MENB Mendocino Brewing Inc (CE)

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

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three and nine months ended September 30, 2016, compared to the three and nine months ended September 30, 2015. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

In the rest of this Quarterly Report on Form 10-Q, the terms “we”, “us”, “our”, and “the Company” and its variants are generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term “MBC” is used to refer to Mendocino Brewing Company, Inc. as an individual entity standing alone.

Forward Looking Statements

Various portions of this Quarterly Report on Form 10-Q, including but not limited to the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements. Forward-looking statements involve risks and uncertainties that are based on current expectations, estimates and projections about the Company’s business, Management’s beliefs, and assumptions made by Management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of those and similar words are intended to identify such forward-looking statements. Any forward-looking statements made by the Company are intended to provide investors with additional information with which they may assess the Company’s future potential. All forward-looking statements are based on assumptions about an uncertain future and are based on information available as of the date such statements are issued. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including but not limited to, changes in the pricing environment for the Company’s products, changes in demand for malt beverage products in different Company markets, changes in distributor relationships or performance, changes in customer preference for the Company’s malt beverage products, regulatory or legislative changes, the impact of competition, changes in the prices of raw materials, availability of financing for operations, changes in interest rates, changes in the Company’s European beer business, and other risks discussed elsewhere in this Quarterly Report on Form 10-Q and from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and reports. In addition, such statements could be adversely affected by general industry and market conditions and growth rates, and general domestic, Canadian and European economic and political conditions. The Company undertakes no obligation to update these forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made or to publicly release the results of any revisions to these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

Segment Information

Prior to August 2001, the Company’s business operations were exclusively located in the US, and consisted of the manufacture and distribution of beer. With the Company’s acquisition of United Breweries International (UK), Ltd. (“UBIUK”) in August 2001, the Company gained a new business segment ― distribution of beer outside the US, primarily in the United Kingdom (the “UK”) and continental Europe (collectively, the “Foreign Territory”). This segment accounted for 60% and 61% of the Company’s gross sales during the first nine months of 2016 and 2015 respectively, with the US and Canada (the “North American Territory”) accounting for the remaining 40% and 39% during the first nine months of 2016 and 2015 respectively.

Seasonality

Sales of the Company’s products are somewhat seasonal. Historically, sales volumes in both the Company’s North American and Foreign Territories have been comparatively low during the first quarter of the calendar year. The volume of sales in any given area may also be adversely affected by local weather conditions. Because of the seasonality of the Company’s business, results for any one quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Summary of Financial Results

The Company ended the first nine months of 2016 with a net loss of $1,335,000, as compared to a net loss of $750,100 for the same period in 2015. As set forth more fully under the section captioned “Results of Operations” below, during the first nine months of 2016, the Company experienced a decrease in net sales of $1,946,200 compared to the same period in 2015. Compared to the first nine months of 2015, costs of goods sold decreased by $1,180,500, operating expenses decreased by $202,200, and net other expenses increased by $23,600 in the first nine months of 2016, all of which contributed to the Company’s results for the period.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2016 Compared To Three Months Ended September 30, 2015

Net Sales

Our overall net sales for the third quarter of 2016 were $6,831,900, compared to $8,399,200 for the third quarter of 2015, a decrease of $1,567,300, or 18.7%. The decrease was due to a reduction in sales volume and exchange rate fluctuation.

North American Territory : Our net sales in the North American Territory for the third quarter of 2016 were $2,746,700 compared to $3,247,500 for the same period in 2015, a decrease of $500,800, or 15.4%, mainly due to decreased sales volume. The sales volume decreased to 13,100 barrels in the third quarter of 2016 from 16,500 barrels in the third quarter of 2015; a net decrease of 3,400 barrels, or 20.6% mainly due to competitive pressure and lower demand. We continue to solicit opportunities to enter into non-binding contract brewing arrangements to address the low production capacity utilization rates in our Ukiah, California and Saratoga Springs, New York brewing facilities.

Foreign Territory : Net sales in the Foreign Territory for the third quarter of 2016 were $4,085,200 compared to $5,151,700 during the corresponding period of 2015, a decrease of $1,066,500, or 20.7% when measured in US Dollars. The decrease in sales was primarily due to exchange rate fluctuations. When measured in UK Pounds Sterling, the functional currency of Foreign Territory, net sales decreased by 6.8% during the third quarter of the year 2016 compared to corresponding period of 2015.

Cost of Goods Sold

Cost of goods sold as a percentage of net sales during the third quarter of 2016 was 67.9%, as compared to 66.9% during the corresponding period of 2015.

North American Territory : Cost of goods sold as a percentage of net sales in the North American Territory during the third quarter of 2016 was 82.1%, compared to 78.4% during the corresponding period of 2015, mainly due to lower sales volume. Utilization of our production capacity has a direct impact on cost. Generally, when facilities are operating at a lower percentage of production capacity, cost is unfavorably affected because fixed and semi-variable operating costs, such as depreciation and production costs, are spread over a smaller volume base. Our production capacity is currently under-utilized, and the lower sales volume in 2016 caused further decreases in productivity.

Foreign Territory : Cost of goods sold as a percentage of net sales in the Foreign Territory during the third quarter of 2016 was 58.4%, as compared to 60.5% during the corresponding period in 2015 due to exchange rate fluctuations.

Gross Profit

Due to the reduction in sales revenue, gross profit for the third quarter of 2016 was $2,193,400 compared to $2,778,500 during the corresponding period of 2015, a decrease of $585,100 or 21.1%. As a percentage of net sales, gross profit during the third quarter of 2016 decreased to 32.1% from 33.1% for the third quarter of 2015.

Operating Expenses

Operating expenses for the third quarter of 2016 were $2,507,600, a decrease of $115,500, or 4.4%, as compared to $2,623,100 for the corresponding period of 2015. Operating expenses consist of marketing and distribution expenses and general and administrative expenses.

Marketing and Distribution Related Expenses : Our marketing and distribution related expenses for the third quarter of 2016 were $1,286,900, as compared to $1,511,500 for the third quarter of 2015, representing a decrease of $224,600 or 14.9%.

North American Territory : Marketing and distribution related expenses in the North American Territory for the third quarter of 2016 were $300,900 compared to $317,800 during the corresponding period of 2015, representing a decrease of $16,900 or 5.3% due to a reduction in manpower. As a percentage of net sales in the North American Territory, such expenses increased to 11% during the third quarter of 2016, compared to 9.8% during the corresponding period of 2015.

Foreign Territory : Marketing and distribution related expenses in the Foreign Territory for the third quarter of 2016 were $986,000 compared to $1,193,700 during the corresponding period of 2015, representing a decrease of $207,700, or 17.4% mainly due reduction in manpower and exchange rate fluctuation. As a percentage of net sales in the Foreign Territory, marketing and distribution expenses increased to 24.1% during the third quarter of 2016 compared to 23.1% during the corresponding period of 2015.

General And Administrative Expenses : Our general and administrative expenses were $1,220,700 for the third quarter of 2016, representing an increase of $109,100 or 9.8%, from $1,111,600 for the corresponding period in 2015.

North American Territory : General and administrative expenses in the North American Territory were $549,600 for the third quarter of 2016, representing an increase of $123,000, or 28.8%, compared to $426,600 for the third quarter of 2015. The increase was mainly due to increase in salary to administrative employees, increased accrual related to directors compensation due to increase in number of directors and meetings. As a percentage of net sales in the North American Territory, expenses increased to 20% during the third quarter of 2016, compared to 13.1% during the third quarter of 2015.

Foreign Territory : General and administrative expenses related to the Foreign Territory were $671,100 for the third quarter of the year 2016, representing a decrease of $13,900 or 2%, when compared to $685,000 for the third quarter of 2015. The decrease was mainly due to exchange rate fluctuation. As a percentage of net sales in the Foreign Territory, expenses increased to 16.4% during the third quarter of 2016 compared to 13.3% during the third quarter of 2015.

Other Expenses

Net other expenses for the third quarter of 2016 totaled $157,800, representing an increase of $12,000, or 8.2%, when compared to $145,800 for the third quarter of 2015 due to increases in interest rates on borrowings related to the North American Territory.

Income Taxes

We made no income tax provision for the third quarter of 2016 or 2015.

Net Income / Loss

Our net loss for the third quarter of 2016 was $472,000, compared to net income of $9,600 for the third quarter of 2015. After providing for a positive foreign currency translation adjustment of $2,900 during the third quarter of 2016 (as compared to a negative foreign currency adjustment of $2,000 for the same period in 2015), our comprehensive loss for the third quarter of 2016 was $469,100, compared to comprehensive income of $7,600 for the same period in 2015. As stated above, the primary reason for the decrease in income was the reduction in sales revenue during the period.

Nine Months Ended September 30, 2016 Compared To Nine Months Ended September 30, 2015

Net Sales

Our overall net sales for the first nine months of 2016 were $21,285,700, a decrease of $1,946,200, or 8.4%, compared to net sales of $23,231,900 for the same period in 2015.

North American Territory : North American Territory net sales for the first nine months of 2016 were $8,292,000 compared to $8,787,700 for the same period in 2015, a decrease of $495,700 or 5.6%. Our North American Territory sales volumes decreased to 40,200 barrels during the first nine months of 2016 from 43,600 barrels in the first nine months of 2015, representing a decrease of 3,400 barrels or 7.7% due to reduction in MBC brands. We continue to solicit opportunities to enter into non-binding contract brewing arrangements to address the low production capacity utilization rates in our Ukiah, California and Saratoga Springs, New York brewing facilities, and anticipate that fluctuations in the availability of such contract brewing arrangements will continue to impact our net sales in the North American Territory.

Foreign Territory: Net sales for the first nine months of 2016 were $12,993,700 compared to $14,444,200 during the corresponding period of 2015, a decrease of $1,450,500 or 10%. The decrease is mainly due to exchange rate fluctuation. When measured in UK Pounds Sterling, the functional currency of the UK, net sales decreased by 1.2%.

Cost of Goods Sold

Cost of goods sold as a percentage of net sales during the first nine months of 2016 was 69%, as compared to 68.3% during the corresponding period of 2015.

North American Territory : Cost of goods sold as a percentage of net sales in the North American Territory during the first nine months of 2016 was 82.2%, as compared to 81.3%, during the corresponding period of 2015. Generally, when facilities are operating at a lower percentage of production capacity, cost is unfavorably affected because fixed and semi-variable operating costs, such as depreciation and production costs, are spread over a smaller volume base. Our production capacity is currently under-utilized.

Foreign Territory : Cost of goods sold as a percentage of net sales in the Foreign Territory during the first nine months of 2016 was 60.6%, as compared to 60.5% during the corresponding period in 2015.

Gross Profit

As a result of a decrease in sales revenue, gross profit for the first nine months of 2016 decreased to $6,597,800, from $7,363,500 during the corresponding period of 2015, a decrease of $765,700 or 10.4%. As a percentage of net sales, the gross profit during the first nine months of 2016 decreased to 31% from 31.7% during the corresponding period in 2015.

Operating Expenses

Operating expenses for the first nine months of 2016 were $7,496,300, a decrease of $202,200, or 2.6%, as compared to $7,698,500 for the corresponding period of the year 2015. Operating expenses consist of marketing and distribution expenses and general and administrative expenses.

Marketing and Distribution Related Expenses : Our marketing and distribution related expenses for the first nine months of 2016 were $3,782,700, as compared to $4,371,500 for the same period in 2015, representing a decrease of $588,800 or 13.5%.

North American Territory : Marketing and distribution related expenses in the North American Territory for the first nine months of 2016 were $882,300 compared to $993,500 during the corresponding period of 2015, representing a decrease of $111,200 or 11.2% mainly due to a reduction in manpower. These expenses equaled 10.6% of net sales in the North American Territory during the first nine months of the year 2016, compared to 11.3% during the corresponding period of 2015.

Foreign Territory : Marketing and distribution related expenses in the Foreign Territory for the first nine months of 2016 were $2,900,400 compared to $3,378,000 during the corresponding period of 2015, representing a decrease of $477,600 or 14.1% mainly due to exchange rate fluctuation. As a percentage of net sales in the Foreign Territory, marketing and distribution expenses decreased to 22.3% for the first nine months of 2016 as compared to 23.4% for the first nine months of 2015.

General and Administrative Expenses : Our general and administrative expenses were $3,713,600 for the first nine months of the year 2016, representing an increase of $386,600 or 11.6%, from $3,327,000 for the corresponding period in 2015.

North American Territory : Domestic general and administrative expenses in the North American Territory were $1,729,900 for the first nine months of 2016, representing an increase of $442,600, or 34. 4%, from $1,287,300 for the same period in 2015 due to increases in salaries of administrative employees, increase in legal expenses associated with raising funds and accrued compensation to Directors on account of an increase in number of meetings. As a percentage of net sales in the North American Territory, expenses increased to 20.9% during the first nine months of 2016, compared to 14.6% during the corresponding period in 2015.

Foreign Territory : General and administrative expenses related to the Foreign Territory were $1,983,700 for the first nine months of 2016, representing a decrease of $56,000 or 2.7%, as compared to $2,039,700 for the same period in 2015. As a percentage of net sales in the Foreign Territory, expenses increased to 15.3% during the first nine months of 2016, compared to 14.1% during the corresponding period in 2015.

Other Expenses

Net other expenses for the first nine months of 2016 totaled $434,900 representing an increase of $23,600 or 5.7% when compared to $411,300 for the same period in 2015. The increase was mainly due to lower other income.

Income Taxes

We had a provision of $1,600 for income taxes for the first nine months of 2016 compared to a provision of $3,800 for the corresponding period in the year 2015.

Net Loss

Our net loss for the first nine months of 2016 was $1,335,000, as compared to net loss of $750,100 for the first nine months of 2015. After providing for a positive foreign currency translation adjustment of $10,900 during the first nine months of 2016 (as compared to a negative foreign currency translation adjustment of $4,900 for the same period in 2015), comprehensive loss for the first nine months of 2016 was $1,324,100, compared to comprehensive loss of $755,000 for the same period in 2015. As stated above, the primary reason for the loss in 2016 was the drop in sales revenues during the period.

LIQUIDITY AND CAPITAL RESOURCES

Unused capacity at our Ukiah, California and Saratoga Springs, New York facilities has continued to place demands on our working capital. Historically, our operations have not generated sufficient cash flows to provide us with sufficient working capital. However, we believe that the liquidity we would derive from a related party loan, cash flows attributable to our operations, and a Financial Transaction (as defined below), if consummated, would be sufficient to fund our capital expenditures, debt maturities and other business needs for the next twelve months. We normally generate our liquidity and capital resources primarily through operations and available debt financing.

The continuation of the Company as a going concern is dependent upon continued financial support from Catamaran and/or UBHL, its ability to obtain other debt or equity financing, and generating profitable operations from the Company’s future operations. However, management cannot provide any assurances that the Company will be successful in accomplishing any of such goals. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

Vijay Mallya, the Company’s Chairman and indirect majority shareholder is presently subject to certain legal proceedings in India, which may impair the Company’s ability to obtain financing from UBHL and other potential funding sources.

On December 9, 2015, the Company engaged Gordian Group, LLC (“Gordian Group”) to serve as the Company’s exclusive investment banker to assist the Company in evaluating, exploring and, if deemed appropriate by the Company, pursuing and implementing certain strategic and financial options and transactions that may be available to the Company, including a possible debt or equity capital financing, merger, consolidation, joint venture or other business combination involving, or sale of substantially all or a material portion of the assets (outside of the ordinary course of business) or outstanding securities of, the Company and/or its subsidiaries, and/or the acquisition of substantially all or a material portion of the assets or outstanding securities of another entity (each, a “Financial Transaction”). Gordian Group is a New York-based independent investment banking firm. While the Company has commenced evaluating its available options, no conclusion as to any specific option or transaction has been reached, nor has any specific timetable been fixed for this effort, and there can be no assurance that any viable strategic or financial option or transaction will be presented, implemented or consummated. The Company intends to use proceeds of the Financial Transaction, if any, in part to repay the amount owed to Lender when it becomes due.

UBHL Support. In response to the losses incurred in connection with the Company’s operations, UBHL 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 and is not a legally binding agreement or guarantee. UBHL’s financial support is contingent upon compliance with any applicable exchange control requirements, other applicable laws, and regulations relating to the transfer of funds from India. The Letter of Comfort does not specify any time limit for extending support. If it becomes necessary to seek UBHL’s financial assistance under the Letter of Comfort or otherwise and UBHL does not provide such financial assistance to MBC, it may result in a material adverse effect on the Company’s financial condition and on its ability to continue to operate. UBHL controls the Company’s two largest shareholders, UBA and Inversiones, and as such, is the Company’s indirect majority shareholder. The Company’s Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the board of directors of UBHL.

On February 3, 2016, the board of directors of UBHL approved debt financing to the Company in the form of a $1,000,000 bridge loan. The Company has not received any proceeds against this UBHL $1,000,000 bridge loan. If UBHL does not consummate this financing, it would have a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate.

Catamaran Notes. On January 22, 2014, Catamaran, a related party, provided a loan to MBC in the principal amount of $500,000 evidenced by a promissory note. On April 24, 2014, Catamaran provided a second loan in the principal amount of $500,000 on terms similar to the previous note. On February 5, 2015, Catamaran provided a third loan in the principal amount of $500,000 on terms similar to the previous notes. On June 30, 2015, Catamaran provided a fourth loan in the principal amount of $500,000 on terms similar to the previous notes, and the Company received the proceeds against this note on July 6, 2015. Each time Catamaran provided a loan, the Company received a letter from Lender permitting the Company to obtain such loans subject to certain conditions, including that no portion of such loans would be payable until either (a) certain obligations of the Company to Lender pursuant to the Credit and Security Agreement were satisfied in full, or (b) such payment was a Permitted Payment. A “Permitted Payment” with respect to the notes dated January 22, 2014, April 24, 2014, and February 5, 2015 means a payment made from an equity investment by the Company’s majority shareholder in excess of $500,000. A “Permitted Payment” with respect to the note dated June 30, 2015 means a payment made from an equity investment by the Company’s majority shareholder. On March 14, 2016, Catamaran provided a fifth loan in the principal amount of $325,000 on terms substantially similar to the previous notes, except that the definition of “Permitted Payment” was revised to mean, for purposes of this fifth note, a payment made from a bridge loan by the Company’s majority shareholder in excess of $600,000. On March 30, 2016, Catamaran provided a sixth loan in the principal amount of $75,000 on terms substantially similar to the fifth note. All Catamaran loans are payable within six months following the date of the notes, and if the Company is not able to satisfy its obligations on these 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. If Catamaran ceases to provide ongoing financial support to the Company, and the Company is unable to obtain alternate financing, it would have a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate.

Interest shall accrue from the date of the applicable Catamaran note on the unpaid principal at a rate equal to the lesser of (i) one and one-half percent (1.5%) per annum above the prime rate offered from time to time by the Bank of America Corporation in San Francisco, California, or (ii) ten percent (10%) per annum, until the principal is fully paid.

The Catamaran notes may be prepaid without penalty at the option of the Company; however, no payments on the Catamaran notes may be made unless such payment is a “Permitted Payment” or certain existing obligations of the Company to Lender pursuant to the Credit and Security Agreement have been satisfied in full. The Catamaran notes may not be amended without the prior written consent of Lender.

MB Financial Credit and Security Agreement

On June 23, 2011, MBC and Releta entered into a Credit and Security Agreement (as amended, the “Credit and Security Agreement”) with Cole Taylor Bank, an Illinois banking corporation (“Cole Taylor”). Cole Taylor merged into MB Financial Bank, an Illinois banking corporation (“MB Financial”) on August 18, 2014. As used in this Report, “Lender” shall refer to Cole Taylor prior to August 18, 2014 and to MB Financial, as successor in interest to Cole Taylor, on or after August 18, 2014. The Credit and Security Agreement provided a credit facility with a maturity date of June 23, 2016 of up to $10,000,000 consisting of a $4,119,000 revolving facility (the “Revolver”), a $1,934,000 machinery and equipment term loan, a $2,947,000 real estate term loan and a $1,000,000 capital expenditure line of credit. The applicable interest rates were as follows: (a) with respect to the Revolver, 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, the Wall Street Journal prime rate plus a margin of 1.50%, and (c) with respect to the real estate term loan, the Wall Street Journal prime rate plus a margin of 2.00%. As described below, effective September 1, 2013, Lender was charging a default interest rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement. As described below, effective July 22, 2016 Lender increased the interest rate under the Credit and Security Agreement to the Wall Street Journal prime rate plus 6% (including default interest) on all loans. As described below, the Second Amendment (as defined below) (among other things) reduces the advance rate for (i) eligible finished goods and raw material inventory and (ii) eligible work-in progress inventory by 2% each month. The advance rates are used in the calculation of the borrowing base of each of MBC and Releta, which is used in the determination of the amount available to each of MBC and Releta pursuant to the Revolver. Under the terms of the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base of each of MBC and Releta fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable. The Credit and Security Agreement binds the Company to certain financial covenants including maintaining prescribed minimum tangible net worth and prescribed minimum fixed charges coverage. There is a prepayment penalty if we prepay all of our obligations prior to the maturity date. The credit facility is secured by a first priority security interest in all of MBC’s and Releta’s personal property and a first priority mortgage on our Ukiah, California real property, among other MBC and Releta assets.

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

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

On September 18, 2013, MBC and Releta received a notice (the “Default Notice”) from Lender regarding its intention to exercise certain rights with respect to events of default of the Company pursuant to the Credit and Security Agreement and, effective September 1, 2013, began charging a default interest rate equal to 2% per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement.

On April 18, 2014, MBC and Releta received a second notice (the “Second Default Notice”) from Lender regarding its intention to exercise certain rights with respect to events of default of the Company pursuant to the Credit and Security Agreement. The Second Default Notice required MBC and Releta to engage a consultant to perform a viability analysis and prepare a revised projection for 2014, 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. 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, 2014. The required fixed charge coverage ratio was initially required to be at least 1.05 to 1.00, but as of July 31, 2013, the required fixed charge coverage ratio increased to 1.10 to 1.00 pursuant to the terms of the Credit and Security Agreement. The Second Default Notice also stated that the tangible net worth of MBC and Releta continued to fall short of the required amount as measured through February 28, 2014.

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. As noted above, 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 Revolver. As noted above, under the terms of the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base of each of MBC and Releta fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

On January 21, 2015, MBC, Releta, and Lender entered into a Second Amendment (the “Second Amendment”) to the Credit and Security Agreement. The Second Amendment reduced the maximum amount of the Revolver from $4,119,000 to $2,500,000. The Second Amendment also changed the definition of borrowing base (including by lowering certain advance rates) such that the calculation of the borrowing base will result in a lower number than it would have if calculated prior to the effectiveness of the Second Amendment. The Second Amendment also 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.

Effective June 20, 2016, MBC, Releta, and Lender entered into a Third Amendment (the “Third Amendment”) to the Credit and Security Agreement. The Third Amendment extended the maturity date of the Credit and Security Agreement from June 23, 2016 to July 23, 2016. The Third Amendment also reduced the Revolver from $2,500,000 to $1,250,000. Effective July 22, 2016, MBC, Releta, and Lender entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit and Security Agreement. The Fourth Amendment extended the maturity date of the Credit and Security Agreement from July 23, 2016 to September 21, 2016 and increased the interest rate under the Credit and Security Agreement to the Wall Street Journal prime rate plus 6% (including default interest). Effective September 21, 2016, MBC, Releta, and Lender entered into a Fifth Amendment to the Credit and Security Agreement which extended the maturity date of the Credit and Security Agreement from September 21, 2016 to October 21, 2016. Effective October 18, 2016, MBC, Releta, and Lender entered into a Sixth Amendment to the Credit and Security Agreement which extended the maturity date of the Credit and Security Agreement from October 21, 2016 to December 31, 2016. Lender has absolutely no commitment and has made no agreement to extend the maturity date beyond December 31, 2016. The Sixth Amendment also confirms the continuance of certain events of default under the Credit and Security Agreement.

As of September 30, 2016, pursuant to the Credit and Security Agreement, the fixed charge coverage ratio was required to be 1.15 to 1. The Company calculated that the fixed charge coverage ratio as of September 30, 2016 was -1.02 to 1. The Company calculated that the required tangible net worth of MBC and Releta was $6,181,400 as of September 30, 2016 and the actual tangible net worth on such date was $3,317,200. The Company does not anticipate that it will regain compliance with the required fixed charge coverage ratio or the minimum tangible net worth, as required by the Credit and Security Agreement.

The Credit and Security Agreement provides that the failure of MBC and Releta to observe any covenant will constitute an event of default under the Credit and Security Agreement. Lender has not waived the events of default described in the Default Notice, the Second Default Notice or the Third Default Notice and has reserved the right to all other available rights and remedies under the Credit and Security Agreement, certain other related documents and applicable law. An event of default shall be deemed continuing until waived in writing by Lender. Under the Credit and Security Agreement, upon the occurrence of an event of default, all of MBC’s and Releta’s obligations under the Credit and Security Agreement may, at Lender’s option, be declared, and immediately shall become, due and payable, without notice of any kind. Lender could declare the full amount owed under the Credit and Security Agreement due and payable at any time for any reason or no reason. Since executing the Sixth Amendment, the Company has not received any notice or other communication from Lender that it intends to exercise any other remedies available to it under the Credit and Security Agreement in connection with the events of default. As noted above, effective July 22, 2016, Lender increased the interest rate under the Credit and Security Agreement to the Wall Street Journal prime rate plus 6% (including default interest). The Company estimates this increase in interest rate will result in the payment by the Company to Lender of additional interest of approximately $9,000 per month. 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. The Credit and Security Agreement expires on December 31, 2016. There is no guarantee that MBC and Releta will be able to obtain alternate financing on terms favorable to the Company or on any terms. If the Company is unable to obtain alternate financing, it will have a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate.

At September 30, 2016, the Company had cash and cash equivalents of $84,700, an accumulated deficit of $18,730,600, and a working capital deficit of $12,265,800 due to losses incurred, debts payable to Lender and notes payable to related parties. In addition, the book value of the Company’s assets was lower than the book value of its liabilities at September 30, 2016.

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, 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. On October 9, 2016, KBEL paid the final installment and settled the loan in full.

Our available cash is insufficient to fund ongoing business operations, and therefore we need to raise additional funds through bank credit arrangements, or public or private equity or debt financings as described above. If we are not able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all, this will have a material adverse effect on the Company’s financial condition and ability to continue to operate. 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 the Company’s financial condition and ability to continue to operate.

We have several loans, lines of credit, other credit facilities and lease agreements which are currently outstanding (collectively, “Indebtedness”). We currently make timely payments of principal and interest relating to the Indebtedness as they fall due and anticipate that we will continue to make such timely payments in the immediate future. However, if we fail to maintain any of the financial covenants under the various agreements governing Indebtedness (such as the defaults under the Credit and Security Agreement described above), fail to make timely payments of amounts due under the Indebtedness, or commit any other breach resulting in an event of default under the agreements governing Indebtedness, such events of default (including cross-defaults) could have a material adverse effect on our financial condition and ability to continue to operate. 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 to operate. In addition, the Company’s 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 the Company’s financial condition and ability to continue to operate.

Management has taken several actions to reduce the Company’s working capital needs through June 30, 2017, including reducing discretionary expenditures, reducing manpower, securing additional brewing contracts in an effort to utilize a portion of its excess production capacity and appointing Gordian Group for a potential Financial Transaction. The current revenue from operations are insufficient to meet the working capital needs of the Company over the next 12 months. The Company has requested UBHL to make a capital infusion.

If UBHL or other sources do not provide sufficient financial assistance to MBC, it will result in a material adverse effect on the Company’s financial condition and on its ability to continue to operate and we may have to raise funds by selling some of the Company’s operating assets. In addition, the Company’s lenders may seek to satisfy any outstanding obligations through recourse against the applicable pledged collateral which includes the Company’s real and personal property in the United States and the United Kingdom. The loss of any material pledged asset would have a material adverse effect on the Company’s financial condition and its ability to continue to operate.

Vijay Mallya, the Company’s Chairman and indirect majority shareholder is presently subject to certain legal proceedings in India, which may impair the Company’s ability to obtain financing from UBHL and other potential funding sources.

Cash Flow Results

Net cash provided by operating activities for the nine months ended September 30, 2016, was $1,020,200, compared $1,155,200 for the nine months ended September 30, 2015. During the first nine months ended September 30, 2016, accounts receivable decreased by $432,400 mainly due to increased collections in the Foreign Territory. Accounts payable during the first nine months ended September 30, 2016 increased by $278,800, mainly due to increase in the accounts payable in our Foreign Territory. Our inventory decreased by $67,300 during the first nine months of 2016 due to lower production in North American Territory. Accrued liabilities increased by $370,800 during the first nine months of 2016 mainly due to an increase in provisions for directors compensation.

Net cash used in investing activities totaled $205,900 for the first nine months of 2016, compared to $403,800 during the corresponding period in 2015, due to decreased purchases of beer dispensing equipment.

Net cash used in financing activities during the first nine months of 2016 totaled $854,100, compared to net cash used in financing activities during the first nine months of 2015 of $794,700, as a result of borrowing against notes payable to Catamaran in the North American Territory, decrease in use of the revolving lines of credit and repayment of debts to MB Financial and HUK.

Description of Our Indebtedness

MB Financial Facility

On June 23, 2011, MBC and Releta entered into a Credit and Security Agreement (as amended, the “Credit and Security Agreement”) with Cole Taylor Bank, an Illinois banking corporation (“Cole Taylor”). Cole Taylor merged into MB Financial Bank, an Illinois banking corporation (“MB Financial”) on August 18, 2014. As used in this Report, “Lender” shall refer to Cole Taylor prior to August 18, 2014 and to MB Financial, as successor in interest to Cole Taylor, on or after August 18, 2014. The Credit and Security Agreement provided a credit facility with a maturity date of June 23, 2016 of up to $10,000,000 consisting of a $4,119,000 revolving facility (the “Revolver”), a $1,934,000 machinery and equipment term loan, a $2,947,000 real estate term loan and a $1,000,000 capital expenditure line of credit. The applicable interest rates were as follows: (a) with respect to the Revolver, 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, the Wall Street Journal prime rate plus a margin of 1.50%, and (c) with respect to the real estate term loan, the Wall Street Journal prime rate plus a margin of 2.00%. As described below, effective September 1, 2013, Lender was charging a default interest rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement. As described below, effective July 22, 2016 Lender increased the interest rate under the Credit and Security Agreement to the Wall Street Journal prime rate plus 6% (including default interest) on all loans. As described below, the Second Amendment (among other things) reduces the advance rate for (i) eligible finished goods and raw material inventory and (ii) eligible work-in progress inventory by 2% each month. The advance rates are used in the calculation of the borrowing base of each of MBC and Releta, which is used in the determination of the amount available to each of MBC and Releta pursuant to the Revolver. Under the terms of the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base of each of MBC and Releta fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable. The Credit and Security Agreement binds the Company to certain financial covenants including maintaining prescribed minimum tangible net worth and prescribed minimum fixed charges coverage. There is a prepayment penalty if we prepay all of our obligations prior to the maturity date. The credit facility is secured by a first priority security interest in all of MBC’s and Releta’s personal property and a first priority mortgage on our Ukiah, California real property, among other MBC and Releta assets.

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

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

On September 18, 2013, MBC and Releta received a notice (the “Default Notice”) from Lender regarding its intention to exercise certain rights with respect to events of default of the Company pursuant to the Credit and Security Agreement and, effective September 1, 2013, began charging a default interest rate equal to 2% per annum in excess of the interest rate otherwise payable under the Credit and Security Agreement.

On April 18, 2014, MBC and Releta received a second notice (the “Second Default Notice”) from Lender regarding its intention to exercise certain rights with respect to events of default of the Company pursuant to the Credit and Security Agreement. The Second Default Notice required MBC and Releta to engage a consultant to perform a viability analysis and prepare a revised projection for 2014, 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. 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, 2014. The required fixed charge coverage ratio was initially required to be at least 1.05 to 1.00, but as of July 31, 2013, the required fixed charge coverage ratio increased to 1.10 to 1.00 pursuant to the terms of the Credit and Security Agreement. The Second Default Notice also stated that the tangible net worth of MBC and Releta continued to fall short of the required amount as measured through February 28, 2014.

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 Revolver. Under the terms of the Credit and Security Agreement, if such availability is less than $0, or if certain components of the borrowing base of each of MBC and Releta fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.

On January 21, 2015, MBC, Releta, and Lender entered into a Second Amendment (the “Second Amendment”) to the Credit and Security Agreement. The Second Amendment reduced the maximum amount of the Revolver from $4,119,000 to $2,500,000. The Second Amendment also changed the definition of borrowing base (including by lowering certain advance rates) such that the calculation of the borrowing base will result in a lower number than it would have if calculated prior to the effectiveness of the Second Amendment. The Second Amendment also 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.

Effective June 20, 2016, MBC, Releta, and Lender entered into a Third Amendment (the “Third Amendment”) to the Credit and Security Agreement. The Third Amendment extended the maturity date of the Credit and Security Agreement from June 23, 2016 to July 23, 2016. The Third Amendment also reduced the Revolver from $2,500,000 to $1,250,000. Effective July 22, 2016, MBC, Releta, and Lender entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit and Security Agreement. The Fourth Amendment extended the maturity date of the Credit and Security Agreement from July 23, 2016 to September 21, 2016 and increased the interest rate under the Credit and Security Agreement to the Wall Street Journal prime rate plus 6% (including default interest). Effective September 21, 2016, MBC, Releta, and Lender entered into a Fifth Amendment to the Credit and Security Agreement which extended the maturity date of the Credit and Security Agreement from September 21, 2016 to October 21, 2016. Effective October 18, 2016, MBC, Releta, and Lender entered into a Sixth Amendment to the Credit and Security Agreement which extended the maturity date of the Credit and Security Agreement from October 21, 2016 to December 31, 2016. Lender has absolutely no commitment and has made no agreement to extend the maturity date beyond December 31, 2016. The Sixth Amendment also confirms the continuance of certain events of default under the Credit and Security Agreement.

As of September 30, 2016, pursuant to the Credit and Security Agreement, the fixed charge coverage ratio was required to be 1.15 to 1. The Company calculated that the fixed charge coverage ratio as of September 30, 2016 was -1.02 to 1. The Company calculated that the required tangible net worth of MBC and Releta was $6,181,400 as of September 30, 2016 and the actual tangible net worth on such date was $3,317,200. The Company does not anticipate that it will regain compliance with the required fixed charge coverage ratio or the minimum tangible net worth, as required by the Credit and Security Agreement.

The Credit and Security Agreement provides that the failure of MBC and Releta to observe any covenant will constitute an event of default under the Credit and Security Agreement. Lender has not waived the events of default described in the Default Notice, the Second Default Notice or the Third Default Notice and has reserved the right to all other available rights and remedies under the Credit and Security Agreement, certain other related documents and applicable law. An event of default shall be deemed continuing until waived in writing by Lender. Under the Credit and Security Agreement, upon the occurrence of an event of default, all of MBC’s and Releta’s obligations under the Credit and Security Agreement may, at Lender’s option, be declared, and immediately shall become, due and payable, without notice of any kind. Lender could declare the full amount owed under the Credit and Security Agreement due and payable at any time for any reason or no reason. Since executing the Sixth Amendment, the Company has not received any notice or other communication from Lender that it intends to exercise any other remedies available to it under the Credit and Security Agreement in connection with the events of default. As noted above, effective July 22, 2016 Lender increased the interest rate under the Credit and Security Agreement to the Wall Street Journal prime rate plus 6% (including default interest). The Company estimates this increase in interest rate will result in the payment by the Company to Lender of additional interest of approximately $9,000 per month. 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. The Credit and Security Agreement expires on December 31, 2016. There is no guarantee that MBC and Releta will be able to obtain alternate financing on terms favorable to the Company or on any terms. If the Company is unable to obtain alternate financing, it will have a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate.

Master Line of Credit and UBA Notes

On August 31, 1999, MBC and UBA, one of our principal shareholders, entered into a Master Line of Credit Agreement, which was subsequently amended in April 2000 and February 2001 (the “Credit Agreement”). The terms of the Credit Agreement provide us with a line of credit in the principal amount of up to $1,600,000. As of the date of this filing, UBA has made thirteen separate advances to us under the Credit Agreement and one additional advance on March 2, 2005, on substantially the same terms as those under the Credit Agreement, pursuant to a series of individual eighteen-month convertible promissory notes issued by us to UBA (the “UBA Notes”). Thirteen of the UBA Notes are convertible into common stock of the Company 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, 2017, 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. However, the UBA Notes are subordinated to credit facilities extended to us by Lender pursuant to a subordination agreement executed by UBA. Per the terms of the subordination agreement, UBA is precluded from demanding repayment of the UBA Notes unless and until the Lender’s facility is repaid in full.

The aggregate outstanding principal amount of the UBA Notes as of September 30, 2016 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,836,600, for a total amount outstanding of $3,752,000.

As of September 30, 2016, the outstanding principal and interest on the UBA Notes was convertible into approximately 2,520,100 shares of our common stock. However, as the current market price of our common stock is substantially less than the conversion rate, voluntary conversion by UBA is unlikely.

Catamaran Notes:

On January 22, 2014, Catamaran, a related party, provided a loan to MBC in the principal amount of $500,000 evidenced by a promissory note. On April 24, 2014, Catamaran provided a second loan in the principal amount of $500,000 on terms similar to the previous note. On February 5, 2015, Catamaran provided a third loan in the principal amount of $500,000 on terms similar to the previous notes. On June 30, 2015, Catamaran provided a fourth loan in the principal amount of $500,000 on terms similar to the previous notes, and the Company received the proceeds against this note on July 6, 2015. Each time Catamaran provided a loan, the Company received a letter from Lender permitting the Company to obtain such loans subject to certain conditions, including that no portion of such loans would be payable until either (a) certain obligations of the Company to Lender pursuant to the Credit and Security Agreement (as defined below) were satisfied in full, or (b) such payment was a Permitted Payment. A “Permitted Payment” with respect to the notes dated January 22, 2014, April 24, 2014, and February 5, 2015 means a payment made from an equity investment by the Company’s majority shareholder in excess of $500,000. A “Permitted Payment” with respect to the note dated June 30, 2015 means a payment made from an equity investment by the Company’s majority shareholder. On March 14, 2016, Catamaran provided a fifth loan in the principal amount of $325,000 on terms substantially similar to the previous notes, except that the definition of “Permitted Payment” was revised to mean, for purposes of this fifth note, a payment made from a bridge loan by the Company’s majority shareholder in excess of $600,000. On March 30, 2016, Catamaran provided a sixth loan in the principal amount of $75,000 on terms substantially similar to the fifth note. The Catamaran loans are payable within six months following the date of the notes, and if the Company is not able to satisfy its obligations on these 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. If Catamaran ceases to provide ongoing financial support to the Company, and the Company is unable to obtain alternate financing, it would have a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate.

Interest shall accrue from the date of the applicable Catamaran note on the unpaid principal at a rate equal to the lesser of (i) one and one-half percent (1.5%) per annum above the prime rate offered from time to time by the Bank of America Corporation in San Francisco, California, or (ii) ten percent (10%) per annum, until the principal is fully paid.

The Catamaran notes may be prepaid without penalty at the option of the Company; however, no payments on the Catamaran notes may be made unless such payment is a “Permitted Payment” or certain existing obligations of the Company to Lender pursuant to the Credit and Security Agreement have been satisfied in full. The Catamaran notes may not be amended without the prior written consent of Lender.

Other Loans, Credit Facilities and Commitments

Heineken Loan

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

Royal Bank of Scotland Facility

On April 26, 2005, 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. On July 20, 2016, KBEL used the proceeds from the Invoice Discounting Facility provided by Santander (described below) to repay the amount owed in full to RBS and terminated this facility.

Santander Facility:

On July 20, 2016, KBEL entered into a Sales Finance Agreement with Santander, (the “Invoice Discounting Facility”) pursuant to which Santander provided KBEL with an approximately $2.8 million (£1,750,000) maximum revolving line of credit (the “Review Limit”) with advances permitted up to 85% 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 three months’ written notice. If the Invoice Discounting Facility terminates on or before the first anniversary, KBEL must pay as breakage costs 3% of the Review Limit. The Invoice Discounting Facility carries an interest rate of 2.1% above the Santander base rate and a fixed service charge of approximately $1,300 (£1,000) per month. The Invoice Discounting Facility binds KBEL to certain financial covenants relating to accounts receivable including turnover ratios, maximum dilution, and ageing, while also requiring KBEL to maintain a minimum level of net tangible assets.

Weighted Average Interest

The weighted average interest rates paid on our US indebtedness was 6% for the first nine months of 2016 and 2015. For loans primarily associated with our Foreign Territory, the weighted average rate paid was 4% and 5% for the first nine months of 2016 and 2015 respectively.

Current Ratio

On September 30, 2016, our ratio of current assets to current liabilities was 0.30 to 1.00 and our ratio of total assets to total liabilities was 0.84 to 1.00. On September 30, 2015, our ratio of current assets to current liabilities was 0.35 to 1.0 and our ratio of total assets to total liabilities was 0.93 to 1.0.

Restricted Net Assets

The Company’s wholly-owned subsidiary, UBIUK, had undistributed losses of $129,900 as of September 30, 2016. Under KBEL’s line of credit agreement with RBS, distributions and other payments to MBC from KBEL were not permitted if retained earnings dropped below $1,301,500.