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. In this Annual Report, 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.
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 European 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 procured under a contract with Heineken UK Limited (“HUK”). This contract expires in October 2018. KBEL is the distributor of Kingfisher Premium Lager to specialty restaurant trade distributors, liquor and convenience stores in the United Kingdom, Ireland, and continental Europe, but does not physically distribute our products to customers. KBEL relies on 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, HUK has 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 have a contract with HUK to procure Kingfisher Premium Lager for distribution in the Foreign Territory which 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, some of which include 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 15.3 million barrels in the year 2013. 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, but is relatively small. 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 European Union are made in the United Kingdom. Sales in the Foreign Territory primarily consist of sales of Kingfisher Premium Lager. KBEL 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.
Within the European Union, 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 eleven ales, one wheat beer, two lagers, two pilsners and four stouts, all on a year-round basis, and four seasonal brews and one anniversary brew. 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 (formerly located in Hopland, 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 many European markets 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 our 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. In 2008, MBC and Releta each entered into long term contracts to purchase hops. These contracts expire in 2015. If we are unable to enter into new contracts to purchase hops 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 supply of raw materials will be determined by, among other factors, the level of crop production, weather conditions, export 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 International Paper Co. Pittsburg, PA (cartons); Rose City Printing and Packaging, 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 2014 totaled $5,466,700 (approximately 16% of our sales), as compared to sales to our top five customers in 2013 which totaled $7,575,900 (approximately 21% of our sales).
No individual customer accounted for more than 5% of our total sales during fiscal year 2014. Sales to Shepherd Neame, which is a related party to a former Board member, and was one of our European customers, represented approximately 11% of our Foreign Territory sales (or approximately 7% of our total sales) during 2013. No other individual customer accounted for more than 5% of our total sales 2013.
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. The 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), TWIN SISTERS (Reg. No. 3,589,090), REVOLUTION X (Reg. No. 3,237,471); ROCK HARD TEN (Reg. No. 3,585,772), 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 and KBEL hold 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 which 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.
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, 2015. 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 our insurance coverage could adversely affect our financial condition.
EMPLOYEES
As of December 31, 2014, MBC had 50 full-time and 13 part-time employees in the United States, including 11 in management and administration, 38 in brewing and production operations, 5 in retail and tavern operations and 9 in sales and marketing positions. In England, UBIUK and KBEL together had 28 full-time employees as of December 31, 2014, including 18 in sales and marketing and 10 in managerial and administrative positions. Management believes that our relationship with our employees is generally good.
Approximately 14 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 14 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.
ITEM 1A. RISK FACTORS.
In addition to the other information about risks in this Annual Report on Form 10-K, described below are 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 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 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 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, 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 dated June 23, 2011, as previously amended on March 29, 2013.
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 continue 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. 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. 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.
On March 5, 2015, United Breweries (Holdings) Limited (“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.
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 and are awaiting its 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.
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 26% of our beer volume in the North American Territory for fiscal year 2014 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 European 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, 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 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:
● the entry into, or termination of, key agreements;
● the introduction of new products by us or our competitors;
● future sales of our Common Stock;
● variations in our operating results;
● changes in the market values of public companies that operate in our business segment;
● general market conditions; and
● domestic and international economic factors unrelated to our specific performance.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not required for smaller reporting companies.
ITEM 2.
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 Bank 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, 2014 was $2,423,600.
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 $10,438,800. 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 1.15%, for an annual tax of $120,100.
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 2,000 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.
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.
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.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
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.
We had approximately 2,145 holders of our Common Stock of record as of March 23, 2015.
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 the lender’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 shall receive an addition $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 2014”.
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.
ITEM 6. SELECTED FINANCIAL DATA.
Not required for smaller reporting companies.
ITEM 7.
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 2014 and 2013 resulted in loss from operations of $919,200 and $265,600, respectively. After providing for interest, other income and taxes, the net loss in 2014 was $1,539,500 compared to a net loss in 2013 of $876,900.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2014 COMPARED TO YEAR ENDED DECEMBER 31, 2013
The following table sets forth, for the periods indicated, a comparison of certain items from our Consolidated Statements of Operations:
NET SALES
As used herein, the term “net sales” refers to gross sales less excise taxes. Overall net sales for fiscal year 2014 were $34,039,200 a decrease of $1,596,700 or 5% as compared to $35,635,900 in fiscal year 2013 due to lower sales volume.
NORTH AMERICAN TERRITORY OPERATIONS: Net sales in the North American Territory totaled $12,253,800 in fiscal year 2014, compared to $14,024,400 for fiscal year 2013, representing a decrease of $1,770,600 or 13%. Sales of beer for fiscal year 2014 decreased by 8,100 barrels to 60,900 barrels, a decrease of 12%, as compared to 69,000 barrels in fiscal year 2013. This decrease was due to (i) a decrease in sales of brands we own by 7,000 barrels due to increased competition and (ii) a decrease in sales of contract brands by 1,100 barrels because of lower demand from contractors. 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 $21,785,400 in fiscal year 2014, compared to $21,611,500 during fiscal year 2013, an increase of $173,900 or 1%. The increase is attributable to higher sales in continental Europe, including sales pursuant to a new brewing contract in Germany.
Inflation did not have a significant impact on net sales.
COST OF GOODS SOLD
Overall cost of goods sold during fiscal year 2014 was $23,435,100, as compared to $25,770,300 during fiscal year 2013, a decrease of $2,335,200, or 9%. As a percentage of net sales, costs of goods sold decreased to 69% in 2014 compared to 72% in 2013, mainly due to lower purchase prices negotiated with HUK.
Utilization of our production capacity has a direct impact on cost. Generally, when facilities are operating at higher percentage of production capacity, cost is favorably affected because fixed and semi-variable operating costs, such as depreciation and production costs, are spread over a larger volume base. Our production capacity is currently under-utilized. 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 increased to 84% during fiscal year 2014 compared to 81% in fiscal year 2013. Underutilization of our production capacity, as described above, was a factor in costs of goods sold in North America in 2014. The lower sales volume in 2014 caused further decreases in productivity. There was also a slight increase in the price of raw materials.
FOREIGN TERRITORY OPERATIONS: As a percentage of net sales, cost of goods sold in the United Kingdom during fiscal year 2014 decreased to 61%, as compared to 67% during fiscal year 2013. The reduction was due to a lower purchase price negotiated with HUK.
GROSS PROFIT
As a result of decreased sales, offset by decreased cost of goods, gross profit for fiscal year 2014 (expressed in United States dollars) was $10,604,100, an increase of $738,500, or 8%, as compared to gross profit of $9,865,600 in fiscal year 2013. As a percentage of net sales, our overall gross profit during fiscal year 2014 increased to 31% in 2014 compared to 28% in fiscal year 2013.
OPERATING EXPENSES
Operating expenses consist of marketing and distribution expenses, and general and administrative expenses. Operating expenses for fiscal year 2014 totaled $11,523,300, an increase of $1,392,100, or 14%, as compared to $10,131,200 for fiscal year 2013. As a percentage of net sales, operating expenses increased to 34% during fiscal year 2014 compared to 28% in fiscal year 2013.
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 2014, such expenses equaled $5,887,200, an increase of $455,200 or 8%, as compared to $5,432,000 in fiscal year 2013. As a percentage of net sales, our marketing and distribution expenses increased to 17% in fiscal year 2014, as compared to 15% in fiscal year 2013.
NORTH AMERICAN TERRITORY OPERATIONS: Marketing and distribution expenses for the North American Territory in fiscal year 2014 equaled $1,433,700, a decrease of $276,900, or 16%, as compared to $1,710,600 incurred during fiscal year 2013 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 2014 and 2013.
FOREIGN TERRITORY OPERATIONS: Marketing and distribution expenses in the Foreign Territory during fiscal year 2014 equaled $4,453,500, an increase of $732,100, or 20%, as compared to $3,721,400 during fiscal year 2013. Such increase is mainly due to higher manpower costs due to an increase in manpower, costs associated with re-branding of packaged products and higher spending on point of sale items. As a percentage of net sales in the United Kingdom, such expenses increased to 20% during fiscal year 2014 compared to 17% during 2013.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses include all expenses not characterized as sales and marketing expenses. Our general and administrative expenses totaled $5,636,100 for fiscal year 2014, representing an increase of $936,900, or 20%, as compared to $4,699,200 for fiscal year 2013. General and administrative expenses equaled 17% of net sales for fiscal year 2014 and 13% of net sales for fiscal year 2013.
NORTH AMERICAN TERRITORY OPERATIONS: General and administrative expenses for our North American Territory equaled $2,538,100 for fiscal year 2014, representing an increase of $443,900, or 21%, as compared to $2,094,200 for fiscal year 2013. The increase in general and administrative expenses was due to accrual 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). The expenses were partly offset by a decrease in administrative manpower and related costs.
FOREIGN TERRITORY OPERATIONS: General and administrative expenses for our Foreign Territory equaled $3,098,000 in fiscal year 2014, representing an increase of $493,000, or 19%, as compared to $2,605,000 for fiscal year 2013 mainly due to increased manpower and salary of administrative employees, higher depreciation and increase in various other miscellaneous costs.
OTHER EXPENSES
Other expenses, including interest expenses, totaled $620,300 in fiscal year 2014, representing an increase of $13,100, or 2%, as compared to $607,200 in fiscal year 2013, due to an increase in interest expenses.
INCOME TAXES
We have not made any provision for income taxes for the fiscal year 2014 due to losses. We made a provision for income taxes of $4,100 for the fiscal year 2013.
NET LOSS
Our net loss for fiscal year 2014 was $1,539,500, as compared to a net loss of $876,900 for fiscal year 2013. After providing for a positive foreign currency translation adjustment of $40,500 during fiscal year 2014 (as compared to a positive foreign currency translation adjustment of $7,300 for fiscal year 2013), comprehensive loss for fiscal year 2014 was $1,499,000, compared to comprehensive loss of $869,600 for fiscal year 2013. As stated above, the primary reason for the loss in fiscal year 2014 was the drop in sales revenues during the period and accrual of severance payable.
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 ($247,400 in 2014 and $241,800 in 2013), 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 believe that the liquidity we derive from debt financing and cash flow attributable to our operations is sufficient to fund our capital expenditures, debt maturities and other business needs for the next twelve months.
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. Each time Catamaran provided a note loan, the Company received a letter from Lender (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 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 the portion of an equity investment by the Company’s majority shareholder that is over $500,000.
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 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 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, 2015. 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, 2014, the fixed charge coverage ratio was required to be 1.10 to 1. The Company calculated that the fixed charge coverage ratio as of December 31, 2014 was -1.18 to 1. The Company calculated that the required tangible net worth of MBC and Releta was $6,181,400 as of December 31, 2014 and the actual tangible net worth on such date was $3,843,400. 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. 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.
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, 2014, we had cash and cash equivalents of $145,100, an accumulated deficit of $16,247,100, and a working capital deficit of $6,982,900 due to losses incurred and reclassification of debts owing to MB Financial as a result of the default under the Agreement described above. In addition, the book value of the Company’s assets was lower than the book value of its liabilities at December 31, 2014.
Management has taken several actions to enable us to meet our working capital needs through December 31, 2015, including reducing discretionary expenditures, expanding business in new territories, reducing manpower and securing additional brewing contracts in an effort to utilize a portion of the Company’s excess production capacity. We have requested a capital infusion from UBHL. If UBHL is unwilling or unable to infuse additional capital, we may seek capital from other sources.
If it becomes necessary to seek UBHL’s financial assistance under the Letter of Comfort, and UBHL does not provide such financial assistance, and we are unable to obtain capital from other sources, it may result in a material adverse effect on our financial position and on our ability to continue operations. In addition, our lenders may seek to satisfy any outstanding obligations through recourse against the applicable pledged collateral which may include our real property and fixed and current assets. The loss of any material pledged asset would likely have a material adverse effect on our financial position and results of operations.
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 $793,400 and $276,100 for 2014 and 2013 respectively. During the year ended December 31, 2014, the primary factors contributing to our calculation of net cash provided by operating activities were non-cash expenses consisting primarily of depreciation expense of $1,382,400, accrued severance payable of $760,100, net increase in accounts receivable of $329,000, net increase in accounts payable and accrued liabilities of $456,400 and net loss of $1,539,500.
During the year 2014, the value of our inventory decreased by $119,900 compared to an increase of $330,100 during the year 2013. Fluctuations in inventory are normal for our operations and industry and are typically not indicators of any material contributing cause.
Increases and decreases in inventories, prepaid accounts, deposits and accrued liabilities over the course of the year are due to normal operational fluctuations during the year.
Net cash used in investing activities was $876,100 and $816,000, respectively, for 2014 and 2013. Such funds were used primarily for purchases of beer dispensing equipment in the Foreign Territory.
Net cash used in financing activities was $117,600 during the year 2014 compared to $669,500 provided by such activities in 2013. During 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”). 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, 2015 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, 2014 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,673,500, for a total amount outstanding of $3,588,900. As of December 31, 2014, the outstanding principal and interest on the UBA Notes was convertible into approximately 2,410,500 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 2014 and 2013, the greatest aggregate amount of principal outstanding on the UBA Notes was $1,915,400. No principal or interest was paid during fiscal years 2014 or 2013. As of February 28, 2015, the aggregate outstanding principal amount of the UBA Notes was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,688,200, for a total amount outstanding of $3,603,600, convertible in to approximately 2,420,400 shares of our Common Stock. As of February 28, 2015, 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, the Company issued a promissory note to Catamaran in the principal amount of $500,000. Catamaran Holdings, Ltd., the sole shareholder of Catamaran (“Holdings”) has directors in common with Inversiones, one of the major shareholders of the Company. The indirect beneficial owner of Inversiones is UBHL. Dr. Vijay Mallya, the Chairman of the Board of Directors of the Company is also the Chairman of the Board of Directors of UBHL. The Company has asked Catamaran whether any relationships exist between the shareholders of Holdings and any affiliates of the Company, and has not received a response to such inquiries. On April 24, 2014, the Company issued another note to Catamaran in the principal amount of $500,000 on terms similar to the note issued on January 22, 2014. On February 5, 2015, the Company issued the third note to Catamaran in the principal amount of $500,000 on terms similar to the notes issued earlier.
Pursuant to the terms of the notes, the Company promises to pay each 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, as defined below, or (b) to pay both the notes and certain existing obligations of the Company to Lender in full. “Permitted Payments” on the notes are payments made from the portion of a Shareholder Investment that is in excess of $500,000.
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 a Shareholder Investment sufficient to satisfy the notes is received. Interest shall accrue from the date of the notes on the unpaid principal at a rate equal to the lesser of (i) one and one-half percent (1.5%) per annum above the prime rate offered from time to time by the Bank of America Corporation in San Francisco, California, or (ii) ten percent (10%) per annum, until the principal is fully paid.
The notes may be prepaid without penalty at the option of the Company; however, no payments on the notes may be made unless such payment is a Permitted Payment or certain existing obligations of the Company to Lender have been satisfied in full. The notes may not be amended without the prior written consent of Lender.
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 license 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.
WEIGHTED AVERAGE INTEREST: The weighted average interest rates on our debts incurred in connection with the North American Territory were 6.4% for fiscal year 2014 compared to 5.4% for fiscal year 2013. For loans primarily associated with our Foreign Territory, the weighted average interest rate paid was 4.5% for fiscal year 2014 and 3.5% for the fiscal year 2013.
CURRENT RATIO: Our ratio of current assets to current liabilities on December 31, 2014 was 0.51 to 1.0 and on December 31, 2013 was 0.53 to 1.0. Our ratio of total assets to total liabilities as of December 31, 2014 was 0.98 to 1.0 and on December 31, 2013 was 1.06 to 1.0.
RESTRICTED NET ASSETS. Our wholly-owned subsidiary, UBIUK, had cumulative losses of approximately $682,200 as of December 31, 2014. 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 $1,557,800.
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, 2014.
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 the 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 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, 2014 and 2013, 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, 2014 and 2013.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted.
In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard requires management to evaluate the entity’s ability to continue as a going concern for 12 months following the issuance of the financial statements and provide related footnote disclosures. This standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods thereafter. Early adoption is permitted. We will adopt this standard beginning with our 2017 annual reporting period.
In January 2015, the FASB issued an Accounting Standards Update which eliminates from GAAP the concept of extraordinary items and the need to separately classify, present, and disclose extraordinary events and transactions. This guidance is effective for annual and interim reporting periods beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this pronouncement is not expected to impact the Company’s consolidated financial statements.
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for smaller reporting companies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth on Pages through of this Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
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, 2014. 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 were effective as of December 31, 2014.
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 authorizations 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, 2014. 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, 2014, 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, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth the names, ages as of February 28, 2015, and certain information regarding each of our current directors and executive officers:
Name
Age
Position(s)
Director Since**
Scott R. Heldfond *+
Director
Michael Laybourn+
Director
Vijay Mallya, Ph.D.
Director and Chairman of the Board
Jerome G. Merchant*
Director
Mahadevan Narayanan
Chief Financial Officer and Secretary
N/A
Sury Rao Palamand, Ph.D.
Director
Kent D. Price*+
Director
Yashpal Singh
Director, President and Chief Executive Officer
** 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 September 30, 2015. 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.
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.
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 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 Chairman of the Board in October 1997 and was MBC’s Chief Executive Officer until January 2005. Dr. Mallya is a well-known industrialist and the Chairman of UBICS, Inc., United Breweries Limited, United Spirits Limited, Whyte & Makay 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.)), Kingfisher Airlines Limited, UB Engineering Limited, Mangalore Chemicals and Fertilizers Ltd., and other affiliated companies (collectively the “UB Group”). The UB Group is comprised of businesses in the following sectors: alcoholic beverages, life sciences, engineering, agrochemicals, information technology, fertilizers, print media, civil aviation and infrastructure development. United Breweries Limited and United Spirits Limited are two of Asia’s leading beer and spirits 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 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 companies comprising the UB Group, 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.
Jerome G. Merchant became a director 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.
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.
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 criterion in his selection as a member of the Board.
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.
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 was 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
There are no family relationships among any of the directors and executive officers.
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 2014, 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. Jerome G. Merchant, Scott R. Heldfond 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. 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, 2014, the Board of Directors held one meeting and the Audit/Finance Committee held six meetings. One director did not attend the 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 2014.
Audit/Finance Committee. The Board of Directors has a standing Audit/Finance Committee.
Messrs. Merchant, Price (Chair), and Heldfond serve as the members of the Audit/Finance Committee (established in accordance with Section 3(a)(58)(A) of the Exchange Act). This committee met six times during fiscal year 2014. 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.
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 on MBC’s Compensation Committee for the fiscal year ended December 31, 2014. 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.
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, 2014.
Neither of these executive officers has been issued equity shares or stock options as compensation to date.
* Other compensation includes use of company vehicle, health care reimbursement for the executive and his immediate family and vacation reimbursement.
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 September 30, 2015. 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. 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.
Total compensation for the Chief Executive Officer and Chief Financial Officer consists of base salary, annual cash bonus payments, health benefits for each such officer and his immediate dependent family members, use of 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. No adjustments have been made to such salaries during fiscal 2014.
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.
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 company vehicles, health care reimbursement 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 the 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 December 31, 2014, Mr. Singh would have received the following approximate amounts of compensation for the applicable triggering event: termination by the Company for Cause - $304,000; completion of term of Employment Agreement - $760,100 plus COBRA payments; termination due to disability or death - $760,100 plus COBRA payments; termination by Mr. Singh for Good Reason - $760,100 plus COBRA payments; or termination by the Company without Cause - $1,064,100 plus COBRA payments.
Except for the Employment Agreement and Separation Agreement with Mr. Singh, 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.
DIRECTORS’ COMPENSATION FOR THE YEAR 2014
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 $147,700 in United States dollars at the average exchange rate for the year 2014) 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.
* Fee for attending one 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 was not paid and no payment was made for the fees earned during 2014. Such unpaid fees are accrued and to be paid in the future out of available cash.
+ Fixed annual retainer of $15,000 and $2,000 additional fixed retainer and fee for attending one Board meeting calculated at $1,250 per meeting. $9,500 of the fees earned for the year 2013 was not paid and no payment was made for the fees earned during 2014. Such unpaid fees are accrued and to be paid in the future out of available cash.
# Fee for attending one Board meeting and five committee meetings calculated at $1,250 per meeting, $15,000 fixed annual retainer and $2,000 additional fixed retainer. $14,500 of the fees earned for the year 2013 was not paid and no payment was made for the fees earned during 2014. Such unpaid fees are accrued and to be paid in the future out of available cash.
## Fee for attending one Board meeting 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. $16,760 of the fees earned for the year 2013 was not paid and no payment was made for the fees earned during 2014. Such unpaid fees are accrued and to be paid in the future out of available cash.
^ Fixed annual retainer of $15,000 and $2,000 additional fixed retainer. $10,750 of the fees earned for the year 2013 was not paid and no payment was made for the fees earned during 2014. Such unpaid fees are accrued and to be paid in the future out of available cash.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Heldfond (Chair), Price and Laybourn served on MBC’s Compensation Committee for the fiscal year ended December 31, 2014. 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, 2014.
The Compensation Committee
Scott R. Heldfond (Chair)
Kent D. Price
Michael Laybourn
ITEM 12.
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 28, 2015, 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:
(1) Applicable percentages of ownership are based on 12,611,133 shares of Common Stock outstanding as of March 23, 2015.
(2) Does not include 2,420,354 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.
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, 2014, so the current term has been extended until June 30, 2015.
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, 2014 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,673,500, for a total amount due of $3,588,900.
The outstanding principal amount of the notes and the unpaid interest thereon may be converted, at UBA’s discretion, into shares of our unregistered Common Stock at a conversion rate of $1.50 per share for the notes issued pursuant to the Credit Agreement and $1.44 for the note issued on March 2, 2005. As of December 31, 2014, the outstanding principal and interest on the UBA Notes was convertible into 2,410,464 shares of our Common Stock.
As of February 28, 2015, the aggregate outstanding principal amount of the UBA Notes was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,688,200. As of February 28, 2015, the entire amount of the outstanding principal and accrued but unpaid interest owed with respect to the UBA Notes was convertible into 2,420,354 shares of our Common Stock. As of February 28, 2015, 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 2014 and 2013, the largest aggregate amount of principal outstanding was $1,915,400. No principal or interest was paid during fiscal year 2014 or 2013.
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 but, pursuant to its amended terms, will no longer provide brewing and distribution rights in the United States. The Company has negotiated arrangements to continue to brew and distribute beer using the Kingfisher trademark pursuant to the License Agreement. If the Company cannot obtain the right 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 a 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 2014) 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 2014 was approximately $67,700 and for the year 2013 was approximately $57,900.
Brewing License Agreement
Effective October 26, 2001, MBC entered into a Brewing License Agreement with KBEL, 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 2014 was approximately $6,400 and for the year 2013 was approximately $97,400.
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 granted 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 $12,884,700 during the year 2014 and $3,006,100 in the year 2013. Royalty fees receivable from HUK in 2014 was $61,800 and in 2013 were $9,600.
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 2014 and 2013 was £1,000,000. The amount of principal outstanding as of March 27, 2015 was £583,300. Principal and interest repayments in 2014 were £333,300 and £56,900 respectively. No principal or interest was paid in 2013.
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. 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.
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 an equity investment by its majority shareholder (the “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 portion of a Shareholder Investment that is in excess of $500,000 of the value of all the notes issued by Catamaran.
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. 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 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 February 28, 2015 was $1,500,000.
DIRECTOR INDEPENDENCE
The Board has determined that the following directors qualify as “independent” in accordance with the published listing requirements of NASDAQ: 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 serve 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 28, 2015. UBA has also advanced us the principal amount of $1,915,400 under separate convertible notes. As of February 28, 2015 the principal amount outstanding on the notes together with the accrued interest was convertible into 2,420,354 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.
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 2014 and fiscal year 2013.
AUDIT FEES. The aggregate fees billed by RBSM during the year 2014 and 2013 for the audit of our annual consolidated financial statements was $80,000 and of an additional $36,000 were billed to us in connection with 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 2014 and 2013.
AUDIT RELATED FEES. RBSM did not bill us any amount in fees for assurance or related services in 2014 or 2013.
TAX FEES. The aggregate fees billed by RBSM during 2014 and 2013 for tax products and services related to the preparation of our tax returns other than those described in the foregoing paragraphs, was $14,500. Such fees represented approximately 11% of the total fees for services rendered to us by RBSM during 2014 and 2013.
ALL OTHER FEES. RBSM did not bill us for any amount towards fees for services other than those mentioned above during the years 2014 and 2013.
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 2014 Financial Statements was performed by full-time, permanent employees of RBSM.
ITEM 15.
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, 2014 and 2013
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Cash Flow for the Years Ended December 31, 2014 and 2013
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.
(3) LIST OF EXHIBITS
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.
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.
* 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.
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.
Mendocino Brewing Company, Inc.
Consolidated Financial Statements
For the Years Ended
December 31, 2014 and 2013
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, 2014 and 2013, 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 subsidiaries as of December 31, 2014 and 2013, and the results of its operations and comprehensive income (loss) and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
/s/ RBSM, LLP
Larkspur, California
March 31, 2015
Mendocino Brewing Company, Inc.
Consolidated Balance Sheets
As of December 31, 2014 and 2013
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, 2014 and 2013
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, 2014 and 2013
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, 2014 and 2013
The accompanying notes are an integral part of these financial statements.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
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, Inc. 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, 2014 and 2013 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.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
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.
Foreign Operations
Approximately 26% 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 $56,700 and $68,200 for doubtful accounts receivable as of December 31, 2014 and 2013, 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.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
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:
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, 2014 and 2013.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
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, 2014 and 2013.
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.
“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.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
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 2014 and 2013, as presented in the Company’s statements of operations, are reduced by $1,140,800 and $1,165,100 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.
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 2014 and 2013.
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 $1,051,300 and $911,200, for the years ended December 31, 2014 and 2013, respectively.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
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 2014, 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, 2014. 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:
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, 2014 and 2013, 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.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
Advertising
Advertising costs are expensed as incurred and were $987,500 and $755,600 for the years ended December 31, 2014 and 2013, 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, 2014 and 2013, 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, 2014 and December 31, 2013 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.
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.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted.
.
In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard requires management to evaluate the entity’s ability to continue as a going concern for 12 months following the issuance of the financial statements and provide related footnote disclosures. This standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods thereafter. Early adoption is permitted. We will adopt this standard beginning with our 2017 annual reporting period.
In January 2015, the FASB issued an Accounting Standards Update which eliminates from GAAP the concept of extraordinary items and the need to separately classify, present, and disclose extraordinary events and transactions. This guidance is effective for annual and interim reporting periods beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this pronouncement is not expected to impact the Company’s consolidated financial statements.
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 (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 United Breweries of America, Inc. (“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 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 Agreement.
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 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 Agreement. The Company estimates that the increased rate currently results in approximately $120,000 additional annual interest expense.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 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. As stated in the Second Default Notice, the Company has continued to be in default on the fixed charge coverage ratio for each measurement period beginning March 31, 2013 through February 28, 2015. 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 Company calculated that the required tangible net worth of MBC and Releta was $6,181,400 as of December 31, 2014 and the actual tangible net worth on such date was $3,843,400. 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.
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 reduced 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.
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. Lender could declare the full amount owed under the 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 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 Agreement. The exercise of additional remedies by Lender may have a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate. If it becomes necessary for MBC and Releta to seek additional financing, there is no guarantee that MBC and Releta will be able to obtain such financing on terms favorable to the Company or on any terms.
As of December 31, 2014, the fixed charge coverage ratio was required to be 1.10 to 1. The Company calculated that the fixed charge coverage ratio as of December 31, 2014 was -1.18 to 1. The Company calculated that the required tangible net worth of MBC and Releta was $6,181,400 as of December 31, 2014 and the actual tangible net worth on such date was $3,843,400. 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.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
At December 31, 2014, we had cash and cash equivalents of $145,100, an accumulated deficit of $16,247,100, and a working capital deficit of $6,982,800 due to losses incurred and reclassification of debts owing to MB Financial as a result of the default under the Agreement described above. In addition, the book value of the Company’s assets was lower than the book value of its liabilities at December 31, 2014.
The Company received a letter dated November 11, 2013 from UBHL, our indirect majority shareholder, expressing its willingness to commit to invest $2,000,000 in the Company in four installments to be paid every six months over a two year period. The letter did not state definitive terms for the proposed investment. UBHL would consider 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 an 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.
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 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 to MBC, 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.
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 each date on 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 a Permitted Payment. A “Permitted Payment” is a payment made from the portion of an equity investment by the Company’s majority shareholder that is over $500,000.
Management has taken several actions to enable us to meet our working capital needs through December 31, 2015, including reducing discretionary expenditures, expanding business in new territories, reducing manpower and securing additional brewing contracts in an effort to utilize a portion of excess production capacity. We have requested UBHL to make a capital infusion. If UBHL is unwilling or unable to infuse additional capital, we may seek capital from other sources.
If it becomes necessary to seek UBHL’s financial assistance under the Letter of Comfort and UBHL does not fulfill its commitment to MBC, it may result in a material adverse effect on our financial position and on our ability to continue operations. In addition, our lenders may seek to satisfy any outstanding obligations through recourse against the applicable pledged collateral which may include our real property and fixed and current assets. The loss of any material pledged asset would likely have a material adverse effect on our financial position and results of operations.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
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:
4. Property and Equipment
The following is a summary of property and equipment, at cost less accumulated depreciation, at December 31:
The total depreciation expense for the years ended December 31, 2014 and 2013 was $1,337,400 and $1,060,400, 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 the Third Default Notice, MB Financial notified the Company 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, 2014 was approximately $1,192,900. Included in the Company’s balance sheet as accounts receivable at December 31, 2014, are account balances totaling $1,365,000 of accounts receivables and $2,047,700 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, 2014 was approximately $964,000.
6. Notes Payable to Related Party
Notes payable to related party includes notes payable to Catamaran dated January 22, 2014 and April 24, 2014 for a total value of $1,038,700 including interest of $38,700 at US prime rate plus 1.5% per year, but not to exceed 10%. Catamaran Holdings, Ltd., the sole shareholder of Catamaran (“Holdings”), 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.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
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 portion of equity investment by the Company’s majority shareholder that is in excess of $500,000. 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.
7. Secured Notes Payable
8. Long-Term Debt - Related Party
Maturities of debt for succeeding years are as follows:
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, 2014 and 2013
9. 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 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 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 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). 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. As of December 31, 2014, the Company estimated the obligation to be $760,100.
10. Capital Lease Obligations
The Company leases certain brewing equipment, vehicles and office equipment 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, 2014, are as follows:
11. 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 $3,588,900 and $3,497,900 as of December 31, 2014 and 2013, 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 2015 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. Therefore, the Company will not require the use of working capital to repay any of the UBA notes until the MB Financial facilities are repaid. The UBA notes included $1,673,500 and $1,582,500 of accrued interest at December 31, 2014 and December 31, 2013, respectively.
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:
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, 2014 and 2013
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.
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 2019 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).
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 $341,300 and $359,300 for the years ended December 31, 2014 and 2013, respectively.
Future minimum lease payments under these agreements are as follows:
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
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 Shepherd Neame, Ltd., which is a related party to a former Board member. KBEL also 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, 2014 and 2013 and the value of the transactions with these related parties for the years ended December 31, 2014 and 2013:
Independent outside members of the Board of Directors are compensated for their services. Expenses related to this compensation totaled $120,300 and $152,800 for the years ended December 31, 2014 and 2013 respectively, and are included in general and administrative expenses.
14. 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 $83,600 in cash deposits and $3,019,500 of accounts receivable due from customers located in the UK as of December 31, 2014.
The Company could experience labor disputes, work stoppages or other disruptions in production that could adversely affect it. As of December 31, 2014, a union represented approximately 22% of the Company’s US-based workforce. On that date, the Company had approximately fourteen 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 $5,466,700 and $7,575,900 for the years ended December 31, 2014 and 2013, which represents 16% and 21% of sales for the years ended December 31, 2014 and 2013, respectively. No individual customer accounted for more than 5% of our total sales during 2014. Sales to Shepherd Neame represented approximately 7% of our total sales during 2013. No other individual customer accounted for more than 5% of our total sales during 2013.
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
15. 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.
16. 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, 2014 and 2013. Consequently, no benefit for deferred tax assets appears on the Company’s financial statements.
The Company’s income tax expense is summarized as follows:
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:
Temporary differences and carryforwards that give rise to deferred tax assets and liabilities are as follows:
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
The Company has net operating losses available for carry forward. The US Federal net operating losses total approximately $15,569,200 and expire beginning 2018 and ending in 2034. The US state operating losses total approximately $1,282,200 and expire beginning in 2015 and ending in 2034. The Company’s UK operating losses total approximately $928,400 and do not expire.
Tax years that remain open for examination by the Internal Revenue Service and the US states include 2011, 2012, and 2013; the Company expects to file its 2014 returns in the summer of 2015. California may still examine 2010 because of its longer statute of limitations. 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.
17. 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 37% and 41% of the Company’s gross sales during the years 2014 and 2013, 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 63% and 59% of the Company’s gross sales during 2014 and 2013 respectively.
A summary of each segment is as follows:
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
18. Unrestricted Net Assets
The Company’s wholly-owned subsidiary, UBIUK, has cumulative losses of approximately $682,200 as of December 31, 2014. 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 $1,557,800. Condensed financial information of the United States operations is as follows:
Mendocino Brewing Company, Inc.
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
19. Subsequent Events
On February 5, 2015, MBC issued a promissory note (the “Catamaran 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.
Pursuant to the terms of the Catamaran Note, MBC promises to pay the principal sum of $500,000 with accrued interest, as described below, to Catamaran within six months following the date of the Catamaran Note, subject to the receipt by MBC of an equity investment by its majority shareholder (the “Shareholder Investment”) in an amount sufficient either (a) to pay the Catamaran Note through Permitted Payments, as defined below, or (b) to pay both the Catamaran Note and 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 (the “Agreement”) in full. “Permitted Payments” on the Catamaran Note are payments made from the portion of a Shareholder Investment that is in excess of $500,000.
If MBC is not able to satisfy its obligations on the Catamaran Note within six month following the date of the Catamaran Note, the Catamaran Note shall be automatically extended for additional six month terms. 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 Note 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 or certain existing obligations of MBC to MB Financial pursuant to the Agreement have been satisfied in full. The Catamaran Note may not be amended without the prior written consent of MB Financial.