, 2014, MBC and Releta received a second notice (the “Second Default Notice”) from Lender regarding its intention to exercise certain rights with respect to events of default of the Company pursuant to the Credit and Security Agreement. The Second Default Notice required MBC and Releta to engage a consultant to perform a viability analysis and prepare a revised projection for 2014.

 

Effective August 20, 2014, pursuant to a notice to MBC and Releta dated August 18, 2014 (the “Third Default Notice”) which referred to MBC’s and Releta’s continued failure to meet the required fixed charge coverage ratio and the tangible net worth requirement, Lender notified MBC and Releta that it would reduce the advance rate for (i) eligible finished goods and raw material inventory and (ii) eligible work-in progress inventory by 2% each month. The advance rates are used in the calculation of the borrowing base of each of MBC and Releta, which is used in the determination of the amount available to each of MBC and Releta pursuant to the revolving facility. Under the terms of the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base of each of MBC and Releta fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

 

On January 21, 2015, MBC, Releta, and Lender entered into a Second Amendment (the “Second Amendment”) to the Credit and Security Agreement. The Second Amendment reduced the maximum amount of the Revolver from $4,119,000 to $2,500,000. The Second Amendment also changed the definition of borrowing base (including by lowering certain advance rates) such that the calculation of the borrowing base will result in a lower number than it would have if calculated prior to the effectiveness of the Second Amendment. The borrowing base is used in the determination of the amount available to each borrower (a “Borrower”) pursuant to the Revolver. Pursuant to the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

 

The Second Amendment reduced the advance rate for (i) eligible finished goods and raw material inventory and (ii) eligible work-in progress inventory by two percent (2%) and continues to reduce each by an additional two percent (2%) on the 20th day of each month thereafter. The advance rates are used in the calculation of the borrowing base of each Borrower, which is used in the determination of the amount available to each Borrower pursuant to the Revolver. As stated above, if such availability is less than $0, or if certain components of the borrowing base fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

 

Lender has not waived the events of default described in the Default Notice, the Second Default Notice or the Third Default Notice and has reserved the right to all other available rights and remedies under the Credit and Security Agreement, certain other related documents and applicable law. Lender could declare the full amount owed under the Credit and Security Agreement due and payable at any time for any reason or no reason. Since receiving the Second Amendment, the Company has not received any notice or other communication from Lender that it intends to exercise any other remedies available to it under the Credit and Security Agreement in connection with the events of default. Lender continues to charge a default interest rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement. The exercise of additional remedies by Lender may have a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate. If it becomes necessary for MBC and Releta to seek additional financing, there is no guarantee that MBC and Releta will be able to obtain such financing on terms favorable to the Company or on any terms.

 

 

Pursuant to a letter from UBHL dated November 11, 2013, UBHL indicated a willingness to invest up to $2,000,000 in the Company. On January 22, 2014, Catamaran Services, Inc., (“Catamaran”), a related party (see “Notes Payable to Related Party”, below), provided a note loan of $500,000 repayable upon receipt of an equity investment by the Company’s majority shareholder. On April 24, 2014, another note loan of $500,000 was received from Catamaran on terms similar to the previous note. On February 5, 2015, another note loan of $500,000 was received from Catamaran on terms similar to the previous notes. On July 6, 2015, the proceeds of another note loan of $500,000 was received from Catamaran on terms similar to the previous notes. On each date on or prior to which Catamaran provided a note loan, the Company received a letter from Lender permitting the Company to obtain loans subject to certain conditions, including that no portion of such loans would be payable until either (a) certain obligations of the Company to Lender pursuant to the Agreement were satisfied in full, or (b) such payment was made from an equity investment by the Company’s majority shareholder.

 

In response to the losses incurred in connection with the Company’s operations, UBHL, the Company’s indirect majority shareholder, issued a letter of comfort on March 5, 2015 (the “Letter of Comfort”), to confirm that UBHL had agreed to provide funding on an as needed basis to ensure that the Company is able to meet its financial obligations as and when they fall due. The Letter of Comfort does not specify either the terms of UBHL’s support, or a maximum dollar limit and is not a legally binding agreement. However, to date UBHL through its affiliated company, Catamaran, has provided funds for working capital needs. UBHL’s financial support is contingent upon compliance with any applicable exchange control requirements, other applicable laws, and regulations relating to the transfer of funds from India. The Letter of Comfort does not specify any time limit for extending support. If it becomes necessary to seek UBHL’s financial assistance under the Letter of Comfort and UBHL is either unable or unwilling to provide such financial assistance to MBC, it may result in a material adverse effect on the Company’s financial position and on its ability to continue operations. UBHL controls the Company’s two largest shareholders, United Breweries of America, Inc. (“UBA”) and Inversiones, and as such, is the Company’s indirect majority shareholder. The Company’s Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the board of directors of UBHL.

 

As of September 30, 2015, the fixed charge coverage ratio was required to be 1.15 to 1. The Company calculated that the fixed charge coverage ratio as of September 30, 2015 was -1.2 to 1. The Company calculated that the required tangible net worth of MBC and Releta was $6,181,400 as of September 30, 2015 and the actual tangible net worth on such date was $4,079,800. The Company does not anticipate that it will regain compliance with the required fixed charge coverage ratio or the minimum tangible net worth in the immediate future.

 

At September 30, 2015, the Company had cash and cash equivalents of $92,300, an accumulated deficit of $16,997,200, and a working capital deficit of $11,330,900 due to losses incurred, reclassification of debts owing to MB Financial as a result of the default under the Credit and Security Agreement described above and reclassification of subordinated notes payable to UBA maturing in June 2016. In addition, the book value of the Company’s assets was lower than the book value of its liabilities at September 30, 2015.

 

Management has taken several actions to reduce the Company’s working capital needs through September 30, 2016, including reducing discretionary expenditures, reducing manpower, securing additional brewing contracts in an effort to utilize a portion of excess production capacity, and pursuing export opportunities. The current revenue from operations are insufficient to meet the working capital needs of the Company over the next 12 months. The Company has requested UBHL to make a capital infusion. If UBHL is unwilling or unable to infuse additional capital, the Company will seek capital from other sources, including outside investors. If sufficient capital for working capital needs is not obtained, the Company may sell some of its operating assets.

 

 

If the Company is unable to find any source of funds, it may result in a material adverse effect on the Company’s ability to continue operations. If it becomes necessary to seek UBHL’s financial assistance under the Letter of Comfort and UBHL does not provide such financial assistance to MBC, it may result in a material adverse effect on the Company’s financial position and on its ability to continue operations. In addition, the Company’s 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 have a material adverse effect on the Company’s financial position and results of operations.

 

3. Inventories

 

Inventories are stated at the lower of average cost or market and consist of the following:

 

		September 30, 2015				December 31, 2014
Raw Materials		$	579,900			$	740,300
Beer-in-process			384,500				259,400
Finished Goods			773,300				1,034,200
Merchandise			61,100				84,000
TOTAL		$	1,798,800			$	2,117,900

 

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 the period expiring in June 2016. The borrowings are collateralized, with recourse, by MBC’s and Releta’s trade receivables and inventory located in the US. This facility currently carries interest (including default interest) at a rate of prime plus 3% 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, 2015 was approximately $317,700. Included in the Company’s balance sheet as of September 30, 2015 are account balances totaling $1,170,200 of accounts receivable and $1,700,300 of inventory collateralized to MB Financial, as successor in interest 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 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, 2015 was approximately $813,900. Included in the Company’s balance sheet at September 30, 2015 are account balances totaling $2,444,500 of accounts receivable collateralized to RBS under this facility.

 

5. Notes Payable to Related Party

 

Notes payable to related party consist of notes payable to Catamaran dated January 22, 2014, April 24, 2014 February 5, 2015 and June 30, 2015, for a total value of $2,095,400 including interest of $95,400. The Catamaran Holding, Ltd. (“Holding”), the sole shareholder of Catamaran, has directors in common with Inversiones, one of the major shareholders of MBC. The indirect beneficial owner of Inversiones is UBHL. Dr. Vijay Mallya, the Chairman of the Board of Directors of the Company is also the Chairman of the Board of Directors of UBHL. The Company has asked Catamaran whether any relationships exist between the shareholders of Holdings and any affiliates of the Company, and has not received a response to such inquiries.

 

 

The notes are payable within six months following the date of the notes, subject to the receipt by the Company of an equity investment by the Company’s majority shareholder in an amount sufficient either (a) to pay the notes from an equity investment by the Company’s majority shareholder, or (b) to pay the notes and certain existing obligations of the Company to Lender. If the Company is not able to satisfy its obligations on the notes within the six month period following the date of the notes, the notes are automatically extended for additional six month terms until they are paid.

 

6. Subordinated Convertible Notes Payable to Related Party

 

Subordinated convertible notes to a related party included notes payable to UBA (the “UBA Notes”) for a total value of $3,657,000 as of September 30, 2015, including interest at the prime rate plus 1.5% per year, but not to exceed 10%. Thirteen of the UBA Notes are convertible into common stock at a rate of $1.50 per share and one UBA Note is convertible at a rate of $1.44 per share. The UBA Notes have been extended until June 2016 and have 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. UBA has agreed to subordinate the UBA Notes to the Company’s long-term debt agreements with MB Financial, as successor-in-interest to Cole Taylor, which mature in June 2016. Therefore, the Company will not require the use of working capital to repay any of the UBA Notes until the Lender’s facility is repaid. The UBA Notes include $1,741,600 and $1,673,500 of accrued interest at September 30, 2015 and December 31, 2014, respectively.

 

7. Secured Notes Payable

 

Maturities of secured notes payable for succeeding years are as follows:

 

		September 30, 2015				December 31, 2014
Loan from Cole Taylor, payable in monthly installments of $12,300, plus interest (including default interest) at prime plus 4% with a balloon payment of approximately $2,202,500 in June 2016; secured by substantially all assets of Releta and MBC.		$	2,313,100			$	2,423,600
Loans from Cole Taylor, payable in monthly installments of $32,300 plus interest (including default interest) at prime plus 3.5% with a balloon payment of approximately $908,700 in June 2016; secured by substantially all assets of Releta and MBC.			1,199,200				1,489,700
			3,512,300				3,913,300
Less current maturities			3,512,300				3,913,300
		$	-			$	-

 

8. Long-Term Debt – Related Party

 

		September 30, 2015				December 31, 2014
Loan from Heineken UK Limited, payable in quarterly installments of $126,000, plus interest at UK prime plus 5% maturing on October 9, 2016, secured by licensing rights pursuant to a Sub-License Agreement.		$	629,900			$	1,038,600
Less current maturities			503,900				519,300
Non-current loan payable		$	126,000			$	519,300

 

 

Maturities of debt for succeeding years are as follows:

 

Three months ending December 31, 2015		$	126,000
Year ending December 31, 2016		$	503,900

 

On April 18, 2013, KBEL entered into a Loan Agreement (the “HUK Loan Agreement”) with HUK pursuant to which HUK provided KBEL with a secured term loan of £1,000,000 on October 9, 2013 to be repaid in twelve quarterly installment of £83,333.33 each, commencing from January 9, 2014 along with interest at the rate of 5% above the Bank of England base rate. Prepayment is permitted. Upon an Event of Default, as defined in the HUK Loan Agreement, if HUK and KBEL fail to agree on a payment plan acceptable to HUK, HUK may, among other remedies, declare the loan immediately due and repayable or exercise its right to an exclusive license pursuant to the Sub-License Agreement as described and defined in the HUK Loan Agreement.

 

9. Capital Lease Obligations

 

The Company leases certain assets under an agreement that is classified as a capital lease. The future minimum lease payments required under the capital lease and the present values of net minimum lease payments as of September 30, 2015 are as follows:

 

Three months Ending December 31, 2015		$	6,600
Year Ending December 31, 2016			26,200
Year Ending December 31, 2017			26,200
Year Ending December 31, 2018			19,800
Year Ending December 31, 2019			19,800
Year Ending December 31, 2020			20,100
			118,700
Less amounts representing interest			(18,400	)
Present value of minimum lease payments			100,300
Less current maturities			(21,500	)
Non-current leases payable		$	78,800

 

10. Severance Payable

 

The Company is a party to a Separation and Severance Agreement (the “Separation Agreement”) with Mr. Yashpal Singh, its President and Chief Executive Officer. Pursuant to the terms of the Separation Agreement, upon Mr. Singh’s (i) termination of employment for Good Reason (as defined in the Separation Agreement), (ii) termination of employment at the end of the employment term, (iii) death, (iv) disability or (v) termination by the Company without Cause (as defined in the Separation Agreement), he shall be entitled to certain severance benefits and payments. The severance payment shall equal the product of 2.5 times his average monthly base salary (calculated over the twelve (12) month period preceding the termination event), multiplied by the number of years (on a pro-rated basis) he had been employed by the Company at the Termination Date (as defined in the Separation Agreement); provided, however, that the severance payment may not exceed thirty (30) months of Mr. Singh’s average monthly base salary (calculated over the twelve (12) months preceding his termination date). Payments due to Mr. Singh under the Separation Agreement shall be paid in equal monthly installments by the Company over a 20 month period. Mr. Singh’s current employment contract ends on June 30, 2016.The receipt of payments is contingent on Mr. Singh executing a release of claims for the benefit of the Company. As of September 30, 2015, the Company estimated this obligation to be $760,100.

 

 

11. 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.

 

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 the exercise of judgment.

 

On September 26, 2014, The New Buffalo Brewing Co., Inc. (“NBB”) initiated an action against Releta in the Supreme Court of the State of New York for the County of Erie to recover damages for alleged breaches of a Brewing Production Agreement between NBB and Releta dated September 6, 2013 (the “Brewing Production Agreement”), as well as for a declaration rescinding and nullifying the Brewing Production Agreement, and, in case of Releta’s failure to answer or appear, damages resulting from the alleged breaches, rescission of the Brewing Production Agreement, attorneys’ fees and any other relief deemed proper by the court. In a demand letter to Releta dated October 16, 2014, NBB demanded payment of the sum of $500,000. The Company has engaged a law firm in New York to respond.

 

On June 3, 2015, IAE International Aero Engines AG (“IAE”) served the Company with a complaint (the “Complaint”), filed in Marin County Superior Court, California (the “Court”), which requests, among other things, (i) that the Court recognize and enforce a foreign judgment against an Indian corporate entity (which is an affiliate of the Company), the alleged judgment debtor, and (ii) that such judgment be made enforceable against any assets of the Company (and of the other defendants) that are located in California, on the alleged ground that the Company (along with the other defendants) is an “alter ego” of the alleged judgment debtor. Along with the Complaint, IAE also served the Company with an ex parte application for a right to attach order and a writ of attachment, and, in the alternative, a temporary protective order (collectively, the “ex parte application”) to, among other things, stop the Company from making certain transfers to related parties other than in the ordinary of business.

 

The ex parte application came up for hearing before the Court on June 5, 2015. At the conclusion of that hearing, the Court: (i) issued a temporary protective order of limited scope, providing that to the extent the Company had possession, custody or control of any stock belonging to the alleged judgment debtor (which the Company does not), it should not transfer said stock out of Marin County, California until 5:00 PM (Pacific Time), June 9, 2015; and (ii) continued the hearing on the ex parte application to 3:00 PM on June 9, 2015. At the conclusion of the continued hearing on June 9, 2015, the Court denied the ex parte application for a writ of attachment and dissolved the limited temporary protective order.

 

The Company believes that the allegations in the Complaint are without merit and will continue to vigorously defend against the lawsuit.

 

As discussed in more detail in the Company’s Current Report on Form 8-K filed on June 9, 2015, the Company has discussed with the Lender the allegations set forth in the Complaint and the ex parte application and, as of the date of this Quarterly Report, the Company has not received any notice or other communication from the Lender that the Lender intends to exercise any of the remedies available to it under the Credit and Security Agreement in connection therewith.

 

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 between 2015 and 2020 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, including 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.

 

12. Related-Party Transactions

 

The Company conducts business with United Breweries of America, Inc. (“UBA”), which owns approximately 25% of the Company’s common stock. Until October 2013, KBEL had significant transactions with Shepherd Neame, Ltd., which is a related party with respect to a former Board member. KBEL also had significant transactions with HUK, a related party with respect to one of MBC’s Board members, beginning in October 2013.

 

The following table reflects the value of such transactions during the nine months ended September 30, 2015 and 2014 and the balances outstanding as of September 30, 2015 and December 31, 2014.

 

		September 30, 2015				September 30, 2014
TRANSACTIONS
Purchases from HUK		$	8,239,200			$	9,886,800
Expense reimbursement including interest to HUK		$	715,200			$	853,600
Interest expense related to UBA convertible notes		$	68,100			$	68,100
Interest expenses related to Catamaran notes		$	56,700			$	26,700
Borrowing from Catamaran		$	1,000,000			$	1,000,000

 

		September 30, 2015				December 31, 2014
ACCOUNT BALANCES
Accounts payable and accrued liability to HUK		$	1,581,500			$	1,802,300
Notes payable to Catamaran		$	2,095,400			$	1,038,700
Notes payable to UBA		$	3,657,000			$	3,588,900

 

13. Segment Information

 

The Company’s business presently consists of two segments – the North American Territory and the Foreign Territory. The Company’s operations in the North American Territory consist primarily of brewing and marketing proprietary craft beers. For distribution in the North American Territory, the Company brews its brands in its own facilities, which are located in Ukiah, California and Saratoga Springs, New York. The Company’s operations in the Foreign Territory, which are conducted through its wholly-owned subsidiary UBIUK and UBIUK’s wholly-owned subsidiary KBEL, consist primarily of the marketing and distribution of Kingfisher Premium Lager in the Foreign Territory.

 

A summary of each segment is as follows: 

 

Nine months ended September 30, 2015
		North American Territory				Foreign  Territory				Total
Net Sales		$	8,787,700			$	14,444,200			$	23,231,900
Operating Income (Loss)		$	(629,000	)		$	294,000			$	(335,000	)
Identifiable Assets		$	12,969,300			$	4,121,300			$	17,090,600
Depreciation & Amortization		$	505,200			$	384,000			$	889,200
Capital Expenditures		$	70,400			$	429,400			$	499,800

 

 

Nine months ended September 30, 2014
		North American Territory				Foreign Territory				Total
Net Sales		$	9,564,000			$	16,358,800			$	25,922,800
Operating Income (loss)		$	(781,500	)		$	738,300			$	(43,200	)
Identifiable Assets		$	14,409,100			$	4,683,800			$	19,092,900
Depreciation & Amortization		$	509,500			$	335,500			$	845,000
Capital Expenditures		$	105,300			$	537,400			$	642,700

 

14. Unrestricted Net Assets

 

The Company’s wholly-owned subsidiary, UBIUK, had undistributed losses of $508,100 as of September 30, 2015. 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 $1,511,600. Condensed financial information of MBC, together with its other subsidiary, Releta, is as follows:

 

Balance Sheets

 

		September 30, 2015				December 31, 2014
		(unaudited)
Assets
Cash and cash equivalents		$	91,500			$	61,500
Accounts receivable, net			1,170,200				1,365,000
Inventories			1,700,300				2,047,700
Other current assets			238,400				173,600
Total current assets			3,200,400				3,647,800
Investment in subsidiary			1,225,000				1,225,000
Property and equipment			9,503,500				9,904,500
Intercompany receivable			338,600				421,900
Other assets			265,400				310,400
Total assets		$	14,532,900			$	15,509,600
Liabilities
Line of credit		$	317,700			$	1,192,900
Accounts payable			2,650,300				2,620,000
Accrued liabilities			1,131,700				1,031,300
Note payable related party			2,095,400				1,038,700
Subordinated convertible notes payable			3,657,000				-
Current maturities of debt, leases and severance			3,631,900				3,918,900
Total current liabilities			13,484,000				9,801,800
Long-term capital leases			8,000				12,100
Subordinated convertible notes payable			-				3,588,900
Severance payable			646,100				760,100
Total liabilities			14,138,100				14,162,900
Stockholders’ equity
Common stock			15,100,300				15,100,300
Preferred stock			227,600				227,600
Accumulated deficit			(14,933,100	)			(13,981,200	)
Total stockholders’ equity			394,800				1,346,700
Total liabilities and stockholders’ equity		$	14,532,900			$	15,509,600

 

 

Statements of Operations		Three months ended September 30,								Nine months ended September 30,
		2015				2014				2015				2014
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Net sales		$	3,247,500			$	3,584,500			$	8,787,700			$	9,564,000
Cost of goods sold			(2,547,100	)			(2,879,200	)			(7,141,000	)			(7,937,500	)
Sales, marketing, and retail expenses			(317,800	)			(365,500	)			(993,500	)			(1,071,900	)
General and administrative expenses			(426,600	)			(412,900	)			(1,287,300	)			(1,341,100	)
Loss from operations			(44,000	)			(73,100	)			(634,100	)			(786,500	)
Other income			7,400				22,100				51,000				32,800
Interest expense			(117,500	)			(131,600	)			(365,000	)			(388,200	)
Provision for taxes			-				—				(3,800	)			—
Net loss		$	(154,100	)		$	(182,600	)		$	(951,900	)		$	(1,141,900	)

 

Statements of Cash Flows		Nine months ended September 30 ,
		2015				2014
		(unaudited)				(unaudited)
Cash flows from operating activities		$	297,400			$	(518,900	)
Purchase of property and equipment			(70,400	)			(105,300	)
Proceeds from sale of asset			-				700
Net repayment on line of credit			(875,200	)			(205,900	)
Borrowing on note payable			1,000,000				1,000,000
Repayment on long term debt			(401,000	)			(401,000	)
Payment on obligation under capital lease			(4,100	)			(3,700	)
Net change in payable to UBIUK			83,300				165,600
Increase (decrease) in cash			30,000				(68,500	)
Cash, beginning of period			61,500				113,700
Cash, end of period		$	91,500			$	45,200

 

 

15. Income Taxes

 

In the Nine months ended September 30, 2015 and 2014, the Company recorded tax expenses related to state franchise taxes only, and did not record income tax expenses due to the availability of deferred tax assets to offset any taxable income in the US (at the federal and state level to the extent applicable) 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 has not yet been met. During the nine months ended September 30, 2015 and 2014, the Company’s effective tax rates were de minimis.

 

The Company’s 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 2011 through 2014. 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 tax jurisdiction.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three and nine months ended September 30, 2015, compared to the three and nine months ended September 30, 2014. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

In the rest of this Quarterly Report on Form 10-Q, 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 on Form 10-Q, 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 as of 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 business, and other risks discussed elsewhere in this Quarterly Report on Form 10-Q and from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and reports. In addition, such statements could be adversely affected by general industry and market conditions and growth rates, and general domestic, Canadian 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 August 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, the Company gained a new business segment ― distribution of beer outside the US, primarily in the United Kingdom (the “UK”) and continental Europe (collectively, the “Foreign Territory”). This segment accounted for 61% and 62% of the Company’s gross sales during the first nine months of 2015 and 2014 respectively, with the US and Canada (the “North American Territory”) accounting for the remaining 39% and 38% during the first nine months of 2015 and 2014 respectively.

 

Seasonality

 

Sales of the Company’s products are somewhat seasonal. Historically, sales volumes in both the Company’s North American and Foreign Territories have been comparatively low during the first quarter of the calendar year. The volume of sales in any given area may also be adversely 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 2015 with a net loss of $750,100, as compared to a net loss of $522,800 for the same period in 2014. As set forth more fully under the section captioned “Results of Operations” below, during the first nine months of 2015, the Company experienced a decrease in net sales of $2,690,900 compared to the same period in 2014. Compared to the first nine months of 2014, costs of goods sold decreased by $2,015,500, operating expenses decreased by $383,600, and net other expenses decreased by $68,300 in the first nine months of 2015, all of which contributed to the Company’s results for the period.

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2015 Compared To Three Months Ended September 30, 2014

 

Net Sales

 

Our overall net sales for the third quarter of 2015 were $8,399,200, a decrease of $760,900, or 8.3%, compared to $9,160,100 for the third quarter of 2014. The decrease was due to decreases in sales of our brands and contract brands in the North American Territory.

 

North American Territory: Our net sales for the third quarter of 2015 were $3,247,500 compared to $3,584,500 for the same period in 2014, a decrease of $337,000, or 9.4%, mainly due to decreased sales volume. The sales volume decreased to 16,500 barrels in the third quarter of 2015 from 17,900 barrels in the third quarter of 2014; a net decrease of 1,400 barrels, or 7.8% mainly due to reduction in sales of MBC’s brands due to competitive pressure. We continue to solicit opportunities to enter into non-binding contract brewing arrangements to address the low production capacity utilization rates in our Ukiah, California and Saratoga Springs, New York brewing facilities.

 

Foreign Territory: Net sales for the third quarter of 2015 were $5,151,700 compared to $5,575,600 during the corresponding period of 2014, a decrease of $423,900, or 7.6% when measured in US Dollars. The decrease in sales was due to exchange rate fluctuations. When measured in UK Pounds Sterling, the functional currency of Foreign Territory, net sales remained the same during the third quarter of the years 2015 and 2014.

 

Cost of Goods Sold

 

Cost of goods sold as a percentage of net sales during the third quarter of 2015 was 66.9%, as compared to 68.1% during the corresponding period of 2014.

 

 

North American Territory: Cost of goods sold as a percentage of net sales in the US during the third quarter of 2015 was 78.4%, compared to 80.3% during the corresponding period of 2014 mainly due to sales price increase. Utilization of our production capacity has a direct impact on cost. Generally, when facilities are operating at higher percentage of production capacity, cost is favorably affected because fixed and semi-variable operating costs, such as depreciation and production costs, are spread over a larger volume base. Our production capacity is currently under-utilized, and the lower sales volume in 2015 caused further decreases in productivity.

 

Foreign Territory: Cost of goods sold as a percentage of net sales in the UK during the third quarter of 2015 was 60.5%, as compared to 60.3% during the corresponding period in 2014.

 

Gross Profit

 

Due to the reduction in sales revenue, gross profit for the third quarter of 2015 was $2,778,500 compared to $2,919,800 during the corresponding period of 2014, a decrease of $141,300 or 4.8%. As a percentage of net sales, gross profit during the third quarter of 2015 increased to 33.1% from 31.9% for the third quarter of 2014.

 

Operating Expenses

 

Operating expenses for the third quarter of 2015 were $2,623,100, a decrease of $58,400, or 2.2%, as compared to $2,681,500 for the corresponding period of 2014. Operating expenses consist of marketing and distribution expenses and general and administrative expenses.

 

Marketing and Distribution Expenses: Our marketing and distribution expenses for the third quarter of 2015 were $1,511,500, as compared to $1,479,300 for the third quarter of 2014, representing an increase of $32,200 or 2.2%.

 

North American Territory: Marketing and distribution expenses for the third quarter of 2015 were $317,800 compared to $365,500 during the corresponding period of 2014, representing a decrease of $47,700 or 13.1%. As a percentage of net sales in the US, such expenses decreased to 9.8% during the third quarter of 2015, compared to 10.2% during the corresponding period of 2014. The decrease was due to a reduction in manpower and associated travel costs.

 

Foreign Territory: Marketing and distribution expenses for the third quarter of 2015 were $1,193,700 compared to $1,113,800 during the corresponding period of 2014, representing an increase of $79,900, or 7.2%. This increase is mainly due to an increase in marketing and promotional expenses. As a percentage of net sales in the UK, marketing and distribution expenses increased to 23.1% during the third quarter of 2015 compared to 20% during the corresponding period of 2014.

 

General And Administrative Expenses: Our general and administrative expenses were $1,111,600 for the third quarter of 2015, representing a decrease of $90,600 or 7.5%, from $1,202,200 for the corresponding period in 2014.

 

North American Territory: Domestic general and administrative expenses were $426,600 for the third quarter of 2015, representing an increase of $13,700, or 3.3%, compared to $412,900 for the third quarter of 2014.

 

Foreign Territory: General and administrative expenses related to the Foreign Territory were $685,000 for the third quarter of the year 2015, representing a decrease of $104,300 or 13.2%, when compared to $789,300 for the third quarter of 2014. The decrease was mainly due to reduction in recruitment and consulting costs.

 

Other Expenses

 

Net other expenses for the third quarter of 2015 totaled $145,800, representing a decrease of $9,700, or 6.2%, when compared to $155,500 for the third quarter of 2014. The decrease was due to decreased interest expenses.

 

Income Taxes

 

We made no income tax provision for the third quarter of 2015 and 2014.

 

 

Net Income / Loss

 

Our net income for the third quarter of 2015 was $9,600, compared to net income of $82,800 for the third quarter of 2014. After providing for a negative foreign currency translation adjustment of $2,000 during the third quarter of 2015 (as compared to a positive foreign currency adjustment of $54,400 for the same period in 2014), our comprehensive income for the third quarter of 2015 was $7,600, compared to comprehensive income of $137,200 for the same period in 2014. As stated above, the primary reason for the income was the reduction in sales revenue during the period.

 

Nine Months Ended September 30, 2015 Compared To Nine Months Ended September 30, 2014

 

Net Sales

 

Our overall net sales for the first nine months of 2015 were $23,231,900, a decrease of $2,690,900, or 10.4%, compared to net sales of $25,922,800 for the same period in 2014.

 

North American Territory: North American net sales for the first nine months of 2015 were $8,787,700 compared to $9,564,000 for the same period in 2014, a decrease of $776,300 or 8.1%. Our domestic sales volumes decreased to 43,600 barrels during the first nine months of 2015 from 47,300 barrels in the first nine months of 2014, representing a decrease of 3,700 barrels or 7.8%. Sales of MBC’s brands decreased by 6,200 barrels, sales of Kingfisher brands increased by 600 barrels and sales of contract brands increased by 1,900 barrels during the first nine months of 2015 compared to the same period in 2014. We have redesigned our product packaging to enhance its appeal and are introducing new products. We continue to solicit opportunities to enter into non-binding contract brewing arrangements to address the low production capacity utilization rates in our Ukiah, California and Saratoga Springs, New York brewing facilities, and anticipate that fluctuations in the availability of such contract brewing arrangements will continue to impact our net sales in the North American Territory.

 

Foreign Territory: Net sales for the first nine months of 2015 were $14,444,200 compared to $16,358,800 during the corresponding period of 2014, a decrease of $1,914,600 or 11.7%. The decrease is due to exchange rate fluctuation, lower sales volume and price reduction.

 

Cost of Goods Sold

 

Cost of goods sold as a percentage of net sales during the first nine months of 2015 was 68.3%, as compared to 69% during the corresponding period of 2014.

 

North American Territory: Cost of goods sold as a percentage of net sales in the US during the first nine months of 2015 was 81.3%, as compared to 83%, during the corresponding period of 2014 mainly due to sales price increase. Generally, when facilities are operating at a higher percentage of production capacity, cost is favorably affected because fixed and semi-variable operating costs, such as depreciation and production costs, are spread over a larger volume base. Our production capacity is currently under-utilized.

 

Foreign Territory: Cost of goods sold as a percentage of net sales in the UK during the first nine months of 2015 was 60.5%, as compared to 60.8% during the corresponding period in 2014.

 

Gross Profit

 

As a result of decrease in sales revenue, gross profit for the first nine months of 2015 decreased to $7,363,500, from $8,038,900 during the corresponding period of 2014, a decrease of $675,400 or 8.4%. As a percentage of net sales, the gross profit during the first nine months of 2015 increased to 31.7% from 31% during the corresponding period in 2014.

 

Operating Expenses

 

Operating expenses for the first nine months of 2014 were $7,698,500, a decrease of $383,600, or 4.7%, as compared to $8,082,100 for the corresponding period of the year 2014. 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 2015 were $4,371,500, as compared to $4,614,500 for the same period in 2014, representing a decrease of $243,000 or 5.3%.

 

 

North American Territory: Marketing and distribution expenses for the first nine months of 2015 were $993,500 compared to $1,071,900 during the corresponding period of 2014, representing a decrease of $78,400 or 7.3%. The decrease was mainly due to a reduction in manpower and employee travel cost. These expenses equaled 11.3% of net sales in the US during the first nine months of the year 2015, compared to 11.2% during the corresponding period of 2014.

 

Foreign Territory: Marketing and distribution expenses for the first nine months of 2015 were $3,378,000 compared to $3,542,600 during the corresponding period of 2014, representing a decrease of $164,600 or 4.6% mainly due to exchange rate fluctuation. As a percentage of net sales in the UK, marketing and distribution expenses increased to 23.4% for the first nine months of 2015 as compared to 21.7% for the first nine months of 2014.

 

General and Administrative Expenses: Our general and administrative expenses were $3,327,000 for the first nine months of the year 2015, representing a decrease of $140,600 or 4.1%, from $3,467,600 for the corresponding period in 2014.

 

North American Territory: Domestic general and administrative expenses were $1,287,300 for the first nine months of 2015, representing a decrease of $53,800, or 4%, from $1,341,100 for the same period in 2014 due to a reduction in manpower.

 

Foreign Territory: General and administrative expenses related to the Foreign Territory were $2,039,700 for the first nine months of 2015, representing a decrease of $86,800 or 4.1%, as compared to $2,126,500 for the same period in 2014 due to exchange rate fluctuations.

 

Other Expenses

 

Net other expenses for the first nine months of 2015 totaled $411,300 representing a decrease of $68,300 or 14.2% when compared to $479,600 for the same period in 2014. The decrease was mainly due to decreased interest expenses as a result of reduction in borrowings.

 

Income Taxes

 

We had a provision of $3,800 for income taxes for the first nine months of 2015 but did not provide for taxes during the corresponding period in 2014.

 

Net Loss

 

Our net loss for the first nine months of 2015 was $750,100, as compared to net loss of $522,800 for the first nine months of 2014. After providing for a negative foreign currency translation adjustment of $4,900 during the first nine months of 2015 (as compared to a positive foreign currency translation adjustment of $14,100 for the same period in 2014), comprehensive loss for the first nine months of 2015 was $755,000, compared to comprehensive loss of $508,700 for the same period in 2014. As stated above, the primary reason for the loss in 2015 was the drop in sales revenues during the period.

 

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. Historically, our operations have not generated sufficient cash flows to provide us with sufficient working capital. However, we believe that the liquidity we derive from the debt financing and cash flows attributable to our operations is sufficient to fund our capital expenditures, debt maturities and other business needs for the next twelve months. We normally generate our liquidity and capital resources primarily through operations and available debt financing.

 

On June 23, 2011, MBC and Releta entered into a Credit and Security Agreement (the “Credit and Security Agreement”) with Cole Taylor Bank, an Illinois banking corporation (“Cole Taylor”). Cole Taylor merged into MB Financial Bank, an Illinois banking corporation (“MB Financial”) on August 18, 2014. As used in this Quarterly Report, “Lender” shall refer to Cole Taylor prior to August 18, 2014 and to MB Financial, as successor in interest to Cole Taylor, on or after August 18, 2014. The Credit and Security Agreement provided 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 Lender’s facility.

 

 

The Credit and Security Agreement requires MBC and Releta to maintain certain minimum fixed charge coverage ratios for trailing twelve month periods and minimum tangible net worth. The minimum tangible net worth MBC and Releta are required to maintain is subject to increase based on the net income of MBC and Releta. On March 29, 2013, MBC, Releta, and Lender entered into a First Amendment to the Credit and Security Agreement to clarify the method by which the fixed charge coverage ratio is calculated, with retrospective application.

 

The required fixed charge coverage ratio for the trailing twelve month periods ended March 31, 2013 onwards fell short of the required ratio. The tangible net worth fell short of the required amount for the period beginning June 1, 2013 onwards.

 

On September 18, 2013, MBC and Releta received a notice (the “Default Notice”) from Lender regarding its intention to exercise certain rights with respect to events of default of the Company pursuant to the Credit and Security Agreement.

 

The Credit and Security Agreement provides that the failure of MBC and Releta to observe any covenant will constitute an event of default under the Credit and Security Agreement. Under the Credit and Security Agreement, upon the occurrence of an event of default, all of MBC’s and Releta’s obligations under the Credit and Security Agreement may, at the option of the Lender, be declared, and immediately shall become, due and payable, without notice of any kind. The event of default shall be deemed continuing until waived in writing by the Lender. The Default Notice states that Lender has elected, effective September 1, 2013, to charge a default interest rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement. The Company estimates that the increased rate currently results in approximately $120,000 additional annual interest expense.

 

On April 18, 2014, MBC and Releta received a second notice (the “Second Default Notice”) from Lender regarding its intention to exercise certain rights with respect to events of default of the Company pursuant to the Credit and Security Agreement. As stated in the Second Default Notice, the Company has continued to be in default on the fixed charge coverage ratio for each measurement period beginning March 31, 2013 through February 28, 2014. The required fixed charge coverage ratio was initially required to be at least 1.05 to 1.00, but as of July 31, 2013, the required fixed charge coverage ratio increased to 1.10 to 1.00 pursuant to the terms of the Credit and Security Agreement.

 

The Second Default Notice also stated that the tangible net worth of MBC and Releta continued to fall short of the required amount as measured through February 28, 2014. The Company does not anticipate that it will regain compliance with the required fixed charge coverage ratio or the minimum tangible net worth in the immediate future. In addition, the Second Default Notice required MBC and Releta to engage a consultant to perform a viability analysis and prepare a revised projection for 2014.

 

Effective August 20, 2014, pursuant to a notice to MBC and Releta dated August 18, 2014 (the “Third Default Notice”) which referred to MBC’s and Releta’s continued failure to meet the required fixed charge coverage ratio and the tangible net worth requirement, Lender notified MBC and Releta that it would reduce the advance rate for (i) eligible finished goods and raw material inventory and (ii) eligible work-in progress inventory by 2% each month. The advance rates are used in the calculation of the borrowing base of each of MBC and Releta, which is used in the determination of the amount available to each of MBC and Releta pursuant to the revolving facility. Under the terms of the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base of each of MBC and Releta fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

 

 

On January 21, 2015, MBC, Releta, and Lender entered into a Second Amendment (the “Second Amendment”) to the Credit and Security Agreement.

 

The Second Amendment reduced the maximum amount of the Revolver from $4,119,000 to $2,500,000. The Second Amendment also changed the definition of borrowing base (including by lowering certain advance rates) such that the calculation of the borrowing base will result in a lower number than it would have if calculated prior to the effectiveness of the Second Amendment. The borrowing base is used in the determination of the amount available to each Borrower pursuant to the Revolver. Pursuant to the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

 

The Second Amendment reduced the advance rate for (i) eligible finished goods and raw material inventory and (ii) eligible work-in progress inventory by two percent (2%) and continues to reduce each by an additional two percent (2%) on the 20th day of each month thereafter. The advance rates are used in the calculation of the borrowing base of each Borrower, which is used in the determination of the amount available to each Borrower pursuant to the Revolver. As stated above, if such availability is less than $0, or if certain components of the borrowing base fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

 

Lender has not waived the events of default described in the Default Notice, the Second Default Notice or the Third Default Notice and has reserved the right to all other available rights and remedies under the Credit and Security Agreement, certain other related documents and applicable law. Lender could declare the full amount owed under the Credit and Security Agreement due and payable at any time for any reason or no reason. Since entering into the Second Amendment, the Company has not received any notice or other communication from Lender that it intends to exercise any other remedies available to it under the Credit and Security Agreement in connection with the events of default. Lender continues to charge a default interest rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement. The exercise of additional remedies by Lender may have a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate. If it becomes necessary for MBC and Releta to seek additional financing, there is no guarantee that MBC and Releta will be able to obtain such financing on terms favorable to the Company or on any terms.

 

As of September 30, 2015, the fixed charge coverage ratio was required to be 1.15 to 1. The Company calculated that the fixed charge coverage ratio as of September 30, 2015 was -1.2 to 1. The Company calculated that the required tangible net worth of MBC and Releta was $6,181,400 as of September 30, 2015 and the actual tangible net worth on such date was $4,079,800. The Company does not anticipate that it will regain compliance with the required fixed charge coverage ratio or the minimum tangible net worth in the immediate future.

 

At September 30, 2015, the Company had cash and cash equivalents of $92,300, an accumulated deficit of $16,997,200, and a working capital deficit of $11,330,900 due to losses incurred, reclassification of debts owing to MB Financial as a result of the default under the Credit and Security Agreement described above and reclassification of subordinated notes payable to UBA maturing in June 2016. In addition, the book value of the Company’s assets was lower than the book value of its liabilities at September 30, 2015.

 

The Company received a letter dated November 11, 2013 from UBHL, our indirect majority shareholder, expressing its willingness to commit to invest $2,000,000 in the Company in four installments to be paid every six months over a two year period. The letter did not state definitive terms for the proposed investment but stated that UBHL would consider such additional investment based on a business plan to be provided by the Company. We provided a business plan in February 2015 and requested additional investment from UBHL and are awaiting UBHL’s response. If we are unable to come to a final agreement with UBHL on the terms of the proposed investment or if UBHL does not agree to provide additional investment we will pursue other sources of funds.

 

 

In response to the losses incurred in connection with our operations, UBHL, our indirect majority shareholder, issued a letter of comfort to the Company’s accountants on March 5, 2015 (the “Letter of Comfort”), to confirm that UBHL would provide funding on an as needed basis to ensure that the Company is able to meet its financial obligations as and when they fall due. The Letter of Comfort does not specify either the terms of UBHL’s support, or a maximum dollar limit and is not a legally binding agreement. UBHL’s financial support is contingent upon compliance with any applicable exchange control requirements, other applicable laws, and regulations relating to the transfer of funds from India. The Letter of Comfort does not specify any time limit for extending support. If it becomes necessary to seek UBHL’s financial assistance under the Letter of Comfort and UBHL is either unable or unwilling to provide such financial assistance to MBC, it may result in a material adverse effect on the Company’s financial position and on its ability to continue operations. UBHL controls the Company’s two largest shareholders, United Breweries of America, Inc. (“UBA”) and Inversiones, and as such, is the Company’s indirect majority shareholder. The Company’s Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the board of directors of UBHL.

 

If it becomes necessary to seek UBHL’s financial assistance under the Letter of Comfort and UBHL does not provide such financial assistance to MBC, it may result in a material adverse effect on the Company’s financial position and on its ability to continue operations. In addition, the Company’s 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.

 

On January 22, 2014, Catamaran Services, Inc., (“Catamaran”), a related party (see “Notes Payable to Related Parties”, below), provided a note loan of $500,000 repayable upon receipt of an equity investment by the Company’s majority shareholder. On April 24, 2014, another note loan of $500,000 was received from Catamaran on terms similar to the previous note. On February 5, 2015, another note loan of $500,000 was received from Catamaran on terms similar to the previous notes. On July 6, 2015, the proceeds of another note loan of $500,000 was received from Catamaran on terms similar to the previous notes. On each date on or prior to which Catamaran provided a note loan, the Company received a letter from Lender permitting the Company to obtain loans subject to certain conditions, including that no portion of such loans would be payable until either (a) certain obligations of the Company to Lender pursuant to the Credit and Security Agreement were satisfied in full, or (b) such payment was made from an equity investment by the Company’s majority shareholder.

 

We have several loans, lines of credit, other credit facilities and lease agreements which are currently outstanding (collectively, “Indebtedness”). We currently make timely payments of principal and interest relating to the Indebtedness as they fall 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 Indebtedness (such as the defaults under the Credit and Security Agreement described above), fail to make timely payments of amounts due under the Indebtedness, or commit any other breach resulting in an event of default under the agreements governing Indebtedness, such events of default (including cross-defaults) could have a material adverse effect on our financial condition and results of operations. If our existing debt were accelerated and terminated, we would need to obtain replacement financing, the lack of which would have a material adverse effect on our financial condition and ability to continue operations. In addition, actions taken by secured parties against the Company’s assets which have been pledged as collateral could have a material adverse effect on our financial condition and results of operations.

 

Management has taken several actions to reduce the Company’s working capital needs through September 30, 2016, including reducing discretionary expenditures, reducing manpower, securing additional brewing contracts in an effort to utilize a portion of excess production capacity, and pursuing export opportunities. The current revenue from operations are insufficient to meet the working capital needs of the Company over the next 12 months. The Company has requested UBHL to make a capital infusion. If UBHL is unwilling or unable to infuse additional capital, the Company will seek capital from other sources, including outside investors. If sufficient capital for working capital needs is not obtained, the Company may sell some of its operating assets.

 

 

Cash Flow Results

 

Net cash provided by operating activities for the nine months ended September 30, 2015 was $1,155,200, compared to net cash provided by operations of $375,100 for the nine months ended September 30, 2014. During the first nine months ended September 30, 2015, accounts receivable decreased by $716,000 mainly due to increased collections in Foreign Territory. Accounts payable during the first nine months ended September 30, 2015 decreased by $389,800, mainly due to a reduction in the accounts payable in our Foreign Territory. Our inventory decreased by $316,600 during the first nine months of 2015 due to lower production in North American Territory. Accrued liabilities increased by $269,300 during the first nine months of 2015 due to an increase in the financing of insurance premiums.

 

Net cash used in investing activities totaled $403,800 for the first nine months of 2015, compared to $625,700 during the corresponding period in 2014, due to decreased purchases of beer dispensing equipment.

 

Net cash used in financing activities during the first nine months of 2015 totaled $794,700, compared to net cash used in financing activities during the first nine months of 2014 of $38,200, as a result of borrowing against notes payable to Catamaran in the North American Territory and net decrease in use of the revolving lines of credit and repayment of debts to MB Financial and HUK.

 

Description of Our Indebtedness

 

MB Financial Facility

 

On June 23, 2011, MBC and Releta entered into the Credit and Security Agreement with Lender (as described in “Liquidity and Capital Resources”). The Credit and Security Agreement provided 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 line of credit. At the time that the applicable loan or advance is made, we 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 and 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%. As described below, effective September 1, 2013, Lender is charging a default interest rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement. As described below, the Second Amendment (among other things) reduces the advance rate for (i) eligible finished goods and raw material inventory and (ii) eligible work-in progress inventory by 2% each month. The advance rates are used in the calculation of the borrowing base of each of MBC and Releta, which is used in the determination of the amount available to each of MBC and Releta pursuant to the revolving facility. Under the terms of the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base of each of MBC and Releta fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable. The Second Amendment also reduces the maximum amount of the Revolver from $4,119,000 to $2,500,000 and changes the definition of borrowing base (including by lowering certain advance rates). The Credit and Security 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 date. The credit facility is secured by a first priority security interest in all of MBC’s and Releta’s personal property and a first priority mortgage on our Ukiah, California real property, among other MBC and Releta assets.

 

 

On March 29, 2013, MBC and Releta entered into the Amendment to the Credit and Security Agreement (as described in “Liquidity and Capital Resources”). The Amendment clarifies the method by which the fixed charge coverage ratio shall be calculated.

 

As previously disclosed, the Company has been and remains in default of the fixed charge coverage ratio and the minimum tangible net worth requirement among other covenants contained in the Credit and Security Agreement. On September 18, 2013, April 18, 2014 and August 18, 2014, MBC and Releta received the Default Notice, the Second Default Notice and the Third Default Notice, respectively, from Lender regarding its intention to exercise certain rights with respect to events of default of the Company pursuant to the Credit and Security Agreement. Under the Credit and Security Agreement, upon the occurrence of an event of default, all of MBC’s and Releta’s obligations under the Credit and Security Agreement may, at the option of Lender, be declared, and immediately shall become, due and payable, without notice of any kind. The Default Notice stated that Lender has elected to charge a default interest rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement effective September 1, 2013. The Second Default Notice required MBC and Releta to engage a consultant to perform a viability analysis and prepare a revised projection for 2014. The Third Default Notice notified us that Lender would be reducing the advance rate for (i) eligible finished goods and raw material inventory and (ii) eligible work-in progress inventory by 2% each month. For more details on the defaults, please refer to “Liquidity and Capital Resources” above.

 

On January 21, 2015, MBC, Releta, and Lender entered into a Second Amendment (the “Second Amendment”) to the Credit and Security Agreement.

 

The Second Amendment reduced the maximum amount of the Revolver from $4,119,000 to $2,500,000. The Second Amendment also changed the definition of borrowing base (including by lowering certain advance rates) such that the calculation of the borrowing base will result in a lower number than it would have if calculated prior to the effectiveness of the Second Amendment. The borrowing base is used in the determination of the amount available to each Borrower pursuant to the Revolver. Pursuant to the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

 

The Second Amendment reduced the advance rate for (i) eligible finished goods and raw material inventory and (ii) eligible work-in progress inventory by two percent (2%) and continues to reduce each by an additional two percent (2%) on the 20th day of each month thereafter. The advance rates are used in the calculation of the borrowing base of each Borrower, which is used in the determination of the amount available to each Borrower pursuant to the Revolver. As stated above, if such availability is less than $0, or if certain components of the borrowing base fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

 

Master Line of Credit and UBA Notes

 

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 the date of this filing, 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”). Thirteen of the UBA Notes are convertible into common stock at a rate of $1.50 per share and one UBA Note is convertible at a rate of $1.44 per share. 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, 2016 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.

 

 

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 UBA 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 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 and until the Lender’s facility is repaid in full.

 

The aggregate outstanding principal amount of the UBA Notes as of September 30, 2015 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,741,600, for a total amount outstanding of $3,657,000.

 

As of September 30, 2015, the outstanding principal and interest on the UBA Notes was convertible into approximately 2,456,224 shares of our common stock. However, as the current market price of our common stock is substantially less than the conversion rate, voluntary conversion by UBA is unlikely.

 

Catamaran Notes:

 

On January 22, 2014, the Company issued a promissory note to Catamaran in the principal amount of $500,000. Catamaran Holdings, Ltd., the sole shareholder of Catamaran (“Holdings”) has directors in common with Inversiones, one of the major shareholders of the Company. The indirect beneficial owner of Inversiones is UBHL. Dr. Vijay Mallya, the Chairman of the Board of Directors of the Company is also the Chairman of the Board of Directors of UBHL. The Company has asked Catamaran whether any relationships exist between the shareholders of Holdings and any affiliates of the Company, and has not received a response to such inquiries. On April 24, 2014, the Company issued another note to Catamaran in the principal amount of $500,000 on terms similar to the note issued on January 22, 2014. On February 5, 2015, the Company issued a third note to Catamaran in the principal amount of $500,000, on terms similar to the notes issued earlier. On June 30, 2015, a fourth note was issued by the Company in the principal amount of $500,000 to Catamaran on terms similar to the previous notes and the proceeds against this note was received on July 6, 2015.

 

Pursuant to the terms of the notes, the Company promises to pay each note with accrued interest to Catamaran within six months following the date of the note, subject to the receipt by the Company of an equity investment by the Company’s majority shareholder (the “Shareholder Investment”) in an amount sufficient either (a) to pay the notes from equity investment by the Company’s majority shareholder, or (b) to pay the notes and certain existing obligations of the Company to Lender.

 

If the Company is not able to satisfy its obligations on the notes within the six month period following the date of the notes, the notes are automatically extended for additional six month terms until a Shareholder Investment sufficient to satisfy the notes is received. Interest shall accrue from the date of the notes on the unpaid principal at a rate equal to the lesser of (i) one and one-half percent (1.5%) per annum above the prime rate offered from time to time by the Bank of America Corporation in San Francisco, California, or (ii) ten percent (10%) per annum, until the principal is fully paid.

 

The notes may be prepaid without penalty at the option of the Company; however, no payments on the notes may be made unless such payment is a payment made from that portion of any equity investment by the Company’s majority shareholder that is in excess of $500,000, or certain existing obligations of the Company to Lender have been satisfied in full. The notes may not be amended without the prior written consent of Lender.

 

 

Other Loans, Credit Facilities and Commitments

 

Heineken Loan

 

On April 18, 2013, KBEL entered into a loan agreement with Heineken UK Limited (“HUK”) pursuant to which HUK agreed to provide KBEL with a secured term loan facility of £1,000,000 (the “HUK Loan Agreement”) which was made available, upon the fulfillment of certain conditions precedent, on October 9, 2013 and to be repaid in full by October 9, 2016. Interest on the loan is payable quarterly in arrears on the outstanding balance of the loan at the rate of 5% above the Bank of England base rate. Prepayment is permitted. Upon an event of default, as defined in the HUK Loan Agreement, if HUK and KBEL fail to agree on a payment plan acceptable to HUK, HUK may, among other remedies, declare the loan immediately due and repayable or exercise its right to an exclusive license pursuant to the Sub-Licence Agreement as described and defined in the HUK Loan Agreement.

 

Royal Bank of Scotland Facility

 

On April 26, 2005, Royal Bank of Scotland Commercial Services Limited (“RBS”) provided KBEL with an approximately $2.8 million (£1,750,000) maximum revolving line of credit with an advance rate based on 80% of KBEL’s qualified accounts receivable. This facility has a minimum maturity of twelve months, but is automatically extended unless terminated by either party upon six months’ written notice.

 

Weighted Average Interest

 

The weighted average interest rates paid on our US indebtedness was 6% for the first nine months of 2015 and 2014. For loans primarily associated with our Foreign Territory, the weighted average rate paid was 4% and 5% for the first nine months of 2015 and 2014 respectively.

 

Current Ratio

 

On September 30, 2015, our ratio of current assets to current liabilities was 0.35 to 1.00 and our ratio of total assets to total liabilities was 0.93 to 1.00. On September 30, 2014, our ratio of current assets to current liabilities was 0.53 to 1.0 and our ratio of total assets to total liabilities was 1.0 to 1.0.

 

Restricted Net Assets

 

The Company’s wholly-owned subsidiary, UBIUK, had undistributed losses of $508,100 as of September 30, 2015. 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 $1,511,600.

 

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, 2015. 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, 2015.

 

 

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 fiscal quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II

 

OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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 the exercise of judgment.

 

On September 26, 2014, The New Buffalo Brewing Co., Inc. (“NBB”) initiated an action against Releta in the Supreme Court of the State of New York for the County of Erie to recover damages for alleged breaches of a Brewing Production Agreement between NBB and Releta dated September 6, 2013 (the “Brewing Production Agreement”), as well as for a declaration rescinding and nullifying the Brewing Production Agreement, and, in case of Releta’s failure to answer or appear, damages resulting from the alleged breaches, rescission of the Brewing Production Agreement, attorneys’ fees and any other relief deemed proper by the court. In a demand letter to Releta dated October 16, 2014, NBB demanded payment of the sum of $500,000. The Company has engaged a law firm in New York to respond.

 

On June 3, 2015, IAE International Aero Engines AG (“IAE”) served the Company with a complaint (the “Complaint”), filed in Marin County Superior Court, California (the “Court”), which requests, among other things, (i) that the Court recognize and enforce a foreign judgment against an Indian corporate entity (which is an affiliate of the Company), the alleged judgment debtor, and (ii) that such judgment be made enforceable against any assets of the Company (and of the other defendants) that are located in California, on the alleged ground that the Company (along with the other defendants) is an “alter ego” of the alleged judgment debtor. Along with the Complaint, IAE also served the Company with an ex parte application for a right to attach order and a writ of attachment, and, in the alternative, a temporary protective order (collectively, the “ex parte application”) to, among other things, stop the Company from making certain transfers to related parties other than in the ordinary of business.

 

The ex parte application came up for hearing before the Court on June 5, 2015. At the conclusion of that hearing, the Court: (i) issued a temporary protective order of limited scope, providing that to the extent the Company had possession, custody or control of any stock belonging to the alleged judgment debtor (which the Company does not), it should not transfer said stock out of Marin County, California until 5:00 PM (Pacific Time), June 9, 2015; and (ii) continued the hearing on the ex parte application to 3:00 PM on June 9, 2015. At the conclusion of the continued hearing on June 9, 2015, the Court denied the ex parte application for a writ of attachment and dissolved the limited temporary protective order.

 

The Company believes that the allegations in the Complaint are without merit and will continue to vigorously defend against the lawsuit.

 

As discussed in more detail in the Company’s Current Report on Form 8-K filed on June 9, 2015, the Company has discussed with the Lender the allegations set forth in the Complaint and the ex parte application and, as of the date of this Quarterly Report, the Company has not received any notice or other communication from the Lender that the Lender intends to exercise any of the remedies available to it under the Credit and Security Agreement in connection therewith.

 

 

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.

 

Item 1A. Risk Factors

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

The discussion provided under the heading “Liquidity and Capital Resources” with respect to our default under our agreement with MB Financial, as successor in interest to Cole Taylor, and the discussion under the subheading “MB Financial Facility,” under the heading “Description of Our Indebtedness,” both set forth in Item 2 of PART I of this Quarterly Report, are hereby incorporated by reference in their entirety.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit Number		Description
10.1	(A)	Promissory Note of Mendocino Brewing Company, Inc., in favor of Catamaran Services, Inc., dated June 30, 2015.
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.

 

NOTE: Each Exhibit listed above that is annotated with one of the following letters is incorporated by reference from the following sources:

 

(A)	MBC’s Current Report on Form 8-K filed as of July 7, 2015.

 

 

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 16, 2015	By:	/s/ Yashpal Singh
		Yashpal Singh
		President and Chief Executive Officer
		(Principal Executive Officer)
Dated: November 16, 2015	By:	/s/ Mahadevan Narayanan
		Mahadevan Narayanan
		Chief Financial Officer and Secretary
		(Principal Financial and Accounting Officer)

 

 

Exhibit 31.1

 

CERTIFICATION PURSUANT TO RULE 13a-14(a) AND 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934 

 

I, Yashpal Singh, certify that:

 

	1.	I have reviewed this quarterly report on Form 10-Q of Mendocino Brewing Company, Inc.;
	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 16, 2015
	/s/ Yashpal Singh
	Yashpal Singh,
	Chief Executive Officer
	(Principal Executive Officer)

 

  

 

Exhibit 31.2

 

CERTIFICATION PURSUANT TO RULE 13a-14(a) AND 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934 

 

I, Mahadevan Narayanan, certify that:

 

	1.	I have reviewed this quarterly report on Form 10-Q of Mendocino Brewing Company, Inc.;
	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 16, 2015
	/s/ Mahadevan Narayanan
	Mahadevan Narayanan,
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

 

In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yashpal Singh, Chief Executive Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 

	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

Date: November 16, 2015
	By:	/s/ Yashpal Singh
	Name:	Yashpal Singh
	Title:	Chief Executive Officer
		(Principal Executive Officer)

 

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

 

In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mahadevan Narayanan, Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 

	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

Date: November 16, 2015
	By:	/s/ Mahadevan Narayanan
	Name:	Mahadevan Narayanan
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)