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Description of Operations and Summary of Significant Accounting Policies
 6 Months Ended
Jun. 30, 2014
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, and has two operating subsidiaries: Releta Brewing Company, LLC (“Releta”), and United Breweries International (UK) Limited (“UBIUK”). In the United States (the “US”), MBC and 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 MBC 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. Generally, product shipments are made directly from the breweries to the wholesalers or distributors in accordance with state and local laws.

 

MBC’s United Kingdom (“UK”) subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe Limited (“KBEL”). KBEL is a distributor of alcoholic beverages, mainly Kingfisher Lager Beer, in the UK and Europe. The offices of KBEL are located in Maidstone, Kent in the UK. In addition, during the period covered by this report, through UBIUK, the Company had production and distribution rights to Kingfisher Premium Lager in Canada and the United States. The Company has the right to use the Kingfisher mark and the name “Kingfisher Brewing Company” in connection with the brewing and distribution of the assorted beers in the United States pursuant to an agreement with Kingfisher America, Inc. Generally sales are made through distributors.

 

All of our beers sold in Europe (except for beers sold in Germany) are procured under a contract with Heineken UK Limited (“HUK”). This contract expires in October 2018. KBEL is the distributor of Kingfisher Premium Lager to specialty restaurant trade distributors, liquor and convenience stores in the United Kingdom, Ireland, and continental Europe, but does not physically deliver products to customers. KBEL relies on HUK for delivery of the product in Europe in exchange for a fee paid to HUK, except for in Germany where beers are manufactured and distributed pursuant to a separate contract with a different entity. In addition, HUK has the exclusive right to sell Kingfisher Premium Lager, for a royalty fee, to certain large retail customers, including, but not limited to, Sainsbury’s, Asda, and Tesco.

 

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 on which our financial statements are electronically prepared for filing with the Securities and Exchange Commission (“SEC”).

 

Principles of Consolidation

 

The consolidated financial statements present the accounts of MBC and its wholly-owned subsidiaries, Releta and UBIUK. All material intracompany and inter-company balances, profits and transactions have been eliminated.

 

Basis of Presentation and Organization

 

The accompanying unaudited condensed consolidated financial statements for the six months ended June 30, 2014 and 2013 have been prepared in accordance with accounting principles generally accepted in the US. These condensed financial statements should be read in conjunction with the audited consolidated financial statements included in our most recent Annual Report on Form 10-K, as filed with the SEC, which contains additional financial and operating information and information concerning significant accounting policies followed by the Company. The financial statements and notes are representations of our management (“Management”) and board of directors (the “Board of Directors”), who are responsible for their integrity and objectivity.

 

 Operating results from the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any future period.

 

Reclassifications

 

Certain items in the unaudited condensed consolidated financial statements for the prior year have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income or equity.

 

SIGNIFICANT ACCOUNTING POLICIES

 

There have been no significant changes in our significant accounting policies during the six months ended June 30, 2014 compared to what was previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Cash and Cash Equivalents, Short and Long-Term Investments

 

For purposes of cash flows, we consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

 

Revenue Recognition

 

We recognize revenue from the brewing and distribution operations in accordance with Accounting Standards Codification 605 of the Financial Accounting Standards Board. We recognize revenue from product sales, net of discounts.

 

We recognize 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
     
  ● Collectability is reasonably assured.

 

“Persuasive Evidence of an Arrangement” – We document 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” – We deliver the products prior to recognizing revenue and we perform 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 our 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” – We determine that collectability is reasonably assured prior to recognizing revenue. Collectability is assessed on a customer-by-customer basis based on criteria outlined by Management. We do 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.

 

We record certain consideration paid to customers for services or placement fees as a reduction in revenue rather than as an expense. We report these items on the income statement as a reduction in revenue and as a corresponding reduction in marketing and selling expenses.

 

Revenues from our brewpub and gift store are recognized when sales have been completed.

 

Allowance for Doubtful Accounts

 

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. Balances over 90 days past due and other higher risk amounts are reviewed individually for collectability. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on Management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have 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). We regularly review our 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 related to a borrowing made in June 2011 were $225,000. Amortization of deferred financing costs charged to operations was $22,500 for the six months ended June 30, 2014 and 2013, and $11,300 for the three months ended June 30, 2014 and 2013.

 

Concentrations

 

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents, and accounts receivable. Substantially all of our cash and cash equivalents are deposited with commercial banks in the US and the UK that have minimal credit risk. 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. As of June 30, 2014, we have approximately $2,527,800 of accounts receivable due from UK customers.

 

Labor disputes, work stoppages or other disruptions in production could adversely affect us. As of June 30, 2014, union members represented approximately 18% of our US-based workforce. MBC has approximately fourteen employees at its Ukiah, California facility who are working under a collective bargaining agreement that expires on July 31, 2018.

 

Income Taxes

 

We account 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. We periodically assess uncertain tax positions that we have taken or expect to take on tax returns, including decisions whether to file returns in any particular jurisdiction. We have evaluated our tax positions and have determined that there were no uncertain tax benefits as of June 30, 2014 and December 31, 2013.

 

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. Basic net earnings (loss) per share exclude the dilutive effect of stock options or warrants and convertible notes. If the Company’s operations result in net loss for any period, diluted net loss per share would be the same as basic net loss per share, since the effect of any potentially dilutive securities would be anti-dilutive. Therefore, the conversion of the related party notes has been excluded from the Company’s calculation of net loss per share. The computations of basic and dilutive net loss per share are as follows:

 

    Three months ended     Six months ended  
    6/30/2014     6/30/2013     6/30/2014     6/30/2013  
Net loss   $ (137,000 )     (69,100 )   $ (605,600 )     (423,300 )
Weighted average common shares outstanding     12,611,133       12,611,133       12,611,133       12,611,133  
Basic net loss per share   $ (0.01 )     (0.01 )   $ (0.05 )     (0.03 )
Interest expense on convertible notes   $ -       -     $ -       -  
Loss for computing diluted net income per share   $ (137,000 )     (69,100 )   $ (605,600 )     (423,300 )
Incremental shares from assumed exercise of dilutive securities     -       -       -       -  
Dilutive potential common shares     12,611,133       12,611,133       12,611,133       12,611,133  
Diluted net loss per share   $ (0.01 )     (0.01 )   $ (0.05 )     (0.03 )

 

Foreign Currency Translation

 

The local currency in the UK, the UK Pound Sterling, is the functional currency for our UK subsidiaries. Financial statements of these subsidiaries are translated into US dollars using period-end exchange rates for assets and liabilities, historical rates for stockholders’ equity 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 flows were translated at the average exchange rates for the three months 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 US includes having us 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 our 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

 

Our operations are managed 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 UK (the “Foreign Territory”). We evaluate performance based on net operating profit. Where applicable, portions of our administrative expenses are allocated between the operating segments. The operating segments do not share manufacturing or distribution facilities. If any materials and/or services are provided to one operating segment by the other, the transaction is valued according to our 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.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. ASU 2014-09 will be effective for the Company in the first quarter of 2017. Management is currently evaluating the impact the adoption of ASU 2014-09 will have on the Company’s condensed consolidated financial position, results of operations or cash flows and the method of retrospective application, either full or modified.