Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
1.
|
Description
of Business
|
We
are a Portland, Oregon-based producer and marketer of craft spirits, founded in 2008. Our products span several alcoholic beverage
categories, including bourbon, American whiskey, vodka and rum. As a small business in the large, international spirits marketplace
dominated by massive conglomerates, we rely heavily on our creativity. Our mission is to be an innovator in creating spirits that
offer better value than comparable spirits, for example our Burnside Bourbon and Portland Potato Vodka, and in creating imaginative
spirits that offer an unusual taste experience, for example our cold-brewed coffee rum, Oregon oak aged whiskeys, Marionberry
Whiskey and Peppermint Bark holiday liquor. Our strategy is to expand from our local base in the Pacific Northwest by using major
spirits distributors, such as Southern Glazer Wines and Spirits, to address the demand for premium and high-end craft spirits.
In late 2016, to aid us in this strategy, we retained Sandstrom Partners, a Portland-based firm specializing in spirits branding,
and tasked them with reviewing our current product portfolio, as well as our new ideas, and advising us on marketing, creation
of brand awareness and product positioning, locally and nationally. We also intend to capitalize on our uniqueness as a publicly-traded
craft spirit producer, with access to the public markets, to support our growth, including by making strategic acquisitions.
We
currently sell our products in 22 states (Oregon, California, Washington, Florida, Nevada, Texas, Virginia, Indiana, Illinois,
New York, New Jersey, Massachusetts, Connecticut, Minnesota, Georgia, Pennsylvania, Rhode Island, New Hampshire, Maine, Idaho,
Vermont and Maryland) as well as Ontario, Canada. The Company also generates revenue from tastings, tasting room tours, private
parties, and merchandise sales from its facilities in Oregon. The Company is subject to the Oregon Liquor Control Commission (OLCC)
and the Alcohol and Tobacco Tax and Trade Bureau (TTB).
On
October 31, 2014, Eurocan Holdings Ltd. (Eurocan) consummated the acquisition (the Acquisition) of Eastside Distilling, LLC (the
LLC) pursuant to an Agreement and Plan of Merger (the Agreement) by and among Eurocan, the LLC, and Eastside Distilling, Inc.,
Eurocan’s wholly-owned subsidiary. Pursuant to the Agreement, the LLC merged with and into Eastside Distilling, Inc. The
merger consideration for the Acquisition consisted of 32,000,000 shares of Eurocan’s common stock. In addition, certain
of Eurocan’s stockholders cancelled an aggregate of 24,910,000 shares of Eurocan’s common stock held by them. As a
result, on October 31, 2014, Eurocan had 40,000,000 shares of common stock issued and outstanding, of which 32,000,000 shares
were held by the former members of the LLC. Consequently, for accounting purposes, the transaction was accounted for as a reverse
acquisition, with the LLC as the acquirer of Eurocan. These consolidated financial statements are presented as a continuation
of the operations of the LLC with one adjustment to retroactively adjust the legal common stock of Eastside Distilling, Inc. to
reflect the legal capital of Eurocan prior to the Acquisition.
Subsequent
to the Acquisition, Eastside Distilling, Inc. merged with and into Eurocan, and Eurocan’s name was officially changed to
Eastside Distilling, Inc. (Eastside). Prior to the Acquisition, Michael Williams Web Design, Inc. (MWWD) was a wholly-owned subsidiary
of Eurocan and constituted the majority of Eurocan’s operations. Pursuant to the Agreement and subsequent activity, MWWD
became a wholly-owned subsidiary of Eastside on October 31, 2014. MWWD’s operations were not significant. Eastside and MWWD
are collectively referred to herein as “the Company”.
On
February 3, 2015, the Company entered into a Separation and Share Transfer Agreement (Share Transfer) with MWWD under which substantially
all assets and liabilities of MWWD were transferred to Michael Williams in consideration of MWWD’s and Mr. Williams’
full release of all claims and liabilities related to MWWD and the MWWD business. Following the Share Transfer, MWWD ceased to
be a subsidiary. As a result of the Share Transfer, the Company recorded a gain of $52,890, which is included in other income
(expense) in the accompanying consolidated statement of operations for the year ended December 31, 2015. This gain is primarily
the result of the transfer of net liabilities to Michael Williams. The results for the year ended December 31, 2015 referred to
in these consolidated financial statements include both the results of Eastside and MWWD (through February 3, 2015).
Historically,
the Company has funded its cash and liquidity needs through convertible notes, extended credit terms, and equity raisings. For
the years ended December 31, 2016 and 2015, the Company incurred a net loss of approximately $5.3 and $3.6 million in 2016 and
2015, respectively, and has an accumulated deficit of approximately $12.8 million as of December 31, 2016. The Company has been
dependent on raising capital from debt and equity financings to meet its needs for cash flow used in operating activities. For
the year ended December 31, 2016, the Company raised approximately $5.9 million in cash flow from financing activities to meet
cash flow used in operating activities.
At
December 31, 2016, the Company has approximately $1.1 million of cash on hand with a positive working capital of $1.4 million.
The Company’s ability to meet its ongoing operating cash needs is dependent on generating positive operating cash flow,
primarily through increased sales, improved profit growth and controlling expenses. Management has taken actions to improve profitability,
reduce headcount, reduce rent, reduce professional fees and increase sales. In addition, through March 31, 2017, the Company has
raised an additional $967,750 in cash through equity offerings (see Note 14, Subsequent Events). Also in March 2017, the Company
acquired a small distillery bottling and production support business (stock purchase transaction) that is expected to improve
operating results (see Note 14, Subsequent Events). Management believes that cash on hand and the most recent equity raise and
acquisition will be sufficient to meet their operating activities to meet their near-term cash needs over the next twelve months.
3.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Consolidation
The
accompanying consolidated financial statements for Eastside Distilling, Inc. were prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). The consolidated financial statements include the accounts of Eastside
Distilling, Inc. and its wholly-owned subsidiary MWWD (through February 3, 2015). All intercompany balances and transactions have
been eliminated in consolidation.
Segment
Reporting
The
Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company has
one business activity, marketing and distributing hand-crafted spirits, and operates as one segment. The Company’s chief
operating decision makers, its chief executive officer and chief financial officer, review the Company’s operating results
on an aggregate basis for purposes of allocating resources and evaluating financial performance.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
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
revenue includes product sales, less excise taxes and customer programs and incentives. The Company records revenue when all four
of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products
and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.
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 (OLCC), 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. The Company excludes sales tax collected and remitted
to various states from sales and cost of sales. Sales from items sold through the Company’s retail location are recognized
at the time of sale.
Revenue
received from online merchants who sell discounted gift certificates for the Company’s merchandise and tastings is deferred
until the customer has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier.
Customer
Programs and Incentives
Customer
programs and incentives, which include customer promotional discount programs, customer incentives and other payments, are a common
practice in the alcohol beverage industry. The Company makes these payments to customers and incurs these costs to promote sales
of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded
as reductions to net revenue or as advertising, promotional and selling expenses in accordance with ASC Topic 605-50, Revenue
Recognition - Customer Payments and Incentives, based on the nature of the expenditure. Amounts paid to customers totaled $136,786
and $3,184 in years 2016 and 2015, respectively.
Advertising,
Promotional and Selling Expenses
The
following expenses are included in advertising, promotions and selling expenses in the accompanying consolidated statements of
operations: media advertising costs, special event costs, tasting room costs, sales and marketing expenses, salary and benefit
expenses, travel and entertainment expenses for the sales, brand and sales support workforce and promotional activity expenses.
Cost
of Sales
Cost
of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing
rent, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging
and production costs.
Shipping
and Fulfillment Costs
Freight
costs incurred related to shipment of merchandise from the Company’s distribution facilities to customers are recorded in
cost of sales.
Cash
and Cash Equivalents
Cash
equivalents are considered to be highly liquid investments with maturities of three months or less at the time of the purchase.
The Company had no cash equivalents at December 31, 2016 and 2015.
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At
December 31, 2016, three distributors represented 91% of trade receivables. At December 31, 2015, one distributor, the Oregon
Liquor Control Commission (OLCC), represented 67% of trade receivables. Sales to two distributors accounted for approximately
46% of consolidated net sales for the year ended December 31, 2016. Sales to one distributor, the OLCC, accounted for approximately
40% of consolidated net sales for the year ended December 31, 2015.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
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. At December
31, 2016 and December 31, 2015, 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 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.
|
None
of the Company’s assets or liabilities were measured at fair value at December 31, 2016 and 2015. 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, note payable, and convertible note payable. The
estimated fair value of trade receivables, accounts payable, and accrued liabilities approximates their carrying value due to
the short period of time to their maturities. At December 31, 2016 and 2015, the Company’s note payable and convertible
notes payable are at fixed rates and their carrying value approximates fair value.
Inventories
Inventories
primarily consist of bulk and bottled liquor and merchandise 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 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. The Company has recorded no write-downs of inventory for the years ended December 31, 2016 and 2015.
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.
Long-lived
Assets
The
Company accounts for long-lived assets, including property and equipment, 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.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
Income
Taxes
The
provision for income taxes is based on income and expenses as reported for financial statement purposes using the “asset
and liability method” for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be realized. At December 31, 2016 and 2015, the Company established
valuation allowances against its net deferred tax assets.
Income
tax positions that meet the “more-likely-than-not” recognition threshold are measured at the largest amount of income
tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion
of the benefits associated with income tax positions taken that exceeds the amount measured as described above would be reflected
as a liability for unrecognized income tax benefits in the accompanying consolidated balance sheets along with any associated
interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with
unrecognized income tax benefits would be classified as additional income taxes in the accompanying consolidated statements of
operations. There were no unrecognized income tax benefits, nor any interest and penalties associated with unrecognized income
tax benefits, accrued or expensed at and for the years ended December 31, 2016 and 2015.
The
Company files federal income tax returns in the U.S. and various state income tax returns. The Company is no longer subject to
examinations by the related tax authorities for the Company’s U.S. federal and state income tax returns for years prior
to 2011.
Advertising
Advertising
costs are expensed as incurred. Advertising expense was approximately $297,000 and $389,000 for the years ended December 31, 2016
and 2015, respectively.
Comprehensive
Income
The
Company does not have any reconciling other comprehensive income (expense) items for the years ended December 31, 2016 and 2015.
Excise
Taxes
The
Company is responsible for compliance with the 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 alcohol 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 $797,435 and $620,862 in years 2016 and 2015, respectively.
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
as the underlying stock-based awards vest. Stock-based compensation was $374,687 and $140,370 in fiscal years 2016 and 2015, respectively.
Accounts
Receivable Factoring Program
We
use an accounts receivable factoring program with certain customer accounts. Under this program, we have the option to sell those
customer receivables in advance of payment for 75% of the amount due. When the customer remits payment, we then receive the remaining
25%. We are charged interest on the advanced 75% payment at a rate of 1.5% per month. Under the terms of the agreement with the
factoring provider, any factored invoices have recourse should the customer fail to pay the invoice. Thus, we record factored
amounts as a liability until the customer remits payment and we receive the remaining 25% of the non-factored amount. During the
year ended December 31, 2016, we factored invoices totaling $542,083 and received total proceeds of $406,562. At December 31,
2016, we had factored invoices outstanding of $171,150, and we incurred fees associated with the factoring program of $48,601
during 2016. Comparatively, during the year ended December 31, 2015, we factored invoices totaling $99,258 and received total
proceeds of $74,444. At December 31, 2015, we had $17,601 in factored invoices outstanding, and we incurred fees associated with
the factoring program of $5,867 during 2015.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
Recent
Accounting Pronouncements
In
March 2016, the Financial Accounting Standard Boards (the “FASB”) issued Accounting Standard Update (“ASU”)
No. 2016-09,
Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.
” ASU 2016-09,
which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for
income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.
ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
The Company does not plan to early adopt. We are currently evaluating the impact ASU 2015-11 will have on the Company’s
consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
Under the new guidance, lessees will be required to
recognize the following for all leases (with the exception of short-term leases) at the commencement date:
|
-
|
A
lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis; and
|
|
|
|
|
-
|
A
right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified
asset for the lease term.
|
Under
the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor
accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified
the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.
Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments
in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e.,
January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities upon issuance. Lessees
(for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases
that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition
approach. We are currently evaluating the impact ASU 2016-02 will have on the Company’s condensed consolidated financial
statements.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 will supersede
virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised
goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or
services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. ASU 2014-09
is to be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most
current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. The Company
will elect to apply the impact (if any) of applying ASU 2014-09 to the most current reporting period presented in the financial
statements with a cumulative effect adjustment to retained earnings. In August 2015, the FASB issued ASU No. 2015-14,
Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date
. ASU 2015-14 defers the effective date of ASU 2014-09
for one year, making it effective for the year beginning December 31, 2017, with early adoption permitted as of January 1, 2017.
The Company currently expects to adopt ASU 2014-09 in the first quarter of 2018. The Company does not expect adoption of ASU 2014-09
to have a material impact on its consolidated financial statements.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements - Going Concern
. The new guidance explicitly
requires that management assess an entity’s ability to continue as a going concern and may require additional detailed disclosures.
ASU 2014-15 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods.
We have adopted as of December 31, 2016.
In
July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330), Simplifying the Measurement of Inventory
. ASU 2015-11
is part of the FASB’s initiative to simplify accounting standards. The guidance requires an entity to recognize inventory
within scope of the standard at the lower of cost or net realizable value. Net realizable value is the estimated selling price
in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. ASU 2015-11
will be effective prospectively for the year beginning January 1, 2017. The Company is currently evaluating the impact of ASU
2015-11 and has preliminarily concluded that it will not have a significant impact on the consolidated financial statements.
In
April 2015, the FASB issued ASU 2015-03, simplifying the presentation of debt issuance costs, which requires that debt issuance
costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount
of that debt liability. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015 and early application
is permitted. We have early adopted as of December 31, 2015.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
Reclassifications
Certain
prior period amounts have been reclassified to conform to the December 31, 2016 presentation with no changes to net loss or total
stockholders’ equity (deficit) previously reported.
Inventories
consist of the following at December 31:
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
439,739
|
|
|
$
|
415,953
|
|
Finished goods
|
|
|
340,298
|
|
|
|
248,713
|
|
Other
|
|
|
-
|
|
|
|
19,158
|
|
Total inventories
|
|
$
|
780,037
|
|
|
$
|
683,824
|
|
5.
|
Property
and Equipment
|
Property
and equipment consists of the following at December 31:
|
|
2016
|
|
|
2015
|
|
Furniture and fixtures
|
|
$
|
70,140
|
|
|
$
|
64,288
|
|
Leasehold improvements
|
|
|
8,607
|
|
|
|
8,607
|
|
Vehicles
|
|
|
38,831
|
|
|
|
38,831
|
|
Construction
In Progress
|
|
|
34,603
|
|
|
|
31,253
|
|
Total cost
|
|
|
152,181
|
|
|
|
142,979
|
|
Less accumulated
depreciation and amortization
|
|
|
(52,965
|
)
|
|
|
(30,974
|
)
|
Total property
and equipment, net
|
|
$
|
99,216
|
|
|
$
|
112,005
|
|
Depreciation
and amortization expense totaled $21,991 and $19,277 for the years ended December 31, 2016 and 2015, respectively.
Notes
payable consists of the following at December 31:
|
|
2016
|
|
|
2015
|
|
Notes payable bearing interest
at 7.99%. The note is payable in monthly principal plus interest payments of $472 through December, 2020. The note is secured
by a vehicle.
|
|
$
|
16,642
|
|
|
$
|
21,940
|
|
Notes payable
bearing interest at 8%. The notes have a 2-year maturity and are due at various dates between September 19, 2018 – October
19, 2018, and pay interest only on a monthly basis
|
|
|
547,500
|
|
|
|
|
|
Total note payable
|
|
|
564,142
|
|
|
|
21,940
|
|
Less current portion
|
|
|
(4,537
|
)
|
|
|
(4,098
|
)
|
Less debt discount
for detachable warrant
|
|
|
(131,849
|
)
|
|
|
|
|
Total notes payable,
less current portion and debt discount
|
|
$
|
427,756
|
|
|
$
|
17,842
|
|
Maturities
on notes payable as of December 31, 2016, are as follows:
Year
ending December 31:
2017
|
|
$
|
4,537
|
|
2018
|
|
|
554,915
|
|
2019
|
|
|
4,690
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
564,142
|
|
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
7.
|
Convertible
Notes Payable
|
There
were no convertible notes payable outstanding at December 31, 2016. At December 31, 2015, convertible notes payable consisted
of three separate notes:
|
|
December
31, 2015
|
|
Convertible note bearing
interest at 5% per annum in the principal amount of $150,000. The original maturity date of June 13, 2015 was extended to
April 1, 2016 during the period ended December 31, 2015 and was further extended to July 1, 2016. The note was convertible
into shares of the Company’s common stock at a fixed conversion price of $8.00 per share. On July 1, 2016, the Company
paid the outstanding amount under this Note, including interest in full.
|
|
$
|
150,000
|
|
|
|
|
|
|
Secured Convertible
promissory note, bearing interest at 14% per annum in the principal amount of $275,000 (the “Note”), payable in
six installments (“Amortization Payments”) as set forth in an Amortization Schedule beginning the 30
th
day after issuance and each 30-days thereafter. The Note is convertible at a price per share equal to the lesser of (i) the
Fixed Conversion Price (currently $3.00) or (ii) 65% of the lowest trading price of the Company’s common stock during
the 5 trading days prior to conversion. The note was issued with an original issue discount, which is amortized over the life
of the loan. The Note is secured by all of the Company’s assets pursuant to the terms and conditions of an Amended and
Restated Pledge and Security Agreement.(1)
|
|
|
272,708
|
|
|
|
|
|
|
Convertible
note bearing interest at 0% per annum. The note was converted into Company’s preferred equity financing on April 4,
2016.
|
|
|
50,000
|
|
Total convertible notes payable
|
|
|
472,708
|
|
|
|
|
|
|
Less discount
on convertible debt
|
|
|
16,750
|
|
|
|
|
|
|
Total convertible
notes payable – net of debt discount
|
|
$
|
455,958
|
|
|
|
|
|
|
|
(1)
|
On
April 14, 2016, this note (the “Initial Note”) was transferred to MR Group I, LLC (“Investor”). In
addition, on April 14, 2016, the Company issued and sold to Investor a convertible promissory note dated April 18, 2016, bearing
interest at 14% per annum in the principal amount of $300,000 (the “Additional Note”, together with the Initial
Note, the “Notes”). The Additional Note had a maturity date of January 18, 2017 and an original issue discount
of $100,000. On May 13, 2016, the Company entered into Exchange Agreement (the “Exchange Agreement”) with the
Investor pursuant to which the Company (i) issued Investor a 14% secured convertible promissory note dated May 13, 2016 in
the aggregate principal amount of $219,200 with an August 31, 2016 maturity date (the “Note”) in exchange for
a previously issued 14% secured convertible promissory note dated September 10, 2015 in the original principal amount of $275,000
(with current outstanding principal and interest of $197,208 and $21,992, respectively) with a May 10, 2016 maturity date
held by Investor and (ii) issued Investor a 14% secured convertible promissory note dated May 13, 2016 in the aggregate principal
amount of $302,647 with an April 30, 2017 maturity date (the “Second Note”, together with the Note, the “Exchange
Notes”) in exchange for a previously issued 14% secured convertible promissory note dated April 18, 2016 in the original
principal amount of $300,000 (with current outstanding principal and interest of $300,000 and $2,647, respectively) with a
May 10, 2016 maturity date held by Investor. During the June period, $196,330 of the note was converted into common shares.
On June 6, 2016, the Company paid the remaining outstanding amount under this Note ($100,000) in full, and on June 28, 2016,
the Company paid the outstanding amount under the Second Note ($306,378) in full.
|
Amortization
of the debt discount and beneficial conversion feature of the convertible notes totaled $359,688 for the fiscal year ended December
31, 2016. Amortization of the debt discount was $16,750 for the year ended December 31, 2015 and was recorded as other expense
in the consolidated statement of operations.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
The
provision for income taxes results in effective tax rates which are different than the federal income tax statutory rate. The
nature of the differences for the year ended December 31 were as follows:
|
|
2016
|
|
|
2015
|
|
Expected
federal income tax benefit
|
|
$
|
(1,774,361
|
)
|
|
$
|
(1,200,378
|
)
|
State income taxes
after credits
|
|
|
(344,435
|
)
|
|
|
(233,015
|
)
|
Change in valuation
allowance
|
|
|
2,118,795
|
|
|
|
1,442,900
|
|
Other
|
|
|
-
|
|
|
|
(9,507
|
)
|
Total provision
for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
components of the net deferred tax assets and liabilities at December 31 consisted of the following:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,557,909
|
|
|
|
1,582,317
|
|
Stock-based
compensation
|
|
|
213,181
|
|
|
|
61,050
|
|
Total
deferred tax assets
|
|
|
3,771,090
|
|
|
|
1,643,367
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(70,816
|
)
|
|
|
(61,888
|
)
|
Total
deferred tax liabilities
|
|
|
(70,816
|
)
|
|
|
(61,888
|
)
|
Valuation
allowance
|
|
|
(3,700,274
|
)
|
|
|
(1,581,479
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
|
-
|
|
At
December 31, 2016, the Company has a cumulative net operating loss carryforward (NOL) of approximately $3.6 million, to offset
against future income for federal and state tax purposes. These federal and state NOLs can be carried forward for 20 and 15 years,
respectively. The federal NOLs begin to expire in 2034, and the state NOLs begin to expire in 2029. The utilization of the net
operating loss carryforwards may be subject to substantial annual limitation due to ownership change provisions of the Internal
Revenue code of 1986 and similar state provisions. In general, if the Company experiences a greater than 50 percentage aggregate
change in ownership of certain significant stockholders over a three-year period (a “Section 382 ownership change”),
utilization of its pre-change NOL carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue
Code (and similar state laws). The annual limitation generally is determined by multiplying the value of the Company’s stock
at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations
may result in expiration of a portion of the NOL carryforwards before utilization and may be substantial.
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation
of future taxable income during the periods in which those temporary differences become deductible. Due to the uncertainty of
the realizability of the deferred tax assets, management has determined a full valuation allowance is appropriate.
9.
|
Commitments
and Contingencies
|
Operating
Leases
The
Company leases its warehouse, kiosks, and tasting room space under operating lease agreements which expire through October 2020.
Monthly lease payments range from $1,300 to $24,000 over the terms of the leases. For operating leases which contain fixed escalations
in rental payments, the Company records the total rent expense on a straight-line basis over the lease term. The difference between
the expense computed on a straight-line basis and actual payments for rent represents deferred rent which is included within accrued
liabilities on the accompanying consolidated balance sheets. Retail spaces under lease are subject to monthly percentage rent
adjustments when gross sales exceed certain minimums.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
At
December 31, 2016, future minimum lease payments required under the operating leases are approximately as follows:
For
year ending December 31st:
2017
|
|
$
|
297,000
|
|
2018
|
|
|
272,000
|
|
2019
|
|
|
278,000
|
|
2020
|
|
|
240,000
|
|
Total
|
|
$
|
1,087,000
|
|
Total
rent expense was approximately $416,000 and $384,000 for the years ended December 31, 2016 and 2015, respectively.
Legal
Matters
We
are not currently subject to any material legal proceedings, however we could be subject to legal proceedings and claims from
time to time in the ordinary course of our business. Regardless of the outcome, litigation can, among other things, be time consuming
and expensive to resolve, and divert management resources.
10.
|
Net
Loss per Common Share
|
Basic
loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the
period, without considering any dilutive items. Diluted net loss per common share is computed by dividing net loss by the sum
of the weighted average number of common shares outstanding and the potential number of any dilutive common shares outstanding
during the period. Potentially dilutive securities consist of the incremental common stock issuable upon exercise of stock options
and convertible notes. Potentially dilutive securities are excluded from the computation if their effective is anti-dilutive.
There were no dilutive common shares at December 31, 2016 and 2015. The numerators and denominators used in computing basic and
diluted net loss per common share in 2016 and 2015 are as follows:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Net loss available to
common shareholders (numerator)
|
|
$
|
(5,251,293
|
)
|
|
$
|
(3,601,066
|
)
|
Weighted average shares (denominator)
|
|
|
3,741,842
|
|
|
|
2,287,518
|
|
Basic and
diluted net loss per common share
|
|
$
|
(1.40
|
)
|
|
$
|
(1.57
|
)
|
11.
|
Issuance
of Common Stock, Warrants and Convertible Preferred Stock
|
Reverse
Stock Split
All
shares related and per share information in these financial statements has been adjusted to give effect to the 20-for-1 reverse
stock split of the Company’s common stock effected on October 18, 2016.
Issuance
of Common Stock
In
the year ended December 31, 2016, the Company issued 63,499 shares of common stock to employees for stock-based compensation of
$153,996. Additionally, the Company had $220,691 of stock-based compensation expense related to stock options granted to employees
and vested during the year ended December 31, 2016.
In
the year ended December 31, 2016, the Company issued 115,184 shares of common stock to eight third-party consultants in exchange
for services rendered and trade debt totaling $284,277.
In
December, 2016, the Company issued 800,000 shares of its common stock for $1,040,000, including 800,000 warrants for common stock.
In
December, 2016, the Company issued 564,781 shares of its common stock for warrant exercises totaling $734,216.
In
December 2016, the Company issued 886,538 shares of its common stock upon conversion of 8% convertible promissory notes with an
aggregate principal amount converted of $1,152,499.
In
December 2016, the Company issued 531,000 shares of its common stock upon conversion of 672 shares of preferred stock.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
In
July 2016, the Company issued 12,802 shares of its common stock in consideration of $17,759 in accrued and unpaid dividends due
at June 30, 2016 for its outstanding Series A Preferred.
From
June 4, 2016 to June 22, 2016, the Company issued 2,000,000 shares of its common stock for $2,000,000, including 2,000,000 warrants
for common stock, net of issuance costs of $23,762.
From
April 20, 2016 to June 3, 2016, the Company issued 343,873 shares of its common stock upon conversion of a 14% convertible promissory
note. The aggregate principal amount of this note that was converted was $196,503.
In
December 2015, the Company entered into management consulting agreements under which it agreed to issue 2,500 shares of common
stock to third-party consultants in exchange for services rendered of $10,500. These shares were issued effective February 18,
2016.
In
November 2015, the Company entered into management consulting agreements under which it agreed to issue 4,500 shares of common
stock to third-party consultants in exchange for services rendered of $17,100. These shares were issued in February 2016.
In
October 2015, the Company entered into a consulting agreement under which it agreed to issue 5,000 shares of common stock to a
consultant for services of $45,000. These shares have not been issued.
In
August 2015, the Company issued 2,250 shares of common stock to employees valued at $42,750.
In
August 2015, the Company issued 6,750 shares of common stock to two third-party consultants in exchange for services rendered
of $128,250.
In
July 2015, the Company issued 11,250 shares of common stock to two third-party consultants in exchange for services rendered of
$479,250.
In
April 2015, the Company issued 1,875 shares of common stock to a third-party consultant in exchange for services rendered of $65,625.
All
shares were fully vested upon issuance.
Issuance
of Convertible Preferred Stock
The
Company has authorized the issuance of 3,000 shares of Series A convertible preferred stock as of December 31, 2016.
From
April 4, 2016 to June 17, 2016, the Company sold 972 shares of its series A convertible preferred stock (“Series A Preferred”)
for an aggregate purchase price of $972,000, of which (i) 499 Units were purchased for $499,000 in cash (ii) 423 Units were purchased
by certain of our officers in consideration of $423,000 accrued and unpaid salary and (iii) 50 Units were purchased in consideration
of cancellation of $50,000 of outstanding indebtedness net of issuance costs of $69,528.
Each
share of Series A Convertible Preferred has a stated value of $1,000, which is convertible into shares of the Company’s
common stock (the “Common Stock”) at a fixed conversion price equal to $1.50 per share. The Series A Convertible Preferred
accrue dividends at a rate of 8% per annum, cumulative. Dividends are payable quarterly in arrears at the Company’s option
either in cash or “in kind” in shares of Common Stock; provided, however that dividends may only be paid in cash following
the fiscal year in which the Company has net income (as shown in its audited financial statements contained in its Annual Report
on Form 10-K for such year) of at least $500,000, to the extent permitted under applicable law out of funds legally available
therefore. For ‘in-kind” dividends, holders will receive that number of shares of Common Stock equal to (i) the amount
of the dividend payment due such stockholder divided by (ii) 90% of the average of the per share market values during the twenty
(20) trading days immediately preceding a dividend date.
In
the event of any voluntary or involuntary liquidation, dissolution or winding up, or sale of the Company, each holder of Series
A Preferred shall be entitled to receive its pro rata portion of an aggregate payment equal to: (i) $1,000 multiplied by (ii)
the total number of shares of Series A Preferred Stock issued under the Series A Certificate of Designation multiplied by (iii)
2.5.
For
all matters submitted to a vote of the Company’s stockholders, the holders of the Series A Preferred as a class shall have
an aggregate number of votes equal to the product of (x) the number of shares of Common Stock (rounded to the nearest whole number)
into which the total shares of Series A Preferred Stock issued under the Series A Certificate of Designation on such date of determination
are convertible multiplied by (y) 2.5 (the “Total Series A Votes”), with each holder of Series A Preferred entitled
to vote its pro rata portion of the Total Series A Votes. Holders of Common Stock do not have cumulative voting rights. In addition,
the holders of Series A Preferred shall vote separately a class to change any of the rights, preferences and privileges of the
Series A Preferred.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
The
following table provides various information about the Series A convertible preferred stock.
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Issued and
|
|
|
Net
|
|
|
Conversion
|
|
|
of common stock
|
|
|
Liquidation
|
|
|
Liquidation
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Proceeds
|
|
|
Price/Share
|
|
|
Equivalents
|
|
|
Preference
|
|
|
Value/Share
|
|
Series A convertible preferred
stock
|
|
|
3,000
|
|
|
|
50
|
|
|
$
|
38,932
|
|
|
$
|
1.50
|
|
|
|
33,333
|
|
|
$
|
125,000
|
|
|
$
|
2,500
|
|
Beneficial
conversion feature
The
Company evaluated the convertible note and determined that a portion of the note should be allocated to additional paid-in capital
as a beneficial conversion feature, since the conversion price on the note as of March 10, 2016 was set at a discount to the fair
market value of the underlying stock. As a result, a discount of $228,550 was attributed to the beneficial conversion feature
of the note, which amount was then amortized fully during the year ended December 31, 2016.
Warrants
During
the year ended December 31, 2016, the Company issued detachable warrants in connection to common stock, Series A preferred stock,
and convertible notes payable to purchase 4,306,915 shares of common stock. The Company has determined the Warrants are classified
as equity on the consolidated balance sheet as of December 31, 2016. The estimated fair value of the warrants after relative fair
value allocation at issuance was $2,010,502, based on the Black-Scholes option-pricing model using the weighted-average assumptions
below:
Volatility
|
|
|
75
|
%
|
Risk-free interest rate
|
|
|
1.03
|
%
|
Expected term (in years)
|
|
|
3.0
|
|
Expected dividend yield
|
|
|
-
|
|
Fair value of common stock
|
|
$
|
1.68
|
|
A
summary of activity in warrants is as follows:
|
|
Warrants
|
|
|
Weighted
Average
Remaining
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,306,915
|
|
|
|
|
|
|
$
|
2.06
|
|
|
$
|
-
|
|
Exercised
|
|
|
(1,451,319
|
)
|
|
|
|
|
|
|
1.30
|
|
|
|
|
|
Forfeited
and cancelled
|
|
|
(315,301
|
)
|
|
|
|
|
|
|
2.00
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
2,540,295
|
|
|
|
2.77
years
|
|
|
$
|
2.16
|
|
|
$
|
-
|
|
12.
|
Stock-Based
Compensation
|
On
September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the 2016 Plan). The total number of shares available for
the grant of either stock options or compensation stock under the Plan is 500,000 shares, subject to adjustment. The exercise
price per share of each stock option shall not be less than 100 percent of the fair market value of the Company’s common
stock on the date of grant. At December 31, 2016, there were 427,500 options and 53,449 RSU’s issued under the Plan outstanding,
with vesting schedules varying between immediate and three (3) years from the grant date.
On
January 29, 2015, the Company adopted the 2015 Stock Incentive Plan (the 2015 Plan). The total number of shares available for
the grant of either stock options or compensation stock under the 2015 Plan is 150,000 shares, subject to adjustment. The exercise
price per share of each stock option shall not be less than 20 percent of the fair market value of the Company’s common
stock on the date of grant. At December 31, 2016, there were 43,750 options issued under the Plan outstanding, which options vest
at the rate of at least 25 percent in the first year, starting 6-months after the grant date, and 75% in year two.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
The
Company also issues, from time to time, options which are not registered under a formal option plan. At December 31, 2016, there
were 50,000 options outstanding that were not issued under the Plan.
A
summary of all stock option activity at and for the years ended December 31, 2016 and 2015 is presented below:
|
|
#
of Options
|
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding
at December 31, 2014
|
|
|
50,000
(1)
|
|
|
$
|
8.00
|
|
Options granted
|
|
|
82,500
(2)
|
|
|
|
23.20
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
Options
canceled
|
|
|
(22,500
) (2)
|
|
|
|
40.00
|
|
Outstanding
at December 31, 2015
|
|
|
110,000
|
|
|
$
|
12.80
|
|
Options granted
|
|
|
427,500
(3)
|
|
|
|
1.83
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
Options
canceled
|
|
|
(16,250
) (3)
|
|
|
|
36.23
|
|
Outstanding
at December 31, 2016
|
|
|
521,250
|
|
|
$
|
3.08
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2016
|
|
|
144,973
|
|
|
$
|
4.77
|
|
(1)
Non-Plan options.
(2)
82,500 options granted under 2015 Stock Incentive Plan; 22,500 non-plan options, which were subsequently canceled under an agreement
with the holder.
(3)
427,500 options granted under 2016 Equity Incentive Plan; 16,250 options were canceled under the 2015 Stock Incentive Plan.
The
aggregate intrinsic value of options outstanding at December 31, 2016 was $60,900.
At
December 31, 2016, there were 376,277 unvested options with an aggregate grant date fair value of $489,230. The unvested options
will vest in accordance with the vesting schedule in each respective option agreement, which is generally over a period of 6 to
36 months. The aggregate intrinsic value of unvested options at December 31, 2016 was $60,900. During the year ended December
31, 2016, 103,567 options vested.
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.
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
The
following weighted-average assumptions were used in the Black-Scholes valuation model for options granted during the year ended
December 31, 2016:
Risk-free interest rate
|
|
|
1.17
|
%
|
Expected term (in years)
|
|
|
3.38
|
|
Dividend yield
|
|
|
-
|
|
Expected volatility
|
|
|
75
|
%
|
The
weighted-average grant-date fair value per share of stock options granted during the year ended December 31, 2016 was $0.97. The
aggregate grant date fair value of the 427,500 options granted during the year ended December 31, 2016 was $414,383.
For
the twelve months ended December 31, 2016, total stock option expense related to stock options was $220,691. At December 31, 2016,
the total compensation cost related to stock options not yet recognized is approximately $234,391, which is expected to be recognized
over a weighted-average period of approximately 2.08 years.
13.
|
Related
Party Transactions
|
During
the years ended December 31, 2016 and 2015, the Company’s chief executive officer paid expenses on behalf of the Company
on his personal credit card. These related party advances do not bear interest and are payable on demand. At December 31, 2016
and 2015, the balance due to the chief executive officer was approximately $0 and $27,075, respectively, and is included in accounts
payable on the accompanying consolidated balance sheets. The Company also has a note payable due its chief executive officer in
the amount of $12,500 at December 31, 2015, that was repaid during fiscal year 2016.
On
April 4, 2016, the following officers purchased an aggregate of 423 Units, with each Unit consisting of 1 share of our Series
A Preferred and a 3-year warrant to purchase 667 shares of the Company’s common stock at an exercise price of $2.00 per
share: (i) the Company’s president and chief executive officer, purchased 185 Units in consideration of $185,000 in accrued
and unpaid salary; (ii) the Company’s chief financial officer purchased 97 Units in consideration of $97,000 in accrued
and unpaid salary; (iii) the Company’s chief marketing officer and secretary purchased 58 Units in consideration of $58,000
in accrued and unpaid salary and (iv) the Company’s chief branding officer and wife of the Company’s chief executive
officer purchased 83 Units in consideration of $83,000 in accrued and unpaid salary. On November 4, 2016, the Company entered
into separate agreements with Steven Earles, Steven Shum, Carrie Earles and Martin Kunkel pursuant to which each of such individuals
agreed to convert an aggregate of 423 shares of Series A Convertible Preferred Stock at the Conversion Price into an aggregate
of 282,000 shares of Common Stock.
Between
June 2016 and December 2016, pursuant to subscription agreements, the following securities were purchased by Mr. Wickersham, our
Chairman and Chief Executive Officer, or by entities he controls or with whom he has a material relationship:
|
●
|
Mr.
Wickersham, in his capacity as trustee of The Grover T. Wickersham Employees’ Profit Sharing Plan (“PSP”),
purchased in a private placement an aggregate of 250,000 units, each unit consisting of one share of common stock and one
common stock purchase warrant (the “Warrants, and collectively with the Common Stock, the “Common Stock Units”)
at a purchase price of $1.00 per Common Stock Unit, for a total purchase price of $250,000. The exercise price of the warrants
was temporarily reduced to $1.30 in December 2016, at which time 130,769 warrants were exercised.
|
|
|
|
|
●
|
Mr.
Wickersham directly purchased in a private placement an aggregate of 100,000 Common Stock Units at a purchase price of $1.00
per Common Stock Unit for a total purchase price of $100,000. In December 2016, Mr. Wickersham transferred and/or voluntarily
cancelled 33,653 of his warrants.
|
|
|
|
|
●
|
Mr.
Wickersham, in his capacity as trustee of an education trust established for the benefit of an unrelated minor (“Education
Trust”) purchased in a private placement 50,000 Common Stock Units at a purchase price of $1.00 per Unit, for a total
purchase price of $50,000. The exercise price of the warrants was temporarily reduced to $1.30 in December 2016, at which
time 25,000 of the warrants were exercised.
|
|
|
|
|
●
|
Mr.
Wickersham, in his capacity as trustee of the Lindsay Anne Wickersham 1999 Irrevocable Trust (the “Irrevocable Trust”)
purchased in a private placement 200,000 Common Stock Units at a purchase price of $1.00 per Common Stock Unit, for a total
purchase price of $200,000.
|
|
|
|
|
●
|
In
June 2016, the PSP purchased from us a promissory note bearing interest at the rate of 8% per annum (a “Promissory Note”)
for aggregate consideration of $50,000, along with a warrant to acquire 25,000 shares of common stock at a price of $2.00
per share. In July 2016, the PSP purchased an additional Promissory Note for aggregate consideration of $120,000, along with
a warrant to acquire 60,000 shares of common stock at an exercise price of $2.00 per share.
|
Eastside
Distilling, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2016 and 2015
|
●
|
In
June 2016, the Grover T. and Jill Z. Wickersham 2000 Charitable Remainder Trust (the “CRUT”) purchased a Promissory
Note for aggregate consideration of $50,000, along with a warrant to acquire 25,000 shares of common stock at an exercise
price of $2.00 per share. In November 2016, the CRUT purchased an additional Promissory Note for aggregate consideration of
$75,000, along with a warrant to acquire 37,500 shares of common stock at an exercise price of $2.00 per share. The exercise
price of the warrants was temporarily reduced to $1.30 in December 2016, at which time the warrants were exercised.
|
In
June 2016, pursuant to a Subscription Agreement, Michael M. Fleming, one of our directors, purchased in a private placement an
aggregate of 25,000 Units at a purchase price of $1.00 per Unit, each Unit consisting of one share of Common Stock and a Warrant
to purchase one share of Common Stock at an exercise price of $2.00 per share, for a total purchase price of $25,000.
On
September 19, 2016, an entity for which Lawrence Hirson, a former director, serves as manager purchased $150,000 of promissory
notes and received 3-year warrants to purchase 75,000 shares of our common stock at an exercise price of $2.00 per share.
From
January 15, 2017 through February 16, 2017, the Company received additional warrant exercises and subscription documents totaling
$217,750 for 167,500 shares issued.
On
January 19, 2017, Eastside Distilling, Inc. (the “Company”) received a written letter of resignation from Steven Earles
stating that he has resigned, effective immediately, from his position as President and a director of the Company. Mr. Earles
did not sit on any committees of the Board of Directors. His resignation from all positions with the Company was not because of
any disagreements with the Company on matters relating to its operations, policies and practices. In connection with his resignation,
Mr. Earles has agreed to continue working with the Company in a consultant capacity for the foreseeable future. The vacancy on
the Company’s Board of Directors resulting from Mr. Earles’ resignation will remain vacant until such time as a new
director is identified and appointed. Similarly, the Company has not yet appointed a new President. Grover T. Wickersham continues
to serve as the Company’s Chief Executive Officer and Chairman of the Board and, until such time as a new President is appointed,
he will assume the functions of that office.
On
February 1, 2017, the Company filed an S-1 registration statement for the proposed sale common stock of up to $6.9 million.
On
February 7, 2017 we entered into a Lease Termination Agreement with PJM BLDG. II LLC (the “Termination Agreement”),
the landlord of our current headquarters and production facilities located at 1805 SE Martin Luther King Jr. Blvd., Portland,
Oregon. The Termination Agreement provides that the original lease agreement dated July 17, 2014 (the “Lease”) will
terminate on June 30, 2017 rather than October 30, 2020.
On
February 17, 2017, the Company entered into a Commercial Sublease Agreement (the “Sublease”) dated February 1, 2017
with MotherLode, LLC, an Oregon limited liability company (“MotherLode”). Under the Sublease, the Company has agreed
to sublease from MotherLode a total of 5,000 square feet of MotherLode’s facility located at 2150 SE Hanna Harvester Drive,
Milwaukie, OR 97222 (the “Premises”) for $5,000 per month from February 1, 2017 through December 31, 2018. Under the
Sublease, the Company is permitted to use the subleased Premises for its distillery operations, including, without limitation,
blending, bottling and warehousing. The sublease facilities will be used as the new production facilities upon completion of the
tenant improvements. Under the terms of the Sublease, the parties will enter into an addendum to the Sublease within 120 days
of the effective date of the Sublease that will describe the tenant improvements to be constructed, any construction requirements
and MotherLode’s approval of such tenant improvements. In the event the parties are unable to agree on tenant improvement
issues within the stated period, the Company may terminate the Sublease.
On
March 8, 2017, the Company completed the acquisition of MotherLode LLC (“MotherLode”), a Portland, Oregon based provider
of bottling services and production support to craft distilleries. Since its founding in 2014 by Allen Barteld, the mission of
MotherLode has been to enable craft distillers to increase their production and extend their product lines, reducing cost and
increasing efficiency, thereby freeing them to focus on their craft. The typical MotherLode customer is a distillery of small
batch, hand-crafted spirits, or a premium craft spirit sold as a private label. We plan to relocate much of our own operations
to MotherLode’s facility and jointly expand both companies manufacturing resources. Plans are in place for a pneumatic bottling
line, allowing for a five times increase in bottling rate, and large volume spirit handling capability. The Company believes the
MotherLode operations will be immediately accretive to earnings. In addition to bottling services for distillers and other producers
of spirits, MotherLode bottles “private label” craft spirits for customers who have on-premise or off-premise licenses
including retail and liquor stores, bars, restaurants, events, and businesses who want to take advantage of the benefits that
come from having their brand clearly printed on a label. MotherLode’s premium craft spirits can also be private labeled
for corporate gifts, wedding, birthdays and other personal events. We believe that MotherLode can help with new product development
and the implementation of Eastside’s spirits branding initiatives in concert with our Portland-based spirits branding firm,
Sandstrom Partners. We issued 260,000 shares of common stock to the owners of MotherLode as consideration for the acquisition.
Based on the closing share price of our common stock of $1.45 on March 8, 2017, the value of the transaction was $377,000 which
is approximately equal to the revenues of MotherLode in 2016. Additionally, Eastside entered into a three-year employment agreement
with Allen Barteld and issued standard employee stock options, with vesting over five years. The terms of the acquisition and
Mr. Barteld’s employment are more fully set forth in the Form 8-K filed on March 14, 2017.
On
March 31, 2017, the Company issued 576,923 shares of its common stock for $750,000, including 576,923 warrants for common stock.
This represented an initial closing of the Company’s private offering as filed in the Form 8-K on March 27, 2017.
15.
|
Selected
Quarterly Consolidated Financial Data (unaudited)
|
The
following table sets for the selected unaudited condensed consolidated statements of operations data for each of the four quarters
of the years ended December 31, 2016 and 2015. The unaudited quarterly information has been prepared on the same basis as the
annual information presented elsewhere herein and, in the Company’s opinion, includes all adjustments (consisting only of
normal recurring entries) necessary for a fair statement of the information for the quarters presented. The operating results
for any quarter are not necessarily indicative of results for any future period and should be read in conjunction with the audited
consolidated financial statements of the Company’s and the notes thereto included elsewhere herein.
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
Net sales
|
|
$
|
463,474
|
|
|
$
|
504,311
|
|
|
$
|
607,847
|
|
|
$
|
532,674
|
|
Gross profit
|
|
|
207,305
|
|
|
|
236,095
|
|
|
|
236,993
|
|
|
|
147,569
|
|
Net loss
|
|
|
(1,014,679
|
)
|
|
|
(1,309,500
|
)
|
|
|
(1,456,049
|
)
|
|
|
(1,419,391
|
)
|
Net loss available per common share
basic and diluted
|
|
|
(0.44
|
)
|
|
|
(0.46
|
)
|
|
|
(0.31
|
)
|
|
|
(0.20
|
)
|
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2015
|
|
|
2015
|
|
|
2015
|
|
Net sales
|
|
$
|
325,070
|
|
|
$
|
304,414
|
|
|
$
|
352,081
|
|
|
$
|
721,053
|
|
Gross profit
|
|
|
107,208
|
|
|
|
146,763
|
|
|
|
184,557
|
|
|
|
393,700
|
|
Net loss
|
|
|
(831,018
|
)
|
|
|
(688,060
|
)
|
|
|
(1,412,612
|
)
|
|
|
(669,376
|
)
|
Net loss available per common sharebasic
and diluted
|
|
|
(0.37
|
)
|
|
|
(0.30
|
)
|
|
|
(0.62
|
)
|
|
|
(0.28
|
)
|
Eastside
Distilling, Inc. and Subsidiary
Consolidated
Balance Sheets
March
31, 2017 and December 31, 2016
(unaudited)
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
883,715
|
|
|
$
|
1,088,066
|
|
Trade
receivables
|
|
|
360,126
|
|
|
|
344,955
|
|
Inventories
|
|
|
995,733
|
|
|
|
780,037
|
|
Prepaid
expenses and current assets
|
|
|
146,802
|
|
|
|
187,714
|
|
Total
current assets
|
|
|
2,386,376
|
|
|
|
2,400,772
|
|
Property
and equipment, net
|
|
|
128,560
|
|
|
|
99,216
|
|
Intangible
assets, net
|
|
|
373,502
|
|
|
|
-
|
|
Deposits
|
|
|
59,400
|
|
|
|
48,000
|
|
Total
Assets
|
|
$
|
2,947,838
|
|
|
$
|
2,547,988
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
476,175
|
|
|
$
|
457,034
|
|
Accrued
liabilities
|
|
|
208,418
|
|
|
|
523,702
|
|
Deferred
revenue
|
|
|
1,458
|
|
|
|
2,126
|
|
Current
portion of notes payable
|
|
|
-
|
|
|
|
4,537
|
|
Total
current liabilities
|
|
|
686,051
|
|
|
|
987,399
|
|
Notes
payable - less current portion and debt discount
|
|
|
365,160
|
|
|
|
427,756
|
|
Total
liabilities
|
|
|
1,051,211
|
|
|
|
1,415,155
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock, $0.0001 par value; 3,000
|
|
|
|
|
|
|
|
|
shares
authorized; 50 and 300 shares issued and outstanding at
|
|
|
|
|
|
|
|
|
March
31, 2017 and December 31, 2016, respectively (liquidation
|
|
|
|
|
|
|
|
|
values
of $125,000 and $750,000, respectively)
|
|
|
49,426
|
|
|
|
245,838
|
|
Common
stock, $0.0001 par value; 45,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
9,010,352
and 7,627,512 shares issued and outstanding at
|
|
|
|
|
|
|
|
|
March
31, 2017 and December 31, 2016, respectively
|
|
|
901
|
|
|
|
764
|
|
Additional
paid-in capital
|
|
|
15,566,199
|
|
|
|
13,699,275
|
|
Accumulated
deficit
|
|
|
(13,719,899
|
)
|
|
|
(12,813,044
|
)
|
Total
stockholders' equity
|
|
|
1,896,627
|
|
|
|
1,132,833
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
2,947,838
|
|
|
$
|
2,547,988
|
|
Eastside
Distilling, Inc. and Subsidiary
Consolidated
Statements of Operations
Three
months ended March 31, 2017 and 2016
(unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
Sales
|
|
$
|
829,669
|
|
|
$
|
621,882
|
|
Less
excise taxes, customer programs and incentives
|
|
|
217,188
|
|
|
|
167,120
|
|
Net
sales
|
|
|
612,481
|
|
|
|
454,762
|
|
Cost
of sales
|
|
|
322,913
|
|
|
|
256,169
|
|
Gross
profit
|
|
|
289,568
|
|
|
|
198,593
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Advertising,
promotional and selling expenses
|
|
|
386,132
|
|
|
|
156,203
|
|
General
and administrative expenses
|
|
|
726,396
|
|
|
|
886,011
|
|
Loss
on disposal of property and equipment
|
|
|
35,534
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
1,148,062
|
|
|
|
1,042,214
|
|
Loss
from operations
|
|
|
(858,494
|
)
|
|
|
(843,621
|
)
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(47,809
|
)
|
|
|
(171,054
|
)
|
Other
income (expense)
|
|
|
4,485
|
|
|
|
(4
|
)
|
Total
other expense, net
|
|
|
(43,324
|
)
|
|
|
(171,058
|
)
|
Loss
before income taxes
|
|
|
(901,818
|
)
|
|
|
(1,014,679
|
)
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
(901,818
|
)
|
|
|
(1,014,679
|
)
|
|
|
|
|
|
|
|
|
|
Dividends
on convertible preferred stock
|
|
|
(5,037
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(906,855
|
)
|
|
$
|
(1,014,679
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
7,842,971
|
|
|
|
2,275,625
|
|
Eastside
Distilling, Inc. and Subsidiary
Consolidated
Statements of Cash Flows
Three
months ended March 31, 2017 and 2016
(unaudited)
|
|
2017
|
|
|
2016
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(901,818
|
)
|
|
$
|
(1,014,679
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,006
|
|
|
|
5,574
|
|
Loss
on disposal of property and equipment
|
|
|
35,534
|
|
|
|
-
|
|
Amortization
of debt issuance costs
|
|
|
37,009
|
|
|
|
11,167
|
|
Amortization
of beneficial conversion feature
|
|
|
-
|
|
|
|
148,077
|
|
Issuance
of common stock in exchange for services
|
|
|
86,317
|
|
|
|
89,100
|
|
Stock-based
compensation
|
|
|
158,658
|
|
|
|
105,839
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
(15,171
|
)
|
|
|
(40,974
|
)
|
Inventories
|
|
|
(112,208
|
)
|
|
|
61,356
|
|
Prepaid
expenses and other assets
|
|
|
29,512
|
|
|
|
64,751
|
|
Accounts
payable
|
|
|
13,961
|
|
|
|
(7,808
|
)
|
Accrued
liabilities
|
|
|
(466,335
|
)
|
|
|
304,739
|
|
Deferred
revenue
|
|
|
(668
|
)
|
|
|
1,381
|
|
Net
cash used in operating activities
|
|
|
(1,126,203
|
)
|
|
|
(271,477
|
)
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Cash
acquired in acquisition
|
|
|
7,062
|
|
|
|
-
|
|
Purchases
of property and equipment
|
|
|
(39,631
|
)
|
|
|
(6,954
|
)
|
Net
cash used in investing activities
|
|
|
(32,569
|
)
|
|
|
(6,954
|
)
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Preferred
stock deposit
|
|
|
-
|
|
|
|
151,200
|
|
Stock
issuance cost related to acquisition
|
|
|
(5,580
|
)
|
|
|
-
|
|
Payments
of principal on notes payable
|
|
|
(1,716
|
)
|
|
|
(1,286
|
)
|
Proceeds
from common stock, net of issuance costs of $6,033, with detachable warrants
|
|
|
802,467
|
|
|
|
-
|
|
Proceeds
from warrant exercise
|
|
|
159,250
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
954,421
|
|
|
|
149,914
|
|
Net
decrease in cash
|
|
|
(204,351
|
)
|
|
|
(128,517
|
)
|
Cash
- beginning of period
|
|
|
1,088,066
|
|
|
|
141,317
|
|
Cash
- end of period
|
|
$
|
883,715
|
|
|
$
|
12,800
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
10,800
|
|
|
$
|
1,380
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Financing Activity:
|
|
|
|
|
|
|
|
|
Issuance
of common stock for the acquisition of MotherLode Craft Distillery, LLC
|
|
$
|
377,000
|
|
|
$
|
-
|
|
Common
stock issued in exchange of notes payable
|
|
$
|
87,500
|
|
|
$
|
-
|
|
Eastside
Distilling, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
March
31, 2017
(unaudited)
1.
Description of Business
We are a Portland, Oregon-based
producer and marketer of craft spirits, founded in 2008. Our products span several alcoholic beverage categories, including bourbon,
American whiskey, vodka and rum. Unlike many, if not most distillers, we operate several retail tasting rooms in Oregon to market
our brands directly to consumers. Our growth strategy is to build on our local base in the Pacific Northwest and expand
selectively to other markets by using major spirits distributors, such as Southern Glazer Wines and Spirits, or regional distributors
that focus on craft brands. As a small company in the large, international spirits marketplace filled with massive conglomerates,
we are innovative in exploiting new trends with our products, for example our Coffee Rum with cold brew coffee and low sugar and
our gluten free potato vodka. In December of 2016 we retained Sandstrom Partners (an internationally known spirit branding firm
that branded St Germain and Bulleit Bourbon), to guide our marketing strategy and branding. They subsequently became an
investor in our Company. We seek to be both a leader in creating spirits that offer better value than comparable spirits, for
example our value priced Burnside Bourbon and Portland Potato Vodka, and an innovator in creating imaginative spirits that offer
a unique taste experience, for example our cold-brewed coffee rum, Oregon oak aged whiskeys, Marionberry Whiskey and Peppermint
Bark holiday liqueur. On May 1, 2017, we acquired Big Bottom Distillery (“BBD”) for its excellent, award winning range
of super premium gins and whiskeys, including Navy Proof Gin, Oregon Gin, Delta Rye and initial production of American Single
Malt whiskey. BBD’s super premium spirits will expand our tasting room offerings and give us a presence at the “high
end” of the market. In addition, through MotherLode Craft Distillery (“MotherLode”), our wholly-owned subsidiary
acquired on March 8, 2017, we also provide contract bottling and packaging services for existing and would be spirits producers,
some of whom contract with us to blend or distill spirits. As a publicly-traded craft spirit producers, we have access to the
public capital markets to support our long-term growth initiatives, including strategic acquisitions.
We
currently sell our products in 22 states (Oregon, California, Washington, Florida, Nevada, Texas, Virginia, Indiana, Illinois,
New York, New Jersey, Massachusetts, Connecticut, Minnesota, Georgia, Pennsylvania, Rhode Island, New Hampshire, Maine, Idaho,
Vermont and Maryland) as well as Canada and China. The Company also generates revenue from tastings, tasting room tours, private
parties, and merchandise sales from its facilities in Oregon. The Company is subject to the Oregon Liquor Control Commission (OLCC)
and the Alcohol and Tobacco Tax and Trade Bureau (TTB).
2.
Liquidity
Historically,
the Company has funded its cash and liquidity needs through convertible notes, extended credit terms, and equity raisings. The
Company has incurred a net loss of approximately $901,818 and has an accumulated deficit of $13,719,889 for the three months ended
March 31, 2017. The Company has been dependent on raising capital from debt and equity financings to meet its needs for cash flow
used in operating activities. For the three months ended March 31, 2017, the Company raised $954,421 in cash flow from financing
activities to meet cash flow used in operating activities.
At
March 31, 2017, the Company has $883,715 of cash on hand with a positive working capital of $1,700,325. The Company’s ability
to meet its ongoing operating cash needs is dependent on generating positive operating cash flow, primarily through increased
sales, improved profit growth and controlling expenses. Management has taken actions to improve profitability, by reducing headcount,
rent, professional fees and increasing sales. In addition, through May 12, 2017, the Company has raised an additional $833,815
in cash through equity and debt offerings (see Note 14, Subsequent Events). Also in May 2017, the Company acquired a small distillery
business (stock purchase transaction) that is expected to improve operating results (see Note 14, Subsequent Events). Management
believes that cash on hand and the most recent equity raise and acquisition will be sufficient to meet their operating activities
to meet their near-term cash needs over the next twelve months.
3.
Summary of Significant Accounting Policies
Basis
of Presentation and Consolidation
The
accompanying condensed consolidated financial statements for Eastside Distilling, Inc. and Subsidiary were prepared in accordance
with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with
instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management,
necessary for a fair presentation of the interim condensed consolidated financial statements have been included. All such adjustments
are of a normal recurring nature. The unaudited condensed 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, 2016. The unaudited condensed consolidated results of operations for the three months ended March 31, 2017 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending December 31, 2017. The condensed consolidated
financial statements include the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiary, MotherLode (beginning
as of March 8, 2017). All intercompany balances and transactions have been eliminated in consolidation.
Segment
Reporting
The
Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company has
one business activity, producing, marketing and distributing hand-crafted spirits, and operates as one segment. The Company’s
chief operating decision makers, its chief executive officer and chief financial officer, review the Company’s operating
results on an aggregate basis for purposes of allocating resources and evaluating financial performance.
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
revenue includes product sales, less excise taxes and customer programs and incentives. The Company records revenue when all four
of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products
and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.
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 (OLCC), 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. The Company excludes sales tax collected and remitted
to various states from sales and cost of sales. Sales from items sold through the Company’s retail location are recognized
at the time of sale.
Revenue
received from online merchants who sell discounted gift certificates for the Company’s merchandise and tastings is deferred
until the customer has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier.
Customer
Programs and Incentives
Customer
programs and incentives, which include customer promotional discount programs, customer incentives and other payments, are a common
practice in the alcohol beverage industry. The Company makes these payments to customers and incurs these costs to promote sales
of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded
as reductions to net sales or as advertising, promotional and selling expenses in accordance with ASC Topic 605-50, Revenue Recognition
- Customer Payments and Incentives, based on the nature of the expenditure. Amounts paid to customers totaled $40,772 and $8,712
for the three months ended March 31, 2017 and 2016, respectively.
Advertising,
Promotional and Selling Expenses
The
following expenses are included in advertising, promotions and selling expenses in the accompanying consolidated statements of
operations: media advertising costs, special event costs, tasting room costs, sales and marketing expenses, salary and benefit
expenses, travel and entertainment expenses for the sales, brand and sales support workforce and promotional activity expenses.
Cost
of Sales
Cost
of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing
rent, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging
and production costs.
Shipping
and Fulfillment Costs
Freight
costs incurred related to shipment of merchandise from the Company’s distribution facilities to customers are recorded in
cost of sales.
Cash
and Cash Equivalents
Cash
equivalents are considered to be highly liquid investments with maturities of three months or less at the time of the purchase.
The Company had no cash equivalents at March 31, 2017 and December 31, 2016.
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At
March 31, 2017 and December 31, 2016, three customers represented 79% and 91% of trade receivables, respectively. Sales to three
customers accounted for approximately 57% of consolidated net sales for the three months ended March 31, 2017. Sales to one customer,
the OLCC, accounted for approximately 32% of net sales for the three months ended March 31, 2016.
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. At March
31, 2017 and December 31, 2016, 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 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.
|
None
of the Company’s assets or liabilities were measured at fair value at March 31, 2017 and December 31, 2016. 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, note payable, and convertible note payable. The
estimated fair value of trade receivables, accounts payable, and accrued liabilities approximates their carrying value due to
the short period of time to their maturities. At March 31, 2017 and December 31, 2016, the Company’s note payable and convertible
notes payable are at fixed rates and their carrying value approximates 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.
Inventories
Inventories
primarily consist of bulk and bottled liquor and merchandise 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 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. The Company has recorded no write-downs of inventory for the three months ended March 31, 2017 and 2016.
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.
Long-lived
Assets
The
Company accounts for long-lived assets, including property and equipment, 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.
Income
Taxes
The
provision for income taxes is based on income and expenses as reported for financial statement purposes using the “asset
and liability method” for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be realized. At March 31, 2017 and December 31, 2016, the Company
established valuation allowances against its net deferred tax assets.
Income
tax positions that meet the “more-likely-than-not” recognition threshold are measured at the largest amount of income
tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion
of the benefits associated with income tax positions taken that exceeds the amount measured as described above would be reflected
as a liability for unrecognized income tax benefits in the accompanying consolidated balance sheets along with any associated
interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with
unrecognized income tax benefits would be classified as additional income taxes in the accompanying condensed consolidated statements
of operations. There were no unrecognized income tax benefits, nor any interest and penalties associated with unrecognized income
tax benefits, accrued or expensed at and for the three months ended March 31, 2017 and 2016.
The
Company files federal income tax returns in the U.S. and various state income tax returns. The Company is no longer subject to
examinations by the related tax authorities for the Company’s U.S. federal and state income tax returns for years prior
to 2011.
Advertising
Advertising
costs are expensed as incurred. Advertising expense was $386,132 and $156,203 for the three months ended March 31, 2017 and 2016,
respectively.
Comprehensive
Income
The
Company does not have any reconciling other comprehensive income items for the three months ended March 31, 2017 and 2016.
Excise
Taxes
The
Company is responsible for compliance with the 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 alcohol 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 $176,416 and $158,408 for the three months ended March 31, 2017 and 2016, respectively.
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. Stock-based compensation was $158,658 and $105,839
for the three months ended March 31, 2017 and 2016, respectively.
Accounts
Receivable Factoring Program
We
use an accounts receivable factoring program with certain customer accounts. Under this program, we have the option to sell those
customer receivables in advance of payment for 75% of the amount due. When the customer remits payment, we then receive the remaining
25%. We are charged interest on the advanced 75% payment at a rate of 1.5% per month. Under the terms of the agreement with the
factoring provider, any factored invoices have recourse should the customer fail to pay the invoice. Thus, we record factored
amounts as a liability until the customer remits payment and we receive the remaining 25% of the non-factored amount. We did not
factor any invoices during the three months ended March 31, 2017. At March 31, 2017, we had factored invoices outstanding of $59,547,
and we incurred fees associated with the factoring program of $2,582 during the three months ended March 31, 2017. During the
three months ended March 31, 2016, we factored invoices totaling $117,933 and received total proceeds of $88,450. At March 31,
2016, we had factored invoices outstanding of $79,120, and we incurred fees associated with the factoring program of $4,269 during
the three months ended March 31, 2016.
Recent
Accounting Pronouncements
In
March 2016, the Financial Accounting Standard Boards (the “FASB”) issued Accounting Standard Update (“ASU”)
No. 2016-09,
Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.
” ASU 2016-09,
which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for
income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.
ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
We have adopted as of March 31, 2017.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
Under the new guidance, lessees will be required to
recognize the following for all leases (with the exception of short-term leases) at the commencement date:
|
●
|
A
lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis; and
|
|
|
|
|
●
|
A
right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified
asset for the lease term.
|
Under
the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor
accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified
the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.
Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments
in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e.,
January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities upon issuance. Lessees
(for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases
that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition
approach. We are currently evaluating the impact ASU 2016-02 will have on the Company’s condensed consolidated financial
statements.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 will supersede
virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised
goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or
services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. ASU 2014-09
is to be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most
current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. The Company
will elect to apply the impact (if any) of applying ASU 2014-09 to the most current reporting period presented in the financial
statements with a cumulative effect adjustment to retained earnings. In August 2015, the FASB issued ASU No. 2015-14,
Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date
. ASU 2015-14 defers the effective date of ASU 2014-09
for one year, making it effective for the year beginning December 31, 2017, with early adoption permitted as of January 1, 2017.
The Company currently expects to adopt ASU 2014-09 in the first quarter of 2018. The Company does not expect adoption of ASU 2014-09
to have a material impact on its consolidated financial statements.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements - Going Concern
. The new guidance explicitly
requires that management assess an entity’s ability to continue as a going concern and may require additional detailed disclosures.
ASU 2014-15 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods.
We have adopted as of December 31, 2016.
In
July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330), Simplifying the Measurement of Inventory
. ASU 2015-11
is part of the FASB’s initiative to simplify accounting standards. The guidance requires an entity to recognize inventory
within scope of the standard at the lower of cost or net realizable value. Net realizable value is the estimated selling price
in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. ASU 2015-11
will be effective prospectively for the year beginning January 1, 2017. We have adopted as of March 31, 2017.
In
April 2015, the FASB issued ASU 2015-03, simplifying the presentation of debt issuance costs, which requires that debt issuance
costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount
of that debt liability. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015 and early application
is permitted. We have early adopted as of December 31, 2015.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the March 31, 2017 presentation with no changes to net loss or total
stockholders’ equity previously reported.
4.
Business Acquisition
For
the three months ended March 31, 2017, the Company completed the following acquisition.
MotherLode
LLC
On
March 8, 2017, the Company completed the acquisition of MotherLode LLC (“MotherLode”), a small Portland, Oregon based
provider of bottling services and production support to craft distilleries. The Company’s consolidated financial statements
for the three months ended March 31, 2017 include MotherLode’s results of operations from the Acquisition date of March
8, 2017 through March 31, 2017. The Company’s consolidated financial statements reflect the final purchase accounting adjustments
in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired
and liabilities assumed based upon their estimated fair values on the Acquisition date. The Company had approximately $375,000
in revenues (unaudited) in 2016.
The
following allocation of the purchase price is as follows:
Consideration
given:
|
|
|
|
260,000
shares of common stock valued at $1.45 per share
|
|
$
|
377,000
|
|
Assets
and liabilities acquired:
|
|
|
|
|
Cash
|
|
|
7,062
|
|
Inventory
|
|
|
103,488
|
|
Property
and equipment
|
|
|
46,250
|
|
Intangible
assets - customer list
|
|
|
376,431
|
|
Accounts
payble
|
|
|
(5,180
|
)
|
Customer
deposits
|
|
|
(151,051
|
)
|
|
|
$
|
377,000
|
|
Intangible
assets are recorded at estimated fair value, as determined by management based on available information. The fair values assigned
to identifiable intangible assets were determined through the use of the income approach, specifically the relief from royalty
and the multi-period excess earning methods. The major assumptions used in arriving at the estimated identifiable intangible asset
values included management’s estimates of future cash flows, discounted at an appropriate rate of return which are based
on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates,
as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the
remaining useful economic lives of the tangible assets that are expected to contribute directly or indirectly to future cash flows.
The customer relationships estimated useful life is seven years.
5.
Inventories
Inventories
consist of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Raw
materials
|
|
$
|
533,814
|
|
|
$
|
439,739
|
|
Finished
goods
|
|
|
461,919
|
|
|
|
340,298
|
|
Total
inventories
|
|
$
|
995,733
|
|
|
$
|
780,037
|
|
6.
Property and Equipment
Property
and equipment consists of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Furniture
and fixtures
|
|
$
|
147,721
|
|
|
$
|
70,140
|
|
Leasehold
improvements
|
|
|
14,907
|
|
|
|
8,607
|
|
Vehicles
|
|
|
12,000
|
|
|
|
38,831
|
|
Construction
In-Progress
|
|
|
-
|
|
|
|
34,603
|
|
Total
cost
|
|
|
174,928
|
|
|
|
152,181
|
|
Less
accumulated depreciation
|
|
|
(46,068
|
)
|
|
|
(52,965
|
)
|
Property
and equipment - net
|
|
$
|
128,560
|
|
|
$
|
99,216
|
|
Depreciation
expense totaled $6,077 and $5,574 for the three months ended March 31, 2017 and 2016, respectively.
7.
Intangible Assets
There
were no intangible assets at December 31, 2016. At March 31, 2017, intangible assets consist of the following:
|
|
2017
|
|
Permits
and licenses
|
|
$
|
25,000
|
|
Customer
lists
|
|
|
351,431
|
|
Total
intangible asset
|
|
|
376,431
|
|
Less
accumulated amortization
|
|
|
(2,929
|
)
|
Intangible
assets - net
|
|
$
|
373,502
|
|
Amortization
expense totaled $2,929 and nil for the three months ended March 31, 2017 and 2016, respectively.
8.
Notes Payable
Notes
payable consists of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Notes
payable bearing interest at 7.99%. The note is payable in monthly principal plus interest payments of $472 through December,
2020. The note is secured by a vehicle.
|
|
$
|
-
|
|
|
$
|
16,642
|
|
Notes
payable bearing interest at 8%. The notes have a 2-year maturity and are due at various dates between September 19, 2018 –
October 19, 2018, and pay interest only on a monthly basis
|
|
|
460,000
|
|
|
|
547,500
|
|
Total
note payable
|
|
|
460,000
|
|
|
|
564,142
|
|
Less
current portion
|
|
|
-
|
|
|
|
(4,537
|
)
|
Less
debt discount for detachable warrant
|
|
|
(94,840
|
)
|
|
|
(131,849
|
)
|
Long-term
portion of note payable
|
|
$
|
365,160
|
|
|
$
|
427,756
|
|
Maturities
on notes payable as of March 31, 2017, are as follows:
Year
ending December 31:
2017
|
|
$
|
-
|
|
2018
|
|
|
460,000
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
460,000
|
|
9.
Income Taxes
The
provision for income taxes results in effective tax rates which are different than the federal income tax statutory rate. The
nature of the differences for the three months ended March 31, 2017 and 2016 were as follows:
|
|
2017
|
|
|
2016
|
|
Expected
federal income tax benefit
|
|
$
|
(286,381
|
)
|
|
$
|
(344,991
|
)
|
State
income taxes after credits
|
|
|
(59,520
|
)
|
|
|
(66,969
|
)
|
Change
in valuation allowance
|
|
|
345,901
|
|
|
|
411,960
|
|
Total
provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
components of the net deferred tax assets and liabilities at March 31, 2017 and December 31, 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,843,052
|
|
|
$
|
3,557,909
|
|
Stock-based
compensation
|
|
|
277,596
|
|
|
|
213,181
|
|
Total
deferred tax assets
|
|
|
4,120,648
|
|
|
|
3,771,090
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(74,473
|
)
|
|
|
(70,816
|
)
|
Total
deferred tax liabilities
|
|
|
(74,473
|
)
|
|
|
(70,816
|
)
|
Valuation
allowance
|
|
|
(4,046,175
|
)
|
|
|
(3,700,274
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At
March 31, 2017, the Company has a cumulative net operating loss carryforward (NOL) of approximately $3.8 million, to offset against
future income for federal and state tax purposes. These federal and state NOLs can be carried forward for 20 and 15 years, respectively.
The federal NOLs begins to expire in 2034, and the state NOLs begins to expire in 2029. The utilization of the net operating loss
carryforwards may be subject to substantial annual limitation due to ownership change provisions of the Internal Revenue code
of 1986 and similar state provisions. In general, if the Company experiences a greater than 50 percentage aggregate change in
ownership of certain significant stockholders over a three-year period (a “Section 382 ownership change”), utilization
of its pre-change NOL carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code (and similar
state laws). The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of
such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result
in expiration of a portion of the NOL carryforwards before utilization and may be substantial.
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation
of future taxable income during the periods in which those temporary differences become deductible. Due to the uncertainty of
the realizability of the deferred tax assets, management has determined a full valuation allowance is appropriate.
10.
Commitments and Contingencies
Operating
Leases
The
Company leases its warehouse, kiosks, and tasting room space under operating lease agreements, which expire through December 2018.
Monthly lease payments range from $1,802 to $21,000 over the terms of the leases. For operating leases which contain fixed escalations
in rental payments, the Company records the total rent expense on a straight-line basis over the lease term. The difference between
the expense computed on a straight-line basis and actual payments for rent represents deferred rent which is included within accrued
liabilities on the accompanying consolidated balance sheets. Retail spaces under lease are subject to monthly percentage rent
adjustments when gross sales exceed certain minimums.
At
March 31, 2017, future minimum lease payments required under the operating leases are approximately as follows:
2017
|
|
$
|
213,000
|
|
2018
|
|
|
90,000
|
|
2019
|
|
|
2,000
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
305,000
|
|
Total
rent expense was approximately $19,000 and $74,000 for the three months ended March 31, 2017 and 2016, respectively.
On
February 7, 2017, we entered into a Lease Termination Agreement with PJM BLDG. II LLC (the “Termination Agreement”),
the landlord of our current headquarters and production facilities located at 1805 SE Martin Luther King Jr. Blvd., Portland,
Oregon. The Termination Agreement provides that the original lease agreement dated July 17, 2014 (the “Lease”) will
terminate on June 30, 2017 rather than October 30, 2020.
Legal
Matters
We
are not currently subject to any material legal proceedings, however we could be subject to legal proceedings and claims from
time to time in the ordinary course of our business. Regardless of the outcome, litigation can, among other things, be time consuming
and expensive to resolve, and divert management resources.
11.
Net Loss per Common Share
Basic
loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the
period, without considering any dilutive items. Diluted net loss per common share is computed by dividing net loss by the sum
of the weighted average number of common shares outstanding and the potential number of any dilutive common shares outstanding
during the period. Potentially dilutive securities consist of the incremental common stock issuable upon exercise of stock options
and convertible notes. Potentially dilutive securities are excluded from the computation if their effective is anti-dilutive.
There were no dilutive common shares at March 31, 2017 and 2016. The numerators and denominators used in computing basic and diluted
net loss per common share in 2017 and 2016 are as follows:
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
Net
loss attributable to common shareholders (numerator)
|
|
$
|
(906,855
|
)
|
|
$
|
(1,014,679
|
)
|
Weighted
average shares (denominator)
|
|
|
7,842,971
|
|
|
|
2,275,625
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.45
|
)
|
12.
Stockholder’s Deficit
|
|
Convertible
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance,
Dec 31, 2016
|
|
|
300
|
|
|
|
245,838
|
|
|
|
7,627,512
|
|
|
|
764
|
|
|
|
13,699,275
|
|
|
|
(12,813,044
|
)
|
|
|
1,132,833
|
|
Issuance
of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
45,000
|
|
|
|
4
|
|
|
|
58,496
|
|
|
|
|
|
|
|
58,500
|
|
Issuance
of common stock, net of issuance costs of $6,033, with detachable warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
576,923
|
|
|
|
57
|
|
|
|
743,910
|
|
|
|
|
|
|
|
743,967
|
|
Issuance
of common stock from warrant exercise for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
122,500
|
|
|
|
12
|
|
|
|
159,238
|
|
|
|
|
|
|
|
159,250
|
|
Issuance
of common stock for services by third parties
|
|
|
-
|
|
|
|
-
|
|
|
|
59,385
|
|
|
|
6
|
|
|
|
83,794
|
|
|
|
|
|
|
|
83,800
|
|
Issuance
of common stock for services by employees
|
|
|
-
|
|
|
|
-
|
|
|
|
1,724
|
|
|
|
-
|
|
|
|
2,517
|
|
|
|
|
|
|
|
2,517
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158,658
|
|
|
|
|
|
|
|
158,658
|
|
Issuance
of common stock for acquisition of MotherLode, net of issuance costs of $5,580
|
|
|
-
|
|
|
|
-
|
|
|
|
260,000
|
|
|
|
26
|
|
|
|
371,394
|
|
|
|
|
|
|
|
371,420
|
|
Shares
Issued for payoff of long-term notes
|
|
|
-
|
|
|
|
-
|
|
|
|
67,308
|
|
|
|
7
|
|
|
|
87,493
|
|
|
|
|
|
|
|
87,500
|
|
Cumulative
dividend on Series A preferred
|
|
|
-
|
|
|
|
5,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,037
|
)
|
|
|
-
|
|
Common
shares issued for preferred conversion
|
|
|
(250
|
)
|
|
|
(201,449
|
)
|
|
|
250,000
|
|
|
|
25
|
|
|
|
201,424
|
|
|
|
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(901,818
|
)
|
|
|
(901,818
|
)
|
Balance,
Mar 31, 2017
|
|
|
50
|
|
|
|
49,426
|
|
|
|
9,010,352
|
|
|
|
901
|
|
|
|
15,566,199
|
|
|
|
(13,719,899
|
)
|
|
|
1,896,627
|
|
Reverse
Stock Split
All
shares related and per share information in these financial statements has been adjusted to give effect to the 20-for-1 reverse
stock split of the Company’s common stock effected on October 18, 2016.
Issuance
of Common Stock
From
January 4, 2017 to January 22, 2017, we sold 45,000 shares of common stock to accredited investors at a price of $1.30 per share
for aggregate cash proceeds of $58,500.
On
March 31, 2017, the Company issued 576,923 shares of its common stock for $750,000 including 576,923 warrants for common stock.
This represented an initial closing of the Company’s private offering as filed in the Form 8-K on March 27, 2017.
From
January 15, 2017 through February 16, 2017, the Company received warrant exercises and subscription documents totaling $159,250
for 122,500 shares issued.
In
March 2017, the Company issued 59,385 shares of common stock to four third-party consultants in exchange for services rendered.
In
March 2017, the Company issued 1,724 shares of common stock to employees for stock-based compensation of $2,517.
On
March 8, 2017, the Company completed the acquisition of MotherLode LLC (“MotherLode”), a Portland, Oregon based provider
of bottling services and production support to craft distilleries. We issued 260,000 shares of common stock to the owners of MotherLode
as consideration for the acquisition. Based on the closing share price of our common stock of $1.45 on March 8, 2017, the value
of the transaction was $377,000.
In
March 2017, the Company issued 67,308 shares of its common stock upon conversion of 8% convertible promissory notes with an aggregate
principal amount converted of $87,500.
In
March 2017, the Company issued 250,000 shares of its common stock upon conversion of 250 shares of preferred stock.
All
shares were fully vested upon issuance.
Issuance
of Convertible Preferred Stock
From
April 4, 2016 to June 17, 2016, the Company sold 972 shares of its series A convertible preferred stock (“Series A Preferred”)
for an aggregate purchase price of $972,000, of which (i) 499 Units were purchased for $499,000 in cash (ii) 423 Units were purchased
by certain of our officers in consideration of $423,000 accrued and unpaid salary and (iii) 50 Units were purchased in consideration
of cancellation of $50,000 of outstanding indebtedness net of issuance costs of $35,920.
Each
share of Series A Convertible Preferred has a stated value of $1,000, which is convertible into shares of the Company’s
common stock (the “Common Stock”) at a fixed conversion price equal to $1.50 per share. The Series A Convertible Preferred
accrue dividends at a rate of 8% per annum, cumulative. Dividends are payable quarterly in arrears at the Company’s option
either in cash or “in kind” in shares of Common Stock; provided, however that dividends may only be paid in cash following
the fiscal year in which the Company has net income (as shown in its audited financial statements contained in its Annual Report
on Form 10-K for such year) of at least $500,000, to the extent permitted under applicable law out of funds legally available
therefore. For ‘in-kind” dividends, holders will receive that number of shares of Common Stock equal to (i) the amount
of the dividend payment due such stockholder divided by (ii) 90% of the average of the per share market values during the twenty
(20) trading days immediately preceding a dividend date.
In
the event of any voluntary or involuntary liquidation, dissolution or winding up, or sale of the Company, each holder of Series
A Preferred shall be entitled to receive its pro rata portion of an aggregate payment equal to: (i) $1,000 multiplied by (ii)
the total number of shares of Series A Preferred Stock issued under the Series A Certificate of Designation multiplied by (iii)
2.5.
For
all matters submitted to a vote of the Company’s stockholders, the holders of the Series A Preferred as a class shall have
an aggregate number of votes equal to the product of (x) the number of shares of Common Stock (rounded to the nearest whole number)
into which the total shares of Series A Preferred Stock issued under the Series A Certificate of Designation on such date of determination
are convertible multiplied by (y) 2.5 (the “Total Series A Votes”), with each holder of Series A Preferred entitled
to vote its pro rata portion of the Total Series A Votes. Holders of Common Stock do not have cumulative voting rights. In addition,
the holders of Series A Preferred shall vote separately a class to change any of the rights, preferences and privileges of the
Series A Preferred.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Shares
Issued and
|
|
|
Net
|
|
|
Conversion
|
|
|
of
common stock
|
|
|
Liquidation
|
|
|
Liquidation
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Proceeds
|
|
|
Price/Share
|
|
|
Equivalents
|
|
|
Preference
|
|
|
Value/Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
3,000
|
|
|
|
50
|
|
|
$
|
49,426
|
|
|
$
|
1.50
|
|
|
|
33,333
|
|
|
$
|
125,000
|
|
|
$
|
2,500
|
|
Stock-Based
Compensation
On
September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the 2016 Plan). The total number of shares available for
the grant of either stock options or compensation stock under the 2016 Plan is 500,000 shares, subject to adjustment. On January
1, 2017, the number of shares available for grant under the 2016 Plan reset to 869,125 shares, equal to 8% of the number of outstanding
shares of the Company’s capital stock, calculated on an as-converted basis, on December 31 of the preceding calendar year.
In May 2017 the Board of Directors approved an amendment to the 2016 Plan to increase the number of shares of common stock reserved
thereunder to a new total of 1,169,125 shares, contingent upon shareholder adoption and approval of this amendment at the next
annual meeting of stockholders. The exercise price per share of each stock option shall not be less than 100 percent of the fair
market value of the Company’s common stock on the date of grant. At March 31, 2017, there were 762,500 options and 68,540
RSU’s issued under the Plan, with vesting schedules varying between immediate and five (5) years from the
grant date.
On
January 29, 2015, the Company adopted the 2015 Stock Incentive Plan (the 2015 Plan). The total number of shares available for
the grant of either stock options or compensation stock under the 2015 Plan is 150,000 shares, subject to adjustment. The exercise
price per share of each stock option shall not be less than 20 percent of the fair market value of the Company’s common
stock on the date of grant. At March 31, 2017, there were 43,750 options issued under the Plan outstanding, which options vest
at the rate of at least 25 percent in the first year, starting 6-months after the grant date, and 75% in year two.
The
Company also issues, from time to time, options which are not registered under a formal option plan. At March 31, 2017, there
were 50,000 options outstanding that were not issued under the Plan.
A
summary of all stock option activity at and for the three months ended March 31, 2017 is presented below:
|
|
#
of Options
|
|
|
Weighted-
Average Exercise Price
|
|
Outstanding
at December 31, 2016
|
|
|
521,250
|
|
|
$
|
3.08
|
|
Options
granted
|
|
|
335,000
(1)
|
|
|
|
1.57
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
Options
canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at March 31, 2017
|
|
|
856,250
|
|
|
$
|
2.49
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2017
|
|
|
258,854
|
|
|
$
|
3.93
|
|
(1)
options granted under 2016 Stock Incentive Plan;
The
aggregate intrinsic value of options outstanding at March 31, 2017 was $0.
At
March 31, 2017, there were 597,396 unvested options with an aggregate grant date fair value of $612,752. The unvested options
will vest in accordance with the vesting schedule in each respective option agreement, which varies between immediate and five
(5) years from the grant date. The aggregate intrinsic value of unvested options at March 31, 2017 was $0. During the three months
ended March 31, 2017, 113,881 options became vested.
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
following weighted-average assumptions were used in the Black-Scholes valuation model for options granted during the three months
ended March 31, 2017:
Risk-free
interest rate
|
|
|
1.60
|
%
|
Expected
term (in years)
|
|
|
7.25
|
|
Dividend
yield
|
|
|
-
|
|
Expected
volatility
|
|
|
75
|
%
|
The
weighted-average grant-date fair value per share of stock options granted during the three months ended March 31, 2017 was $1.11.
The aggregate grant date fair value of the 335,000 options granted during the three months ended March 31, 2017 was $371,865.
For
the three months ended March 31, 2017 and 2016, total stock option expense related to stock options was $158,658 and $51,569 respectively.
At March 31, 2017, the total compensation cost related to stock options not yet recognized is approximately $666,286, which is
expected to be recognized over a weighted-average period of approximately 3.41 years.
Warrants
During
the three months ended March 31, 2017, the Company issued 576,923 detachable warrants in connection with the purchase of 576,923
shares of common stock. The Company has determined the Warrants are classified as equity on the condensed consolidated balance
sheet as of March 31, 2017. The estimated fair value of the warrants at issuance was $301,731,
based on the Black-Scholes option-pricing model using the weighted-average assumptions below:
Volatility
|
|
|
75
|
%
|
Risk-free
interest rate
|
|
|
1.50
|
%
|
Expected
term (in years)
|
|
|
3.0
|
|
Expected
dividend yield
|
|
|
-
|
|
Fair
value of common stock
|
|
$
|
1.46
|
|
A
total of 122,500 warrants were exercised during the three months ended March 31, 2017 for cash proceeds of $159,250.
A
summary of activity in warrants is as follows:
|
|
Warrants
|
|
|
Weighted
Average Remaining Life
|
|
|
Weighted
Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December
31, 2016
|
|
|
2,540,295
|
|
|
|
2.77
years
|
|
|
$
|
2.16
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
576,923
|
|
|
|
3.00
years
|
|
|
$
|
2.50
|
|
|
$
|
0
|
|
Exercised
|
|
|
(122,500
|
)
|
|
|
2.00
years
|
|
|
$
|
1.30
|
|
|
|
|
|
Forfeited
and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
2,994,718
|
|
|
|
2.61
years
|
|
|
$
|
2.25
|
|
|
$
|
0
|
|
13.
Related Party Transactions
There
were no related party transactions during the three months ended March 31, 2017. During the three months ended March 31, 2016,
the Company’s chief executive officer paid expenses on behalf of the Company on his personal credit card. These related
party advances do not bear interest and are payable on demand. At March 31, 2016, the balance due to the chief executive officer
was approximately $95,000, and is included in accounts payable on the accompanying condensed consolidated balance sheets.
14.
Subsequent Events
On
May 12, 2017, the Company filed a revised S-1 registration statement for the proposed sale common stock of up to $6.9 million.
On
May 1, 2017, the Company announced the acquisition of a majority stake in Big Bottom Distilling, LLC (“BBD”), a Hillsboro,
Oregon-based distiller of award winning and super premium gins, whiskeys, brandies, rum, and vodka. The transaction is structured
as an exchange of 84,286 Eastside shares for 90% of the BBD LLC units, and will maintain the independence of BBD as a separate
entity underneath the operational umbrella of Eastside Distilling. BBD and Eastside will benefit from brand synergies because
of the limited overlap with Eastside products. Eastside will devote sales, marketing, financial capital and production resources
to expanding BBDs business, which in 2016 had total revenues of approximately $201,000.
On
April 24, 2017, the Company issued 50,000 shares of its common stock upon conversion of 50 shares of preferred stock. As of April
24, 2017, the Company has zero shares of preferred stock outstanding.
On
April 21, 2017, the Company completed a $500,000 convertible note purchase agreement with an accredited investor. The note has
a maturity date of April 3, 2020, and bears interest at the rate of five percent (5%) per annum. The note has an automatic conversion
feature upon the closing (or first in a series of closings) of the next equity financing in which the Company sells shares of
its equity securities for an aggregate consideration of at least $4,000,000 at a purchase price of at least $2.50. The outstanding
principal and unpaid accrued interest on the Note shall be automatically converted into equity securities at a price equal to
80% of the price paid per share by the investors in the next equity financing or $2.00, whichever is lower, provided, however,
that in no event shall the conversion price be less than $2.00. The note has a voluntary conversion feature where the investor
may convert, in whole or in part, at any time at the conversion rate of $2.00.
On
April 5, 2017, the board approved an incentive option grant to Mr. Grover Wickersham totaling 100,000 shares with an exercise
price of $1.60. In addition, the board approved a restricted stock unit grant of 100,000 shares of common stock that vested on
April 5, 2017. 30,650 shares were not issued in order to satisfy Mr. Wickersham’s personal tax withholding responsibility.
On
April 3, 2017, the Company issued 25,000 shares of common stock to a third-party consultant in exchange for services rendered.
From
April 3, 2017 to May 4, 2017, the Company issued 256,781 shares of its common stock for $333,815 in cash, including warrants to
purchase 256,781 shares of common stock. This represented the remaining closings of the Company’s private offering as described
in the Company’s Form 8-K filed on March 27, 2017. The private offering was completed on May 4, 2017.
On
April 2, 2017 and April 18, 2017, 13, 2016, the independent directors, Messrs. Trent Davis and Michael Fleming, respectively,
each exercised 13,888 stock options to purchase common stock at $1.80 per share.
Through
and including , 2017 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’
obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Shares
Eastside
Distilling, Inc.
Common
Stock
PRELIMINARY
PROSPECTUS
Roth
Capital Partners
,
2017