UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K


(Mark
One)


xANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2009


or


oTRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
transition period from __________  to __________




COMMISSION
FILE NUMBER 1-13636





MENDOCINO
BREWING COMPANY, INC.


(Exact
name of Registrant as Specified in our Charter)


CALIFORNIA
              68-0318293(State or
      Other Jurisdiction of
              (IRS
      EmployerIncorporation
      or Organization)
              Identification
      No.)





1601
AIRPORT ROAD, UKIAH, CA 95482


(Address
of principal executive offices)




(707)
463-6610


(Registrant's
Telephone Number, Including Area Code)




Securities
registered pursuant to section 12(b) of the Act: none




Securities
registered pursuant to section 12(g) of the Act:




Common
stock, no par value




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes oNox




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes oNo x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes xNo o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any , every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes xNo o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.




Large
accelerated Filer oAccelerated
Filer oNon-accelerated
Filer oSmaller
reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo x




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant based on the average of the closing bid and
asked prices for such stock as reported by the NASDAQ OTC Bulletin Board on June
30, 2009 was $355,600.




The
number of shares of the registrant's Common Stock outstanding as of March 29,
2010 was 12,427,262.




DOCUMENTS
INCORPORATED BY REFERENCE




None









FORWARD-LOOKING
INFORMATION




This
annual report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which we refer to in
this annual report as the Exchange Act. Forward-looking statements are not
statements of historical fact but rather reflect our current expectations,
estimates and predictions about future results and events. These statements may
use words such as "anticipate," "believe," "estimate," "expect," "intend,"
"predict," "project" and similar expressions as they relate to us or our
management. Unless the context otherwise requires, references in this annual
report to “we,” “us,” “our,” or the “Company” refer to Mendocino Brewing
Company, Inc. together with its subsidiaries. When we make forward-looking
statements, we are basing them on our management's beliefs and assumptions,
using information currently available to us. These forward-looking statements
are subject to risks, uncertainties and assumptions, including but not limited
to, risks, uncertainties and assumptions discussed in this annual report.
Factors that can cause or contribute to these differences include those
described under the headings "Risk Factors" and "Management Discussion and
Analysis and Plan of Operation." If one or more of these or other risks or
uncertainties materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we projected. All
subsequent written and oral forward-looking statements attributable to us or
individuals acting on our behalf are expressly qualified in their entirety by
this paragraph. You should specifically consider the factors identified in this
annual report, which would cause actual results to differ before making an
investment decision. We are under no duty to update any of the forward-looking
statements after the date of this annual report or to conform these statements
to actual results.





In
addition, such statements could be affected by general industry and market
conditions and growth rates, and by general economic and political conditions in
the markets in which we compete. Readers are cautioned not to place undue
reliance on these forward-looking statements.




PART
I




ITEM
1. BUSINESS




OVERVIEW




Mendocino
Brewing Company, Inc., a California corporation,(the “Company”)  was
founded in 1983. 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
2008, we celebrated our 25th anniversary. (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 three geographic markets, domestic (the United States) (referred to
in this Annual Report as the "Domestic Territory"), 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) and Canada (collectively, referred to with
Europe as the "Foreign Territory"). Our European operations are primarily in the
United Kingdom.




Our
domestic operations 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, White Hawk Original IPA, and Red Tail Lager, and a licensed
international specialty beer, Kingfisher Premium Lager. For domestic
distribution, we brew our brands in our own facilities, which are located in
Ukiah, California and Saratoga Springs, New York. Domestically, we distribute
our products in most of the states and the District of Columbia.




2


Our
foreign operations, which are conducted through our wholly-owned subsidiary
United Breweries International (U.K.) Limited ("UBI") and UBI's wholly-owned
subsidiary UBSN, Limited ("UBSN"), consist primarily of the marketing and
distribution of Kingfisher Premium Lager in the European Territory through
Indian restaurants, chain retail grocers, liquor stores, and other retail
outlets (such as convenience stores). We hold an exclusive license from United
Breweries Limited, an Indian public limited company ("UB Limited") to brew and
distribute Kingfisher Premium Lager. Our Chairman of the Board, Dr. Vijay
Mallya, is also the Chairman of the Board of UB Limited.




All of
our beers sold in the Foreign Territory are brewed in England under a contract
with Shepherd Neame, Ltd. ("Shepherd Neame"), a prominent English brewer.
Although UBSN is the sole distributor of Kingfisher Premium Lager in the United
Kingdom, Ireland, continental Europe, and Canada, it does not physically
distribute our products to our ultimate trade customers, relying instead on
specialty restaurant trade distributors in the United Kingdom and Shepherd
Neame, acting as UBSN's agent, on a commission basis, for distribution to the
supermarket, liquor and convenience store trade.




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 the inclusion of
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 90,000 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 the inclusion of additional equipment.




In July
1998, we purchased certain assets from Carmel Brewing Company, Inc., a
California corporation ("Carmel Brewing"), including trademarks, trade names,
and other brand related assets as well as certain points of sale and brewing
ingredients inventory. We continue to bottle and sell beer under the Carmel
Brewing name.




On August
13, 2001, we acquired UBI together with UBI's wholly-owned subsidiary UBSN, from
Inversiones Mirabel, S. A., a Panamanian corporation, ("Inversiones") in
exchange for MBC stock then valued at approximately $5,500,000 (the "UBI
Acquisition"). UBI and UBSN 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 UBI Acquisition. We brew Kingfisher Premium
Lager in our Saratoga Springs, New York and Ukiah, California facilities. We
have engaged Shepherd Neame to brew Kingfisher Premium Lager for distribution in
the Foreign Territory.




During
the last quarter of fiscal year 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. Mallya is the Chairman of the board of directors of
UBHL.




INDUSTRY
OVERVIEW




DOMESTIC
MARKET




We are a
brewer in the craft brewing segment of the United States beer industry. The
United States domestic beer market falls into a number of market categories,
some of which include low-priced, premium, super premium, lite, import, and
specialty/craft beers. In the Domestic Territory, we compete in the
specialty/craft category, which is currently estimated by Brewers Association to
be approximately 9.1 and 8.6 million barrels per year in 2009 and 2008,
respectively. 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. The craft brewing segment is growing, but is relatively
small. Recently, the United States beer market has seen two trends, the number
of craft brewers have increased in number and the large domestic brewers (i.e.,
InBev S.A.'s acquisition of Anheuser-Busch Companies, Inc.) have merged or been
acquired by other large domestic and international brewers. The
InBev-Anheuser-Busch group and SAB MillerCoors group account for approximately
80% of the beer shipped in the United States. Since our formation in the 1980s,
the rate at which the craft beer segment has grown has fluctuated over the
years. The national domestic brewers have increased the competition by producing
their own fuller-flavored products to compete against craft beers. The
introduction of flavored malt beverages starting in 2001 has also increased
competition in the beer market. Additionally, the wine and spirits market has
seen an increase in recent years, attributable to competitive pricing,
television advertising, increased merchandising and resurgent consumer interest
in wine and spirits.




3


EUROPEAN
MARKET




The vast
majority of our sales in the European Union are made in the United Kingdom.
During fiscal years 2009 and 2008 our sales in the United Kingdom constituted
approximately 89% of our total sales in the Foreign Territory. Sales in the
Foreign Territory primarily consist of sales of Kingfisher Lager. We have
production and distribution rights for Kingfisher Lager in the United Kingdom
and the other European Union countries.




Within
the European Union, we primarily distribute our products through Indian
restaurants using specialist restaurant trade distributors. In addition, we
distribute our products through other licensed premises and through other retail
outlets such as supermarkets, liquor stores, and licensed shops and convenience
stores.





CANADIAN
MARKET





During
fiscal years 2009 and 2008 our sales in Canada constituted approximately 2% of
our total sales in the Foreign Territory. We have production and distribution
rights for Kingfisher Lager in Canada.





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. Through our subsidiary in the United Kingdom, we have production and
distribution rights to Kingfisher Premium Lager (Kingfisher) in the European
Union, Canada and the United States. Generally sales are done through
distributors.





THE
HOPLAND TAVERN ALE HOUSE AND MERCHANDISE STORE





The
historic Hopland tavern ale house and merchandise store serves to market our
products in the Domestic Territory. Located on a tourist route in Hopland,
California, 100 miles north of San Francisco, the Hopland Brewery opened in 1983
as the first new brewpub in California and the second in the United States
following the repeal of Prohibition.




Beverages
served at the Hopland tavern include Red Tail Ale, Blue Heron Pale Ale, Black
Hawk Stout, Eye of the Hawk Select Ale, Peregrine Golden Ale, White Hawk IPA,
and a seasonal brew. The adjacent merchandise store sells our brews and
merchandise such as hand-screened label T-shirts, posters, engraved glasses and
mugs, logo caps and other brewery-related gifts.




PRODUCTS




We
produce a variety of flavorful craft beers by using high quality ingredients in
our brewing process. For distribution in the Domestic Territory, we brew six
ales, one wheat beer, three lagers, one stout and a root beer on a year-round
basis, and five seasonal ales. 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 of
California, New York and the New England states.




4


In the
Foreign Territory, we currently distribute Kingfisher Premium
Lager.  Kingfisher 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 year-round 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 hop character. It is available
year-round 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 year-round 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 year-round in 12 oz. six-packs,
half-barrel kegs, and 5 gallon kegs.




WHITE HAWK ORIGINAL IPA is a
heavily hopped ale with distinctive hop character and bold malt flavor. It is
available year-round in 12 oz. six-packs and half-barrel kegs.





RED TAIL LAGER is a
traditional lager, with a smooth light feel and a crisp sweet finish. It is
currently available year-round only in northern California 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
Domestic Territory, Kingfisher Premium Lager is currently available year-round
in 12 oz. six-packs, 22 oz. bottles, half-barrel kegs, and 5 gallon kegs. In the
Foreign Territory, it is available year-round, in 330ml and 660ml bottles in
multi-packs in the United Kingdom, Ireland, and continental Europe and in 330ml
bottles in Canada, as well as in a variety of keg sizes. In the United Kingdom,
it is also available on tap in Indian restaurants. In the United States, it is
available on tap in a few pubs and Indian restaurants.




DISTRIBUTION
METHODS




In the
Domestic Territory, our products are sold through wholesale distributors to
consumers at supermarkets, warehouse stores, liquor stores, taverns and bars,
restaurants, and convenience stores.




Most of
our brands are also available on draft. 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 the tavern and merchandise store in Hopland, California and our
tasting room attached to the Saratoga Springs brewery in New York.




In the
Foreign Territory, our products are distributed primarily through Indian
restaurants by specialist restaurant trade distributors. Such points of sale
represent approximately 95% of our total sales volume in the Foreign Territory,
with the remaining 5% of sales volume attributed to sales in supermarkets,
liquor stores, and licensed shops and convenience stores. The majority of our
restaurant sales are through our on-tap draft installations. UBSN also exports
Kingfisher Premium Lager to 16 European markets outside of the United Kingdom
and to Canada, 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 per
regulation applicable to each province.




5


COMPETITION




In the
Domestic 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. 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, both 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 brand. We promote the brand through
our significant participation in events directed at the Indian restaurant trade
and volume driven promotions in supermarkets and Cash & Carry stores, a
retail chain in the United Kingdom.





The
larger domestic and international brewers have introduced more fuller-flavored
beers, and these are 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. The craft brewers compete
on product quality, taste profile, and consistency.




We face
tough competition in the Domestic 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 these competitors have substantially greater
financial and marketing resources and distribution networks than us. 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 quantities of various agricultural products, including
malt, hops and malted wheat for beer. We fulfill our commodities requirements
through purchases from various sources, some through contractual arrangements
and others on the open market. In the Foreign Territory, these purchases are
made directly by Shepherd Neame, which brews our products on a contract basis.
We experienced substantial increase in the price of hops during 2008 due to low
availability and high demand. High prices for hops continued in 2009. In 2008
the Company entered into a long term contract to purchase hops which should
decrease the amount spent by the Company on hops over the next two years. The
commodity markets have experienced and we believe that the commodity markets
will continue to 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 the United States are Great Western Malting Co., Yakima, WA, and
Canada Malting Company, Montreal, Canada (malt); Hop Union LLC, Yakima, WA
(hops); Gamer Packaging Inc., Minneapolis, MN (bottles and crowns); Alliance
Packaging, Seattle, WA, and International Paper Co. Pittsburg, PA (cartons);
Sierra Pacific Packaging, Oroville, CA and Keystone Paper and Box Co, South
Windsor, CT (carriers); and DWS Printing Associates, Bay Shore, NY
(labels).




Our major
supplier for the Foreign Territory is Shepherd Neame, which brews 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.




6


DEPENDENCE ON MAJOR
CUSTOMERS




Sales to
our top five customers in fiscal year 2009 totaled $11,972,100, or approximately
33%, of our total sales, as compared to $10,508,300 or 28% of total net sales
for fiscal year 2008.





In our
Domestic Territory, sales to Mesa Distributing Company, Inc. totaled
approximately 8.7% and 8.6% of our domestic sales (or approximately 3.7% and
3.6% of our total sales) for fiscal years 2009 and 2008,
respectively.




Sales to
our principal European customer, Shepherd Neame during fiscal year 2009
represented approximately 31.8% of our European Territory sales (or
approximately 18.4% of our total sales), as compared to approximately 22.2% of
European Territory sales (or approximately 12.9% of total sales) in fiscal year
2008. No other individual customer accounted for more than 5% of our total sales
during fiscal years 2009 or 2008.





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. The
sales volume can 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 have a tasting
room in at our Saratoga Springs brewery and a brewpub in Hopland
California.  We also utilize signs, tap handles, coasters, logo
glassware and posters to promote our products in bars, pubs and
restaurants.





We also
participate in various consumer promotion programs, primarily ‘post-offs’ that
are often done in conjunction with our distributors and retailers. Additionally,
we also occasionally advertise our products in print media.




TRADEMARKS




We have
U.S. 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), BREWSLETTER word
mark (Reg. No. 1,768,639), 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), WHITE HAWK ORIGINAL IPA word and design mark (Reg. No.
2,956,999), RAPTOR RED LAGER word and design mark (Reg. No. 3,113,619), and
BLACK HAWK STOUT word mark (Reg. No. 3,205,652).





We use
the BLUE HERON word mark 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.





Our use
of the BLACK HAWK STOUT word mark is, by agreement with Hiram Walker & Sons,
Inc., subject to the restriction that it be used solely to identify and
distinguish malt beverage products namely, beer, ale and stout, and only in
conjunction with the words "Mendocino Brewing Company."





Our
United States federal trademark registration for the BLUE HERON word mark
(Cancelled Reg. No. 1,820,076) was cancelled as a result of an alleged technical
deficiency in registration compliance filings. We continue to use the BLUE HERON
word mark and claim common law trademark rights in and to that mark. We
presently have a pending application on file with the United States Patent and
Trademark Office for the re-registration of the BLUE HERON word
mark.





7


We claim
common law trademark rights in and to the TALON BARLEY WINE ALE word mark and
TALON BARLEY WINE ALE word and design mark and intend to register the marks with
the United States Patent and Trademark Office.





We have
acquired the trademark CARMEL BREWING COMPANY and any other variation of the
same as used by Carmel Brewing Company and claim common law trademark rights in
and to all such marks. We have also acquired the rights to use the RAZOR EDGE
word mark through a License Agreement with Beverage Mates, Ltd. However, we are
currently not using the RAZOR EDGE mark, and it is unclear whether we will use
the mark in the future. The original term of the RAZOR EDGE License Agreement
ended in 2008, but has been automatically renewed. License fees are calculated
based on sales of the product. We have not had any sales of this brand since
2001.




LICENSE
AGREEMENTS




In August
2001, we acquired UBI and its wholly-owned subsidiary UBSN, which 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. Under its terms, this licensing agreement is
currently scheduled to remain in effect until October 2013.




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. Under its terms,
this agreement is currently scheduled to remain in effect until October
2013.




Since
1998, UBI and UBSN have licensed to Shepherd Neame 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.
The price UBSN pays to Shepherd Neame 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 - Shepherd Neame - Brewing Agreement".) Under its terms, this
agreement is currently scheduled to remain in effect until October
2013.




In April
2004, we entered into a licensing agreement with Frank's Famous Foods ("FFF")
and granted a non exclusive license to FFF for the trademark and trade name Red
Tail Ale to be used in the manufacture and sale of barbecue sauces and
marinades. FFF pays us licensing fees ranging from $1.50 to $3.00 per case sold.
This licensing agreement is scheduled to terminate April 2, 2012.




GOVERNMENTAL
REGULATION




Our
Domestic 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. Prompt notice of any changes in the operations, ownership, or
company structure must also be made to these regulatory agencies. 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. The Hopland
tavern is regulated by the Mendocino County Health Department, which requires an
annual permit and conducts spot inspections to monitor compliance with
applicable health codes.




8


In the
United States, 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. for brewers producing
less than 2,000,000 barrels per year. The California excise tax rate is $6.20
per bbl. The State of New York presently imposes on brewers an excise tax of
$3.88 per bbl. for production in excess of 100,000 bbl. per year.




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 UBI distributes our products. Due to the contract brewing arrangement in
the Foreign Territory, Shepherd Neame, rather than the Company, is subject to
various laws of the European countries regarding production, bottling,
packaging, and labeling. In Canada, provincial governments regulate the beer
industry, particularly the regulation of 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
through Provincial Liquor Control Boards or independent distributors, as per
regulation applicable to each province.




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.




Our waste
products consist of 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. We have not purchased any special equipment and do not
incur any identifiable fees in connection with environmental compliance at our
Hopland site.




Ukiah. We have built
our own wastewater treatment plant for the Ukiah facility. As a result, we are
currently required to pay lower 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 wastewater treatment facility construction costs totaled
approximately $900,000, and the approximate operating costs of the plant are
between $6,000 and $10,000 per month. The operating costs of the facility 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 the natural gas fired
boiler in Ukiah; this permit is valid until August 30, 2010. Management expects
this permit to be renewed each year.




Saratoga Springs. The
Saratoga Springs facility is subject to various federal, state, and local
environmental laws which regulate use, storage and disposal of various
materials. 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 a 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. The sewer discharge from the brewery is monitored
and is within the standards set by the Saratoga County Sewer Department. 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 in the Domestic Territory, including
California and New York, have adopted certain restrictive packaging laws and
regulations for beverages that require deposit on packages. Such laws have not
had a significant effect on our sales. The adoption of similar legislation by
Congress or a substantial number of states or additional local jurisdictions
might require us to incur significant capital expenditures for
compliance.




In
general, European packaging regulations are covered by specifications provided
by the European Union; we believe we are in compliance with such specifications.
We also believe we are in compliance with all applicable Canadian laws and
regulations.




We have
not received any notice from any governmental agency relating to the violation
by us of any applicable environmental law.





Dram Shop
Laws


9





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
uninsured damage awards against us could adversely affect our financial
condition.




EMPLOYEES




As of
December 31, 2009, MBC employed 57 full-time and 6 part-time individuals in the
United States, including 11 in management and administration, 38 in brewing and
production operations, 4 in retail and tavern operations and 10 in sales and
marketing positions. In England, UBI and UBSN together employed 12 people in
sales and marketing and 8 in managerial and administrative positions. Management
believes that our relations with our employees are generally good.




Approximately
14 employees currently engaged in brewing, bottling, warehousing, and shipping
at the Ukiah brewery elected Teamsters Local No. 896, International Brotherhood
of Teamsters, AFL-CIO (the "Union") to represent them as a collective bargaining
agent. We and the Union renewed the collective bargaining agreement effective
August 1, 2008. Such collective bargaining agreement will expire on July 31,
2013. All of such 14 employees' positions henceforth must be held and filled by
members of the Union.




RESEARCH
AND DEVELOPMENT




We have
not spent any material amount during the last two fiscal years on research and
development activities nor on customer-sponsored research activities relating to
the development of new products, services or techniques or the improvement of
existing products, services or techniques.




ITEM
1A. RISK
FACTORS




In
addition to the other information 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 economy. 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 incurred a net loss for fiscal year 2009.
Historically, the Domestic Territory operations have resulted in a net loss.
Since fiscal year 2005, operations in the Foreign Territory have also resulted
in a net loss. We believe such losses are attributable to low sales volume in
our Domestic Territory and higher operating expenses in the Foreign Territory.
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, may cause our gross margins to be sensitive to
small increases or decreases in sales volume in the Domestic Territory. In
addition, higher cost of materials in 2009 resulted in increased materials
costs. 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
may not be successful in our efforts to increase sales volume and utilization
rates. Moreover, it is uncertain when, if at all, our operations 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 losses from our European operations continued to place demands on
our working capital. We have loans, lines of credit, other credit facilities,
and lease obligations with various creditors. Any breach of a loan by us which
leads to our default, inability of any lender to continue offer credit
facilities, our inability to refinance credit facilities when they become due,
or an attempt by one of our creditors to exercise our 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, could potentially make it
difficult, at least in the short term, for us to continue our
operations.





We rely
on short and  long-term debt to meet our working capital
needs.  As described in the "Liquidity and Capital Resources" section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations, the terms of the Company's loan agreement with Marquette Business
Credit, Inc. require that we meet certain financial covenants. We did not meet
two of these covenants in such loan agreement in the past which resulted in
default of such covenants leading to higher borrowing costs. The default has not
been cured as of the date of filing of this report. However, no default actions
were commenced by the lender causing cross-defaults. We are seeking modification
of the agreement and the associated covenants with our lenders. We may not be
able to generate financial results sufficient to meet the financial covenant
measurements, which would cause us to be in violation of the loan agreement.
Failure to meet the covenants required by the loan agreement is an event of
default and, at its option, the lender could deny a request for a waiver and
declare the entire outstanding loan balance immediately due and payable. In such
a case, we would seek to refinance the loan with one or more lenders,
potentially at less desirable terms. Given the current economic environment and
the tightening of lending standards by many financial institutions, including
some of the banks that we might seek credit from, there can be no guarantee that
additional financing would be available at commercially reasonable terms, if at
all.


10


Our
management is continually focused on increasing profitability through cost
savings initiatives, increasing sales volume and the price of our products and
will continue to do so in 2010. Management believes that the Company can meet
its normal cash flow requirements and comply with the terms of its loan
agreement and possible financial support from our majority shareholder, but
there is no complete assurance that we can do so. The failure to satisfy our
working capital requirements could have a material adverse effect on our
financial position and future operations.





Our
credit agreements have covenants that limit our near-term capital
expenditures.  Maintaining our
facilities or entering into new product or packaging introduction may require
incremental capital expenditures; however, per the terms of our loan agreements
with our lenders, 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.


During 2009, the amount due to Shepherd
Neame increased by approximately $5.6 million and the amount due from Shepherd
Neame increased by approximately $4.5 million thereby significantly increasing
our aggreagate accounts payable and accounts receivable balances at December 31,
2009. We do not expect such increases will result in any adverse liquidity
situation in the next 12 months. We have conducted business with Shepard Neame
since 1998. By the end of our first quarter of 2010 , we expect both our
payables and receivables will significantly be reduced, since we have made
substantial payments (approximately GBP 1 million) to Shepherd Neame and also
collected significant sums from Shepherd Neame.
  COMPETITION:
We face intense competition in both our Domestic Territory as well as in our
Foreign Territory from both 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 operations. As a result, an interruption in the
supply chain may have an adverse effect on our operations if we were unable to
find an alternative supplier at a comparable price. Our cost of materials,
particularly that of barley, wheat, malt and hops increased significantly during
the year 2008 (and early 2009) due to limited supply and higher demand (See Part
1, Item 1, “Sources And Availability of Raw Materials’). In 2009, the Company
entered into a long term contract to purchase hops which should cause the amount
spent by the Company on hops to decrease over the next two years. We may not be
in a position to pass the entire cost increase to our customers which may have
an adverse effect on our operations.




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 Releta facility. Approximately 22% of
our sales volume in the Domestic Territory for fiscal year 2009 includes sales
made under such contract brewing arrangements. There is no certainty that such
existing arrangements will be extended in the future or that we will be able to
enter into new arrangements. Any significant variation in these arrangements
could have a material adverse effect on our results of operations, cash flows
and financial position.




DEPENDENCY
ON DISTRIBUTORS: We sell beer to independent beer distributors for distribution
to retailers and, ultimately, to drinkers. Although the Company currently has
arrangements with its wholesale distributors to distribute the products,
sustained growth will require it 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.





11


ARRANGEMENT
WITH SHEPHERD NEAME: UBI and UBSN entered into a brewing agreement that grants
Shepherd Neame 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. Continued losses in the European Territory
has increased the working capital gap and diminished our ability to timely
settle our dues. Any interruption of the brewing, packaging or distribution of
our products by Shepherd Neame for any reason is likely to have a material
adverse effect on our results of operations, cash flows and financial
position.





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 to 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 under utilization (See “Item 2 –
Properties” below). Both of our brewing facilities incur maintenance costs,
property taxes, 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. In
addition, other factors beyond our control 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, the
sales mix of various bottled product packages, and federal or state excise
taxes. 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 the 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 2014. Under the terms of the agreement with MicroStar, we
receive our entire supply of kegs exclusively from MicroStar. Moreover, pursuant
to the terms of the agreement, if the agreement is terminated, we are required
to purchase four times the average monthly keg usage for the preceding six-month
period from MicroStar. If we are required in the future to purchase such kegs,
we may need additional funds for such purchases. An interruption in the supply
of kegs by MicroStar to us 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.




ECONOMIC CONDITIONS: There is an
increasing concern over current economic conditions in our domestic as well as
Foreign territories and its impact on consumer spending. This may adversely
affect the sale of our products. Our business is seasonal in nature, and we are
likely to experience fluctuations in our results of operations and financial
condition.  Sales of our
products are somewhat seasonal, with the first and fourth quarters historically
being the slowest and the rest of the year generating stronger sales. Our sales
volume may also be affected by weather conditions. Therefore, our 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 our
seasonal business.





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.





ECONOMIC
DOWNTURN: Economic conditions have deteriorated significantly in the United
States, the United Kingdom and other countries, and may remain depressed for the
foreseeable future. These conditions make it difficult for us to accurately
forecast and plan future business activities. Furthermore, during challenging
economic times, we may face issues gaining timely access to financings or
capital infusion, which could result in an impairment of our ability to continue
our business activities. We cannot predict the timing, strength or duration of
any economic slowdown or subsequent economic recovery, worldwide, in the United
States, or in our industry. These and other economic factors could have a
material adverse effect on our financial condition and operating
results.





12


POTENTIAL
ADDITIONAL 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 increased taxation by federal, state and local governmental agencies than
those of 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 additional or new
licenses, permits or approvals, when required, 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 state and federal licensing and permitting 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 do not maintain 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.





Increasing
the federal and/or state excise tax on alcoholic beverages, or certain types of
alcoholic beverages such as flavored malt beverages, is frequently proposed in
various jurisdictions 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 may reduce overall demand for beer, thus
negatively impacting sales of our products. Recently, states have been reviewing
the state tax treatment for flavored malt beverages which 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 an increasing 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 availability of a 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, which includes 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 the
factors such as perceived or actual general economic conditions, job losses and
the resultant rising unemployment rate, perceived or actual disposable consumer
income and wealth, the current United States economic recession and changes
in consumer confidence in the economy, could significantly reduce customer
demand for craft beer in general, and the products we offer specifically.
Certain of our core markets, particularly in the western and northeastern
regions of the United States, have been harder hit by the economic recession,
with job loss and unemployment rates in excess of the national averages.
Furthermore, any of these factors may cause consumers to substitute our products
with the fuller-flavored national brands or other more affordable, although
lower quality, alternatives available to the consumers. In either event, this
would likely have a significant negative impact on our operating
results.





ADVERTISING
AND MARKETING EFFORTS: The sales and marketing programs used by us to generate
demand for our products may be unsuccessful.  In the future
this could lead to lowering prices that we charge for our products from our
historical levels, 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 domestic consumers, or if the domestic
beer industry were subjected to significant additional governmental regulation,
our operations could be adversely affected.


13


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 thatcould 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: Our common stock price could be subject to significant fluctuations
and/or may decline.  The market price of our common stock could be
subject to significant fluctuations. Among the factors that could affect our
stock price are:


-
            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.





In 2009,
the stock markets in general experienced increased volatility that has sometimes
been unrelated to the operating performance of a particular company. These broad
market fluctuations may cause the trading price of our common stock to
decline.





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.





SECTION 404(b) of the SARBANES-OXLEY
ACT OF 2002:We will
be subject to reporting on internal controls in accordance with Section
404(b) of The Sarbanes-Oxley Act and the requirement that our registered public
accounting firm provide an attestation report regarding internal control over
financial reporting for fiscal years ending on or after June 15, 2010. We are
currently unable to predict the cost or difficulties required to complete such
certifications. We may need to hire and/or engage additional personnel and incur
incremental costs in order to complete the work required by Section 404. We have
in the past discovered, and may in the future discover, areas of our internal
controls that need improvement. We may not be able to remediate these problems
on a timely basis. Additionally, upon completion of a Section 404 plan, we may
not be able to conclude in the future that our internal controls are effective,
or in the event that we conclude that our internal controls are effective, our
independent accountants may disagree with our assessment and may issue a report
that is qualified. Any failure to implement required new or improved controls,
or difficulties encountered in their implementation, could harm our operating
results or cause us to fail to meet our reporting obligations.




ITEM
1B. UNRESOLVED STAFF
COMMENTS




None.




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. Grand Pacific Financing Corporation
currently holds a first 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 - Liquidity and Capital Resources
- Grand Pacific Financing Corporation Loan".) The principal amount outstanding
on the loan as of December 31, 2009 was $2,849,100.




14


We have
estimated the life of the building 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 tax basis on the Ukiah facility is
$10,750,000. Various other assets incorporated in this facility are being
depreciated, on a straight-line basis, at rates of between 10 and 20 years.
Property taxes are currently assessed on the Ukiah property at a rate of 1.125%,
for an annual tax of $121,000.




We also
lease 3.66 acres in Saratoga Springs, New York, on which the Ten Springs Brewery
facilities are located. In the years 2004 and 2009, we leased additional
warehouse space and the currentterm
of this lease expires on July 2014  with an option to extend for three
successive terms of five years each if the lease is not in default.




The
brewery in Ukiah, California has a current annual cellar capacity based on
current product mix of approximately 50,000 bbl. The annual sales volume from
this facility was approximately 44,100 bbl. or 88% of maximum capacity in 2009,
as compared with 46,600 bbl. or 93% of maximum capacity in 2008. The brewery at
Saratoga Springs, New York currently has an annual cellar capacity based on
current product mix of approximately 40,000 bbl. per year. Our annual sales
volume from this facility was approximately 27,900 bbl. or 56% of our
maximum  capacity in 2009, as compared with 26,800 bbl. or 53% of our
then maximum capacity in 2008. Cellar capacity can be expanded by addition of
tanks of desired size and quantity.





Ukiah and
Saratoga Springs breweries have annual packaging capacity of 100,000 bbl. and
90,000 bbl. respectively on a single shift basis and each brewery has annual
brewing capacity of 200,000 bbl. (See “Item 1A – Risk Factors – Gross Margins”
above.)




TAVERN




We have leased a 2,275 square foot
building in Hopland on which the Hopland tavern ale house and merchandise store
are located. The lease on this property expires in August 2010. We intend to
negotiate an extension of the lease.




MACHINERY
AND EQUIPMENT




We lease
certain equipment and vehicles under capital and operating leases which expire
at varying times through September 2012. 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
pursuant to the terms of the leases and the vehicles will be
surrendered.




UBSN has
leased a 1,365 square foot office located at Faversham, Kent, in England for a
period of 10 years. This lease expires in July 2015. We do not own or lease any
other material properties in Europe.




We
consider our land, buildings, improvements, and equipment to be well maintained,
in good condition, and adequate to meet the operating demands placed upon them.
In the opinion of Management, all of these properties are adequately covered by
insurance.




ITEM 3.LEGAL
PROCEEDINGS.





The
Company is involved from time to time in 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.SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.





Not Applicable.




15


PART
II




ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES




MARKET
INFORMATION




Since May
2002, our Common Stock has been quoted on the NASDAQ OTC Bulletin Board, under
the symbol "MENB". The table below sets forth, for the fiscal quarters
indicated, the reported high and low bid prices for our Common Stock, as
reported on the OTC Bulletin Board. The information listed below reflects
inter-dealer bids, without retail mark-up, mark-down, or commission, and may not
represent actual transactions.





2009
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    0.20
                    
                    
                    $
                    0.16Second
      Quarter
                    
                    $
                    0.18
                    
                    
                    $
                    0.16Third
      Quarter
                    
                    $
                    0.26
                    
                    
                    $
                    0.15Fourth
      Quarter
                    
                    $
                    0.26
                    
                    
                    $
                    0.05







2008
                          
                          High
                          
                          
                          LowFirst
      Quarter
                          
                          $
                          0.42
                          
                          
                          $
                          0.30Second
      Quarter
                          
                          $
                          0.38
                          
                          
                          $
                          0.33Third
      Quarter
                          
                          $
                          0.38
                          
                          
                          $
                          0.35Fourth
      Quarter
                          
                          $
                          0.35
                          
                          
                          $
                          0.16








We had
approximately 2,269 holders of our common stock of record as of March 17, 2010.
We have never paid a cash dividend on our Common Stock and we do not expect to
pay cash dividends in the foreseeable future. Our credit agreements provide 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. The Series A Preferred Shares must be canceled
after the holders of these shares have received their $1.00 per share aggregate
dividend. For additional information see, "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Other Loans and Credit
Facilities- Restricted Net Assets."





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 the board of directors 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.




16


SECURITIES AUTHORIZED FOR ISSUANCE
UNDER EQUITY COMPENSATION PLANS




As of
December 31, 2009, we had 1,000,000 shares authorized for issuance under an
equity compensation plan, the Directors' Compensation Plan, approved by the
shareholders.





Prior to
2003, we had a policy of granting shares of Common Stock in lieu of cash to
non-employee directors at their option, as compensation for their attendance at
meetings of the Board of Directors and of Committees of the Board on which they
served, based on a standard schedule of $3,000 per Board meeting attended and
$1,000 per committee meeting attended. However, because the market value of our
Common Stock fell below $0.50 per share during the latter half of 2003, and has
since remained consistently below $1.00 per share (at times falling below twenty
cents per share) - which would have increased quite significantly the number of
shares otherwise issuable to these directors — the Board of Directors adopted a
Directors' Stock Grant Plan under which non-employee directors would receive, as
compensation for Board and Committee meetings attended, shares of our Common
Stock valued, for the purposes of determining how many shares to issue to each
Director, at the higher of the book or market value.





Our
Directors' Compensation Plan as amended in 2009 reserved an aggregate of
1,000,000 shares of our unregistered Common Stock to be issued to Directors.
Each Director is entitled to receive only that number of shares that is equal to
the amount of cash compensation that such Director otherwise would have received
for attending Board and Board committee meetings. A Board meeting is valued at
$3,000 per meeting and a Board committee meeting is valued at $1,000 per
meeting. Pursuant to the Directors' Compensation Plan, for the purposes of
determining the number of shares to be issued to each Director, the Common Stock
is to be valued at the higher of the book value of the Company's common stock or
the average fair market value of the common stock for the year in which the
Board meetings occurred.





Dr. Vijay
Mallya, Chairman of the Board, receives fixed remuneration described in "Item
11-Executive Compensation – Directors' Compensation for the Year
2009".




Plan
      Category
              Number
      of securities to be
                issued
      upon exercise of
                outstanding
      options,
                warrants
      and rights
              Weighted-average
      exercise
                price
      of outstanding
                options,
      warrants and
                rights
              Number
      of securities
                remaining
      available for
                future
      issuance under
                equity
      compensation plans
                (excluding
      securities
                reflected
      in column (a))(a)
              (b)
              (c)Equity
      compensation plans approved by security holders
              --
              --
              140,612Equity
      compensation plans not approved by security holders
              --
              --
              --Total
              --
              --
              140,6121





1– Representsshares
of the Company's Common Stock available for grant pursuant to the Company's
Directors' Compensation Plan.





RECENT
SALES OF UNREGISTERED SECURITIES




We have
issued thirteen (13) promissory notes pursuant to a Master Line of Credit
Agreement between the Company and United Breweries of America, Inc. ("UBA") and
one note on substantially similar terms, but unrelated to the Master Line of
Credit Agreement, to UBA between September 1999, and March 2005 (the "UBA
Notes"). The outstanding principal amount of the UBA 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. As of
December 31, 2009, the outstanding principal and interest on the UBA Notes
totaled approximately $3,133,800, and the UBA Notes were convertible into
approximately 2,089,200 shares of our Common Stock. If the UBA Notes were deemed
to be securities, our Management believes that the issuance of all such notes is
exempt from registration pursuant to Section 4(2) of the Securities Act of 1983,
as amended (the "Act"), because UBA, the sole offeree and recipient thereof, has
significant business experience, financial sophistication, and knowledge of and
familiarity with our business. Management believes that if these notes were
eventually to be converted into shares of our Common Stock, the issuance of such
shares would also be exempt from registration pursuant to Section 4(2) of the
Act.





17


On
November 16, 2009, the Board approved the issuance of an aggregate of 435,576
shares of the Company's unregistered Common Stock to certain of the Company's
independent non-employee directors in recognition of services provided to the
Board by such directors and as compensation pursuant to the terms of the
Company's Directors' Compensation Plan, as amended, for their attendance at
Board and Committee meetings held during 2008 and 2007.  The Company
believes that the issuance of the aforementioned shares is exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended,
because of the limited numbers of recipients, the significant business
experience and financial sophistication of each of the recipients and the
intimate knowledge and familiarity with the Company's business possessed by such
directors.




ISSUER
PURCHASE OF EQUITY SECURITIES




None.




ITEM
6. SELECTED FINANCIAL
DATA.




Not
required for smaller reporting companies.




ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.




The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and related notes, and the
other financial information included in 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 as a result of many factors, including but
not limited to those set forth under “Risk Factors” and elsewhere in this Form
10-K.





OVERVIEW




Since our
formation in 1983, we have been brewing and selling our craft beers in the
United States. Effective upon our merger with UBI 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 year 2009 resulted in loss from operations of $477,900.
After providing for interest, other income and taxes, the net loss was
$1,019,700.




In the
Domestic Territory, our brewing operations sales (based on volume) were 72,100
bbl. during fiscal year 2009, as compared to 73,400 bbl. in fiscal years 2008.
Sales from the Ukiah facility totaled 44,200 bbl., and 46,600 bbl., for the
fiscal years 2009 and 2008 respectively. Sales from the Saratoga Springs
facility totaled 27,900 bbl. and 26,800 bbl. for the fiscal years 2009 and 2008
respectively. We bottled 5,100 bbl. and 5,300 bbl. in fiscal years 2009 and 2008
respectively, of cider products on a contract basis.




We sold
69,400 bbl. of beer in the Foreign Territory during fiscal year 2009 as compared
to 67,500 bbl. during fiscal year 2008. Sales in the United Kingdom accounted
for 61,700 bbl. and 59,800 bbl. during 2009 and 2008, respectively. Sales in
continental Europe and Canada totaled 7,700 bbl. for each of fiscal years 2009
and 2008. Although the sales of certain brands have fluctuated over the past few
years, overall sales levels have remained consistent.




18


RESULTS
OF OPERATIONS
  YEAR
ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31,
2008




The
following table sets forth, for the periods indicated, a comparison of certain
items from our Consolidated Statements of Operations:





2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  Increase/
                                                    (Decrease)
                                                  
                                                  
                                                  %
      ChangeGross
      sales
                                                  
                                                  $
                                                  35,866,700
                                                  
                                                  
                                                  $
                                                  37,640,500
                                                  
                                                  
                                                  $
                                                  (1,773,800
                                                  )
                                                  
                                                  
                                                  -4.7
                                                  %Excise
      taxes
                                                  
                                                  
                                                  865,200
                                                  
                                                  
                                                  
                                                  905,500
                                                  
                                                  
                                                  
                                                  (40,300
                                                  )
                                                  
                                                  
                                                  -4.5
                                                  %Net
      sales
                                                  
                                                  
                                                  35,001,500
                                                  
                                                  
                                                  
                                                  36,735,000
                                                  
                                                  
                                                  
                                                  (1,733,500
                                                  )
                                                  
                                                  
                                                  -4.7
                                                  %Cost
      of goods sold
                                                  
                                                  
                                                  26,565,900
                                                  
                                                  
                                                  
                                                  27,323,100
                                                  
                                                  
                                                  
                                                  (757,200
                                                  )
                                                  
                                                  
                                                  -2.8
                                                  %Gross
      profit
                                                  
                                                  
                                                  8,435,600
                                                  
                                                  
                                                  
                                                  9,411,900
                                                  
                                                  
                                                  
                                                  (976,300
                                                  )
                                                  
                                                  
                                                  -10.4
                                                  %Operating
      expenses
                                                  
                                                  
                                                  8,913,500
                                                  
                                                  
                                                  
                                                  9,011,300
                                                  
                                                  
                                                  
                                                  (97,800
                                                  )
                                                  
                                                  
                                                  -1.1
                                                  %Income
      (loss) from operations
                                                  
                                                  
                                                  (477,900
                                                  )
                                                  
                                                  
                                                  400,600
                                                  
                                                  
                                                  
                                                  (878,500
                                                  )
                                                  
                                                  
                                                  -219.3
                                                  %Interest
      expense
                                                  
                                                  
                                                  (572,700
                                                  )
                                                  
                                                  
                                                  (781,500
                                                  )
                                                  
                                                  
                                                  (208,800
                                                  )
                                                  
                                                  
                                                  -26.7
                                                  %Other
      income (expense)
                                                  
                                                  
                                                  37,500
                                                  
                                                  
                                                  
                                                  90,900
                                                  
                                                  
                                                  
                                                  (53,400
                                                  )
                                                  
                                                  
                                                  -58.7
                                                  %(Loss)
      before income taxes
                                                  
                                                  
                                                  (1,013,100
                                                  )
                                                  
                                                  
                                                  (290,000
                                                  )
                                                  
                                                  
                                                  723,100
                                                  
                                                  
                                                  
                                                  249.3
                                                  %Provision  for  income
      taxes
                                                  
                                                  
                                                  6,600
                                                  
                                                  
                                                  
                                                  4,500
                                                  
                                                  
                                                  
                                                  2,100
                                                  
                                                  
                                                  
                                                  46.7
                                                  %Net  (loss)
                                                  
                                                  $
                                                  (1,019,700
                                                  )
                                                  
                                                  $
                                                  (294,500
                                                  )
                                                  
                                                  $
                                                  725,200
                                                  
                                                  
                                                  
                                                  246.2
                                                  %





NET
SALES




As used
herein, the term "net sales" refers to gross sales less excise taxes. Overall
net sales for fiscal year 2009 were $35,001,500, a decrease of $1,733,500 as
compared to $36,735,000 in fiscal year 2008 mainly due to lower sales volume in
the Domestic Territory and exchange rate fluctuations.




DOMESTIC
OPERATIONS: Net sales in the Domestic Territory totaled $14,253,000 in fiscal
year 2009, compared to $14,784,000 for fiscal year 2008, representing a decrease
of $531,000 or 4%. Sales of beer for fiscal year 2009 decreased by 1,300
barrels, to 72,100 barrels a decrease of 2% as compared to 73,400 barrels in
fiscal year 2008. The decrease in sales was due to a reduction in the volume of
our brands by 2,800 bbl. which was offset by an increase in sales of contract
brands by 1,500 bbl. During fiscal year 2009, we bottled approximately 5,100
bbl. of cider products on a contract basis compared to 5,300 bbl. in fiscal year
2008. We anticipate continuing to solicit opportunities to enter into
non-binding contract brewing arrangements to address the low production capacity
utilization rates in our Ukiah and Releta brewing facilities and anticipate that
fluctuations in the availability of such contract brewing arrangements will
continue to impact our net sales in the Domestic Territory.




EUROPEAN
TERRITORY: Net sales in the Foreign Territory totaled $20,748,500 (£13,248,500)
in fiscal year 2009, compared to $21,951,000 (£11,836,600) during fiscal year
2008.  Net sales for the year 2009  presented in U.S.
dollars resulted in a decrease of $1,202,500 or 5% due to devaluation of Pound
Sterling as compared to fiscal year 2008, and an increase of 12% compared to
fiscal year 2008 when presented in pounds sterling. We sold 69,400 bbl. of beer
in the Foreign Territory during fiscal year 2009 as compared to 67,500 bbl.
during fiscal years 2008, an increase of 3%. We also increase our sales prices
by 5% during the year 2009.





COST
OF GOODS SOLD:




Overall
cost of goods sold during fiscal year 2009 was $26,565,900, as compared to
$27,323,100 during fiscal year 2008, a decrease of $757,200, or 3%. As a
percentage of net sales, costs of goods sold was 76% in fiscal year 2009
compared to 74% in the year 2008. Such amounts are calculated in U.S. dollars,
and do not take into account the effect of exchange rate fluctuations on the
actual costs of goods sold in the Foreign Territory.




19


Our
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. In 2009
our volume level decreased and the cost of materials increased significantly. 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 continued contract
brewing contracts.




DOMESTIC
OPERATIONS: Cost of goods sold as a percentage of net sales in the Domestic
Territory  remained at 77% during fiscal years 2009 and 2008. Any
significant increase in cost of materials and availability constraints could
significantly impact our future operations. When the market allows us to pass on
price increases to the customer, we do so, but in uncertain markets, we absorb a
portion of the costs.




FOREIGN TERRITORY: As a percentage of
net sales, cost of goods sold in the United Kingdom during fiscal year 2009 was
75%, as compared to 73% during fiscal year 2008 (in each case as calculated in
United States dollars, after taking into account the effects of exchange rate
fluctuations), mainly due to product mix and the additional expense required to
produce beer in bottles compared to beer in kegs.





GROSS
PROFIT




As a
result of increased costs of goods sold and decreased sales, gross profit for
fiscal year 2009 (expressed in U.S. dollars) was $8,435,600, a decrease of
$976,300, or 10%, as compared to gross profit of $9,411,900 in fiscal year 2008.
As a percentage of net sales, our overall gross profit during fiscal year 2009
was 24% compared to 26% in 2008.




OPERATING
EXPENSES




Operating
expenses for fiscal year 2009 totaled $8,913,500, a decrease of $97,800, or 1%,
as compared to $9,011,300 for fiscal year 2008. Operating expenses consist of
marketing and distribution expenses, and general and administrative expenses. As
a percentage of net sales, such expenses remained at 25% in fiscal years 2009
and 2008.




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 2009, such
expenses equaled $4,642,800, a decrease of $474,900 or 9%, as compared to
$5,117,700 in fiscal year 2008. As a percentage of net sales, our marketing and
distribution expenses decreased to 13% in fiscal year 2009, as compared to 14%
in fiscal year 2008.




DOMESTIC
OPERATIONS: Marketing and distribution expenses for the Domestic Territory in
fiscal year 2009 equaled $1,257,600, a decrease of $62,100, or 5%, as compared
to $1,319,700 in marketing and distribution expenses incurred during fiscal year
2008 mainly due to lower sales incentive and commission costs payable to
independent sales agents as the sales volume of our brands dropped during the
year 2009. Marketing and distribution expenses equaled 9% of Domestic Territory
net sales during fiscal years 2009 and 2008.




FOREIGN
TERRITORY: Marketing and distribution expenses in the Foreign Territory during
fiscal year 2009 equaled $3,385,200, a decrease of $412,800, or 11%, as compared
to $3,798,000 during fiscal year 2008 mainly due to decrease in freight expenses
and exchange rate fluctuation. As a percentage of net sales in the United
Kingdom, such expenses were 16% during 2009 compared to 17% in the year 2008 (in
each case as calculated in United States dollars, after taking into account the
effects of exchange rate calculations).




GENERAL
AND ADMINISTRATIVE EXPENSES: Our general and administrative expenses totaled
$4,270,700 for fiscal year 2009, representing an increase of 377,100, or 10%, as
compared to $3,893,600 for fiscal year 2008. General and administrative expenses
equaled 12% of net sales for fiscal year 2009 compared to 11% of net sales
during fiscal year 2008.




20


DOMESTIC
OPERATIONS. General and administrative expenses for our Domestic Territory
equaled $1,929,400 for fiscal year 2009, representing an increase of $81,000, or
4%, as compared to $1,848,400 for fiscal year 2008. The increase was primarily
due to increased legal and professional expenses with respect to various matters
and increase in depreciation associated with accounting software and associated
computer hardware.




FOREIGN
TERRITORY. General and administrative expenses for our Foreign Territory equaled
$2,341,300 in fiscal year 2009, representing an increase of $296,100, or 14%, as
compared to $2,045,200 for fiscal year 2008. The increase was mainly due to
increase in the provision against bad debts due to a more conservative credit
control.




OTHER
EXPENSES




Other
expenses including interest expenses totaled $535,200 in fiscal year 2009,
representing a decrease of $155,400, or 23%, as compared to $690,600 in fiscal
year 2008. Interest expense was $572,700 in 2009 as compared to $781,500 in
2008, a reduction of $208,800 or 27% of the interest expense for
2008.




INCOME
TAXES




We
incurred an income tax expense of $6,600 for fiscal year 2009, as compared to
expense of $4,500 for fiscal year 2008 related to United States operations. We
have also incurred losses in our United Kingdom operations. At December 31,
2009, based upon the available evidence and due to the Company’s taxable loss
for the current year and historically, we believe that it is more likely than
not that our deferred tax assets (primarily from net operating loss
carryforwards and investment tax credits) will not be realized. As a result, the
Company recorded a valuation allowance of $1.0 million recorded as a
reduction of the tax benefit for each of the years ended December 31, 2009
and 2008.




We also
have $68,433 of California Manufacturers' Investment Tax Credit that can be
carried forward to reduce future taxes. These credits begin expiring in
2011.




NET
LOSS




Our net
loss for fiscal year 2009 prior to accounting for foreign currency translation
adjustments was $1,019,700, an increase of $725,200 as compared to a net loss of
$294,500 for fiscal year 2008. After taking into account a negative foreign
currency translation adjustment of $131,100 for fiscal year 2009 (compared to a
positive adjustment of $410,600 for fiscal year 2008), our comprehensive fiscal
year 2009 net loss was $1,150,800, as compared to a net income of $116,100 in
fiscal year 2008.




RETAIL
OPERATIONS




We
operate brew pubs at Hopland and Saratoga Springs. Although sales revenues at
the brew pubs are not significant ($245,400 in 2009 and $308,600 in 2008), we
view the pubs as a marketing opportunity for our products. The pubs serve our
brews on tap and also sell logo merchandise. We also sell various items of
apparel and memorabilia bearing the Company’s trademarks at the pubs, which
creates further awareness of our beers and reinforces our branding.




CASH
FLOWS




Historically,
we have funded our operations primarily with proceeds from issuances of
preferred stock, common stock, debt financing, lease financing, and cash flows
from operations.





Net cash
provided by operations was $1,484,800 and $564,400, for 2009 and 2008, and
respectively. During the year ended December 31, 2009, net cash provided by
operating activities was primarily attributable to non cash expenses of
$1,739,600, net increase in payable and accrued liabilities of $5,180,600 and
net increase of $4,406,000 in receivables and prepaid expenses. This was offset
in part by net loss of $1,019,700, and profit on sale of asset of $9,900.
Non-cash expenses include depreciation, stock-based compensation and interest
accrued on related party notes.





21


Net cash
used in investing activities was $422,200 and $764,700, respectively, for 2009
and, 2008. Such funds were used primarily for purchases of
equipment.




Net cash
(used in) provided by financing activities was $(1,197,000) and $139,100 for
2009 and 2008. Net cash used by financing activities comprised of repayment of
debts and reduction in usage of working capital revolving line of credit. Net
cash provided by financing activities included additional borrowing on long term
debt and increase in usage of working capital revolving line of credit, offset
by repayment of debts.





We
believe that an anticipated increase in 2010 sales and continued efforts to
manage costs will provide enough cash to fund our operations through early 2011.
However, there can be no assurance that we will be able to increase sales to
provide cash for operating activities. Our future working capital requirements
will depend on many factors, including our ability to refinance maturing debts,
the rates of our revenue growth, our introduction of new products and our
expansion of sales and marketing activities. To the extent our cash and cash
equivalents and cash flow from operating activities are 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 also may need to
raise additional funds in the event we determine in the future to effect one or
more acquisitions of businesses or products. If additional funding is required,
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.





LIQUIDITY
AND CAPITAL RESOURCES




We had
$140,900 and $273,700 of cash and cash equivalents at December 31, 2009 and
2008, respectively. At December 31, 2009, we had working capital deficit of
$3,463,500. Our long-term debt as a percentage of total capitalization
(long-term debt and common stockholders’ equity) was 75% at December 31,
2009 compared to 69% at December 31, 2008.





Low
production capacity utilization rates at our Ukiah and Saratoga Springs
facilities and losses from European operations continue to place demands on our
working capital. Beginning approximately in the second quarter of 1997, the time
at which the Ukiah brewery commenced operations, proceeds from operations have
not been able to provide sufficient working capital. As a result we have entered
into a substantial number of loans, lines of credit, other credit facilities,
and lease agreements over the last several years. In order to continue our
operations, we will have to make timely payments of our debt and lease
commitments as they become due. Any breach of a loan or lease covenant which
leads to default, or to an attempt by a creditor to exercise their rights
against our tangible or intangible assets, or our inability to refinance debts
when they become due could potentially make it difficult, at least in the short
term, for us to continue our operations. As it has done in certain instances in
the past, our majority shareholder has agreed to directly guaranty the
operations of UBSN for the upcoming calendar year. Without such guaranty, our
cash flow concerns would be more troubling.




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. We have executed an Extension of Term of
Notes under the Master Line of Credit Agreement (the "Extension Agreement") with
UBA. The Extension Agreement confirms UBA's and our extension of the terms of
the UBA Notes for a period ending on June 30, 2010. On December 28, 2001, we
entered into a Confirmation of Waiver with UBA which confirms that as of August
13, 2001, UBA waived their rights with regard to all conversion rate protection
as set forth in the UBA Notes.




As of the
date of this filing, UBA has made thirteen (13) separate advances to us under
the Credit Agreement and one additional advance 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"). The
aggregate outstanding principal amount of the UBA Notes as of December 31, 2009
was $1,915,400, and the accrued but unpaid interest thereon was equal to
approximately $1,218,400, for a total amount due of $3,133,800.




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. As of December 31, 2009, the outstanding
principal and interest on the UBA Notes was convertible into 2,089,200 shares of
our Common Stock.




22


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 UBA Note, 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 Note may be
converted, at the option of UBA, into shares of our common stock. If UBA does
not elect to so convert any UBA Note upon maturity, it has the option to extend
the term of such note for any period of time mutually agreed upon by UBA and us.
During the extended term of any note, UBA has the right to require us to repay
the outstanding principal balance, along with the accrued and unpaid interest
thereon, to UBA within sixty (60) days.




These UBA
Notes are subordinated to credit facilities extended to us by Grand Pacific
Financing Corporation (“Grand Pacific”) and Marquette Business Credit Inc.
("MBCI") under subordination agreements executed by UBA. As per the terms of the
subordination agreements, UBA is precluded from demanding repayment of the notes
due unless the Grand Pacific and MBCI facilities are settled in full. Hence, we
do not expect to make payments on any of these UBA Notes within the next
year.




(For
additional information on the Credit Agreement see "Item 13. Certain
Relationships and Related Transactions, and Director Independence -Master Line
of Credit Agreement".)




GRAND
PACIFIC FINANCING CORPORATION LOAN : On July 3, 2006, MBC obtained a $3.0
million loan from Grand Pacific, secured by a first priority deed of trust on
the Ukiah land, fixtures attached to the land, and improvements. The loan is
payable in monthly installments calculated on 25 years amortization basis including interest at
the rate of 1.75% over the prime rate published by The Wall Street Journal,
maturing June 28, 2011 with a balloon payment. The amount of the balloon payment
will vary depending on the change in interest rates over the term of the loan.
Grand Pacific also collects an amount of approximately $10,554 on a monthly
basis towards property taxes payable on the Ukiah property and pays such taxes
when they become due.




MARQUETTE
BUSINESS CREDIT INC. FACILITY: On November 21, 2006, MBCI extended a total
facility of $4,925,000 for a period up to June 27, 2011 consisting of a
$2,750,000 revolving facility, a $1,525,000 term loan and a $650,000 capital
expenditure loan. The rate of interest on the term loan and capital expenditure
loan is the one-month LIBOR rate published in the Wall Street Journal plus a
margin of 5.25% and the rate of interest on the revolving facility is the
one-month LIBOR rate published in the Wall Street Journal plus a margin of
4.25%. The facility is subject to certain financial covenants including
prescribed minimum fixed charges coverage, prescribed minimum tangible net worth
and minimum earning before interest, depreciation and taxes. The facility is
secured by substantially all of our assets located in the United States
excluding real property and fixtures located at our property in Ukiah,
California.





On May 8,
2009, we received written notice (the "Notice") from Marquette that an event of
default had occurred and was continuing under the loan agreement.




Specifically,
the event of default was triggered by our failure to maintain a fixed charge
coverage ratio of at least 1.05 to 1.0 for the period of twelve consecutive
calendar months ending on March 31, 2009. The default continues as of the date
of this filing.




As of the
date of this filing, Marquette has elected to assess the default interest rates
under our loan agreement with them.  The default interest rates are as
follows:  (i) for the revolving loan, LIBOR plus 7.125% per annum and
(ii) for the capex loan, the term loan and any other obligations owed by us to
Marquette, LIBOR plus 8.125% per annum.  The default interest rates
have applied to our outstanding balances under the respective loans with
retroactive effect from and after April 1, 2009.




Pursuant
to the terms of the loan in case of an event of default, Marquette is also
entitled in its sole and absolute discretion to (i) terminate its commitment to
us to make loans under the relevant loan agreement, (ii) to declare all
outstanding amounts due under the loan agreement immediately due and payable
and/or (iii) exercise any or all other rights and remedies available to it under
the loan agreement or applicable law.  To date, Marquette has not
exercised such additional rights.  However, Marquette has not waived
its rights to pursue such remedies in the future.




23


Our
Management is in discussions with Marquette to waive the financial covenant
requirements.  However, to date, an agreement has not been reached
with Marquette.  Notwithstanding the failure to maintain the fixed
charge coverage ratio, to date, we have made every scheduled payment of
principal and interest under the loan agreement.





OTHER
LOANS AND CREDIT FACILITIES




ROYAL
BANK OF SCOTLAND FACILITY: Royal Bank of Scotland Commercial Services Limited
(“RBS”) provided UBSN with a £1,750,000 (US $2,829,200) maximum revolving line
of credit with an advance rate based on 80% of UBSN'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.




SHEPHERD
NEAME LOAN: Shepherd Neame has a contract with UBSN to brew Kingfisher Premium
Lager for our European Territory. As consideration for extending the brewing
contract, Shepherd Neame advanced a loan of £600,000 to UBSN, repayable in
annual installments of £60,000 per year, commencing in June 2003. The loan
carries a fixed interest rate of 5% per year. (For more information about this
loan see "Item 13. - Certain Relationships and Related Transactions, and
Director Independence — Loan Agreement".)




Sales to Shepherd Neame increased
significantly in 2009 from 2008 (GBP 4,227,500 versus GBP 2,627,500). Shepherd
Neame is a distrubutor of our products. Additionally, we needed more beer to be
brewed in 2009 by Shepherd Neame. This resulted in higher purchases from
Shepherd Neame in 2009 compared to 2008, (GBP 9,863,200 vs GBP 8,645,200). In
2009 we had a higher reserve for bad debts in the United Kingdom as result of
the economic conditions in the United Kingdom affecting some of our customers.
The increase in the bad debt expense attributable to the European opeations
resulted in increased expenses and related net loss in
2009.




WEIGHTED
AVERAGE INTEREST: The weighted average interest rates paid on our debts incurred
in connection with the Domestic Territory was 6.2% for fiscal year 2009 compared
to 7.2% for fiscal year 2008. For loans primarily associated with our Foreign
territory, the weighted average interest rates paid was 2.6% for fiscal years
2009 and 6.1% for fiscal year 2008.




KEG
MANAGEMENT ARRANGEMENT: We entered into a keg management agreement (the "Keg
Agreement") with MicroStar Keg Management LLC ("MicroStar") for a five year term
effective September 1, 2009. Under this arrangement, MicroStar provides us with
half-barrel kegs for which we pay a filling and use fee. Distributors return the
kegs to MicroStar instead of to us. MicroStar then supplies us with additional
kegs. In case of a change of control of the Company during the term of the Keg
Agreement, MicroStar shall have an option to terminate the Keg Agreement by
providing the Company with written notice within 45 days following the effective
date of the change of control.  If the Keg Agreement is terminated for
any reason prior to the end of the term of the Keg Agreement, MicroStar shall
have an option to require the Company to purchase four (4) times the average
quantity of MicroStar kegs delivered to the Company during the six month period
preceding the effective date of the termination of the Keg
Agreement.  We anticipate financing the purchase of such kegs through
debt or lease financing, if available. However, there can be no assurance that
we will be able to finance the purchase of such kegs. Failure to purchase the
necessary kegs from MicroStar upon the termination of the Keg Agreement is
likely to have a material adverse effect on both our business (if we are unable
to find a comparable supplier) as well as on our working capital (if we are
required to purchase the kegs upon early termination and are unable to obtain
adequate financing). Under the terms of the Keg Agreement, the Company retains
the risk of loss of the kegs covered by the Keg Agreement.  In
addition, the Keg Agreement contains indemnification provisions pursuant to
which the Company will indemnify and hold harmless MicroStar against
liabilities, damages, judgments, awards, fines, costs and expenses (including
attorneys' fees).




CURRENT
RATIO: Our ratio of current assets to current liabilities on December 31, 2009
was 0.8 to 1.0 and our ratio of total assets to total liabilities was 1.1 to
1.0. On December 31, 2008 our ratio of current assets to current liabilities was
0.79 to 1.0 and our ratio of total assets to total liabilities was 1.18 to
1.0.




RESTRICTED
NET ASSETS. Our wholly-owned subsidiary, UBI, had retained losses of
approximately £884,300 as of December 31, 2009. Under UBSN's line of credit
agreement with Royal Bank of Scotland, distributions and other payments from our
subsidiaries to us are not permitted if the retained earnings drop below
approximately £1,000,000.




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
UBSN and Shepherd Neame; a Market Development Agreement, a Distribution
Agreement, and a Brewing License Agreement between MBC and UBSN; a Distribution
Agreement between UBI and UBSN; a Trademark Licensing Agreement between MBC and
Kingfisher of America, Inc.; and a License Agreement between UBI and UB Limited.
(For more information on these agreements please see "Item 13. -- Certain
Relationships and Related Transactions, and Director
Independence".)




24


OFF-BALANCE SHEET TRANSACTIONS.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,
2009.





Contractual
      Obligations
              
              Payments
      due by periodTotal
              
              Less
      than 1 year
              
              1
      -3 years
              
              3
      -5 years
              
              More
      than 5 yearsSecured
      line of credit
              
              $
              3,126,200
              
              $
              3,126,200
              
              
              -
              
              
              -
              
              
              -Long
      Term Debt Obligations
              
              
              3,829,300
              
              
              319,800
              
              $
              3,509,500
              
              
              -
              
              
              -Capital
      Lease Obligations
              
              
              354,400
              
              
              165,600
              
              
              188,800
              
              
              -
              
              
              -Operating
      Lease Obligations
              
              
              1,033,200
              
              
              256,300
              
              
              442,300
              
              
              326,800
              
              
              7,800Purchase
      Obligations
              
              
              3,144,300
              
              
              1,594,000
              
              
              949,400
              
              
              283,800
              
              
              317,100Other
      Long Term Liabilities
              
              
              3,424,800
              
              
              97,000
              
              
              3,327,800
              
              
              -
              
              
              -Total
              
              $
              14,912,200
              
              $
              5,558,900
              
              $
              8,417,800
              
              $
              610,600
              
              $
              324,900







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 financial statements:





Revenue Recognition. We
recognize revenue from two types of customers: end users and distributors.
Revenue is recognized in accordance with Staff Accounting Bulletin 104, “Revenue
Recognition in Financial Statements” when all of the following criteria are met:
persuasive evidence of an arrangement exists, shipment of the product has
occurred and title of products transferred at the point of shipment, payment of
the product is reasonably assured and no substantive obligations to the customer
remain. Revenue is presented net of discounts, allowances, and returns.
Customers are not generally entitled to any rights of product return. Payment
terms are either open trade credit or cash. We have distributors in and the
United States, the United Kingdom, Europe and Canada and we record as revenue
the wholesale price we charge our distributors. Although title and risk of loss
on all shipments may not transfer until delivery of our products to the
distributor, we recognize revenue upon shipment rather than when title passes
because the time between shipment and delivery is short and product damage
claims and returns are immaterial. We recognize revenue on retail sales at the
time of sale. We recognize revenue from events at the time of the
event.




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.





25


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.




Long-Lived
Assets.  We evaluate potential impairment of long-lived assets
in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 establishes
procedures for review of recoverability and measurement of impairment, if
necessary, of long-lived assets, goodwill and certain identifiable intangibles.
When facts and circumstances indicate that the carrying values of long-lived
assets may be impaired, an evaluation of recoverability is performed by
comparing the carrying value of the assets to projected future undiscounted cash
flows in addition to other quantitative and qualitative analyses. Upon
indication that the carrying value of such assets may not be recoverable, we
will recognize an impairment loss by a charge against current
operations.




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 in 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.





RECENT
ACCOUNTING PRONOUNCEMENTS




Accounting Standards
Codification: In June 2009, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standard (“SFAS”)
No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles—a replacement of FASB Statement No. 162
(“SFAS 168”). The guidance establishes the FASB Accounting Standards
Codification (“ASC”) as the source of authoritative accounting principles
recognized by the FASB. The guidance is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company adopted this guidance for its fiscal quarter ended September 30, 2009.
There was no change to the Company’s consolidated financial statements due to
the implementation of this guidance.




Fair Value Measurements: In
August 2009, the FASB issued Accounting Standards Update (“ASU”)
No. 2009-05, Measuring
Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value of such liability using one or more of the techniques
prescribed by the update. ASU 2009-05 is effective for the first reporting
period beginning after issuance. The Company adopted ASU 2009-05 for its fiscal
quarter ended September 30, 2009. There was no change to its consolidated
financial statements due to the implementation of this guidance.




In
January, 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements(“ASU 2010-06”). Reporting entities will have to provide information
about movements of assets among Levels 1 and 2; and a reconciliation of
purchases, sales, issuance, and settlements of activity valued with a Level 3
method, of the three-tier fair value hierarchy established by SFAS No. 157,
Fair Value Measurements (ASC 820). The ASU 2010-06 also clarifies the existing
guidance to require fair value measurement disclosures for each class of assets
and liabilities. ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009 for Level 1 and 2 disclosure
requirements and after December 15, 2010 for Level 3 disclosure
requirements. The Company will adopt the guidance in its fiscal quarter ending
March 31, 2010. The Company does not anticipate this adoption will have a
material impact on its consolidated financial statements.




Transfers of Financial
Assets: In December 2009, the FASB issued ASU No. 2009-16,
Transfers and Servicing (Topic
860)—Accounting for Transfers of Financial Assets (“ASU 2009-16”). ASU
2009-16 codifies SFAS No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140
(“SFAS 166”), issued in June 2009. The guidance eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The guidance is effective as of the beginning of
the first annual reporting period that begins after November 15, 2009.
Earlier adoption is prohibited. The Company will adopt the guidance in the first
quarter of fiscal 2010. The Company does not anticipate this adoption will have
a material impact on its consolidated financial statements.




26


Amendments to Accounting Standards
Codification: In February 2010, the FASB issued ASU No. 2010-08,
Technical Corrections to
Various Topics (“ASU 2010-08”). ASU 2010-08 makes various non-substantive
amendments to the FASB Codification that does not fundamentally change existing
GAAP; however, certain amendments could alter the application of GAAP relating
to embedded derivatives and the income tax aspects of reorganization. The
amended guidance is effective beginning in the first interim or annual period
beginning after the release of the ASU, except for certain amendments. The
Company will adopt the guidance in the second quarter of 2010. The Company does
not anticipate this adoption will have a material impact on its consolidated
financial statements.




Subsequent Events: On
February 24, 2010, the FASB issued ASU No. 2010-09, Subsequent Events
(Topic 855)—Amendments to Certain Recognition and Disclosure
Requirements (“ASU 2010-09”). ASU 2010-09 removes the requirement
that Securities and Exchange Commission (“SEC”) filers disclose the date through
which subsequent events have been evaluated. This amendment alleviates potential
conflicts between Subtopic 855-10 and the SEC’s requirements. The guidance
became effective with the issuance of ASU 2010-09 and the Company adopted this
guidance upon its issuance.





ITEM
7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
required for smaller reporting companies.




ITEM
8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.




The
information required by this item is set forth at Pages F-1 through F-29 to this
Annual Report.




ITEM
9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.




None.




ITEM 9A




DISCLOSURE
CONTROLS AND PROCEDURES


EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





Our
management team, under the supervision and with the participation of our
principal executive officer and our principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as such term is defined under Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last
day of the fiscal period covered by this report, December 31, 2009. 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 principal executive officer and our
principal financial officer concluded that, our disclosure controls and
procedures were effective as of December 31,
2009.


27


CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  There
were no changes in our internal control over financial reporting that occurred
in the last fiscal quarter ended December 31, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





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, 2009. In making this assessment,
management used the criteria set forth in Internal Control — Integrated
Frameworkby 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, 2009, our internal control over financial reporting was
effective.





Our
independent registered public accounting firm has not issued an audit report on
the effectiveness of our internal control over financial reporting. Management's
report was not subject to attestation by the Company's registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management's report in this
annual report.




ITEM
9B. OTHER
INFORMATION.




None.




28


PART
III
  ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE
COMPANY





Name
              
              Age
              
              Position(s)
              
              Director
      Since**Scott
      R. Heldfond *+
              
              65
              
              Director
              
              2005H.
      Michael Laybourn+
              
              71
              
              Director
              
              1993Vijay
      Mallya, Ph.D.
              
              54
              
              Director
      and Chairman of the Board
              
              1997Jerome
      G. Merchant*
              
              48
              
              Director
              
              1997Mahadevan
      Narayanan
              
              52
              
              Chief
      Financial Officer and Secretary
              
              N/ASury
      Rao Palamand, Ph.D.
              
              79
              
              Director
              
              1998Kent
      D. Price*+
              
              66
              
              Director
              
              1998Yashpal
      Singh
              
              64
              
              Director,
      President and Chief Executive Officer
              
              1997




**
            All
      directors are elected by the Shareholders at the Annual Meeting to serve
      until the following Annual Meeting. Currently, there are no arrangements
      or understandings between any of the directors and any other person
      pursuant to which any director was or is to be selected as a director. We
      have entered into an employment agreement with our Chief Executive Officer
      pursuant to which his term of employment has been extended until January
      1, 2011. Our Chief Financial Officer does not have any set date for the
      expiration of his terms of office.




*
            Member
      of the Audit/Finance Committee.




+
            Member
      of the Compensation Committee.




Mr. Scott
Heldfond joined the Board in January 2005. He is a Senior Executive of
Aon Risk Services. Prior to the purchase of NASDAQ Insurance Group, LLC, a
national insurance brokerage and consulting firm, by Aon Risk Services in
November 2009, Mr. Helfond was a Director of NASDAQ Insurance Group, LLC. 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 from 1995 to 1999, Chairman of Hales Capital LLC,
an investment banking firm from 1994 to 1997 and President of AON Real Estate
& Investments. Mr. Heldfond also served as a Director of HomeGain, Inc
(recently sold to Classified Ventures), a private venture backed company and
UBICS, Inc., a NASDAQ traded firm that provides information technology staffing
and solutions for domestic and international businesses. Mr. Heldfond has also
served as a Director of Galoob Toys, which was the third largest toy manufacture
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 Commissioner and the President 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,
state, and national charitable and community service organizations. Mr. Heldfond
is the Honorary Consul General to the U.S. for the Republic of Rwanda. In
particular, Mr. Helfond's expertise in financial and insurance matters led to
his selection as a Board member.




H.
Michael Laybourn, co-founder of the Company, served as the Company's President
from its inception in 1982 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. In particular, Mr. Laybourn's
expertise in craft brewing led to his selection as a director.




Dr. Vijay
Mallya, Ph.D., became Chairman of the Board in October 1997 and was its Chief
Executive Officer until January 2005. Dr. Mallya is Chairman of UBICS, Inc.,
United Breweries Limited, United Spirits Limited, Whyte & Makay Limited,
United Breweries (Holdings) Limited, Kingfisher Airlines Limited, UB Engineering
Limited, Mangalore Chemicals and Fertilizers Ltd., Aventis Pharma Limited, 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. United Breweries
(Holdings) Limited owns, through its subsidiaries, United Breweries of America,
Inc. and Inversiones Mirabel, S.A., 71.6% of the Company. Dr. Mallya is
also a keen sportsman and an ardent aviator and yachtsman.  He
participates and supports several sporting activities worldwide, including the
Force India F1 Formula One Motor Racing Team, the United East Bengal Football
Team and the United Mohun Bagan Football Team.  He also sits on the
boards and committees of several foreign companies and organizations including
companies comprising the UB Group, The Institute of Economic Studies (India),
and 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 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. Mr. Mallya's
knowledge and expertise in the global alcoholic beverage industry was
significant in his selection as a member of the Company's Board of
Directors.




29


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 McGladrey
Capital Markets, LLC a leading mid market investment bank. He has over 20 years
experience in investment banking and capital raising transactions. Previously,
he held executive positions at Citigroup and MetLife Investors. Mr. Merchant has
advised the investment division and clients of Citibank, Smith Barney, Bank of
America, Wells Fargo and U.S. Bank 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, at Davis. Mr.
Merchant's expertise in fundraising and financial markets contributed to his
choice as a member of the Company's Board.




Mahadevan
Narayanan joined the company in early 2001 as Secretary, Corporate Controller
and Chief Financial Officer. Before joining the Company, he served the United
Breweries Group in India for 17 years as part of the management team in various
financial and accounting capacities.  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 the Company 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 involved in the development of
microbreweries and brewpubs in addition to real estate activities 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 is WHO in America and in the WHO is WHO in the
Midwest.




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, UCLA and Harvard Business
School. Mr. Price is a member of the board of directors and the Investment
Committee of the University of Montana and a member of its Investment Committee.
Mr. Price has extensive operational experience, including his role as CEO of The
Chloride Group, a global battery company, CEO 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, Singapore and
the United States. He is presently serving as a director of UBICS, Inc. and has
served on boards in the United Kingdom, India, South Africa, Hong Kong, Taiwan,
China and the United States. Mr. Price served as a Captain in the United States
Air Force. In particular, Mr. Price's financial expertise was important in his
selection as a Board member.




30


Yashpal
Singh became a director of the Company 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 the Company's
major shareholders. In that capacity, he was responsible for UBA's United States
brewing operations. Between 1992 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
projects, and technical and operational evaluations of potential acquisition
opportunities worldwide. Mr. Singh has over 45 years of experience in the
brewing industry. Mr. Singh holds a Bachelors 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's technical expertise in brewing and his
long standing management experience in the brewing industry led to his selection
as a member of our Board of Directors.




FAMILY
RELATIONSHIPS




There are
no family relationships between 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 2009, 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




Our Board
of Directors believes that at least one member of our Audit Committee - Mr. Kent
D. Price - 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, Chief
Financial Officer, and principal accounting officer. The Code of Ethics is
posted on our website at www.mendobrew.com. We intends 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, N. Mahadevan at our principal executive offices 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 our board of directors.




31


ITEM
11. EXECUTIVE
COMPENSATION




SUMMARY
COMPENSATION TABLE





The
following table sets forth the annual compensation of the principal executive
officer and the only additional employee (the chief financial officer) whose
total compensation exceeded $100,000 during the fiscal year ended December 31,
2009.




None of
these executive officers were issued any equity shares or stock options as
compensation to date.





Name
      and Principal Position
                        
                        
                        Year
                        
                        
                        Salary
      ($)
                        
                        
                        Bonus
                          ($)
                        
                        
                        Stock
      Awards
                          ($)
                        
                        
                        Option
      Awards
                          ($)
                        
                        
                        Non
      Equity Incentive Plan Compensation ($)
                        
                        
                        Nonqualified
      Deferred Compensation Earnings ($)
                        
                        
                        All
      Other Compensation ($)*
                        
                        
                        Total
                          ($)(a)
                        
                        
                        (b)
                        
                        
                        (c)
                        
                        
                        (d)
                        
                        
                        (e)
                        
                        
                        (f)
                        
                        
                        (g)
                        
                        
                        (h)
                        
                        
                        (i)
                        
                        
                        (j)Yashpal
      Singh
                          President
      and Chief
                          Executive Officer
                        
                        
                        2009
                        
                        
                        235,000
                        
                        
                        23,600
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        21,986
                        
                        
                        273,8992008
                        
                        
                        235,000
                        
                        
                        19,000
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        19,899
                        
                        
                        273,899Mahadevan
      Narayanan
                          Chief Financial
                          Officer and
                          Corporate Secretary
                        
                        
                        2009
                        
                        
                        140,000
                        
                        
                        14,100
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        23,825
                        
                        
                        176,5742008
                        
                        
                        140,000
                        
                        
                        11,500
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        25,074
                        
                        
                        176,574




*
            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 of Directors (the "Committee") determines
and administers the compensation for our executive officers. The Committee
reviews and determines all components of the executive officers' compensation,
including making individual compensation decisions and reviewing and revising
compensation guidelines as appropriate. The 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. We do not
currently have an employment agreement in place with our Chief Financial
Officer, but may enter into an employment agreement with such executive officer
in the future. 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 prior to the expiration of a
twelve-month notice period, he is entitled to be paid an amount equal to his
remaining unpaid compensation for the remainder of the period. We do not have
any payment arrangements that would be triggered by a "change in control"
of  the Company. We also do not maintain any retirement plan programs
or provide the executive officers with any benefit following their retirement or
termination from the Company.




Total
compensation for the Chief Executive Officer consists of base salary, annual
cash bonus payments, health benefit for the executive officer and their
immediate dependent family members, key person life insurance, use of company
vehicle and vacation reimbursement.




32


Elements
of Compensation





The
Company based its selection of elements of compensation so as to provide
incentives for its executive officers to relocate to the United States from
India. In so doing, the Company reviewed the compensation packages of its
executive officers at their prior positions in India, so that comparable
packages could be provided.




Base
Salary




The
Committee establishes executive officers' base salaries on an annual basis.
Historically approximately 25% of the cash compensation paid to the Chief
Executive Officer and Chief Financial Officer, respectively, was paid in the
form of a bonus rather than as salary due to the lack of sufficient available
working capital during certain periods. Beginning January 1, 2008 the base
salary was raised and the bonus potential was reduced to 10%.  Given
our stock performance and financial situation, there is currently no salary
component directly tied to our stock price nor to our financial
performance.




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 the Company's past working capital constraints, the 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.




Perquisites
and Personal Benefit




In
addition to salary and annual bonus, the total compensation of our Chief
Executive Officer and the 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.




Retirement
Plans




On August
27, 2009, we entered into a certain Separation and Severance Agreement (the
"Agreement") with Mr.Yashpal Singh, our President & Chief Executive
Officer.





Pursuant
to the terms of the Agreement, upon Mr. Singh’s (i) termination of employment
for Good Reason (as defined in the 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 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 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 shall 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.





33


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 the Company for Cause.





We do not currently maintain any
retirement plan nor provide any post-retirement benefits to any employee or
executive officer other than to Mr. Singh.








DIRECTORS'
COMPENSATION FOR THE YEAR 2009





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 $140,300 in United
States dollars at average exchange rate for the year 2009) by UBI for promoting
our products in the Foreign Territory outside the United Kingdom.




Directors
who are not in receipt of fixed remuneration from the Company receive fees for
their service as a director consisting of stock grants valued at $3,000 per
Board meeting and $1,000 per committee meeting attended by such director. The
following table provides details of directors' compensation for the year
2009.





Name
              
              Fees
      Earned or Paid in Cash ($)
              
              Stock*
                Awards
                ($)
              
              Option
      Awards
                ($)
              
              Non
      Equity
                Incentive
      Plan Compensation ($)
              
              Nonqualified
                Deferred
                Compensation
                Earnings
      ($)
              
              All
      Other
                Compensation
                ($)
              
              Total
                ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)Dr.Vijay
      Mallya
              
              260,300
              
              
              
              
              
              
              
              
              
              
              
              260,300Kent
      Price
              
              
              -
              
              
              14,000
              **
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              14,000Sury
      Rao Palamand
              
              
              -
              
              
              9,000
              +
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,000Jerome
      Merchant
              
              
              4,000
              
              
              9,000
              #
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,000Scott
      Heldfond
              
              
              -
              
              
              18,000
              ##
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              18,000Michael
      Laybourne
              
              
              -
              
              
              7,000
              ^
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,000




*
            Because
      these stock grants were earned during fiscal year 2009, but will be
      granted during 2010, the aggregate fair value on the grant dates is
      unknown. The values listed in column (c) will be used to calculate the
      number of shares issued to each director based on the higher of book value
      or the average fair market value for fiscal 2009; provided, however, that
      in no instance shall the price per share of Common Stock used to calculate
      the number of shares to be issued be lower than fair market value on the
      grant date.**
            Fee
      for attending three board meetings and five committee meetings calculated
      at $3,000 per board meeting and $1,000 per committee meeting, to be
      compensated in the form of Company’s common stock calculated at $0.26 per
      share (the average fair market value for fiscal year
  2009).


+
            Fee
      for attending three board meetings calculated at $3,000 per board meeting
      to be compensated in the form of Company’s common stock calculated at
      $0.26 per share (the average fair market value for fiscal year
      2009).  34
 #
            Fee
      for attending three board meetings and four committee meetings calculated
      at $3,000 per board meeting and $1,000 per committee meeting, to be
      compensated in the form of Company’s common stock calculated at $0.26 per
      share (the average fair market value for fiscal year
  2009).##
            Fee
      for attending three board meetings and nine committee meetings calculated
      at $3,000 per board meeting and $1,000 per committee meeting, to be
      compensated in the form of Company’s common stock calculated at $0.26 per
      share (the average fair market value for fiscal year
  2009).


^
            Fee
      for attending two board meetings and one committee meeting calculated at
      $3,000 per board meeting and $1,000 per committee meeting, to be
      compensated in the form of Company’s common stock calculated at $0.31 per
      share (the average fair market value for fiscal year
  2009).




COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION





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.





REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION





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 the discussions with
management with respect to the Compensation Discussion and Analysis, our
committee recommended to the Board of Directors that the Compensation Discussion
and Analysis be included in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2009.





The Compensation
Committee





Scott R.
Heldfond (Chair)


Kent D.
Price


H.
Michael Laybourn




The
information contained above under the caption “Report of the Compensation
Committee of the Board of Directors on Executive Compensation” shall not be
deemed to be “soliciting material” or to be “filed” with the Securities and
Exchange Comission, nor shall such information be incorporated by reference into
any future filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates it by reference to such
filing.




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 our Common Stock and Series A Preferred Stock as of
December 31, 2009, for (a) each shareholder known by us to own beneficially 5%
or more of the outstanding shares of our Common Stock or Series A Preferred
Stock:





35


Security
      Ownership of Certain Beneficial OwnersName
      and Address
                
                Shares
                  Beneficially
                  Owned
      (1)
                
                Percent
      of
                  ClassCOMMON
      STOCKUnited
      Breweries of America, Inc.
                  1050,
      Bridge way,
                  Sausalito,
      CA 94965
                
                
                3,087,818
      (2
                )
                
                25.7
                %Inversiones
      Mirabel S.A.
                  Hong
      Kong Bank Building
                  6th
      Floor, Samuel Lewis Avenue
                  P O
      Box 6-4298, El Dorado
                  Panama
      City, Panama
                
                
                5,500,000
      (2
                )
                
                45.9
                %United
      Breweries (Holdings) Limited.
                  100/1,
      Richmond Road,
                  Bangalore
      - 560 025, India
                
                
                8,587,818
      (3
                )
                
                71.6
                %Vijay
      Mallya
                  United
      Breweries of America, Inc.
                  1050,
      Bridge way,
                  Sausalito,
      CA 94965
                
                
                8,587,818
      (4
                )
                
                71.6
                %





(1)
Applicable percentages of ownership are based on 12,427,262 shares of Common
Stock outstanding as of December 31, 2009.





(2)
Does not include 2,089,180 shares issuable to UBA upon conversion of certain
convertible notes issued by MBC to UBA under a Master Line of Credit Agreement
(For additional information, see "Item 13. Certain Relationships and Related
Transactions"). UBHL is the ultimate beneficiary of substantially all of the
shares owned by both UBA and Inversiones.





(3)
Includes all shares held by our two largest shareholders, UBA and Inversiones.
UBHL is the beneficial owner of UBA and Inversiones because they are both
controlled by Rigby International Corp., a company registered in the British
Virgin Island, with primary offices at Vanterpool Plaza, 2nd Floor, Wickhams Cay
I, Road Town, Tortola, British Virgin Island 2 and a mailing address c/o CAS SA,
12-14 Avenue, Riverdil, CH-1260, Lyon, Switzerland, ("Rigby"). Rigby is a
wholly-owned subsidiary of UBHL. Such amount does not include 2,089,180 shares
issuable to UBA upon conversion of certain convertible notes issued by MBC to
UBA under a Master Line of Credit Agreement.





(4)
Includes all shares indirectly held by UBHL. Does not include 2,089,180 shares
issuable to UBA upon conversion of certain convertible notes issued by MBC to
UBA described in footnotes (2) and (3) above. Dr. Mallya disclaims beneficial
ownership of the reported securities except to the extent of his pecuniary
interest therein. Dr. Mallya owns approximately 5,285,300 equity shares, or 7.9%
of all outstanding equity shares, of UBHL.




The
following table sets forth certain information known to the Company regarding
the beneficial ownership of our Common Stock and Series A Preferred Stock as of
December 31, 2009, for each director and all directors and executive officers of
the Company as a group. Except as otherwise noted, we believe that the
beneficial owners of the Common Stock and Series A Preferred Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.




36


Security
      Ownership of ManagementCOMMON
      STOCK
                
                Shares
                  Beneficially
                  Owned
      (1)
                
                Percent
      of
                  ClassVijay
      Mallya
                
                
                8,587,818
                (2)
                
                71.6
                %H.
      Michael Laybourn
                
                
                469,640
                
                
                3.8
                %Kent
      D Price
                
                
                383,240
                
                
                2.3
                %Sury
      Rao Palamand
                
                
                303,078
                
                
                2.0
                %Jerome
      G. Merchant
                
                
                261,498
                
                
                1.3
                %Yashpal
      Singh
                
                
                --
                
                
                --Scott
      R. Heldfond
                
                
                199,210
                
                
                *Mahadevan
      Narayanan
                
                
                --
                
                
                --All
      Directors and executive officers as a group (8 persons)
                
                
                10,204,484
                
                
                81.5
                %SERIES
      A PREFERRED STOCKH.
      Michael Laybourn
                
                
                6,100
                
                
                2.7
                %All
      Directors and executive officers as a group (8 persons)
                
                
                6,100
                
                
                2.7
                %




*Amount
represents less than 1% of the outstanding securities of the class.





(1)
Applicable percentages of ownership are based on 12,427,262 shares of Common
Stock outstanding as of December 31, 2009.





(2)
Includes all shares indirectly held by UBHL. Does not include 2,089,180
shares issuable to UBA upon conversion of certain convertible notes issued by
MBC to UBA under a Master Line of Credit Agreement (For additional information,
see "Item 13. Certain Relationships and Related Transactions"). UBHL is the
ultimate beneficiary of substantially all of the shares owned by both UBA and
Inversiones. Dr. Mallya disclaims beneficial ownership of the reported
securities except to the extent of his pecuniary interest therein. Dr. Mallya
owns approximately 5,285,300 equity shares, or 7.9% of all outstanding equity
shares, of UBHL.











37


CHANGES
IN CONTROL


There are
no arrangements currently known to us which may result in a change in control of
our Company at a future date.




DIRECTORS'
EQUITY COMPENSATION PLAN




Our
Directors' Compensation Plan as amended in 2009 reserved an aggregate of
1,000,000 shares of our unregistered Common Stock to be issued to Directors.
Each Director is entitled to receive only that number of shares that is equal to
the amount of cash compensation that such Director otherwise would have received
for attending Board and Board committee meetings. A Board meeting is valued at
$3,000 per meeting and a Board committee meeting is valued at $1,000 per
meeting. Pursuant to the Directors' Compensation Plan, for the purposes of
determining the number of shares to be issued to each Director, the Common Stock
is to be valued at the higher of the book value of the Company's common stock or
the average fair market value of the common stock for the year in which the
Board meetings occurred.





ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.




During
fiscal years 2009 and 2008, 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 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:




Master
Line of Credit Agreement




On
August 31, 1999, we entered into a Master Line of Credit Agreement with
UBA, which was subsequently amended on April 28, 2000, and
February 12, 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.




UBA has
made thirteen (13) separate advances to the Company under the Credit Agreement,
and one separate advance with a principal amount of $400,000 on terms
substantially similar to those of the Credit Agreement, each pursuant to an
eighteen-month promissory note, (collectively, the "UBA Notes"). Interest
accrues on the UBA Notes 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 in San Francisco, California, or (ii) ten percent (10%). The
maturity dates of the UBA Notes have been extended until June 30,
2010.




As of
February 28, 2010, the aggregate outstanding principal amount of the UBA Notes
was $1,915,400, and the accrued but unpaid interest thereon was equal to
approximately $1,233,100. The entire amount of the outstanding principal and
accrual but unpaid interest is convertible into shares of our common stock at a
conversion price of $1.50 per share. As of February 28, 2010, United Brewers of
America beneficially owns approximately 24.8% of our outstanding Common Stock
(excluding any shares issuable upon the conversion of the UBA Notes) and our
Chairman, Dr. Vijay Mallya, is also the Chairman of the board of UBA. During
fiscal years 2009 and 2008, the largest aggregate amount of principal
outstanding was $1,915,400. No principal or
interest was paid during either 2009 or 2008, respectively.





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 UBI and UBSN
remains in effect. The Distribution Agreement is scheduled to expire in October
2013.





Because
our Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the Board
of UB Limited, the transactions represented by these license agreements may be
deemed to be related party transactions.





The
dollar value of the license agreement cannot be accurately
estimated.





38


Shepherd
Neame, Ltd.





As
described more fully below, our principal European subsidiary, UBSN, is a party
to a Brewing Agreement and a Loan Agreement with Shepherd Neame. Shepherd Neame
and the Company may be deemed to be related parties, because Mr. R.H.B. Neame
(Shepherd Neame's Chairman of the Board) was also our director until 2004, and
Mr. David Townshend (a senior Shepherd Neame employee) was serving as the
President of UBSN (pursuant to an agreement between UBSN and Shepherd Neame) and
was also our director until 2004.





Brewing
Agreement





On
October 9, 1998, UBI and UBSN originally entered into a Brewing Agreement with
Shepherd Neame, and on October 24, 2001, this agreement was amended by a
Supplemental Agreement (together, the "Brewing Agreement").





The
Brewing Agreement, which was entered into (and amended) in conjunction with the
Loan Agreement described below, grants to Shepherd Neame 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, and
distribute  such products elsewhere in the Foreign Territory. UBI and
UBSN further agreed that they would require any other distributor of such
products (subject to applicable laws and regulations) to obtain such products
directly from a company related to UBI or our subsidiaries and to refrain from
seeking customers, or establishing a distribution network for such products, in
the United Kingdom. In exchange, Shepherd Neame agreed to brew and/or supply
Kingfisher Premium Lager and related products to UBSN for destinations within
(and, with the consent of Shepherd Neame, outside) the United Kingdom. The price
UBSN pays to Shepherd Neame 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 2009, the
purchases from Shepherd Neame by UBSN equaled approximately $15,446,700 at the
average exchange rate in effect during 2009. For 2008, the purchases from
Shepherd Neame by UBSN equaled approximately $16,032,400at the average exchange
rate in effect during 2008.





The dollar value of the license
agreement cannot be accurately estimated.





Loan
Agreement





Concurrently
with the Brewing Agreement described above, UBSN and Shepherd Neame entered into
a Loan Agreement, under which on or about October 24, 2001, Shepherd Neame
advanced to UBSN £600,000 (the full amount available under the Loan Agreement),
at a fixed interest rate of 5%, for general corporate purposes. This loan is
payable in ten annual installments of £60,000 each, commencing on June 30, 2003
and continuing on each anniversary thereof until the Loan is fully repaid. Any
remaining balance of principal or interest will become due and payable (and the
loan will terminate) on June 30, 2013. It would be an event of default under the
Loan Agreement, and the lender would have the right, at will, not only to cancel
the Loan Agreement and accelerate all sums due under it, but also to terminate
the Brewing Agreement, if UBSN were to terminate or default under the Brewing
Agreement, or if either of the License Agreements that UBI and UBSN have entered
into with UB Limited are terminated (except in accordance with their terms or in
connection with the parties' entry into an equivalent Brewing Agreement). The
aggregate amount of principal paid during each of 2009 and 2008 was £60,000 or
$94,000and
$111,300 at the average exchange rate during 2009 and 2008,
respectively.





Distribution
Agreement





UBI
entered into a Distribution Agreement with our wholly-owned subsidiary UBSN on
October 9, 1998. Under this agreement, which was subsequently amended by a
Supplemental Agreement dated as of October 24, 2001 (together, the "Distribution
Agreement"), UBI granted UBSN 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 UBSN to pay UBI
a royalty fee of 50 British pence (approximately $0.78 at the average exchange
rates in effect during fiscal year 2009) for every 100 liters (26 gallons) of
beer brewed for sale in the Foreign Territory, will expire in October 2013. The
royalty due to UBI for the year 2009 was approximately $62,800 and for the year
2008 was approximately $73,500.





39


Market
Development Agreement





Effective
October 26, 2001, the Company and UBSN entered into a Market Development,
General and Administrative Services Agreement (the "Market Development
Agreement"), under the terms of which UBSN engaged us to perform a variety of
advertising, promotional, and other market development activities in the United
States in connection with Kingfisher beer and related consumer products (the
"Products"), provide certain legal and business management support services to
UBSN, and provide assistance with the establishment and management of
distribution channels for the Products in the United States. In consideration
for the services received under this agreement, UBSN agreed to pay our service
fees amounting in the aggregate to $1,500,000 over the period from 2001 through
2003. Such payments have been made in full and no additional payments are
anticipated to be made in the future. The Company and UBSN agreed to extend the
agreement for an additional five (5) year period.





Brewing
License Agreement





Concurrently
with the Market Development Agreement described above, we entered into a Brewing
License Agreement with UBSN, under the terms of which UBSN granted us an
exclusive license to brew and distribute Kingfisher Premium Lager in the United
States, in exchange for a royalty, payable to UBSN, of eighty cents ($0.80) for
each case of Kingfisher Premium Lager brewed by us under this agreement. We
agreed with UBSN to extend the agreement for a further period of five years. The
royalty due to UBSN pursuant to the Brewing License Agreement for the year 2009
was approximately $115,200 and for the year 2008 was approximately
$115,400.





DIRECTOR
INDEPENDENCE





Our Board
of Directors has determined that the following directors qualify as
"independent" in accordance with the published listing requirements of NASDAQ:
Mr. Heldfond, Mr. Layborn, Mr. Palamand, Mr. Merchant and Mr. Price. Mr. Singh
is not "independent" because he is our employee. Dr. Mallya is not independent
since he has received payments in excess of $60,000 from us during the last
three (3) fiscal years.





The
NASDAQ rules have 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 has been in
the past three (3) years; (ii) has accepted (or a family member has accepted)
compensation from the Company in excess of $100,000 during any 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 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 we made or received payments that exceed the greater of (a) five
percent (5%) of the recipient's consolidated gross revenues for that year or (b)
$200,000 for the current year or the preceding 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.





COMPANY
RELATIONSHIPS





UBA and
Inversiones own 24.8% and 44.3% of the outstanding shares of our common stock
respectively as of February 28, 2010.  UBA has also advanced us a principal
amount of $1,915,400 under separate convertible notes. As of December 31, 2009
the principal amount outstanding on the notes together with the accrued interest
is convertible into approximately 2,089,200 shares of common stock. Because UBHL
is the ultimate parent of both UBA and Inversiones, UBHL is the ultimate
beneficiary of 69.1% the shares of our common stock. Refer to "Item 12 -
Security ownership of certain beneficial owners and management and related
stockholder matters" above.




ITEM
14. PRINCIPAL ACCOUNTING
FEES AND SERVICES.




The
Company has appointed PMB Helin Donovan, L.L.P. ("PMB"), as our independent
auditors to perform the audit of our financial statements for the year
2009.




40


AUDIT
FEES. The aggregate fees billed by PMB during the year 2009 for the audit of our
annual consolidated financial statements was $100,000; fees of an additional
$42,500 were billed to us during 2009 in connection with PMB’s review of interim
financial statements in connection with our Quarterly Reports on Form 10-Q for
that year. Such fees represented approximately 85% of the total fees for
services billed to us by PMB during 2009.




The
aggregate fees billed by PMB during the year 2008 for the audit of our annual
consolidated financial statements was $100,100; fees of an additional $44,900
were billed to us during 2008 in connection with PMB’s review of interim
financial statements in connection with our Quarterly Reports on Form 10-Q for
that year. Such fees represented approximately 90% of the total fees for
services billed to us by PMB during 2008.




AUDIT
RELATED FEES. PMB did not bill us any amount in fees for assurance or related
services in 2009 or 2008.




TAX FEES.
The aggregate fees billed by PMB during 2009 for tax products and services
related to the preparation of our tax returns other than those described in the
foregoing paragraphs, was $16,000. Such fees represented approximately 10% of
the total fees for services rendered to us by PMB during 2009.




The
aggregate fees billed by PMB during 2008 for tax products and services related
to the preparation of our tax returns , other than those described in the
foregoing paragraphs, was $16,000. Such fees represented approximately 10% of
the total fees for services rendered to us by PMB during 2009.




ALL OTHER
FEES. During the years 2009 PMB billed us $9,365 related to review of our
internal control documentation.  Such fees represented 5% of the total
fees for services billed to us by PMB during 2009. PMB did not bill us for any
amount towards fees for services other than those mentioned above during the
years 2009 and 2008.




All audit
and other services performed by PMB on our behalf are approved in advance by our
audit committee.




We are
not aware that any significant amount of the work done during the course of the
audit of our 2009 and 2008 Financial Statements was performed by persons other
than full-time, permanent, employees of PMB.




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
PMB Helin Donovan, LLP, Independent Registered Auditors




Consolidated
Balance Sheets as of December 31, 2009 and 2008




Consolidated
Statements of Operations and Comprehensive Income for the Years Ended December
31, 2009 and 2008




Consolidated
Statements of Stockholders' Equity for the Years Ended December 31, 2009 and
2008




Consolidated
Statements of Cash Flow for the Years Ended December 31, 2009 and
2008




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.





41





(3)
            LIST
      OF EXHIBITS.   Exhibit
      Number
                          
                          
                          
                          Description
      of Document3.1
                          
                          (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.
  42
  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
      UBSN, Ltd.10.55
                    
                    (T)
                    
                    Supplemental
      Agreement to Distribution Agreement between United Breweries International
      (U.K.), Limited. and UBSN, Ltd.10.56
                    
                    (T)
                    
                    Market
      Development, General and Administrative Services Agreement between
      Mendocino Brewing Company, Inc. and UBSN, Ltd.10.57
                    
                    (T)
                    
                    Contract
      to Brew and Supply Kingfisher Products among Shepherd Neame, Limited,
      United Breweries International (U.K.), Limited. and UBSN,
    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 UBSN, Ltd.10.59
                    
                    (T)
                    
                    Loan
      Agreement between Shepherd Neame, Limited and UBSN,
Ltd.10.60
                    
                    (T)
                    
                    Brewing
      License Agreement between UBSN, 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.
 43
  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 UBSN, 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 UBSN Limited, dated April 26,
2005.10.77
                        
                        
                        
                        [Intentionally
      omitted]10.78
                        
                        
                        
                        [Intentionally
      omitted]10.79
                        
                        (EE)
                        
                        Loan
      Agreement by and between Mendocino Brewing Company, Inc. and Grand Pacific
      Financing Corporation dated June 28, 2006.10.80
                        
                        (EE)
                        
                        Promissory
      Note of Mendocino Brewing Company, Inc. in favor of Grand Pacific
      Financing Corporation, dated June 28, 2006.10.81
                        
                        
                        
                        [Intentionally
      omitted]10.82
                        
                        (FF)
                        
                        Loan
      and Security Agreement by and among Marquette Business Credit Inc. and
      Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC, dated
      November 16, 2006.10.83
                        
                        (FF)
                        
                        Revolving
      Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in
      favor of Marquette Business Credit Inc., dated November 16,
      2006.10.84
                        
                        (FF)
                        
                        Term
      Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in
      favor of Marquette Business Credit Inc., dated November 16,
      2006.10.85
                        
                        (FF)
                        
                        CAPEX
      Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in
      favor of Marquette Business Credit Inc., dated November 16,
      2006.10.86
                        
                        (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.
  44
  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†.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.




† 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)
            The
      Company's Registration Statement dated June 15, 1994, as amended,
      previously filed with the Commission, Registration No.
      33-78390-LA.(B)
            The
      Company's Annual Report on Form 10-KSB for the period ended December 31,
      1995.(C)
            The
      Company's Quarterly Report on Form 10-QSB for the period ended March 31,
      1995.(D)
            The
      Company's Quarterly Report on Form 10-QSB/A No. 1 for the period ended
      September 30, 1997.


(F)
            The
      Company's Annual Report on Form 10-KSB for the period ended December 31,
      1996.(G)
            The
      Company's Quarterly Report on Form 10-QSB for the period ended September
      30, 1995.(I)
            The
      Company'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)
            The
      Company's Quarterly Report on Form 10-QSB for the period ended June 30,
      1998.(N)
            The
      Company's Quarterly Report on Form 10-QSB for the period ended June 30,
      1999.(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)
            The
      Company's Current Report on Form 8-K filed as of February 19,
      2002.(T)
            The
      Company'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)
            The
      Company'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.(X)
            Amendment
      No. 11 to Schedule 13D, jointly filed by United Breweries of America, Inc.
      and Dr. Vijay Mallya on August 16, 2004.                   45
  (Z)
            The
      Company's Quarterly Report on Form 10-Q for the period ended September 30,
      2004.(BB)
            The
      Company's Current Report on Form 8-K filed as of March 8,
      2005.(DD)
            The
      Company's Quarterly Report on Form 10-Q for the period ended June 30,
      2005.(EE)
            The
      Company's Quarterly Report on Form 10-Q for the period ended June 30,
      2006.(FF)
            The
      Company's Annual Report on Form 10-K for the fiscal year ended December
      31, 2006.(GG)
            The
      Company's Quarterly Report on Form 10-Q for the period ended June 30,
      2007.(HH)
            The
      Company's Annual Report on Form 10-K for the period ended December 31,
      2007.(II)
            The
      Company's Quarterly Report on Form 10-Q for the period ended September 30,
      2008.(JJ)
            The
      Company's Annual Report on Form 10-K for the period ended December 31,
      2008.(KK)
            The
      Company's Quarterly Report on Form 10-Q for the period ended June 30,
      2009.(LL)
            The
      Company's Current Report on Form 8-K filed as of August 31,
      2009.(MM)
            The
      Company's Quarterly Report on Form 10-Q for the period ended September 30,
      2009.




























(b)
              Exhibit
      Attached The following Exhibits are attached to this Annual Report
      on Form 10-K:




21.1
            Subsidiaries
      of the Registrant.31.1
            Certification
      of Chief Executive Officer pursuant to Rule
      13a-14(a)/15d-14(a).31.2
            Certification
      of Chief Financial Officer pursuant to Rule
      13a-14(a)/15d-14(a).32.1
            Certification
      of Chief Executive Officer Pursuant to U.S.C. 1350.32.2
            Certification
      of Chief Financial Officer Pursuant to U.S.C.
  1350.




(c)
              Excluded
      Financial Statements.
None.




46





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on our behalf by
the undersigned, thereunto duly authorized.




(Registrant)
      MENDOCINO BREWING COMPANY, INC.By:
                /s/
      Yashpal SinghYashpal
      Singh
                  Our
      President and Chief Executive OfficerDate:
      March 31, 2010








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.


(Registrant)
      MENDOCINO BREWING COMPANY, INC.By:
              /s/
      Dr. Vijay MallyaDr.
      Vijay Mallya
                Director
      and Chairman of the BoardDate:
      March 31, 2010




By:
              /s/
      Yashpal SinghYashpal
      Singh
                Our
      President, Director and Chief Executive OfficerDate:
      March 31, 2010




By:
              /s/
      Scott R. HeldfondScott
      R. Heldfond, DirectorDate:
      March 31, 2010




By:
              /s/
      Jerome G. MerchantJerome
      G. Merchant, DirectorDate:
      March 31, 2010




47


By:
            /s/
      Mahadevan NarayananMahadevan
      Narayanan
              Our
      Secretary and Chief Financial OfficerDate:
      March 31, 2010By:
            /s/
      H. Michael LaybournH.
      Michael Laybourn, DirectorDate:
      March 31, 2009




By:
              /s/
      Kent PriceKent
      Price, DirectorDate:
      March 31, 2010




By:
              /s/
      Sury Rao PalamandSury
      Rao Palamand, DirectorDate:
      March 31, 2010





48


Mendocino
Brewing Company, Inc.
 
 Consolidated
Financial Statements
 For
the Years Ended
 December
31, 2009 and 2008
 Mendocino
Brewing Company, Inc.
 
 
 C
O N T E N T S
 ___________________________________________________________
 
 
 Report
      of Independent Registered Public Accounting Firm
                F-1Consolidated
      Balance Sheets
                F-2Consolidated
      Statements of Operations and Comprehensive Income (Loss)
                F-3Consolidated
      Statements of Stockholders' Equity
                F-4Consolidated
      Statements of Cash Flows
                F-5Notes
      to Consolidated Financial Statements
                F-6
      – F-25
 
 
 49
 
 Report
of Independent Registered Public Accounting Firm
 
 
 
 To the
Board of Directors and Stockholders
 Mendocino
Brewing Company, Inc.
 Ukiah,
California
 
 
 
 We have
audited the accompanying consolidated balance sheets of Mendocino Brewing
Company, Inc. (“MBC”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders’ equity and cash flows for each of the years in the two year period
ended December 31, 2009 and 2008.  These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether
the financial statement is 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 audit includes 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 financial statement.  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 audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Mendocino Brewing Company, Inc. as
of December 31, 2009 and 2008, and the results of its operations and its
cash flows for each of the years in the two year period ended December 31,
2009, in conformity with accounting principles generally accepted in the United
States of America.
 
 /s/
PMB Helin Donovan,
LLP
 PMB
Helin Donovan, LLP
 San
Francisco, California
 March 31,
2010
 
 F-1
 
 Mendocino
Brewing Company, Inc.
 Consolidated
Balance Sheets
 As
of December 31, 2009 and 2008
 2009
                              
                              
                              2008ASSETSCurrent
      AssetsCash
                              
                              $
                              140,900
                              
                              
                              $
                              273,700Accounts
      receivable, net of allowance fordoubtful
      accounts of $504,900 and $65,700, respectively
                              
                              
                              11,267,700
                              
                              
                              
                              6,966,900Inventories
                              
                              
                              1,862,600
                              
                              
                              
                              1,865,200Prepaid
      expenses
                              
                              
                              543,300
                              
                              
                              
                              201,700Total
      Current Assets
                              
                              
                              13,814,500
                              
                              
                              
                              9,307,500Property
      and Equipment(net
      of accumulated depreciation)
                              
                              
                              12,474,200
                              
                              
                              
                              12,806,100Other
      AssetsDeposits
      and other assets
                              
                              
                              288,200
                              
                              
                              
                              326,100Intangibles,
      (net of amortization)
                              
                              
                              47,600
                              
                              
                              
                              47,600Total
      Other Assets
                              
                              
                              335,800
                              
                              
                              
                              373,700Total
      Assets
                              
                              $
                              26,624,500
                              
                              
                              $
                              22,487,300LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesSecured
      lines of credit
                              
                              $
                              3,126,200
                              
                              
                              $
                              3,601,700Accounts
      payable
                              
                              
                              12,088,200
                              
                              
                              
                              6,152,900Accrued
      liabilities
                              
                              
                              1,504,100
                              
                              
                              
                              1,513,000Current
      maturities of notes to related parties
                              
                              
                              97,000
                              
                              
                              
                              87,700Current
      maturities of obligation under long-term debt
                              
                              
                              319,800
                              
                              
                              
                              316,400Current
      maturities of obligation under capital lease
                              
                              
                              142,700
                              
                              
                              
                              113,400Total
      Current Liabilities
                              
                              
                              17,278,000
                              
                              
                              
                              11,785,100Long-Term
      LiabilitiesNotes
      to related parties including accruedinterest
      of $1,218,400 and $1,127,400, respectively
                              
                              
                              3,327,800
                              
                              
                              
                              3,306,000Long
      term debt, less current maturities
                              
                              
                              3,509,500
                              
                              
                              
                              3,820,000Obligations
      under capital leases, less current maturities
                              
                              
                              161,500
                              
                              
                              
                              218,700Total
      Long-Term Liabilities
                              
                              
                              6,998,800
                              
                              
                              
                              7,344,700Total
      Liabilities
                              
                              
                              24,276,800
                              
                              
                              
                              19,129,800Stockholders'
      EquityPreferred
      stock, Series A, no par value, withliquidation
      preference of $1 per share; 10,000,000shares
      authorized, 227,600 shares issued and outstanding
                              
                              
                              227,600
                              
                              
                              
                              227,600Common
      stock, no par value 30,000,000 shares authorized,12,427,262
      and 11,991,686  shares issued and outstanding,
      respectively
                              
                              
                              15,043,300
                              
                              
                              
                              14,902,300Accumulated
      comprehensive income
                              
                              
                              436,800
                              
                              
                              
                              567,900Accumulated
      deficit
                              
                              
                              (13,360,000
                              )
                              
                              
                              (12,340,300
                              )Total
      Stockholders' Equity
                              
                              
                              2,347,700
                              
                              
                              
                              3,357,500Total
      Liabilities and Stockholders' Equity
                              
                              $
                              26,624,500
                              
                              
                              $
                              22,487,300
 The
accompanying notes are an integral part of these financial
statements.
 F-2
 Mendocino
Brewing Company, Inc.
 Consolidated
Statements of Operations and Comprehensive Income (Loss)
 For
the Years Ending December 31, 2009 and 2008
 2009
                  
                  
                  2008Sales
                  
                  $
                  35,866,700
                  
                  
                  $
                  37,640,500Less
      excise tax
                  
                  
                  865,200
                  
                  
                  
                  905,500Net
      Sales
                  
                  
                  35,001,500
                  
                  
                  
                  36,735,000Cost
      of Goods Sold
                  
                  
                  26,565,900
                  
                  
                  
                  27,323,100Gross
      Profit
                  
                  
                  8,435,600
                  
                  
                  
                  9,411,900Operating
      ExpensesMarketing
                  
                  
                  4,642,800
                  
                  
                  
                  5,117,700General
      and administrative (1)
                  
                  
                  4,270,700
                  
                  
                  
                  3,893,600Total
      Operating Expenses
                  
                  
                  8,913,500
                  
                  
                  
                  9,011,300Income
      (loss) from Operations
                  
                  
                  (477,900
                  )
                  
                  
                  400,600Other
      Income (Expense)Miscellaneous
      income
                  
                  
                  27,600
                  
                  
                  
                  85,300Profit
      (loss) on sale of equipment, net
                  
                  
                  9,900
                  
                  
                  
                  5,600Interest
      expense
                  
                  
                  (572,700
                  )
                  
                  
                  (781,500
                  )Total
      Other Income (Expense)
                  
                  
                  (535,200
                  )
                  
                  
                  (690,600
                  )Loss
      before Income Taxes
                  
                  
                  (1,013,100
                  )
                  
                  
                  (290,000
                  )Provision
      for (Benefit from) Income Taxes
                  
                  
                  6,600
                  
                  
                  
                  4,500Net
      Loss
                  
                  
                  (1,019,700
                  )
                  
                  
                  (294,500
                  )Other
      Comprehensive Income (Loss)Foreign
      currency translation adjustment
                  
                  
                  (131,100
                  )
                  
                  
                  410,600Comprehensive
      Income (Loss)
                  
                  $
                  (1,150,800
                  )
                  
                  $
                  116,100Net
      Income (Loss) percommon
      share (basic and diluted)
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.02
                  )Weighted
      average common sharesoutstanding
      (basic and diluted)
                  
                  
                  12,274,801
                  
                  
                  
                  11,991,686
  (1)
Includes $93,000 and $61,000, of stock based compensation, for 2009 and 2008,
respectively.
 The
accompanying notes are an integral part of these financial
statements.
 F-3
 Mendocino
Brewing Company, Inc.
 Consolidated
Statements of Stockholders’ Equity
 For
the Years Ending December 31, 2009 and 2008
 
 Series
      A
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          Other
      AccumulatedPreferred
                          
                          
                          
                          
                          
                          Common
                          
                          
                          
                          
                          
                          Comprehensive
                          
                          
                          Accumulated
                          
                          
                          TotalShares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          Income/(Loss)
                          
                          
                          Deficit
                          
                          
                          EquityBalance
      December 31, 2007
                          
                          
                          227,600
                          
                          
                          $
                          227,600
                          
                          
                          
                          11,991,686
                          
                          
                          $
                          14,902,300
                          
                          
                          $
                          157,300
                          
                          
                          $
                          (12,045,800
                          )
                          
                          $
                          3,241,400Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (294,500
                          )
                          
                          
                          (294,500
                          )Currency
      translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          410,600
                          
                          
                          
                          -
                          
                          
                          
                          410,600Balance
      December 31, 2008
                          
                          
                          227,600
                          
                          
                          $
                          227,600
                          
                          
                          
                          11,991,686
                          
                          
                          $
                          14,902,300
                          
                          
                          $
                          567,900
                          
                          
                          $
                          (12,340,300
                          )
                          
                          $
                          3,357,500Stock
      issued for compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          435,576
                          
                          
                          
                          141,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          141,000Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,019,700
                          )
                          
                          
                          (1,019,700
                          )Currency
      translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (131,100
                          )
                          
                          
                          -
                          
                          
                          
                          (131,100
                          )Balance
      December 31, 2009
                          
                          
                          227,600
                          
                          
                          $
                          227,600
                          
                          
                          
                          12,427,262
                          
                          
                          $
                          15,043,300
                          
                          
                          $
                          436,800
                          
                          
                          $
                          (13,360,000
                          )
                          
                          $
                          2,347,700
 
 The
accompanying notes are an integral part of these financial
statements.
 F-4
 Mendocino
Brewing Company, Inc.
 Consolidated
Statements of Cash Flows
 For
the Years Ending December 31, 2009 and 2008
 
 2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                  
                  $
                  (1,019,700
                  )
                  
                  $
                  (294,500
                  )Adjustments
      to reconcile net income(loss)
      to net cash from operating activities:Depreciation
      and amortization
                  
                  
                  1,086,400
                  
                  
                  
                  1,077,000Provision
      for doubtful accounts
                  
                  
                  421,200
                  
                  
                  
                  28,000Loss
      (gain) on sale of assets
                  
                  
                  (9,900
                  )
                  
                  
                  (5,600
                  )Interest
      accrued on related party notes
                  
                  
                  91,000
                  
                  
                  
                  126,500Non-cash
      compensation
                  
                  
                  141,000
                  
                  
                  
                  61,000Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                  
                  
                  (4,082,300
                  )
                  
                  
                  (1,377,400
                  )(Increase)
      decrease in inventories
                  
                  
                  2,600
                  
                  
                  
                  (404,000
                  )(Increase)
      decrease in prepaid expenses
                  
                  
                  (327,200
                  )
                  
                  
                  349,200(Increase)
      decrease in deposits and other assets
                  
                  
                  900
                  
                  
                  
                  (49,600
                  )Increase
      (decrease) in accounts payable
                  
                  
                  5,261,200
                  
                  
                  
                  667,800Increase
      (decrease) in accrued liabilities
                  
                  
                  (80,600
                  )
                  
                  
                  386,000Net
      cash provided by  operating activities
                  
                  
                  1,484,600
                  
                  
                  
                  564,400CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, equipment and leasehold improvements
                  
                  
                  (434,900
                  )
                  
                  
                  (770,300
                  )Proceeds
      from sale of fixed assets
                  
                  
                  12,700
                  
                  
                  
                  5,600Net
      cash used in investing activities:
                  
                  
                  (422,200
                  )
                  
                  
                  (764,700
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      borrowing (repayment) on line of credit
                  
                  
                  (655,600
                  )
                  
                  
                  457,100Borrowings
      on long term debt
                  
                  
                  -
                  
                  
                  
                  168,500Repayment
      on long-term debt
                  
                  
                  (307,100
                  )
                  
                  
                  (259,100
                  )Repayment
      on related party debt
                  
                  
                  (94,000
                  )
                  
                  
                  (111,300
                  )Payments
      on obligations under long term leases
                  
                  
                  (140,300
                  )
                  
                  
                  (116,100
                  )Net
      cash provided by (used in) financing activities:
                  
                  
                  (1,197,000
                  )
                  
                  
                  139,100EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                  
                  
                  1,800
                  
                  
                  
                  (4,800
                  )Net
      Change in Cash
                  
                  
                  (132,800
                  )
                  
                  
                  (66,000
                  )Cash
      at beginning of period
                  
                  
                  273,700
                  
                  
                  
                  339,700Cash
      at end of period
                  
                  $
                  140,900
                  
                  
                  $
                  273,700SUPPLEMENTAL
      CASH FLOW INFORMATIONCash
      paid during the period for:Interest
                  
                  $
                  481,700
                  
                  
                  $
                  655,000Income
      taxes
                  
                  $
                  6,600
                  
                  
                  $
                  4,500Non-cash
      investing and financing activities:Common
      stock issued for
                    prior
      year compensation
                  
                  $
                  141,000
                  
                  
                  $
                  -Seller
      financed equipment
                  
                  $
                  98,700
                  
                  
                  $
                  369,400
 The
accompanying notes are an integral part of these financial
statements.
 F-5
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 1.         Description of Operations
and Summary of Significant Accounting Policies
 
 Description of
Operations
 
 Mendocino
Brewing Company, Inc., ("the Company" or "MBC"), was formed in 1983 in
California, has operating subsidiaries, Releta Brewing Company, ("Releta"), and
United Breweries International, Limited (UK), ("UBIUK").  In the
United States, MBC and its subsidiary, Releta, operate two breweries that
produce beer and malt beverages for the specialty "craft" segment of the beer
market.  The breweries are located in Ukiah, California and Saratoga
Springs, New York.  The Company also owns and operates a brewpub and
gift store located in Hopland, California.  The majority of US sales
for Mendocino Brewing Company 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 Lager in the US. Generally,
product shipments are made directly from the breweries to the wholesalers or
distributors in accordance with state and local laws.
 
 The
Company's UK subsidiary, UBIUK, is a holding company for UBSN
Limited.  UBSN is a distributor of alcoholic beverages, mainly
Kingfisher Lager, in the United Kingdom and Europe.  The
distributorship is located in Faversham, Kent in the United
Kingdom.
 
 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 Securities and Exchange Commission.
 
 Principles of
Consolidation
 
 The
consolidated financial statements present the accounts of Mendocino Brewing
Company, Inc., and its wholly-owned subsidiaries, Releta Brewing Company, LLC,
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 fiscal years ended December 31, 2009 and 2008, 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.
  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, those
with original maturities not greater than three months and current maturities
less than twelve months from the balance sheet date are considered short-term
investments, and those with maturities greater than twelve months from the
balance sheet date are considered long-term investments.
 
 F-6
 
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 Concentration
 
 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 $168,300 in cash deposits
and $5,169,800 of accounts receivable due from customers located in the United
Kingdom as of December 31, 2009.
 
 The
Company could experience labor disputes, work stoppages or other disruptions in
production that could adversely affect us. As of December 31, 2009, unions
represented approximately 22% of our US workforce. On that date, the Company had
approximately 14 employees at its CA facility who were working under a
collective bargaining agreement. The agreement covering the CA facility expires
on July 31, 2013.
 
 Foreign
Operations
  Approximately
44% of the Company’s assets are located in the United
Kingdom.  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 collectibility 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
collectibility.  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. As of December 31, 2009, the Company maintained a reserve
of $504,900 of potentially doubtful accounts receivable.  Bad debt
expenses totaled $512,000 and $61,000 for the years ended December 31, 2009 and
2008 respectively.
  F-7
 
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 Inventories
 
 Inventories
are stated at the lower of average cost, which approximates the first-in,
first-out method, or market (net realizable value). The Company regularly
reviews its inventories for the presence of obsolete product attributed to age,
seasonality and quality. Inventories that are considered obsolete are written
off or adjusted to carrying value.
  Prepaid Expenses and Other
Assets
  Prepaid
expenses and other assets generally consist of deposits, other receivables and
prepayments for future services. Prepayments are expensed when the services are
received.
 
 Property and
Equipment
 
 Property
and equipment are stated at cost and depreciated or amortized using
straight-line method over the assets' estimated useful
lives.  Leasehold improvements are amortized over the shorter of the
life of the related asset or the life of the 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
operations.
 
 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.
 
 Estimated
useful lives of property and equipment are as follows:
 
 Building
                  40
      yearsMachinery
      and equipment
                  3 -
      40 yearsEquipment
      under capital lease
                  3 -
      20 yearsLeasehold
      improvements
                  5 -
      10 yearsVehicles
                  3 -
      5 yearsFurniture
      and fixtures
                  5 -
      10 years
  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)
360-10-50, (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.
 F-8
 
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 Intangibles
 
 Intangibles
consist of trade names and trademarks.  Purchased trademarks are
initially measured based on their fair values.  Trademarks include
purchased trademarks, brand names, logos or other recognizable symbols
associated with the Company's products.  Trademarks are not amortized
because they have indefinite lives.  Assets determined to have
indefinite lives are no longer amortized in accordance with SFASASC 350,
Goodwill and other Intangibles, but are tested for impairment on an annual
basis.  The carrying amount of intangibles not subject to amortization
is $47,600 as of December 31, 2009 and 2008.
 
 Impairment
of Intangible Assets
 
 The
Company evaluates the recoverability of identifiable intangible assets whenever
events or changes in circumstances indicate that an intangible asset's carrying
amount may not be recoverable.  Such circumstances could include, but
are not limited to: (1) a significant decrease in the market value of an asset,
(2) a significant adverse change in the extent or manner in which an asset is
used, or (3) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition of an asset.  The Company
measures the carrying amount of the asset against the estimated undiscounted
future cash flows associated with it.  If the sum of the expected
future net cash flows are less than the carrying value of the asset being
evaluated, an impairment loss would be recognized.  The impairment
loss would be calculated as the amount by which the carrying value of the asset
exceeds its fair value.  The fair value is measured based on quoted
market prices, if available.  If quoted market prices are not
available, the estimate of fair value is based on various valuation techniques,
including the discounted value of estimated future cash flows.  The
evaluation of asset impairment requires the Company to make assumptions about
future cash flows over the life of the asset being evaluated.  These
assumptions require significant judgment and actual results may differ from
assumed and estimated amounts.  During the years ended December 31,
2009 and 2008, the Company recorded no impairment losses related to an
intangible asset.
 
 Deferred Financing
Costs
 
 Costs
relating to obtaining financing are capitalized and amortized over the term of
the related debt.  Deferred financing costs were $311,300, and the
related accumulated amortization at December 31, 2009 and 2008 was $213,300 and
$147,900, respectively.  Amortization of deferred financing costs
charged to operations was $65,300 for both the years ended December 31, 2009 and
2008.  The Company will continue to amortize these fees until
2011.  When a loan is paid in full, any unamortized financing costs
are removed from the related accounts and charged to operations.
 
 Income
Taxes
 
 The
Company accounts for income taxes in accordance with the accounting standard
(ASC 750-10-60) 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.
 F-9
 
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 The Company adopted the accounting
standard for uncertainty in income taxes  (ASC 740)which prescribes a
comprehensive model for how a company should recognize, measure, present and
disclose in its financial statements 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, 2009 and 2008.
  Revenue
Recognition
 
 The
Company recognizes revenue from the 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
 ·
              Collectibility
      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 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.  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.
 
 "Collectibility is Reasonably
Assured" – The Company determines that collectibility is reasonably
assured prior to recognizing revenue.  Collectibility is assessed on a
customer-by-customer basis based on criteria outlined by
management.  The Company does not enter into arrangements unless
collectibility 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
collectibility is not reasonably assured, revenue is recognized on a cash
basis.
 
 The
Company records  certain consideration paid to customers for services
or placement fees are to be reported 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.
 F-10
 
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 Revenues
from the brewpub and gift store are recognized when sales have been
completed.
  United
Kingdom
  The
Company has agreements with Shepard Neame Limited (SN), to produce, market and
distribute Kingfisher Lager in the United Kingdom. See Note 10 regarding
transactions with SN.  The Company invoices SN based on an agreed
transfer price per unit, which is subject to revision upon reconciliations based
on contractual formulas.
  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 United Kingdom, excise taxes
are paid by the manufacturer and not by the Company.
 
 Discounts
  To
further promote retail bottled product sales and in response to local
competitive conditions, the Company regularly offers “post-offs,” or price
discounts, to distributors in most of its markets. Distributors and retailers
usually participate in the cost of these price discounts.
  Chargebacks and Sales
Reserves
 
 The
Company has estimated reserves for chargebacks for goods purchased 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 estimates 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
 
 F-11
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
  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 2009 and 2008.
  Delivery
Costs
 
 In
accordance with FASB 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 $604,200 and $948,700, for the years ended December 31, 2009 and
2008, respectively.
 
 Stock-Based
Compensation
 
 The
Company uses the fair value method of accounting for share-based compensation
arrangements.ASC 718 The Company has not granted any stock options
in 2009 or 2008 or had any stock options outstanding in 2009 and 2008. If the
Company issues stock options the compensation costs for those options will be
based on the grant-date fair value estimated in accordance with the provisions
of FASB ASC 718.
  FASB ASC
718 requires companies to estimate the fair value of stock options on the date
of grant using an option pricing model. If the Company does grant stock options
it would use the Black-Scholes option pricing model to determine the fair value
of our options. The determination of the fair value of stock based awards using
an option pricing model is affected by a number of assumptions including
expected volatility of the common stock over the expected term, the expected
term, the risk free interest rate during the expected term and the expected
dividends to be paid.
  No
stock-based compensation expense related to employee stock options was
recognized under FASB ASC 718 for 2009 and 2008. The value of the portion
of the award that is ultimately expected to vest is recognized as compensation
expense over the requisite service periods.
 
 In 2009
and 2008, the Company did not grant any options or warrants, and all options
outstanding were fully vested prior to January 1, 2008 and no stock options were
outstanding as of December 31, 2009 and 2008.
 
 Stock-based Compensation –
Non-employees
 
 The
company accounts for equity instruments (typically stock grants) issued to
non-employees in accordance with the provisions of FASB ASC 505 and 718
..
 
 Basic and Diluted Earnings
(Loss) per Share
 
 The net
income (loss) per common share ("basic EPS") is computed by
dividing net income (loss) by the weighted average number of common
shares outstanding and excluding any
potential dilution.Basic net loss per share excludes the
dilutive effect of stock options or warrants and convertible
notes.  Diluted net loss per share was the same as basic net loss per
share for 2009 and 2008, since the effect of any potentially dilutive securities
is excluded, as they are anti-dilutive due to the Company's net
losses.  The following table sets forth the computation of basic and
diluted net loss per common share:
 
 Basic and Diluted Earnings
(Loss) per Share (continued)
 F-12
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 
 Year
      ended December 31,2009
                  
                  
                  2008Net
      income (loss) – available to common shareholders
                  
                  $
                  (1,019,700
                  )
                  
                  $
                  (294,500
                  )Weighted
      average common shares outstanding: Basic and diluted
                  
                  
                  12,274,801
                  
                  
                  
                  11,991,686Total
      shares outstanding at end of period
                  
                  
                  12,427,262
                  
                  
                  
                  11,991,686Net
      income (loss) per common share: Basic and diluted
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.02
                  )
 
 
 The
potential shares, which are excluded from the determination of basic and diluted
net loss per share as their effect is anti-dilutive, are as
follows:
 
 Year
      Ended December 31,2009
                      
                      
                      2008Convertible
      Notes
                      
                      
                      3,133,800
                      
                      
                      
                      3,042,800Potential
      equivalent shares excluded
                      
                      
                      2,089,180
                      
                      
                      
                      2,028,527
 
 Foreign Currency
Translation
 
 Financial
statements of foreign subsidiaries, located in the United Kingdom, where the
local currency, UK Pound Sterling, is the functional currency 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, 2009 and 2008,
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.  The Company has determined that deferred tax
assets associated with net operating loss carryforwards may expire prior to
utilization.  The Company has placed a valuation allowance on these
deferred tax assets.
 F-13
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 
 Advertising
 
 Advertising
costs are expensed as incurred and were $1,005,000 and $1,014,900 for the years
ended December 31, 2009 and 2008, respectively.
 
 Fair Value of Financial
Instruments
  Fair
Value
  The
Company adopted ASC 820, Fair Value Measurements and Disclosures for
nonfinancial assets and nonfinancial liabilities measured on a nonrecurring
basis in the first quarter of 2009, and such adoption did not have a material
impact on the Company’s financial statement disclosures. ASC 820 defines
fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principle or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
 
 The
levels of the fair value hierarchy established by ASC 820 are:
 
 Level
1:  inputs are quoted prices, unadjusted, in active markets for
identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
 
 Level
2:  inputs are other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or
indirectly.  A Level 2 input must be observable for substantially the
full term of the asset or liability.
 
 Level
3:  inputs are unobservable and reflect the reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
the asset or liability.
 
 At
December 31, 2009 and 2008, the Company does not have any assets or liabilities
which are recorded at fair value on a recurring basis.
 
 The
Company considers the recorded value of certain of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, accounts
receivable, other current assets, accounts payable and accrued expenses, to
approximate the fair value of the respective assets and liabilities at December
31, 2009 and December 31, 2008 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.
  The
carrying value of certain of the financial instruments, of other current assets
and accrued expenses, approximate fair value due to their short
maturities.
 F-14
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 Comprehensive Income
(Loss)
 
 Comprehensive
income (loss) is composed of the Company's net income (loss) and changes in
equity from non-stockholder sources. The accumulated balances of these
non-stockholder sources are reflected as a separate item in the equity section
of the balance sheet.
 
 Reportable
Segments
 
 The
Company manages its operations through two business segments: brewing
operations, tavern and tasting room operations (domestic) and distributor
operations (international).  The international business segment sells
the Company's products outside the U.S.  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.
  Reclassifications
 
 Certain
amounts in the prior periods presented have been reclassified to conform to the
current period financial statement presentation.  These
reclassifications have no effect on previously reported net loss.
  Recent Accounting
Pronouncements
  Accounting Standards
Codification: In June 2009, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standard (“SFAS”)
No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles—a replacement of FASB Statement No. 162
(“SFAS 168”). The guidance establishes the FASB Accounting Standards
Codification (“ASC”) as the source of authoritative accounting principles
recognized by the FASB. The guidance is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company adopted this guidance for its fiscal quarter ended September 30, 2009.
There was no change to the Company’s consolidated financial statements due to
the implementation of this guidance.
  Fair Value Measurements: In
August 2009, the FASB issued Accounting Standards Update (“ASU”)
No. 2009-05, Measuring
Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value of such liability using one or more of the techniques
prescribed by the update. ASU 2009-05 is effective for the first reporting
period beginning after issuance. The Company adopted ASU 2009-05 for its fiscal
quarter ended September 30, 2009. There was no change to its consolidated
financial statements due to the implementation of this guidance.
  In
January, 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements(“ASU 2010-06”). Reporting entities will have to provide information
about movements of assets among Levels 1 and 2; and a reconciliation of
purchases, sales, issuance, and settlements of activity valued with a Level 3
method, of the three-tier fair value hierarchy established by SFAS No. 157,
Fair Value Measurements (ASC 820). The ASU 2010-06 also clarifies the existing
guidance to require fair value measurement disclosures for each class of assets
and liabilities. ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009 for Level 1 and 2 disclosure
requirements and after December 15, 2010 for Level 3 disclosure
requirements. The Company will adopt the guidance in its fiscal quarter ending
March 31, 2010. The Company does not anticipate this adoption will have a
material impact on its consolidated financial statements.
 F-15
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 Transfers of Financial
Assets: In December 2009, the FASB issued ASU No. 2009-16,
Transfers and Servicing (Topic
860)—Accounting for Transfers of Financial Assets (“ASU 2009-16”). ASU
2009-16 codifies SFAS No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140
(“SFAS 166”), issued in June 2009. The guidance eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The guidance is effective as of the beginning of
the first annual reporting period that begins after November 15, 2009.
Earlier adoption is prohibited. The Company will adopt the guidance in the first
quarter of fiscal 2010. The Company does not anticipate this adoption will have
a material impact on its consolidated financial statements.
  Amendments to Accounting Standards
Codification: In February 2010, the FASB issued ASU No. 2010-08,
Technical Corrections to
Various Topics (“ASU 2010-08”). ASU 2010-08 makes various non-substantive
amendments to the FASB Codification that does not fundamentally change existing
GAAP; however, certain amendments could alter the application of GAAP relating
to embedded derivatives and the income tax aspects of reorganization. The
amended guidance is effective beginning in the first interim or annual period
beginning after the release of the ASU, except for certain amendments. The
Company will adopt the guidance in the second quarter of 2010. The Company does
not anticipate this adoption will have a material impact on its consolidated
financial statements.
  Subsequent Events: On
February 24, 2010, the FASB issued ASU No. 2010-09, Subsequent Events
(Topic 855)—Amendments to Certain Recognition and Disclosure
Requirements (“ASU 2010-09”). ASU 2010-09 removes the requirement
that SEC filers disclose the date through which subsequent events have been
evaluated. This amendment alleviates potential conflicts between
Subtopic 855-10 and the SEC’s requirements. The guidance became effective
with the issuance of ASU 2010-09 and the Company adopted this guidance upon its
issuance.
  2.           Liquidity and Management
Plans
 
 At
December 31, 2009, the Company had cash and cash equivalents of $140,900, a
working capital deficit of $3,463,500 and an accumulated deficit of
$13,360,000.  Additionally, the Company has a history of past losses
as infrastructure and marketing costs were incurred in advance of obtaining
customers. At December 31, 2009, the Company was in default on two of the
financial covenants in its secured credit facility. This violation has resulted
in the Company incurring a higher rate of interest until the violation is cured.
The Company is in discussion with the lender to remediate the covenant
violations.Management
has taken several actions to ensure that the Company will have sufficient cash
for its working capital needs through December 31, 2010, including reductions in
discretionary expenditures, optimizing prices and discounts to increase margin
and securing additional contract brewing contracts. In addition, Company’s
majority shareholder issued a letter of support to provide financial assistance
when required. The Company may also seek additional capital infusion to support
operations. Management believes that these actions will enable the Company to
meet its working capital needs through December 31, 2010.
 
 3.           Inventories
 F-16
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 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:
 
 2009
                    
                    
                    2008Raw
      materials
                    
                    $
                    591,600
                    
                    
                    $
                    667,700Work-in-progress
                    
                    
                    241,300
                    
                    
                    
                    324,000Finished
      goods
                    
                    
                    988,800
                    
                    
                    
                    848,400Merchandise
                    
                    
                    40,900
                    
                    
                    
                    25,100$
                    1,862,600
                    
                    
                    $
                    1,865,200
 
 Work in
process is beer held in fermentation tanks prior to the filtration and packaging
process.
 
 4.           Property and
Equipment
 
 The
following is a summary of property and equipment, at cost less accumulated
depreciation, at December 31:
 2009
                    
                    
                    2008Machinery
      and equipment
                    
                    $
                    11,840,800
                    
                    
                    $
                    11,902,700Buildings
                    
                    
                    7,222,100
                    
                    
                    
                    7,222,100Equipment
      under capital lease
                    
                    
                    233,800
                    
                    
                    
                    233,800Land
                    
                    
                    810,900
                    
                    
                    
                    810,900Leasehold
      improvements
                    
                    
                    1,456,800
                    
                    
                    
                    1,452,200Vehicles
                    
                    
                    425,200
                    
                    
                    
                    363,000Furniture
      and fixtures
                    
                    
                    498,900
                    
                    
                    
                    401,500Equipment
      in progress
                    
                    
                    6,700
                    
                    
                    
                    68,70022,495,200
                    
                    
                    
                    22,454,900Less:  Accumulated
      depreciation and amortization
                    
                    
                    (10,021,000
                    )
                    
                    
                    (9,648,800
                    )$
                    12,474,200
                    
                    
                    $
                    12,806,100
 
 The
Company has property and equipment located in the United Kingdom with a net book
value of approximately $1,584,600 as of December 31,
2009.  Amortization of assets under capital leases is included in
depreciation and amortization expense. Depreciation and amortization expense for
the years ended December 31, 2009 and 2008 was $1,086,400 and $1,077,000,
respectively.
 
 5.           Line of Credit and Note
Payable
 
 In
November 2006, Marquette Business Credit, Inc. provided a line of credit
drawable up to 85% of eligible receivable and 60% of eligible inventory for a
period up to June 2011.  The borrowings were collateralized, with
recourse, by certain eligible trade receivables up to a maximum percentage of
85% of the qualified net amounts of such receivables of each of MBC and Releta
and 60% of MBC’s and Relata’s eligible inventory located in the
US.  This facility carries interest at a rate of one-month LIBOR plus
4.25% and secured by substantially all assets, excluding real property of the
Releta and MBC.
 
 The
Company retains the right to recall any of the collateralized receivables under
the line of credit, and the receivables are subject to
recourse.  Therefore, the transaction does not qualify as a sale under
the terms of FASB ASC 860 and 405  (Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities).  Included in the Balance Sheets as receivable at
December 31, 2009, are account balances totaling $1,724,900 of uncollected
receivables collateralized to the financial institution under this facility. The
amount outstanding on this line of credit as of December 31, 2009 was
approximately $1,562,900. The credit agreements contain financial covenants, and
violations of these covenants result in the Company incurring a higher interest
rate.  At December 31, 2009, the Company was in default on two of the
financial covenants, and management is in discussions with the lender to modify
or waive the covenants.
 F-17
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 On April
26, 2005, Royal Bank of Scotland Commercial Services Limited ("RBS") provided an
invoice discounting facility to UBSN Limited for a maximum amount of £1,750,000
(US $2,558,300) based on 80% prepayment against qualified accounts receivable
related to UBSN's United Kingdom customers.  The initial term of the
facility is for a period of one year after which the facility can be terminated
by either party by providing the other party a notice of six
months.  The facility carries an interest rate of 1.38% above 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, 2009 was
approximately $1,563,300.
 
 6.           Long-Term
Debt
 
 Maturities
of long-term debt for succeeding years are as follows:
 2009
                  
                  
                  2008Notes
      to a financial institution, payable in monthly installment of $20,500,
      plus interest at one month LIBOR plus 5.25% with a balloon payment of
      $622,400 in June 2011; secured by substantially all assets of the Releta
      Brewing Company and Mendocino Brewing Company excluding real property at
      Ukiah.
                  
                  $
                  991,400
                  
                  
                  $
                  1,237,300Note
      to a financial institution, payable in monthly installment of $17,900
      including interest at prime plus 1.75% with a balloon payment of
      approximately $2,737,000 in June 2011, secured by property in Ukiah,
      CA.
                  
                  
                  2,837,900
                  
                  
                  
                  2,899,1003,829,300
                  
                  
                  
                  4,136,400Less
      current maturities
                  
                  
                  319,800
                  
                  
                  
                  316,400$
                  3,509,500
                  
                  
                  $
                  3,820,000
 
 Payments
      due during Year Ending December 31,2010
                    
                    $
                    319,8002011
                    
                    
                    3,509,500$
                    3,829,300
 
 7.           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 leases and the present value of the
net minimum lease payments as of December 31, 2009, are as follows:
 
 Year
      Ending December 31,2010
                    
                    $
                    165,6002011
                    
                    
                    115,7002012
                    
                    
                    73,100354,400Less
      amounts representing interest
                    
                    
                    (50,200
                    )Present
      value of minimum lease payments
                    
                    
                    304,200Less
      current maturities
                    
                    
                    (142,700
                    )Non-current
      leases payable
                    
                    $
                    161,500
 F-18
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 Depreciation
expense related to capital lease was $47,500 for both the years ended
December  31, 2009 and 2008.
 
 8.           Notes to Related Party –
Subordinated
 
 Notes
payable to a related party consist of unsecured convertible notes to United
Breweries of America (UBA), with interest at the prime rate plus 1.5%, but not
to exceed 10% per year.  The notes are convertible into common stock
at $1.50 per share.  The notes have been extended until June
2010.  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 Grand Pacific Financing
Corporation and Marquette Business Credit, Inc., both maturing in June
2011.  Therefore, the Company will not require the use of working
capital to repay any of the UBA notes until the above facilities are
repaid.  Accordingly, the entire amount due of $3,133,800 and
$3,042,800 as of December 31, 2009 and 2008 under the notes is classified as a
long term liability.  The notes include $1,218,400and $1,127,400 of accrued
interest at December 31, 2009 and 2008.
 
 Notes
payable also includes balance of unsecured loan from Shepherd Neame Limited to
UBSN Limited payable in annual installment of $97,000 with interest at 5% per
year and maturing June 2012.  The amounts outstanding, under this loan
as of December 31, 2009 and 2008 were $291,000 and $350,900
respectively.
 
 Payments
      due during Year Ending December 31,2010
                        
                        $
                        97,0002011
                        
                        
                        3,230,8002012
                        
                        
                        97,000$
                        3,424,800
  
 9.           Commitments and
Contingencies
 
 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.
 
 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.
 F-19
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 Loss
contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the nature of the guarantee would be
disclosed.  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 2015 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 Hopland, California; land at its Saratoga Springs, New York,
facility; a building in the United Kingdom; and certain
equipment.  The land lease includes a renewal option for three
additional five-year periods, which the Company intends to exercise, and some
leases are adjusted annually for changes in the consumer price
index.  The leases begin expiring in 2010.  Rent expense
charged to operations was $243,300 and $200,600 for the years ended December 31,
2009 and 2008.
 
 Future
minimum lease payments under these agreements are as follows:
 
 Year
      Ending December 31,2010
                    
                    $
                    256,3002011
                    
                    
                    228,0002012
                    
                    
                    214,3002013
                    
                    
                    207,3002014
                    
                    
                    119,500Thereafter
                    
                    
                    7,800$
                    1,033,200
 
 Keg Management
Agreement
 
 In
September 2009, the Company renewed the keg management agreement with MicroStar
Keg Management LLC.  Under this arrangement, MicroStar provides all
kegs for which the Company pays a service fee depending on the applicable
territory.  The agreement is effective for five years ending in
September 2014.  If the agreement is terminated, the Company is
required to purchase four times the average monthly keg usage for the preceding
six-month period from MicroStar.  The Company expects to continue this
relationship.  Rental expense associated with this agreement was
$53,100 and $46,700 for the years ended December 31, 2009 and 2008,
respectively.
  10.        Related-Party
Transactions
 
 The
Company conducts business with United Breweries of America (UBA), which owns
approximately 25% of the Company's common stock.  Additionally, UBSN
Limited has significant transactions, amounting to 18% of sales in the year
ending December 31, 2009, with Shepherd Neame, Ltd., which is a related party to
a former Board member.    The following table reflects
balances outstanding and the value of the transactions with these related
parties for the years ended December 31, 2009 and 2008:
 F-20
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 2009
                      
                      
                      2008TRANSACTIONSGross
      sales to Shepherd Neame Ltd.
                      
                      $
                      6,620,700
                      
                      
                      $
                      4,872,800Purchases
      from Shepherd Neame Ltd.
                      
                      
                      15,446,700
                      
                      
                      
                      16,032,400Expenses
      reimbursement to Shepherd Neame Ltd.
                      
                      
                      1,031,100
                      
                      
                      
                      1,161,700Interest
      expenses associated with UBA notes (see note 8)
                      
                      
                      91,000
                      
                      
                      
                      126,500Interest
      paid to Shepherd Neame Ltd. (see note 8)
                      
                      
                      16,400
                      
                      
                      
                      25,000ACCOUNT
      BALANCESAccounts
      payable and accrued liabilities to Shepherd Neame Ltd.
                      
                      
                      10,577,700
                      
                      
                      
                      4,936,800Accounts
      receivable and prepayments to Shepherd Neame Ltd.
                      
                      
                      5,774,700
                      
                      
                      
                      1,309,000
  11.        Major
Customers
 
 Sales to
the top five customers totaled $11,972,100 and $10,508,300 for the years ended
December 31, 2009 and 2008, which represents 33% and 28% of sales for the years
ended December 31, 2009 and 2008, respectively. No other customers individually
represent greater than 5% of the accounts receivable balance or
revenues.
  12.        Stockholders'
Equity
 
 Independent
outside members of the Board of Directors are compensated for attending Board of
Directors and committee meetings through the issuance of common
stock.  Expenses related to this compensation totaled $93,000 and
$61,000 for the years ended December 31, 2009 and 2008,
respectively.
  Preferred
Stock
 
 Ten
million shares of preferred stock have been authorized, of which 227,600 are
designated as Series A. 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.
  13.        Stock Option
Plan
 
 The
Company had a stock option plan, the 1994 Stock Option Plan, which expired in
2004.   As of December 31, 2009 and 2008, no options were
outstanding and the Company did not issue any options during the years 2009 and
2008.
 
 During
the years ended December 31, 2009 and 2008, the Company granted no performance
based options to employees, executives or senior management.
 
 14.        Income
Taxes
 F-21
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 The
accumulated losses during the past in the U.S. operations has resulted in the
Company determining that the deferred tax assets associated with net operating
loss carryforwards and investment tax credits may expire prior to
utilization.  The Company recorded a valuation allowance of $4,202,600
for deferred tax assets.  The Company also has $68,433 of California
Manufacturers' Investment Tax Credits that can be carried forward to reduce
future taxes.  These credits begin expiring in 2011.
 
 2009
                      
                      
                      2008Provision
      for income taxesUS
      Federal
                      
                      $
                      -
                      
                      
                      $
                      -US
      States
                      
                      
                      6,600
                      
                      
                      
                      4,500Current
      provision
                      
                      
                      6,600
                      
                      
                      
                      4,500Change
      in deferred income taxes
                      
                      
                      -
                      
                      
                      
                      -Total
      provision for income taxes
                      
                      $
                      6,600
                      
                      
                      $
                      4,500
 
 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:
 
 2009
                    
                    
                    2008US
      Federal income tax expense (benefit) at 34%
                    
                    $
                    (86,400
                    )
                    
                    $
                    (46,500
                    )US
      State income tax expense (benefit)
                    
                    
                    (33,800
                    )
                    
                    
                    (8,200
                    )United
      Kingdom income tax expense (benefit)
                    
                    
                    (102,500
                    )
                    
                    
                    (32,200
                    )Other
      tax items
                    
                    
                    (109,400
                    )
                    
                    
                    (590,300
                    )Change
      in valuation allowance
                    
                    
                    338,700
                    
                    
                    
                    681,700Total
                    
                    $
                    6,600
                    
                    
                    $
                    4,500
  Temporary
differences and carryforwards that give rise to deferred tax assets and
liabilities are as follows:
 
 2009
                    
                    
                    2008Benefit
      of net operating loss carryforwards
                    
                    $
                    6,005,000
                    
                    
                    $
                    5,032,900Undistributed
      earnings of UBIUK
                    
                    
                    (371,300
                    )
                    
                    
                    (335,000
                    )Investment
      in UBIUK
                    
                    
                    366,800
                    
                    
                    
                    366,800Depreciation
      and amortization
                    
                    
                    (1,513,800
                    )
                    
                    
                    (1,239,000
                    )Other
                    
                    
                    (284,100
                    )
                    
                    
                    38,200Subtotal
                    
                    
                    4,202,600
                    
                    
                    
                    3,863,900Less
      valuation allowance
                    
                    
                    (4,202,600
                    )
                    
                    
                    (3,863,900
                    )Total
                    
                    $
                    -
                    
                    
                    $
                    -Change
      in valuation allowance
                    
                    $
                    (338,700
                    )
                    
                    $
                    (681,700
                    )
 F-22
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 The
Company has net operating losses available for carry forward. The US Federal net
operating losses total approximately $17,200,000 and expire beginning 2013 and
ending in 2027. The US state operating losses total approximately $316,000 and
expire beginning 2012 and ending 2027. The Company’s United Kingdom operating
losses total approximately $1,026,000 and they do not expire.
  Tax years
that remain open for examination by the Internal Revenue Service include 2005,
2006, 2007, 2008 and 2009 (expected to be filed in August 2010), and by the
State of California include 2004 through 2009.  In addition, tax years
from 1997 to 2003 may subject to examination by the Internal Revenue Service to
the extent that the Company utilizes the net operating losses from those years
in its current or future year tax returns.
  15.        Segment
Information
 
 The
Company's business presently consists of two segments.  The first is
brewing for wholesale to distributors and sale along with merchandise at the
Company's brewpub and retail merchandise store located at the Hopland Brewery
and at Saratoga Springs brewery in the state of New York.  This
segment accounted for approximately 42% of the Company's gross sales during the
years 2009 and 2008.  The second consists of distributing alcoholic
beverages to retail establishments and restaurants in the United Kingdom and
Europe.  This segment accounted for approximately 58% of the Company's
gross sales during 2009 and 2008.  A summary of each segment is as
follows:
 
 Year
      Ended December 31,2009Brewing
      Operations
                
                
                Distributor
                  Operations
                
                
                Corporate
                  and
      Other
                
                
                TotalSales
                
                
                $
      15,118,200
                
                
                
                $
      20,748,500
                
                
                
                
                
                
                $
      35,866,700Operating
      income (loss)
                
                
                173,200
                
                
                
                (651,100
                )
                
                
                
                
                
                
                (477,900
                )Identifiable
      assets
                
                
                12,752,200
                
                
                
                11,632,900
                
                
                
                2,239,400
                
                
                
                26,624,500Depreciation
      and amortization
                
                
                585,900
                
                
                
                500,500
                
                
                
                
                
                
                
                1,086,400Capital
      expenditures
                
                
                132,500
                
                
                
                401,100
                
                
                
                
                
                
                
                533,600
 
 
 Year
      Ended December 31,2008Brewing
      Operations
                
                
                Distributor
                  Operations
                
                
                Corporate
                  and
      Other
                
                
                TotalSales
                
                
                $
      15,689,500
                
                
                
                $
      21,951,000
                
                
                
                
                
                
                $
      37,640,500Operating
      income
                
                
                325,200
                
                
                
                75,400
                
                
                
                
                
                
                400,600Identifiable
      assets
                
                
                13,144,700
                
                
                
                6,898,800
                
                
                
                2,443,800
                
                
                
                22,487,300Depreciation
      and amortization
                
                
                533,900
                
                
                
                543,100
                
                
                
                
                
                
                
                1,077,000Capital
      expenditures
                
                
                490,100
                
                
                
                649,600
                
                
                
                
                
                
                
                1,139,700
  16.       Unrestricted Net
Assets
 F-23
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 The
Company's wholly-owned subsidiary, UBI, has retained losses of approximately
£884,300 as
of December 31, 2009.  Under UBSN's line of credit agreement with RBS,
distributions and other payments to the Company from its subsidiary are not
permitted if the retained earnings drop below £1,000,000.  Condensed
financial information of the United States operations is as
follows:
  Balance
      Sheets
                    
                    2009
                    
                    
                    2008AssetsCash
                    
                    $
                    46,700
                    
                    
                    $
                    105,400Accounts
      receivable
                    
                    
                    1,695,500
                    
                    
                    
                    1,797,100Inventories
                    
                    
                    1,862,600
                    
                    
                    
                    1,865,200Other
      current assets
                    
                    
                    161,400
                    
                    
                    
                    167,600Total
      current assets
                    
                    
                    3,766,200
                    
                    
                    
                    3,935,300Investment
      in subsidiary
                    
                    
                    1,225,000
                    
                    
                    
                    1,225,000Property
      and equipment
                    
                    
                    10,889,600
                    
                    
                    
                    11,279,500Other
      assets
                    
                    
                    335,800
                    
                    
                    
                    373,700Total
      assets
                    
                    $
                    16,216,600
                    
                    
                    $
                    16,813,500LiabilitiesLine
      of credit and note payable
                    
                    $
                    1,562,900
                    
                    
                    $
                    1,762,000Accounts
      payable
                    
                    
                    1,546,900
                    
                    
                    
                    1,324,100Accrued
      liabilities
                    
                    
                    831,400
                    
                    
                    
                    802,100Current
      maturities of debt and leases
                    
                    
                    381,500
                    
                    
                    
                    374,500Total
      current liabilities
                    
                    
                    4,322,700
                    
                    
                    
                    4,262,700Intercompany
      payable
                    
                    
                    275,100
                    
                    
                    
                    533,900Long-term
      debt and capital leases
                    
                    
                    3,594,800
                    
                    
                    
                    3,970,700Notes
      payable to related party
                    
                    
                    3,133,800
                    
                    
                    
                    3,042,800Total
      liabilities
                    
                    
                    11,326,400
                    
                    
                    
                    11,810,100Stockholders'
      equityCommon
      stock
                    
                    
                    15,043,300
                    
                    
                    
                    14,902,300Preferred
      stock
                    
                    
                    227,600
                    
                    
                    
                    227,600Accumulated
      deficit
                    
                    
                    (10,380,700
                    )
                    
                    
                    (10,126,500
                    )Total
      stockholders' equity
                    
                    
                    4,890,200
                    
                    
                    
                    5,003,400Total
      Liabilities and stockholders' equity
                    
                    $
                    16,216,600
                    
                    
                    $
                    16,813,500
 F-24
 Mendocino
Brewing Company, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2009
 17.       Unrestricted Net Assets
(continued)
 
 Statement
      of Operations
                          
                          2009
                          
                          
                          2008Net
      sales
                          
                          $
                          14,253,000
                          
                          
                          $
                          14,784,000Cost
      of goods sold
                          
                          
                          11,008,000
                          
                          
                          
                          11,406,100Selling,
      marketing, and retail expenses
                          
                          
                          1,257,600
                          
                          
                          
                          1,319,700General
      and administrative expenses
                          
                          
                          1,929,400
                          
                          
                          
                          1,848,400Income
      from operations
                          
                          
                          58,000
                          
                          
                          
                          209,800Other
      income and (expense)Interest
      expenses
                          
                          
                          (465,700
                          )
                          
                          
                          (545,100
                          )Other
      income
                          
                          
                          160,100
                          
                          
                          
                          198,600Provision
      for taxes
                          
                          
                          (6,600
                          )
                          
                          
                          (4,500
                          )(305,600
                          )
                          
                          
                          (351,000
                          )Net
      loss
                          
                          $
                          (254,200
                          )
                          
                          $
                          (141,200
                          )
 
 
 Statements
      of Cash Flows
                    
                    2009
                    
                    
                    2008Cash
      flows from operating activities
                    
                    $
                    891,300
                    
                    
                    $
                    253,700Cash
      flow from investing activitiesPurchase
      of property and equipment
                    
                    
                    (132,500
                    )
                    
                    
                    (286,100
                    )Proceeds
      from sale of assets
                    
                    
                    9,300
                    
                    
                    
                    -Net
      cash from investment activities
                    
                    
                    (123,200
                    )
                    
                    
                    (286,100
                    )Cash
      flow from financing activitiesNet
      borrowing (repayment) on line of credit
                    
                    
                    (199,100
                    )
                    
                    
                    448,500Borrowing
      on long-term debt
                    
                    
                    -
                    
                    
                    
                    168,500Repayment
      of long-term debt
                    
                    
                    (307,100
                    )
                    
                    
                    (259,100
                    )Payment
      on obligation under capital lease
                    
                    
                    (61,800
                    )
                    
                    
                    (32,100
                    )Net
      change in inter company payable
                    
                    
                    (258,800
                    )
                    
                    
                    (220,000
                    )Net
      cash flow from financing activities
                    
                    
                    (826,800
                    )
                    
                    
                    105,800Cash,
      beginning of year
                    
                    
                    105,400
                    
                    
                    
                    32,000Cash,
      end of year
                    
                    $
                    46,700
                    
                    
                    $
                    105,400
 
 F-25