For The Quarterly Period Ended September 30, 2010

OR

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

For the transition period from                      to                     

Commission File Number 0-26542

929 North Russell Street
Portland, Oregon 97227
(Address of principal executive offices)

(503) 331-7270
(Registrant’s telephone number, including Area Code)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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 o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (See the definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). Check one:

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

Yes o No þ

The number of shares of the registrant’s common stock outstanding as of November 4, 2010 was 18,819,053.

 

 

CRAFT BREWERS ALLIANCE, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2010

TABLE OF CONTENTS

				Page
PART I.		Financial Information
ITEM 1.		Financial Statements
		Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009			3
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009			4
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009			5
		Consolidated Notes to Financial Statements			6
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			30
ITEM 4.		Controls and Procedures			31
PART II.		Other Information
ITEM 1.		Legal Proceedings			31
ITEM 1A.		Risk Factors			31
ITEM 6.		Exhibits			36
SIGNATURES					37
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32.1
EX-99.1

PART I.

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these financial statements.

CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The accompanying consolidated financial statements and related notes of the Company should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 Annual Report”). These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These financial statements are unaudited but, in the opinion of management, reflect all material adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. All such adjustments were of a normal, recurring nature. Certain reclassifications have been made to the prior year’s financial statements to conform to the current year presentation. The results of operations for such interim periods are not necessarily indicative of the results of operations for the full year.

Organization

     The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, 2010 Enterprises LLC, which was formed on July 27, 2010 for the purpose of acquiring Kona Brewing Co., Inc. (“KBC”). 2010 Enterprises LLC was dormant prior to the acquisition of KBC. See Note 11, Subsequent Events for a discussion of the merger (“Merger”) completed October 1, 2010 among the Company, KBC and related entities, including Kona Brewery LLC (“Kona”), and the KBC shareholders.

     The financial statements as of and for the three and nine months ended September 30, 2010 exclude the October 1, 2010 merger of KBC and related entities with and into the Company, except as more fully described in Note 4 and Note 11 below.

Recent Accounting Pronouncements

     On January 1, 2010, the Company adopted the guidance in Accounting Standards Update 2009-17, which was incorporated into Accounting Standards Codification (“ASC”) Topic 810-10, Consolidation — Overall. This standard requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”) and requires ongoing assessments of whether an entity qualifies as a VIE and if a holder of an interest in a VIE qualifies as the primary beneficiary of the VIE. The adoption of this new accounting standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

2. Inventories

     Inventories consist of the following:

     Work in process is beer held in fermentation tanks prior to the filtration and packaging process.

3. Other Current Assets

     Other current assets consist of the following:

4. Equity Investments

     Equity investments consist of the following:

FSB

     For the three months ended September 30, 2010 and 2009, the Company’s share of FSB’s net income totaled $163,000 and $132,000, respectively. For the nine months ended September 30, 2010 and 2009, the Company’s share of FSB’s net income totaled $541,000 and $212,000, respectively. The Company’s investment in FSB was $5.1 million and $4.5 million at September 30, 2010 and December 31, 2009, respectively, and the Company’s portion of equity as reported on FSB’s financial statement was $2.8 million and $2.3 million as of the corresponding dates. The Company has not received any cash capital distributions associated with FSB during its ownership period. At September 30, 2010 and December 31, 2009, the Company has recorded a payable to FSB of $2.5 million and $2.3 million, respectively, primarily for amounts owing for purchases of Goose Island-branded product.

Kona

     For the three months ended September 30, 2010 and 2009, the Company’s share of Kona’s net income totaled $100,000 and $64,000, respectively. For the nine months ended September 30, 2010 and 2009, the Company’s share of Kona’s net income totaled $145,000 and $112,000, respectively. The Company’s investment in Kona was $1.1 million and $1.2 million at September 30, 2010 and December 31, 2009, respectively, and the Company’s portion of equity as reported on Kona’s financial statement was $369,000 and $419,000, respectively, as of the corresponding dates. The Company received cash capital distributions totaling $195,000 associated with Kona during the nine months ended September 30, 2010. The Company did not receive any such cash capital distributions during the nine months ended September 30, 2009. At September 30, 2010 and December 31, 2009, the Company has recorded a receivable from Kona of $2.2 million and $1.9 million, respectively, primarily related to amounts owing under the alternating proprietorship and distribution agreements. As of September 30, 2010 and December 31, 2009, the Company has recorded a payable to Kona of $2.4 million and $2.3 million, respectively, primarily for amounts owing for purchases of Kona-branded product.

     At September 30, 2010 and December 31, 2009, the Company had net outstanding receivables due from KBC of $119,000 and $57,000, respectively. As of September 30, 2010, KBC and the Company were the only members of Kona.

     See Note 11, Subsequent Events for a discussion of the merger completed October 1, 2010 among the Company, KBC and related entities, including Kona, and the KBC shareholders.

     Since June 2008, the Company has maintained a loan agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”), which was initially comprised of a $15.0 million revolving line of credit (“Line of Credit”), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and a $13.5 million term loan (“Term Loan”). The Company may draw upon the Line of Credit for working capital and general corporate purposes. At September 30, 2010, the Company had no borrowings outstanding under the Line of Credit.

     On June 8, 2010, the Company and BofA executed a second modification to its Loan Agreement effective June 1, 2010 (“Second Amendment”). The significant provisions of the Second Amendment were to reduce the marginal rates for borrowings under the Loan Agreement, reduce the quarterly fees on the unused portion of the Line of Credit, and eliminate the requirements that the Company maintain a minimum asset coverage ratio and provide certain monthly reporting packages to BofA. The Company and BofA executed a third modification dated September 30, 2010 (“Third Amendment”) to the Loan Agreement. Pursuant to the Third Amendment, the maximum borrowing availability under the revolving line of credit has been increased, the maturity date of the Line of Credit has been extended, and the marginal rates for borrowing under the Loan Agreement and the quarterly fees on the unused portion of the Line of Credit have been reduced. BofA also consented to the Company’s acquisition of KBC, including the assumption of debt of KBC. Under the Third Amendment, KBC and related entities were added as guarantors with respect to the Loan Agreement following the closing of the acquisition.

     As of the effective date of the Third Amendment, the maximum borrowing available under the Line of Credit increased from $15.0 million to $22.0 million and the maturity date for the Line of Credit was extended from January 1, 2013 to September 30, 2015, at which time the outstanding principal balance, as applicable, and any accrued but unpaid interest will be due.

     Under the Loan Agreement as amended, the Company may select either the London Inter-Bank Offered Rate (“LIBOR”) or the Inter-Bank Offered Rate (“IBOR”) (each, a “Benchmark Rate”) as the basis for calculating interest on the outstanding principal balance of the Line of Credit. Interest accrues at an annual rate equal to the Benchmark Rate plus a marginal rate. The Company may select different Benchmark Rates for different tranches of its borrowings under the Line of Credit. Effective with the Third Amendment, the marginal rate will vary from 1.00% to 2.25% based on the ratio of the Company’s funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined (“funded debt ratio”). LIBOR rates may be selected for one, two, three, or six month periods, and IBOR rates may be selected for no shorter than 14 days and no longer than six months. Accrued interest for the Line of Credit is due and payable monthly.

     Under the Loan Agreement as amended, a quarterly fee on the unused portion of the Line of Credit, including the undrawn amount of the related standby letter of credit, will vary from 0.15% to 0.30% based upon the Company’s funded debt ratio. At September 30, 2010, the quarterly fee was 0.20%. An annual fee will be payable in advance on the notional amount of each standby letter of credit issued and outstanding multiplied by an applicable rate ranging from 1.00% to 2.00%.

CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)

     Interest on the Term Loan will accrue on the outstanding principal balance in the same manner as provided for under the Line of Credit, as established under the LIBOR one-month Benchmark Rate. At September 30, 2010, the principal balance outstanding under the Term Loan was $12.7 million. The interest rate on the Term Loan was 1.51% as of September 30, 2010. Accrued interest for the Term Loan is due and payable monthly. At September 30, 2010, principal payments are due monthly in accordance with an agreed-upon schedule set forth in the Loan Agreement. Any unpaid principal balance and unpaid accrued interest will be due on July 1, 2018.

     The Company is in compliance with all applicable contractual financial covenants at September 30, 2010. Under the Loan Agreement as amended, the Company is required to meet the financial covenant ratios of funded debt to EBITDA, as defined, and fixed charge coverage in the manner and at levels established pursuant to the Loan Agreement. These financial covenants are measured on a trailing four-quarter basis. The definition of EBITDA under the Loan Agreement is EBITDA as adjusted for certain other items specifically identified in either the Loan Agreement or the Third Amendment. For all periods ending subsequent to and including December 31, 2010, the Company is required to maintain a ratio of funded debt to EBITDA, as defined, less than or equal to 3.0 to 1 and a fixed charge coverage ratio in excess of 1.25 to 1.

     The Loan Agreement is secured by substantially all of the Company’s personal property and by the real properties located at 924 North Russell Street, Portland, Oregon and 14300 NE 145 ^th Street, Woodinville, Washington (the “Collateral”), which comprise its Oregon Brewery and Washington Brewery, respectively. In addition, the Company is restricted in its ability to declare or pay dividends, repurchase any outstanding common stock, incur additional debt or enter into any agreement that would result in a change in control of the Company.

6. Derivative Financial Instruments and Fair Value Measurement

Interest Rate Swap Contracts

     The Company’s risk management objectives are to ensure that business and financial exposures to risk that have been identified and measured are minimized using the most effective and efficient methods to reduce, transfer and, when possible, eliminate such exposures. Operating decisions contemplate associated risks and management strives to structure proposed transactions to avoid or reduce risk whenever possible.

     The Company has assessed its vulnerability to certain business and financial risks, including interest rate risk associated with its variable-rate long-term debt. To mitigate this risk, the Company entered into with BofA a five-year interest rate swap agreement with a total notional value of $9.6 million (as of September 30, 2010) to hedge the variability of interest payments associated with its variable-rate borrowings under its Term Loan. Through this swap agreement, the Company pays interest at a fixed rate of 4.48% and receives interest at a floating-rate of the one-month LIBOR. Since the interest rate swap hedges the variability of interest payments on variable rate debt with similar terms, it qualifies for cash flow hedge accounting treatment under ASC 815, Derivatives and Hedging (“ASC 815”). As of September 30, 2010, unrealized net losses of $991,000 were recorded in accumulated other comprehensive loss as a result of this hedge. The effective portion of the gain or loss on the derivative is reclassified into interest expense in the same period during which the Company records interest expense associated with the Term Loan. There was no hedge ineffectiveness recognized for the three and nine months ended September 30, 2010. No hedge ineffectiveness was recognized for the corresponding periods in 2009.

     As a result of the merger with Widmer Brothers Brewing Company (“WBBC”), the Company assumed WBBC’s contract with BofA for a $7.0 million notional interest rate swap agreement. On the effective date of the merger with WBBC, the Company entered into with BofA an equal and offsetting interest rate swap contract. Neither swap contract qualifies for hedge accounting under ASC 815. The assumed contract requires the Company to pay interest at a fixed rate of 4.60% and receive interest at a floating rate of the one-month LIBOR, while the offsetting contract requires the Company to pay interest at a floating rate of the one-month LIBOR and receive interest at a fixed rate of 3.47%. Both contracts expired on November 1, 2010. The Company recorded as other income a net gain associated with the contracts of $21,000 for the three months ended September 30, 2010 and 2009. The Company recorded as other income a net gain associated with the contracts of $61,000 and $59,000 for the nine months ended September 30, 2010 and 2009, respectively.

     The following table presents the balance sheet location and fair value of the Company’s derivative instruments:

CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)

conjunction with these stock grants, the Company issued 18,000 shares of Common Stock in each period. The Company recognized stock-based compensation expense associated with these grants of $61,000 and $36,000 in the Company’s statements of operations during the nine months ended September 30, 2010 and 2009, respectively.

Stock Plans

     The Company maintains several stock incentive plans, including those discussed below, under which non-qualified stock options, incentive stock options and restricted stock are granted to employees and non-employee directors. The Company issues new shares of common stock upon exercise of stock options. Under the terms of the Company’s stock option plans, subject to certain limitations, employees and directors may be granted options to purchase the Company’s common stock at the market price on the date the option is granted.

     On May 26, 2010, the shareholders approved the 2010 Stock Incentive Plan (the “2010 Plan”), as recommended by the Company’s board of directors. The 2010 Plan provides for grants of stock options, restricted stock, restricted stock units, performance awards and stock appreciation rights to directors and employees. While incentive stock options may only be granted to employees, awards other than incentive stock options may be granted to employees and directors. The 2010 Plan is administered by the compensation committee of the board of directors (“Compensation Committee”), which determines the grantees, the number of shares of common stock for which options are exercisable and the exercise prices of such shares, among other terms and conditions of equity-based awards under the 2010 Plan. A maximum of 750,000 shares of common stock is authorized for issuance under the 2010 Plan.

     The Company maintains the 2002 Stock Option Plan (“2002 Plan”) under which non-qualified stock options and incentive stock options were granted to employees and non-qualified stock options were granted to non-employee directors and independent consultants or advisors, subject to certain limitations. Options granted to the Company’s employees were generally designated to vest over either a four-year or five-year period while options granted to the Company’s directors were generally designated to become exercisable from the date of grant up to three months following the grant date. Vested options are generally exercisable for ten years from the date of grant. The Compensation Committee administers the 2002 Plan.

     The Company maintains the 2007 Plan under which grants of stock options and restricted stock were made to the Company’s employees and restricted stock grants were made to the Company’s directors. These grants have been made since the inception of the 2007 Plan in May 2007 through May 2010, as discussed above. Options granted to the Company’s employees were generally designated to vest over a five-year period. Vested options are generally exercisable for ten years from the date of grant. The 2007 Plan is administered by the Compensation Committee.

     With the approval of the 2010 Plan, no further grants of stock options or similar stock awards may be made under either the 2002 Plan or the 2007 Plan; however, the provisions of these plans will remain in effect until all outstanding options are terminated or exercised.

Stock Option Plan Activity

     Presented below is a summary of the Company’s stock option plan activity for the nine months ended September 30, 2010:

CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)

     Stock options totaling 7,500 vested during the nine months ended September 30, 2010. No stock options vested during the corresponding period of 2009. The total intrinsic value of stock options exercised during the nine months ended September 30, 2010 and 2009 was approximately $227,000 and $99,000, respectively.

     The Company recognized stock-based compensation expense associated with stock options of $11,000 and $24,000 for the three and nine months ended September 30, 2010, respectively. The Company recognized stock-based compensation expense for stock option grants of $4,000 for the corresponding periods in 2009. At September 30, 2010, the total unrecognized stock based compensation associated with unvested option grants was approximately $160,000, which is expected to be recognized over a period of approximately 4.13 years.

     The following table summarizes information for options currently outstanding and exercisable at September 30, 2010:

8. Earnings per Share

     The following table sets forth the computation of basic and diluted earnings per common share:

     The potential common shares excluded from the calculation of diluted earnings per share totaled 16,000 for the three months ended September 30, 2009, and such shares totaled 45,000 and 209,000 for the nine months ended September 30, 2010 and 2009, respectively, because their effect would be anti-dilutive. No potential common shares were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2010.

9. Comprehensive Income

     The following table sets forth the Company’s comprehensive income for the periods indicated:

10. Income Taxes

     As of September 30, 2010, the Company’s deferred tax assets were primarily comprised of federal net operating loss carryforwards (“NOLs”) of $22.4 million, or $7.6 million tax-effected; state NOL carryforwards of $171,000 tax-effected; and federal and state alternative minimum tax credit carryforwards of $278,000 tax-effected. In assessing the realizability of its deferred tax assets, the Company considered both positive and negative evidence when measuring the need for a valuation allowance. The ultimate realization of deferred tax assets is dependent upon the existence of, or generation of, taxable income during the periods in which those temporary differences become deductible. Among other factors, the Company considered future taxable income generated by the projected differences between financial statement depreciation and tax depreciation. At December 31, 2009, based upon the available evidence, the Company believed that it was not more likely than not that all of the deferred tax assets would be realized. The valuation allowance was $100,000 as of December 31, 2009. Based on the cumulative earnings generated and other evidence available to it as of June 30, 2010, the Company recorded a $100,000 reduction of the valuation allowance, eliminating it as of that date.

     The effective tax rate for the first nine months ended September 30, 2010 was also affected by the impact of the Company’s non-deductible expenses, primarily meals and entertainment and merger-related expenses and an average state tax rate that results from a relatively high proportion of shipments the Company makes to states with relatively high tax rates.

     The Company reached a settlement with the Internal Revenue Service during the second quarter of 2010 over outstanding examination issues associated with the income tax returns for 2007 and 2008 filed by WBBC. The amount associated with this settlement was $86,000, most of which the Company had provided for during 2009.

11. Subsequent Events

Merger with KBC

     On October 1, 2010 (the “effective date”), the Company completed its acquisition of KBC and related entities pursuant to an agreement and plan of merger dated July 31, 2010 (the “Merger Agreement”). The Merger Agreement was filed by the Company with the SEC as Exhibit 2.1 to a Current Report on Form 8-K filed August 3, 2010.

     As of the effective date, a wholly owned subsidiary of the Company, Kona Brewing Co., LLC (“KBC LLC”), formerly known as 2010 Enterprises LLC, acquired all outstanding shares of KBC common stock in exchange for aggregate consideration of approximately $17.8 million (the “Merger Consideration”), which was comprised of approximately $6.1 million in cash and the balance (approximately $11.7 million) in the form of 1,667,000 shares of the Company’s common stock based on the value of such shares as of the effective date. Of the total shares issued, the Company deposited 292,456 shares of common stock in escrow with a designated escrow agent (the “Escrow Shares”) in connection with indemnification provisions relating to claims that may be asserted by the Company in connection with breaches of representations and warranties made by KBC and its shareholders (the “KBC shareholders”). The Merger Consideration is subject to adjustment based on final verification by the parties of the final balance sheet of KBC, including its working capital position, as of the effective date.

CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)

     On October 1, 2010, the Company borrowed $6.1 million under the Line of Credit to fund the cash component of the Merger Consideration. As discussed in Note 5, the maximum borrowing available under the Company’s Line of Credit was increased from $15.0 million to $22.0 million to accommodate the execution of the Merger.

     As a result of the merger, the Company acquired a 100 percent interest in Kona, which continues to own and operate the brewing facilities located in Kailua-Kona, Hawaii. KBC LLC runs the restaurant and pub operations, which were previously operated by KBC, and are situated in Honolulu, Oahu and Kailua-Kona, Hawaii.

     The Company believes that the combined entity is able to secure advantages beyond those that had already been achieved in its long-term strategic relationship with KBC in supporting KBC’s brand family of products with increased financial, marketing and distribution capabilities, allowing the Kona brand to reach more consumers in both Hawaii and the U.S. mainland. This acquisition increases the breadth and variety of the Company’s brand offerings, creating favorable selling opportunities in a greater number of targeted markets.

Accounting for the Acquisition of KBC

     The merger was accounted for using the acquisition method of accounting for business combinations. The following table summarizes the consideration transferred to acquire KBC:

     The fair value of the common stock issued was computed by multiplying the number of shares of the Company’s common stock issued to the Kona shareholders pursuant to the Merger times $7.02, the closing price of the Company’s common stock as reported by Nasdaq as of the effective date.

     The following table summarized the preliminary amounts of identified assets acquired and liabilities assumed at the acquisition date:

     The Company is in the process of obtaining third-party valuations that will be used to estimate the fair value of the property, equipment and leasehold improvements as well as of the trade names and other intangible assets. Additionally, the Company has not finalized its fair value estimates of accounts receivables, deferred taxes, inventories and other identified rights, assets acquired and liabilities assumed. Therefore, the preliminary estimates in the table above are subject to change.

     The unaudited pro forma results of operations are not necessarily indicative of the operating results that would have been achieved had the Merger been consummated as of the dates indicated, or that may be achieved in the future. Rather, the unaudited pro forma combined condensed results of operations presented above are based on estimates and assumptions that have been made solely for the purpose of developing such pro forma results. Historical results of operations were adjusted to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) expected to have a continuing impact on the combined results. These pro forma results of operations do not give effect to any cost savings, revenue synergies or restructuring costs which may result from the integration of KBC’s or Kona’s operations.

     Certain expenses were incurred by either the Company, KBC or Kona in the three and nine months ended September 30, 2010 that are included in the pro forma presentation above; however, the Company believes these expenses to be material non-recurring charges. These non-recurring expenses are as follows:

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

      This quarterly report on Form 10-Q includes forward-looking statements. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “may,” “plan” and similar expressions or their negatives identify forward-looking statements, which generally are not historical in nature. These statements are based upon assumptions and projections that Craft Brewers Alliance, Inc. (the “Company”) believes are reasonable, but are by their nature inherently uncertain. Many possible events or factors could affect the Company’s future financial results and performance, and could cause actual results or performance to differ materially from those expressed, including those risks and uncertainties described in Part I, Item 1A. “Risk Factors” and those described from time to time in the Company’s future reports filed with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report.

      The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto of the Company included herein, as well as the audited Financial Statements and Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s 2009 Annual Report. The discussion and analysis includes period-to-period comparisons of the Company’s financial results. Although period-to-period comparisons may be helpful in understanding the Company’s financial results, the Company believes that they should not be relied upon as an accurate indicator of future performance.

Overview

     Since its formation, the Company has focused its business activities on the brewing, marketing and selling of craft beers in the United States. The Company reported gross sales and net income of $39.1 million and $376,000, respectively, for the three months ended September 30, 2010, an increase of 14.1% and 300.0%, respectively, as compared with gross sales and net income of $34.3 million and $94,000, respectively, for the corresponding period in 2009. The Company generated basic and fully-diluted earnings per share of $0.02 for the third quarter of 2010 compared with $0.01 per share for the corresponding period of 2009. The Company generated operating profit of $558,000 during the quarter ended September 30, 2010 compared with $588,000 during the quarter ended September 30, 2009, primarily due to an increase in selling, general and administrative expenses and merger-related expenses for the 2010 third quarter, partially offset by an increase in revenues for the third quarter of 2010 resulting from an increase in shipments and a higher average sales price, and an improved margin for the 2010 third quarter. The Company’s sales volume (shipments) totaled 165,400 barrels in the third quarter of 2010 as compared with 149,500 barrels in the third quarter of 2009, an increase of 10.6%.

     The Company reported gross sales and net income of $108.1 million and $2.3 million, respectively, for the first nine months ended September 30, 2010, an increase of 6.0% and 205.9%, respectively, compared with gross sales and net income of $101.9 million and $758,000, respectively, for the corresponding period in 2009. The Company generated basic and fully-diluted earnings per share of $0.14 for the first nine months of 2010 compared with $0.04 per share for the corresponding period of 2009. The Company generated operating profit of $4.1 million during the first nine months ended September 30, 2010 compared with $2.5 million during the corresponding period of 2009, primarily due to an increase in revenues resulting from an increase in shipments and a higher average sales price, and improved margin for the 2010 period, partially offset by an increase in selling, general and administrative expenses and merger-related expenses for the 2010 period. The Company’s sales volume totaled 465,000 barrels in the first nine months of 2010 as compared with 445,700 barrels in the corresponding period of 2009, an increase of 4.3%.

     The Company produces its specialty bottled and draft products at its Company-owned breweries, one in the Seattle suburb of Woodinville, Washington (“Washington Brewery”), another in Portsmouth, New Hampshire (“New Hampshire Brewery”), and two in Portland, Oregon. The two breweries in Portland, Oregon are the Company’s largest production facility (“Oregon Brewery”) and its smallest, a manual brewpub-style brewery at the Rose Quarter. As discussed below, effective October 1, 2010, the Company acquired another brewery located in Kailua-Kona, Hawaii. The Company sells products produced at these breweries primarily to Anheuser-Busch, Incorporated (“A-B”) and its network of wholesalers pursuant to the July 1, 2004 Master Distributor Agreement (the “A-B Distribution Agreement”), as amended. These products are available in 48 states. The framework for the Company’s current

operating configuration came about as a result of the Company’s merger with Widmer Brothers Brewing Company (“WBBC”), which was consummated July 1, 2008.

     For additional information regarding A-B and the A-B Distribution Agreement, see Part 1, Item 1, Business under the headings “— Product Distribution” and “— Relationship with Anheuser-Busch, Incorporated” in the Company’s 2009 Annual Report. On August 12, 2010, the Company entered into an amendment to the A-B Distribution Agreement, which will exempt certain product shipments beginning in the fourth quarter of 2010 from fees that would otherwise have been payable by the Company by A-B. See discussion of the impact of this agreement in the section headed “ — Nine months ended September 30, 2010 compared with nine months ended September 30, 2009” under “Pricing and Fees”.

     As of July 31, 2010, the Company, Kona Brewing Co., Inc. (“KBC”); Kona Brewery LLC (“Kona”); KBC’s shareholders, and related entities entered into an agreement and plan of merger (the “KBC Merger Agreement”). As of October 1, 2010 (the “effective date”), the merger with KBC was completed and KBC merged with and into a wholly owned subsidiary of the Company (the “KBC Merger”). The KBC Merger Agreement was filed as Exhibit 2.1 to the Company’s Form 8-K filed on August 3, 2010.

     Kona continues to own and operate its brewing facilities located in Kailua-Kona, Hawaii, as a wholly-owned subsidiary of the Company. Another wholly owned subsidiary, Kona Brewing Co. LLC (“KBC LLC”), runs the restaurant and pub operations, which are situated in Honolulu, Oahu and Kailua-Kona, Hawaii.

     As of the effective date, the Company acquired all outstanding shares of KBC common stock in exchange for aggregate consideration transferred of approximately $17.8 million as measured consistent with Accounting Standards Codification ("ASC") Topic 805, Business Combinations , which was comprised of approximately $6.1 million in cash and the balance in the form of 1,677,000 shares of the Company’s common stock (collectively the “Merger Consideration”). The value of the Merger Consideration as contemplated by the KBC Merger Agreement was $14.1 million, based on the value of the Company's common stock as established in the KBC Merger Agreement. The Merger Consideration is subject to adjustment based on final verification by the parties of the final balance sheet of KBC, including its working capital position, as of the effective date. The Company deposited 292,456 shares of common stock from the Merger Consideration in escrow in connection with indemnification provisions relating to claims that may be asserted in connection with breaches of representations and warranties made by KBC and its shareholders.

     In periods prior to the KBC Merger, the Company also recognized revenue in connection with several operating agreements with Kona, including an alternating proprietorship agreement and a distribution agreement. Pursuant to the alternating proprietorship agreement, Kona produces a portion of its malt beverages at the Oregon Brewery. The Company sells raw materials to Kona prior to production beginning and receives from Kona a facility leasing fee based on the barrels brewed and packaged at the Oregon Brewery. These sales and fees are reflected as revenue in the Company’s statements of operations up to the effective date of the KBC Merger. Under the distribution agreement, the Company distributes Kona-branded product, whether brewed at Kona’s facility or the Company’s breweries, and then markets, sells and distributes the Kona-branded products pursuant to the A-B Distribution Agreement. In periods subsequent to the effective date, the consolidated entity will eliminate the revenues associated with the alternating proprietorship.

     The Company also derives other revenues from sources including the sale of retail beer, food, apparel and other retail items in its three brewery pubs. In periods subsequent to the effective date, the Company will also recognize revenues from the operations of KBC LLC’s three restaurants and pubs.

     See Item 1, Notes to Financial Statements, Note 11 “Subsequent Events” for further discussion of the terms and conditions regarding the KBC Merger and the KBC Merger Agreement and for the presentation of the combined entity’s pro forma results for the three months and nine months ended September 30, 2010, as if the KBC Merger was completed effective January 1, 2010, as well as the corresponding periods of 2009 as if the KBC Merger was completed as of the beginning of that year.

     The Company estimates that, if the KBC Merger had been in place throughout the first nine months of 2010, total Company revenues would have been approximately $2.8 million lower than the $101.4 million of net revenues reported for the period primarily due to the elimination of the revenues earned under the alternating proprietorship, partially offset by revenues earned by KBC, primarily in its restaurant and pub operations. For this period, the

Company’s estimated gross margin on a pro forma basis would have been approximately $6.3 million higher than the $25.9 million gross margin reported by the Company for the period, primarily due to the recognition by the combined entity of the gross profit associated with shipments of Kona-branded products and the gross profit generated by KBC’s restaurant and pub operations, partially offset by increased excise taxes associated with the loss of the lower rate benefit to Kona as a separate company.

Results of Operations

     The following table sets forth, for the periods indicated, certain items from the Company’s Statements of Operations expressed as a percentage of net sales:

Non-GAAP Financial Measures

     Since June 2008, the Company has maintained a loan agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”), which was initially comprised of a $15.0 million revolving line of credit (“Line of Credit”), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and a $13.5 million term loan (“Term Loan”). The Loan Agreement was most recently amended effective September 30, 2010 (the “Third Amendment”), primarily to accommodate the KBC Merger. The Loan Agreement, as amended, subjects the Company to a financial covenant based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). See “Liquidity and Capital Resources.” EBITDA is defined per the Loan Agreement and requires additional adjustments, among other items, to (a) exclude merger-related expenses, (b) adjust losses (gains) on sale or disposal of assets, (c) exclude certain other non-cash income and expense items and (d) adjust for certain items that are specifically identified in either the Loan Agreement or the Third Amendment. The financial covenants under the Loan Agreement are measured on a trailing four-quarter basis. EBITDA as defined was $12.6 million for the trailing four quarters ended September 30, 2010.

     The following table reconciles net income to EBITDA per the Loan Agreement for this period:

      Three months ended September 30, 2010 compared with three months ended September 30, 2009

     The following table sets forth, for the periods indicated, a comparison of certain items from the Company’s Statements of Operations:

     The following table sets forth a comparison of sales revenues for the periods indicated:

      Gross Sales . Gross sales increased $4.8 million, or 14.1%, from $34.3 million for the third quarter of 2009 to $39.1 million for the third quarter of 2010. The primary factor contributing to the increase in sales revenues for the three months ended September 30, 2010 was the increase in shipments to A-B of 10,200 barrels from shipments of 145,700 barrels in the third quarter of 2009 to 155,900 barrels in the third quarter of 2010, an increase in revenues generated under the alternating proprietorship arrangement with Kona, and a net increase in sales prices for the Company’s products sold through A-B. Shipments to A-B for the third quarter of 2010 as compared with the corresponding period one year ago were impacted by fluctuations in the wholesaler inventory balances. The inventories at wholesalers locations as of the end of the 2010 third quarter increased above the balances held a year ago, reflecting in part a more broad-based demand for the Company’s brand families rather than being concentrated in only a few brand offerings. While the wholesaler inventory balances at the end of the 2010 third quarter were above the balances held a year ago, they were generally within the normal operating parameters established for the wholesalers’ suppliers, including the Company. The rate of change in depletions, or sales by the wholesalers to

retailers, for the third quarter of 2010 increased at a 2.2% rate from the prior quarter a year ago, reflecting an increase in the demand for the Company’s product offerings, in particular the Kona brand family.

     Alternating proprietorship fees increased $1.1 million to $3.8 million for the third quarter of 2010. These fees are earned from Kona for leasing the Oregon Brewery and sales of raw materials during the corresponding periods, and reflect both the increased demand for Kona-branded products in the third quarter of 2010 as compared with the corresponding quarter a year ago and utilization of the Oregon Brewery to source some of the Kona-branded products for the Company’s eastern markets.

     The Company experienced a net price increase for both the Company’s draft and bottled products. This pricing increase was primarily due to increased prices at the wholesaler levels and a greater percentage of higher priced brands sold during the 2010 third quarter as compared with the corresponding period a year ago.

     In addition, the Company generated revenues of $718,000 under the contract brewing arrangement during the third quarter of 2010, which was an increase of $616,000 as compared with the contract revenues earned during the third quarter a year ago. Implementation of the contract brewing occurred during the latter part of the 2009 third quarter.

      Shipments — Customer . The following table sets forth a comparison of shipments by customer (in barrels) for the periods indicated:

      Pricing and Fees . The average revenue per barrel on shipments of beer through the A-B distribution network for the third quarter of 2010 increased by 2.8% as compared with the average revenue per barrel for the corresponding period of 2009. During the third quarters of 2010 and 2009, the Company sold 94.3% and 97.5%, respectively, of its beer through A-B at wholesale pricing levels. Management believes that most, if not all, craft brewers are weighing their pricing strategies in the face of the current economic environment and competitive landscape. Pricing changes implemented by the Company have generally followed pricing changes initiated by large domestic or import brewing companies. While the Company has implemented modest price increases during the past few years, some of the benefit has been offset by competitive promotions and discounting. The Company expects that product pricing will continue to demonstrate modest increases in the near term tempered by the current economic climate; however, to the extent economic conditions improve in the United States, pricing is likely to increase further. The Company’s pricing is expected to follow the general trend in the industry.

     In connection with all sales through the A-B Distribution Agreement, as amended, the Company pays a Margin fee to A-B (“Margin”). The Margin does not apply to sales under the Company’s contract brewing arrangement or from its retail operations and dock sales. The A-B Distribution Agreement also requires the Company to pay an Additional Margin fee on shipments of Redhook-, Widmer Brothers-, and Kona-branded product that exceed shipments in the same territory during the same periods in fiscal 2003 (“Additional Margin”). During the three months ended September 30, 2010 and 2009, the Margin was paid to A-B on shipments totaling 155,900 barrels and 145,700 barrels, respectively. As 2010 and 2009 shipments in the United States exceeded 2003 domestic shipments, the Company paid A-B the Additional Margin. For the three months ended September 30, 2010 and 2009, the Company recognized expense of $1.6 million and $1.4 million, respectively, related to the total of Margin and Additional Margin. These fees are reflected as a reduction of sales in the Company’s statements of operations.

As of September 30, 2010 and December 31, 2009, the net amount due from A-B under all Company agreements with A-B totaled $3.8 million and $1.8 million, respectively. In connection with the sale of beer pursuant to the A-B Distribution Agreement, the Company’s accounts receivable reflect significant balances due from A-B, and the refundable deposits and accrued expenses reflect significant balances due to A-B. Although the Company considers

these balances to be due to or from A-B, the final destination of the Company’s products is an A-B wholesaler and payments by the wholesaler are settled through A-B. The Company obtains services from A-B under separate arrangements; balances due to A-B under these arrangements are reflected in accounts payable and accrued expenses. These amounts are also included in the net amount due to A-B presented above.

      Shipments — Brand . The following table sets forth a comparison of shipments by brand (in barrels) for the periods indicated:

     Shipments of bottled beer have steadily increased as a percentage of total shipments since the mid-1990’s; however, with the consolidation of all Widmer Brothers-branded shipping activities by the Company, this trend has reversed somewhat as a higher percentage of Widmer Brothers-branded products are sold as draft products than the Company’s historical experience. During the three months ended September 30, 2010, 73.2% of Redhook-branded shipments were shipments of bottled beer as compared with 71.3% in the three months ended September 30, 2009. Although the sales mix of Kona-branded beer is also weighted toward bottled product, it is slightly less than Redhook-branded beer as 64.5% and 62.6% of Kona-branded shipments consisted of bottled beer in the three months ended September 30, 2010 and 2009, respectively. The sales mix of Widmer Brothers-branded products contrasts significantly from that of the Redhook and Kona brands with 52.0% and 49.5% of Widmer Brothers-branded products being bottled beer in the third quarter of 2010 and 2009, respectively. Although the average revenue per barrel for sales of bottled beer is typically significantly higher than that of draft beer, the cost per barrel is also higher, resulting in a gross margin that is approximately 10% less than that of draft beer sales.

      Excise Taxes . Excise taxes for the three months ended September 30, 2010 increased $163,000, or 7.4%, primarily due to the increase in the Company’s shipments for the third quarter of 2010 as compared with the corresponding quarter of 2009 and an increase in the marginal tax rate for beer produced in Washington state, which became effective in July 2010. These increases were partially offset by an increase during the third quarter of 2010 of Kona-branded shipments produced under the alternating proprietorship agreement with Kona as Kona is responsible for the excise taxes under the agreement. Additionally, a net price increase of the Company’s products during the three months ended September 30, 2010 contributed to a decrease in excise taxes as a percentage of net sales for the same period of 2010 compared with the corresponding 2009 period.

      Cost of Sales . Cost of sales increased $3.4 million, or 13.7%, from $24.7 million for the three months ended September 30, 2009 to $28.1 million for the three months ended September 30, 2010, which was primarily due to the increase in shipments for the 2010 quarter as compared with the corresponding period a year ago, and increases in costs for the 2010 quarter associated with brewing beer under the alternating proprietorship due to the increased demand for Kona-branded products. In addition, the Company incurred costs in the third quarter of 2010, including shipping and related logistics as partial sourcing support was made from the Company’s other breweries, associated with a significant quantity of beer brewed at one of the Company’s facilities that did not meet the Company’s exacting quality standards, causing the Company to dispose of in-process and finished draft and packaged beer. Cost of sales increased by $4.53 or 2.7% on a per barrel basis for the corresponding periods, largely due to the increase in the costs described above. Cost of sales decreased as a percentage of net sales to 76.5% from 77.1%, primarily due to a net price increase of the Company’s products during the three months ended September 30, 2010 as compared with the corresponding 2009 period.

      At September 30, 2010, all production issues were resolved and the Company was producing beer at normal seasonal levels that meets its quality standards at each of its facilities. The Company continues to make on-going investments in its people and brewing equipment, enhancing its procedures and facilities in an effort to produce the highest quality beer possible.

     Based upon its combined working capacity for the corresponding periods, the Company’s utilization rate was 71.2% and 64.4%, respectively. Capacity utilization rates are calculated by dividing the Company’s total shipments by the working capacity. The Company’s brewing and production initiatives have contributed to an increase in capacity in excess of the anticipated near term demand for the Company’s products. This resulted in the Company possessing a significant amount of unused working capacity, albeit with a minimal increase in its associated cost structure, allowing the Company to aggressively evaluate other operating configurations and arrangements, including contract brewing, to utilize the available capacity of its production facilities. To this end, during the third quarter of 2009, the Company executed a contract brewing arrangement under which the Company will produce beer in volumes and per specifications as designated by a third party. The Company anticipates the volume of this contract to be approximately 20,000 barrels in annual production, although the third party may designate greater or lesser quantities per the terms of the contract. During the fourth quarter of 2010, the Company executed a three-year contract brewing arrangement with Fulton Street Brewery LLC (“FSB”), an entity in which the Company holds a 42% equity interest, under which the Company will produce beer in volumes and per specifications as designated by FSB. The Company anticipates that the volume of this contract may be approximately 15,000 barrels to 20,000 barrels per year, with shipments under this arrangement expected to begin in the first quarter of 2011.

     Cost of sales for the third quarters of 2010 and 2009 include costs associated with two distinct Kona revenue streams: (i) direct and indirect costs related to the alternating proprietorship arrangements with Kona and (ii) the cost paid to Kona for the Kona-branded finished goods that are marketed and sold by the Company to wholesalers through the A-B Distribution Agreement. In periods subsequent to the effective date, the consolidated entity will eliminate the costs paid to Kona for the latter activity and will recognize the costs to produce Kona-branded beer.

     Inventories acquired pursuant to the merger with WBBC were recorded at their estimated fair values as of July 1, 2008, resulting in an increase over the cost at which these inventories were stated on the June 30, 2008 WBBC balance sheet (the “Step Up Adjustment”). The Step Up Adjustment, net of amortization at December 31, 2009, totaled approximately $253,000 for raw materials acquired. During the three months ended September 30, 2010 and 2009, approximately $33,000 and $138,000, respectively, of the Step Up Adjustment was expensed to cost of sales in connection with normal production and sales for the corresponding periods.

      Selling, General and Administrative Expenses . Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2010 increased $1.0 million, or 14.5%, from $6.7 million for the third quarter of 2009 to $7.7 million for the third quarter in 2010. The increase in SG&A for the third quarter of 2010 was primarily due to an increase in direct costs in sales and marketing activities, principally promotions, festivals, sampling and sponsorship activity, point of sale and related trade merchandise and increased salaries and benefit costs for the sales and marketing workforce. The Company also experienced an increase in other SG&A costs, primarily travel and related expenses, and consulting and professional fees for the 2010 third quarter as compared with the corresponding quarter of the prior year.

     The Company incurs costs for the promotion of its products through a variety of advertising programs with its wholesalers and downstream retailers. These costs are included in SG&A expenses and frequently involve the local wholesaler sharing in the cost of the program. Reimbursements from wholesalers for advertising and promotion activities are recorded as a reduction to SG&A expenses in the Company’s statements of operations. Reimbursements for pricing discounts to wholesalers are recorded as a reduction to sales. The wholesalers’ contribution toward these activities was an immaterial percentage of net sales for the 2010 third quarter. Depending on the industry and market conditions, the Company may adjust its advertising and promotional efforts in a wholesaler’s market if a change occurs in a cost-sharing arrangement. The timing of these efforts may also be adjusted due to opportunities available to the Company over the course of the fiscal year.

     While the Company may adjust the amount and timing of its advertising and promotional efforts in any particular market locality, the Company expects its total brand development, sales and marketing expenditures to increase for the fourth quarter of 2010 as compared with the corresponding period of 2009. The increased cost associated with these expenditures will be funded in part by the reduction in Margin and Additional Margin fees provided under the amendment to the A-B Distribution Agreement described above.

      Merger-Related Expenses . In connection with the KBC Merger, the Company incurred $353,000 in merger-related expenses associated with the KBC Merger, primarily legal and other professional fees. The Company did not

recognize any merger-related expenses during the third quarter of 2009, either associated with the KBC Merger or in connection with the merger with WBBC. In connection with the merger with WBBC, the Company estimates that merger-related severance benefits totaling approximately $215,000 will be paid during the remainder of 2010 through the second quarter of 2011.

      Income from Equity Investments . As of September 30, 2010, the Company held corporate investments, a 42% equity ownership in FSB and a 20% equity ownership in Kona. Both investments are accounted for under the equity method, as outlined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 325, Investments. For the quarters ended September 30, 2010 and 2009, the Company’s share of FSB’s net income totaled $163,000 and $132,000, respectively. For the quarters ended September 30, 2010 and 2009, the Company’s share of Kona’s net income totaled $100,000 and $64,000, respectively. In periods subsequent to the effective date of the KBC Merger, the Company will discontinue recognizing further equity income from Kona.

      Interest Expense. Interest expense decreased approximately $174,000 to $357,000 in the third quarter of 2010 from $531,000 in the third quarter of 2009 due to a lower level of debt outstanding during the current period and a lower average interest rate on borrowings under the credit agreement. To support its capital project and working capital requirements for 2009, the Company maintained average outstanding debt for the third quarter of 2009 at $29.8 million; however, the Company has paid down its outstanding borrowings such that its average outstanding debt was $19.1 million for the third quarter of 2010. The lower average interest rate was primarily due to the Company’s improved financial results and the corresponding decrease in its funded debt ratio, and the effect of a favorable modification to its primary borrowing arrangement granted by the Company’s lender in the second quarter of 2010.

      Other Income, net . Other income, net decreased by $13,000 to $75,000 for the third quarter of 2010 from $88,000 for the same period of 2009, primarily attributable to differences in the gains and losses recognized on disposals of property and equipment during the corresponding periods.

      Income Taxes . The Company’s provision for income taxes was $163,000 and $247,000 for the three months ended September 30, 2010 and 2009, respectively. The effective tax rate for the third quarter of 2010 was affected by the level of the Company’s non-deductible expenses, primarily meals and entertainment and merger-related expenses, and an average state tax rate that results from a relatively high proportion of shipments to states with relatively high tax rates. The effective rate for the third quarter of 2009 was affected by similar factors, and was also affected by the adjustment to the state tax rate, and the related deferred tax liabilities associated with an increase of the proportion of shipments to these higher-tax jurisdictions and an adjustment of the accrual liability for the WBBC tax accounting due to the filing of the short year final tax return for that entity. See “— Critical Accounting Policies and Estimates” for further discussion related to the Company’s income tax provision and NOL carryforward position as of September 30, 2010.

      Nine months ended September 30, 2010 compared with nine months ended September 30, 2009

     The following table sets forth, for the periods indicated, a comparison of certain items from the Company’s Statements of Operations:

     The following table sets forth a comparison of sales revenues for the periods indicated:

      Gross Sales . Gross sales increased $6.1 million, or 6.0%, from $101.9 million for the first nine months of 2009 to $108.1 million for the corresponding period in 2010. The primary factor contributing to the increase in sales revenues for the nine months ended September 30, 2010 was the increase in the net selling price for the Company’s products sold through A-B and an increase in shipments to A-B of 3,100 barrels from shipments of 437,600 barrels in the first nine months of 2009 to 440,700 barrels in the first nine months of 2010. The Company experienced a net price increase for both the Company’s draft and bottled products. This pricing increase was primarily due to increased prices at the wholesaler levels and a greater percentage of higher priced brands sold during the first nine months of 2010 as compared with the corresponding period a year ago. The rate of change in depletions for the first nine months of 2010 increased at a 0.9% rate from the prior period a year ago, reflecting the increase in demand for Kona-branded products.

     The following factors also contributed to the increase in revenues for the first nine months of 2010 as compared with the first nine months of 2009:

	•		The Company generated revenues of $1.8 million under the contract brewing arrangement during the first nine months of 2010. Implementation of contact brewing occurred during the latter part of the third quarter of 2009.
	•		Alternating proprietorship fees increased $1.4 million from $8.4 million for the first nine months of 2009 to $9.8 million for the first nine months of 2010. These fees are earned from Kona for leasing the Oregon Brewery and sales of raw materials during the corresponding periods and reflect both the increased demand for Kona-branded

			products for the first nine months of 2010 as compared with the corresponding period a year ago and utilization of the Oregon Brewery to source some of the Kona-branded products for the Company’s eastern markets during the third quarter of 2010.
	•		Additionally, revenues from pubs and other sales increased by $270,000 for the first nine months of 2010 as compared with the corresponding period a year ago.