Form 10-Q Eastside Distilling, For: Sep 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period
ended | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ______________ to _________________ |
Commission
File No.:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
Issuer’s
telephone number:
Securities registered pursuant to Section 12(b) of the Act:
| The
| ||||
| (Title of Each Class) | (Trading Symbol) | (Name of Each Exchange on Which Registered) |
Indicate
by check mark whether the registrant (1) 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.
Indicate
by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company
| |
| Emerging growth company
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 14, 2022, shares of our common stock, $0.0001 par value, were outstanding.
EASTSIDE DISTILLING, INC.
FORM 10-Q
September 30, 2022
TABLE OF CONTENTS
| 2 |
PART I: FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
Eastside Distilling, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2022 and December 31, 2021
(Dollars in thousands, except shares and per share amounts)
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Trade receivables, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Other assets, net | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Deferred revenue | ||||||||
| Current portion of secured credit facilities, net of debt issuance costs | ||||||||
| Note payable, related party, net of debt issuance costs | ||||||||
| Current portion of notes payable | ||||||||
| Current portion of lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Note payable, related party | ||||||||
| Notes payable, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Preferred stock, $ par value; shares authorized; issued and outstanding as of both September 30, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2022 and 2021
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Less customer programs and excise taxes | ||||||||||||||||
| Net sales | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Loss on disposal of property and equipment | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) from discontinued operations | ( | ) | ||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||
| Deemed dividend-warrant price protection-revaluation adjustment | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Diluted weighted average common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2022 and 2021
(Dollars in thousands)
(Unaudited)
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Net income from discontinued operations | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| Bad debt expense | ||||||||
| Forgiveness of debt - Paycheck Protection Program | ( | ) | ||||||
| Loss on disposal of assets | ||||||||
| Inventory reserve | ( | ) | ||||||
| Remeasurement of deferred consideration | ( | ) | ||||||
| Stock dividend payable | ( | ) | ||||||
| Amortization of debt issuance costs | ||||||||
| Interest accrued to secured credit facilities | ||||||||
| Issuance of common stock in exchange for services for related parties | ||||||||
| Issuance of common stock in exchange for services for third parties | ||||||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables, net | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Right-of-use assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities | ( | ) | ||||||
| Other liabilities, related party | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Net lease liabilities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Net cash provided by operating activities of discontinued operations | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Proceeds from sale of fixed assets | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash provided by investing activities of discontinued operations | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Cash Flows From Financing Activities: | ||||||||
| Issuance of common stock from warrant exercise for cash, net of expenses | ||||||||
| Proceeds from issuance of stock | ||||||||
| Proceeds from secured credit facilities | ||||||||
| Proceeds from note payable, related party | ||||||||
| Payments of principal on notes payable, related party | ( | ) | ||||||
| Payments of principal on secured credit facilities | ( | ) | ( | ) | ||||
| Payments of principal on notes payable | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash at the beginning of the period | ||||||||
| Cash at the end of the period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash paid for amounts included in measurement of lease liabilities | $ | $ | ||||||
| Supplemental Disclosure of Non-Cash Financing Activity | ||||||||
| Issuance of detachable warrants on notes payable | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations | $ | $ | ||||||
| Warrants issued in relation to secured credit facilities | $ | $ | ||||||
| Issuance of common stock pursuant to Azuñia earn-out | $ | $ | ||||||
| Issuance of notes payable pursuant to Azuñia final earn-out | $ | $ | ||||||
| Deemed dividend-warrant price protection-revaluation adjustment | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
1. Description of Business
Eastside Distilling (the “Company” or “Eastside Distilling”) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, the Company changed its corporate name to Eastside Distilling, Inc. to reflect the acquisition of Eastside Distilling, LLC. The Company manufactures, acquires, blends, bottles, imports, markets and sells a wide variety of alcoholic beverages under recognized brands. The Company currently employs 75 people in the United States.
The Company’s spirits’ brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila. The Company sells products on a wholesale basis to distributors in open states and through brokers in control states.
The Company operates a mobile craft canning business that primarily services the craft beer and craft cider industries. During 2022, the Company made substantial investments to expand its product offerings to include digital can printing activities in the Pacific Northwest (together Craft Canning + Printing, “Craft C+P”). Craft C+P operates 14 mobile filling lines in Seattle, Washington; Spokane, Washington; Portland, Oregon; and Denver, Colorado. The Company now offers co-packing services in Portland, Oregon through its recent asset acquisition, allowing it to offer end-to-end production capabilities.
2. Liquidity
The Company’s primary capital requirements are for cash used in operating activities and the repayment of debt. Funds for the Company’s cash and liquidity needs have historically not been generated from operations but rather from loans as well as from convertible debt and equity financings. The Company has been dependent on raising capital from debt and equity financings to meet the Company’s operating needs.
The
Company had an accumulated deficit of $
During
the nine months ended September 30, 2022, the Company raised $
Although the Company’s audited financial statements for the year ended December 31, 2021 were prepared under the assumption that it would continue operations as a going concern, the report of its independent registered public accounting firm that accompanied the financial statements for the year ended December 31, 2021 contained a going concern explanatory paragraph in which such firm expressed substantial doubt about the Company’s ability to continue as a going concern, based on the financial statements at that time. If the Company cannot continue as a going concern, its stockholders would likely lose most or all of their investment in it.
| 6 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
3. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements for Eastside Distilling, Inc. and subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements in accordance with GAAP have been condensed or eliminated as permitted under the SEC’s rules and regulations. In management’s opinion, the unaudited consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2022, its operating results for the three and nine months ended September 30, 2022 and 2021 and its cash flows for the nine months ended September 30, 2022 and 2021. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Interim results are not necessarily indicative of the results that may be expected for an entire fiscal year. The consolidated financial statements include the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiaries, including, MotherLode LLC, Redneck Riviera Whiskey Co., LLC (a discontinued operation), Craft Canning + Bottling, LLC (doing business as Craft Canning + Printing) and its wholly-owned subsidiary Galactic Unicorn Packaging LLC (the Company’s newly acquired fixed co-packing assets) and the Azuñia tequila assets. All intercompany balances and transactions have been eliminated on consolidation.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Net sales include product sales, less excise taxes and customer programs and incentives. The Company recognizes revenue by applying the following steps in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
The Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment sales, which include sales to the Oregon Liquor Control Commission, the Company recognizes sales upon the consignee’s shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary rights of return.
Customer Programs
Customer
programs, which include customer promotional discount programs, are a common practice in the alcoholic beverage industry. The
Company reimburses wholesalers for an agreed amount to promote sales of products and to maintain competitive pricing. Amounts paid
in connection with customer programs are recorded as reductions to net sales in accordance with ASC 606 - Revenue from Contracts
with Customers. Amounts paid in customer programs totaled $
Excise Taxes
The
Company is responsible for compliance with the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) regulations, which includes
making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also
impose excise taxes on alcoholic beverages in varying amounts. The Company calculates its excise tax expense based upon units produced
and on its understanding of the applicable excise tax laws. Excise taxes totaled $
Cost of Sales
Cost of sales consists of all direct costs related to both spirits and canning for service, labor, overhead, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs.
| 7 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
Sales and Marketing Expenses
Sales
and marketing expenses consist of sponsorships, agency fees, digital media, salary and benefit expenses, travel and entertainment
expenses. Sales and marketing costs are expensed as incurred. Advertising and marketing expenses totaled $
General and Administrative Expenses
General and administrative expenses consist of salary and benefit expenses, travel and entertainment expenses for executive and administrative staff, rent and utilities, professional fees, insurance, and amortization and depreciation expense. General and administrative costs are expensed as incurred.
Stock-Based Compensation
The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest.
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of September
30, 2022, two distributors represented
Fair Value Measurements
GAAP defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAAP permits an entity to choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation and disclosure requirements for assets and liabilities for which the fair value option is elected. As of September 30, 2022 and December 31, 2021, management has not elected to report any of the Company’s assets or liabilities at fair value under the “fair value option” provided by GAAP.
The hierarchy of fair value valuation techniques under GAAP provides for three levels: Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, generally would require significant management judgment. The three levels for categorizing assets and liabilities under GAAP’s fair value measurement requirements are as follows:
| Level 1: | Fair value of the asset or liability is determined using cash or unadjusted quoted prices in active markets for identical assets or liabilities. | |
| Level 2: | Fair value of the asset or liability is determined using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. | |
| Level 3: | Fair value of the asset or liability is determined using unobservable inputs that are significant to the fair value measurement and reflect management’s own assumptions regarding the applicable asset or liability. |
| 8 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
None of the Company’s assets or liabilities were measured at fair value as of September 30, 2022 or December 31, 2021. However, GAAP requires the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments consist principally of trade receivables, accounts payable, accrued liabilities, notes payable, and the secured credit facilities. The estimated fair value of trade receivables, accounts payable, and accrued liabilities approximate their carrying value due to the short period of time to their maturities. As of September 30, 2022 and December 31, 2021, the principal amounts of the Company’s notes approximate fair value.
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities acquired in a business acquisition are valued at fair value at the date of acquisition due to having indefinite lives. The Company, on an annual basis, tests the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then the Company will estimate its useful life and amortize the asset over the remainder of its useful life.
Inventories
Inventories primarily consist of bulk and bottled liquor and raw materials and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (“FIFO”) method. A portion of the Company’s finished goods inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the life of the lease or the useful lives of the assets, whichever is shorter. The cost and related accumulated depreciation and amortization of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is reported as current period income or expense. The costs of repairs and maintenance are expensed as incurred.
Intangible Assets / Goodwill
The Company accounts for certain intangible assets at cost. Management reviews these intangible assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative assessment of certain of its intangible assets as of September 30, 2022 and determined that they were not impaired.
Long-lived Assets
The Company accounts for long-lived assets, including certain intangible assets, at amortized cost. Management reviews long-lived assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount of the asset, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative assessment of certain of its long-lived assets as of September 30, 2022 and determined that they were not impaired.
Comprehensive Income
The
Company did
| 9 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
Accounts Receivable Factoring Program
The
Company has two accounts receivable factoring programs. One for its spirits customers (the “spirits program”)
and another for its co-packing customers (the “co-packing program”).
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, (“ASU 2021-08”) which requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue Recognition. This ASU is effective for annual and interim periods beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2021-08 will have on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, (“ASU 2020-06”) which simplifies the accounting for convertible instruments by eliminating the beneficial conversion feature and cash conversion models. Certain convertible instruments will be accounted for as a single unit of account, unless the conversion feature requires bifurcation and recognition as a derivative. Additionally, this ASU simplifies the earnings per share calculation, by eliminating the treasury stock method and requiring entities to use the if-converted method. This guidance is effective for annual periods beginning after December 31, 2021 with early adoption permitted. The Company early adopted ASU 2020-06 for the year ended December 31, 2021.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”). The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and will apply to trade receivables. The new guidance will be effective for the Company’s annual and interim periods beginning after December 15, 2022. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.
4. Discontinued Operations
The Company reports discontinued operations by applying the following criteria in accordance with ASC Topic 205-20, Presentation of Financial Statements – Discontinued Operations: (1) Component of an entity; (2) Held for sale criteria; and (3) Strategic shift.
| 10 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
On December 31, 2019, management made a strategic shift to focus the Company’s sales and marketing efforts on the nationally branded product platform, resulting in the decision to close all four of its retail stores in the Portland, Oregon area. The retail stores were closed or abandoned by March 31, 2020.
On
February 2, 2021, Redneck Riviera Whiskey Co, LLC (“RRWC”) entered into a Termination and Inventory Purchase Agreement (the
“Termination Agreement”) with Rich Marks, LLC, John D. Rich Tisa Trust and Redneck Spirits Group, LLC (collectively the buyers
referred to as “RSG”), pursuant to which, on February 5, 2021, RRWC sold all of its inventory of Redneck Riviera, Granny
Rich, and Howdy Dew distilled spirits products, including finished goods, raw materials, and barrel inventory, as well as all assignable
certificates of label approval/exemption, branding, permits, and registrations relating thereto, for $
For the nine months ended September 30, 2021, the revenue, expenses and cash flows from retail operations and the RRWC business have been classified as discontinued operations separately from continuing operations. As of December 31, 2021, there were no assets and liabilities related to discontinued retail operations and the Redneck Riviera Spirits business.
Income and expense related to discontinued retail operations and the Redneck Riviera Spirits business were as follows for the nine months ended September 30, 2022 and 2021:
| (Dollars in thousands) | 2022 | 2021 | ||||||
| (Unaudited) | (Unaudited) | |||||||
| Sales | $ | $ | ||||||
| Less customer programs and excise taxes | ||||||||
| Net sales | ||||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Sales and marketing expenses | ||||||||
| General and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Income from operations | ||||||||
| Other income, net | ||||||||
| Other income | ||||||||
| Gain on termination of license agreement | ||||||||
| Total other expense, net | ||||||||
| Net income | $ | $ | ||||||
5. Business Segment Information
The
Company’s internal management financial reporting consists of Eastside spirits and Craft C+P. The spirits brands span several alcoholic
beverage categories, including whiskey, vodka, rum, and tequila and are sold on a wholesale basis to distributors in open states, and
brokers in control states. The Company’s principal area of operation is in the U.S. and has two spirits customers that represents
Craft C+P offers digital can printing and co-packing services in Portland, Oregon allowing it to offer end-to-end production capabilities. Craft C+P operates 14 mobile lines in Washington, Oregon and Colorado.
The measure of profitability reviewed is condensed statements of operations, and gross margin. These business segments reflect how operations are managed, operating performance is evaluated and the structure of internal financial reporting. Total asset information by segment is not provided to, or reviewed by, the chief operating decision maker (“CODM”) as it is not used to make strategic decisions, allocate resources or assess performance. The accounting policies of the segments are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 3. Spirits allocates 50% of certain general and administrative expenses to Craft C+P, which is included in the segments’ financial data below.
| 11 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
Segment information was as follows for the nine months ended September 30, 2022 and 2021:
| (Dollars in thousands) | 2022 | 2021 | ||||||
| Spirits | ||||||||
| Sales | $ | $ | ||||||
| Net sales | ||||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Total operating expenses | ||||||||
| Net income (loss) | ( | ) | ||||||
| Gross margin | % | % | ||||||
| Interest expense | $ | $ | ||||||
| Depreciation and amortization | ||||||||
| Significant noncash items: | ||||||||
| (Gain) loss on disposal of property and equipment | ( | ) | ||||||
| Forgiveness of debt - PPP | ( | ) | ||||||
| Remeasurement of deferred consideration | ( | ) | ||||||
| Gain on disposal of offsite inventory | ( | ) | ||||||
| One-time professional fees | ||||||||
| Stock compensation | ||||||||
| Craft C+P | ||||||||
| Sales | $ | $ | ||||||
| Net sales | ||||||||
| Cost of sales | ||||||||
| Gross profit | ( | ) | ||||||
| Total operating expenses | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Gross margin | - | % | % | |||||
| Interest expense | $ | $ | ||||||
| Depreciation and amortization | ||||||||
| Significant noncash items: | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Forgiveness of debt - PPP | ( | ) | ||||||
| Stock compensation | ||||||||
Craft C+P’s gross margin decreased primarily due to lower sales of services, a change in product and service mix, and higher raw material costs. In addition, Craft C+P’s digital printer commenced operations in April, 2022 and Craft C+P now bears the operating costs. Although printing revenues significantly increased through the quarter, the printer is not yet operating at full capacity.
6. Inventories
Inventories consisted of the following:
| (Dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
| 12 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
7. Prepaid Expenses and Current Assets
Prepaid expenses and current assets consisted of the following:
| (Dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Prepayment of fixed assets | $ | $ | ||||||
| Prepayment of inventory | ||||||||
| Other | ||||||||
| Total prepaid expenses and current assets | $ | $ | ||||||
During the nine months ended September 30, 2022, the Company began operations of its new digital can printer. This resulted in a decrease in prepayment of fixed assets, as the printer was reclassified to property and equipment.
8. Property and Equipment
Property and equipment consisted of the following:
| (Dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Furniture and fixtures | $ | $ | ||||||
| Digital can printer | ||||||||
| Leasehold improvements | ||||||||
| Vehicles | ||||||||
| Total cost | ||||||||
| Less accumulated depreciation | ( |
) | ( |
) | ||||
| Total property and equipment, net | $ | $ | ||||||
Purchases
of property and equipment totaled $
During
the nine months ended September 30, 2022, the Company disposed of fixed assets with a net book value of $
During
the nine months ended September 30, 2022, the Company entered into a master equity lease agreement with Enterprise FM Trust (“Enterprise”).
Per the agreement, the Company delivered to Enterprise the titles to certain vehicles, which resulted in a loss on disposal of $
During
the nine months ended September 30, 2022, the Company acquired the assets of a production facility for a cash payment of $
| 13 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
9. Intangible Assets
Intangible assets consisted of the following:
| (Dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Permits and licenses | $ | $ | ||||||
| Azuñia brand | ||||||||
| Customer lists | ||||||||
| Total intangible assets | ||||||||
| Less accumulated amortization | ( |
) | ( |
) | ||||
| Intangible assets, net | $ | $ | ||||||
The
customer list is being amortized over a seven-year life. Amortization expense totaled $
The permits and licenses, and Azuñia brand have all been determined to have an indefinite life and will not be amortized. The Company, on an annual basis, tests the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then the Company will estimate its useful life and amortize the asset over the remainder of its useful life.
10. Other Assets
Other assets consisted of the following:
| (Dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Product branding | $ | $ | ||||||
| Deposits | ||||||||
| Total other assets | ||||||||
| Less accumulated amortization | ( | ) | ( |
) | ||||
| Other assets, net | $ | $ | ||||||
As
of September 30, 2022, the Company had $
Amortization
expense totaled $
The deposits represent office lease deposits.
11. Leases
The
Company has various lease agreements in place for facilities, equipment and vehicles. Terms of these leases include, in some instances,
scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease.
Maturities of lease liabilities as of September 30, 2022 were as follows:
| (Dollars in thousands) | Operating Leases | Weighted- Average Remaining Term in Years | |||||||
| 2022 | $ | ||||||||
| 2023 | |||||||||
| 2024 | |||||||||
| 2025 | |||||||||
| 2026 | |||||||||
| Thereafter | |||||||||
| Total lease payments | |||||||||
| Less imputed interest (based on | ( | ) | |||||||
| Present value of lease liability | $ | ||||||||
| 14 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
12. Notes Payable
Notes payable consisted of the following:
| (Dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Notes payable bearing interest at | $ | $ | ||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory note payable under a revolving line of credit bearing variable interest starting at | ||||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory notes payable bearing interest of | ||||||||
| Total notes payable | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| Long-term portion of notes payable | $ | $ | ||||||
| 15 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
The
Company paid $
Maturities on notes payable as of September 30, 2022 were as follows:
| (Dollars in thousands) | |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| $ | |||||
13. Secured Credit Facilities
6% Secured Convertible Promissory Notes
On
April 19, 2021, the Company entered into a securities purchase agreement (“Purchase Agreement”) with accredited investors
(“Subscribers”) for their purchase of up to $
Roth
Capital, LLC acted as placement agent in the private offering, and the Company paid the Placement Agent a cash fee of five percent (
Interest
on the Notes accrues at a rate of
All
amounts due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional
shares), at the option of the holders into the Company’s common stock at a fixed conversion price, which is subject to adjustment
as summarized below. The Notes were initially convertible into the Company’s common stock at an initial fixed conversion price
of $
The Notes contain customary triggering events including but not limited to: (i) failure to make payments when due under the Notes; and (ii) bankruptcy or insolvency of the Company. If a triggering event occurs, each holder may require the Company to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash.
| 16 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
The Notes are secured by a subordinated security interest in the Company’s assets pursuant to the terms of a Security Agreement entered into between the Company and the Subscribers.
On
July 30, 2021, the Company entered into warrant exercise inducement offer letters (“Inducement Letters”) with the holders
of the Existing Warrants to exercise for cash their Existing Warrants. During the year ended December 31, 2021, the Company received
gross proceeds of $
Live Oak Loan Agreement
On
January 15, 2020, the Company and its subsidiaries entered into a loan agreement (the “Loan Agreement”) between the Company
and Live Oak Banking Company (“Live Oak”), a North Carolina banking corporation (the “Lender”) to refinance existing
debt of the Company and to provide funding for general working capital purposes.
The
Loan bore interest at a rate equal to the prime rate plus a spread of
The Loan Agreement contained affirmative and negative covenants that include covenants restricting the Company’s ability to, among other things, incur indebtedness, grant liens, dispose of assets, merge or consolidate, make investments, or enter into restrictive agreements, subject to certain exceptions.
The obligations of the Company under the Loan Agreement were secured by substantially all of its spirits respective assets, except for accounts receivable and certain other specified excluded property.
The
Loan Agreement included customary events of default that included among other things, non-payment defaults, covenant defaults, inaccuracy
of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults and change in control defaults.
Under certain circumstances, a default interest rate would have applied on all obligations during the existence of an event of default
under the Loan Agreement at a per annum rate equal to
In
connection with the Loan Agreement, the Company issued to the Lender a warrant to purchase up to
14. Commitments and Contingencies
Legal Matters
On December 15, 2020, Grover Wickersham filed a complaint in the United States District Court for the District Court of Oregon against the Company. Mr. Wickersham, the former CEO and Chairman of the Board of the Company, has asserted causes of action for fraud in the inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, defamation, interference with economic advantage, elder financial abuse, and dissemination of false and misleading proxy materials. The Company disputes the allegations and intends to defend the case vigorously.
| 17 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
The Company is not currently subject to any other material legal proceedings; however, it could be subject to legal proceedings and claims from time to time in the ordinary course of its business, or legal proceedings it considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and can divert management resources.
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Potentially dilutive securities consist of the incremental common stock issuable upon exercise of stock options, convertible notes and warrants. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. There were anti-dilutive common shares included in the calculation of income (loss) per common share as of September 30, 2022. As of September 30, 2021, the Company had dilutive common shares.
16. Stockholders’ Equity
Series B Preferred Stock | Common Stock | Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| (Shares and dollars in thousands) | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | |||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | | $ | $ | ( | ) | $ | | |||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of common stock for services by third parties | - | |||||||||||||||||||||||||||
| Issuance of common stock for services by employees | - | |||||||||||||||||||||||||||
| Issuance of detachable warrants on notes payable | - | - | ||||||||||||||||||||||||||
| Shares issued for cash | - | |||||||||||||||||||||||||||
| Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
Issuance of Common Stock
During the nine months ended September 30, 2022, the Company issued shares of common stock to directors and employees for stock-based compensation of $ million. The shares were valued using the closing share price of the Company’s common stock on the date of grant, within the range of $ to $ per share. Of these shares, were issued to the Company’s former Chief Executive Officer pursuant to his separation agreement.
On April 5, 2022, the
Company sold
shares of common stock to its Chief Executive Officer for proceeds of $
During
2021, the Company issued
shares of common stock to directors and employees for stock-based compensation of $
On February 10, 2021 and April 19, 2021, the Company issued million shares and shares, respectively, of its common stock (the “Shares”) to certain affiliates of Intersect pursuant to an Asset Purchase Agreement dated September 12, 2019 by and between the Company and Intersect in respect of the Azuñia Tequila acquisition at a weighted-average of $ per share and $ per share, respectively. The Shares constitute the “Fixed Shares” due to Intersect pursuant to the Asset Purchase Agreement.
On
July 30, 2021, the Company entered into Inducement Letters with the holders of the Existing Warrants to exercise their Existing Warrants
and purchased
| 18 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
During
2021, the Company sold shares of common stock for net proceeds of $
Issuance of Series B Preferred Stock
On
October 19, 2021, Company entered into a securities purchase agreement (“Purchase Agreement”) with an accredited investor
(“Subscriber”) for its purchase of million shares (“Preferred Shares”) of Series B Convertible Preferred
Stock (“Series B Preferred Stock”) at a purchase price of $ per Preferred Share, which Preferred Shares are convertible
into shares of the Company’s common stock pursuant to the terms and conditions set forth in a Certificate of Designation Establishing
Series B Preferred Stock of the Company with an initial conversion price of $
The
Series B Preferred Stock accrues dividends at a rate of
Stock-Based Compensation
On
September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). Pursuant to the terms of the
plan, on January 1, 2022 the number of shares available for grant under the 2016 Plan reset to
shares, equal to
The Company also issues, from time to time, options that are not registered under a formal option plan. As of September 30, 2022, there were no options outstanding that were not issued under the Plans.
| # of Options | Weighted- Average Exercise Price | |||||||
| Outstanding as of December 31, 2021 | $ | |||||||
| Options canceled | ( | ) | ||||||
| Outstanding as of September 30, 2022 | $ | |||||||
| Exercisable as of September 30, 2022 | $ | |||||||
On
December 7, 2021, the Company issued shares of common stock at $ per share upon the exercise of stock options for proceeds
of $
The aggregate intrinsic value of options outstanding as of September 30, 2022 was $.
As of September 30, 2022, there were unvested options with an aggregate grant date fair value of $. The unvested options will vest in accordance with the vesting schedule in each respective option agreement, which varies between immediate and three years from the grant date. The aggregate intrinsic value of unvested options as of September 30, 2022 was $. During the nine months ended September 30, 2022, options vested.
| 19 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
The Company uses the Black-Scholes valuation model to measure the grant-date fair value of stock options. The grant-date fair value of stock options issued to employees is recognized on a straight-line basis over the requisite service period. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments as the underlying stock-based awards vest.
To determine the fair value of stock options using the Black-Scholes valuation model, the calculation takes into consideration the effect of the following:
| ● | Exercise price of the option | |
| ● | Fair value of the Company’s common stock on the date of grant | |
| ● | Expected term of the option | |
| ● | Expected volatility over the expected term of the option | |
| ● | Risk-free interest rate for the expected term of the option |
The calculation includes several assumptions that require management’s judgment. The expected term of the options is calculated using the simplified method described in GAAP. The simplified method defines the expected term as the average of the contractual term and the vesting period. Estimated volatility is derived from volatility calculated using historical closing prices of common shares of similar entities whose share prices are publicly available for the expected term of the options. The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the options.
The Company did not issue any additional options during the nine months ended September 30, 2022.
For
the nine months ended September 30, 2022 and 2021, net compensation expense related to stock options was $ and $ million, respectively.
As of September 30, 2022, the total compensation expense related to stock options not yet recognized was approximately $ million,
which is expected to be recognized over a weighted-average period of approximately
Warrants
On
March 21, 2022, the Company entered into a promissory note with TQLA to accept a one year loan of $
The estimated fair value of the new warrants issued was based on a combination of closing market trading price on the date of issuance for the public offering warrants, and the Black-Scholes option-pricing model, using the assumptions below:
| Volatility | % | |||
| Risk-free interest rate | % | |||
| Expected term (in years) | ||||
| Expected dividend yield | ||||
| Fair value of common stock | $ |
From
April 19, 2021 through May 12, 2021, the Company issued in a private placement Existing Warrants to purchase up to
| 20 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
On
July 30, 2021, the Company entered into Inducement Letters with the holders of the Existing Warrants whereby such holders agreed to exercise
for cash their Existing Warrants to purchase the
A summary of all warrant activity as of and for the nine months ended September 30, 2022 is presented below:
| Warrants | Weighted- Average Remaining Life (Years) | Weighted- Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of December 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Outstanding as of September 30, 2022 | $ | $ | ||||||||||||||
17. Related Party Transactions
The
following is a description of transactions since January 1, 2021 as to which the amount involved exceeds the lesser of $
On October 24, 2019, the Company’s Board appointed Stephanie Kilkenny to the Board to fill an existing vacancy on the Board effective immediately. Stephanie Kilkenny was the former managing director of Azuñia Tequila, and together with her spouse, Patrick Kilkenny, owns and controls TQLA, the majority owner of Intersect. Effective June 15, 2020, the Company’s Board appointed Robert Grammen to the Board to fill an existing vacancy, Mr. Grammen is also a member of Intersect .
On
April 19, 2021, the Company issued $
On
February 5, 2021, the Company paid other liabilities of $
Secured Line of Credit Promissory Note
On
March 21, 2022, the Company entered into a Secured Line of Credit Promissory Note payable to TQLA to accept a one year loan of
$
| 21 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2022
(Unaudited)
18. Subsequent Events
Debt
On
October 7, 2022, the Company entered into a Note Purchase Agreement dated as of October 6, 2022 with Aegis Security Insurance
Company (“Aegis”). The principal owner of Aegis is Patrick Kilkenny, whose spouse is a member of the Company’s
Board of Directors. Pursuant to the Note Purchase Agreement, Aegis purchased from the Company a secured promissory note in the
principal amount of $
The
Aegis Note bears interest at
The aforesaid payment by Aegis to TQLA fully satisfied the Secured Line of Credit Promissory Note that the Company issued to TQLA on March 21, 2022 and subsequently amended.
On October 13, 2022, the Company entered into an Amendment Agreement with the holders of the 6% Secured Convertible Promissory Notes. The Amendment Agreement changed the Maturity Date of the Notes from October 18, 2022 to November 18, 2022. In consideration of the extension, the Company issued shares of its common stock to each of the Subscribers.
Common Stock Issuance
On October 6, 2022, the Company issued shares of common stock under its 2016 Equity Incentive Plan. The shares were issued to the members of the Board of Directors as quarterly compensation.
| 22 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This section of the Quarterly Report includes “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events about the company or our outlook and involve uncertainties that could significantly impact results. You can identify forward-looking statements by the fact they do not relate to historical or current facts and by the use of words indicating anticipation or speculation such as “believe,” “expect,” “estimate,” “anticipate,” “will be,” “should,” “plan,” “project,” “intend,” “could” and similar words or expressions.
You should not place undue certainty on these forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that could cause our expectations to be unfulfilled include those discussed in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2021 entitled “Risk Factors” as well as factors we have not yet anticipated.
Overview
Eastside Distilling, Inc. (the “Company,” “Eastside Distilling,” “we,” “us,” or “our,” below) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, we changed our corporate name to Eastside Distilling, Inc. to reflect our acquisition of Eastside Distilling, LLC. We operate in two segments. Our Spirits segment manufactures, blends, bottles, markets and sells a wide variety of alcoholic beverages under recognized brands in 34 U.S. states. Our Craft Canning + Printing (“Craft C+P”) segment provides digital can printing and canning services to the craft beer and cider industries in Washington, Oregon and Colorado. We now offer co-packing services in Portland, Oregon through our recent asset acquisition, allowing us to offer end-to-end production capabilities. We employ 75 people in the United States.
| 23 |
Mission-What We Do
Our mission is to source, make and deliver the best in class, end-to-end craft spirits brands and product portfolio. In addition, we contract pack and decorate cans and bottles with distinct capability and craftsmanship, as well as now offer advanced digital can printing with custom graphics and co-packing services.
Strategy
Our spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum and tequila. We sell our products on a wholesale basis to distributors in open states, and brokers in control states. Craft C+P primarily services the craft beer, cider and kombucha beverage segments. Craft C+P operates 14 mobile lines in Seattle and Spokane, Washington; Portland, Oregon; and Denver, Colorado, as well as now offers digital can printing to customers and co-packing services.
Eastside Distilling is unique in several specific areas: (1) to our knowledge, we are the only craft spirits company listed on Nasdaq, (2) we do not function as a traditional craft distillery with store fronts relying on local sales, (3) our contract manufacturing division is diversified, and (4) we have a diversified portfolio of spirits brands. We are similar to other craft distillers in that (1) we have concentrated local volume, (2) we produce small batches and remain within the volume definition of “Craft”, and (3) our brands achieve success through differentiation, discovery and distribution.
The U.S. spirits market is occupied by large multi-national conglomerates with substantially more resources than Eastside Distilling. However, we can use our small size to be fast, focused, and flexible in our strategy. If we attempt to grow too quickly, we may lack the underlying strength required to build scale with loyalty via strong unaided awareness and powerfully derived attributes. Moreover, attempting to focus our “frame-of-reference” to compete with the biggest brands in the most expensive venues is likely to fail unless we first establish underlying brand equity.
Our strategy is to utilize our public company stature to our advantage and position to expand our two distinct businesses – Spirits and Craft C+P. Our spirits portfolio is to be positioned as a leading regional craft spirits provider that develops brands, expands geographic presence growing revenue and cash flow. We look to grow and vertically integrate our Craft C+P business to expand our product offerings and improve our competitive position. These two segments are detailed below.
Segments
Spirits
Over the years, we have developed, matured, perfected, or acquired then launched many award-winning spirits while evolving to meet the growing demand for quality products and services associated with the burgeoning craft and premium beverage trade. Our portfolio includes originals like the Quercus garryana barrel-finished Burnside Whiskey family, Portland Potato Vodka, Hue-Hue Coffee Rum, and Azuñia Tequilas.
| ● | Burnside Whiskey Family – Our Burnside Whiskey Family celebrates the unique attributes of the native Oregon Oak tree (Quercus garryana). The unique complexity of each distinct whiskey comes from blending Oregon Oak barrels of differing sizes, char levels, and ages. After an initial experiment in 2012, we made it our mission to turn the Burnside program into a one-of-a-kind oak study.
|
| 24 |
| ● | Portland Potato Vodka – Our award-winning premium craft vodka is distilled four times to ensure a smooth finish. While most vodka is made from grain, we source award winning premium potato ethanol and blend it with pristine water sourced from Oregon.
| |
| ● | Hue-Hue (pronounced “way-way”) Coffee Rum – Premium silver rum is blended with concentrated cold-brewed coffee and a small amount of Demerara sugar. We source fair-trade, single-origin Arabica coffee beans from the Finca El Paternal Estate in Huehuetenango, Guatemala that are lightly roasted for us by Portland Coffee Roasters.
|
| ● | Azuñia Tequilas – Smooth, clean, tequilas crafted by Rancho Miravalle, a second generation, family-owned-and-operated estate, bursting with authentic flavor from the local terroir of Tequila Valley, Mexico. 100% pure Weber Blue Agave is harvested by hand, roasted in traditional clay hornos, and finished with a natural, open-air fermentation process. It is bottled on-site in small batches using a consistent process to deliver consistent field-to-bottle quality and exclusively exported by Agaveros Unidos de Amatitán.
|
| ● | Eastside Brands – We make the unique by blending together the unusual, craft inspired, experiential brands and high-quality artisan, in-and-out, seasonal and ongoing limited-edition products. Each Eastside-branded product is rare and hard-to-get with a peculiar balance of age and innovation, craftsmanship and curiosity, creativity and restraint.
|
| 25 |
Craft Canning + Printing
With 10 years of experience in the mobile canning business, we’ve become the West’s most trusted and premier mobile packaging provider. We serve locations in Oregon, Washington and Colorado. Our team of professionals have packaged hundreds of award-winning products across both established and innovative beverage segments - beer, wine, cider, RTD cocktails, kombucha, seltzer, and many more. We use extensive proprietary and data-driven quality control measures and a robust clean-in-place procedure in order to provide the best packaging service for our customers. We take great pride in helping local beverage producers expand their distribution reach by using our service to offer industry-top quality and branding. Our greatest asset is the unmatched expertise of our talented group of printing and packaging professionals who show up every day to go above and beyond to get the job done.
 |
 |
Digital Can Printing
We now operate an innovative digital can printer that will revolutionize the growing custom canning operation. Our new printer, the German-made Hinterkopf D240.2, is the only one of its kind on the West Coast and one of ten in the world. The new acquisition gives Craft C+P the ability to offer unparalleled customization and flexibility to craft beverage producers seeking direct printing for canning projects of all sizes while having a production capacity of over 28 million cans. The new printer began operations in April 2022.
We print 12-ounce or 16-ounce cans in any quantity with any image. This flexibility allows for custom graphics of limited releases, vintages, partnerships, and special events.
 |
 |
 |
In connection with the can printer, we partnered with a leading can provider to provide quality canning services from end to end. The new partnership guarantees a current and future supply of domestically manufactured Crown cans, cost-effective solutions for our customers, and improved logistics for beverage producers.
Co-packing Facility
We now offer co-packing services in Portland, Oregon through our recent asset acquisition, allowing us to offer end-to-end production capabilities. We currently are the exclusive provider of can printing and co-packing services for a CBD and wellness water maker.
| 26 |
Mobile Canning
Our Craft mobile team offers a variety of services and products, including:
| ● | High Mobile Canning Capacity – We operate 14 Wild Goose MC-250 machines, with the capacity to can over 150,000 barrels per year. In addition to the canning lines, we use custom in-house designed fully automated depalletizers and twist rinses. |
 |
 |
| ● | Large Craft Volumes – With capabilities of around 600-800 cases per shift, we can manage any volume. Averaging 40 cans per minute, each machine can do 100 cases per hour.
| |
| ● | Dedicated Team – All of our employees are carefully and rigorously trained. A fully insured workforce is ready to take on any and all of the customer’s packaging needs. We believe in continuous improvement, and we understand the value of our clients’ products and dedicate ourselves to making every run a successful run.
| |
| ● | Quality Control – Hach Orbispheres measure our dissolved oxygen (“DO”) during packaging to ensure the lowest Total Packaged Oxygen for the customer’s can. We use luminometers and ATP swabs to ensure sanitation of our equipment. We can provide Zahm & Nagel volume meters to measure carbon dioxide (“CO2”) volumes in carbonated products before packaging. As masters of the “double seam” we frequently take on-site measurements with micrometers. We also offer CMC Kuhnke technology to generate even more accurate measurements in the form of visual seam reports.
|
| 27 |
| ● | Velcorin and Nitrogen Dosing – We have both velcorin and nitrogen dosing capabilities that supports microbial control and allows packaging of still products in addition to carbonated and nitrogenated beverages.
|
| ● | Pre-printing and Outfeed Labeling – Bringing on advanced digital can printing technology from Hinterkopf in Q2 2022 allows us to offer customers both world-class aesthetics and full sustainability in an end-to-end branding and packaging solution, accessible from our smallest to our largest customers. We also provide outfeed labeling and the ability to package customer-provided branded cans of all varieties. | |
| ● | Location Flexibility – We allow our customers to choose the location of canning. We bring our mobile equipment to their facility, or our customers can bring their product to us for co-packing. |
Recent Developments
During the second quarter of 2022, we began operating our new digital can printer providing our customers with photo-realistic graphics and the ability to make label changes at the last minute, as well as a sustainable product that is 100% recyclable, unlike the traditional craft label and shrink sleeve. These capabilities are game changers in the craft beverage space, offered to all makers of beverages not only brewers. During October 2022, we printed almost 1 million cans.
In addition, we purchased the assets of a maker of wellness beverages during the second quarter and we are contracted to be its exclusive provider of can printing and co-packing services. This asset purchase allows us to offer additional production capabilities to customers in our canning operation.
We faced a number of challenges in both business segments in 2021 that have continued into 2022. The COVID-19 pandemic presented significant operational challenges for both the mobile canning operation as well as spirits division. Increased competition, supply change issues and restructuring activities added to performance challenges in 2021 that have continued into 2022.
Our spirits volume has been soft during 2022, primarily due to terminating deep discounting of Azuñia tequila in 2021. In addition, we faced challenges with distribution partners that resulted in out of stocks at retail and missed programming windows. The majority of these issues are behind us as we head into the fourth quarter. Finally, we saw cost increases across much of our direct and indirect costs. While a substantial amount of our raw materials is owned, such as our whisky, and not susceptible to price inflation, imported tequila and other materials such as glass increased through the year. These challenges are expected to continue in the last quarter of 2022. The decline in distributed sales was offset by a direct sale of nearly 1,500 barrels sold for $4.4 million during 2022.
Craft C+P also continues to face unique challenges and opportunities. In the beginning of the second quarter, we started a new business activity decorating craft beverage cans. The first half of 2022 involved substantial investment and planning to launch the technology in a new Portland, Oregon based printing facility. This new initiative has helped us improve our competitive position and deal with a number of industry challenges. Beginning mid-year 2020 and throughout 2021, the craft beverage industry faced a shortage of aluminum cans. Domestic aluminum can manufacturers continue to make adjustments to manage a supply demand imbalance into 2022. As a result, buyers of aluminum cans continue to face uncertainties. We believe we have sourced an adequate supply of cans to supply our current business plan. In addition, suppliers have successfully passed through price increases, which we did not immediately pass through to our customers. Moreover, this period of rapidly escalating prices left us at a competitive disadvantage to others that had a superior source of cans. Digital printing has allowed us to improve our ability to pass through aluminum can price inflation. In addition, we have faced workforce challenges related to retention and hiring.
| 28 |
Results of Operations
Overview
Three and Nine Months Ended September 30, 2022 Compared to the Three and Nine Months Ended September 30, 2021
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | Variance | 2022 | 2021 | Variance | ||||||||||||||||||
| Sales | $ | 3,064 | $ | 3,277 | $ | (213 | ) | $ | 11,967 | $ | 10,138 | $ | 1,829 | |||||||||||
| Less customer programs and excise taxes | 87 | 70 | 17 | 393 | 338 | 55 | ||||||||||||||||||
| Net sales | 2,977 | 3,207 | (230 | ) | 11,574 | 9,800 | 1,774 | |||||||||||||||||
| Cost of sales | 2,787 | 2,347 | 440 | 8,985 | 7,488 | 1,497 | ||||||||||||||||||
| Gross profit | 190 | 860 | (670 | ) | 2,589 | 2,312 | 277 | |||||||||||||||||
| Sales and marketing expenses | 702 | 533 | 169 | 2,078 | 2,087 | (9 | ) | |||||||||||||||||
| General and administrative expenses | 1,438 | 1,471 | (33 | ) | 5,116 | 5,000 | 116 | |||||||||||||||||
| Loss on disposal of property and equipment | - | 360 | (360 | ) | 101 | 421 | (320 | ) | ||||||||||||||||
| Total operating expenses | 2,140 | 2,364 | (224 | ) | 7,295 | 7,508 | (213 | ) | ||||||||||||||||
| Loss from operations | (1,950 | ) | (1,504 | ) | (446 | ) | (4,706 | ) | (5,196 | ) | 490 | |||||||||||||
| Interest expense | (808 | ) | (414 | ) | (394 | ) | (1,976 | ) | (885 | ) | (1,091 | ) | ||||||||||||
| Other income | 25 | 25 | - | 125 | 2,242 | (2,117 | ) | |||||||||||||||||
| Loss from continuing operations | (2,733 | ) | (1,893 | ) | (840 | ) | (6,557 | ) | (3,839 | ) | (2,718 | ) | ||||||||||||
| Income (loss) from discontinued operations | - | (17 | ) | 17 | - | 3,869 | (3,869 | ) | ||||||||||||||||
| Net income (loss) | (2,733 | ) | (1,910 | ) | (823 | ) | (6,557 | ) | 30 | (6,585 | ) | |||||||||||||
| Preferred stock dividends | (38 | ) | - | (38 | ) | (113 | ) | - | (113 | ) | ||||||||||||||
| Deemed dividend- warrant price protection-revaluation adjustment | - | (2,288 | ) | 2,288 | - | (2,288 | ) | 2,288 | ||||||||||||||||
| Net loss attributable to common shareholders | $ | (2,771 | ) | $ | (4,198 | ) | $ | 1,427 | $ | (6,670 | ) | $ | (2,258 | ) | $ | (4,412 | ) | |||||||
| Gross margin | 6 | % | 27 | % | -21 | % | 22 | % | 24 | % | -2 | % | ||||||||||||
Segment information was as follows for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | Variance | 2022 | 2021 | Variance | ||||||||||||||||||
| Spirits | ||||||||||||||||||||||||
| Sales | $ | 1,188 | $ | 1,492 | $ | (304 | ) | $ | 7,586 | $ | 4,304 | $ | 3,282 | |||||||||||
| Net sales | 1,101 | 1,422 | (321 | ) | 7,293 | 3,966 | 3,327 | |||||||||||||||||
| Cost of sales | 787 | 907 | (120 | ) | 4,176 | 2,989 | 1,187 | |||||||||||||||||
| Gross profit | 314 | 515 | (201 | ) | 3,117 | 977 | 2,140 | |||||||||||||||||
| Total operating expenses | 1,034 | 1,345 | (311 | ) | 3,595 | 4,358 | (763 | ) | ||||||||||||||||
| Net income (loss) | $ | (1,492 | ) | $ | (1,223 | ) | $ | (269 | ) | $ | (2,397 | ) | $ | 1,484 | $ | (3,881 | ) | |||||||
| Gross margin | 29 | % | 36 | % | -7 | % | 43 | % | 25 | % | 18 | % | ||||||||||||
| Craft C+P | ||||||||||||||||||||||||
| Sales | $ | 1,876 | $ | 1,785 | $ | 91 | $ | 4,381 | $ | 5,834 | $ | (1,453 | ) | |||||||||||
| Net sales | 1,876 | 1,785 | 91 | 4,281 | 5,834 | (1,553 | ) | |||||||||||||||||
| Cost of sales | 2,000 | 1,440 | 560 | 4,809 | 4,499 | 310 | ||||||||||||||||||
| Gross profit | (124 | ) | 345 | (469 | ) | (528 | ) | 1,335 | (1,863 | ) | ||||||||||||||
| Total operating expenses | 1,106 | 1,019 | 87 | 3,700 | 3,150 | 550 | ||||||||||||||||||
| Net loss | $ | (1,241 | ) | $ | (687 | ) | $ | (554 | ) | $ | (4,160 | ) | $ | (1,454 | ) | $ | (2,706 | ) | ||||||
| Gross margin | -7 | % | 19 | % | -26 | % | -12 | % | 23 | % | -35 | % | ||||||||||||
| 29 |
Sales
Sales were $12.0 million and $10.1 million for the nine months ended September 30, 2022 and 2021, respectively, and $3.1 million and $3.3 million for the three months ended September 30, 2022 and 2021, respectively.
Spirits
Sales increased for the nine months ended September 30, 2022 due to the sale of nearly 1,450 barrels for gross proceeds of $4.4 million, partially offset by weaker Azuñia volume due to a reduction in discounting and a price increase in 2021. Sales decreased for the three months ended September 30, 2022 from the Azuñia challenges, and two large one-time inventory purchases in 2021. The following table presents volumes by nine-liter cases for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| 9 Liter Cases | 2022 | 2021 | Variance | 2022 | 2021 | Variance | ||||||||||||||||||
| Azuñia | 1,347 | 3,316 | (1,969 | ) | 5,136 | 9,463 | (4,327 | ) | ||||||||||||||||
| Burnside | 779 | 1,109 | (330 | ) | 2,717 | 3,318 | (601 | ) | ||||||||||||||||
| Hue-Hue | 55 | 57 | (2 | ) | 277 | 259 | 18 | |||||||||||||||||
| Portland Potato Vodka | 5,186 | 5,057 | 129 | 13,944 | 14,403 | (459 | ) | |||||||||||||||||
| Eastside Brands | 91 | 96 | (5 | ) | 330 | 142 | 188 | |||||||||||||||||
| Legacy Brands | 1 | 90 | (89 | ) | 14 | 362 | (348 | ) | ||||||||||||||||
| 7,459 | 9,725 | (2,266 | ) | 22,418 | 27,947 | (5,529 | ) | |||||||||||||||||
Craft C+P
Sales decreased for the nine months ended September 30, 2022. The decrease partially reflected the more favorable circumstances for can sales during the pandemic, when on-premise consumption had yet to open up. We also experienced increased competition. Sales increased for the three months ended September 30, 2022 as our new digital can printer came online.
Customer programs and excise taxes
Customer programs and excise taxes were $0.4 million and $0.3 million for the nine months ended September 30, 2022 and 2021, respectively, and $0.1 million for both the three months ended September 30, 2022 and 2021. Included among customer programs during the nine months ended September 30, 2022, was the discount of $0.1 million that we gave to a beverage maker that sold us its printing and canning assets.
Cost of Sales
Cost of sales consists of all direct costs related to both spirits and canning for service, labor, overhead, packaging, and in-bound freight charges. Cost of sales were $9.0 million and $7.5 million for the nine months ended September 30, 2022 and 2021, respectively, and $2.7 million and $2.3 million for the three months ended September 30, 2022 and 2021, respectively.
Spirits
Cost of sales increased for the nine months ended September 30, 2022 due to bulk sales partially offset by lower Azuñia Tequila sales volume and product mix. Cost of sales decreased for the three months ended September 30, 2022 due to lower Azuñia Tequila sales volume and product mix.
| 30 |
Craft C+P
Cost of sales increased for both the three and nine months ended September 30, 2022 due to increased costs related to the relocation of the business and our new digital can printer ramp-up.
Gross Profit
Gross profit is calculated by subtracting the cost of products sold from net sales. Gross profit was $2.6 million and $2.3 million for the nine months ended September 30, 2022 and 2021, respectively, and $0.2 million and $0.9 million for the three months ended September 30, 2022 and 2021, respectively.
Gross margin is gross profit stated as a percentage of net sales. Our gross margin was 22% and 24% for the nine months ended September 30, 2022 and 2021, respectively, 6% and 27% for the three months ended September 30, 2022 and 2021, respectively.
Spirits
Gross margin increased for the nine months ended September 30, 2022 primarily due to excess bulk spirits sales. Gross margin decreased for the three months ended September 30, 2022 primarily due weak to Azuñia Tequila sales volume and product mix.
Craft C+P
Craft C+P’s gross margin decreased for both the three and nine months ended September 30, 2022 primarily due to lower sales of services for the nine months ended September 30, 2022, flat for the three months ended September 30; and a change in product and service mix, and higher raw material costs for both the three and nine months ended September 30, 2022. In addition, Craft C+P launched its digital can printing business at the end of April 2022, which led to an increase in revenues during the three months ended September 30, 2022. However, since we have not achieved full capacity of the printer, the costs of the ramp-up offset much of the revenue.
Sales and Marketing Expenses
Sales and marketing expenses were $2.1 million for both the nine months ended September 30, 2022 and 2021, and $0.7 million and $0.5 million for the three months ended September 30, 2022 and 2021, respectively. The increase for the three months ended September 30, 2022 was primarily due to increased compensation, as we hired additional upper management, and had a write-off of bad accounts.
General and Administrative Expenses
General and administrative expenses were flat at $5.1 million and $5.0 million for the nine months ended September 30, 2022 and 2021, respectively, and flat at $1.4 million and $1.5 million for the three months ended September 30, 2022 and 2021, respectively.
Other Income
Other income was $0.1 million for the nine months ended September 30, 2022 and was attributable to our co-packing asset acquisition. Other income was $2.2 million for the nine months ended September 30, 2021 and was attributable to the forgiveness of our loans under the U.S. government Paycheck Protection Program (“PPP Loans”) and the remeasurement of deferred consideration for the final Azuñia earn-out.
Other income was $25,000 for both the three months ended September 30, 2022 and 2021.
Net Income (Loss)
Net loss was $(6.6) million and net income of $29,677 for the nine months ended September 30, 2022 and 2021, respectively, and net loss of $(2.7) million and $(1.9) million for the three months ended September 30, 2022 and 2021, respectively.
| 31 |
Preferred Stock Dividends
Preferred stock dividends were $37,500 and $0.1 million for the three and nine months ended September 30, 2022, respectively, and related to the Series B preferred stock dividend of 6% per annum.
Deemed Dividend - Warrant Price Protection-Revaluation Adjustment
Deemed dividend - warrant price protection-revaluation adjustment was $2.3 million for both the three and nine months ended September 30, 2021 and related to the exercise of outstanding warrants.
Liquidity and Capital Resources
Our primary capital requirements are for cash used in operating activities and the repayment of debt. Funds for our cash and liquidity needs have historically not been generated from operations but rather from short-term credit in the form of extended payment terms from suppliers as well as proceeds from the sale of convertible debt and equity financings. We have been dependent on raising capital from debt and equity financings to meet our operating needs.
During 2021, our working capital position improved by $22.0 million, primarily due to the conversion of a large portion of debt into equity related to our acquisition of the Azuñia brand. In addition, during 2021, the Small Business Administration (“SBA”) notified us that it approved our request for full forgiveness of the PPP Loans that we took in 2020 in the principal amount of $1.4 million.
We had an accumulated deficit of $65.3 million as of September 30, 2022, having incurred a net loss of $6.6 million during the nine months ended September 30, 2022. The net loss, combined with a reclassification from current assets to equipment of $4.3 million in prepayments related to the digital can printer, resulted in an $8.5 million reduction in working capital. As of September 30, 2022, we had $0.4 million of cash on hand with negative working capital of $3.9 million.
During the nine months ended September 30, 2022, we raised $3.7 million in additional capital through debt financing and an equity raise to invest in our three year growth plan. Our ability to meet our ongoing operating cash needs over the next 12 months depends on growing revenues and gross margins, and generating positive operating cash flow, primarily through increased sales, profitable operations, and controlling expenses. If we are unable to obtain additional financing, or additional financing is not available on acceptable terms, we may seek to sell assets, reduce operating expenses, reduce or eliminate marketing initiatives and take other measures that could impair our ability to be successful.
We continue to make substantial investments in Craft C+P, which we believe will deliver improved results during 2023, in part due to our acquisition of a state-of-the-art digital can printer that will add incremental services and revenue.
Our cash flow results for the nine months ended September 30, 2022 and 2021 were as follows:
| (Dollars in thousands) | 2022 | 2021 | ||||||
| Net cash flows provided by (used in): | ||||||||
| Operating activities | $ | 0.1 | $ | (2.7 | ) | |||
| Investing activities | $ | (2.5 | ) | $ | 3.3 | |||
| Financing activities | $ | (0.5 | ) | $ | 1.3 | |||
Operating Activities
Total cash provided by operating activities was $0.1 million during the nine months ended September 30, 2022 compared to cash used of $2.7 million during the nine months ended September 30, 2021. The increase in cash was primarily attributable to a decrease in inventory as a result of our bulk spirits sales, as well as increases in accounts payable and accrued liabilities.
Investing Activities
Total cash used in investing activities was $2.5 million during the nine months ended September 30, 2022 representing our investment in digital can printing equipment, compared to cash provided of $3.3 million during the nine months ended September 30, 2021, which consisted of $3.4 million received for the Termination Agreement with RSG.
| 32 |
Financing Activities
Total cash used in financing activities was $0.5 million during the nine months ended September 30, 2022 compared to cash provided of $1.3 million during the nine months ended September 30, 2021. Net cash used in financing activities during the nine months ended September 30, 2022 consisted primarily of $2.9 million of principal payments of our secured credit facilities and $1.0 million of payments on principal of notes payable, offset by the net proceeds from a note payable with a related party of $3.2 million and the issuance of common stock of $0.2 million. Net cash provided by financing activities during the nine months ended September 30, 2021 consisted of proceeds from secured credit facilities of $3.3 million, the issuance of common stock from the warrant exercise for cash, net of expenses, of $2.4 million, and proceeds from the issuance of common stock of $2.0 million; offset by $3.6 million of principal payments of our secured credit facilities and $2.8 million of payments on principal of notes payable.
Lines of Credit
We utilize an existing accounts receivable factoring line of credit with ENGS that provides for a minimum of $0.5 million purchased accounts receivable. If we obtain the consent of our senior lender and can pledge adequate assets, the line can be increased to a maximum of $1.2 million of purchased accounts receivable. The advance rate is 85%, and interest is charged against the greater of $0.5 million or the total funds advanced at a rate of 1% plus the prime rate published in the Wall Street Journal. The Company factored $0.3 million of invoices and incurred $3,150 in fees associated with the co-packing program during the nine months ended September 30, 2022. As of September 30, 2022, the Company had a balance of $0.1 million of factored co-packing invoices outstanding.
Since 2019, we utilized an existing accounts receivable factoring line of credit with Park Street Financial Services, LLC. The advance rate is 75%, and interest is charged at a rate of 2.4% for the first 30 days plus 1.44% for each additional ten-day period. The Company factored $0.3 million of invoices during the year ended December 31, 2021. As of September 30, 2022, the Company had no factored invoices outstanding.
Inventory Line
In January 2020, we and our subsidiaries entered into a loan agreement with Live Oak Banking Company (“Live Oak”) for a loan in an aggregate principal amount not to exceed the lesser of (i) $8.0 million and (ii) a borrowing base of up to 85% of the appraised value of the borrowers’ eligible inventory of whisky in barrels or totes less an amount equal to all service fees or rental payments owed by borrowers during the 90 day period immediately succeeding the date of determination to any warehouses or bailees holding eligible inventory (the “Live Oak Loan”). The Live Oak Loan was secured by all assets of the Company excluding accounts receivable and certain other specified excluded property. The Live Oak Loan bore interest at a variable rate of interest equal to (i) two and 49/100ths percent (2.49%) per annum plus (ii) the Prime Rate as published in The Wall Street Journal, adjusted on a calendar quarterly basis. Interest was payable monthly. Additionally, we issued to Live Oak 100,000 warrants to purchase common stock at an exercise price of $3.94 per share. The proceeds of the Live Oak Loan were used to pay off all principal and accrued interest under the TQLA Note of $0.9 million and all principal and interest under loan issued pursuant to that Credit and Security Agreement, by and between the Company and The KFK Children’s Trust, Jeffrey Anderson – Trustee of $3.0 million. The loan matured on November 11, 2021. On February 4, 2022, we paid $0.9 million of the loan. On February 28, 2022, Live Oak and the Company entered into a forbearance agreement while the parties finalized a further extension of the maturity date. In June 2022, we paid the remaining balance of $1.9 million.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.
| 33 |
In connection with the preparation of our financial statements for the nine months ended September 30, 2022, there was one accounting estimate we made that was subject to a high degree of uncertainty and was critical to our results, as follows:
Intangible Assets
On September 12, 2019, we purchased the Azuñia brand, the direct sales team, existing product inventory, supply chain relationships and contractual agreements from Intersect Beverage, LLC, an importer and distributor of tequila and related products. The Azuñia brand has been determined to have an indefinite life and will not be amortized. We do, however, on an annual basis, test the indefinite life for impairment. If the indefinite life is found to be impaired, then we will estimate the useful life of the brand and amortize the asset over the remainder of its useful life.
We estimate the brand’s fair value using market information to estimate future cash flows and will impair it when its carrying amount exceeds its estimated fair value, in which case we will write it down to its estimated fair value. We consider market values for similar assets when available. Considerable management judgment is necessary to estimate fair value, including making assumptions about future cash flows, net sales and discount rates.
We have the option, before quantifying the fair value, to evaluate qualitative factors to assess whether it is more likely than not that our brand is impaired. If we determine that is not the case, then we are not required to quantify the fair value. That assessment also takes considerable management judgment.
Based on our assumptions, we believe that, as of September 30, 2022, the Azuñia brand was not impaired.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
ITEM 4 – CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) that are designed to provide reasonable assurances that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that these disclosure controls and procedures were effective as of September 30, 2022.
There were no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 34 |
PART II: OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
On December 15, 2020, Grover Wickersham filed a complaint in the United States District Court for the District Court of Oregon against the Company. Mr. Wickersham, the former CEO and Chairman of the Board of the Company, has asserted causes of action for fraud in the inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, defamation, interference with economic advantage, elder financial abuse, and dissemination of false and misleading proxy materials. The Company disputes the allegations and intends to defend the case vigorously.
We are not currently subject to any other material legal proceedings; however, we could be subject to legal proceedings and claims from time to time in the ordinary course of our business, or legal proceedings we considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and divert management resources.
ITEM 1A – RISK FACTORS
There have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 31, 2021.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the third quarter of 2022 that have not been previously reported.
The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the third quarter of fiscal year 2022.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None
ITEM 6 – EXHIBITS
| Exhibit No. | Description | |
| 31.1 * | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a). | |
| 32.1 * | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Schema Linkbase Document | |
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Labels Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith. |
| 35 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| EASTSIDE DISTILLING, INC. | ||
| Date: November 14, 2022 | By: | /s/ Geoffrey Gwin |
| Geoffrey Gwin | ||
| Chief Executive Officer | ||
| Date: November 14, 2022 | By: | /s/ Geoffrey Gwin |
| Geoffrey Gwin | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 36 |
ATTACHMENTS / EXHIBITS
INLINE XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
INLINE XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
INLINE XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
INLINE XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
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