On August 18, 2014, Mendocino Brewing Company Inc. and its wholly-owned subsidiary, Releta Brewing Company LLC received a notice from MB Financial Bank, N.A. as successor in interest to Cole Taylor Bank regarding its intention to exercise certain rights with respect to events of default of the company pursuant to the credit and security agreement, dated as of June 23, 2011, by and among the borrowers and the Lender, as amended by that certain First Amendment, dated as of March 29, 2013. The borrowers have previously received notices from the Lender regarding the exercise of rights related to events of default on September 18, 2013 and April 18, 2014, respectively. The loan agreement provides the borrowers a credit facility with a maturity date of June 23, 2016, of up to $10,000,000, which consists of a $4,119,000 revolving facility (the Revolver), a $1,934,000 machinery and equipment term loan, a $2,947,000 real estate term loan and a $1,000,000 capital expenditure line of credit.

The credit facility is secured by the personal property of the company and releta, and the company's Ukiah, California facility, among other items of the borrowers' property. The covenants made by the borrowers pursuant to the loan agreement include requirements that the borrowers maintain certain financial metrics. The default notice also states that the tangible net worth of the borrowers has continued to fall short of the required amount as measured through June 30, 2014.

The company calculates the required tangible net worth of the borrowers to be $6,181,400 as of June 30, 2014 and the actual tangible net worth on such date to be $4,989,400. The company does not anticipate that the borrowers will be able to regain compliance with the required fixed charge coverage ratio or the minimum tangible net worth in the near future. The default notice states that the Lender, effective August 20, 2014, will exercise its right to reduce the advance rate for: eligible finished goods and raw material inventory; and eligible work-in progress inventory by 2% and will continue to reduce each by an additional 2% on the 20th day of each month thereafter.

The advance rates are used in the calculation of the borrowing base of each borrower, which is used in the determination of the amount available to each borrower pursuant to the revolver. Pursuant to the loan agreement, if such availability is less than $0, or if certain components of the borrowing base fall below certain limits in relation to outstanding revolving loans, such difference shall be immediately due and payable.