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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee
Required)
 For the transition period from            to            .
 Commission file number 0-27116
 
 PYRAMID BREWERIES INC.
  Washington
    
    91-1258355(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 91 South Royal Brougham Way,
Seattle, WA 98134  (Address of principal executive offices)  (206) 682-8322  (Registrants telephone number, including area code)
 
 þ o
  o o þ
 o þ




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##### Table of Contents



PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
TABLE OF CONTENTS
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  March 31, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations  Three Month Periods Ended March 31, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows  Three Month Periods Ended March 31, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART IIOTHER INFORMATIONItem 1A. Risk Factors
    
    
    18Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I
 
 Item 1  FINANCIAL STATEMENTS
 PYRAMID BREWERIES INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    595
    
    
    $
    227Accounts receivable, net of $20 allowance
    
    
    3,155
    
    
    
    3,052Inventories
    
    
    1,943
    
    
    
    1,877Prepaid expenses and other
    
    
    867
    
    
    
    806Current assets held for sale
    
    
    
    
    
    
    86Total current assets
    
    
    6,560
    
    
    
    6,048Fixed assets, net of accumulated depreciation of $18,133 and $17,588
    
    
    26,126
    
    
    
    26,284Assets held for sale, long term
    
    
    
    
    
    
    432Intangibles, net
    
    
    106
    
    
    
    118Escrow reserve
    
    
    800
    
    
    
    765Other assets
    
    
    248
    
    
    
    393Total assets
    
    $
    33,840
    
    
    $
    34,040LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,180
    
    
    $
    3,260Accrued Expenses
    
    
    2,649
    
    
    
    2,834Refundable deposits
    
    
    483
    
    
    
    483Current portion of long-term financing
    
    
    105
    
    
    
    105Current portion of capital lease obligation
    
    
    392
    
    
    
    385Deferred rent  current
    
    
    122
    
    
    
    122Liabilities held for sale
    
    
    
    
    
    
    78Other current liabilities
    
    
    205
    
    
    
    201Total current liabilities
    
    
    6,136
    
    
    
    7,468Long-term financing, net of current
    
    
    7,539
    
    
    
    7,566Capital lease obligation, net of current
    
    
    395
    
    
    
    505Deferred rent, net of current
    
    
    559
    
    
    
    590Other liabilities
    
    
    380
    
    
    
    433COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, 10,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.01 par value:Authorized shares  40,000,000Issued and outstanding shares  9,157,000 and 8,946,000 at March
31, 2007 and December 31, 2006, respectively
    
    
    92
    
    
    
    89Additional paid-in capital
    
    
    37,488
    
    
    
    37,408Accumulated deficit
    
    
    (18,749
    )
    
    
    (20,019
    )Total stockholders equity
    
    
    18,831
    
    
    
    17,478Total liabilities and stockholders equity
    
    $
    33,840
    
    
    $
    34,040
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PYRAMID
BREWERIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (in thousands, except share data)
 Three Month Period EndedMarch 31,2007
    
    
    2006Gross sales
    
    $
    11,155
    
    
    $
    11,507Less excise taxes
    
    
    791
    
    
    
    651Net sales
    
    
    10,364
    
    
    
    10,856Cost of sales
    
    
    8,098
    
    
    
    8,376Gross margin
    
    
    2,266
    
    
    
    2,480Selling, general and administrative expenses
    
    
    (3,399
    )
    
    
    (2,930
    )Gain on sale of net assets (Note 2)
    
    
    2,436
    
    
    
    Operating income (loss)
    
    
    1,303
    
    
    
    (450
    )Other (expense) income, net
    
    
    (30
    )
    
    
    (51
    )Income (loss) before income taxes
    
    
    1,273
    
    
    
    (501
    )Provision for income taxes
    
    
    (3
    )
    
    
    (4
    )Net income (loss)
    
    $
    1,270
    
    
    $
    (505
    )Basic and diluted net earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.06
    )Weighted average basic shares outstanding
    
    
    8,961,000
    
    
    
    8,880,000Weighted average diluted shares outstanding
    
    
    9,197,000
    
    
    
    8,880,000
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PYRAMID BREWERIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (in thousands)
 Three Month Period EndedMarch 31,2007
    
    
    2006OPERATING ACTIVITIES:Net income (loss)
    
    $
    1,270
    
    
    $
    (505
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    577
    
    
    
    615Stock-based compensation expense
    
    
    37
    
    
    
    30Gain on sale of net assets
    
    
    (2,436
    )
    
    
    Deferred rent
    
    
    (31
    )
    
    
    (19
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (103
    )
    
    
    346Inventories
    
    
    (66
    )
    
    
    (557
    )Prepaid expenses and other
    
    
    29
    
    
    
    (34
    )Accounts payable and accrued expenses
    
    
    (1,490
    )
    
    
    45Refundable deposits
    
    
    
    
    
    
    (20
    )Net cash used in operating activities
    
    
    (2,213
    )
    
    
    (99
    )INVESTING ACTIVITIES:Acquisition of fixed assets
    
    
    (387
    )
    
    
    (175
    )Proceeds from sale of net assets
    
    
    3,100
    
    
    
    Net cash provided by (used in) investing activities
    
    
    2,713
    
    
    
    (175
    )FINANCING ACTIVITIES:Payments on capital lease obligation
    
    
    (102
    )
    
    
    Payments on TTB excise tax obligation
    
    
    (49
    )
    
    
    Payments on long-term financing
    
    
    (27
    )
    
    
    (26
    )Proceeds from exercise of stock options and stock issuance through the employee
stock purchase plan
    
    
    46
    
    
    
    8Net cash used in financing activities
    
    
    (132
    )
    
    
    (18
    )Increase (decrease) in cash and cash equivalents
    
    
    368
    
    
    
    (292
    )Cash and cash equivalents at beginning of period
    
    
    227
    
    
    
    416Cash and cash equivalents at end of period
    
    $
    595
    
    
    $
    124
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PYRAMID BREWERIES INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Nature of Operations and Summary of Significant Accounting Policies
 The Company
  Basis of Presentation
  Basis of Consolidation
  Impairment of Long-lived Assets
  Inventories
  6




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Revenue Recognition
   Reporting Revenue as a Principal versus Net as an Agent
 Excise Taxes
   Net Earnings (Loss) Per Share
   Three MonthsEnded March 31,2007
    
    
    2006(in thousands except per sharedata)Net income (loss)
    
    $
    1,270
    
    
    $
    (505
    )Shares:Weighted average basic shares outstanding
    
    
    8,961
    
    
    
    8,880Dilutive effect of employee stock options and awards
    
    
    236
    
    
    
    Weighted average diluted shares outstanding
    
    
    9,197
    
    
    
    8,880Basic net earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.06
    )Diluted net earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.06
    )
  Three MonthsEnded March 31,2007
    
    2006(in thousands)Shares excluded from calculation of dilutive net earnings (loss) per share
    
    
    
    
    
    
    824
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Liquidity
       Recently Issued Accounting Pronouncements
  Accounting for Uncertainty
in Income Taxesan Interpretation of FASB Statement No. 109
 8




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Considering the Effects of Prior Year Misstatements
when Quantifying Current Year Misstatements.
 Fair
Value Measurements,
 The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115
 Reclassification
  2. Thomas Kemper Soda Transaction
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3. Stock-Based Compensation
 Share-Based Payment, Accounting for Stock-Based Compensation Accounting for
Stock-Based Compensation Transition and Disclosure
 Restricted Stock Awards
    Employee Stock Purchase Plan
    Stock-based Compensation Expense and Proceeds
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4. Inventories
  March 31,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    866
    
    
    $
    825Work in process
    
    
    263
    
    
    
    226Finished goods
    
    
    814
    
    
    
    826$
    1,943
    
    
    $
    1,877
  5. Line of Credit
  6. Capital Lease
  7. Litigation and Contingencies
   8. Segment Information
  ).
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BeverageOperations
    
    Alehouse
    
    Other
    
    TotalQuarter ended March 31, 2007Gross revenues from external customers
    
    $
    7,791
    
    
    $
    3,364
    
    
    $
    
    
    
    $
    11,155Net revenues from external customers
    
    
    7,000
    
    
    
    3,364
    
    
    
    
    
    
    
    10,364Intersegment revenues
    
    
    108
    
    
    
    
    
    
    
    (108
    )
    
    
    Operating income (loss)
    
    
    3,302
    
    
    
    (75
    )
    
    
    (1,924
    )
    
    
    1,303Capital expenditures
    
    
    250
    
    
    
    107
    
    
    
    30
    
    
    
    387Total assets
    
    
    19,919
    
    
    
    4,845
    
    
    
    9,076
    
    
    
    33,840Quarter ended March 31, 2006Gross revenues from external customers
    
    $
    8,151
    
    
    $
    3,356
    
    
    $
    
    
    
    $
    11,507Net revenues from external customers
    
    
    7,500
    
    
    
    3,356
    
    
    
    
    
    
    
    10,856Intersegment revenues
    
    
    129
    
    
    
    
    
    
    
    (129
    )
    
    
    Operating income (loss)
    
    
    1,213
    
    
    
    (28
    )
    
    
    (1,635
    )
    
    
    (450
    )Capital expenditures
    
    
    1,053
    
    
    
    
    
    
    
    
    
    
    
    1,053Total assets
    
    
    20,630
    
    
    
    5,339
    
    
    
    8,325
    
    
    
    34,294
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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 This report contains forward-looking statements within the meaning of the federal securities
laws. All statements that do not concern historical facts are forward-looking statements concerning
future performance, developments or events, concerning potential sales, restaurant expansion,
production capacity, pending agreements with third parties and any other guidance on future
periods, constitute forward-looking statements. These statements may be identified by the use of
forward-looking terminology such as anticipate, believe, continue, could, estimate,
expect, intend, may, might, plan, potential, predict, should, or will, or the
negative thereof, or comparable terminology. While we believe these expectations, assumptions,
estimates and projections are reasonable, such forward-looking statements are only predictions and
involve known and unknown risks and uncertainties, many of which are beyond our control and which
could cause actual results or outcomes to differ materially from our stated expectations. Some
factors, which could cause or contribute to such differences include, but are not limited to, those
discussed in Item 1A of Part I, Risk Factors, included in our Annual Report on Form 10-K for the
year ended December 31, 2006 as filed with the Securities and Exchange Commission (SEC). Any
forward-looking statements are made only as of the date hereof. We do not intend to update any such
statements or to publicly announce the results of any revisions to any such statements to reflect
future events or developments, except as may be required by law. Our actual future results could
differ materially from those projected in the forward-looking statements. We assume no obligation
to update the forward-looking statements for such factors.
 Overview
    Results of Operations
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SELECTED UNAUDITED OPERATING DATA
 Three Months Ended March 31,(in thousands, except barrel & per share amounts)% of
    
    
    
    
    
    
    % of2007
    
    
    Net Sales
    
    
    2006
    
    
    Net SalesGross sales
    
    $
    11,155
    
    
    
    
    
    
    $
    11,507Less excise taxes
    
    
    791
    
    
    
    
    
    
    
    651Net sales
    
    
    10,364
    
    
    
    100.0
    
    
    
    10,856
    
    
    
    100.0Cost of sales
    
    
    8,098
    
    
    
    78.1
    
    
    
    8,376
    
    
    
    77.2Gross margin
    
    
    2,266
    
    
    
    21.9
    
    
    
    2,480
    
    
    
    22.8Selling, general and administrative expenses
    
    
    (3,399
    )
    
    
    (32.8
    )
    
    
    (2,930
    )
    
    
    (27.0
    )Gain on sale of net assets
    
    
    2,436
    
    
    
    23.5
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    1,303
    
    
    
    12.6
    
    
    
    (450
    )
    
    
    (4.2
    )Other (expense) income, net
    
    
    (30
    )
    
    
    (0.3
    )
    
    
    (51
    )
    
    
    (0.5
    )Income (loss) before income taxes
    
    
    1,273
    
    
    
    12.3
    
    
    
    (501
    )
    
    
    (4.7
    )Provision for income taxes
    
    
    (3
    )
    
    
    
    
    
    
    (4
    )
    
    
    Net income (loss)
    
    $
    1,270
    
    
    
    12.3
    
    
    $
    (505
    )
    
    
    (4.7
    )Basic and diluted net earnings (loss) per share
    
    $
    0.14
    
    
    
    
    
    
    $
    (0.06
    )Operating data (in barrels):Beer shipped
    
    
    44,700
    
    
    
    
    
    
    
    42,700Soda shipped
    
    
    8,800
    
    
    
    
    
    
    
    7,900Total shipped
    
    
    53,500
    
    
    
    
    
    
    
    50,600Annual production capacity
    
    
    265,000
    
    
    
    
    
    
    
    265,000
 QUARTER ENDED MARCH 31, 2007 COMPARED TO QUARTER ENDED MARCH 31, 2006
 Gross Sales.
 Excise Taxes.
 Gross Margin
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Three Month Period Ended March 31,(in thousands)% of
    
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    
    SegmentGross Margin
    
    2007
    
    
    Net Sales
    
    
    2006
    
    
    Net Sales
    
    
    $ Change
    
    
    % ChangeBeverage Division
    
    $
    2,341
    
    
    
    33.4
    %
    
    $
    2,508
    
    
    
    33.4
    %
    
    $
    (167
    )
    
    
    (6.7
    )%Alehouse Division
    
    
    (75
    )
    
    
    (2.2
    )%
    
    
    (28
    )
    
    
    (0.8
    )%
    
    
    (47
    )
    
    
    (167.9
    )%Total
    
    $
    2,266
    
    
    
    21.9
    %
    
    $
    2,480
    
    
    
    22.8
    %
    
    $
    (214
    )
    
    
    (8.6
    )%
 Selling, General and Administrative Expenses
 Gain on sale
 Other (Expense) Income, Net
 Income Taxes
 Net Income (Loss)
 Liquidity and Capital Resources and Commitments
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Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1 - 3 Years
    
    3 - 5 Years
    
    5 YearsOperating leases-(1)
    
    $
    4,669
    
    
    
    1,176
    
    
    
    1,827
    
    
    
    1,170
    
    
    
    496Capital leases-(2)
    
    $
    787
    
    
    
    392
    
    
    
    395
    
    
    
    
    
    
    
    Note payable-(3)
    
    $
    7,644
    
    
    
    105
    
    
    
    225
    
    
    
    254
    
    
    
    7,060TTB excise tax assessment-(4)
    
    $
    585
    
    
    
    205
    
    
    
    380
    
    
    
    
    
    
    
    
 
 (1)
    
    We have obligations in the form of revenue sharing provisions in certain alehouse lease
agreements, based on the excess of the percentage of revenue over the minimum lease payment.
For the quarters ended March 31, 2007 and 2006, there were no amounts owed under revenue
sharing agreements.(2)
    
    In 2006, we acquired 14,500 of new kegs under our capital lease agreement (Note 6 to the
condensed consolidated financial statements) for a total of $1.2 million, payable over a
30-month period.(3)
    
    The amounts are principal only payments as stated in the securitized financing arrangement
for the Berkeley Facility purchase.(4)
    
    In 2006 we settled with the TTB, resolving all issues arising for the audit including the
federal tax assessments for the period at issue for a total amount of $700,000, payable in
monthly installments for a period of three years.  16




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Contingencies
   Critical Accounting Policies
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
 Procedures
 Procedures
 (a) Evaluation of disclosure controls and procedure
  (b) Changes in internal controls
  17




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PART II  OTHER INFORMATION
 
 ITEM 1A. Risk Factors
  18




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ITEM 6. EXHIBITS
 31.1
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: Scott S. Barnum, President
and Chief Executive Officer31.2
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: Michael R. OBrien, Chief
Financial Officer & Vice President of Finance32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Scott S. Barnum, President and Chief Executive Officer32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Michael R. OBrien, Chief Financial Officer & Vice President of
Finance
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SIGNATURE
  PYRAMID BREWERIES INC.By:
    /s/ SCOTT S. BARNUMScott BarnumPresident and Chief Executive OfficerBy:
    /s/ MICHAEL R. OBRIENMichael R. OBrienChief Financial Officer and Vice President of Finance
(Principal Financial Officer)  20