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Description of Operations and Summary of Significant Accounting Policies
 6 Months Ended
Jun. 30, 2012
Accounting Policies [Abstract]  
Description of Operations and Summary of Significant Accounting Policies

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, LLC, (“Releta”), and United Breweries International (UK) Limited (“UBIUK”). In the United States (the “US”), 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 majority of sales for Mendocino Brewing Company in the US 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 Premium 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 United Kingdom (“UK”) subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe, Limited (“KBEL”), a distributor of alcoholic beverages, mainly Kingfisher Premium Lager, in the UK and Europe. The distributorship is located in Maidstone, Kent in the UK.

 

Principles of Consolidation

 

The consolidated financial statements present the accounts of Mendocino Brewing Company, Inc., and its wholly-owned subsidiaries, Releta and UBIUK. All inter-company balances, profits and transactions have been eliminated.

 

Basis of Presentation and Organization

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with US generally accepted accounting principles. These condensed financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s most recent Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, which contains additional financial and operating information and information concerning the significant accounting policies followed by the Company. The financial statements and notes are representations of the management and the Board of Directors, who are responsible for their integrity and objectivity.

 

Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any future period.

 

SIGNIFICANT ACCOUNTING POLICIES

 

There have been no significant changes in the Company’s significant accounting policies during the six months ended June 30, 2012 compared to what was previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

   

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.

 

Revenue Recognition

 

The Company recognizes revenue from brewing and distribution operations through product sales, net of discounts.

 

Revenue is recognized 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

 

  ● Collectability 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 are 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.

 

“Collectability is Reasonably Assured” – The Company determines that collectability is reasonably assured prior to recognizing revenue. Collectability is assessed on a customer-by-customer basis based on criteria outlined by Management. The Company does not enter into arrangements unless collectability 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 collectability is not reasonably assured, revenue is recognized on a cash basis.

 

The Company records certain consideration paid to customers for services or placement fees 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.

 

Revenues from the Company’s brewpub and gift store are recognized when sales have been completed.

 

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.

 

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.

 

Deferred Financing Costs

 

Costs relating to obtaining financing are capitalized and amortized over the term of the related debt. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations. Deferred financing costs of $311,300 related to loans repaid in June 2011 were fully amortized as of June 30, 2011. Deferred financing costs related to new borrowing made in June 2011 were $225,000. Amortization of deferred financing costs charged to operations was $22,500 and $32,700 for the six months ended June 30, 2012 and 2011, respectively. Amortization of deferred financing costs charged to operations was $11,300 and $16,400 for the three months ended June 30, 2012 and 2011, respectively.

 

Concentration of Credit Risks

 

Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables, cash deposits in excess of FDIC limits, and assets located in the UK. Substantially all of the Company’s cash deposits are deposited with commercial banks in the US and the UK.

 

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 $14,500 in cash deposits in the UK and $2,198,400 of accounts receivable due from customers located in the UK as of June 30, 2012.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 750 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. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at June 30, 2012 and December 31, 2011.

 

Basic and Diluted Earnings (Loss) per Share

 

The basic earnings (loss) per share is computed by dividing the earnings (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. The computations for basic and dilutive net earnings per share are as follows:

 

    Three months ended     Six months ended  
    6/30/2012     6/30/2011     6/30/2012     6/30/2011  
Net income   $ 485,400       205,400     $ 438,600       176,100  
Weighted average common shares outstanding     12,611,133       12,427,262       12,611,133       12,427,262  
Basic net income per share   $ 0.04       0.02     $ 0.03       0.01  
Interest expense on convertible notes   $ 22,700       22,700     $ 45,400       45,100  
Income for computing diluted net income per share   $ 508,100       228,100     $ 484,000       221,200  
Incremental shares from assumed exercise of dilutive securities     2,257,260       2,179,911       2,257,260       2,179,911  
Dilutive potential common shares     14,868,393       14,607,173       14,868,393       14,607,173  
Diluted net earnings per share   $ 0.03       0.02     $ 0.03       0.01  

 

Foreign Currency Translation

 

The Company has subsidiaries located in the UK, where the local currency, UK Pound Sterling, is the functional currency. Financial statements of these subsidiaries are translated into US 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.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the US 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 the allowance for bad debts, depreciation and amortization periods, and the future utilization of deferred tax assets.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is composed of the Company’s net income 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: (i) brewing operations and tasting room operations in the US and distributor operations in Canada (the “North American Territory”) and (ii) distributor operations in Europe (including the United Kingdom) (the “Foreign Territory”). 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.