UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 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 our Charter)
| CALIFORNIA |
|
68-0318293 |
| (State
or Other Jurisdiction of |
|
(IRS
Employer |
| Incorporation
or Organization) |
|
Identification
No.) |
1601
AIRPORT ROAD, UKIAH, CA95482
(Address
of principal executive offices)
(707)
463-2627
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act: none
Securities
registered pursuant to Section 12(g) of the Act:
Common
stock, no par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
No [X]
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
Date 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 if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company.
| 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 Act). Yes [ ] No [X]
The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the average
of the closing bid and asked prices for such stock as reported by the OTC Markets Bulletin Board on June 30, 2015 was approximately
$555,700.
The
number of shares of the registrant’s Common Stock outstanding as of March 15, 2016 was 12,611,133.
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
FORWARD-LOOKING
INFORMATION
This
Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this Annual Report as the
Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates
and predictions about future results and events. These statements may use words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “predict,” “project” and similar expressions
as they relate to us or our Management. Unless the context otherwise requires, references in this Annual Report to “we,”
“us,” “our,” or the “Company” refer to Mendocino Brewing Company, Inc. together with its subsidiaries,
while the term “MBC” is used to refer to Mendocino Brewing Company, Inc. as an individual entity. When we make forward-looking
statements, we are basing them on our Management’s beliefs and assumptions, using information currently available to us.
These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties
and assumptions discussed in this Annual Report. Factors that can cause or contribute to differences in actual results include
those described under the headings “Risk Factors” and “Management Discussion and Analysis and Plan of Operation.”
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual
results may vary materially from what we projected. All subsequent written and oral forward-looking statements attributable to
us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider
the factors identified in this Annual Report, which would cause actual results to differ before making an investment decision.
We are under no duty to update any of the forward-looking statements after the date of this Annual Report or to conform these
statements to actual results.
In
addition, such statements could be affected by general industry and market conditions and growth rates, and by general economic
and political conditions in the markets in which we compete. Readers are cautioned not to place undue reliance on these forward-looking
statements.
PART
I
ITEM
1. BUSINESS.
OVERVIEW
Mendocino
Brewing Company, Inc., a California corporation, was founded in 1983 as a limited partnership and converted to a corporation in
1993. We were one of the first modern craft brewers, having opened the first new brewpub in California and the second in the United
States following the repeal of Prohibition. We have been recognized for our innovations in the brewpub concept, our craft brew
style and our distinctive labels.
We
operate in two geographic markets, (i) the United States and Canada (referred to in this Annual Report as the “North American
Territory”) and (ii) Europe (including Austria, Belgium, Denmark, Ireland, Italy, the Netherlands, France, Finland, Germany,
Greece, Iceland, Liechtenstein, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom) (referred to
in this Annual Report as the “Foreign Territory”). Our Foreign Territory operations are primarily in the United Kingdom,
which is also referred to in this Annual Report as the “UK”.
Our
operations in the North American Territory consist primarily of brewing and marketing proprietary craft beers, including Red Tail
Ale, Blue Heron Pale Ale, Black Hawk Stout, Eye of the Hawk Select Ale, and White Hawk Original IPA, and a licensed international
specialty beer, Kingfisher Premium Lager. For distribution in the North American Territory, we brew our brands in our own facilities,
which are located in Ukiah, California and Saratoga Springs, New York. In the North American Territory, we distribute our products
in most of the states, the District of Columbia and Canada.
Our
operations in the Foreign Territory, which are conducted through our wholly-owned subsidiary, United Breweries International (U.K.)
Limited (“UBIUK”) and UBIUK’s wholly-owned subsidiary, Kingfisher Beer Europe Limited (“KBEL”),
consist primarily of the marketing and distribution of Kingfisher Premium Lager through Indian restaurants, chain retail grocers,
liquor stores, and other retail outlets (such as convenience stores). We hold an exclusive license, expiring in October 2018,
from United Breweries Limited, an Indian public limited company (“UB Limited”) to brew and distribute Kingfisher Premium
Lager in certain areas of the Foreign Territory. The Chairman of our board of directors, Dr. Vijay Mallya, is also the Chairman
of the board of directors of UB Limited.
All
of our beers sold in the Foreign Territory (except for beers sold in Germany) are brewed for us under a subcontract with Heineken
UK Limited (“HUK”). This subcontract 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 our products to customers. KBEL contracts with HUK for distribution of the product in the Foreign
Territory in exchange for a fee paid to HUK, except in Germany, where beers are manufactured and distributed pursuant to a separate
contract with a different entity. In addition, KBEL sublicenses to HUK the exclusive right to sell Kingfisher Premium Lager, for
a royalty fee, to certain large retail customers, including, but not limited to, Sainsbury’s, Asda, and Tesco.
COMPANY
BACKGROUND
We
first bottled our flagship brand, Red Tail Ale, in December 1983, and conducted our initial public offering in February 1995.
We completed construction of our brewery in Ukiah, California in May 1997. This facility, which has a current annual packaging
capacity of 100,000 brewers’ barrels (“bbl.”) assuming one eight hour shift per day, was designed to enable
our production capacity at such facility to be expanded to 200,000 bbl. per year with additional equipment.
Our
New York subsidiary, Releta Brewing Company, LLC, d/b/a Ten Springs Brewery (“Releta”), which is located in Saratoga
Springs, New York, commenced production in our leased facilities in February 1998. This facility, which has a current annual packaging
capacity of 100,000 bbl. assuming one eight hour shift per day, was also designed to enable our production at such facility to
be expanded to 200,000 bbl. per year with additional equipment.
In
1998, we purchased certain assets from Carmel Brewing Company, Inc., a California corporation (“Carmel Brewing”).
We continue to bottle and sell beer under the Carmel Brewing name.
In
2001, we acquired UBIUK together with UBIUK’s wholly-owned subsidiary, KBEL, from Inversiones Mirabel, S.A., a Panamanian
corporation, (“Inversiones”) in exchange for MBC stock then valued at approximately $5,500,000 (the “UBIUK Acquisition”).
UBIUK and KBEL primarily market, sell, and distribute Kingfisher Premium Lager in the Foreign Territory. Kingfisher Premium Lager,
which is the flagship brand of UB Limited, is a recognized international brand, with widespread distribution outside our geographic
markets.
We
also acquired the United States brewing and distribution rights for Kingfisher Premium Lager as a result of the UBIUK Acquisition.
We brew Kingfisher Premium Lager in our Saratoga Springs, New York and Ukiah, California facilities. We subcontract to HUK the
right to brew Kingfisher Premium Lager for distribution in the Foreign Territory which subcontract expires in October 2018.
In
2005, United Breweries of America, BVI, a British Virgin Islands corporation (“UBA-BVI”), an indirect beneficial owner
of a majority of our outstanding shares, merged into United Breweries Holdings, Ltd., an Indian public limited company (“UBHL”).
As a result of the merger of UBA-BVI into UBHL, UBHL acquired indirect control over approximately 78% of our then outstanding
shares. Dr. Vijay Mallya, our Chairman of the Board, is also the Chairman of the board of directors of UBHL.
In
2010, we purchased certain brand-related assets from Golden West Brewing Company, a California corporation and Beautiful Brews
Inc., a Florida corporation, including trademarks, trade names, and other brand-related assets related to the Butte Creek brands
of organic ales and Honey Amber Rose ale, respectively. MBC pays royalties based on sales of products which use such assets.
INDUSTRY
OVERVIEW
NORTH
AMERICAN MARKET
We
are a brewer in the craft brewing segment of the United States beer industry. The United States domestic beer market consists
of a number of market categories, including low-priced, premium, super premium, lite, import, and specialty/craft beers. In the
North American Territory, we compete in the specialty/craft category which the Brewers Association estimates sold approximately
25.8 million barrels in the year 2014. Craft beers are typically all malt, characterized by their full flavor, and are usually
produced using methods similar to those of traditional European brews. The domestic beer market is dominated by large domestic
and international brewers. Since our formation in the 1980s, the rate at which the craft beer segment has grown has fluctuated
over the years. The craft brewing segment is currently growing. The number of craft brewers has increased significantly in the
last two years and the large domestic brewers produce their own fuller-flavored products to compete against craft beers.
EUROPEAN
MARKET
The
vast majority of our sales in the Foreign Territory are made in the United Kingdom. Sales in the Foreign Territory primarily consist
of sales of Kingfisher Premium Lager. UBIUK has production and distribution rights for Kingfisher Premium Lager in the United
Kingdom and the other European Union countries pursuant to an agreement with UB Limited and sublicense such rights to KBEL.
Within
the Foreign Territory, our products are primarily distributed through Indian restaurants using restaurant trade distributors.
In addition, our products are distributed through other retail outlets such as supermarkets, liquor stores, and licensed shops
and convenience stores. For more information on our distribution methods and our relationship with HUK, please refer to the discussion
under the “Overview” heading above.
OUR
BUSINESS
We
are a pioneering brewer in the specialty craft brewing segment in the United States. We produce high quality ales and lagers in
our own breweries in the United States. We have production and distribution rights to Kingfisher Premium Lager in the European
Union, Canada and the United States. Generally, sales are made through distributors.
PRODUCTS
We
produce a variety of flavorful craft beers by using high quality ingredients in our brewing process. For distribution in the North
American Territory, we brew ten ales, one wheat beer, two lagers, two pilsners and four stouts, all on a year-round basis, and
three seasonal brews. All of these products are brewed at our production facilities in Ukiah, California, and Saratoga Springs,
New York. The locations of the breweries are well positioned to serve the large markets on the East and West coasts.
In
the Foreign Territory, we currently distribute Kingfisher Premium Lager. Kingfisher Premium Lager is the leading Indian beer by
sales volume in India and abroad.
Our
principal products are as follows:
RED
TAIL ALE, a full flavored amber ale, is our flagship brand. It is available in 12 oz. six-packs and twelve-packs, half-barrel
kegs, and 5 gallon kegs.
BLUE
HERON PALE ALE is a golden ale with a full body and a distinctive hoppy character. It is available in 12 oz. six-packs and
twelve-packs, half-barrel kegs, and 5 gallon kegs.
BLACK
HAWK STOUT is a rich bodied stout with big traditional flavors. It is available in 12 oz. six-packs, half-barrel kegs, and
5 gallon kegs.
EYE
OF THE HAWK SELECT ALE is a rich-bodied amber ale. It is available in 12 oz. six-packs, half-barrel kegs, and 5 gallon kegs.
WHITE
HAWK ORIGINAL IPA is a heavily hopped ale with a distinctive hoppy character and bold malt flavor. It is available in 12 oz.
six-packs and half-barrel kegs.
KINGFISHER
PREMIUM LAGER is a conventionally fermented specialty lager with a smooth crisp taste. In the United States, Kingfisher Premium
Lager is available in 12 oz. six-packs, 22 oz. bottles, half-barrel kegs, and 5 gallon kegs as well as on tap in a few pubs and
Indian restaurants. In Canada, Kingfisher Premium Lager is available in 12 oz. six-packs and 22 oz. bottles. Kingfisher Premium
Lager is available year-round in 330ml and 660ml bottles in multi-packs as well as in a variety of keg sizes in the United Kingdom,
Ireland, and continental Europe. In the United Kingdom, it is also available on tap in Indian restaurants.
DISTRIBUTION
METHODS
In
the North American Territory, our products are sold through wholesale distributors to consumers at supermarkets, warehouse stores,
liquor stores, taverns and bars, restaurants and convenience stores.
Our
products are delivered to retail outlets by independent distributors whose principal business is the distribution of beer, and
in some cases other alcoholic beverages, and who typically also distribute one or more national beer brands. Together with our
distributors, we market our products to retail outlets and rely on our distributors to provide regular deliveries, to maintain
retail shelf space, and to oversee timely rotation of inventory. We also offer a variety of ales and lagers directly to consumers
at a tasting room attached to the Saratoga Springs brewery in New York and at our ale house in Ukiah, California.
In
the Foreign Territory, our products are distributed primarily through Indian restaurants by restaurant trade distributors and
also through supermarkets, liquor stores, and licensed shops and convenience stores. The majority of our restaurant sales are
through our on-tap draft installations. KBEL exports Kingfisher Premium Lager, for the most part pursuant to our distribution
agreement with HUK, to European markets inside and outside of the United Kingdom, and our sales growth in those markets typically
correlates with the establishment and proliferation of Indian restaurants in such locations.
Distribution
and retailing of products in Canada involves a wide range and varied degree of government control through provincial liquor boards.
We distribute our products through provincial liquor control boards or independent distributors, as required in each province.
COMPETITION
In
the North American Territory, we compete against a variety of brewers in the craft beer segment, including brewpubs, microbrewers,
regional craft brewers, and craft beer products of major national breweries. There has been a significant increase in the number
of craft brewers in the last two years. Additionally, the entire craft beer segment competes to some extent with other segments
of the United States beer market, including major national brands like Budweiser and Miller and imported beers such as Heineken
and Becks.
The
lager market in the United Kingdom is dominated by major international brands such as Stella Artois, Carling, Heineken, Budweiser,
and Becks, in the restaurant and pub sectors and in sales through supermarkets and other retail outlets. Our products are marketed
through Indian and other restaurants, major supermarket chains, smaller chains, and individual stores. In all of these sectors,
we face competition from other ethnic and international brands produced by local and large international brewers. We promote Kingfisher
Premium Lager as the worldwide No. 1 selling premium Indian lager. We promote the brand through our significant participation
in events directed at the Indian restaurant trade and volume-driven promotions in supermarkets and retail chains in the United
Kingdom.
In
recent years, the larger domestic and international brewers have introduced fuller-flavored beers meant to compete with craft
beer offerings. The participation by larger domestic and international brewers increases competition and price sensitivity within
the craft beer segment. Craft brewers compete primarily on product quality, taste profile, and consistency.
We
face tough competition in the North American Territory as well as in the Foreign Territory. We compete with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf and tap space in retail establishments. We must also
vie for marketing focus by our distributors and their customers, all of which also distribute and sell other beer and alcoholic
beverage products. Many of our competitors’ financial and marketing resources and distribution networks are substantially
greater than ours. Moreover, the introduction of new products by competitors that compete directly with our products, or that
diminish the importance of our products to retailers or distributors, may have a material adverse effect on our results of operations,
cash flows and financial position.
SOURCES
AND AVAILABILITY OF RAW MATERIALS
Production
of our beverages requires various processed agricultural products, including malt and hops. We fulfill our commodities requirements
through purchases from various sources, some through contractual arrangements and others on the open market. In the Foreign Territory,
purchases of commodities are currently made by HUK, which has been brewing our products on a contract basis beginning October
2013. If we are unable to enter into new contracts to purchase materials on commercially reasonable terms, our results of operations,
cash flows and financial position may be materially adversely affected. We believe that the commodity markets will experience
price, availability and demand fluctuations. The price and availability of raw materials will be determined by, among other factors,
the level of crop production, weather conditions, demand, and government regulations and legislation affecting agriculture.
Our
major suppliers in North America are Great Western Malting Co., Yakima, WA, and Canada Malting Company, Montreal, Canada (malt);
Hop Union LLC, Yakima, WA and S.S. Steiner Inc., New York, NY (hops); Gamer Packaging Inc., Minneapolis, MN (bottles and crowns);
Alliance Packaging, Seattle, WA, and Buckeye Corrugated, Syracuse, NY (cartons); Graphic Packaging International, Vancouver, WA
and Keystone Paper and Box Company, Inc., South Windsor, CT (carriers); and DWS Printing Associates, Bay Shore, NY (labels).
Our
major supplier for the Foreign Territory is HUK, which supplies on a contract basis all of our products that are sold in the Foreign
Territory. We do not directly purchase any agricultural commodities or other products for use in the Foreign Territory.
DEPENDENCE
ON MAJOR CUSTOMERS
Sales
to our top five customers in 2015 totaled $4,854,000 (approximately 15% of our sales), as compared to sales to our top five customers
in 2014 which totaled $5,466,700 (approximately 16% of our sales).
No
individual customer accounted for more than 5% of our total sales during fiscal year 2015 or 2014.
Seasonality
Our
product sales are seasonal, with the first and fourth quarters historically being the slowest and the rest of the year typically
having stronger sales. Sales volume may be affected by weather. Accordingly, our results for any individual quarter may not be
indicative of the results that may be achieved for the full fiscal year.
Sales
and Marketing
We
market our products through various promotional programs with our distributors and wholesalers. Our sales and marketing staff
offer support to the wholesalers and retailers by educating them about our products. Our products are promoted at local art, music
and food festivals, and restaurants and pubs. We operate a tasting room at our Saratoga Springs brewery and our ale house in Ukiah,
California. We utilize signs, tap handles, coasters, logo glassware and posters to promote our products in bars, pubs and restaurants.
We
participate in various consumer promotion programs, primarily price discounts. We occasionally advertise our products in print
media.
TRADEMARKS
We
have United States federal trademark registrations on the principal register of the United States Patent and Trademark Office
for the following marks: MENDOCINO BREWING COMPANY word mark (Reg. No. 2,441,141), RED TAIL ALE word mark (Reg. No. 2,032,382),
RED TAIL design mark (Reg. No. 2,011,817), BLUE HERON PALE ALE design mark (Reg. No. 2,011,816), EYE OF THE HAWK SELECT ALE word
mark (Reg. No. 1,673,594), YULETIDE PORTER word mark (Reg. No. 1,666,891), PEREGRINE GOLDEN ALE word mark (Reg. No. 2,475,522),
HOPLAND BREWERY word mark (Reg. No. 2,509,464), BLACK EYE ALE word mark (Reg. No. 2,667,078), BLACK HAWK STOUT word mark (Reg.
No. 3,205,652), BLUE HERON word mark (Reg. No. 3,818,385), HONEY AMBER ROSE design mark (Reg. No. 3,276,229), REVOLUTION X (Reg.
No. 3,237,471), ORGANIC PIONEERS (Reg. No. 3,339,179), THE OFFICIAL BEER OF PLANET EARTH (Reg. No. 3,339,151), YOSEMITE (Reg.
No. 4,064,887), and CATCH 22 (Reg. No. 3,814,885).
We
use the BLUE HERON word mark (Reg. No. 3,818,385) under a concurrent use agreement with Bridgeport Brewing Company which gives
us the exclusive right to use the BLUE HERON word mark throughout the United States with the exception of Oregon, Idaho, Washington,
and Montana. Bridgeport Brewing Company, the other concurrent use party, has the exclusive right to use the BLUE HERON word mark
in those states.
We
claim common law trademark rights in and to the following marks: TALON BARLEY WINE ALE word mark, TALON BARLEY WINE ALE design
mark, TRAINWRECK word mark, HELLTOWN word mark, and BUTTE CREEK BREWING word mark.
We
acquired the trademark CARMEL BREWING COMPANY and any other variation of the same as previously used by Carmel Brewing Company
and claim common law trademark rights in and to all such marks.
LICENSE
AND ROYALTY AGREEMENTS
UBIUK
holds the exclusive brewing and distribution rights for Kingfisher Premium Lager in the United Kingdom, Ireland, continental Europe,
and Canada through a licensing agreement with UB Limited. UBIUK licenses such rights to KBEL. The licensing agreement between
UBIUK and UB Limited is currently scheduled to expire in October 2018.
In
July 2001, we entered into the Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., pursuant to
which we obtained a royalty-free, exclusive license to use the Kingfisher trademark and trade name in connection with the brewing
and distribution of beer in the United States. This agreement is scheduled to expire in October 2018.
Since
October 2013, KBEL has licensed to HUK the exclusive right to brew, keg, bottle, can, label, and package all beers and related
products sold under the Kingfisher trademark in the United Kingdom, Ireland, and continental Europe. In exchange for certain exclusive
resale rights, HUK pays a royalty fee to KBEL for certain sales. The price KBEL pays to HUK for brewing Kingfisher Premium Lager
for distribution in the United Kingdom is set by a formula which varies according to the applicable duty on Kingfisher Premium
Lager and other factors. (For additional information see “Item 13. — Certain Relationships and Related Transactions
- Brewing Agreement”.) Under its terms, this agreement will expire in October 2018.
GOVERNMENTAL
REGULATION
Our
North American Territory operations are subject to licensing by local, state and federal governments, as well as to regulation
by a variety of state and local agencies. We are licensed to manufacture and sell beer by the Departments of Alcoholic Beverage
Control in California and New York. A federal permit from the United States Treasury Department, Alcohol and Tobacco Tax and Trade
Bureau (the “TTB”) (formerly the Bureau of Alcohol, Tobacco, and Firearms) allows us to manufacture fermented malt
beverages. To keep these licenses and permits in force we must pay annual fees and submit timely production reports and excise
tax returns. We must give these regulatory agencies prompt notice of any changes in our operations, ownership, or company structure.
The TTB must also approve all product labels, which must include an alcohol use warning. These agencies require that individuals
owning equity securities totaling in the aggregate 10% or more of our outstanding securities be investigated as to their suitability
of character. Our production operations must also comply with the Occupational Safety and Health Administration’s workplace
safety and worker health regulations and comparable state laws. Management believes that we are presently in compliance with the
aforementioned laws and regulations. In addition, we have implemented our own voluntary safety program. Our Ukiah ale house is
regulated by the Mendocino County Health Department, which requires an annual permit and conducts spot inspections to monitor
compliance with applicable health codes. In Canada, provincial governments regulate the beer industry, particularly the pricing,
mark-up, container management, sale, distribution and advertising of beer. Distribution and retailing of products in Canada involves
a wide range and varied degree of government control through provincial liquor boards. We distribute our products in Canada through
provincial liquor control boards or independent distributors, as per the applicable regulation for each province.
In
the United States, for brewers producing less than 2,000,000 barrels (or bbl.) per year, the federal excise tax rate is $7.00
per bbl. for up to 60,000 bbl. per year and $18.00 per bbl. for over 60,000 bbl. The California excise tax rate is $6.20 per bbl.
The State of New York presently imposes on brewers an excise tax of $4.34 per bbl.
Our
operations in the Foreign Territory are subject to regulation by United Kingdom and European laws, as well as by the laws of various
individual countries in which our products are distributed. Due to the current contract brewing arrangement in the Foreign Territory,
HUK, rather than the Company, is subject to various laws of the European countries (other than Germany) regarding production,
bottling, packaging, and labeling. Our products in Germany are manufactured and distributed by contractual partners in Germany
who are subject to such laws in Germany.
COMPLIANCE
WITH ENVIRONMENTAL LAWS
We
are subject to various federal, state, and local environmental laws which regulate the use, storage, handling, and disposal of
various substances. We have not received any notice from any governmental agency relating to our violation of any applicable environmental
law.
Our
waste products consist of process water, spent grains, hops, glass and cardboard. We have instituted a recycling program for our
office paper, newspapers, magazines, glass, and cardboard at minimal cost to us. We sell or give away our spent grain to local
cattle ranchers.
Ukiah.
We built our own wastewater treatment plant for the Ukiah facility. As a result, we have reduced our sewer hook-up fees at that
location. If our discharge exceeds 55,000 gallons per day, which Management does not expect to occur until annual capacity exceeds
100,000 bbl., we may be required to pay additional fees. The approximate operating costs of the plant are between $6,000 and $10,000
per month, which may increase with increased production. We have contracted to have the liquid sediment that remains from the
treated wastewater trucked to a local composting facility at a cost of between $4,500 and $5,500 per month. We obtained a Mendocino
County Air Quality Control Permit to operate a natural gas fired boiler in Ukiah; this permit is valid until August 30, 2016.
Management expects this permit to be renewed each year.
Saratoga
Springs. Our solid waste materials consist of spent grain, cardboard, glass, and liquid waste. We have instituted a recycling
program for cardboard, office paper and glass at minimal cost to us. Spent grain is given away to local cattle dairy farms free
of charge. We pay approximately $2,500 per month in sewer fees for liquid waste. We follow and operate under the rules and regulations
of the New York Department of Environmental Conservation for Air Pollution Control.
Various
states in which we sell our products, including California and New York, have adopted certain restrictive packaging laws and regulations
for beverages. These laws require deposits on packages. Such laws have not had a significant effect on our sales. The adoption
of similar legislation by Congress, a substantial number of states or additional local jurisdictions, might require us to incur
significant capital expenditures for compliance. We believe we are in compliance with all applicable Canadian laws and regulations.
In
general, European packaging regulations are covered by specifications provided by the European Union; we believe we are in compliance
with such specifications.
Dram
Shop Laws
The
serving of alcoholic beverages to a person known to be intoxicated may, under certain circumstances, result in the server being
held liable to third parties for injuries caused by the intoxicated customer. Our brewpub and tasting room have limited hours
and our employees have knowledge of this issue. Large awards in excess of, or not covered by, our insurance coverage could adversely
affect our financial condition.
EMPLOYEES
As
of December 31, 2015, MBC had 48 full-time and 12 part-time employees in the United States, including 9 in management and administration,
39 in brewing and production operations, 4 in retail and tavern operations and 8 in sales and marketing positions. In England,
UBIUK and KBEL together had 29 full-time employees as of December 31, 2015, including 18 in sales and marketing and 11 in managerial
and administrative positions. Management believes that our relationship with our employees is generally good.
Approximately
15 employees currently engaged in brewing, bottling, warehousing, and shipping at the Ukiah brewery are represented by Teamsters
Local No. 896, International Brotherhood of Teamsters, AFL-CIO (the “Union”). Under our collective bargaining agreement
with the Union, all such 15 employees’ positions must be held and filled by members of the Union. The collective bargaining
agreement expires on July 31, 2018.
RESEARCH
AND DEVELOPMENT
We
have not spent a material amount during the last two fiscal years on research and development activities or on customer-sponsored
research activities relating to the development of new products, services or techniques, or the improvement of existing products,
services or techniques.
ITEM
1A. RISK FACTORS.
In
addition to the other information about risks in this Annual Report on Form 10-K, described below are the risks and uncertainties
that we believe are most likely to be material to our business and results of operations. Our business operations and results
may also be adversely affected by additional risks and uncertainties not presently known, or which we currently deem immaterial,
or which are applicable in general to the industries in which we compete or to the economies in which we sell our products. Any
of the following risks or uncertainties might cause our business, financial condition, results of operations or cash flows to
suffer.
LACK
OF PROFITABLE OPERATIONS: We have incurred a net loss in the North American Territory since 2012. From 2005 to 2011, operations
in the Foreign Territory resulted in a net loss. We have not incurred a net loss in the Foreign Territory since then. We believe
our losses are attributable to low sales volume and high operating expenses. Our business is also subject to certain fixed and
semi-variable operating costs, which, when combined with the difference between current levels of production and maximum production
capacity in the North American Territory, may cause our gross margins to be sensitive to small increases or decreases in sales
volume. We may not be able to offset such increased expenses with comparable price increases in our products, which could also
impact our gross margins. We contract brew products for other brewers in an effort to use our capacity. We may not be successful
in our efforts to increase sales volume of our brands or contract brands and capacity utilization rates. It is uncertain when,
if at all, our operations in the North American Territory will become profitable once again. Future operating losses may have
a material adverse effect on our cash flows and financial position.
LIQUIDITY:
Low utilization of the production capacity at our Ukiah and Saratoga Springs facilities and continued losses from our North American
Territory operations place demands on our working capital. We have loans, lines of credit, other credit facilities, and lease
obligations with various creditors. We may find it difficult to continue our operations, at least in the short term, if any of
the following occur: a breach of any loan provision by us that leads to our default, an inability of any lender to continue to
offer or renew credit facilities, the refusal of any lenders to whom we presently are in default to continue to provide credit
to us, our inability to refinance credit facilities when and as they become due, or an attempt by one of our creditors to exercise
its rights to certain of our tangible or intangible assets which have been used as collateral or which have been pledged as security
for our obligations.
We
rely on short and long-term debt to meet our working capital needs. As described in the “Description of Our Indebtedness”
section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms of the Company’s
loan agreement (“Agreement”) with MB Financial Bank, successor in interest to Cole Taylor Bank, an Illinois banking
corporation (“MB Financial”), require that we meet certain financial covenants. Failure to meet the covenants is an
event of default under the Agreement. On September 18, 2013, MBC and Releta received a notice (the “Default Notice”)
from MB Financial regarding its intention to exercise certain rights with respect to events of default of the Company pursuant
to the Agreement. Under the Agreement, upon the occurrence of an event of default, all of MBC’s and Releta’s obligations
under the Agreement may, at the option of MB Financial, be declared, and immediately shall become, due and payable, without notice
of any kind. MB Financial has elected under the Agreement to charge a default interest rate equal to two percent (2%) per annum
in excess of the interest rate otherwise payable under the Agreement effective September 1, 2013.
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 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, MB Financial 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 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 Agreement
dated June 23, 2011, as previously amended on March 29, 2013.
The
Second Amendment reduces the maximum amount of the Company’s revolving line of credit with MB Financial (the “Revolver”)from
$4,119,000 to $2,500,000. The Second Amendment also changes 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
(“Borrower”) pursuant to the Revolver. Pursuant to the 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.
MB
Financial has not waived the events of default described in the Default Notice, the Second Default Notice or the Third Default
Notice and has reserved all other available rights and remedies under the Agreement, certain other related documents and applicable
law. MB Financial could declare the full amount owed under the Agreement due and payable at any time for any reason or no reason.
The Company has not received any further notice or other communication from MB Financial that it intends to exercise any of the
remedies available to it under the Agreement in connection with the events of default. However, the Agreement expires on June
23, 2016. The exercise of additional remedies by MB Financial or its failure to renew the Agreement 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.
Rates
of interest on our credit facilities are variable based on the prime lending rates in the United States and the United Kingdom.
Any increase in the prime lending rates would increase our interest expense and could have a material adverse effect on our financial
position and results of operations.
The
Agreement contains covenants that limit our near-term capital expenditures. Maintaining our facilities or introducing new
products or packaging may require incremental capital expenditures; however, per the terms of the Agreement, our capital expenditures
will be limited to specified amounts (based on a formula). If the capital expenditures necessary to maintain our facilities or
bring new products or packaging to market are greater than the amounts to which we are limited by this arrangement, our ability
to maintain or increase sales growth could be impaired, which could materially adversely affect our business.
The
Company received a letter dated November 11, 2013, from UBHL 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. Such additional investment would be 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. If we are unable to come to a final agreement
with UBHL on the terms of the proposed investment or UBHL does not agree to provide such additional investment, it may result
in a material adverse effect on our financial position and on our ability to continue operations
On
March 5, 2015, UBHL, MBC’s indirect majority shareholder, issued a letter of comfort (the “Letter of Comfort”)
to the Company’s accountants, 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. 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 and
is not a legally binding guarantee. 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, it may result in a material adverse effect on our financial position and on our ability to continue
operations.
On
December 9, 2015, the Company engaged Gordian Group, LLC (“Gordian Group”) to serve as the Company’s exclusive
investment banker to assist the Company in evaluating, exploring and, if deemed appropriate by the Company, pursuing and implementing
certain strategic and financial options and transactions that may be available to the Company, including a possible debt or equity
capital financing, merger, consolidation, joint venture or other business combination involving, or sale of substantially all
or a material portion of the assets (outside of the ordinary course of business) or outstanding securities of, the Company and/or
its subsidiaries, and/or the acquisition of substantially all or a material portion of the assets or outstanding securities of
another entity (each, a “Financial Transaction”). Gordian Group is a New York-based independent investment banking
firm. While the Company has commenced evaluating its available options, no conclusion as to any specific option or transaction
has been reached, nor has any specific timetable been fixed for this effort, and there can be no assurance that any strategic
or financial option or transaction will be presented, implemented or consummated. The Company intends to use proceeds of any Financial
Transaction to, among other things, repay the amount owed to Lender when it becomes due.
If
we are unable to find any source of funds, it may result in a material adverse effect on our ability to continue operations. For
example, MB Financial may seek to satisfy any outstanding obligations through recourse against the applicable pledged collateral
which may include our real property, fixed assets and current assets. The loss of any material pledged asset would likely have
a material adverse effect on our financial position and results of operations. If we are unable to renew the Agreement or find
an alternate source of funds, this may result in a material adverse effect on our ability to continue operations.
As
described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources – Other Loans and Credit Facilities”, we have a line of credit with Royal Bank of
Scotland Commercial Services Limited (“RBS”), which expires on May 31, 2016. We have engaged in discussions with a
bank which provided an indicative offer to provide a replacement for the RBS line of credit.
COMPETITION:
We face intense competition in both our North American Territory and in our Foreign Territory from competitors in the beer market
and producers of wine and spirits. Certain of our competitors have substantially greater financial and marketing resources and
more extensive distribution networks than we do. In addition, the introduction of new products by existing competitors or new
entrants into the market may impact our market share. Moreover, consumer preference and consumer trends may result in a decrease
in demand for our products which could also have an impact on our results of operations.
RAW
MATERIALS: We are dependent on a limited number of suppliers, and in some instances on a sole supplier, for the majority of the
raw materials and packaging materials used in our North American operations. As a result, an interruption in the supply chain
or refusal of any supplier to provide materials on credit might have an adverse effect on our operations if we were unable to
find an alternative supplier at a comparable price. Unfavorable weather conditions might impact the output of crops necessary
to brew our products which might, in turn, affect our supply chain and increase our costs. We may not be in a position to pass
the entire amount of any cost increase to our customers which may have an adverse effect on our operations.
WATER:
Our brewing operations use significant amount of water. Due to drought conditions in California, there may be a shortage of water.
Any shortage or restricted supply of water will have a material adverse impact on our ability to brew the product and an adverse
effect on our results of operations, cash flows and financial position.
DEPENDENCY
ON CONTRACT BREWING ARRANGEMENTS: We have entered into short term non-binding arrangements with several brewers to brew and package
their brands at our brewing facilities, predominantly at our Saratoga Springs, New York facility. Approximately 33% of our beer
volume in the North American Territory for fiscal year 2015 was comprised of sales made under such contract brewing arrangements.
There is no certainty that our existing arrangements will be extended in the future or that we will be able to enter into other
new arrangements. Any significant variation in contract brewing arrangements could have a material adverse effect on our results
of operations, cash flows and financial position.
DEPENDENCY
ON DISTRIBUTORS: We sell beer (which is physically distributed by HUK in the Foreign Territory and by another contractual partner
in Germany) to independent beer distributors for distribution to retailers. Although the Company currently has arrangements sufficient
to meet our current needs with its wholesale distributors to distribute the products, any sustained growth would require us to
maintain such relationships and possibly enter into agreements with additional distributors. Changes in control or ownership of
the current distribution network could lead to less support of our products. No assurance can be given that we will be able to
maintain or secure additional distributors on terms favorable to us. Our ability to maintain existing distribution arrangements
may be adversely affected by the fact that many of our distributors are reliant on one of the major beer producers for a large
percentage of their revenue and, therefore, they may be influenced by such producers. If our existing distribution agreements
are terminated, we may not be able to enter into new distribution agreements on substantially similar terms, which may result
in an increase in the costs of distribution.
ARRANGEMENT
WITH HUK: KBEL entered into a brewing agreement that grants HUK the exclusive right to brew and package all beers sold under the
Kingfisher trademark in the United Kingdom, and to distribute such products elsewhere in the Foreign Territory. Any interruption
of the brewing, packaging or distribution of our products by HUK for any reason is likely to have a material adverse effect on
our results of operations, cash flows and financial position. In addition, any failure of HUK to comply with any applicable laws
or regulations may have an adverse impact on us.
GROSS
MARGINS: Our gross margins may fluctuate while our expenses remain constant. We anticipate that our future gross margins
will fluctuate and may even decline as a result of many factors, including disproportionate depreciation and other fixed and semi-variable
operating costs, and the level of production at our breweries in relation to current production capacity. Our sales volume is
much lower than our brewing and packaging capacities, leading to underutilization (See “Item 2 – Properties”
below). Both of our brewing facilities incur maintenance and other costs on a level consistent with their maximum capacity rather
than with their current utilization levels. Our high level of fixed and semi-variable operating costs causes gross margin to be
especially sensitive to relatively small increases or decreases in sales volume. Other factors that could affect cost of sales
include changes in freight charges, the availability and prices of raw materials and packaging materials, the mix between draft
and bottled product sales, and federal or state excise taxes and levies. Our inability to align costs and utilization rates affects
our capital, liquidity, and management resources. Failure to adequately align such costs and utilization rates may have a material
adverse effect on our business, financial condition, and results of operations.
MATERIAL
CONTRACT FOR THE SUPPLY OF KEGS: We have entered into an exclusive Keg Management Agreement with MicroStar Keg Management LLC
(“MicroStar”) which expires in September 2019. Under the terms of the agreement with MicroStar, we receive our entire
supply of kegs exclusively from MicroStar. If the agreement is terminated by either party, we are required to purchase from MicroStar
four times the average monthly keg usage for the preceding six-month period. We may need additional funds to purchase those kegs.
An interruption in the supply of kegs or, in the case of termination of the agreement, our failure to obtain the necessary funding
to facilitate such purchases could have a material adverse effect on our business, results of operations, cash flows or financial
position.
SEASONALITY:
Sales of craft beer products in the United States and beer sales in the United Kingdom are somewhat seasonal, with the winter
months historically being the slowest and the summer months generating stronger sales. Our sales volume may also be affected by
weather conditions. Therefore, the results for any quarter may not be indicative of the results that may be achieved for the full
fiscal year. If an adverse event such as a regional economic downturn or poor weather conditions should occur during the second
and third quarters, the adverse impact to our revenues would likely be greater as a result of the seasonal business.
REGULATION
AND TAXATION: The manufacture and sale of alcoholic beverages is a business that is highly regulated and taxed at the federal,
state and local levels. Our operations may be subject to more restrictive regulations and higher taxation compared to non-alcohol
related businesses. For instance, brewery and wholesale operations require various federal, state and local licenses, permits
and approvals. In addition, some states prohibit wholesalers and retailers from holding an interest in any supplier such as the
Company. Violation of such regulations can result in the loss or revocation of existing licenses by the wholesaler, retailer and/or
supplier. The loss or revocation of any existing licenses, permits or approvals, failure to obtain any necessary additional or
new licenses, permits or approvals, or the failure to obtain approval for the transfer of any existing permits or licenses, could
have a material adverse effect on our ability to conduct our business. Because of the many and various licensing and permitting
requirements and the complexity of complying with all such requirements, there is a risk that one or more regulatory authorities
could determine that we have not complied with applicable licensing or permitting regulations, paid the appropriate excise taxes,
or maintained the approvals necessary to conduct business within their respective jurisdictions. There can be no assurance that
any such regulatory action would not have a material adverse effect upon us or our operating results.
Various
jurisdictions frequently propose increasing the federal and/or state excise tax on alcoholic beverages, or certain types of alcoholic
beverages such as flavored malt beverages, either to increase revenues, or discourage purchase by underage drinkers. If adopted,
these measures could affect some or all of our products. If federal or state excise taxes are increased, we may have to raise
prices to maintain present profit margins which may have an impact on our sales volume. Higher taxes on beer may reduce the overall
demand, thus negatively impacting sales of our products. Recently, states have been reviewing the tax treatment for flavored malt
beverages. A change in such treatment could result in increased costs for the Company and decreased sales.
Further
federal or state regulation may be forthcoming that could limit distribution and sales of alcohol products. Such regulation might
reduce our ability to sell our products at retail and at wholesale and could severely impact our business.
CHANGE
IN PUBLIC ATTITUDE AND DRINKING PREFERENCES: There is public concern over alcohol-related social problems, including drunk driving,
underage drinking and health consequences from the misuse of alcohol, including alcoholism. This may adversely affect consumption
of alcoholic beverages. Consumer drinking preferences may also change due to the availability of an increasing variety of products
in the craft brew segment. Any change in government regulation or shift in consumer preference may have an adverse impact on our
operations. Consumer demand for luxury items, including craft beer, is sensitive to downturns in the economy and the corresponding
impact on discretionary spending. Changes in discretionary consumer spending or consumer preferences brought about by factors
such as perceived or actual general economic conditions, job losses and the resultant rising unemployment rate, perceived or actual
decreases in disposable consumer income and wealth and changes in consumer confidence in the economy could significantly reduce
customer demand for craft beer in general, and our products, specifically. Furthermore, any of these factors may cause consumers
to substitute our products with the fuller-flavored national brands or other more affordable alternatives. In either event, decreased
consumer demand would likely have a significant negative impact on our operating results.
ADVERTISING
AND MARKETING EFFORTS: The sales and marketing programs we use to generate demand for our products may be unsuccessful.
In the future this could lead us to lower the prices that we charge for our products, depending on competitive factors in our
various markets. To increase demand for our products, we have participated in price promotions with our wholesalers and retail
customers in most of our markets. The number of markets in which we participate in price promotions and the frequency of such
promotions may change depending upon market conditions. There can be no assurance that our price promotions will be successful
in increasing demand for our products. If consumers were unwilling to accept our products or if general consumer trends caused
a decrease in the demand for beer, including craft beer, it would adversely impact our sales and results of operations. If the
flavored alcohol beverage market, the wine market, or the spirits market continues to grow, this could draw consumers away from
our products and have an adverse effect on sales and results of operations. Furthermore, if beer consumption in general were to
fall out of favor among consumers, or if the beer industry were subjected to significant additional governmental regulation, our
operations could be adversely affected.
INFORMATION
TECHNOLOGY SYSTEMS: We rely upon the capacity, reliability and security of our information technology, or IT, systems across all
of our major business functions, including manufacturing, retail, financial and administrative functions. We also rely on systems
owned and operated by third party business vendors to process payroll for our employees. Our business requires us to use and store
customer, employee and business partner personally identifiable information, which we refer to as PII. This may include names,
addresses, phone numbers, email addresses and contact preferences.
Information
technology helps us operate efficiently and produce our financial statements. If we do not allocate and effectively manage the
resources necessary to sustain our technology infrastructure, we could be subject to transaction errors, processing inefficiencies,
business disruptions or the loss of or damage to intellectual property through security breach. Any inefficiency in our data management
systems could materially impair our ability to effectively plan, forecast and execute our business plan and comply with applicable
laws and regulations. We also face the challenge of supporting our older data management systems and implementing upgrades when
necessary. Any impairment to our data management systems could materially and adversely affect our financial condition, results
of operations, cash flows and the timeliness with which we report our internal and external operating results.
We
require user names and passwords in order to access our information technology systems. We also use encryption and authentication
technologies to secure the transmission and storage of data. We rely on security measures implemented by third party vendors to
protect our PII. These security measures may be compromised as a result of third-party security breaches, employee error, malfeasance,
faulty password management or other irregularities, and result in persons obtaining unauthorized access to our data or accounts.
We
are not aware of any material cyber-attack on our information technology systems. The costs to timely detect and eliminate or
alleviate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant,
and our efforts to address these problems may not be successful and could result in unexpected interruptions, delays, or cessation
of service, and may harm our business operations. Moreover, if a computer security breach affects our systems or results in the
unauthorized release of PII, our reputation and brand could be materially damaged and use of our products and services could decrease.
We would also be exposed to risks of loss, litigation and potential liability, which could result in a material adverse effect
on our business, results of operations and financial condition. We do not have specific insurance coverage against risks related
to cyber incidents.
INSURANCE:
We may experience material losses in excess of, or not covered by, our insurance coverage. We believe that we have a reasonable
amount of insurance coverage for a business of our size and type. There are, however, certain types of catastrophic losses that
are not generally insured because it is not economically feasible to insure against such losses. Should an uninsured loss or a
loss in excess of insured limits occur, such loss could have an adverse effect on our results of operations and financial condition.
LITIGATION:
In the future we may be subject to litigation that could have a material adverse effect on our financial condition and operations.
At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of these proceedings
cannot be predicted. If a plaintiff were successful in a claim against our Company, we could be faced with the payment of a material
sum of money. If this were to occur, it could have an adverse effect on our financial condition.
COMMON
STOCK PRICE: The market for our Common Stock is limited, sporadic and highly volatile. Since our shares do not qualify to trade
on any national securities exchange, the only market currently available, to the extent any trading occurs, is the “bulletin
boards/pink sheets”. It is possible that no active public market with significant liquidity will ever develop. Thus, investors
run the risk of never being able to sell their shares or selling at a depressed price. Our Common Stock price could be subject
to significant fluctuations and/or may decline. Factors that could affect our stock price include, but are not limited to:
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the
entry into, or termination of, key agreements; |
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the
introduction of new products by us or our competitors; |
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future
sales of our Common Stock; |
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variations
in our operating results; |
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changes
in the market values of public companies that operate in our business segment; |
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general
market conditions; and |
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domestic
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DIVIDENDS:
We have never paid cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future.
Instead, we will likely retain future earnings for reinvestment in our business.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
required for smaller reporting companies.
ITEM
2. PROPERTIES.
BREWING
FACILITIES
We
own nine acres of land in Ukiah, California on which our Ukiah brewery is located. Management believes that this facility is adequate
for our current capacity and also provides space for future expansion. MB Financial currently holds a deed of trust on this property
in connection with a loan advanced to us. (See “Item 7. – Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Description of our Indebtedness – MB Financial Facility”). The principal
amount outstanding on the loan as of December 31, 2015 was $2,276,200.
We
have estimated the life of the Ukiah brewery at 40 years and depreciate the cost of the building on a straight-line method over
its anticipated life. We do not depreciate the cost of the land. Our assessed value on the Ukiah facility is approximately $10,664,700.
Various other assets incorporated in this facility are being depreciated, on a straight-line basis, at rates of between 5 to 40
years. Property taxes are currently assessed on the Ukiah property (including machinery and equipment) at a rate of approximately
1.16%, for an annual tax of $123,200.
We
also lease 3.66 acres in Saratoga Springs, New York, on which the Ten Springs brewery facilities are located. In 2009, we leased
additional warehouse space and entered into a new lease. The current term of this lease expires on July 2019, with an option to
extend the lease for two successive terms of five years each, provided that the lease is not in default.
Based
on current product mix, the brewery in Ukiah, California has a current annual cellar capacity of approximately 65,000 bbl, and
the brewery at Saratoga Springs, New York currently has an annual cellar capacity of approximately 55,000 bbl. per year. The Ukiah
and Saratoga Springs breweries have annual packaging capacity of approximately 100,000 bbl. each on a single shift basis, and
each brewery has annual brewing capacity of approximately 200,000 bbl. (See “Item 1A – Risk Factors – Gross
Margins” above.)
ALE
HOUSE
We
have leased a 2,500 square foot building in Ukiah, California where our ale house and merchandise store is located.
OFFICE
SPACE
KBEL
has leased approximately 1,400 square feet of office space in Maidstone, Kent, in England. We do not own or lease any other material
properties in Europe.
MACHINERY
AND EQUIPMENT
We
lease certain equipment and vehicles under capital and operating leases which expire at varying times. Additionally, we lease
equipment and vehicles under various other leases. As these leases expire, it is anticipated that, in accordance with our current
practices, the equipment will be acquired, the vehicles will be surrendered, and we may enter into new vehicle leases.
We
consider our land, buildings, improvements, and equipment to be well maintained, in good condition, and adequate to meet the operating
demands placed upon them. In the opinion of Management, all of these properties are adequately covered by insurance.
ITEM
3. LEGAL PROCEEDINGS.
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. As of the date of this Annual Report, this litigation remains ongoing.
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 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.
No trial date has been set, and the matter is ongoing.
The
Company believes that the allegations in the Complaint are without merit and will continue to vigorously defend against the lawsuit.
As
discussed in the Company’s Current Report on Form 8-K filed on June 9, 2015, the Company has informed MB Financial about
the allegations set forth in the Complaint and the ex parte application and, as of the date of this Annual Report, the Company
has not received any notice or other communication from MB Financial that it intends to exercise any of the remedies available
to it under the Agreement in connection therewith.
The
Company is involved from time to time in other claims, proceedings and litigation arising in the normal course of business. The
Company believes that, to the extent that any pending or threatened litigation involving the Company or its properties exists,
such litigation will not likely have any material adverse effect on the Company’s financial condition or results of operations.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET
INFORMATION
Our
Common Stock is quoted for trading on the OTCQB tier of the OTC Markets under the symbol “MENB”. The market
for our Common Stock is limited, sporadic and highly volatile. Since our shares do not qualify to trade on any national securities
exchange, the only market currently available, to the extent any trading occurs, will continue to be the “bulletin boards”.
It is possible that no active public market with significant liquidity will ever develop. Thus, investors run the risk of never
being able to sell their shares.
The
table below sets forth, for the fiscal quarters indicated, the quoted high and low bid prices for our Common Stock, as reported
on the OTCQB tier of the OTC Markets. The information listed below reflects inter-dealer bids, without retail mark-up,
mark-down, or commission, and may not necessarily represent actual transactions.
| 2015 | |
High | | |
Low | |
| First Quarter | |
$ | 0.34 | | |
$ | 0.08 | |
| Second Quarter | |
$ | 0.30 | | |
$ | 0.20 | |
| Third Quarter | |
$ | 0.25 | | |
$ | 0.03 | |
| Fourth Quarter | |
$ | 0.27 | | |
$ | 0.11 | |
| 2014 | |
High | | |
Low | |
| First Quarter | |
$ | 0.29 | | |
$ | 0.21 | |
| Second Quarter | |
$ | 0.88 | | |
$ | 0.25 | |
| Third Quarter | |
$ | 0.75 | | |
$ | 0.35 | |
| Fourth Quarter | |
$ | 0.42 | | |
$ | 0.03 | |
We
had approximately 2,139 holders of our Common Stock of record as of March 15, 2016.
Dividends
Historically,
we have not paid any dividends. We anticipate that for the foreseeable future, all earnings, if any, will be retained for the
operation and expansion of our business and that we will not pay cash dividends. The payment of dividends, if any, in the future
will be at the discretion of MBC’s board of directors, which we refer to in this Annual Report as the Board, and will depend
upon, among other things, future earnings, capital requirements, restrictions in future financing agreements, the general financial
condition of the Company and general business conditions. Our Agreement with MB Financial provides that we may not declare or
pay any dividend or other distribution on our Common Stock (other than a stock dividend), or purchase or redeem any Common Stock,
without MB Financial’s prior written consent. Management anticipates that similar restrictions will remain in effect for
as long as we have significant bank financing.
The
holders of our 227,600 outstanding shares of Series A Preferred Stock (which are not listed for trading on any market, or to our
knowledge quoted on any bulletin board or other public quotation system) are entitled to aggregate cash dividends and liquidation
proceeds of $1.00 per share before any dividend may be paid with respect to the Common Stock.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Effective
as of January 1, 2012, the Board adopted a directors compensation plan (the “Directors’ Compensation Plan”)
with respect to the compensation of Non-Employee (as defined therein) members of the Board for their services as directors. The
Directors’ Compensation Plan was subsequently approved by the shareholders. Under the terms of the Directors’ Compensation
Plan, each Non-Employee director receives a fixed annual retainer of $15,000 as well as additional fees of $1,250 per meeting
of the Board and $1,250 per committee meeting attended. The chairs of the Compensation Committee and the Audit/Finance Committee
each receive $4,500 in fees for acting as chairpersons of such committees. In addition, each Non-Employee Director on January
1 of each calendar year during the five year period commencing January 1, 2012 and ending December 31, 2016 was to receive an
additional $2,000 per year.
Dr.
Vijay Mallya, Chairman of the Board, receives fixed remuneration as described in “Item 11-Executive Compensation –
Directors’ Compensation for the Year 2015”.
Currently
there are no equity compensation plans, therefore, no equity compensation plan information has been provided in chart form.
RECENT
SALES OF UNREGISTERED SECURITIES
None.
ISSUER
PURCHASE OF EQUITY SECURITIES
None.
ITEM
6. SELECTED FINANCIAL DATA.
Not
required for smaller reporting companies.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion of our financial condition and results of operations should be read in conjunction with our financial statements
and related notes, and the other financial information included in this Form 10-K. With respect to this discussion, the terms
“Company,” “we,” “us,” and “our” refer to the consolidated operations of Mendocino
Brewing Company, Inc. This discussion and analysis may contain forward-looking statements.
OVERVIEW
Since
our formation in 1983, we have been brewing and selling our craft beers in the United States. Effective upon our acquisition of
UBIUK in 2001, we have produced and distributed Kingfisher Premium Lager in the United States, Europe (primarily the United Kingdom)
and Canada.
Our
operations for fiscal years 2015 and 2014 resulted in loss from operations of $652,600 and $919,200, respectively. After providing
for interest, other income and taxes, the net loss in 2015 was $1,148,500 compared to a net loss in 2014 of $1,539,500.
RESULTS
OF OPERATIONS
YEAR
ENDED DECEMBER 31, 2015 COMPARED TO YEAR ENDED DECEMBER 31, 2014
The
following table sets forth, for the periods indicated, a comparison of certain items from our Consolidated Statements of Operations:
| | |
2015 | | |
2014 | | |
Increase/ (Decrease) | | |
% Change | |
| | |
| | |
| | |
| | |
| |
| Gross sales | |
$ | 31,691,900 | | |
$ | 34,654,900 | | |
$ | (2,963,000 | ) | |
| (9 | %) |
| Excise taxes | |
| 508,200 | | |
| 615,700 | | |
| (107,500 | ) | |
| (18 | %) |
| Net sales | |
| 31,183,700 | | |
| 34,039,200 | | |
| (2,855,500 | ) | |
| (8 | %) |
| Cost of goods sold | |
| 21,407,500 | | |
| 23,435,100 | | |
| (2,027,600 | ) | |
| (9 | %) |
| Gross profit | |
| 9,776,200 | | |
| 10,604,100 | | |
| (827,900 | ) | |
| (8 | %) |
| Operating expenses | |
| 10,428,800 | | |
| 11,523,300 | | |
| 1,094,500 | | |
| 10 | % |
| Loss from operations | |
| (652,600 | ) | |
| (919,200 | ) | |
| (266,600 | ) | |
| (29 | %) |
| Interest expense | |
| (605,000 | ) | |
| (686,700 | ) | |
| (81,700 | ) | |
| (12 | %) |
| Other income (expenses) net | |
| 112,900 | | |
| 66,400 | | |
| 46,500 | | |
| 70 | % |
| Loss before income taxes | |
| (1,144,700 | ) | |
| (1,539,500 | ) | |
| (394,800 | ) | |
| (26 | %) |
| Provision for income taxes | |
| 3,800 | | |
| - | | |
| (3,800 | ) | |
| - | |
| Net loss | |
($ | 1,148,500 | ) | |
($ | 1,539,500 | ) | |
($ | 391,000 | ) | |
| (25 | %) |
NET
SALES
As
used herein, the term “net sales” refers to gross sales less excise taxes. Overall net sales for fiscal year 2015
were $31,183,700 a decrease of $2,855,500 or 8% as compared to $34,039,200 in fiscal year 2014 due to lower sales volume.
NORTH
AMERICAN TERRITORY OPERATIONS: Net sales in the North American Territory totaled $11,364,100 in fiscal year 2015, compared to
$12,253,800 for fiscal year 2014, representing a decrease of $889,700 or 7%. Sales of beer for fiscal year 2015 decreased by 4,900
barrels to 56,000 barrels, a decrease of 8%, as compared to 60,900 barrels in fiscal year 2014. This decrease was due to (i) a
decrease in sales of brands we own by 7,200 barrels due to increased competition offset by an increase in sales of contract brands
by 2,300 barrels because of new contracts secured in 2015. We continue to solicit opportunities to enter into non-binding contract
brewing arrangements to address the low production capacity utilization rates in our Ukiah and Saratoga Springs 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 OPERATIONS: Net sales in the Foreign Territory totaled $19,819,600 in fiscal year 2015, compared to $21,785,400 during
fiscal year 2014, a decrease of $1,965,800 or 9%. The decrease is attributable to lower sales volume due to decline in number
of restaurants serving Kingfisher and unfavorable exchange rate in continental Europe resulting in decline in export to that region.
COST
OF GOODS SOLD
Overall
cost of goods sold during fiscal year 2015 was $21,407,500, as compared to $23,435,100 during fiscal year 2014, a decrease of
$2,027,600, or 9%. As a percentage of net sales, costs of goods sold was 69% in 2015 and 2014.
Utilization
of our production capacity has a direct impact on cost. 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. In addition to capacity utilization,
other factors that could affect cost of sales include unanticipated increases in material and shipping costs, the availability
and prices of raw materials and packaging materials, and the availability of contract brewing arrangements.
NORTH
AMERICAN TERRITORY OPERATIONS: Cost of goods sold as a percentage of net sales in the North American Territory was 83% during
fiscal year 2015 compared to 84% in fiscal year 2014. Underutilization of our production capacity, as described above, was a factor
in costs of goods sold in North America in 2015. The lower sales volume in 2015 caused further decreases in productivity.
FOREIGN
TERRITORY OPERATIONS: As a percentage of net sales, cost of goods sold in the United Kingdom was 61% during fiscal year 2015 and
2014.
GROSS
PROFIT
As
a result of decreased sales, offset by decreased cost of goods, gross profit for fiscal year 2015 (expressed in United States
dollars) was $9,776,200, a decrease of $827,900, or 8%, as compared to gross profit of $10,604,100 in fiscal year 2014. As a percentage
of net sales, our overall gross profit was 31% during fiscal year 2015 and 2014.
OPERATING
EXPENSES
Operating
expenses consist of marketing and distribution expenses, and general and administrative expenses. Operating expenses for fiscal
year 2015 totaled $10,428,800, a decrease of $1,094,500, or 10%, as compared to $11,523,300 for fiscal year 2014. As a percentage
of net sales, operating expenses decreased to 33% during fiscal year 2015as compared to 34% in fiscal year 2014.
MARKETING
AND DISTRIBUTION EXPENSES: Our marketing and distribution expenses consist of salaries and commissions, advertising costs, product
and sales promotion costs, travel expenses, and retail operating expenses. For fiscal year 2015, such expenses equaled $5,888,600,
an increase of $1,400 as compared to $5,887,200 in fiscal year 2014. As a percentage of net sales, our marketing and distribution
expenses increased to 19% in fiscal year 2015, as compared to 17% in fiscal year 2014.
NORTH
AMERICAN TERRITORY OPERATIONS: Marketing and distribution expenses for the North American Territory in fiscal year 2015 equaled
$1,320,900, a decrease of $112,800, or 8%, as compared to $1,433,700 incurred during fiscal year 2014, mainly due to reduction
in manpower and related costs. Marketing and distribution expenses remained at 12% of North American Territory net sales during
fiscal years 2015 and 2014.
FOREIGN
TERRITORY OPERATIONS: Marketing and distribution expenses in the Foreign Territory during fiscal year 2015 equaled $4,567,700,
an increase of $114,200, or 3%, as compared to $4,453,500 during fiscal year 2014. Such increase is mainly due to an increase
in manpower and increased promotional expenses. As a percentage of net sales in the United Kingdom, such expenses increased to
23% during fiscal year 2015 compared to 20% during 2014.
GENERAL
AND ADMINISTRATIVE EXPENSES: General and administrative expenses include all expenses not characterized as sales and marketing
expenses. Our general and administrative expenses totaled $4,540,200 for fiscal year 2015, representing a decrease of $1,095,900,
or 19%, as compared to $5,636,100 for fiscal year 2014. General and administrative expenses equaled 15% of net sales for fiscal
year 2015 and 17% of net sales for fiscal year 2014.
NORTH
AMERICAN TERRITORY OPERATIONS: General and administrative expenses for our North American Territory equaled $1,771,400 for fiscal
year 2015, representing a decrease of $766,700, or 30%, as compared to $2,538,100 for fiscal year 2014, due to a one-time accrual
in the year 2014 of severance payable to our President & Chief Executive Officer at the termination of his employment contract
pursuant to the terms of his separation and severance agreement with the Company (see Item 11. Executive Compensation –
Elements of Compensation – Severance).
FOREIGN
TERRITORY OPERATIONS: General and administrative expenses for our Foreign Territory equaled $2,768,800 in fiscal year 2015, representing
a decrease of $329,200, or 11%, as compared to $3,098,000 for fiscal year 2014, mainly due to exchange rate fluctuation, reduction
in rent due to reduction in office space and lower depreciation expense.
OTHER
EXPENSES
Other
expenses, including interest expenses, totaled $492,100 in fiscal year 2015, representing a decrease of $128,200, or 21%, as compared
to $620,300 in fiscal year 2014, due to lower interest expenses due to reduction in borrowing and higher other income.
INCOME
TAXES
We
made a provision for income taxes of $3,800 for the fiscal year 2015. We did not make any provision for income taxes for the fiscal
year 2014 due to losses.
NET
LOSS
Our
net loss for fiscal year 2015 was $1,148,500, as compared to a net loss of $1,539,500 for fiscal year 2014. After providing for
a positive foreign currency translation adjustment of $18,200 during fiscal year 2015 (as compared to a positive foreign currency
translation adjustment of $40,500 for fiscal year 2014), comprehensive loss for fiscal year 2015 was $1,130,300, compared to comprehensive
loss of $1,499,000 for fiscal year 2014. As stated above, the primary reason for the loss in fiscal year 2015 was the drop in
sales revenues.
RETAIL
OPERATIONS
We
operate a tasting room and merchandise store where we serve our brews on tap. We also sell various items of apparel and memorabilia
bearing the Company’s trademarks, which creates further awareness of our beers and reinforces our branding. Although sales
revenues from retail operations are not significant ($279,500 in 2015 and $247,400 in 2014), we view them as a marketing opportunity
for our products.
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 flow to provide us with sufficient working capital. However, we
have received $400,000 this year and believe that the liquidity we would derive from debt financing in the form of an additional
$600,000 of bridge loans, approved by the board of directors of UBHL, and cash flow attributable to our operations would be sufficient
to fund our capital expenditures, debt maturities and other business needs for the next twelve months.
On
December 9, 2015, the Company engaged Gordian Group, LLC (“Gordian Group”) to serve as the Company’s exclusive
investment banker to assist the Company in evaluating, exploring and, if deemed appropriate by the Company, pursuing and implementing
certain strategic and financial options and transactions that may be available to the Company, including in connection with a
possible debt or equity capital financing, merger, consolidation, joint venture or other business combination involving, or sale
of substantially all or a material portion of the assets (outside of the ordinary course of business) or outstanding securities
of, the Company and/or its subsidiaries, and/or the acquisition of substantially all or a material portion of the assets or outstanding
securities of another entity (each, a “Financial Transaction”). Gordian Group is a New York-based independent investment
banking firm. While the Company has commenced evaluating its available options, no conclusion as to any specific option or transaction
has been reached, nor has any specific timetable been fixed for this effort, and there can be no assurance that any strategic
or financial option or transaction will be presented, implemented or consummated. The Company intends to use proceeds of the Financial
Transaction to repay the amount owed to MB Financial when it becomes due.
UBHL
Support. 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. 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 and is not a legally binding guarantee. 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, it may result in a material adverse effect on our
financial position and on our 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.
Our Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the board of directors of UBHL.
The
Company received a letter dated November 11, 2013 from UBHL 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. 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.
If
we are unable to find any source of funds, it may result in a material adverse effect on our ability to continue operations. For
example, MB Financial may seek to satisfy any outstanding obligations through recourse against the applicable pledged collateral
which may include our real property, fixed assets and current assets. The loss of any material pledged asset would likely have
a material adverse effect on our financial position and results of operations.
On
January 22, 2014, Catamaran Services, Inc., (“Catamaran”), a related party 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 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 Company received the proceeds against this note
on July 6, 2015. Each time Catamaran provided a note loan, the Company received a letter from Lender (as defined below) permitting
the Company to obtain such 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 a Permitted Payment. A “Permitted Payment” is a payment made from an equity investment by the Company’s
majority shareholder.
On
March 14, 2016, a fifth note was issued by the Company in the principal amount of $325,000 to Catamaran on terms substantially
similar to the previous notes, except that the definition of “Permitted Payment” was revised to mean, for purposes
of this fifth note, a payment made from a bridge loan by the Company’s majority shareholder in excess of $600,000 (a “Permitted
Bridge Loan Payment”). On March 30, 2016, a sixth note was issued by the Company in the principal amount of $75,000 to Catamaran
on terms substantially similar to the fifth note.
MB
Financial Facility. On June 23, 2011, MBC and Releta entered into a Credit and Security Agreement (the “Agreement”)
with Cole Taylor Bank, an Illinois banking corporation (“Cole Taylor”). Cole Taylor merged into MB Financial Bank,
an Illinois banking corporation (“MB Financial”) on August 18, 2014. As used in this 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 Agreement provides a credit facility with a maturity date of June 23, 2016 of up to $10,000,000 consisting
of a $4,119,000 revolving facility, a $1,934,000 machinery and equipment term loan, a $2,947,000 real estate term loan and a $1,000,000
capital expenditure line of credit. Convertible promissory notes issued to UBA, one of the Company’s principal shareholders,
are subordinated to Lender’s facility.
The
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 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 and onwards fell short of the
required ratio. The tangible net worth fell short of the required amount for the period beginning June 1, 2013 and 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 Agreement. 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 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 Agreement. As stated in the Second
Default Notice, the Company continued to be in default on the fixed charge coverage ratio for each measurement period beginning
March 31, 2013 through February 28, 2016. 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 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
Second Default Notice required MBC and Releta to engage a consultant to perform a viability analysis and prepare a revised projection
for 2014, to be delivered to Lender on or before April 30, 2014. MBC and Releta engaged a consultant and delivered a revised projection
on April 30, 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 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 Agreement.
The
Second Amendment reduces the maximum amount of the Revolver from $4,119,000 to $2,500,000. The Second Amendment also changes 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 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.
As
of December 31, 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 December 31, 2015 was -0.28 to 1. The Company calculated that the required tangible net worth of MBC and
Releta was $6,181,400 as of December 31, 2015 and the actual tangible net worth on such date was $3,738,400. 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.
The
Agreement provides that the failure of MBC and Releta to observe any covenant will constitute an event of default under the Agreement.
Under the Agreement, upon the occurrence of an event of default, all of MBC’s and Releta’s obligations under the Agreement
may, at MB Financial’s option, be declared, and immediately shall become, due and payable, without notice of any kind. An
event of default shall be deemed continuing until waived in writing by MB Financial. 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 Agreement, certain other related documents and applicable law. 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 Agreement in connection with the events of default. Lender elected to charge a default interest rate
equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Agreement effective September 1,
2013. The Company estimates that the increased interest rate has resulted in the payment by the Company to MB Financial of an
additional interest of approximately $120,000 for the first year. The exercise of additional remedies by MB Financial may have
a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate. The
Agreement expires on June 23, 2016. If the Agreement is not renewed, and it becomes necessary for MBC and Releta to seek additional
financing due to non-renewal or for other reasons, 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.
HUK
Facility. On April 18, 2013, KBEL entered into a Loan Agreement with HUK pursuant to which HUK agreed to provide KBEL with
a secured term loan facility of £1,000,000 to be made available, subject to the fulfillment of certain conditions precedent,
on October 9, 2013, and to be repaid in full by October 9, 2016. KBEL availed itself of the loan on October 9, 2013. The Loan
Agreement with HUK is described under the section captioned “Description Of Our Indebtedness” below.
Our
ability to meet future working capital requirements will depend on many factors, including the rate of our revenue growth or contraction,
whether we successfully introduce new products and expansion of sales and marketing activities. There can be no assurance that
we will be able to increase sales to provide cash for operating activities. To the extent our available cash is insufficient to
fund our future activities, we may need to raise additional funds through bank credit arrangements, or public or private equity
or debt financings. We may not be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable
to us or at all.
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 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. 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 operations.
At
December 31, 2015, the Company had cash and cash equivalents of $129,600, an accumulated deficit of $17,395,600, and a working
capital deficit of $11,601,700 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 December
31, 2015.
Management
has taken several actions to reduce the Company’s working capital needs through December 31, 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 Company is pursuing a Financial Transaction through Gordian Group as described
above. The Company continues to receive cash infusion from Catamaran to support operations. The current revenue from operations
is 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 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.
Cash
Flow Results:
Historically,
we have funded our operations primarily with proceeds from issuances of preferred stock, Common Stock, debt financing, lease financing,
and cash flows from operations.
Net
cash provided by operations was $1,105,900 and $793,400 for 2015 and 2014 respectively. During the year ended December 31, 2015,
the primary factors contributing to our calculation of net cash provided by operating activities were non-cash expenses consisting
primarily of depreciation expense of $1,226,200, accrued severance payable of $38,000, decrease in accounts receivable of $430,800,
decrease in accounts payable of $262,100, increase in accrued liabilities of $186,400, decrease in inventory of $567,500 and net
loss of $1,148,500.
Decreases
in receivables, inventories and accounts payable during the year 2015 were due to lower sales volume in the year 2015 compared
to 2014. Increase in accrued liabilities in 2015 compared to 2014 was mainly due to accrued Directors Compensation for the year
2015.
Net
cash used in investing activities was $642,400 and $876,100, respectively, for 2015 and 2014. Such funds were used primarily for
purchases of brewery equipment in the North American Territory and beer dispensing equipment in the Foreign Territory.
Net
cash used in financing activities was $493,500 during the year 2015 compared to $117,600 used in such activities in 2014. During
2015 and 2014, we borrowed from Catamaran to finance working capital. Financing activities also include debt payments and lease
installment payments.
DESCRIPTION
OF OUR INDEBTEDNESS:
MB
FINANCIAL FACILITY: On June 23, 2011, MBC and Releta entered into the Agreement with Lender (as described in “Liquidity
and Capital Resources”) which is scheduled to expire on June 23, 2016. The Agreement provides a credit facility of up to
$10,000,000 with a maturity date of June 23, 2016, consisting of a $4,119,000 revolving facility, a $1,934,000 machinery and equipment
term loan, a $2,947,000 real estate term loan and a $1,000,000 capital expenditure 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 Agreement. As described in the Third Default Notice, effective August
20, 2014, 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 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 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 interest in all of MBC’s and Releta’s
personal property and a first 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 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 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 Agreement.
Under the Agreement, upon the occurrence of an event of default, all of MBC’s and Releta’s obligations under the 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 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”
in Item 2 above.
On
January 21, 2015, MBC, Releta, and Lender entered into a Second Amendment (the “Second Amendment”) to the Agreement.
The
Second Amendment reduces the maximum amount of the Revolver from $4,119,000 to $2,500,000. The Second Amendment also changes 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 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: 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 MB Financial 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 MB Financial facilities are repaid in full.
The
aggregate outstanding principal amount of the UBA Notes as of December 31, 2015 was $1,915,400, and the accrued but unpaid interest
thereon was equal to approximately $1,764,700, for a total amount outstanding of $3,680,100. As of December 31, 2015, the outstanding
principal and interest on the UBA Notes was convertible into approximately 2,471,800 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.
During
the fiscal years 2015 and 2014, the greatest aggregate amount of principal outstanding on the UBA Notes was $1,915,400. No principal
or interest was paid during fiscal years 2015 or 2014. As of February 28, 2016, the aggregate outstanding principal amount of
the UBA Notes was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,780,500, for a total amount
outstanding of $3,695,900, convertible into approximately 2,482,400 shares of our Common Stock. As of February 28, 2016, UBA beneficially
owned approximately 24.5% of our outstanding Common Stock (excluding any shares issuable upon conversion of the UBA Notes). Our
Chairman, Dr. Vijay Mallya, is also the Chairman of the board of directors of UBA.
CATAMARAN
NOTES: On January 22, 2014, Catamaran Services, Inc., (“Catamaran”), a related party provided a note loan of $500,000
repayable upon receipt of an equity investment by the Company’s majority shareholder. 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. 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 June 30, 2015, another note loan of $500,000 was issued to Catamaran on terms similar
to the previous notes. Each time Catamaran provided a note loan, the Company received a letter from MB Financial (as defined below)
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 MB Financial pursuant to the Agreement were satisfied in full, or (b) such
payment was a Permitted Payment. A “Permitted Payment” is a payment made from an equity investment by the Company’s
majority shareholder.
Pursuant
to the terms of the first four Catamaran notes, the Company promises to pay each such note with accrued interest, as described
below, to Catamaran within six months following the date of the note, subject to the receipt by the Company of an equity investment
by its majority shareholder (the “Shareholder Investment”) in an amount sufficient either (a) to pay the notes through
Permitted Payments, or (b) to pay both the notes and certain existing obligations of the Company to Lender in full.
On
March 14, 2016, a fifth note was issued by the Company in the principal amount of $325,000 to Catamaran on terms substantially
similar to the previous notes, except that the definition of “Permitted Payment” was revised to mean, for purposes
of this fifth note, a payment made from a bridge loan by the Company’s majority shareholder in excess of $600,000. On March
30, 2016, a sixth note was issued by the Company in the principal amount of $75,000 to Catamaran on terms substantially similar
to the fifth note.
Pursuant
to the terms of the fifth and sixth Catamaran Notes, the Company promises to pay the principal sum of $325,000 and $75,000 respectively
with accrued interest (as described below) to Catamaran within six months following the dates of such notes, subject to the receipt
by the Company of a bridge loan from its majority shareholder (the “Shareholder Loan”) in an amount sufficient
either (a) to pay such notes through Permitted Bridge Loan Payments, or (b) to pay the notes and certain existing obligations
of the Company to the Lender in full.
If
the Company is not able to satisfy its obligations on a Catamaran note within the six month period following the date thereof,
such note shall be automatically extended for an additional six month term until a Permitted Payment (for the first through fourth
notes) or Permitted Bridge Loan Payment (for the fifth and sixth notes), as the case may be, can be made or such note is otherwise
paid. Interest shall accrue from the date of the applicable Catamaran note 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
Catamaran notes may be prepaid without penalty at the option of the Company; however, no payments on the Catamaran notes may be
made unless such payment is a Permitted Payment (for the first through fourth notes) or a Permitted Bridge Loan Payment (for the
fifth and sixth notes), as the case may, be or certain existing obligations of the Company to MB Financial pursuant to the Credit
Agreement have been satisfied in full. The Catamaran notes may not be amended without the prior written consent of MB Financial.
HUK
LOAN: On April 18, 2013, KBEL entered into a Loan Agreement with HUK pursuant to which HUK provided KBEL with a secured term loan
facility of £1,000,000 on October 9, 2013, to be repaid in twelve equal quarterly installment commencing on January 9, 2014.
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, 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 sublicense
from UBIUK to produce, market and sell Kingfisher beer in the Foreign Territory(excluding Germany)pursuant to the Sub-Licence
Agreement entered into between HUK, UBIUK, KBEL and UB Limited on April 18, 2013.
OTHER
LOANS AND CREDIT FACILITIES
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 will be automatically
extended unless terminated by either party upon six months’ written notice.
On
November 24, 2015, KBEL received a notice from RBS regarding its intention to terminate the credit line and all other banking
services it currently provides to KBEL on February 26, 2016. RBS subsequently extended the termination date to May 31, 2016. KBEL
is in the process of finding a substitute replacement for the line of credit and other banking services before the termination
of the Credit Line is effective. We have been in discussions a bank which has provided an indicative offer to provide KBEL with
alternate financing and other banking services in place of RBS. If KBEL does not finalize such alternate financing and provision
of banking services, and if KBEL is unable to find a substitute replacement before termination of the RBS facilities, this would
have a material adverse effect on KBEL and the Company.
WEIGHTED
AVERAGE INTEREST: The weighted average interest rates on our debts incurred in connection with the North American Territory were
6.1% for fiscal year 2015 compared to 6.4% for fiscal year 2014. For loans primarily associated with our Foreign Territory, the
weighted average interest rate paid was 3.9% for fiscal year 2015 and 4.5% for the fiscal year 2014.
CURRENT
RATIO: Our ratio of current assets to current liabilities on December 31, 2015 was 0.35 to 1.0 and on December 31, 2014 was 0.51
to 1.0. Our ratio of total assets to total liabilities as of December 31, 2015 was 0.91 to 1.0 and on December 31, 2014 was 0.98
to 1.0.
RESTRICTED
NET ASSETS. Our wholly-owned subsidiary, UBIUK, had cumulative losses of approximately $317,600 as of December 31, 2015. Under
KBEL’s line of credit agreement with RBS, distributions and other payments from our subsidiaries to us are not permitted
if the retained earnings drop below approximately $1,528,400.
RELATED
PARTY TRANSACTIONS: Over the last several years, MBC and our subsidiaries have entered into or amended several agreements with
affiliated and related entities. Among such agreements have been a Brewing Agreement and a Loan Agreement between KBEL and Shepherd
Neame; a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between MBC and KBEL; a Distribution
Agreement between UBIUK and KBEL; a Trademark Licensing Agreement between MBC and Kingfisher of America, Inc.; a License Agreement
between UBIUK and UB Limited; a brewing agreement between KBEL, UBIUK and HUK; a loan agreement between KBEL and HUK; and a sub
license agreement between KBEL, UB Limited, UBIUK and HUK. (For more information on these agreements please see “Item 13.
— Certain Relationships and Related Transactions, and Director Independence”.)
OFF-BALANCE
SHEET ARRANGEMENTS
We
are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material current or future
impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
CONTRACTUAL
OBLIGATIONS
The
following chart sets forth our contractual obligations as of December 31, 2015.
| Contractual Obligations | |
Payments due by period | |
| | |
Total | | |
Less than 1
year | | |
1 -3 years | | |
3 -5 years | | |
More than 5
years | |
| Secured line of credit | |
$ | 1,663,400 | | |
$ | 1,663,400 | | |
| - | | |
| - | | |
| - | |
| Long Term Debt Obligations | |
| 3,870,100 | | |
| 3,870,100 | | |
| - | | |
| - | | |
| - | |
| Capital Lease Obligations | |
| 102,300 | | |
| 23,100 | | |
| 45,000 | | |
| 34,200 | | |
| - | |
| Operating Lease Obligations | |
| 1,408,900 | | |
| 450,900 | | |
| 746,600 | | |
| 211,400 | | |
| - | |
| Purchase Obligations | |
| 1,062,500 | | |
| 1,062,500 | | |
| - | | |
| - | | |
| - | |
| Severance Payable | |
| 798,100 | | |
| 119,700 | | |
| 678,400 | | |
| | | |
| | |
| Notes to Related Parties | |
| 5,799,700 | | |
| 5,799,700 | | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 14,705,000 | | |
$ | 12,989,400 | | |
$ | 1,470,000 | | |
$ | 245,600 | | |
$ | - | |
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of operations are based on our financial statements, which have
been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities
and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base
our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may
differ from these estimates under different assumptions or conditions. While our significant accounting policies are described
in more detail in Note 1 to our financial statements, we believe the following accounting policies to be critical to the judgments
and estimates used in the preparation of our consolidated financial statements:
Revenue
Recognition. The Company recognizes revenue from its brewing and distribution operations in accordance with Accounting Standards
Codification (“ASC”) 605 of the Financial Accounting Standards Board (“FASB”). 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 or purchase order. 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 brewpub and gift store are recognized when sales have been completed.
Allowance
for Doubtful Accounts. We use the allowance method to account for uncollectible accounts receivable. Our estimate is based
on historical collection experience and a review of the current status of accounts receivable. We review our accounts receivable
balances by customer for accounts greater than 90 days old and make a determination regarding the collectability of the accounts
based on specific circumstances and the payment history that exists with such customers. We also take into account our prior experience,
the customer’s ability to pay and an assessment of the current economic conditions in determining the net realizable value
of our receivables. We also review our allowances for doubtful accounts in aggregate for adequacy following this assessment. Accordingly,
we believe that our allowances for doubtful accounts fairly represent the underlying collectability risks associated with our
accounts receivable.
Inventories.
Inventory consists of raw materials, work in progress, and finished goods. Inventory is stated at the lower of cost or market
using the average-cost method. Cost includes the acquisition cost of raw materials and components, direct labor, and manufacturing
overhead. We periodically review our inventory for excess or quality issues. Should we conclude that we have inventory for which
we cannot recover our costs as a result of such review, we would record a charge to cost of goods sold. We record write downs
for excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based on
assumptions about future product life-cycles, product demand and market conditions. If actual product life cycles, product demand
and market conditions are less favorable than those projected by Management, additional inventory write-downs may be required.
Impairment
of Long-Lived Assets. The Company assesses the impairment of its long-lived assets periodically in accordance with the provisions
of ASC 360-10-50, (Accounting for the Impairment and Disposal of Long-Lived Assets). The Company reviews the carrying value of
property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of assets. The factors considered by Management in performing this assessment include current
operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors.
Long-lived assets that Management commits to sell or abandon are reported at the lower of carrying amount or fair value less cost
to sell.
Foreign
Currency Translation. Financial statements of foreign subsidiaries located in the United Kingdom where the local currency,
the UK Pound Sterling, is the functional currency, are translated into United States 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 as 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
at UBIUK was translated at exchange rates in effect on December 31, 2015 and 2014, and its cash flows were translated at the average
exchange rates for the years then ended. Changes in cash resulting from the translations are presented as a separate item in the
statements of cash flows.
Income
Taxes. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement bases and the respective
tax bases of the assets and liabilities and operating loss and tax credit carry forwards. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
as income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized, and have been provided for all periods presented.
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 for the years ending December 31, 2015 and 2014.
RECENT
ACCOUNTING PRONOUNCEMENTS
Please
refer “Notes To Consolidated Financial Statements – Note1. Description of Operations and Summary of Significant Accounting
Policies - Recent Accounting Pronouncements” – for details of recent accounting pronouncements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
required for smaller reporting companies.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
information required by this item is set forth on Pages F-1 through F-25 of this Annual Report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM
9A. CONTROLS AND PROCEDURES.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
Management team, under the supervision and with the participation of our Chief Executive Officer (principal executive officer)
and our Chief Financial Officer (principal financial officer), evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined under Rule 13a-15(e) promulgated under the Exchange Act) as of the last day of
the fiscal period covered by this Annual Report, December 31, 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 principal executive and principal financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive
Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) concluded that our disclosure
controls and procedures as of December 31, 2015 were effective.
Report
of Management on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act as a process designed by, or under the supervision
of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected
by the issuer’s board of directors, Management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes
those policies and procedures that:
●
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the issuer;
●
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorization of
Management and directors of the issuer; and
●
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the
issuer’s assets that could have a material effect on the financial statements.
Because
of our inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions or that the degree of compliance with existing policies or procedures may deteriorate.
In
accordance with the internal control reporting requirements of the SEC, Management completed an assessment of the adequacy of
our internal control over financial reporting as of December 31, 2015. In making this assessment, Management used the criteria
set forth in Internal Control — Integrated Framework by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and the SEC’s guide entitled “Sarbanes-Oxley Section 404: A Guide for Small Business”. As
a result of this assessment and based on the criteria in the COSO framework and SEC guidance, Management has concluded that, as
of December 31, 2015, our internal control over financial reporting was effective.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in our internal control over financial reporting during the year ended December 31, 2015 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION.
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
following table sets forth the names, ages as of February 28, 2016, and certain information regarding each of our current directors
and executive officers:
| Name |
|
Age
|
|
Position(s)
|
|
Director
Since** |
| Joseph S. Cannata+ |
|
41 |
|
Director |
|
2015 |
| James H. Grossman* |
|
76 |
|
Director |
|
2015 |
| Scott R. Heldfond *+ |
|
71 |
|
Director |
|
2005 |
| Michael Laybourn+ |
|
77 |
|
Director |
|
1993 |
| Vijay Mallya, Ph.D. |
|
60 |
|
Director and Chairman
of the Board |
|
1997 |
| Jerome G. Merchant* |
|
54 |
|
Director |
|
1997 |
| Mahadevan Narayanan |
|
58 |
|
Chief Financial Officer
and Secretary |
|
N/A |
| Sury Rao Palamand,
Ph.D. |
|
85 |
|
Director |
|
1998 |
| Kent D. Price*+ |
|
72 |
|
Director |
|
1998 |
| Yashpal Singh |
|
70 |
|
Director, President
and Chief Executive Officer |
|
1997 |
| ** |
All
directors are elected by our shareholders at the Annual Meeting to serve until the following Annual Meeting. Currently, there
are no arrangements or understandings between (i) any of the directors and any other person pursuant to which any director
was or is to be selected as a director or (ii) any of the executive officers and any other person pursuant to which any executive
officer was or is to be selected as an executive officer. We have entered into an employment agreement with our Chief Executive
Officer pursuant to which his term of employment has been extended until June 30, 2016. Our Chief Financial Officer does not
have any set date for the expiration of his term of office. |
| |
|
| * |
Member
of the Audit/Finance Committee. |
| |
|
| + |
Member
of the Compensation Committee. |
Mr.
Joseph Cannata joined the Board in August 2015. He is currently Executive Vice President of Sales & Distribution at Rockstar
Energy Drink. He was part of the original launch team. He also managed Rockstar’s on-premise channel of trade working with
Southern Wine & Spirits throughout Northern California. Additionally, he was responsible for Rockstar’s expanded Independent
Distributor partnership agreements throughout the Western United States for all channels of trade. He established and played a
key role in negotiating the Rockstar product distribution agreement with Dr. Pepper Snapple Group in 2003, Coca-Cola Company in
2005 and Pepsi-Cola North America in 2009. He oversees all National Chain Accounts for Rockstar and manages an Executive Team
of 14 direct reports and full national team of 150+ sales reps throughout the USA & Canada. In his position he is the liaison
and primary contact between Rockstar Inc. and Executive level Pepsi and Independent Distributor personnel. Mr. Cannata is a native
of San Francisco. He attended St. Ignatius College Preparatory and Saint Mary’s College of Moraga where he received a Bachelor
of Arts degree. Mr. Cannata’s expertise in beverage sales and distribution, led to his selection as a member of the Board.
Mr. Cannata is the son-in-law of Mr. Heldfond, who is also a member of the Board.
Mr.
James Grossman joined the Board in August 2015. He has been an international, commercial, intellectual property, and energy focused
arbitrator and mediator since 2001 with a background as an international business person and corporate securities lawyer for more
than 35 years. He has served as a Director of both public and private companies. He has continued his business experience by serving
on the boards of directors of public companies based in the United Kingdom, which have been listed on NASDAQ, the London Stock
Exchange, and AIM. He has business activities in San Francisco, London, Monaco and Geneva. He is a founder and director of the
Silicon Valley Arbitration and Mediation Center based in Palo Alto, California. He also serves as Counsel and a Director of Applaud
Medical, Inc. a medical device company with a newly patented treatment for removal of kidney stones. Mr. Grossman served as Counsel
of Canoel International Energy Ltd from December 9, 2008 to March 23, 2011 and also served as its Chairman of the Board. Mr. Grossman
holds a BA in International Relations/Political Science/History from the University of California at Berkeley, and a JD from Harvard
University/Harvard Law School. Mr. Grossman’s experience as an international business person and his legal background led
to his selection as a member of the Board.
Mr.
Scott Heldfond joined the Board in January 2005. He was a Director of NASDAQ Insurance Group, LLC, a national insurance brokerage
and consulting firm owned by the NASDAQ Stock Market prior to the firm’s sale to Aon Risk Services in 2009. Mr. Heldfond
currently services as a Director at Aon Risk Services. Mr. Heldfond has also served as the Managing Partner of eSEED Capital,
LLC, a technology-focused merchant banking firm since 1999. He also served as President and Chief Executive Officer of Frank Crystal
& Co. of California, a New York-based insurance brokerage firm from 1995 to 1999, as Chairman of Hales Capital LLC, an investment
banking firm from 1994 to February 1997 and as President of AON Real Estate & Investments Mr. Heldfond also previously served
as a Director of HomeGain, Inc. (later sold to Classified Ventures), a private, venture backed company, and currently serves as
a Director of UBICS Inc., a NASDAQ traded firm that provides information technology staffing and solutions for domestic and international
businesses. Mr. Heldfond also served as a Director of Galoob Toys, which was the third largest toy manufacturer before its sale
to Hasbro. Mr. Heldfond holds an undergraduate degree from the University of California, Berkeley and a J.D. from the University
of San Francisco Law School. He is a Mayoral appointed Commissioner of the Health Services Commission of the City and County of
San Francisco. In addition, he serves as an advisor to or on the board of directors of a number of local, statewide, and national
charitable and community service organizations. Mr. Heldfond is the retired Honorary Consul General to the United States for the
Republic of Rwanda. Mr. Heldfond’s expertise in risk management and insurance matters, in particular, led to his selection
as a member of the Board. Mr. Heldfond is the father-in-law of Mr. Cannata, who is also a member of the Board.
Mr.
H. Michael Laybourn, co-founder of the Company, served as the Company’s President from its inception in 1983 through December
1999, and as its Chief Executive Officer from inception through October 1997. Mr. Laybourn was elected as a Director of the Company
in November 1993 when the Company began the process of converting from a limited partnership to a corporation and served as Chairman
of the Board from June 1994 through October 1997. Mr. Laybourn is a former Vice President of the California Small Brewers Association
and a former Chairman of the board of directors of the Brewers Association of America. Mr. Laybourn holds a Bachelor of Fine Arts
degree from Arizona State University. Mr. Laybourn’s expertise in craft brewing, in particular, led to his selection as
a member of the Board.
Dr.
Vijay Mallya, Ph.D., became the Company’s Chairman of the Board in October 1997 and was MBC’s Chief Executive Officer
from October 1997 until January 2005. Dr. Mallya is a well-known industrialist and the Chairman of UBICS, Inc., United Breweries
Limited, United Breweries (Holdings) Limited (which is the indirect beneficial owner of two of MBC’s largest shareholders
(United Breweries of America, Inc. and Inversiones Mirabel S.A.), and other affiliated companies. Dr. Mallya is also a keen sportsman
and an ardent aviator and yachtsman. Dr. Mallya and certain companies with which he is associated provide financial and other
support for several sporting activities worldwide, including the Force India F1 Formula One Motor Racing Team, the United East
Bengal Football Team and the United Mohun Bagan Football Team. He also sits on the boards and committees of several foreign companies
and organizations including, The Institute of Economic Studies (India), the Federation of the Indian Chamber of Commerce and Industries
and Motorsports Association of India. Dr. Mallya has been the recipient of many prestigious awards and accolades, including being
nominated to the Global Leaders of Tomorrow by the World Economic Forum, receiving the Légion d’ Honneur from the
Government of France in 2008 and the Outstanding Business Leader Award from the Associated Chambers of Commerce and Industry of
India in 2009. Dr. Mallya is currently serving as a member of the Upper House of the Indian Parliament for the second time. Dr.
Mallya holds a Bachelor of Commerce degree from the University of Calcutta in India and an honorary Doctorate in Business Administration
from California Southern University, Santa Ana. Dr. Mallya’s knowledge and expertise in the global alcoholic beverage industry
were significant in his selection as a member of the Board as well as his appointment as Chairman of the Board.
Mr.
Jerome G. Merchant became a Director of the Company in October 1997 and was Chief Financial Officer of the Company from November
1997 to October 1998. Mr. Merchant served as the Strategic Planning Consultant to the Chairman’s Office of the Company from
July 1996 until January 2007. Mr. Merchant is a Managing Director with Kinetic Advisors, LLC, a boutique mid-market investment
advisory company. He has over 20 years of experience in investment banking and capital raising transactions. Previously, he held
executive positions at McGladrey Capital Markets, Citigroup and MetLife Investors. Mr. Merchant has advised the investment division
and clients of Citibank and Smith Barney, amongst others. In executive and strategic planning capacities, he has advised public
and private companies and institutional and high-net worth investors. Between April 1993 and December 2003, Mr. Merchant served
in various senior capacities for Cal Fed Investments, a wholly owned subsidiary of Cal Fed Bank. Previously, Mr. Merchant directed
the west coast capital raising for a private equity group focused on equity oriented management buyouts and strategic acquisitions.
He received his B.S. degree in Managerial Economics-Finance from the University of California, Davis. Mr. Merchant’s expertise
in capital raising and financial markets contributed to his selection as a member of the Board.
Mr.
Mahadevan Narayanan joined the company in 2001 as Secretary and Chief Financial Officer. Before joining the Company, he served
the UB Group (including affiliates of the Company) in India for 17 years as part of the management team in various financial and
accounting capacities. Immediately prior to joining the Company, Mahadevan Narayanan was employed as Senior Manager of Accounting
Services of Herbertsons Ltd. for six years. He holds a Bachelor of Science degree in Mathematics from Madurai Kamaraj University
in India and is an Associate member of the Institute of Chartered Accountants of India.
Mr.
Sury Rao Palamand became a director of MBC in January 1998. Dr. Palamand is a director and partner of Summit Products, Inc., a
beverage development and consulting company serving the food and beverage industry. He is also a director and partner in the Historic
Lemp Brewery and is involved in the development of microbreweries and brewpubs, and in the restoration of historic buildings.
Dr. Palamand has over 40 years of experience in the brewing industry and has published numerous scientific and technical papers
on beer and other fermented beverages in various technical journals in the United States and abroad. He is an associate member
of the Institute of Brewing, London and is a member of several brewing organizations in the United States. In addition, Dr. Palamand
possesses technical and technological expertise in wine making as well as in the development of soft drinks. Prior to joining
the Company as a director, Dr. Palamand served as Director of Beer and New Beverage Development at Anheuser-Busch Companies, Inc.
Dr. Palamand holds a Bachelor of Science degree from the University of Mysore, India, a Master of Science degree in Applied Chemistry
from the University of Bombay, India and a Masters degree in Food Microbiology and a Ph.D. degree in Food and Flavor technology
from Ohio State University, Columbus, Ohio. Dr. Palamand is listed in the MARQUIS WHO’S WHO in America and in the WHO’S
WHO in the Midwest. In particular, Mr. Palamand’s technical expertise in fermented beverages was an important criteria in
his selection as a member of the Board.
Mr.
Kent D. Price became a director in January 1998. Kent Price is a founder and President of Parker Price Venture Capital. Mr. Price
was a Rhodes Scholar at Oxford University, attended the University of Montana, the University of California, Los Angeles and Harvard
Business School. Mr. Price is a member of the board of directors of the University of Montana and served on its Foundation and
Investment Committee. Mr. Price is the chairman of Fluid Inc., a technology enhanced service company that is a leader in the development
of eCommerce sites. Mr. Price has extensive operational experience, including as Chief Executive Officer of The Chloride Group,
a global battery company, Chief Executive Officer of the Bank of San Francisco, General Manager of Banking, Finance and Securities
Group at IBM, Chief Financial Officer at the Bank of New England, Executive Vice President of the Bank of America and a senior
officer at Citibank. He has lived and worked in England, Germany, Ireland, Nigeria, Ivory Coast, Taiwan, Hong Kong, Japan and
Singapore as well as the United States. He has served on various boards of directors of companies based in the UK, India, South
Africa, Hong Kong, Taiwan, China and the United States. Mr. Price served on the board of directors of UBICS (a NASDAQ listed company).
Mr. Price served as a Captain in the United States Air Force. Mr. Price’s banking and financial expertise was important
in his selection as a member of the Board.
Mr.
Yashpal Singh became a director of MBC in October 1997 and served as the Company’s Executive Vice President and Chief Operating
Officer beginning in April 1998. Mr. Singh became the Company’s President in January 2000 and its Chief Executive Officer
in January 2005. From May 1997 to March 1998, Mr. Singh served as Executive Vice-President- Operations for UBA, one of MBC’s
major shareholders. Between 1964 and 1990, Mr. Singh served in various capacities including as Head Brewer and Chief Executive
Officer of a large alcoholic beverage corporation in India. Between 1990 and 1997, Mr. Singh also served as Senior Vice President-Operations
for United Breweries Ltd., an Indian Corporation, where he was responsible for the operations of 12 breweries, the establishment
of new green-field projects, and technical and operational evaluations of potential acquisition opportunities worldwide. Mr. Singh
holds a Bachelor’s degree in Science from Punjab University in India, a Diploma in Brewing from the Institute of Brewing
and Distilling in London and has extensive training in the fields of Brewing, Malting, and Mineral Water Technology. Mr. Singh
is an Associate member of the Institute of Brewing, London, a member of the Master Brewers Association of America, and is a former
executive member of the Managing Committee of the All India Brewer’s Association. Mr. Singh has over 48 years of varied
experience in the brewing industry. Mr. Singh’s long standing technical and management expertise in brewing led to his selection
as a member of the Board.
FAMILY
RELATIONSHIPS
Joseph
Cannata is the son-in-law of Scott Heldfond.
INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS
None.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based
solely on our review of the Forms 3, 4 and 5 furnished to us during and with respect to fiscal year 2015, we are not aware of
any untimely filing by a director, officer, or greater than 10% beneficial owner of the reports required by Section 16(a) of the
Exchange Act during our most recent fiscal year.
AUDIT
COMMITTEE
We
have a separately-designated standing Audit/Finance Committee established in accordance with Section 3(a)(58)(A) of the Exchange
Act. James H. Grossman, Scott R. Heldfond, Jerome G. Merchant and Kent D. Price serve as the committee members of the Audit/Finance
Committee.
AUDIT
COMMITTEE FINANCIAL EXPERT
The
Board has determined that Mr. Kent D. Price, a member of our Audit/Finance Committee, is both an independent Director and qualifies
as an “audit committee financial expert” as that term is defined in the Exchange Act, and pursuant to the rules and
regulations promulgated by the SEC.
CODE
OF ETHICS
We
have adopted a Code of Ethics that applies to our Chief Executive Officer (principal executive officer), Chief Financial Officer
(chief financial officer), and principal accounting officer. The Code of Ethics is posted on our website at www.mendobrew.com.
We intend to disclose future amendments to certain provisions of our Code of Ethics, or waivers of such provisions granted to
executive officers and directors on our website within four (4) business days following the date of such amendment or waiver.
Any person desiring a free copy of the Code of Ethics should send a written request to our Secretary, Mahadevan Narayanan, at
our principal executive office located at 1601 Airport Road, Ukiah, CA 95482.
DIRECTORS’
NOMINATIONS
There
have been no material changes to the procedures by which shareholders may recommend nominees to the Board. Once the date of the
next annual meeting has been set, the Company will file a current report on Form 8-K disclosing the date by which a nominating
shareholder or nominating shareholder group must submit a notice on Schedule 14N, which date shall be a reasonable time before
we mail our proxy materials for the meeting.
Corporate
Governance
Director
Independence
The
Board has determined that the following directors qualify as “independent” in accordance with the published listing
requirements of NASDAQ: Mr. Cannata, Mr. Grossman, Mr. Heldfond, Mr. Laybourn, Mr. Palamand, Mr. Merchant and Mr. Price. Mr. Singh
is not “independent” because he is an employee of MBC. Dr. Mallya is not independent since he has received payments
in excess of the applicable threshold from the Company during the last three (3) years. Prior to 2007, Mr. Merchant provided certain
consulting services to the Company, however, given the timing and nature of such services as well as the amount of compensation
provided in relation thereto, the Board has determined that Mr. Merchant now meets the criteria for being an “independent
director”.
The
NASDAQ rules contain both objective tests and a subjective test for determining who is an “independent director.”
The objective tests provide that a director is not considered independent if he (i) is an employee of the Company (or a parent
or subsidiary) (or has been in the past three (3) years); (ii) has accepted (or a family member has accepted) compensation from
the Company in excess of $120,000 during any period of twelve (12) consecutive months within the preceding three (3) year period
(subject to certain exceptions); (iii) has a family member that was employed as an executive officer of the Company (or a parent
or subsidiary) during the past three (3) years; (iv) is (or a family member is) a controlling shareholder or an executive officer
of an organization to which the Company made or received payments in the current year or at any time during the past three (3)
years that exceed the greater of (a) five percent (5%) of the recipient’s consolidated gross revenues or (b) $200,000 for
that year; (v) is (or has a family member who is) employed as an executive officer of another entity where at any time during
the past three (3) years any of the executive officers of the Company served on the compensation committee of such other entity;
or (vi) is (or has a family member who is) a current partner of the Company’s outside auditor who worked on the Company’s
audit at any time during any of the past three (3) years. The subjective test is based on the standard that an independent director
must be a person who lacks a relationship that, in the opinion of the Board, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
Leadership
Structure
Since
January 2005, the Company has separated the roles of Chairman of the Board and Chief Executive Officer. From 1997 until January
2005, Dr. Vijay Mallya served as both the Chief Executive Officer as well as Chairman of the board of directors of MBC (the “Board
of Directors” or the “Board”). The Board of Directors believes that the separation of the roles of Chief Executive
Officer and Chairman of the Board provides the Company with additional processes, controls and oversights that facilitate the
functioning of the Board of Directors and its decision-making in the best interests of MBC and its shareholders. In addition,
the separation of the roles of Chairman and Chief Executive Officer permit the holders of such offices to focus on the fundamental
duties and specialized nature of the respective office. MBC’s Chairman, Dr. Vijay Mallya, and the Board of Directors work
together with the Chief Executive Officer to develop MBC’s strategic goals. Dr. Mallya also acts as an international brand
ambassador and presides over the Board of Directors meetings at which he is present. MBC’s Chief Executive Officer, Yashpal
Singh, is responsible for the day-to-day oversight of MBC’s performance and the brewing operations. Mr. Singh is also responsible
for the implementation of MBC’s strategic goals. The Board of Directors may review its leadership structure from time to
time and implement any changes that it deems appropriate to respond to the needs of the Company.
Risk
Oversight
The
Audit/Finance Committee and Compensation Committee play key roles in the Board of Director’s risk oversight function as
such committee members are all Non-Employee Directors. The Committee system provides an independent level of protection with regards
to MBC’s decision-making processes and an additional mechanism for the oversight of MBC’s risk management controls
and procedures. The Board of Directors as a whole will continue to monitor MBC’s general and specific risks and take action
to manage such risk as it deems appropriate or necessary.
Board
of Directors’ and Committee Meetings
During
the fiscal year ended December 31, 2015, the Board of Directors held two meetings and the Audit/Finance Committee held six meetings.
One director did not attend one meeting of the Board of Directors and no director attended fewer than 75% of the meetings of any
committees of which such Director was a member.
Listed
below are the committees of the Board of Directors, along with the names of the Directors who served as members of each committee
during 2015.
Audit/Finance
Committee. The Board of Directors has a standing Audit/Finance Committee.
Messrs.
Merchant, Price (Chair), and Heldfond served as the members of the Audit/Finance Committee (established in accordance with Section
3(a)(58)(A) of the Exchange Act) for the fiscal year ended December 31, 2015. This committee met six times during fiscal year
2015. Effective November 10, 2015, Mr. James Grossman was appointed as a member of this committee. The Audit/Finance Committee
reviews, acts on, and reports to the Board of Directors with respect to various auditing, accounting and finance matters, including
the selection of the Company’s auditors, the scope of the annual audits, the fees to be paid to the auditors, the performance
of the Company’s auditors, and the accounting practices of the Company. In the judgment of MBC’s Board of Directors,
the members of the Committee are “independent,” as that term is defined in Rule 5605(a)(2) of the NASDAQ Listing Rules
and also meet the additional criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1) under the Exchange
Act. The Board has determined that Mr. Price qualifies as an “audit committee financial expert” under SEC rules.
Nominating
Committee. Due to its limited size, the Board of Directors does not have a nominating committee or a committee performing
similar functions. Instead, all of the Directors participate in the director nomination process. Mr. Singh and Dr. Mallya do not
meet the criteria to qualify as “independent” under the rules of NASDAQ or under the applicable rules of the other
national securities exchanges.
Compensation
Committee. Messrs. Heldfond (Chair), Price, and Laybourn served as the members of MBC’s Compensation Committee for the
full fiscal year ended December 31, 2014, and effective November 10, 2015, Mr. Joseph Cannata was appointed as a member of this
committee. The Compensation Committee considers all matters of compensation with respect to the chief executive officer, president,
any vice president, and any other senior executive, and makes recommendations to the Board of Directors regarding the compensation
of such persons. The Compensation Committee also makes determinations with respect to the granting of stock awards to directors
who are also employees of MBC. In the judgment of MBC’s Board of Directors, the members of the Compensation Committee are
“independent” as that term is defined in Rule 5605(a)(2) of the NASDAQ Listing Rules.
ITEM
11. EXECUTIVE COMPENSATION.
SUMMARY
COMPENSATION TABLE
The
following table sets forth the annual compensation of our Chief Executive Officer (principal executive officer) and Chief Financial
Officer (principal financial officer), who are the only MBC employees whose total compensation exceeded $100,000 during the fiscal
year ended December 31, 2015.
Neither
of these executive officers has been issued equity shares or stock options as compensation to date.
Name and Principal
Position | |
Year | |
Salary
($) | |
Bonus
($) | |
All Other
Compensation
($)* | |
Total
($) |
| (a) | |
(b) | |
(c) | |
(d) | |
(i) | |
(j) |
| Yashpal Singh President and Chief Executive Officer | |
| 2015 | | |
| 311,600 | | |
| 30,500 | | |
| 16,800 | | |
| 358,900 | |
| | |
| 2014 | | |
| 304,000 | | |
| 30,500 | | |
| 22,300 | | |
| 356,800 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Mahadevan Narayanan Chief Financial Officer and Corporate Secretary | |
| 2015 | | |
| 181,100 | | |
| 18,200 | | |
| 14,000 | | |
| 213,300 | |
| | |
| 2014 | | |
| 181,100 | | |
| 18,200 | | |
| 12,700 | | |
| 212,000 | |
*
Other compensation includes use of a company vehicle, vacation reimbursement, health benefits for such executive officers and
their respective immediate dependent family members, and, with respect to the Chief Executive Officer only, life insurance benefits.
Compensation
Narrative
The
Compensation Committee of the Board determines and makes recommendations to the Board of Directors regarding the compensation
for our executive officers. The Compensation Committee reviews all components of the executive officers’ compensation, including
making individual compensation decisions and reviewing and revising compensation guidelines as appropriate. The Compensation Committee
also consults with the Chief Executive Officer regarding revisions to the compensation of the Chief Financial Officer and other
non-executive employees, as appropriate.
We
have entered into an Employment Agreement with our Chief Executive Officer that sets forth the terms of his employment and provides
for certain benefits. The term of the agreement was extended to June 30, 2016. We do not currently have an employment agreement
in place with our Chief Financial Officer. We do not have any severance payment arrangements other than with the Chief Executive
Officer and Chief Financial Officer. We have agreed to reimburse travel expenses for the Chief Executive Officer and his family
to return to their home country upon the termination of the Chief Executive Officer’s employment with us. In addition, if
the Chief Executive Officer is terminated either with or without cause without 12 months’ notice, he is entitled to be paid
an amount equal to twelve months of his base salary. We do not have any payment arrangements that would be triggered by a “change
in control” of MBC. Additionally, if the Chief Financial Officer is terminated either with or without cause without 12 months’
notice, he is entitled to be paid an amount equal to twelve months of his base salary. We do not have any payment arrangements
that would be triggered by a “change in control” of MBC.
Total
compensation for the Chief Executive Officer and Chief Financial Officer consists of base salary, annual cash bonus payments,
health care benefits for each such officer and his immediate dependent family members, use of a company vehicle, vacation reimbursement
and, with respect to the Chief Executive Officer only, life insurance.
Elements
of Compensation
MBC
selected elements of compensation to provide incentives for its executive officers to relocate to the United States from India.
In so doing, MBC reviewed the compensation packages of its executive officers at their prior positions in India, so that comparable
packages could be provided.
Base
Salary
The
Compensation Committee reviews executive officers’ base salaries on an annual basis. Given our stock performance and financial
situation, there is currently no salary component directly tied to our stock price or to our financial performance. Effective
as of January 1, 2012, the Compensation Committee recommended and the Board of Directors increased the annual base salary of the
Chief Executive Officer and the Chief Financial Officer to $304,000 and $181,100 respectively. Effective October 1, 2015,the base
salary of the Chief Executive Officer was increased to $334,400 by merging his annual cash bonus element into his base salary.
No adjustments have been made to the salary of Chief Financial Officer during fiscal year 2015.
Annual
Cash Bonus
The
compensation packages for the Chief Executive Officer and the Chief Financial Officer also contain a component providing for payment
of annual cash bonuses. Given MBC’s past working capital constraints, the Compensation Committee historically determined
that a percentage of the cash compensation of the executive officers would be in the form of annual cash bonuses that could be
disbursed following the completion of the applicable fiscal year. In the past few years approximately 10% of the cash compensation
paid to each of the Chief Executive Officer and the Chief Financial Officer was paid in the form of a bonus rather than as salary.
Effective October 1, 2015, the annual cash bonus element of the Chief Executive Officer was merged with his base salary.
Perquisites
and Personal Benefit
In
addition to salary and annual bonus, the total compensation of our Chief Executive Officer and Chief Financial Officer includes
perquisites and personal benefits. The types of perquisites and personal benefits awarded to such officers were determined when
each such officer commenced employment with us and are substantially of the same nature as the perquisites provided to such executive
officer by previous employers. The perquisites available to the executive officers consist of: use of a company vehicle, health
care benefits for the executive officer and his immediate family, reimbursement of certain specified vacation expenses and life
insurance.
Equity
Plans
We
do not currently maintain any equity compensation plans for or provide any form of equity compensation to our executive officers.
Severance
On
August 27, 2009, we entered into a Separation and Severance Agreement (the “Separation Agreement”) with Mr. Yashpal
Singh, our 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 us 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 (x) 2.5 times his average monthly base salary (calculated over the
twelve (12) month period preceding the termination event), multiplied by (y) the number of years (on a pro-rated basis) he had
been employed by us 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). In addition, we agreed to pay COBRA premiums for Mr. Singh and his spouse until the earlier of (i) the
effective date on which he obtains comparable health insurance from a subsequent employer or (ii) eighteen (18) months following
his Termination Date. Mr. Singh shall also be entitled to accrued salary, vacation time and benefits as set forth in Mr. Singh’s
employment agreement.
If
Mr. Singh’s employment is terminated without Cause, in addition to the severance payment described above, he shall also
receive either (i) 365 days prior written notice or (ii) a lump sum payment equal to twelve (12) months of his base salary at
the rate in place at the Termination Date (the “Notice Payment”).
In
case of Mr. Singh’s resignation without Good Reason, he shall be entitled to accrued salary, vacation time and benefits
set forth in his employment agreement but shall not be entitled to the severance payment or the Notice Payment.
If
Mr. Singh is terminated by us for Cause, he shall be entitled to (i) accrued salary, vacation time and benefits as set forth in
his employment agreement and (ii) if we do not provide Mr. Singh at least twelve (12) months prior notice, the Notice Payment.
Mr. Singh shall not be entitled to the severance payment in case of termination by MBC for Cause.
Payments
due to Mr. Singh under the Separation Agreement shall be paid in equal monthly installments by the Company over a 20 month period.
The receipt of payments is contingent on Mr. Singh executing a release of claims for the benefit of the Company.
For
purposes of illustrating the potential amounts payable to Mr. Singh under the Separation Agreement, assuming a termination date
of March 31, 2016, Mr. Singh would receive the following approximate amounts of compensation for the applicable triggering event:
termination by the Company for Cause - $319,200; completion of term of Employment Agreement - $798,100 plus COBRA payments; termination
due to disability or death - $798,100 plus COBRA payments; termination by Mr. Singh for Good Reason - $798,100 plus COBRA payments;
or termination by the Company without Cause - $1,117,300 plus COBRA payments.
Except
for the Employment Agreement and Separation Agreement with Mr. Singh and a similar arrangement (described below) with Mr. Mahadevan
Narayanan, the Company’s Chief Financial Officer and Secretary, MBC does not currently maintain any other retirement plans
nor provide any post-retirement benefits to any employee or executive officer.
The
Company does not currently have an employment agreement in place with its Chief Financial Officer, but may enter into an employment
agreement with such executive officer in the future.
Pursuant
to a resolution adopted on September 10, 2013 by the Company’s Board of Directors, we entered into a Separation and Severance
Agreement (the “CFO Separation Agreement”) with Mr. Mahadevan Narayanan, our Chief Financial Officer and Secretary
on April 12, 2016.
Pursuant
to the terms of the Separation Agreement, upon Mr. Narayanan’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 us 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 (x) 2.5 times his average monthly base salary (calculated over
the twelve (12) month period preceding the termination event), multiplied by (y) the number of years (on a pro-rated basis) he
had been employed by us at the Termination Date (as defined in the Separation Agreement); provided, however, that the severance
payment may not exceed thirty (30) months of Mr. Narayanan’s average monthly base salary (calculated over the twelve (12)
months preceding his termination date). In addition, we agreed to pay COBRA premiums for Mr. Narayanan and his spouse until the
earlier of (i) the effective date on which he obtains comparable health insurance from a subsequent employer or (ii) eighteen
(18) months following his Termination Date.
If
Mr. Narayanan’s employment is terminated without Cause, in addition to the severance payment described above, he shall also
receive either (i) 365 days prior written notice or (ii) a lump sum payment equal to twelve (12) months of his base salary at
the rate in place at the Termination Date (the “Notice Payment”).
In
case of Mr. Narayanan’s resignation without Good Reason, he shall be entitled to accrued salary, vacation time and benefits
set forth in his employment agreement but shall not be entitled to the severance payment or the Notice Payment.
If
Mr. Narayanan is terminated by us for Cause, he shall be entitled to (i) accrued salary, vacation time and benefits through the
Termination Date and (ii) if we do not provide Mr. Narayanan at least twelve (12) months prior notice, the Notice Payment. Mr.
Narayanan shall not be entitled to the severance payment in case of termination by MBC for Cause.
Payments
due to Mr. Narayanan under the Separation Agreement shall be paid in equal monthly installments by the Company over a 20 month
period. The receipt of payments is contingent on Mr. Narayanan executing a release of claims for the benefit of the Company.
For
purposes of illustrating the potential amounts payable to Mr. Narayanan under the Separation Agreement, assuming a termination
date of March 31, 2016, Mr. Narayanan would receive the following approximate amounts of compensation for the applicable triggering
event: termination by the Company for Cause - $181,100; termination due to disability or death - $452,800 plus COBRA payments;
termination by Mr. Narayanan for Good Reason - $452,800 plus COBRA payments; or termination by the Company without Cause - $633,900
plus COBRA payments.
DIRECTORS’
COMPENSATION FOR THE YEAR 2015
Dr.
Vijay Mallya, Chairman of the Board, is paid $120,000 per year by MBC for services rendered as Chairman, and £89,600 per
year (approximately $136,900 in United States dollars at the average exchange rate for the year 2015) by UBIUK for promoting our
products in the Foreign Territory outside the United Kingdom.
Effective
as of January 1, 2012, the Board adopted a directors compensation plan ( the “Directors’ Compensation Plan”)
with respect to the compensation of Non-Employee (as defined therein) members of the Board for their services as directors. The
Directors’ Compensation Plan was subsequently approved by the shareholders in January 2013. Under the terms of the Directors’
Compensation Plan, each Non-Employee director receives a fixed annual retainer of $15,000 as well as additional fees of $1,250
per meeting of the Board and $1,250 per committee meeting attended. The chairs of the Compensation Committee and the Audit/Finance
Committee each receive $4,500 in fees for acting as chairpersons of such committees. In addition, each Non-Employee Director on
January 1 of each calendar year during the five year period commencing January 1, 2012 and ending December 31, 2016 shall receive
an addition $2,000 per year.
| | |
Fees Earned
or Paid in Cash | | |
Total | |
| Name | |
($) | | |
($) | |
| (a) | |
(b) | | |
(h) | |
| Joseph Cannata | |
| 5,000 | # | |
| 5,000 | |
| James Grossman | |
| 6,250 | ## | |
| 6,250 | |
| Scott Heldfond | |
| 31,500 | * | |
| 31,500 | |
| Michael Laybourn | |
| 19,500 | ** | |
| 19,500 | |
| Dr. Vijay Mallya | |
| 256,900 | | |
| 256,900 | |
| Jerome Merchant | |
| 25,750 | ^ | |
| 25,750 | |
| Sury Rao Palamand | |
| 18,250 | ^^ | |
| 18,250 | |
| Kent Price | |
| 31,500 | @ | |
| 31,500 | |
| # |
Fee
for attending one Board meeting calculated at $1,250 per meeting and prorated fixed annual retainer of $3,750. Fees earned
for the year 2015 were not paid. Such unpaid fees are accrued and to be paid in the future out of available cash. |
| |
|
| ## |
Fee
for attending one Board meeting and one committee meeting calculated at $1,250 per meeting and prorated fixed annual retainer
of $3,750. Fees earned for the year 2015 were not paid. Such unpaid fees are accrued and to be paid in the future out of available
cash. |
| |
|
| * |
Fee
for attending two Board meetings and six committee meetings calculated at $1,250 per meeting, $15,000 fixed annual retainer,
$2,000 additional fixed retainer and $4,500 for acting as Chairman of Compensation Committee. $9,375 of the fees earned for
the year 2013 and $30,250 of the fees earned for the year 2014 were not paid and no payment was made for the fees earned during
2015. Such unpaid fees are accrued and to be paid in the future out of available cash. |
| |
|
| ** |
Fee
for attending two Board meetings at $1,250 per meeting, fixed annual retainer of $15,000 and $2,000 additional fixed retainer.
$5,750 of the fees earned for the year 2013 and $17,050 of the fees earned for the year 2014 were not paid and no payment
was made for the fees earned during 2015. Such unpaid fees are accrued and to be paid in the future out of available cash.
|
| |
|
| ^ |
Fee
for attending two Board meetings and five committee meetings calculated at $1,250 per meeting, $15,000 fixed annual retainer
and $2,000 additional fixed retainer. $8,250 of the fees earned for the year 2013 and $24,500 of the fees earned for the year
2014 were not paid and no payment was made for the fees earned during 2015. Such unpaid fees are accrued and to be paid in
the future out of available cash. |
| |
|
| ^^ |
Fee
for attending one Board meeting at $1,250 per meeting, fixed annual retainer of $15,000 and $2,000 additional fixed retainer.
$5,750 of the fees earned for the year 2013 and $18,250 of the fees earned for the year 2014 were not paid and no payment
was made for the fees earned during 2015. Such unpaid fees are accrued and to be paid in the future out of available cash.
|
| |
|
| @ |
Fee
for attending two Board meetings and six committee meetings calculated at $1,250 per meeting, $15,000 fixed annual retainer,
$2,000 additional fixed retainer and $4,500 for acting as Chairman of Audit Committee. $16,750 of the fees earned for the
year 2013 and $30,250 of the fees earned for the year 2014 were not paid and no payment was made for the fees earned during
2015. Such unpaid fees are accrued and to be paid in the future out of available cash |
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs.
Cannata, Heldfond (Chair), Laybourn and Price served on MBC’s Compensation Committee for the fiscal year ended December
31, 2015. Mr. Laybourn served as MBC’s President from inception in 1983 through December 1999 and its Chief Executive Officer
from inception until October 1997. No member of the Compensation Committee or executive officer of the Company has a relationship
that would constitute an interlocking relationship with executive officers or directors of another entity.
COMPENSATION
COMMITTEE REPORT
The
Compensation Committee has reviewed and discussed with Management the Compensation Discussion and Analysis contained in this Annual
Report on Form 10-K. Based on the Compensation Committee’s review of and discussions with Management with respect to the
Compensation Discussion and Analysis, the Committee recommended to the Board of Directors that the Compensation Discussion and
Analysis be included in MBC’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
The
Compensation Committee
Scott
R. Heldfond ( Chair )
Joseph
Cannata
Michael
Laybourn
Kent
D. Price
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information
regarding Securities Authorized for Issuance under Equity Compensation Plans is provided in Item 5 above.
The
following table sets forth certain information known to the Company regarding the beneficial ownership of MBC’s Common Stock
and Series A Preferred Stock as of February 29, 2016, for each shareholder known by us to own beneficially 5% or more of the outstanding
shares of our Common Stock or Series A Preferred Stock:
| Security Ownership of Certain Beneficial Owners | |
| | |
| |
| Name and Address | |
Amount and Nature
of Beneficial
Ownership (1) | | |
Percent of
Class | |
| COMMON STOCK | |
| | | |
| | |
United Breweries of America, Inc.
700 Larkspur landing Circle, Suite 208
Larkspur,
CA 94939 | |
| 3,087,818
| (2) | |
| 24.5 | % |
Inversiones Mirabel S.A.
Hong Kong Bank Building
6th Floor, Samuel Lewis Avenue
P
O Box 6-4298, El Dorado
Panama City, Panama | |
| 5,500,000 | | |
| 43.6 | % |
United Breweries (Holdings) Limited.
100/1, Richmond Road,
Bangalore - 560 025, India | |
| 8,587,818
| (2),(3) | |
| 68.1 | % |
Vijay Mallya
United Breweries of America, Inc.
700 Larkspur landing Circle, Suite 208
Larkspur, CA 94939 | |
| 8,587,818
| (4) | |
| 68.1 | % |
(1)
Applicable percentages of ownership are based on 12,611,133 shares of Common Stock outstanding as of March 23, 2016.
(2)
Does not include 2,482,400 shares issuable to UBA upon conversion of certain convertible notes issued by MBC to UBA under a Master
Line of Credit Agreement (For additional information, see “Item 13. Certain Relationships and Related Transactions”).
UBHL is the ultimate beneficiary of substantially all of the shares owned by both UBA and Inversiones.
(3)
Includes all shares held by our two largest shareholders, UBA and Inversiones. UBHL is the beneficial owner of UBA and Inversiones
because they are both controlled by Rigby International Corp., a company registered in the British Virgin Island, with primary
offices at Vanterpool Plaza, 2nd Floor, Wickhams Cay 1, Road Town, Tortola, British Virgin Island 2 and a mailing address c/o
CAS SA, 12-14 Avenue, Riverdil, CH-1260, Lyon, Switzerland, (“Rigby”). Rigby is a wholly-owned subsidiary of UBHL.
(4)
Includes all shares indirectly held by UBHL. Does not include 2,482,400 shares issuable to UBA upon conversion of certain convertible
notes issued by MBC to UBA described in footnote (2) above. Dr. Mallya disclaims beneficial ownership of the reported securities
except to the extent of his pecuniary interest therein.
The
following table sets forth certain information known to the Company regarding the beneficial ownership of MBC’s Common Stock
and Series A Preferred Stock as of February 29, 2016, for each director, each executive officer, and all directors and executive
officers of MBC as a group. Except as otherwise noted, we believe that the beneficial owners of the Common Stock and Series A
Preferred Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect
to such shares, subject to community property laws where applicable.
| Security Ownership of Management | |
| | |
| |
COMMON
STOCK | |
Amount and Nature
of Beneficial
Ownership | | |
Percent
of
Class (1) | |
| Joseph Cannata | |
| — | | |
| — | |
| James Grossman | |
| — | | |
| — | |
| Scott R. Heldfond | |
| 257,275 | | |
| 2.0 | % |
| H. Michael Laybourn | |
| 492,221 | | |
| 3.9 | % |
| Vijay Mallya | |
| 8,587,818 | (2) | |
| 68.1 | % |
| Jerome G. Merchant | |
| 290,530 | | |
| 2.3 | % |
| Mahadevan Narayanan | |
| — | | |
| — | |
| Sury Rao Palamand (3) | |
| 332,110 | | |
| 2.6 | % |
| Kent D. Price | |
| 428,401 | | |
| 3.4 | % |
| Yashpal Singh | |
| — | | |
| — | |
| All Directors and executive officers as a group (10persons) | |
| 10,388,355 | | |
| 82.4 | % |
| | |
| | | |
| | |
| SERIES A PREFERRED STOCK | |
| | | |
| | |
| H. Michael Laybourn | |
| 6,100 | | |
| 2.7 | % |
| All Directors and executive officers as a group (10persons) | |
| 6,100 | | |
| 2.7 | % |
*Amount
represents less than 1% of the outstanding securities of the class.
(1)
Applicable percentages of ownership are based on (i) 12,611,133 shares of Common Stock outstanding as of March 23, 2016 and (ii)
227,600 shares of Series A Preferred Stock outstanding as of March 23, 2016.
(2)
Includes all shares indirectly held by UBHL. Does not include 2,482,400 shares issuable to UBA upon conversion of certain convertible
notes issued by MBC to UBA described in footnote (2) of Table 1 above. Dr. Mallya disclaims beneficial ownership of the reported
securities except to the extent of his pecuniary interest therein.
(3)
Shares are held by a revocable trust for the benefit of Mr. Palamand’s immediate family and lineal descendants. Mr. Palamand
serves as the trustee of the trust.
CHANGES
IN CONTROL
There
are no arrangements currently known to us which may result in a change in control of our Company at a future date.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Since
the beginning of fiscal year 2012, we were a participant in the following transactions in which (i) the amount involved exceeded
the lesser of (A) $120,000, or (B) one percent of the average of our total assets at year-end for the last two completed fiscal
years and (ii) a related person had or will have a direct or indirect material interest:
UBA
Line of Credit
On
August 31, 1999, MBC and UBA, one of our principal shareholders, entered into a Master Line of Credit Agreement, which was subsequently
amended in April 2000 and February 2001 (the “Credit Agreement”). The terms of the Credit Agreement provide us with
a line of credit in a principal amount of up to $1,600,000. We have executed an Extension of Term of Notes under the Master Line
of Credit Agreement (the “Extension Agreement”) with UBA. The UBA Notes have been extended until June 2012 with automatic
renewals after such maturity date for successive one year terms, provided that either the Company or UBA may elect not to extend
the term upon written notice given to the other party no more than 60 days and no fewer than 30 days prior to the expiration of
such term. No notice of election not to extend the term was received prior to the expiration of the period ending June 30, 2015,
so the current term has been extended until June 30, 2016.
We
have issued thirteen (13) promissory notes to UBA pursuant to the Credit Agreement between the Company and UBA and one note on
substantially similar terms to UBA, but unrelated to the Credit Agreement, between September 1999 and March 2005. On December
28, 2001, we entered into a Confirmation of Waiver with UBA which confirmed that as of August 13, 2001, UBA waived its rights
with regard to the conversion rate protection set forth in the UBA Notes then outstanding. Such waiver does not apply to the single
note issued to UBA on March 2, 2005 that was not related to the Credit Agreement. The aggregate outstanding principal amount of
the UBA Notes as of December 31, 2015 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,764,700,
for a total amount due of $3,680,100.
The
outstanding principal amount of the notes and the unpaid interest thereon may be converted, at UBA’s discretion, into shares
of our unregistered Common Stock at a conversion rate of $1.50 per share for the notes issued pursuant to the Credit Agreement
and $1.44 for the note issued on March 2, 2005. As of December 31, 2015, the outstanding principal and interest on the UBA Notes
was convertible into approximately 2,471,800 shares of our Common Stock.
As
of February 29, 2016, the aggregate outstanding principal amount of the UBA Notes was $1,915,400, and the accrued but unpaid interest
thereon was equal to approximately $1,780,500. As of February 29, 2016, the entire amount of the outstanding principal and accrued
but unpaid interest owed with respect to the UBA Notes was convertible into approximately 2,482,400 shares of our Common Stock.
As of February 29, 2016, UBA beneficially owns approximately 24.5% of our outstanding Common Stock (excluding any shares issuable
upon the conversion of the notes issued to UBA). Our Chairman, Dr. Vijay Mallya, is also the Chairman of the board of directors
of UBA. During each of fiscal years 2015 and 2014, the largest aggregate amount of principal outstanding was $1,915,400. No principal
or interest was paid during fiscal year 2015 or 2014.
License
Agreement
In
July 2001, we entered into a Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., a Delaware corporation
affiliated with UB Limited, pursuant to which we obtained a royalty-free, exclusive license to use the Kingfisher trademark and
trade name in connection with the brewing and distribution of beer in the United States. This agreement will remain in effect
for as long as the Distribution Agreement (described below) between UBIUK and KBEL remains in effect. The Distribution Agreement
is scheduled to expire in October 2018. The Company has negotiated arrangements with Kingfisher America to continue to brew and
distribute beer in the United States using the Kingfisher trademark pursuant to the License Agreement. If the Company cannot obtain
the right to continue to brew and distribute beer using the Kingfisher trademark on commercially reasonable terms, our results
of operations, cash flows and financial position may be materially adversely affected.
Because
our Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the board of directors of UB Limited, the transactions represented
by this license agreement may be deemed to be related party transactions.
The
dollar value of the license agreement cannot be accurately estimated.
Distribution
Agreement
UBIUK
entered into a Distribution Agreement with its wholly-owned subsidiary KBEL on October 9, 1998. Under this agreement, which was
subsequently amended by a Supplemental Agreement dated as of October 24, 2001 and a deed of variation dated March 11, 2013 and
effective October 9, 2013 (together, the “Distribution Agreement”), UBIUK granted KBEL an exclusive sublicense for
the distribution of all lager and other beer products brewed or prepared for sale in the Foreign Territory, and a sublicense to
use the Kingfisher trademark and trade name, to manufacture, package, market, distribute, and sell beer and other products using
the Kingfisher trademark and logo, and to enter into the Brewing License Agreement described below. The Distribution Agreement,
which also requires KBEL to pay UBIUK a royalty fee of 50 British pence (approximately $0.82 at the average exchange rates in
effect during fiscal year 2015) for every 100 liters (26 gallons) of beer brewed for sale in the Foreign Territory, will expire,
with respect to the Foreign Territory sublicense, in October 2018. The royalty due to UBIUK for the year 2015 was approximately
$61,000 and for the year 2014 was approximately $67,700.
Brewing
License Agreement
Effective
October 26, 2001, MBC entered into a Brewing License Agreement with KBEL in the United States, under the terms of which KBEL granted
us an exclusive license to brew and distribute Kingfisher Premium Lager, in exchange for a royalty, payable to KBEL, of eighty
cents ($0.80) for each case of Kingfisher Premium Lager sold by us under this agreement. The Brewing License Agreement expires
pursuant to its terms in October 2018. Pursuant to a deed of variation, after October 9, 2013, the royalty payable to KBEL was
reduced to $0.56 per US barrel. The royalty due to KBEL pursuant to the Brewing License Agreement for the year 2015 was approximately
$6,800 and for the year 2014 was approximately $6,400.
Brewing
Agreement
On
April 18, 2013, KBEL and UBIUK entered into a Contract Brewing and Distribution Agreement (the “Brewing Agreement”)
with HUK. Affiliates of HUK are significant shareholders of UB Limited. In addition, UB Limited has arrangements with affiliates
of HUK pursuant to which UB Limited brews Heineken beer for the Indian market. The Chairman of the board of directors of the Company,
Dr. Vijay Mallya, is also the Chairman of the board of directors of UB Limited.
Commencing
October 9, 2013, the Brewing Agreement subcontracted to HUK the exclusive right to manufacture, package and supply Kingfisher
beer for sale in the United Kingdom and to manufacture and package Kingfisher beer for export by KBEL to Europe (excluding Germany)
for a period of five years whereupon the Brewing Agreement will automatically terminate. In addition, under the Brewing Agreement,
in exchange for royalty payments to KBEL, HUK received the right to be the sole and exclusive reseller of the Product (as defined
in the Brewing Agreement) to certain customers. If HUK fails to sell a specified amount to such customers, KBEL will be entitled
to withdraw such exclusivity upon the terms provided in the Brewing Agreement. KBEL will continue to sell the Product purchased
from HUK to certain wholesale and on trade customers in the United Kingdom. HUK is entitled to terminate the Brewing Agreement
on thirty days’ notice upon a change of control of KBEL, or immediately upon the occurrence, and failure to rectify within
30 days, of an Event of Default or Potential Event of Default (as such terms are defined in the HUK Loan Agreement, described
below). KBEL purchased beer from HUK for the amount of $11,713,300 during the year 2015 and $12,884,700 in the year 2014. Royalty
fees receivable from HUK in 2015were $68,700 and in 2014 were $61,800.
HUK
Loan Agreement
On
April 18, 2013, KBEL entered into a loan agreement with HUK pursuant to which HUK provided KBEL with a secured term loan facility
of £1,000,000 on October 9, 2013. The loan has to be repaid in twelve equal quarterly installments commencing from January
9, 2014. Interest on the loan will accrue from day to day and is calculated on the basis of the actual number of days elapsed
and a year of 365 days. Such interest 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 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 described and defined below. The
largest amount of principal outstanding under the loan agreement in 2015 and 2014 was £666,700 and £1,000,000 respectively.
The amount of principal outstanding as of March 27, 2016 was £250,000. Principal and interest repayments in 2015 were £333,300
and £25,400 respectively. Principal and interest repayments in 2014 were £333,300 and £56,900 respectively.
Sub-Licence
Agreement
On
April 18, 2013, HUK, UBIUK, KBEL and UB Limited entered into that certain Heineken Sub-Licence Agreement (the “Sub-Licence
Agreement”) pursuant to which HUK has the option, exercisable upon a default or breach by KBEL under the Brewing Agreement
or the loan agreement with HUK described above or a change of control or bankruptcy of KBEL, to acquire an exclusive license from
UBIUK to produce, market and sell Kingfisher beer in the United Kingdom. Such license would expire on the earlier of the date
certain debts (the “Debt”) between HUK and KBEL are settled, and October 9, 2018. As consideration for such exclusive
license, HUK would reduce the Debt pursuant to the terms of the Sub-Licence Agreement. HUK may terminate the Sub-Licence Agreement
upon a material breach by UBIUK, after notice and a thirty day cure period, or, immediately upon the termination of UBIUK’s
license pursuant to its agreement with UB Limited. Upon termination of the Sub-Licence Agreement, the Debt shall become immediately
due and payable. HUK’s aggregate liability for breaches of the Sub-Licence Agreement is capped.
The
dollar value of the Sub-Licence Agreement cannot be accurately estimated.
MBC’s
two largest shareholders are UBA, which owns 24.5% of MBC’s Common Stock, and Inversiones, which owns 43.6% of MBC’s
Common Stock. UBHL is the ultimate beneficial owner of UBA and Inversiones because both UBA and Inversiones are controlled by
Rigby International Corp, a wholly-owned subsidiary of UBHL.
MBC
received a letter dated November 11, 2013 from UBHL, MBC’s indirect majority shareholder, dated November 11, 2013. The chairman
of MBC’s Board, Dr. Vijay Mallya, is also the chairman of the board of directors of UBHL. In the letter, UBHL sets forth
its understanding that its investment in MBC will allow MBC to reach certain goals. In light of such understanding, UBHL is willing
to commit to invest $2,000,000 in MBC in four installments to be paid every six months over a two year period. The letter does
not state definitive terms for the proposed investment. Pursuant to this letter, UBHL will consider additional investment based
on a business plan to be provided by MBC.
On
January 22, 2014, MBC issued a promissory note to Catamaran in the principal amount of $500,000. Catamaran Holdings, Ltd., 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. 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, the Company issued a fourth note
to Catamaran in the principal amount of $500,000 on terms similar to the notes issued earlier, the proceeds of which were received
by the Company on July 6, 2015.
Pursuant
to the terms of each note, MBC promises to pay the principal sum with accrued interest, as described below, to Catamaran within
six months following the date of each note, subject to the receipt by MBC of a Shareholder Investment in an amount sufficient
either (a) to pay all the notes through Permitted Payments, as defined below, or (b) to pay all the notes together with certain
existing obligations of MBC to MB Financial pursuant to the Credit and Security Agreement dated as of June 23, 2011 (as amended,
modified or supplemented from time to time) among MBC, Releta, and MB Financial in full. “Permitted Payments” are
payments made from the Shareholder Investment.
On
March 14, 2016, a fifth note was issued by the Company in the principal amount of $325,000 to Catamaran on terms substantially
similar to the previous notes, except that the definition of “Permitted Payment” was revised to mean, for purposes
of this fifth note, a payment made from a bridge loan by the Company’s majority shareholder in excess of $600,000. On March
30, 2016, a sixth note was issued by the Company in the principal amount of $75,000 to Catamaran on terms substantially similar
to the fifth note.
Pursuant
to the terms of the fifth and sixth notes, the Company promises to pay the principal sum of $325,000 and $75,000 respectively
with accrued interest, as described below, to Catamaran within six months following the dates of the such notes, subject to the
receipt by the Company of a bridge loan from its majority shareholder (the “Shareholder Loan”) in an amount
sufficient either (a) to pay such notes through Permitted Bridge Loan Payments, or (b) to pay both the notes and certain existing
obligations of the Company to the Lender in full.
If
MBC is not able to satisfy its obligations on any Catamaran Note within six month following the date of such Catamaran Note, the
Catamaran Note shall be automatically extended for additional six month terms until a Permitted Payment (for the first through
fourth notes) or Permitted Bridge Loan Payment (for the fifth and sixth notes), as the case may be, can be made or such note is
otherwise paid. Interest shall accrue from the date of the Catamaran Note 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
Catamaran Notes may be prepaid without penalty at the option of MBC; however, no payments on the Catamaran Note may be made unless
such payment is a Permitted Payment (the first through fourth notes), Permitted Bridge Loan Payment (the fifth and sixth notes),
as the case may be, or certain existing obligations of MBC to MB Financial pursuant to the Agreement have been satisfied in full.
The Catamaran Notes may not be amended without the prior written consent of MB Financial.
No
interest has yet been paid on the Catamaran Notes; the largest aggregate amount of principal outstanding under the Catamaran Notes
as of December 31, 2015 and 2014 were $2,000,000 and $1,000,000 respectively. As of March31, 2016,the amount of principal outstanding
was $2,400,000.
DIRECTOR
INDEPENDENCE
The
Board has determined that the following directors qualify as “independent” in accordance with the published listing
requirements of NASDAQ: Mr. Cannata, Mr. Grossman, Mr. Heldfond, Mr. Laybourn, Mr. Palamand, Mr. Merchant and Mr. Price. Mr. Singh
is not “independent” because he is an employee of MBC. Dr. Mallya is not independent since he has received payments
in excess of the applicable threshold from the Company during the last three (3) years. Prior to 2007, Mr. Merchant provided certain
consulting services to the Company, however, given the timing and nature of such services as well as the amount of compensation
provided in relation thereto, the Board has determined that Mr. Merchant meets the criteria for being an “independent director”.
The
NASDAQ rules contain both objective tests and a subjective test for determining who is an “independent director.”
The objective tests provide that a director is not considered independent if he (i) is an employee of the Company (or a parent
or subsidiary) (or has been in the past three (3) years); (ii) has accepted (or a family member has accepted) compensation from
the Company in excess of $120,000 during any period of twelve (12) consecutive months within the preceding three (3) year period
(subject to certain exceptions); (iii) has a family member that was employed as an executive officer of the Company (or a parent
or subsidiary) during the past three (3) years; (iv) is (or a family member is) a controlling shareholder or an executive officer
of an organization to which the Company made or received payments in the current year or at any time during the past three (3)
years that exceed the greater of (a) five percent (5%) of the recipient’s consolidated gross revenues or (b) $200,000 for
that year; (v) is (or has a family member who is) employed as an executive officer of another entity where at any time during
the past three (3) years any of the executive officers of the Company served on the compensation committee of such other entity;
or (vi) is (or has a family member who is) a current partner of the Company’s outside auditor who worked on the Company’s
audit at any time during any of the past three (3) years. The subjective test is based on the standard that an independent director
must be a person who lacks a relationship that, in the opinion of the Board, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
Please
see additional disclosure set forth under the heading “Board of Directors’ and Committee Meetings” above.
The
Board of Directors does not have a nominating committee or a committee performing similar functions. Instead, all of the Directors
participate in the director nomination process. As discussed above, Mr. Singh and Dr. Mallya are not “independent”
directors under the NASDAQ standards for independence.
COMPANY
RELATIONSHIPS
UBA
and Inversiones own 24.5% and 43.6% of the outstanding shares of our Common Stock, respectively, as of February 29, 2016. UBA
has also advanced us the principal amount of $1,915,400 under separate convertible notes. As of February 29, 2016 the principal
amount outstanding on the notes together with the accrued interest was convertible into approximately 2,482,400 shares of our
Common Stock. Because UBHL is the ultimate parent of both UBA and Inversiones, UBHL is the ultimate beneficiary of 68.1% the shares
of our Common Stock. Refer to “Item 12 - Security ownership of certain beneficial owners and management and related stockholder
matters” above.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
Company has appointed RBSM, LLP (“RBSM”) as our independent auditors to perform the audit of our financial statements
for fiscal year 2015 and fiscal year 2014.
AUDIT
FEES. The aggregate fees billed by RBSM during the year 2015 and 2014 for the audit of our annual consolidated financial statements
was $84,000 and $80,000 respectively. RBSM billed an additional $37,800 and $36,000 towards RBSM’s review of interim financial
statements in connection with our Quarterly Reports on Form 10-Q for such years. The fees described in this paragraph represented
approximately 89% of the total fees for services billed to us by RBSM during 2015 and 2014.
AUDIT
RELATED FEES. RBSM did not bill us any amount in fees for assurance or related services in 2015 or 2014.
TAX
FEES. The aggregate fees billed by RBSM during 2015 and 2014 for tax products and services related to the preparation of our tax
returns other than those described in the foregoing paragraphs was $15,225 and $14,500 respectively. Such fees represented approximately
11% of the total fees for services rendered to us by RBSM during 2015 and 2014.
ALL
OTHER FEES. RBSM did not bill us for any amount towards fees for services other than those mentioned above during the years 2015
and 2014.
All
audit and other services performed by RBSM on our behalf are approved in advance by our Audit Committee.
All
of the work done during the course of the audit of our 2015 Financial Statements was performed by full-time, permanent employees
of RBSM.
ITEM
15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES.
| (a) |
DOCUMENTS
FILED AS PART OF THIS REPORT. The following documents are filed as part of this Report: |
| |
(1) |
Audited
financial statements and financial statement schedules |
| Report
of RBSM, LLP, Independent Registered Auditors |
| |
| Consolidated
Balance Sheets as of December 31, 2015 and 2014 |
| |
| Consolidated
Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2015 and 2014 |
| |
| Consolidated
Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2015 and 2014 |
| |
| Consolidated
Statements of Cash Flow for the Years Ended December 31, 2015 and 2014 |
| |
| Notes
to Financial Statements |
| |
(2) |
FINANCIAL
STATEMENT SCHEDULES. The financial statement schedules required to be filed by Item 8 of this Annual Report on Form 10-K are
listed above. All other financial statement schedules are omitted because they were not required or the required information
is included in the Financial Statements or Notes thereto. |
| Exhibit
Number |
|
|
|
Description
of Document |
| |
|
|
|
|
| 3.1 |
|
(T) |
|
Articles of Incorporation
of Mendocino Brewing Company, Inc. as amended. |
| 3.2 |
|
(T) |
|
Bylaws of Mendocino
Brewing Company, Inc., as amended. |
| 10.1 |
|
|
|
[Intentionally omitted] |
| 10.2 |
|
|
|
[Intentionally omitted] |
| 10.3 |
|
(A) |
|
Wholesale Distribution
Agreement between Mendocino Brewing Company, Inc. and Bay Area Distributing. |
| 10.4 |
|
|
|
[Intentionally omitted] |
| 10.5 |
|
(B) |
|
Liquid Sediment
Removal Services Agreement with Cold Creek Compost, Inc. |
| 10.6 |
|
|
|
[Intentionally omitted] |
| 10.7 |
|
(C) |
|
Commercial Real
Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). |
| 10.8 |
|
(D) |
|
Commercial Lease
between Stewart’s Ice Cream Company, Inc. and Releta Brewing Company LLC. |
| 10.9 |
|
|
|
[Intentionally omitted] |
| 10.10 |
|
(F) |
|
Keg Management Agreement
with MicroStar Keg Management LLC. |
| 10.11 |
|
(G) |
|
Agreement to Implement
Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as
Exhibit19.6). |
| 10.12 |
|
|
|
[Intentionally omitted] |
| 10.13 |
|
|
|
[Intentionally omitted] |
| 10.14 |
|
|
|
[Intentionally omitted] |
| 10.15 |
|
(I) |
|
Hazardous Substances
Certificate and Indemnity with the Savings Bank of Mendocino County. |
| 10.16 |
|
|
|
[Intentionally omitted] |
| 10.17 |
|
|
|
[Intentionally omitted] |
| 10.18 |
|
|
|
[Intentionally omitted] |
| 10.19 |
|
(K) |
|
Investment Agreement
with United Breweries of America, Inc. |
| 10.20 |
|
|
|
[Intentionally omitted] |
| 10.21 |
|
(K) |
|
Registration Rights
Agreement Among Mendocino Brewing Company, Inc., United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael
Lovett, John Scahill, and Don Barkley. |
| 10.22 |
|
(L) |
|
Indemnification
Agreement with Vijay Mallya. |
| 10.23 |
|
(L) |
|
Indemnification
Agreement with Michael Laybourn. |
| 10.24 |
|
(L) |
|
Indemnification
Agreement with Jerome Merchant. |
| 10.25 |
|
(L) |
|
Indemnification
Agreement with Yashpal Singh. |
| 10.27 |
|
(L) |
|
Indemnification
Agreement with Robert Neame. |
| 10.28 |
|
(L) |
|
Indemnification
Agreement with Sury Rao Palamand. |
| 10.29 |
|
(L) |
|
Indemnification
Agreement with Kent Price. |
| 10.30 |
|
|
|
[Intentionally omitted] |
| 10.31 |
|
|
|
[Intentionally omitted] |
| 10.32 |
|
|
|
[Intentionally omitted] |
| 10.33 |
|
|
|
[Intentionally omitted] |
| 10.35 |
|
(O) |
|
Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and United Breweries of America Inc. dated August 31, 1999. |
| 10.36 |
|
(O) |
|
Convertible Note
in favor of United Breweries of America Inc. dated Sept. 7, 1999. |
| 10.37 |
|
(P) |
|
Convertible Note
in favor of United Breweries of America Inc. dated October 21, 1999. |
| 10.38 |
|
(P) |
|
Convertible Note
in favor of United Breweries of America Inc. dated November 12, 1999. |
| 10.39 |
|
(P) |
|
Convertible Note
in favor of United Breweries of America Inc. dated December 17, 1999. |
| 10.40 |
|
(P) |
|
Convertible Note
in favor of United Breweries of America Inc. dated December 31, 1999. |
| 10.41 |
|
(P) |
|
Convertible Note
in favor of United Breweries of America Inc. dated February 16, 2000. |
| 10.42 |
|
(P) |
|
Convertible Note
in favor of United Breweries of America Inc. dated February 17, 2000. |
| 10.43 |
|
(P) |
|
Convertible Note
in favor of United Breweries of America Inc. dated April 28, 2000. |
| 10.44 |
|
(P) |
|
First Amendment
to Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated April
28, 2000. |
| 10.45 |
|
(Q) |
|
Convertible Note
in favor of United Breweries of America Inc. dated September 11, 2000. |
| 10.46 |
|
(Q) |
|
Convertible Note
in favor of United Breweries of America Inc. dated September 30, 2000. |
| 10.47 |
|
(Q) |
|
Convertible Note
in favor of United Breweries of America Inc. dated December 31, 2000. |
| 10.48 |
|
(Q) |
|
Convertible Note
in favor of United Breweries of America Inc. dated February 12, 2001. |
| 10.49 |
|
(R) |
|
Convertible Note
in favor of United Breweries of America Inc. dated July 1, 2001. |
| 10.50 |
|
(S) |
|
Confirmation of
Waiver Between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated as of December 28, 2001. |
| 10.51 |
|
(S) |
|
Extension of Term
of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc.,
dated February 14, 2002. |
| 10.52 |
|
(T) |
|
License Agreement
between United Breweries Limited and United Breweries International (U.K.), Limited. |
| 10.53 |
|
(T) |
|
Supplemental Agreement
to License Agreement between United Breweries Limited and United Breweries International (U.K.), Limited. |
| 10.54 |
|
(T) |
|
Distribution Agreement
between United Breweries International (U.K.), Limited. and KBEL, Ltd. |
| 10.55 |
|
(T) |
|
Supplemental Agreement
to Distribution Agreement between United Breweries International (U.K.), Limited and KBEL, Ltd. |
| 10.56 |
|
(T) |
|
Market Development,
General and Administrative Services Agreement between Mendocino Brewing Company, Inc. and KBEL, Ltd. |
| 10.57 |
|
(T) |
|
Contract to Brew
and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited. and KBEL, Ltd. |
| 10.58 |
|
(T) |
|
Supplemental Agreement
to Contract to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited
and KBEL, Ltd. |
| 10.59 |
|
(T) |
|
Loan Agreement between
Shepherd Neame, Limited and KBEL, Ltd. |
| 10.60 |
|
(T) |
|
Brewing License
Agreement between KBEL, Ltd. and Mendocino Brewing Company, Inc. |
| 10.61 |
|
(T) |
|
Kingfisher Trade
Mark and Trade Name License Agreement between Kingfisher of America, Inc. and Mendocino Brewing Company, Inc. |
| 10.62 |
|
(U) |
|
First Amendment
to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries
of America, Inc., dated November 13, 2002. |
| 10.63 |
|
(U) |
|
Second Amendment
to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries
of America, Inc., dated March 31, 2003. |
| 10.64 |
|
|
|
[Intentionally omitted] |
| 10.65 |
|
|
|
[Intentionally omitted] |
| 10.66 |
|
(W) |
|
Third Amendment
to Extension of Term of Notes under Master Line of Credit Agreement, dated August 14, 2003. |
| 10.67 |
|
|
|
[Intentionally omitted] |
| 10.69 |
|
|
|
[Intentionally omitted] |
| 10.70 |
|
(Z) |
|
Second Agreement
dated October 9, 1998 between KBEL, Ltd. and Shepherd Neame, Ltd. |
| 10.71 |
|
|
|
[Intentionally omitted] |
| 10.72 |
|
|
|
[Intentionally omitted] |
| 10.73 |
|
|
|
[Intentionally omitted] |
| 10.74 |
|
(BB) |
|
Convertible Promissory
Note of Mendocino Brewing Company, Inc. in favor of United Breweries of America, Inc., dated March 2, 2005. |
| 10.75 |
|
|
|
[Intentionally omitted] |
| 10.76 |
|
(DD) |
|
Invoice Discounting
Agreement between The Royal Bank of Scotland Commercial Services Limited and KBEL Limited, dated April 26, 2005. |
| 10.77 |
|
|
|
[Intentionally omitted] |
| 10.78 |
|
|
|
[Intentionally omitted] |
| 10.79 |
|
(EE) |
|
[Intentionally omitted] |
| 10.80 |
|
(EE) |
|
[Intentionally omitted] |
| 10.81 |
|
|
|
[Intentionally omitted] |
| 10.82 |
|
(FF) |
|
[Intentionally omitted] |
| 10.83 |
|
(FF) |
|
[Intentionally omitted] |
| 10.84 |
|
(FF) |
|
[Intentionally omitted]. |
| 10.85 |
|
(FF) |
|
[Intentionally omitted] |
| 10.86 |
|
(FF) |
|
Fifth Amendment
to Extension of Term of Notes Under Master Line of Credit Agreement, effective August 31, 2005. |
| 10.87 |
|
(FF) |
|
Sixth Amendment
to Extension of Term of Notes under Master Line of Credit Agreement, effective December 31, 2006. |
| 10.88 |
|
(FF) |
|
Second Amendment
to Convertible Promissory Note, effective December 31, 2006. |
| 10.89 |
|
(GG) |
|
Seventh Amendment
to Extension of Term of Notes under Master Line of Credit Agreement effective June 30, 2007. |
| 10.90 |
|
(GG) |
|
Third Amendment
to Convertible Promissory Note, effective June 30, 2007. |
| 10.91 |
|
(HH) |
|
Employment Agreement
of Yashpal Singh (Management Contract). |
| 10.92 |
|
(II) |
|
Eighth Amendment
to Extension of Term of Notes under Master Line of Credit Agreement, effective June 30, 2008. |
| 10.93 |
|
(II) |
|
Fourth Amendment
to Convertible Promissory Note, effective June 30, 2008. |
| 10.94 |
|
(JJ) |
|
Directors’
Compensation Plan, as amended (Management Contract). |
| 10.95 |
|
(KK) |
|
Ninth Amendment
to Extension of Term Notes under Master Line of Credit effective June 30, 2009. |
| 10.96 |
|
(KK) |
|
Fifth Amendment
to Convertible Promissory Notes, effective June 30, 2009. |
| 10.97 |
|
(LL) |
|
Separation and Severance
Agreement by and between the Company and Yashpal Singh, effective August 27, 2009 (Management Contract). |
| 10.98 |
|
(MM) |
|
Keg Management Agreement
by and between MicroStar Keg Management, LLC and the Company effective September 1, 2009 † . |
| 10.99 |
|
(NN) |
|
Commercial Lease
dated August 1, 2009 between Stewart’s Shop Corp. and Releta Brewing Company LLC. |
| 10.100 |
|
(OO) |
|
Tenth Amendment
to Extension of Term Notes under Master Line of Credit Agreement, effective June 30, 2010. |
| 10.101 |
|
(OO) |
|
Sixth Amendment
to Convertible Promissory Notes, effective June 30, 2010. |
| 10.102 |
|
(OO) |
|
Employment Agreement
with Damon Swarbrick (Management Contract). |
| 10.103 |
|
|
|
[Intentionally omitted] |
| 10.104 |
|
|
|
[Intentionally omitted] |
| 10.105 |
|
|
|
[Intentionally omitted] |
| 10.106 |
|
(PP) |
|
Credit and Security
Agreement dated as of June 23, 2011 between Cole Taylor Bank, Mendocino Brewing Company, Inc. and Releta Brewing Company,
LLC. |
| 10.107 |
|
(PP) |
|
Seventh Amendment
to Convertible Promissory Note effective June 30, 2011. |
| 10.108 |
|
(PP) |
|
Eleventh Amendment
to Extension of Term of Notes under Master Line of Credit Agreement effective June 30, 2011. |
| 10.109 |
|
(QQ) |
|
Amended and Restated
Directors’ Compensation Plan (Management Contract). |
| 10.110 |
|
(RR) |
|
Letter of Support
issued on behalf of Kingfisher Beer Europe Limited by United Breweries (Holdings) Limited, dated March 2, 2012. |
| 10.111 |
|
(SS) |
|
Amended and Restated
Directors’ Compensation Plan (Management Contract). |
| 10.112 |
|
(TT) |
|
First Amendment
to Credit and Security Agreement effective March 29, 2013, by and among Cole Taylor Bank, Mendocino Brewing Company, Inc.
and Releta Brewing Company, LLC. |
| 10.113 |
|
(TT) |
|
Letter of Support
issued on behalf of Kingfisher Beer Europe Limited by United Breweries (Holdings) Limited, dated March 22, 2013. |
| 10.114 |
|
(UU) |
|
Amendment dated
as of March 11, 2013 to that certain License Agreement dated as of October 8, 1998 between United Breweries International
(UK) Limited and United Breweries Limited (previously filed as Exhibit 10.1). |
| 10.115 |
|
(UU) |
|
Amendment dated
as of March 11, 2013 to that certain Distribution Agreement dated as of October 9, 1998 between United Breweries International
(UK) Limited and Kingfisher Beer Europe Limited (previously filed as Exhibit 10.2). |
| 10.116 |
|
(UU) |
|
Amendment dated
as of March 11, 2013 to that certain Brewing License Agreement dated as of October 26, 2001 between Mendocino Brewing Company,
Inc. and Kingfisher Beer Europe Limited (previously filed as Exhibit 10.3). |
| 10.117 |
|
(VV) |
|
Contract Brewing
and Distribution Agreement between Heineken UK Limited and Kingfisher Beer Europe Limited, dated April 18, 2013.† |
| 10.118 |
|
(VV) |
|
Heineken Sub-License
Agreement by and among Heineken UK Limited, United Breweries International (UK) Limited, Kingfisher Beer Europe Limited, and
United Breweries Limited, dated April 18, 2013.† |
| 10.119 |
|
(VV) |
|
Loan Agreement between
Heineken UK Limited and Kingfisher Beer Europe Limited, dated April 18, 2013.† |
| 10.120 |
|
(WW) |
|
Promissory Note
of Mendocino Brewing Company, Inc., in favor of Catamaran Services, Inc., dated January 22, 2014. |
| 10.121 |
|
(XX) |
|
Promissory Note
of Mendocino Brewing Company, Inc., in favor of Catamaran Services, Inc., dated April 24, 2014. |
| 10.122 |
|
(YY) |
|
Promissory Note
of Mendocino Brewing Company, Inc., in favor of Catamaran Services, Inc., dated February 5, 2015 |
| 10.123 |
|
(ZZ) |
|
Promissory Note
of Mendocino Brewing Company, Inc., in favor of Catamaran Services, Inc., dated June 30, 2015 |
| 10.124 |
|
(AAA) |
|
Promissory
Note of Mendocino Brewing Company, Inc., in favor of Catamaran Services, Inc., dated March 14, 2016 |
| 10.125 |
|
(BBB) |
|
Second
Amendment to Credit and Security Agreement effective January 21, 2015, by and among MB Financial Bank, N.A., successor in
interest to Cole Taylor Bank, Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC. |
| 10.126 |
|
|
|
Promissory
Note of Mendocino Brewing Company, Inc., in favor of Catamaran Services, Inc., dated March 30, 2016 |
| 10.127 |
|
|
|
Separation
and Severance Agreement between Mendocino Brewing Company, Inc. and Mahadevan Narayanan, dated April 12, 2016 |
| 14.1 |
|
(V) |
|
Code
of Ethics |
| 21.1 |
|
|
|
Subsidiaries
of the Registrant |
| 31.1 |
|
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
| 31.2 |
|
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
| 32.1 |
|
|
|
Certification
of Chief Executive Officer Pursuant to U.S.C. 1350. |
| 32.2 |
|
|
|
Certification
of Chief Financial Officer Pursuant to U.S.C. 1350. |
| 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 |
†
Certain portions have been omitted and have been filed separately with the SEC pursuant to a request for confidential treatment
under Rule 24b-2 as promulgated under the Securities Exchange Act of 1934.
NOTES
: Each Exhibit listed above that is annotated with one or more of the following letters is incorporated by reference from
the following sources:
| |
|
(A) |
|
MBC’s Registration
Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA. |
| |
|
(B) |
|
MBC’s Annual
Report on Form 10-KSB for the period ended December 31, 1995. |
| |
|
(C) |
|
MBC’s Quarterly
Report on Form 10-QSB for the period ended March 31, 1995. |
| |
|
(D) |
|
MBC’s Quarterly
Report on Form 10-QSB/A No. 1 for the period ended September 30, 1997. |
| |
|
(F) |
|
MBC’s Annual
Report on Form 10-KSB for the period ended December 31, 1996. |
| |
|
(G) |
|
MBC’s Quarterly
Report on Form 10-QSB for the period ended September 30, 1995. |
| |
|
(I) |
|
MBC’s Annual
Report on Form 10-KSB for the period ended December 31, 1997. |
| |
|
(K) |
|
Schedule 13D filed
November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya. |
| |
|
(L) |
|
MBC’s Quarterly
Report on Form 10-QSB for the period ended June 30, 1998. |
| |
|
(O) |
|
Amendment No. 5
to Schedule 13D filed September 15, 1999, by United Breweries of America, Inc. and Vijay Mallya. |
| |
|
(P) |
|
Amendment No. 6
to Schedule 13D filed May 12, 2000, by United Breweries of America, Inc. and Vijay Mallya. |
| |
|
(Q) |
|
Amendment No. 7
to Schedule 13D filed February 22, 2001, by United Breweries of America, Inc. and Vijay Mallya. |
| |
|
(R) |
|
Amendment No. 8
to Schedule 13D filed August 22, 2001, by United Breweries of America, Inc. and Vijay Mallya. |
| |
|
(S) |
|
MBC’s Current
Report on Form 8-K filed as of February 19, 2002. |
| |
|
(T) |
|
MBC’s Annual
Report on Form 10-KSB for the period ended December 31, 2001. |
| |
|
(U) |
|
Amendment No. 9
to Schedule 13D filed March 31, 2003, by United Breweries of America, Inc. and Vijay Mallya. |
| |
|
(V) |
|
MBC’s Annual
Report on Form 10-KSB for the year ended December 31, 2003. |
| |
|
(W) |
|
Amendment No. 10
to Schedule 13D filed August 18, 2003 by United Breweries of America, Inc. and Dr. Vijay Mallya. |
| |
|
|
|
|
| |
|
(Z) |
|
MBC’s Quarterly
Report on Form 10-Q for the period ended September 30, 2004. |
| |
|
(BB) |
|
MBC’s Current
Report on Form 8-K filed as of March 8, 2005. |
| |
|
(DD) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2005. |
| |
|
(EE) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2006. |
| |
|
(FF) |
|
MBC’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2006. |
| |
|
(GG) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2007. |
| |
|
(HH) |
|
MBC’s
Annual Report on Form 10-K for the period ended December 31, 2007. |
| |
|
(II) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended September 30, 2008. |
| |
|
(JJ) |
|
MBC’s
Annual Report on Form 10-K for the period ended December 31, 2008. |
| |
|
(KK) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2009. |
| |
|
(LL) |
|
MBC’s
Current Report on Form 8-K filed as of August 31, 2009. |
| |
|
(MM) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended September 30, 2009. |
| |
|
(NN) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended March 31, 2010. |
| |
|
(OO) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2010. |
| |
|
(PP) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2011. |
| |
|
(QQ) |
|
MBC’s
Schedule 14A filed September 1, 2010. |
| |
|
(RR) |
|
MBC’s
Annual Report on Form 10-K for the year ended December 31, 2011. |
| |
|
(SS) |
|
MBC’s
Schedule 14A filed December 19, 2012. |
| |
|
(TT) |
|
MBC’s
Annual Report on Form 10-K for the period ended December 31, 2012. |
| |
|
(UU) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended on March 31, 2013. |
| |
|
(VV) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2013. |
| |
|
(WW) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended March 31, 2014. |
| |
|
(XX) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2014. |
| |
|
(YY) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended March 31, 2015. |
| |
|
(ZZ) |
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2015. |
| |
|
(AAA) |
|
MBC’s
Current Report on Form 8-K filed as of March 18, 2016. |
| |
|
(BBB) |
|
MBC’s
Current Report on Form 8-K filed as of January 27, 2016. |
| |
|
|
|
|
| (b) |
|
Exhibit
Attached The following Exhibits are attached to this Annual Report on Form 10-K: |
| |
|
21.1 |
|
Subsidiaries
of the Registrant. |
| |
|
31.1 |
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).* |
| |
|
31.2 |
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).* |
| |
|
32.1 |
|
Certification
of Chief Executive Officer Pursuant to U.S.C. 1350.** |
| |
|
32.2 |
|
Certification
of Chief Financial Officer Pursuant to U.S.C. 1350.** |
| |
|
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 |
| |
|
|
|
|
| (c) |
|
Excluded
Financial Statements. None. |
*
Filed herewith
**
Furnished herewith
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on our behalf by the undersigned, thereunto duly authorized.
| |
(Registrant)
MENDOCINO BREWING COMPANY, INC. |
| |
|
|
| |
By:
|
/s/
Yashpal Singh |
| |
|
Yashpal
Singh |
| |
|
President
and Chief Executive Officer |
| |
|
(Principal
Executive Officer) |
| |
|
|
| |
|
Date:
April 14, 2016 |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacity and on the dates indicated.
| |
(Registrant) MENDOCINO BREWING COMPANY,
INC. |
| |
|
|
| |
By |
/s/
Vijay Mallya |
| |
|
Dr.VijayMallya |
| |
|
Director
and Chairman of the Board |
| |
|
Date:
April 14, 2016 |
| |
|
|
| |
By |
/s/
Yashpal Singh |
| |
|
Yashpal
Singh |
| |
|
President,
Director and Chief Executive Officer |
| |
|
(Principal
Executive Officer) |
| |
|
Date:
April 14, 2016 |
| |
|
|
| |
By |
/s/
Mahadevan Narayanan |
| |
|
Mahadevan
Narayanan |
| |
|
Chief
Financial Officer &Secretary |
| |
|
(Principal
Financial Officer) |
| |
|
Date:
April 14, 2016 |
| |
|
|
| |
By |
/s/
James H. Grossman |
| |
|
James
H. Grossman, Director |
| |
|
Date:
April 14, 2016 |
| |
|
|
| |
By |
/s/
Scott R. Heldfond |
| |
|
Scott
R. Heldfond, Director |
| |
|
Date:
April 14, 2016 |
| |
|
|
| |
By |
/s/
H. Michel Laybourn |
| |
|
H.
Michael Laybourn, Director |
| |
|
April
14, 2016 |
| |
|
|
| |
By |
/s/
Jerome G Merchant |
| |
|
Jerome
G. Merchant, Director |
| |
|
April
14, 2016 |
| |
|
|
| |
By |
/s/
Sury Rao Palamand |
| |
|
Sury
Rao Palamand, Director |
| |
|
April
14, 2016 |
| |
|
|
| |
By |
/s/
Kent D. Price |
| |
|
Kent
D. Price, Director |
| |
|
April
14, 2016 |
Mendocino
Brewing Company, Inc.
Consolidated
Financial Statements
For
the Years Ended
December
31, 2015 and 2014
C
O N T E N T S
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders of
Mendocino
Brewing Company, Inc. and Subsidiaries
Ukiah,
California
We
have audited the accompanying consolidated balance sheets of Mendocino Brewing Company, Inc. and subsidiaries (the “Company”)
as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income (loss), changes
in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Mendocino Brewing Company, Inc. and its subsidiaries as of December 31, 2015 and 2014 and the consolidated
results of their operations and cash flows for the year ended December 31, 2015 and 2014 in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has secured lines-of-credit and secured notes payable with an aggregate principal
balance of and $1,663,400 and $3,378,600, respectively, which are due starting from May 31, 2016. The Company does not generate
sufficient cash flow from operations and has not secured additional financing to meet these obligations when they are due. These
conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those
matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/
RBSM LLP
|
|
RBSM
LLP
|
|
Larkspur,
CA
|
|
| April
14, 2016 |
|
Mendocino
Brewing Company, Inc.
Consolidated
Balance Sheets
As
of December 31, 2015 and 2014
| | |
2015 | | |
2014 | |
| ASSETS | |
| | | |
| | |
| Current Assets | |
| | | |
| | |
| Cash | |
$ | 129,600 | | |
$ | 145,100 | |
| Accounts receivable, net | |
| 3,835,500 | | |
| 4,384,500 | |
| Inventories | |
| 1,547,000 | | |
| 2,117,900 | |
| Prepaid expenses | |
| 759,900 | | |
| 632,900 | |
| Total Current Assets | |
| 6,272,000 | | |
| 7,280,400 | |
| | |
| | | |
| | |
| Property and Equipment, net | |
| 10,588,200 | | |
| 11,087,800 | |
| Deposits and other assets | |
| 175,800 | | |
| 310,400 | |
| | |
| | | |
| | |
| Total Assets | |
$ | 17,036,000 | | |
$ | 18,678,600 | |
| | |
| | | |
| | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| | |
| | | |
| | |
| Current Liabilities | |
| | | |
| | |
| Secured lines of credit | |
$ | 1,663,400 | | |
$ | 2,156,900 | |
| Accounts payable | |
| 4,489,000 | | |
| 4,860,800 | |
| Accrued liabilities | |
| 1,908,700 | | |
| 1,768,600 | |
| Notes payable to related party | |
| 2,119,600 | | |
| 1,038,700 | |
| Subordinated convertible notes to related party | |
| 3,680,100 | | |
| - | |
| Current maturities of secured notes payable | |
| 3,378,600 | | |
| 3,913,300 | |
| Current maturities of long-term debt to related party | |
| 491,500 | | |
| 519,300 | |
| Current maturities of obligations under capital leases | |
| 23,100 | | |
| 5,600 | |
| Current maturities of severance payable | |
| 119,700 | | |
| - | |
| Total Current Liabilities | |
| 17,873,700 | | |
| 14,263,200 | |
| | |
| | | |
| | |
| Long-Term Liabilities | |
| | | |
| | |
| Long term debt to related party, less current maturity | |
| - | | |
| 519,300 | |
| Capital lease obligations, less current maturities | |
| 79,200 | | |
| 12,100 | |
| Severance payable | |
| 678,400 | | |
| 760,100 | |
| Subordinated convertible notes to related party | |
| - | | |
| 3,588,900 | |
| Total Long-Term Liabilities | |
| 757,600 | | |
| 4,880,400 | |
| | |
| | | |
| | |
| Total Liabilities | |
| 18,631,300 | | |
| 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 | |
| 472,400 | | |
| 454,200 | |
| Accumulated deficit | |
| (17,395,600 | ) | |
| (16,247,100 | ) |
| Total Stockholders’ Equity | |
| (1,595,300 | ) | |
| (465,000 | ) |
| | |
| | | |
| | |
| Total Liabilities and Stockholders’ Equity | |
$ | 17,036,000 | | |
$ | 18,678,600 | |
The
accompanying notes are an integral part of these financial statements.
Mendocino
Brewing Company, Inc.
Consolidated
Statements of Operations and comprehensive income (loss)
For
the Years Ending December 31, 2015 and 2014
| | |
2015 | | |
2014 | |
| Sales | |
$ | 31,691,900 | | |
$ | 34,654,900 | |
| Less excise tax | |
| 508,200 | | |
| 615,700 | |
| | |
| | | |
| | |
| Net Sales | |
| 31,183,700 | | |
| 34,039,200 | |
| | |
| | | |
| | |
| Cost of Goods Sold | |
| 21,407,500 | | |
| 23,435,100 | |
| | |
| | | |
| | |
| Gross Profit | |
| 9,776,200 | | |
| 10,604,100 | |
| | |
| | | |
| | |
| Operating Expenses | |
| | | |
| | |
| Marketing | |
| 5,888,600 | | |
| 5,887,200 | |
| General and administrative | |
| 4,540,200 | | |
| 5,636,100 | |
| | |
| | | |
| | |
| Total Operating Expenses | |
| 10,428,800 | | |
| 11,523,300 | |
| | |
| | | |
| | |
| Loss from Operations | |
| (652,600 | ) | |
| (919,200 | ) |
| | |
| | | |
| | |
| Other Income (Expense) | |
| | | |
| | |
| Miscellaneous income | |
| 112,900 | | |
| 46,800 | |
| Gain (loss) on disposal of assets | |
| - | | |
| 19,600 | |
| Interest expense | |
| (605,000 | ) | |
| (686,700 | ) |
| | |
| | | |
| | |
| Total Other Expense, net | |
| (492,100 | ) | |
| (620,300 | ) |
| | |
| | | |
| | |
| Income (Loss) before Income Taxes | |
| (1,144,700 | ) | |
| (1,539,500 | ) |
| | |
| | | |
| | |
| Provision for Income Taxes | |
| 3,800 | | |
| - | |
| | |
| | | |
| | |
| Net Loss | |
| (1,148,500 | ) | |
| (1,539,500 | ) |
| | |
| | | |
| | |
| Other Comprehensive Income - Foreign currency translation adjustment | |
| 18,200 | | |
| 40,500 | |
| | |
| | | |
| | |
| Comprehensive Loss | |
$ | (1,130,300 | ) | |
$ | (1,499,000 | ) |
| | |
| | | |
| | |
| Net income (loss) per share | |
| | | |
| | |
| Basic and diluted | |
| (0.09 | ) | |
| (0.12 | ) |
| | |
| | | |
| | |
| Weighted average common shares outstanding – | |
| | | |
| | |
| Basic | |
| 12,611,133 | | |
| 12,611,133 | |
| Diluted | |
| 12,611,133 | | |
| 12,611,133 | |
The
accompanying notes are an integral part of these financial statements.
Mendocino
Brewing Company, Inc.
Consolidated
Statements of Changes in Stockholders’ Equity
For
the Years Ending December 31, 2015 and 2014
| | |
Series A | | |
| | |
| | |
| | |
Accumulated
Other | | |
| | |
| |
| | |
Preferred | | |
| | |
Common | | |
| | |
Comprehensive | | |
Accumulated | | |
Total | |
| | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Income | | |
Deficit | | |
Equity | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance December 31, 2013 | |
| 227,600 | | |
$ | 227,600 | | |
| 12,611,133 | | |
$ | 15,100,300 | | |
$ | 413,700 | | |
$ | (14,707,600 | ) | |
$ | 1,034,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,539,500 | ) | |
| (1,539,500 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| 40,500 | | |
| - | | |
| 40,500 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance December 31, 2014 | |
| 227,600 | | |
$ | 227,600 | | |
| 12,611,133 | | |
$ | 15,100,300 | | |
$ | 454,200 | | |
$ | (16,247,100 | ) | |
$ | (465,000 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,148,500 | ) | |
| (1,148,500 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| 18,200 | | |
| - | | |
| 18,200 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance December 31, 2015 | |
| 227,600 | | |
$ | 227,600 | | |
| 12,611,133 | | |
$ | 15,100,300 | | |
$ | 472,400 | | |
$ | (17,395,600 | ) | |
$ | (1,595,300 | ) |
The
accompanying notes are an integral part of these financial statements.
Mendocino
Brewing Company, Inc.
Consolidated
Statements of Cash Flows
For
the Years Ending December 31, 2015 and 2014
| | |
2015 | | |
2014 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | |
| Net Income loss | |
$ | (1,148,500 | ) | |
$ | (1,539,500 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | | |
| | |
| Depreciation and amortization | |
| 1,226,200 | | |
| 1,382,400 | |
| Provision for doubtful accounts | |
| (2,500 | ) | |
| (11,300 | ) |
| (Gain) loss on the disposal of assets | |
| - | | |
| (19,600 | ) |
| Changes in operating assets and liabilities: | |
| | | |
| | |
| Increase in interest accrued on related party notes | |
| 172,100 | | |
| 129,700 | |
| Increase in accrued severance payable | |
| 38,000 | | |
| 760,100 | |
| (Increase) decrease in accounts receivable | |
| 430,800 | | |
| (329,000 | ) |
| Decrease in inventories | |
| 567,500 | | |
| 119,900 | |
| Increase in prepaid expenses | |
| (156,100 | ) | |
| (70,400 | ) |
| (Increase) decrease in deposits and other assets | |
| 54,100 | | |
| (85,200 | ) |
| Increase (decrease) in accounts payable | |
| (262,100 | ) | |
| 110,200 | |
| Increase in accrued liabilities | |
| 186,400 | | |
| 346,100 | |
| | |
| | | |
| | |
| Net cash provided by operating activities | |
| 1,105,900 | | |
| 793,400 | |
| | |
| | | |
| | |
| CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
| Purchases of property, equipment and leasehold improvements | |
| (642,400 | ) | |
| (895,700 | ) |
| Proceeds from sale of fixed assets | |
| - | | |
| 19,600 | |
| | |
| | | |
| | |
| Net cash used in investing activities: | |
| (642,400 | ) | |
| (876,100 | ) |
| | |
| | | |
| | |
| CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
| Net repayment on lines of credit | |
| (431,200 | ) | |
| (28,100 | ) |
| Borrowing on notes payable | |
| 1,000,000 | | |
| 1,000,000 | |
| Repayment on long-term debts | |
| (534,700 | ) | |
| (534,700 | ) |
| Repayment on related party debt | |
| (509,500 | ) | |
| (549,500 | ) |
| Payments on obligations under capital leases | |
| (18,100 | ) | |
| (5,300 | ) |
| | |
| | | |
| | |
| Net cash used infinancing activities: | |
| (493,500 | ) | |
| (117,600 | ) |
| | |
| | | |
| | |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | |
| 14,500 | | |
| 20,600 | |
| | |
| | | |
| | |
| Net Change in Cash | |
| (15,500 | ) | |
| (179,700 | ) |
| | |
| | | |
| | |
| Cash at beginning of period | |
| 145,100 | | |
| 324,800 | |
| | |
| | | |
| | |
| Cash at end of period | |
$ | 129,600 | | |
$ | 145,100 | |
| | |
| | | |
| | |
| SUPPLEMENTAL CASH FLOW INFORMATION | |
| | | |
| | |
| Cash paid during the period for: | |
| | | |
| | |
| Interest | |
$ | 432,900 | | |
$ | 557,000 | |
| Income taxes | |
$ | 3,800 | | |
$ | - | |
| Non-cash investing and financing activities: | |
| | | |
| | |
| Seller financed assets | |
$ | 105,600 | | |
$ | - | |
The
accompanying notes are an integral part of these financial statements.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
1.
Description of Operations and Summary of Significant Accounting Policies
Description
of Operations
Mendocino
Brewing Company, Inc., 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 (“US”), MBC and its subsidiary,
Releta, operate two breweries that produce beer for the specialty “craft” segment of the beer market. The breweries
are located in Ukiah, California and Saratoga Springs, New York. The majority of sales for Mendocino Brewing Company in the US
are in California. The Company brews several brands, of which Red Tail Ale is the flagship brand. In addition, the Company performs
contract brewing for several other brands, and MBC holds the license to distribute Kingfisher Premium Lager Beer in the US and
Canada. Generally, product shipments are made directly from the breweries to the wholesalers or distributors in accordance with
state and local laws. In these notes, the term “the Company” and its variants and the terms “we,” “us,”
and “our” and their variants are generally used to refer to Mendocino Brewing Company, Inc. together with its subsidiaries,
while the term “MBC” is used to refer to Mendocino Brewing Company, Inc. as an individual entity.
The
Company’s United Kingdom (“UK”) subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe Limited (“KBEL”).
KBEL is a distributor of Kingfisher Premium Lager Beer, in the United Kingdom and Europe. The distributorship is located in Maidstone,
Kent in the UK.
Subsequent
Events
The
Company evaluates events that occur subsequent to the balance sheet date of periodic reports, but before financial statements
are issued for periods ending on such balance sheet dates, for possible adjustment to such financial statements or other disclosure.
This evaluation generally occurs through the date at which the Company’s financial statements are electronically prepared
for filing with the Securities and Exchange Commission (“SEC”).
Principles
of Consolidation
The
consolidated financial statements present the accounts of Mendocino Brewing Company, Inc., 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
financial statements for the years ended December 31, 2015 and 2014 have been prepared in accordance with accounting principles
generally accepted in the United States. The financial statements and notes are representations of the management and the Board
of Directors, who are responsible for their integrity and objectivity.
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.
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.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
Foreign
Operations
Approximately
27% of the Company’s assets are located in the UK. Although this country is considered economically stable and the Company
has experienced no notable burden from foreign exchange transactions, export duties, or government regulations, it is always possible
that unanticipated events in foreign countries could disrupt the Company’s operations.
Trade
Accounts Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are stated at the invoiced amount and are the amount the Company expects to collect. Sales are made to approved
customers on an open account basis, subject to established credit limits, and generally no collateral is required. The allowance
for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing
accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional
allowances in the future.
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. Past due balances over 90 days 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.
The Company had allowances of $69,100 and $56,700 for doubtful accounts receivable as of December 31, 2015 and 2014, respectively.
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.
Prepaid
Expenses and Other Assets
Prepaid
expenses and other assets generally consist of deposits, other receivables, and prepayments for future services. Prepayments are
expensed when the services are received.
Property
and Equipment
Property
and equipment are stated at cost and depreciated or amortized using the straight-line method over the assets’ estimated
useful lives. Leasehold improvements are amortized over the shorter of the life of the improvement or the life of the related
lease. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate.
Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. When
property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated
depreciation are removed from the accounts and any gain or loss is included in the statement of operations.
Estimated
useful lives of property and equipment are as follows:
| Building |
|
40
years |
| Machinery
and equipment |
|
3
- 40 years |
| Vehicles |
|
3
- 5 years |
| Furniture
and fixtures |
|
5
- 10 years |
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
Assets
Held under Capital Leases
Assets
held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of
the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter
of the estimated useful lives of the assets or the period of the related lease.
Impairment
of Long-Lived Assets
The
Company assesses the impairment of its long-lived assets periodically in accordance with the provisions of Accounting Standards
Codification (ASC) 360, (Accounting for the Impairment and Disposal of Long-Lived Assets). The Company reviews the carrying value
of property and equipment and any other long-lived assets for impairment annually or whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by
management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence,
demand, competition, and other economic factors. Long-lived assets that management commits to sell or abandon are reported at
the lower of carrying amount or fair value less cost to sell.
Deferred
Financing Costs
Costs
relating to obtaining financing are capitalized and amortized over the term of the related debt. When a loan is paid in full,
any unamortized financing costs are removed from the related accounts and charged to operations. Deferred financing costs related
to borrowing made in June 2011 were $225,000. Amortization of deferred financing costs charged to operations was $45,000 for the
years ended December 31, 2015 and 2014.
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. A valuation allowance is established to
reduce the deferred tax asset if it is more likely than not that the related tax benefits will not be realized.
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 for the years ending December 31, 2015 and 2014.
Revenue
Recognition
The
Company recognizes revenue from brewing and distribution operations in accordance with ASC 605. 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. |
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
“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 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 or purchase order. 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 statement of operations as a reduction in revenue and as a corresponding reduction
in marketing and selling expenses.
Revenues
from the brewpub and gift store are recognized when sales have been completed.
Excise
Taxes
The
federal government levies excise taxes on the sale of alcoholic beverages, including beer. For brewers producing less than 2.0
million barrels of beer per calendar year, the federal excise tax is $7 per barrel on the first 60,000 barrels of beer removed
for consumption or sale during a calendar year, and $18 per barrel for each barrel in excess of 60,000. Individual states also
impose excise taxes on alcoholic beverages in varying amounts, which have also been subject to change. Sales as presented in the
Company’s statements of operations reflect the amount invoiced to the Company’s wholesalers and other customers. Excise
taxes due to federal and state agencies are not collected from the Company’s customers, but rather are the responsibility
of the Company. Net sales, as presented in the Company’s statements of operations, are reduced by applicable federal and
state excise taxes. In the UK, excise taxes are paid by the manufacturer and not by the Company.
Discounts
To
further promote retail sales of its products and in response to local competitive conditions, the Company regularly offers price
discounts to distributors and retailers in most of its markets. Sales for the years 2015 and 2014, as presented in the Company’s
statements of operations, are reduced by $1,204,400 and $1,140,800 respectively, related to such discounts.
Chargebacks
and Sales Reserves
The
Company has estimated reserves for chargebacks for promotional expenses by distributors. The Company estimates its reserves by
utilizing historical information and current contracts. In estimating chargeback reserves, the Company analyzes actual chargeback
amounts and applies historical chargeback rates to estimate potential chargeback. The Company routinely assesses its experience
with distributors and adjusts the reserves accordingly. If actual chargebacks and other rebates are greater than the Company’s
estimates, additional reserves may be required. Revisions to estimates are charged to income in the period in which the facts
that give rise to the revision become known.
Seasonality
Sales
of the Company’s products are somewhat seasonal, with the first and fourth quarters historically being the slowest and the
rest of the year generating stronger sales. The volume of sales may also be affected by 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.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
Taxes
Collected From Customers
Taxes
collected from customers and remitted to tax authorities are sales tax collected from our retail customers. State and federal
excise taxes on beer shipments are the responsibility of the Company and included in our selling price. Excise taxes on shipments
are shown in a separate line item in the consolidated statement of operations as reduction of gross sales. Sales taxes collected
from customers are recognized as a liability, with the liability subsequently reduced when the taxes are remitted to the tax authority.
Total sales taxes collected from customers and remitted to tax authorities were not material in 2015 and 2014.
Delivery
Costs
In
accordance with ASC 605, (Shipping and Handling Fees and Costs) the company reports pass-through freight costs on beer shipped
to independent beer wholesalers in cost of sales. Reimbursements of these costs by wholesalers are reported in sales.
Non-pass-through
costs incurred by the Company to deliver beer to wholesalers are included in marketing, distribution and administrative expenses.
These costs are considered marketing related because in addition to product delivery, wholesalers provide marketing and other
customer service functions to customers including product display, shelf space management, distribution of promotional materials,
and product rotation. Shipping costs included in marketing expense totaled $968,200 and $1,051,300, for the years ended December
31, 2015 and 2014, respectively.
Basic
and Diluted Income per Share
The
basic earnings per share is computed by dividing the earnings attributable to common stockholders by the weighted average number
of common shares outstanding during the period. In 2015, the effect of any potentially dilutive securities would have been anti-dilutive.
Therefore, the conversion of the related party notes has been excluded from the calculation of net earnings per share for the
year ended December 31, 2015. Basic net earnings per share exclude the dilutive effect of stock options or warrants and convertible
notes. The computations of basic and dilutive net earnings per share are as follows:
| | |
Year Ended December 31 | |
| | |
2015 | | |
2014 | |
| Net loss | |
$ | (1,148,500 | ) | |
| (1,539,500 | ) |
| Weighted average common shares outstanding | |
| 12,611,133 | | |
| 12,611,133 | |
| Basic net income (loss) per share | |
$ | (0.09 | ) | |
| (0.12 | ) |
| Interest expense on convertible notes | |
$ | — | | |
| — | |
| Income (loss) for purpose of computing diluted net income per share | |
$ | (1,148,500 | ) | |
| (1,539,500 | ) |
| Incremental shares from assumed exercise of dilutive securities | |
| — | | |
| — | |
| Dilutive potential common shares | |
| 12,611,133 | | |
| 12,611,133 | |
| Diluted net earnings (loss) per share | |
$ | (0.09 | ) | |
| (0.12 | ) |
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
Foreign
Currency Translation
The
Company has subsidiaries located in the UK, where the local currency, UK Pound Sterling, is the functional currency. Financial
statements of these subsidiaries are translated into U.S. 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
at UBIUK was translated at exchange rates in effect at December 31, 2015 and 2014, and its cash flows were translated at the average
exchange rates for the years 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 United States of America
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, allowance for doubtful accounts, depreciation and amortization periods, and the future utilization of deferred
tax assets.
Advertising
Advertising
costs are expensed as incurred and were $903,600 and $987,500for the years ended December 31, 2015 and 2014, respectively.
Fair
Value of Financial Instruments
Fair
Value
The
fair value of the Company’s financial instruments reflects the amounts that the Company estimates to receive in connection
with the sale of an asset or paid in connection with the transfer of a liability in an orderly transaction between market participants
at the measurement date (exit price). For financial assets and liabilities that are periodically re-measured to fair value, the
Company discloses a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three
levels:
Level
1 – quoted prices in active markets for identical assets and liabilities.
Level
2 – observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level
3 – unobservable inputs.
At
December 31, 2015 and 2014, the Company had no financial assets or liabilities that required periodic re-measurement at fair value.
The
recorded value of certain financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable,
other current assets, accounts payable and accrued expenses, approximate the fair value of the respective assets and liabilities
at December 31, 2015 and December 31, 2014 based upon the short-term nature of the assets and liabilities. Based on borrowing
rates currently available to the Company for loans with similar terms, the carrying value of short and long term notes payable
approximate fair value.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
Comprehensive
Income
Comprehensive
income is composed of the Company’s net income and changes in equity from all other non-stockholder sources. The changes
from these non-stockholder sources are reflected as a separate item in the statements of operations and comprehensive income.
Reportable
Segments
The
Company manages its operations through two business segments: (i) brewing operations, tavern and tasting room operations in the
US and Canada (the “North American Territory”) and (ii) distributor operations in Europe (including Austria, Belgium,
Denmark, Ireland, Italy, the Netherlands, France, Finland, Germany, Greece, Iceland, Liechtenstein, Luxembourg, Norway, Portugal,
Spain, Sweden, Switzerland, and the United Kingdom) (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.
Recent
Accounting Pronouncements
During
the fourth quarter of 2014, the Company adopted Accounting Standards Update (“ASU”) 2014-08, “Presentation of
Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures
of Disposals of Components of an Entity,” which changes the criteria for determining which disposals can be presented as
discontinued operations and modifies related disclosure requirements. This ASU was effective for fiscal years beginning on or
after December 15, 2014, and interim periods within those years. Early adoption was permitted, but only for disposals (or classifications
as held for sale) that had not been reported in the financial statements previously issued or available for issuance. See Notes
X for disclosures related to this adoption.
During
the first quarter of 2015, the company adopted FASB’s guidance on reporting discontinued operations and disclosures of disposals
of components of an entity. This standard raises the threshold for a disposal to qualify as a discontinued operation and requires
new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued
operation. The guidance is effective for annual reporting periods ending after December 15, 2014. Early adoption was permitted
but only for disposals that have not been reported in financial statements previously issued. The adoption of this guidance has
not had a material impact on its financial position, results of operations or cash flows.
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01,
which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current
guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation
and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance
assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should
apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period
in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for
financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income.
The Company is currently evaluating the impact of adopting this guidance.
In
November 2015, the FASB issued (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes. Currently deferred taxes for each
tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet.
To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with
any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is
effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company
has adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of
this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows, and
did not have any effect on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
In
September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement –Period Adjustments. Changes to
the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required
to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment
to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after
the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally
up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and,
instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard
is effective for both public and private companies for periods beginning after December 15, 2015. The Company is currently evaluating
the impact of adopting this guidance.
In
July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which applies
to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity
should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement
is unchanged for inventory that is measured using last-in, first-out (“LIFO”). This ASU is effective for annual and
interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning
of an interim or annual reporting period. The Company is currently evaluating the impact of adopting this guidance.
In
May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent),” which removes the requirement to categorize within the fair
value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further,
the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair
value using the net asset value per share practical expedient. This ASU is effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The new guidance should be applied
on a retrospective basis to all periods presented. The Company is currently evaluating the impact of adopting this guidance.
In
April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Fees Paid in a Cloud Computing Arrangement,” which provides guidance about whether a cloud computing arrangement
includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the
software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement
does not include a software license, the customer should account for the arrangement as a service contract. This ASU is effective
for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption
is permitted. The Company is currently evaluating the impact of adopting this guidance.
In
April 2015, the FASB issued guidance related to a customer’s accounting for fees paid in a cloud computing arrangement.
This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud
computing arrangement includes a software license, then the customer should account for the software license element of the arrangement
consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license,
the customer should account for the arrangement as a service contract. This guidance is effective for interim and annual reporting
periods beginning after December 15, 2015, and early adoption is permitted. The Company will adopt this guidance on January 1,
2016. The adoption of this guidance is not expected to have a material impact on its financial position, results of operations
or cash flows.
In
February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,”
which makes changes to both the variable interest model and voting interest model and eliminates the indefinite deferral of FASB
Statement No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest
in other legal entities will need to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU
is effective for annual periods beginning after December 15, 2015, and early adoption is permitted, including any interim period.
The Company does not expect the adoption of this guidance to have an impact on the consolidated financial statements.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
In
January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20),”
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. This update eliminates
from GAAP the concept of extraordinary items. The adoption of ASU 2014-16 will not have a significant impact on the Company’s
financial position or results of operations.
In
November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815).” Entities commonly raise capital
by issuing different classes of shares, including preferred stock, that entitle the holders to certain preferences and rights
over the other shareholders. The specific terms of those shares may include conversion rights, redemption rights, voting rights,
and liquidation and dividend payment preferences, among other features. One or more of those features may meet the definition
of a derivative under GAAP. Shares that include such embedded derivative features are referred to as hybrid financial instruments.
The objective of this update is to eliminate the use of different methods in practice and thereby reduce existing diversity under
GAAP in the accounting for hybrid financial instruments issued in the form of a share. The amendments are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of ASU 2014-16 will not
have a significant impact on the Company’s financial position or results of operations.
In
August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40),
effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application
is permitted. This standard provides guidance about management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance
is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. The Company expects
to adopt this guidance on January 1, 2017. The Company is currently evaluating the potential impact, if any, the adoption of ASU
2014-15 will have on footnote disclosures, however, the Company does not expect the adoption of this guidance to have any impact
on its financial position, results of operations or cash flows.
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” on revenue recognition.
This guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
This guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from contracts with customers. The original effective date of this guidance
was for interim and annual reporting periods beginning after December 15, 2016, early adoption is not permitted, and the guidance
must be applied retrospectively or modified retrospectively. In July 2015, the FASB approved an optional one-year deferral of
the effective date. As a result, we expect to adopt this guidance on January 1, 2018. The Company has not yet determined its approach
to adoption or the impact the adoption of this guidance will have on its financial position, results of operations or cash flows,
if any. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force (“EITF”)),
the American Institute of Certified Public Accountants (“AICPA”), and the SEC did not or are not believed by management
to have a material impact on the Company’s present or future financial statements.
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 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.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
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.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
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.
On
November 24, 2015, KBEL received a notice from Royal Bank of Scotland (“RBS)” regarding its intention to terminate
the credit line and all other banking services it currently provides to KBEL on February 26, 2016. RBS subsequently extended the
termination date to May 31, 2016. We have engaged in discussions with a bank which provided an indicative offer to provide a replacement
for the RBS line of credit. It would have a material adverse effect on KBEL and the Company if KBEL is unable to find a substitute
replacement before termination of the RBS facilities.
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.
On
December 9, 2015, the Company engaged Gordian Group, LLC (“Gordian Group”) to serve as the Company’s exclusive
investment banker to assist the Company in evaluating, exploring and, if deemed appropriate by the Company, pursuing and implementing
certain strategic and financial options and transactions that may be available to the Company, including in connection with a
possible debt or equity capital financing, merger, consolidation, joint venture or other business combination involving, or sale
of substantially all or a material portion of the assets (outside of the ordinary course of business) or outstanding securities
of, the Company and/or its subsidiaries, and/or the acquisition of substantially all or a material portion of the assets or outstanding
securities of another entity (each, a “Financial Transaction”). Gordian Group is a New York-based independent investment
banking firm. While the Company has commenced evaluating its available options, no conclusion as to any specific option or transaction
has been reached, nor has any specific timetable been fixed for this effort, and there can be no assurance that any strategic
or financial option or transaction will be presented, implemented or consummated. The Company intends to use proceeds of the Financial
Transaction to repay the amount owed to Lender when it becomes due.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
As
of December 31, 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 December 31, 2015 was -0.28 to 1. The Company calculated that the required tangible net worth of MBC and
Releta was $6,181,400 as of December 31, 2015 and the actual tangible net worth on such date was $3,738,400. 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
December 31, 2015, the Company had cash and cash equivalents of $129,600, an accumulated deficit of $17,395,600, and a working
capital deficit of $11,601,700 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 December
31, 2015.
Management
has taken several actions to reduce the Company’s working capital needs through December 31, 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,
consisting of materials, materials overhead, labor, and manufacturing overhead, are stated at the lower of average cost or market
(net realizable value) and consist of the following at December 31:
| | |
2015 | | |
2014 | |
| Raw materials | |
$ | 628,100 | | |
$ | 740,300 | |
| Work-in-progress | |
| 312,200 | | |
| 259,400 | |
| Finished goods | |
| 541,400 | | |
| 1,034,200 | |
| Merchandise | |
| 65,300 | | |
| 84,000 | |
| | |
$ | 1,547,000 | | |
$ | 2,117,900 | |
4.
Property and Equipment
The
following is a summary of property and equipment, at cost less accumulated depreciation, at December 31:
| | |
2015 | | |
2014 | |
| Machinery and equipment | |
$ | 13,068,900 | | |
$ | 12,575,600 | |
| Buildings | |
| 7,218,900 | | |
| 7,218,900 | |
| Equipment under capital lease | |
| 138,200 | | |
| 23,000 | |
| Land | |
| 810,900 | | |
| 810,900 | |
| Leasehold improvements | |
| 1,397,200 | | |
| 1,397,200 | |
| Vehicles | |
| 17,500 | | |
| 17,500 | |
| Furniture and fixtures | |
| 352,500 | | |
| 352,500 | |
| Equipment in progress | |
| 71,500 | | |
| 121,500 | |
| | |
| 23,075,600 | | |
| 22,517,100 | |
| Accumulated depreciation and amortization | |
| (12,487,400 | ) | |
| (11,429,300 | ) |
| | |
$ | 10,588,200 | | |
$ | 11,087,800 | |
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
The
total depreciation expense for the years ended December 31, 2015 and 2014 was $1,181,200and $1,337,400, respectively.
5.
Secured Lines of Credit
In
June 2011, MB Financial provided a line of credit drawable up to 85% of eligible receivables and 60% of eligible inventory for
a period up to June 2016. Effective August 20, 2014, pursuant to Third Default Notice,MB Financial notified that it would reduce
the advance rate for eligible inventory by 2% each month.The borrowings are collateralized, with recourse, by MBC’s and
Releta’s trade receivables and inventory located in the US. This facility 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 December 31, 2015 was approximately $453,100. Included in the Company’s balance sheet as accounts receivable
at December 31, 2015, are account balances totaling $1,121,300 of accounts receivables and $1,490,100 of inventory collateralized
to MB Financial under this facility.
On
April 26, 2005, Royal Bank of Scotland Commercial Services Limited (“RBS”) provided an invoice discounting facility
to KBEL for a maximum amount of £1,750,000 based on 80% prepayment against qualified accounts receivable related to KBEL’s
UK customers. The initial term of the facility was for a one year period after which time the facility could be terminated by
either party by providing the other party with six months’ notice. The facility carries an interest rate of 1.38% above
the RBS base rate and a service charge of 0.10% of each invoice discounted. The amount outstanding on this line of credit as of
December 31, 2015 was approximately $1,210,300.
On
November 24, 2015, KBEL received a notice from RBS regarding its intention to terminate the credit line and all other banking
services it currently provides to KBEL on February 26, 2016. RBS subsequently extended the termination date to May 31, 2016. We
have engaged in discussions with a bank which provided an indicative offer to provide a replacement for the RBS line of credit.
It would have a material adverse effect on KBEL and the Company if KBEL is unable to find a substitute replacement before termination
of the RBS facilities.
6.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 $2,119,600 including accrued interest of $119,600. 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 through Permitted Payments, as
defined below, or (b) to pay the notes and certain existing obligations of the Company to Lender. “Permitted Payments”
on the notes are payments made from the equity investment by the Company’s majority shareholder. 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 shall be automatically
extended for additional six month terms until they are paid.
On
March 14, 2016, Catamaran provided the Company a note loan in the principal amount of $325,000 on terms substantially similar
to the previous notes, repayable on receipt of a bridge loan from the Company’s majority shareholder. On March 30, 2016,
Catamaran provided the Company with another note loan in the principal amount of $75,000 on terms similar to the previous note.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
7.
Subordinated Convertible Notes to Related Party
Subordinated
convertible notes to related parties are unsecured convertible notes payable to UBA for a total value including interest (at the
prime rate plus 1.5%, but not to exceed 10% per year) of $3,680,100 and $3,588,900 as of December 31, 2015 and 2014, respectively.
Thirteen of the UBA notes are convertible into common stock at $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 but 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 such term. UBA may demand payment within 60 days
of the end of the extension period but is precluded from doing so because the notes are subordinated to long-term debt agreements
with MB Financial maturing in June 2016. The Company expects the UBA notes to be continued to be subordinated to any new financing
facility obtained after maturity of MB Financial facility. The Company will also attempt to induce conversion of UBA notes to
equity. Therefore, the Company will not require the use of working capital to repay any of the UBA notes. The UBA notes included
$1,764,700 and $1,673,500 of accrued interest at December 31, 2015 and December 31, 2014, respectively.
8.
Secured Notes Payable
| | |
Year ended December 31, | |
| | |
2015 | | |
2014 | |
| Loan from MB Financial, payable in monthly installments of $12,300, plus interest
at prime plus 4% with a balloon payment of approximately $2,202,500 in June 2016; secured by real property at Ukiah. See disclosures
in Note 2. | |
$ | 2,276,200 | | |
$ | 2,423,600 | |
| | |
| | | |
| | |
| Loan from MB Financial, payable in monthly installments of $32,300 including
interest at prime plus 3.5% with a balloon payment of approximately $908,700 in June 2016; secured by all assets of Releta
and MBC, excluding real property at Ukiah. See disclosures in Note 2. | |
| 1,102,400 | | |
| 1,489,700 | |
| | |
| 3,378,600 | | |
| 3,913,300 | |
| Less current maturities | |
| 3,378,600 | | |
| 3,913,300 | |
| | |
$ | - | | |
$ | - | |
9.
Long-Term Debt – Related Party
| | |
Year ended December 31, | |
| | |
2015 | | |
2014 | |
| Loan from Heineken UK Limited, payable in quarterly installments
of $122,900, plus interest at UK prime plus 5% maturing on October 9, 2016, secured by licensing rights pursuant to the Sub-License
Agreement. | |
$ | 491,500 | | |
$ | 1,038,600 | |
| Less current maturities | |
| 491,500 | | |
| 519,300 | |
| | |
$ | - | | |
$ | 519,300 | |
On
April 18, 2013, KBEL entered into a Loan Agreement (the “Loan Agreement”) with Heineken UK Limited (“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 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 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 Loan Agreement.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
10.
Capital Lease Obligations
The
Company leases certain equipment and vehicles under agreements that are classified as capital leases. The future minimum lease
payments required under the capital lease and the present value of the net minimum lease payments as of December 31, 2015, are
as follows:
| Year Ending December 31, 2016 | |
$ | 28,200 | |
| Year Ending December 31, 2017 | |
| 28,100 | |
| Year Ending December 31, 2018 | |
| 21,800 | |
| Year Ending December 31, 2019 | |
| 21,800 | |
| Year Ending December 31, 2020 | |
| 21,500 | |
| | |
| 121,400 | |
| Less amounts representing interest | |
| (19,100 | ) |
| Present value of minimum lease payments | |
$ | 102,300 | |
| Less current maturities | |
| 23,100 | |
| Non-current leases payable | |
$ | 79,200 | |
11.
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 December 31, 2015, the Company estimated this obligation to be $798,100.
12.
Commitments and Contingencies
Purchase
of raw materials
Production
of the Company’s beverages requires quantities of various processed agricultural products, including malt and hops for beer.
The Company fulfills its commodities requirements through purchases from various sources, some through contractual arrangements
and others on the open market. Future payments under existing contractual arrangements are as follows:
| Year Ending December 31, 2016 | |
$ | 1,062,500 | |
| Total | |
$ | 1,062,500 | |
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. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of
any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought
therein.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable
and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees,
in which case the nature of the guarantee would be disclosed.
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 through 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 (real estate taxes, insurance and repairs).
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
The
Company and its subsidiaries have various lease agreements for the brewpub and gift store in Ukiah, California; land at its Saratoga
Springs, New York, facility; a building in the UK; and certain equipment. The New York lease includes renewal options for two
additional five-year periods beginning in 2019, which the Company presently intends to exercise, and some leases are adjusted
annually for changes in the consumer price index. Rent expense charged to operations was $310,300 and $341,300 for the years ended
December 31, 2015 and 2014, respectively.
Future
minimum lease payments under these agreements are as follows:
| Year Ending December 31, | |
| | |
| 2016 | |
$ | 450,900 | |
| 2017 | |
| 408,300 | |
| 2018 | |
| 338,300 | |
| 2019 | |
| 168,700 | |
| 2020 | |
| 42,700 | |
| | |
$ | 1,408,900 | |
13.
Related-Party Transactions
The
Company conducts business with United Breweries of America (UBA) and Catamaran, which are or are related to major stockholders
of the Company. KBEL had significant transactions with HUK, a related party with respect to one of MBC’s Board members.
The following table reflects balances outstanding as of December 31, 2015 and 2014 and the value of the transactions with these
related parties for the years ended December 31, 2015 and 2014:
| | |
2015 | | |
2014 | |
| TRANSACTIONS | |
| | | |
| | |
| Purchases from HUK | |
$ | 11,713,300 | | |
$ | 12,884,700 | |
| Expenses reimbursement including interest expenses to HUK | |
| 1,081,200 | | |
| 1,355,000 | |
| Interest expenses associated with UBA and Catamaran notes | |
$ | 172,100 | | |
$ | 129,700 | |
| Borrowing from Catamaran | |
| | | |
| | |
| | |
| | | |
| | |
| ACCOUNT BALANCES | |
| | | |
| | |
| Accounts payable and accrued liabilities to HUK | |
$ | 1,669,400 | | |
$ | 1,802,300 | |
| Notes payable to Catamaran | |
| 2,119,600 | | |
| 1,038,700 | |
| Notes payable to UBA | |
$ | 3,680,100 | | |
$ | 3,588,900 | |
Independent
outside members of the Board of Directors are compensated for their services. Accrued expenses related to this compensation totaled
$137,800 and $120,300 for the years ended December 31, 2015 and 2014 respectively and are included in general and administrative
expenses.
13.
Concentrations and Credit Risk
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 that have minimal credit risk, in the US and the UK. 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 $68,300 in cash deposits and $2,714,200 of accounts receivable
due from customers located in the UK as of December 31, 2015.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
The
Company could experience labor disputes, work stoppages or other disruptions in production that could adversely affect it. As
of December 31, 2015, a union represented approximately 25% of the Company’s US-based workforce. On that date, the Company
had approximately fifteen employees at its California (“CA”) facility who were working under a collective bargaining
agreement. The agreement covering the CA facility expires on July 31, 2018.
Gross
sales to the top five customers totaled $4,854,000and $5,466,700 for the years ended December 31, 2015 and 2014, which represents
15% and 16% of sales for the years ended December 31, 2015 and 2014, respectively. No individual customer accounted for more than
5% of our total sales during 2015 and 2014.
14.
Stockholders’ Equity
Preferred
Stock
Ten
million shares of no par preferred stock have been authorized, of which 227,600 shares, designated as Series A,are issued and
outstanding. Series A shareholders are entitled to receive cash dividends and/or liquidation proceeds equal, in the aggregate,
to $1.00 per share before any cash dividends are paid on the common stock or any other series of preferred stock. When the entire
Series A dividend/liquidation proceeds have been paid, the Series A shares are automatically canceled and will cease to be outstanding.
Only a complete corporate dissolution will cause a liquidation preference to be paid.
Common
Stock
Thirty
million shares of no par common stock have been authorized, of which 12,611,133 shares are issued and outstanding.
15. Income Taxes
The large accumulated losses from past
operations have resulted in the Company determining that the deferred tax assets associated with net operating loss carryforwards
may expire prior to utilization. Because of the uncertainty of realization of any tax assets, the Company provided a full valuation
allowance against its net deferred tax assets at December 31, 2015 and 2014. Consequently, no benefit for deferred tax assets
appears on the Company’s financial statements.
The Company’s income tax expense is summarized as
follows:
| |
|
2015 |
|
|
2014 |
|
| Provision for income taxes |
|
|
|
|
|
|
|
|
| US Federal |
|
$ |
- |
|
|
$ |
- |
|
| US States |
|
|
3,800 |
|
|
|
- |
|
| Current provision |
|
|
- |
|
|
|
- |
|
| Change in deferred income taxes |
|
|
- |
|
|
|
- |
|
| Total provision for income taxes |
|
$ |
3,800 |
|
|
$ |
- |
|
The difference between the actual income tax provision and
the tax provision computed by applying the statutory US federal and United Kingdom income tax rates to earnings before taxes is
attributable to the following:
| |
|
2015 |
|
|
2014 |
|
| US Federal income tax expense (benefit) at 34% |
|
$ |
(516,700 |
) |
|
$ |
(828,000 |
) |
| US State income tax expense (benefit) |
|
|
(101,200 |
) |
|
|
(136,100 |
) |
| United Kingdom income tax expense (benefit) at 20% |
|
|
75,000 |
|
|
|
179,100 |
|
| Nondeductible expenses |
|
|
13,600 |
|
|
|
13,300 |
|
| Expiration of net operating loss carryforwards |
|
|
29,800 |
|
|
|
293,500 |
|
| Other |
|
|
174,400 |
|
|
|
147,000 |
|
| Change in valuation allowance |
|
|
328,900 |
|
|
|
331,200 |
|
| Total |
|
$ |
- |
|
|
$ |
- |
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
Temporary differences and carryforwards that give rise to
deferred tax assets and liabilities are as follows:
| |
|
2015 |
|
|
2014 |
|
| Benefit of net operating loss carryforwards |
|
$ |
6,159,300 |
|
|
$ |
5,601,600 |
|
| Depreciation and amortization |
|
|
(1,581,400 |
) |
|
|
(1,630,400 |
) |
| Other |
|
|
81,000 |
|
|
|
358,800 |
|
| Subtotal |
|
|
4,658,900 |
|
|
|
4,330,000 |
|
| Less valuation allowance |
|
|
(4,658,900 |
) |
|
|
(4,330,000 |
) |
| Total |
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
| Change in valuation allowance |
|
$ |
328,900 |
|
|
$ |
331,200 |
|
The Company has net operating losses
available for carry forward. The US Federal net operating losses total approximately $17,021,100 and expire beginning 2018 and
ending in 2035. The US state operating losses total approximately $1,547,400 and expire beginning in 2016 and ending in 2035.
The Company’s UK operating losses total approximately $1,176,900 and do not expire.
Tax years that remain open for examination
by the Internal Revenue Service and the US states include 2012 through 2015. California and New York may still examine 2011 as
well. The Company expects to file its 2015 returns in the summer of 2016. Additional years may be examined in the event of criminal
tax fraud, and any year may be subject to examination to the extent that the Company utilizes the net operating losses from those
years in its current or future tax returns.
16.
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. This segment accounted for approximately 38% and 37% of the Company’s gross sales
during the years 2015 and 2014, respectively.
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
through Indian restaurants, chain retail grocers, liquor stores, and other retail outlets (such as convenience stores). This segment
accounted for approximately 62% and 63% of the Company’s gross sales during 2015 and 2014 respectively.
A
summary of each segment is as follows:
| | |
Year Ended December 31, 2015 | |
| | |
North American
Territory | | |
Foreign
Territory | | |
Total | |
| Sales | |
$ | 11,872,300 | | |
$ | 19,819,600 | | |
$ | 31,691,900 | |
| Operating income (loss) | |
| (1,144,100 | ) | |
| 491,500 | | |
| (652,600 | ) |
| Identifiable assets | |
| 12,426,800 | | |
| 4,609,200 | | |
| 17,036,000 | |
| Depreciation and amortization | |
| 696,500 | | |
| 529,700 | | |
| 1,226,200 | |
| Capital expenditures | |
| 125,500 | | |
| 622,500 | | |
| 748,000 | |
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
| | |
Year Ended December 31, 2014 | |
| | |
North American
Territory | | |
Foreign
Territory | | |
Total | |
| Sales | |
$ | 12,869,500 | | |
$ | 21,785,400 | | |
$ | 34,654,900 | |
| Operating income (loss) | |
| (1,960,600 | ) | |
| 1,041,400 | | |
| (919,200 | ) |
| Identifiable assets | |
| 13,862,700 | | |
| 4,815,900 | | |
| 18,678,600 | |
| Depreciation and amortization | |
| 704,700 | | |
| 677,700 | | |
| 1,382,400 | |
| Capital expenditures | |
| 105,300 | | |
| 790,400 | | |
| 895,700 | |
17.
Unrestricted Net Assets
The
Company’s wholly-owned subsidiary, UBIUK, has cumulative losses of approximately $317,600 as of December 31, 2015. Under
KBEL’s line of credit agreement with RBS, distributions and other payments to the Company from its subsidiary are not permitted
if the subsidiary’s retained earnings drop below $1,528,400. Condensed financial information of the United States operations
is as follows:
| | |
2015 | | |
2014 | |
| Balance Sheets | |
| | | |
| | |
| | |
| | | |
| | |
| Assets | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 61,300 | | |
$ | 61,500 | |
| Accounts receivable, net | |
| 1,121,300 | | |
| 1,365,000 | |
| Inventories | |
| 1,490,100 | | |
| 2,047,700 | |
| Other current assets | |
| 199,800 | | |
| 173,600 | |
| Total current assets | |
| 2,872,500 | | |
| 3,647,800 | |
| | |
| | | |
| | |
| Investment in subsidiary | |
| 1,225,000 | | |
| 1,225,000 | |
| Property and equipment | |
| 9,378,500 | | |
| 9,904,500 | |
| Intercompany receivable | |
| 284,000 | | |
| 421,900 | |
| Other assets | |
| 175,800 | | |
| 310,400 | |
| Total assets | |
$ | 13,935,800 | | |
$ | 15,509,600 | |
| | |
| | | |
| | |
| Liabilities | |
| | | |
| | |
| Line of credit | |
$ | 453,100 | | |
$ | 1,192,900 | |
| Accounts payable | |
| 2,640,400 | | |
| 2,620,000 | |
| Accrued liabilities | |
| 1,021,000 | | |
| 1,031,300 | |
| Note payable to related party | |
| 2,119,600 | | |
| 1,038,700 | |
| Subordinated convertible notes to related party | |
| 3,680,100 | | |
| - | |
| Current maturities of debt, leases and severance | |
| 3,505,900 | | |
| 3,918,900 | |
| Total current liabilities | |
| 13,420,100 | | |
| 9,801,800 | |
| | |
| | | |
| | |
| Long-term capital leases | |
| 14,000 | | |
| 12,100 | |
| Subordinated convertible notes to related party | |
| - | | |
| 3,588,900 | |
| Severance payable | |
| 678,400 | | |
| 760,100 | |
| Total liabilities | |
| 14,112,500 | | |
| 14,162,900 | |
| | |
| | | |
| | |
| Stockholders’ equity | |
| | | |
| | |
| Common stock | |
| 15,100,300 | | |
| 15,100,300 | |
| Preferred stock | |
| 227,600 | | |
| 227,600 | |
| Accumulated deficit | |
| (15,504,600 | ) | |
| (13,981,200 | ) |
| Total stockholders’ equity | |
| (176,700 | ) | |
| 1,346,700 | |
| Total liabilities and stockholders’ equity | |
$ | 13,935,800 | | |
$ | 15,509,600 | |
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2015 and 2014
| | |
2015 | | |
2014 | |
| Statement of Operations | |
| | | |
| | |
| | |
| | | |
| | |
| Net sales | |
$ | 11,364,100 | | |
$ | 12,253,800 | |
| Cost of goods sold | |
| 9,422,700 | | |
| 10,249,000 | |
| Selling, marketing, and retail expenses | |
| 1,320,900 | | |
| 1,433,700 | |
| General and administrative expenses | |
| 1,771,400 | | |
| 2,538,100 | |
| Loss from operations | |
| (1,150,900 | ) | |
| (1,967,000 | ) |
| | |
| | | |
| | |
| Other income and (expense) | |
| | | |
| | |
| Interest expenses | |
| (481,600 | ) | |
| (518,500 | ) |
| Profit (Loss) on disposal of assets | |
| - | | |
| 3,500 | |
| Other income | |
| 112,900 | | |
| 46,800 | |
| Provision for taxes | |
| (3,800 | ) | |
| - | |
| | |
| (372,500 | ) | |
| (468,200 | ) |
| Net loss | |
$ | (1,523,400 | ) | |
$ | (2,435,200 | ) |
| | |
2015 | | |
2014 | |
| Statements of Cash Flows | |
| | | |
| | |
| | |
| | | |
| | |
| Cash flows from operating activities | |
$ | 258,000 | | |
$ | (380,900 | ) |
| Cash flow from investing activities | |
| | | |
| | |
| Purchase of property and equipment | |
| (115,600 | ) | |
| (105,300 | ) |
| Proceeds from sale of equipment | |
| - | | |
| 3,500 | |
| Net cash flows from investing | |
| (115,600 | ) | |
| (101,800 | ) |
| Cash flow from financing activities | |
| | | |
| | |
| Net repayments on line of credit | |
| (739,800 | ) | |
| (324,300 | ) |
| Borrowing on note payable | |
| 1,000,000 | | |
| 1,000,000 | |
| Repayment of long-term debt | |
| (534,700 | ) | |
| (534,700 | ) |
| Payment on obligations under capital leases | |
| (6,000 | ) | |
| (5,300 | ) |
| Net change in intercompany payable | |
| 137,900 | | |
| 294,800 | |
| Net cash flows from financing activities | |
| (142,600 | ) | |
| 430,500 | |
| Cash, beginning of year | |
| 61,500 | | |
| 113,700 | |
| Cash, end of year | |
$ | 61,300 | | |
$ | 61,500 | |
18. Subsequent Events
On March 14, 2016, Catamaran provided
the Company a note loan in the principal amount of $325,000 on terms substantially similar to the previous notes, repayable on
receipt of a bridge loan from the Company’s majority shareholder. On March 30, 2016, Catamaran provided the Company with
another note loan in the principal amount of $75,000 on terms similar to the previous note.
Pursuant to a resolution adopted on
September 10, 2013 by the Company’s Board of Directors, Company entered into a Separation and Severance Agreement with Mr.
Mahadevan Narayanan, Company’s Chief Financial Officer and Secretary on April 12, 2016. Pursuant to the terms of the agreement,
upon Mr. Narayanan’s (i) termination of employment for Good Reason (as defined in the agreement), (ii) death, (iii) disability
or (iv) termination by the Company without Cause (as defined in the 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 agreement); provided, however, that the severance payment may
not exceed thirty (30) months of Mr. Narayanan’s average monthly base salary (calculated over the twelve (12) months preceding
his termination date). Payments due to Mr. Narayanan under the Separation Agreement shall be paid in equal monthly installments
by the Company over a 20 month period.
