Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
1.
|
Description
of Business
|
Eastside
Distilling (the “Company,” “Eastside,” “Eastside Distilling,” “we,” “us,”
or “our”, below) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd.
In December 2014, we changed our corporate name to Eastside Distilling, Inc. to reflect our acquisition of Eastside Distilling,
LLC. We manufacture, acquire, blend, bottle, import, export, market and sell a wide variety of alcoholic beverages under recognized
brands. We currently employ 85 people in the United States.
Our
brands span several alcoholic beverage categories, including bourbon, American whiskey, vodka, gin, rum, tequila and Ready-to-Drink
(“RTD”). We sell our products on a wholesale basis to distributors, and until March 2020, we operated four
retail tasting rooms in Portland, Oregon to market our brands directly to consumers.
|
Principal
Brands
|
Gin
|
|
|
Big
Bottom The Ninety One Gin
|
|
Big
Bottom Navy Strength Gin
|
|
Big
Bottom Barrel Finished Gin
|
|
Big
Bottom London Dry Gin
|
|
|
Rum
|
|
|
Hue-Hue
Coffee Rum
|
|
|
Tequila
|
|
Azuñia
Blanco Organic Tequila
|
|
Azuñia
Reposado Organic Tequila
|
|
Azuñia
Añejo Tequila
|
|
Azuñia
Black, 2-Year, Extra-Aged, Private Reserve Añejo Tequila
|
|
|
Vodka
|
|
|
Portland
Potato Vodka
|
|
Portland
Potato Vodka – Marionberry
|
|
Portland
Potato Vodka – Habanero
|
|
|
Whiskey
|
|
|
Redneck
Riviera Whiskey
|
|
Redneck
Riviera Whiskey - Granny Rich Reserve
|
|
Burnside
Oregon Oaked Rye Whiskey
|
|
Burnside
West End Blend Whiskey
|
|
Burnside
Goose Hollow Bourbon
|
|
Burnside
Oregon Oaked Bourbon
|
|
Burnside
Buckman RSV 10 Year Bourbon
|
|
Oregon
Marionberry Whiskey
|
|
Big
Bottom Barlow Whiskey
|
|
Big
Bottom Barlow Port Whiskey
|
|
Big
Bottom Delta Rye
|
|
Big
Bottom American Single Malt
|
|
Big
Bottom Zin Cask Bourbon
|
|
Barrel
Hitch American Whiskey
|
|
|
Special
|
|
|
Advocaat
Holiday Egg Nog
|
|
|
Ready-to-Drink
|
|
Redneck
Riviera Howdy Dew!
|
|
Portland
Mule – Original
|
|
Portland
Mule – Marionberry
|
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
Our
mission is to build craft inspired experiential brands and high-quality artisan products around premium spirits and Ready
to Drink (“RTD”) craft cocktails. We will focus our core competency around brands, product marketing and distribution.
We are building our branded spirits and mobile canning and bottling service division both organically and through acquisition
to capture growth in the spirits, wine, beer, and RTD categories. Our growth in the mobile canning and bottling services
is being driven through Craft Canning + Bottling, LLC (“Craft Canning”).
Our partnership capabilities were first
demonstrated by our licensing and launch of our Redneck Riviera Whiskey brands (“RRW”). Our RRW brand went from idea,
to market roll-out in less than nine months and achieved national distribution in 49 states within 18 months. We proved how our
team could leverage its market position to successfully launch a nascent or new brand, while demonstrating our ability to focus
and dedicate more of our attention to developing innovative products.
Recent
Developments
COVID-19.
As a result of governmental and self-imposed restrictions due to the COVID-19 pandemic, there has been a shift in on
and off premise demand. On-premise business such as bars and restaurants have been closed leading to a decline in demand of the
Azuñia brand which has been a predominately on-premise brand that we are actively seeking to expand wholesale. While
off-premise business has seen an increase in spirits sales, the customer focus has been on major brands and larger format bottles
which we do not currently have on the national platform. However, in Oregon the Portland Potato Vodka 1.75L has shown a
dramatic increase in sales. Additionally, our Craft Canning operation has seen strong sales and customer
bookings for mobile canning that have extended beyond the normal peak season. We believe this is a result of the transition
from the use of kegs for on premise to the preference for cans for wider off-premise usage. This trend has been dramatic and has
resulted in shortages of available can stock. However, the Company believes it has sourced enough cans to supply its current
business plan.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
Historically,
the Company has funded its cash and liquidity needs through operating cash flow convertible notes, extended credit terms, and
equity financings. The Company has incurred a net loss of $5.7 million for the six months ended June 30, 2020 and has an
accumulated deficit of $49.9 million as of June 30, 2020. The Company has been dependent on raising capital from debt and equity
financings as well as the utilization of our inventory to meet its needs for cash flow used in operating activities. For the six
months ended June 30, 2020, we raised approximately $3.6 million in additional capital through debt financing (net of repayments).
At
June 30, 2020, the Company had $1.9 million of cash on hand with a positive working capital of $0.4 million. Our ability
to meet our ongoing operating cash needs over the next 12 months depends on reducing our operating costs, utilizing our inventory,
raising additional debt or equity capital, selling assets and generating positive operating cash flow, primarily through increased
sales, improved profit growth and controlling expenses. We intend to implement actions to improve profitability, by managing expenses
while continuing to increase sales. See Notes 10 and 11 to our financial statements for a description of our debt and the debt
refinancing initiatives completed in the first half of 2020. If we are unable to obtain additional financing, or additional
financing is not available on acceptable terms, we may seek to sell assets, reduce operating expenses or reduce or eliminate marketing
initiatives, and take other measures that could impair our ability to be successful.
Although
our audited financial statements for the year ended December 31, 2019 were prepared under the assumption that we would continue
our operations as a going concern, the report of our independent registered public accounting firm that accompanies our financial
statements for the year ended December 31, 2019 contains a going concern qualification in which such firm expressed substantial
doubt about our ability to continue as a going concern, based on the financial statements at that time. Specifically, as noted
above, we have incurred operating losses since our inception, and even though we have reduced our operating expenses and increased
our available capacity under our lines of credit, and have large inventory balances to drawn from, we expect to continue to incur
significant expenses and operating losses for the foreseeable future. These prior losses and expected future losses have had,
and will continue to have, an adverse effect on our financial condition. If we cannot continue as a going concern, our stockholders
would likely lose most or all of their investment in us.
3.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Consolidation
The
accompanying unaudited condensed consolidated financial statements for Eastside Distilling, Inc. and subsidiaries were
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for
interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the
“SEC”). Certain information and footnote disclosures normally included in financial statements in accordance with
GAAP have been condensed or eliminated as permitted under the SEC’s rules and regulations. In our opinion, the
unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and
recurring nature, necessary to present fairly our financial position as of June 30, 2020, our operating results for the six
months ended June 30, 2020 and 2019 and our cash flows for the six months ended June 30, 2020 and 2019. 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, 2019. Interim results are not
necessarily indicative of the results that may be expected for an entire fiscal year. The condensed consolidated financial
statements include the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiaries, including, MotherLode LLC,
Big Bottom Distilling LLC, Outlandish Beverages, LLC, Redneck Riviera Whiskey Co., LLC, Craft Canning + Bottling LLC
(beginning as of January 11, 2019) and the Azuñia tequila assets (beginning September 12, 2019). All intercompany
balances and transactions have been eliminated on consolidation.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
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, packaging, marketing and distributing alcoholic beverages 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
sales include product sales, less customer programs and excise taxes. The Company recognizes revenue by applying the following
steps in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with
Customers: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine
the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue
when each performance obligation is satisfied.
The
Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a
consignment sale). For consignment sales, which include sales to the Oregon Liquor Control Commission (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, other
than customary rights of return. The Company excludes sales tax collected and remitted to various states from sales and cost of
sales.
Customer
Programs
Customer
programs, 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 sales and marketing expenses in accordance with ASC 606 - Revenue from Contracts with Customers, based
on the nature of the expenditure. Amounts paid to customers totaled $0.5 million and $0.6 million for the six months ended
June 30, 2020 and 2019, respectively.
Excise
Taxes
The
Company is responsible for compliance with the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) regulations,
which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB.
Individual states also impose excise taxes on alcohol beverages in varying amounts. The Company calculates its excise tax expense
based upon units produced and sold and on its understanding of the applicable excise tax laws. Excise taxes totaled $0.2
million and $0.6 million for the six months ended June 30, 2020 and 2019, respectively.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
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.
Sales
and Marketing Expenses
The
following expenses are included in sales and marketing expenses in the accompanying condensed consolidated statements of operations:
media advertising costs, sales and marketing expenses, promotional costs of value-added packaging, salary and benefit expenses,
travel and entertainment expenses for the sales, brand and sales support workforce and promotional activity expenses. Sales and
marketing costs are expensed as incurred. Sales and marketing expense totaled $2.8 million and $2.6 million for the six
months ended June 30, 2020 and 2019.
General
and Administrative Expenses
The
following expenses are included in general and administrative expenses in the accompanying condensed consolidated statements of
operations: salary and benefit expenses, travel and entertainment expenses for executive and administrative staff, rent and utilities,
professional fees, insurance and amortization and depreciation expense. General and administrative costs are expensed as incurred.
General and administrative expense totaled $4.5 million and $5.4 million for the six months ended June 30, 2020 and 2019,
respectively, of which $1.8 million and $1.6 million were non-cash expenses, 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 $0.7 and $0.8
million for the six months ended June 30, 2020 and 2019, respectively.
Discontinued
Operations
The
Company reports discontinued operations by applying the following criteria in accordance with Accounting Standards Codification
(“ASC”) Topic 205-20 – Presentation of Financial Statements – Discontinued Operations: (1) Component of
an entity; (2) Held for sale criteria; (3) Strategic shift. During the first quarter of 2020, management made a strategic shift
to focus the Company’s sale and marketing efforts on the nationally branded product platform, resulting in the decision
to close / abandon all four of its retail tasting rooms in the Portland, Oregon area by March 31, 2020. This decision meets the
criteria (1) - (3) for reporting discontinued operations, and as a result, the retail operations have been reported as discontinued
operations in the accompanying unaudited condensed consolidated financial statements. In the current year, the income, expense
and cash flows from retail operations during the period they were consolidated have been classified as discontinued operations.
For comparative purposes, amounts in the prior periods have been reclassified to conform to current year presentation.
Additionally, the assets and liabilities from retail operations are shown on the balance sheet as assets and liabilities for discontinued
operations.
Eastside Distilling, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
June 30, 2020
(Unaudited)
Income
and expense related to discontinued retail operations for the six months ended June 30 2020 and 2019:
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Sales
|
|
$
|
143,490
|
|
|
$
|
474,323
|
|
Less customer programs and excise taxes
|
|
|
46,342
|
|
|
|
177,824
|
|
Net sales
|
|
|
97,148
|
|
|
|
296,499
|
|
Cost of sales
|
|
|
64,101
|
|
|
|
142,297
|
|
Gross profit
|
|
|
33,047
|
|
|
|
154,202
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
2,534
|
|
|
|
16,189
|
|
General and administrative expenses
|
|
|
155,800
|
|
|
|
383,916
|
|
Loss on disposal of property and equipment
|
|
|
72,751
|
|
|
|
-
|
|
Total operating expenses
|
|
|
231,085
|
|
|
|
400,105
|
|
Loss from operations
|
|
|
(198,038
|
)
|
|
|
(245,903
|
)
|
Assets
and liabilities related to discontinued retail operations
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
-
|
|
|
$
|
615
|
|
Trade receivables
|
|
|
-
|
|
|
|
1,734
|
|
Inventories
|
|
|
-
|
|
|
|
62,102
|
|
Prepaid expenses and current assets
|
|
|
-
|
|
|
|
10,441
|
|
Total current assets
|
|
|
-
|
|
|
|
74,892
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
86,059
|
|
Right of use asset
|
|
|
110,598
|
|
|
|
164,952
|
|
Other assets
|
|
|
3,189
|
|
|
|
10,855
|
|
Total Assets
|
|
$
|
113,787
|
|
|
$
|
336,758
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
(5,084
|
)
|
|
$
|
56,241
|
|
Accrued liabilities
|
|
|
-
|
|
|
|
7,763
|
|
Deferred revenue
|
|
|
-
|
|
|
|
1,734
|
|
Current portion of lease liability
|
|
|
29,290
|
|
|
|
59,540
|
|
Total current liabilities
|
|
|
24,206
|
|
|
|
125,278
|
|
Lease Liability - less current portion
|
|
|
86,397
|
|
|
|
112,760
|
|
Total liabilities
|
|
$
|
110,603
|
|
|
$
|
238,038
|
|
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 June 30, 2020 and December 31, 2019.
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 June
30, 2020 and December 31, 2019, 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.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
The
hierarchy of fair value valuation techniques under GAAP provides for three levels: Level 1 provides the most reliable measure
of fair value, whereas Level 3, if applicable, generally would require significant management judgment. The three levels for categorizing
assets and liabilities under GAAP’s fair value measurement requirements are as follows:
|
Level
1:
|
Fair
value of the asset or liability is determined using cash or unadjusted quoted prices in active markets for identical assets
or liabilities.
|
|
|
|
|
Level
2:
|
Fair
value of the asset or liability is determined using inputs other than quoted prices that are observable for the applicable
asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities
in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
|
|
Level
3:
|
Fair
value of the asset or liability is determined using unobservable inputs that are significant to the fair value measurement
and reflect management’s own assumptions regarding the applicable asset or liability.
|
None
of the Company’s assets or liabilities were measured at fair value at June 30, 2020 and December 31, 2019. However, GAAP
requires the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments
consist principally of trade receivables, accounts payable, accrued liabilities, notes payable, and convertible notes
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 June 30, 2020 and December 31, 2019, the Company’s 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, raw packaging material for bottling, raw cans for Craft Canning 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 recorded an inventory
allowance of $0.3 million for obsolete inventory for the six months ended June 30, 2020 and no write-downs of inventory
for the six months ended June 30, 2019.
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, ranging from three to seven years. Amortization of leasehold improvements
is computed using the straight-line method over the life of the lease or the useful lives of the assets, whichever is shorter.
The cost and related accumulated depreciation and amortization of property and equipment sold or otherwise disposed of are removed
from the accounts and any gain or loss is reported as current period income or expense. The costs of repairs and maintenance are
expensed as incurred.
Intangible
Assets / Goodwill
The
Company accounts for long-lived assets, including property and equipment and intangible assets, at amortized cost. Management
reviews long-lived assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets
may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted
and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash
flows were less than the carrying amount, an impairment loss would be recognized to write down the asset to its estimated fair
value. The Company performed a qualitative assessment of goodwill at June 30, 2020 and determined that goodwill was not impaired.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
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 June 30, 2020 and December
31, 2019, 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% 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 six months ended June 30, 2020 and 2019.
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 2012.
Comprehensive
Income
The
Company does not have any reconciling other comprehensive income items for the six months ended June 30, 2020 and 2019.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
Accounts
Receivable Factoring Program
The
Company has entered into two accounts receivable factoring programs. One for its spirits customers (the “spirits program”)
and another for its co-packing customers (the “co-packing program”). Under the programs, the Company has the option
to sell certain customer account receivables in advance of payment for 75% (spirits program) or 85% (co-packing program) of the
amount due. When the customer remits payment, the Company receives the remaining balance. For the spirits program, interest is
charged on the advanced 75% payment at a rate of 2.4% for the first 30 days plus 1.44% for each additional ten-day period. For
the co-packing program, interest is charged against the greater of $500,000 or the total funds advanced at a rate of 5% plus the
prime rate published in the Wall Street Journal. Under the terms of both agreements, the factoring provider has full recourse
against the Company should the customer fail to pay the invoice. In accordance with ASC 860, we have concluded that these agreements
have met all three conditions identified in ASC 860-10-40-5 (a) – (c) and have accounted for this activity as a sale. Given
the quality of the factored accounts, the Company has not recognized a recourse obligation. In certain limited instances, the
Company may provide collection services on the factored accounts but does not receive any fees for acting as the collection agent,
and as such, the Company has not recognized a service obligation asset or liability. The Company factored $3.8 million of invoices
and incurred $0.1 million in fees associated with the factoring programs during the six months ended June 30, 2020. At June 30,
2020, the Company had $0.9 million factored invoices outstanding.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
Recently
Adopted Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). 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 will be largely unchanged. Certain targeted improvements were made to align, where necessary,
lessor accounting with the lessee accounting model and ASU No. 2014-09, 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). 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. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842). This guidance provides an additional (and optional) transition method whereby the new lease standard
is applied at the adoption date and recognized as an adjustment to retained earnings. In addition, this ASU provides a practical
expedient, by class of underlying asset, to not separate nonlease components from the associated lease and instead account for
the lease as a single component if both the timing and pattern of transfer of the nonlease component(s) are the same, and if the
lease would be classified as an operating lease. These amendments have the same effective date as ASU 2016-02. On January 1, 2019,
the Company adopted the new accounting standard using the modified retrospective approach and elected to not adjust comparative
periods. Upon adoption, the Company recognized right-of-use assets of $0.9 million, lease liabilities of $1.1 million, and a net
adjustment to retained earnings of $0.2 million. The Company considers the impact of the adoption to be immaterial to its consolidated
financial statements on an ongoing basis.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee
Share-Based Payment Accounting (“ASU 2018-07”), which aligns the accounting for share-based payment awards issued
to employees and nonemployees. Under ASU 2018-07, the existing employee guidance will apply to nonemployee share-based transactions
(as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution
of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods
or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model
for nonemployee awards. The new standard became effective on January 1, 2019 and should be applied to all new awards granted after
the date of adoption. The Company adopted ASU 2018-07 as of January 1, 2019. The Company does not believe the adoption of ASU
2018-07 had any material impact on its consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill
Impairment (“ASU 2017-04”). ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating Step
2 from the goodwill impairment test. Current guidance requires that companies compute the implied fair value of goodwill under
Step 2 by performing procedures to determine the fair value at the impairment testing date of its assets and liabilities following
the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.
ASU 2017-04 will require companies to perform annual or interim goodwill impairment tests by comparing the fair value of a reporting
unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. ASU 2017-04 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years, and will be applied prospectively. Early adoption of this standard is permitted. The Company adopted ASU 2017-04
as of January 1, 2020. The Company does not believe the adoption of ASU 2017-04 had any material impact on its consolidated financial
statements.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
During
the fiscal year 2019, the Company completed the following acquisitions:
Craft
Canning + Bottling
On
January 11, 2019, the Company completed the acquisition of Craft Canning + Bottling, LLC (“Craft Canning”), a Portland,
Oregon-based provider of bottling and canning services. The Company’s consolidated financial statements for the six months
ended June 30, 2020 include Craft Canning’s results of operations. For the six months ended June 30, 2019, Craft Canning’s
results of operations are included from the acquisition date of January 11, 2019 through June 30, 2019. The Company’s condensed
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
following allocation of the purchase price is as follows:
Consideration given:
|
|
|
|
|
338,212 shares of common stock valued at $6.10 per share
|
|
$
|
2,080,004
|
|
Cash
|
|
|
2,003,200
|
|
Notes payable
|
|
|
761,678
|
|
Total value of acquisition
|
|
$
|
4,844,882
|
|
|
|
|
|
|
Assets and liabilities acquired:
|
|
|
|
|
Cash
|
|
$
|
553,283
|
|
Trade receivables, net
|
|
|
625,717
|
|
Inventories, net
|
|
|
154,824
|
|
Prepaid expenses and current assets
|
|
|
250
|
|
Property and equipment, net
|
|
|
1,839,486
|
|
Right-of-use assets
|
|
|
232,884
|
|
Intangible assets - customer list
|
|
|
2,895,318
|
|
Other assets
|
|
|
26,600
|
|
Accounts payable
|
|
|
(231,613
|
)
|
Accrued liabilities
|
|
|
(74,389
|
)
|
Deferred revenue
|
|
|
(52,000
|
)
|
Lease liabilities
|
|
|
(256,375
|
)
|
Notes payable
|
|
|
(869,103
|
)
|
Total
|
|
$
|
4,844,882
|
|
Intangible
assets are recorded at estimated fair value, as determined by management based on available information. The fair value assigned
to the customer list intangible asset was 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
value included management’s estimates of future cash flows, discounted at an appropriate rate of return which is 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.
The
Company incurred acquisition costs of $0.1 million during the six months ended June 30, 2019 that have been recorded in general
and administrative expenses on the consolidated statement of operations. The results of the Craft acquisition are included in
our consolidated financial statements from the date of acquisition through June 30, 2020. The revenue and net profit of Craft
operations included in our condensed consolidated statements of operations were $4.0 million and $0.3 million, for the six months
ended June 30, 2020. The revenue and net income (including transaction costs) of Craft operations included in our condensed consolidated
statements of operations were $3.8 million and $0.5 million, for the period from January 11, 2019 through June 30, 2019.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
Azuñia
Tequila
On
September 12, 2019, the Company completed the acquisition of the Azuñia Tequila brand, the direct sales team, existing
product inventory, supply chain relationships and contractual agreements from Intersect Beverage, LLC, an importer and distributor
of tequila and related products. The Company’s consolidated financial statements for the six months ended June 30, 2020
include the Azuñia Tequila assets and results of operations.
The
acquisition was structured as an all-stock transaction, provided that the Company may, at its election, pay a portion of the consideration
in cash or by executing a three-year promissory note if the issuance of stock would require the Company to hold a vote of its
stockholders under the applicable Nasdaq rules. Subject to compliance with applicable Nasdaq rules, the initial consideration,
will be payable approximately 18 months following the closing and will consist of 850,000 shares of the Company’s common
stock at a stipulated value of $6.00 per share, 350,000 shares of the Company’s common stock based on the Company’s
stock price twelve months after the close of the transaction, and additional shares based on the Azuñia business achieving
certain revenue targets and the Company’s stock price 18 months after the close of the transaction. The Company has also
agreed to issue additional stock consideration (subject to compliance with applicable Nasdaq rules) of up to $1.5 million upon
the Azuñia business achieving revenue of at least $9.45 million in the period commencing on the 13th month following the
closing and ending on the 24th month following the closing.
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 based upon their estimated
fair values on the acquisition date. The Company estimated the purchase price based on weighted probabilities of future results
and recorded deferred consideration payable of $12.8 million on the acquisition date that will be remeasured to fair value at
each reporting date until the contingencies are resolved, with the changes in fair value recognized in earnings. The Company remeasured
the deferred consideration payable for the period ended December 31, 2019 and increased the liability by $2.7 million to a balance
of $15.5 million. No adjustment was made to the deferred consideration payable for the six month period ended June 30,
2020.
The
following allocation of the purchase price is as follows:
Consideration given:
|
|
|
|
|
Deferred consideration payable
|
|
$
|
12,781,092
|
|
Total value of acquisition
|
|
$
|
12,781,092
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Inventories, net
|
|
$
|
836,026
|
|
Intangible assets - brand
|
|
|
11,945,066
|
|
Total
|
|
$
|
12,781,092
|
|
Intangible
assets are recorded at estimated fair value, as determined by management based on available information. The fair value assigned
to the brand intangible asset was determined through the use of the market approach. The major assumptions used in arriving at
the estimated identifiable intangible asset value included category averages for comparable acquisitions, including multiples
of annual sales and dollars per case sold. The brand has an indefinite life and will not be amortized.
The
results of the Azuñia Tequila asset acquisition are included in our consolidated financial statements for the six months
ended June 30, 2020. The sales of Azuñia Tequila products included in our condensed consolidated statements of operations
were $1.4 million for the six months ended June 30, 2020.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
Pro
Forma Financial Information
The
following unaudited pro forma consolidated results of operations for the six months ended June 30, 2019 assume that both acquisitions
of Craft Canning + Bottling and Azuñia Tequila were completed on January 1, 2019:
|
|
2019
|
|
Pro forma sales
|
|
$
|
9,249,720
|
|
Pro forma net loss
|
|
|
(8,227,724
|
)
|
Pro forma basic and diluted net loss per share
|
|
$
|
(0.90
|
)
|
Pro
forma sales and net loss exclude retail operations that have been classified as discontinued operations.
Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred
at the beginning of the periods presented and is not intended to be a projection of future results. The share and per share data
have been retroactively reflected for the acquisitions.
Inventories
consist of the following:
(Dollars
in thousands)
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Raw materials
|
|
$
|
8,772
|
|
|
$
|
9,336
|
|
Finished goods
|
|
|
1,977
|
|
|
|
2,995
|
|
Total inventories
|
|
$
|
10,749
|
|
|
$
|
12,331
|
|
6.
|
Property
and Equipment
|
Property
and equipment consists of the following:
(Dollars
in thousands)
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Furniture and fixtures
|
|
$
|
4,289
|
|
|
$
|
4,464
|
|
Leasehold improvements
|
|
|
1,640
|
|
|
|
1,654
|
|
Vehicles
|
|
|
692
|
|
|
|
690
|
|
Construction in progress
|
|
|
122
|
|
|
|
98
|
|
Total cost
|
|
|
6,743
|
|
|
|
6,906
|
|
Less accumulated depreciation
|
|
|
(3,101
|
)
|
|
|
(2,219
|
)
|
Property and equipment - net
|
|
$
|
3,642
|
|
|
$
|
4,687
|
|
Purchases
of property and equipment totaled $0.2 million and $2.2 million for the six months ended June 30, 2020 and June 30, 2019, respectively.
Depreciation expense totaled $1.0 million and $0.4 million for the six months ended June 30, 2020 and June 30, 2019, respectively.
Gain on disposal of fixed assets totaled $0.02 for the six months ended June 30, 2020 compared to nil for the same period last
year.
7.
|
Intangible
Assets and Goodwill
|
Intangible
assets and goodwill at June 30, 2020 and December 31, 2019 consists of the following:
(Dollars
in thousands)
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Permits and licenses
|
|
$
|
25
|
|
|
$
|
25
|
|
Azuñia brand
|
|
|
11,945
|
|
|
|
11,945
|
|
Customer lists
|
|
|
3,247
|
|
|
|
3,247
|
|
Goodwill
|
|
|
28
|
|
|
|
28
|
|
Total intangible assets and goodwill
|
|
|
15,245
|
|
|
|
15,245
|
|
Less accumulated amortization
|
|
|
(787
|
)
|
|
|
(542
|
)
|
Intangible assets and goodwill - net
|
|
$
|
14,458
|
|
|
|
14,703
|
|
Amortization
expense totaled $0.2 million and $0.2 million for the six months ended June 30, 2020 and June 30, 2019, respectively. The permits
and licenses, Azuñia brand and goodwill have all been determined to have indefinite life and will not be amortized.
The customer list is being amortized over a seven-year life.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
Other
assets consist of the following:
(Dollars
in thousands)
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Product branding
|
|
$
|
929
|
|
|
$
|
809
|
|
Notes receivable
|
|
|
127
|
|
|
|
450
|
|
Deposits
|
|
|
43
|
|
|
|
43
|
|
Total other assets
|
|
|
1,099
|
|
|
|
1,302
|
|
Less accumulated amortization
|
|
|
(186
|
)
|
|
|
(136
|
)
|
Other assets - net
|
|
$
|
913
|
|
|
$
|
1,166
|
|
As
of June 30, 2020, the Company had $0.9 million of capitalized costs related to services provided for the rebranding of its existing
product line and branding of new product lines. This amount is being amortized over a seven-year life.
Amortization expense totaled $0.05 million
and $0.09 million for the six months ended June 30, 2020 and June 30, 2019, respectively.
As
of June 30, 2020, the Company had notes receivable from Wineonline.com for $127,500 which mature on August 25, 2020. The interest
rate on these notes is 5% and will be payable at maturity. The Company received $322,500 from Wineonline.com in June 2020 for
notes receivable that had matured and has determined the remaining note is collectible.
The deposits represent office lease
deposits.
The Company has various lease agreements in place for facilities
and equipment. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance
costs, and vary by lease. These lease obligations expire at various dates through 2022. As the rate implicit in each lease is not
readily determinable, the Company uses its incremental borrowing rate based on information available at commencement to determine
the present value of the lease payments. Based on the present value of the lease payments for the remaining lease term of the Company’s
existing leases, the Company recognized right-of-use assets of $0.9 million and lease liabilities of $1.1 million, and a net adjustment
to retained earnings of $0.2 million upon adoption on January 1, 2019. Right-of-use assets and lease liabilities commencing after
January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of June
30, 2020, the right-of-use assets and lease liabilities were $0.4 million and $0.5 million, respectively. Leases with an initial
term of 12 months or less (“short-term leases”) are not recorded on the balance sheet and are recognized on a straight-line
basis over the lease term. Aggregate lease expense for the six months ended June 30, 2020 was $0.4 million, consisting of $0.2
million in operating lease expense for lease liabilities and $0.2 million in short-term lease cost.
Maturities
of lease liabilities as of June 30, 2020 are as follows:
|
|
Operating
Leases
|
|
|
Weighted-
Average
Remaining Term
in Years
|
|
2020
|
|
$
|
152,352
|
|
|
|
|
|
2021
|
|
|
236,565
|
|
|
|
|
|
2022
|
|
|
324
|
|
|
|
|
|
Thereafter
|
|
|
0
|
|
|
|
|
|
Total
lease payments
|
|
|
389,241
|
|
|
|
|
|
Less
imputed interest (based on 4.04% weighted- average discount rate
|
|
|
(15,721
|
)
|
|
|
|
|
Present
value of lease liability
|
|
$
|
373,520
|
|
|
|
1.3
|
|
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
Notes
payable consists of the following:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Notes payable bearing interest at 5.00%. The notes’ principal, plus any accrued and unpaid interest is due May 1, 2021. Interest is paid monthly.
|
|
|
2,300,000
|
|
|
|
2,300,000
|
|
Notes payable bearing interest at 1.00%. The notes’ principal, plus any accrued and unpaid interest is due May 1, 2022. Loan payments are deferred six months from start of loan.
|
|
|
1,046,274
|
|
|
|
-
|
|
Notes payable bearing interest at 1.00%. The notes’ principal, plus any accrued and unpaid interest is due May 1, 2022. Loan payments are deferred six months from start of loan.
|
|
|
394,441
|
|
|
|
-
|
|
Convertible note payable bearing interest at 9.00%. The note principal, plus any accrued and unpaid interest is due December 31, 2020. The note has a voluntary conversion feature where in the event of an equity offering of at least $1,000,000 at a purchase price of at least $4.25 (subject to adjustment), the noteholder shall have the right to participate in the financing by converting all outstanding principal and accrued and unpaid interest on this note into the securities to be sold in the offering.
|
|
|
254,075
|
|
|
|
254,075
|
|
Notes payable bearing interest at 5.00%. Principal and accrued interest is payable in six equal
installments on each six-month anniversary of the issuance date of January 11, 2019. The notes are secured by the security
interests and are subordinate to the Company’s senior indebtedness.
|
|
|
519,332
|
|
|
|
649,774
|
|
Promissory note payable bearing interest of 5.2%. The note has a 46-month term with maturity in May 2023. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft Canning.
|
|
|
153,247
|
|
|
|
176,571
|
|
Promissory note payable bearing interest of 4.45%. The note has a 34-month term with maturity
in May 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured
by the assets of Craft Canning and includes debt covenants requiring a Current Ratio of 1.75 to 1.00 and a Debt Service Coverage
Ratio of 1.25 to 1.00. Craft Canning must also provide annual financial statements and tax returns. Craft Canning was in compliance
with all debt covenants as of June 30, 2020.
|
|
|
214,810
|
|
|
|
265,509
|
|
Promissory note payable under a revolving line of credit bearing variable interest starting at 5.5%. The note has a 15-month term with principal and accrued interest due in lump sum in October 2020. The borrowing limit is $250,000. The note is secured by the assets of Craft Canning.
|
|
|
141,000
|
|
|
|
50,000
|
|
Promissory note payable bearing interest of 4.14%. The note has a 60-month term with maturity in July 2024. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft Canning.
|
|
|
164,977
|
|
|
|
183,202
|
|
Promissory note payable bearing interest of 3.91%. The note has a 60-month term with maturity in August 2024. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft Canning.
|
|
|
254,050
|
|
|
|
281,802
|
|
Promissory note payable bearing interest of 3.96%. The note has a 60-month term with maturity in November 2024. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft Canning.
|
|
|
268,018
|
|
|
|
295,463
|
|
Secured line of credit promissory note for a revolving line of credit in the aggregate principal amount of $2,000,000. The Note matures on April 15, 2020 and may be prepaid in whole or in part at any time without penalty or premium. Repayment of the Note is subject to acceleration in the event of an event of default. The Company may use the proceeds to purchase tequila for its Azuñia product line and for general corporate purposes, as approved by the Holder. The obligations of the Company under the Note are secured by certain inventory of the Company and its subsidiaries and the Company’s membership interests in Craft Canning. In addition, the Note is guaranteed by the Company’s subsidiaries Craft Canning and Big Bottom Distilling. The Note and the accompanying guaranty restrict Craft Canning from incurring any new indebtedness, other than trade debt incurred in the ordinary course of business, until the Note is repaid in full. The obligations under the Note are subordinate and junior in right and priority of payment to the Company’s obligations under the Company’s Credit and Security Agreement with the KFK Children’s Trust dated May 10, 2018. The Note was paid in full in January 2020.
|
|
|
-
|
|
|
|
946,640
|
|
Promissory notes payable bearing interest between 2.99% - 3.14%. The notes have 60-month terms with maturity dates between February 2019 – June 2020. Principal and accrued interest are paid monthly. The notes are secured by the specific vehicle underlying the loan.
|
|
|
3,193
|
|
|
|
10,390
|
|
Total notes payable
|
|
|
5,713,417
|
|
|
|
5,413,426
|
|
Less current portion
|
|
|
(3,912,668
|
)
|
|
|
(1,819,172
|
)
|
Long-term portion of notes payable
|
|
$
|
1,800,749
|
|
|
$
|
3,594,254
|
|
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
The
Company paid $0.1 million and $0.08 million in interest on notes for the six months ended June 30, 2020 and 2019, respectively.
Maturities
on notes payable as of June 30, 2020, are as follows:
Year
ending December 31:
2020
|
|
$
|
837,790
|
|
2021
|
|
|
3,836,691
|
|
2022
|
|
|
715,344
|
|
Thereafter
|
|
|
323,592
|
|
|
|
$
|
5,713,417
|
|
11.
|
Secured
Credit Facility
|
On
January 15, 2020, the Company entered into a loan agreement (the “Loan Agreement”) between the Company which
includes its wholly-owned subsidiaries MotherLode LLC, an Oregon limited liability company, Big Bottom Distilling, LLC, an Oregon
limited liability company, Craft Canning + Bottling, LLC, an Oregon limited liability company, Redneck Riviera Whiskey Co., LLC,
a Tennessee limited liability company, and Outlandish Beverages LLC, an Oregon limited liability company collectively, (the “Borrowers”
and each a “Borrower”) and Live Oak Banking Company, a North Carolina banking corporation (the “Lender”)
to refinance existing debt of the Borrowers and to provide funding for general working capital purposes. Under the Loan Agreement,
the Lender has committed to make up to two loan advances to the Borrowers in an aggregate principal amount not to exceed the lesser
of (i) $8,000,000 and (ii) a borrowing base equal to 85% of the appraised value of the Borrowers’ eligible inventory of
whisky in barrels or totes less an amount equal to all service fees or rental payments owed by the Borrowers during the 90 day
period immediately succeeding the date of determination to any warehouses or bailees holding eligible inventory (the “Loan”).
The
Loan matures on January 14, 2021 (the “Maturity Date”). On the Maturity Date, all amounts outstanding under
the Loan will become due and payable. The Lender may at any time demand repayment of the Loan in whole or in part, in which case
the Borrowers will be obligated to repay the Loan (or portion thereof for which repayment is demanded) within 30 days following
the date of demand. The Borrowers may prepay the Loan, in whole or in part, at any time without penalty or premium.
The
Loan bears interest at a rate equal to the prime rate plus a spread of 2.49%, adjusted quarterly. Accrued interest is payable
monthly, with the final installment of interest being due and payable on the Maturity Date. The Borrowers are also obligated to
pay a servicing fee, unused commitment fee and origination fee in connection with the Loan. The Company paid $0.2 million in interest
as of June 30, 2020.
The
Loan Agreement contains affirmative and negative covenants that include covenants restricting each Company’s ability to,
among other things, incur indebtedness, grant liens, dispose of assets, merge or consolidate, make investments, or enter into
restrictive agreements, subject to certain exceptions.
The
obligations of the Borrowers under the Loan Agreement are secured by substantially all of their respective assets, except for
accounts receivable and certain other specified excluded property.
The
Loan Agreement includes customary events of default that include among other things, non-payment defaults, covenant defaults,
inaccuracy of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults and change
in control defaults. Under certain circumstances, a default interest rate will apply on all obligations during the existence of
an event of default under the Loan Agreement at a per annum rate equal to 2.00% above the applicable interest rate.
In
connection with the Loan Agreement, the Company issued to the Lender a warrant to purchase up to 100,000 shares of the Company’s
common stock at an initial exercise price of $3.9425 per share (the “Warrant”). The Warrant expires on January
15, 2025. In connection with the issuance of the Warrant, the Company granted the Lender piggy-back registration rights with respect
to the shares of common stock issuable upon exercise of the Warrant, subject to certain exceptions.
On
January 16, 2020, in connection with the Company’s consummation of the Loan Agreement, Eastside repaid in full and terminated
the Secured Line of Credit Promissory Note that Eastside had issued to TQLA, LLC (“Holder”) on November 29,
2019 (the “TQLA Note”). Since Eastside repaid the TQLA Note in full prior to its maturity date, the Common
Stock Purchase Warrant that Eastside had issued to Holder on November 29, 2019 is not be exercisable and is cancelled. No prepayment
or early termination penalties were incurred by Eastside as a result of repaying the TQLA Note. In addition, Eastside repaid in
full and terminated the $3,000,000 credit and security agreement (the “Credit and Security Agreement”), by and between
the Company and The KFK Children’s Trust, Jeffrey Anderson – Trustee (the “Lender”). The Company paid
$27,015 in interest on the TQLA Note and $17,117 in interest on the Credit and Security Agreement during the first quarter of
2020.
On
May 13, 2020, Live Oak Banking Company (the “Lender”) notified the Company that it was in technical default
under certain covenants in a loan agreement, dated January 15, 2020, between the Company, Motherlode LLC, Big Bottom Distilling,
LLC, Craft Canning + Bottling LLC, Redneck Riviera Whiskey Co., LLC, Outlandish Beverages LLC, and Live Oak Bank (the “Loan
Agreement”). Those technical defaults included the failure to timely deliver information and its belief that we owe
certain taxes and did not relate to any failure to pay amounts owing under the Loan Agreement. The Loan Agreement provides that
upon an event of default, the Lender may, at its option, declare the entire loan to be immediately due and payable. Further, a
default interest rate may apply on all obligations during the existence of an event of default at a per annum rate equal to 2.00%
above the applicable interest rate. On June 3, 2020 the Company entered into a Second Modification to Loan Agreement (“Modification”)
with the Lender agreeing to waive the technical defaults upon the satisfaction of certain conditions by June 30, 2020. The Company
complied with these conditions and was compliant with the terms of the Loan Agreement and Modification as of August 13. 2020.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
12.
|
Commitments
and Contingencies
|
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, or legal proceedings we considered immaterial may in the future become material.
Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and divert management
resources.
13.
|
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 effect is anti-dilutive. There
were no dilutive common shares at June 30, 2020 and 2019. The numerators and denominators used in computing basic and diluted
net loss per common share in 2020 and 2019 are as follows:
|
|
Three months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net loss attributable to Eastside Distilling, Inc. common shareholders (numerator)
|
|
$
|
(2,186,415
|
)
|
|
$
|
(2,948,487
|
)
|
Weighted average shares (denominator)
|
|
|
9,983,564
|
|
|
|
9,143,755
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.32
|
)
|
|
|
Six months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net loss attributable to Eastside Distilling, Inc. common shareholders (numerator)
|
|
$
|
(5,694,964
|
)
|
|
$
|
(5,891,926
|
)
|
Weighted average shares (denominator)
|
|
|
9,868,708
|
|
|
|
9,104,593
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.58
|
)
|
|
$
|
(0.65
|
)
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance, December 31, 2019
|
|
|
9,675,028
|
|
|
$
|
967
|
|
|
$
|
51,566,438
|
|
|
$
|
(44,234,087
|
)
|
|
$
|
7,333,318
|
|
Issuance of common stock for services by third parties
|
|
|
129,740
|
|
|
|
13
|
|
|
|
182,043
|
|
|
|
-
|
|
|
|
182,056
|
|
Issuance of common stock for services by employees
|
|
|
212,270
|
|
|
|
21
|
|
|
|
363,360
|
|
|
|
-
|
|
|
|
363,381
|
|
Amortization of non-deal warrant grants
|
|
|
-
|
|
|
|
-
|
|
|
|
13,383
|
|
|
|
-
|
|
|
|
13,383
|
|
Issuance of warrants for secured credit facility
|
|
|
-
|
|
|
|
-
|
|
|
|
97,800
|
|
|
|
-
|
|
|
|
97,800
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
149,074
|
|
|
|
-
|
|
|
|
149,074
|
|
Net loss attributable to common shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,694,964
|
)
|
|
|
(5,694,964
|
)
|
Balance, June 30, 2020
|
|
|
10,017,038
|
|
|
$
|
1,001
|
|
|
$
|
52,372,098
|
|
|
$
|
(49,929,051
|
)
|
|
$
|
2,444,048
|
|
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
Issuance
of Common Stock
In
January 2020, the Company issued 90,798 shares of common stock to directors, employees and consultants for stock-based compensation
of $290,547. The shares were valued using the closing share price of our common stock on the date of grant of $3.20 per share.
On
April 6, 2020, the Company issued 216,363 shares of common stock under the 2016 Equity Incentive Plan to directors, employees
and consultants for stock-based compensation of $238,800. The shares were valued using the closing share price of the Company’s
common stock on the date of the grant, $1.10 per share.
On May 22, 2020, the Company issued
45,553 shares of common stock to consultants for stock-based compensation of $72,885. The shares were valued using the closing
share price of our common stock on the date of grant of $1.60 per share.
On May 28, 2020, 10,704 shares of common
stock were retired that had previously been issued to an employee. The shares were valued at the cost at the time of issuance,
ranging from $3.20 to $7.94.
Stock-Based
Compensation
On
September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). Pursuant to the terms of
the plan, on January 1, 2020, the number of shares available for grant under the 2016 Plan reset to 2,887,005 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, and then added to the prior year plan amount. As of June 30, 2020, there have been 640,825
options and 886,869 restricted stock units (“RSUs”) issued under the 2016 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 50,000 shares, subject to adjustment. The exercise
price per share of each stock option will not be less than 20 percent of the fair market value of the Company’s common stock
on the date of grant. At June 30, 2020, there were 5,417 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 that are not registered under a formal option plan. At June 30, 2020, there were
no options outstanding that were not issued under the Plans.
A
summary of all stock option activity at and for the six months ended June 30, 2020 is presented below:
|
|
# of Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding at December 31, 2019
|
|
|
784,101
|
|
|
$
|
5.65
|
|
Options granted
|
|
|
-
|
|
|
$
|
-
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
Options canceled
|
|
|
(218,001
|
)
|
|
$
|
6.76
|
|
Outstanding at June 30, 2020
|
|
|
568,600
|
|
|
$
|
5.22
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2020
|
|
|
420,225
|
|
|
$
|
5.03
|
|
The
aggregate intrinsic value of options outstanding at June 30, 2020 was $0.
At
June 30, 2020, there were 148,375 unvested options with an aggregate grant date fair value of $367,362. 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 June 30, 2020 was $0. During the six months ended
June 30, 2020, 34,889 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.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
To
determine the fair value of stock options using the Black-Scholes valuation model, the calculation takes into consideration the
effect of the following:
|
●
|
Exercise
price of the option
|
|
●
|
Fair
value of the Company’s common stock on the date of grant
|
|
●
|
Expected
term of the option
|
|
●
|
Expected
volatility over the expected term of the option
|
|
●
|
Risk-free
interest rate for the expected term of the option
|
The
calculation includes several assumptions that require management’s judgment. The expected term of the options is calculated
using the simplified method described in GAAP. The simplified method defines the expected term as the average of the contractual
term and the vesting period. Estimated volatility is derived from volatility calculated using historical closing prices of common
shares of similar entities whose share prices are publicly available for the expected term of the options. The risk-free interest
rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the options.
The
Company did not issue any additional options during the six months ended June 30, 2020.
For
the six months ended June 30, 2020 and 2019, total stock compensation expense related to stock options was $149,074 and $596,852,
respectively. At June 30, 2020, the total compensation cost related to stock options not yet recognized is approximately $367,362,
which is expected to be recognized over a weighted-average period of approximately 1.62 years.
Warrants
During
the six months ended June 30, 2020, the Company issued an aggregate of 100,000 common stock warrants in connection with the Secured
Credit Facility from Live Oak Bank. The estimated fair value of the warrants of $97,800 was recorded as debt issuance cost and
will be amortized to interest expense over the maturity period of the secured credit facility, with $48,900 recorded in
the six months ended June 30, 2020. Warrants issued to three shareholders during 2017 and 2018 vest quarterly for 3 years and
resulted in $13,383 worth of amortization expense for the six months ending June 30, 2020.
The
estimated fair value of the warrants at issuance was based on a combination of closing market trading price on the date of issuance
for the warrants, and the Black-Scholes option-pricing model using the weighted-average assumptions below:
Volatility
|
|
|
40
|
%
|
Risk-free interest rate
|
|
|
1.54
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
Expected dividend yield
|
|
|
-
|
|
Fair value of common stock
|
|
$
|
3.20
|
|
No
warrants were exercised during the six months ended June 30, 2020.
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, 2019
|
|
|
736,559
|
|
|
|
1.18 years
|
|
|
$
|
6.95
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
|
4.79 years
|
|
|
$
|
3.94
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
(556,281
|
)
|
|
|
0.53 years
|
|
|
$
|
7.51
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
280,278
|
|
|
|
2.84 years
|
|
|
$
|
4.76
|
|
|
$
|
-
|
|
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
15.
|
Related
Party Transactions
|
The
following is a description of transactions since January 1, 2019 as to which the amount involved exceeds the lesser of $120,000
or one percent (1%) of the average of our total assets at year-end for the last two completed fiscal years which was $311,118
and in which any related person has or will have a direct or indirect material interest, other than equity, compensation, termination
and other arrangements.
On
June 11, 2019, our Board appointed Owen Lingley to the Board to fill an existing vacancy on the Board effective immediately. Owen
Lingley is the founder of Craft Canning, LLC, which was acquired by the Company on January 11, 2019 and subsequently changed its
name to Craft Canning + Bottling LLC. In connection with the acquisition of Craft Canning, Mr. Lingley received $1,843,200 in
cash, 338,212 shares of common stock of the Company and a promissory note in the aggregate principal amount of $731,211, which
bears interest at a rate of 5% per annum and matures on January 11, 2022. The shares acquired by Mr. Lingley in connection with
the acquisition of Craft Canning are subject to a one-year lock-up restriction and have “piggyback” registration rights
effective after the one-year lock-up. Mr. Lingley resigned from the Board on November 18, 2019.
In
addition, the Company also issued to Mr. Lingley a warrant to purchase 146,262 shares of common stock of the Company at $7.80
per share and an exercise period of three years. The shares of common stock issuable upon exercise of the warrant will be subject
to the same “piggyback” registration rights as the shares received in connection with the acquisition of Craft Canning,
described above.
Following
the acquisition of Craft Canning, Mr. Lingley became non-executive Chairman of Craft Canning and was party to a consulting agreement
with the Company. Under his consulting agreement with the Company, Mr. Lingley was to receive annual cash compensation of $75,000
per year. Mr. Lingley resigned as non-executive Chairman of Craft Canning in January 2020, and under the terms of his consulting
agreement 146,262 warrants were cancelled.
On
October 24, 2019, our Board appointed Stephanie Kilkenny to the Board to fill an existing vacancy on the Board effective immediately.
Mrs. Kilkenny was the former managing director of Azuñia Tequila, and together with her spouse, owns and controls TQLA,
LLC (“TQLA”), the majority owner of Intersect Beverage, LLC. In connection with the acquisition of Azuñia Tequila
from Intersect Beverage, LLC, TQLA is entitled to receive up to 93.88% of the aggregate consideration payable under the asset
purchase agreement. Subject to compliance with applicable Nasdaq rules, the aggregate initial consideration will be
payable approximately 18 months following the closing and will consist of 850,000 shares of Company common stock at a stipulated
value of $6.00 per share, 350,000 shares of Company common stock based on the Company’s stock price twelve months after
the close of the transaction, and additional shares based on the Azuñia business achieving certain revenue targets and
the Company’s stock price 18 months after the close of the transaction. The Company has also agreed to issue additional
stock consideration (subject to compliance with applicable Nasdaq rules) of up to $1.5 million upon the Azuñia business
achieving revenue of at least $9.45 million in the period commencing on the 13th month following the closing and ending on the
24th month following the closing.
In
addition, on September 16, 2019, the Company entered into a Subscription Agreement with Stephanie Kilkenny’s spouse, Patrick
J. Kilkenny as Trustee For Patrick J. Kilkenny Revocable Trust (the “Kilkenny Trust”), in reliance on the exemption
from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated thereunder, pursuant to which
the Company agreed to issue and sell to the Kilkenny Trust an aggregate of 55,555 units at a per unit price of $4.50. Each unit
consists of one share of the Company’s common stock and a three-year warrant to acquire 0.5 shares of common stock at an
exercise price of $5.50 per share.
Effective
November 29, 2019, the Company issued to TQLA, LLC, a California limited liability company (“Holder”), a Secured Line
of Credit Promissory Note (the “Note”) for a revolving line of credit in the aggregate principal amount of $2,000,000.
The Note matures on April 15, 2020 and may be prepaid in whole or in part at any time without penalty or premium. Repayment of
the Note is subject to acceleration in the event of an event of default. The Company may use the proceeds to purchase tequila
for its Azuñia product line and for general corporate purposes, as approved by the Holder. As of December 31, 2019, the
Company has borrowed $946,640 on the Note. Stephanie Kilkenny, a director of the Company, owns and controls TQLA, LLC with her
spouse. The Company’s Audit Committee approved the transaction. The Note was paid in full in January 2020.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
June
30, 2020
(Unaudited)
We
believe that the foregoing transactions were in our best interests. Consistent with Section 78.140 of the Nevada Revised Statutes,
it is our current policy that all transactions between us and our officers, directors and their affiliates will be entered into
only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders,
or are fair to us as a corporation as of the time it is authorized, approved or ratified by the Board. We will continue to conduct
an appropriate review of all related party transactions and potential conflicts of interest on an ongoing basis. Our audit committee
has the authority and responsibility to review, approve and oversee any transaction between the Company and any related person
and any other potential conflict of interest situation on an ongoing basis, in accordance with Company policies and procedures
in effect from time to time.
On
July 18, 2020, the Company issued 44,501 shares of common stock under the 2016 Plan to directors, employees and consultants for
stock-based compensation of $86,500. The shares were valued using the closing share price of the Company’s common stock
on the date of the grant, $1.18 per share.