Notes
to Condensed Consolidated Financial Statements
September
30, 2020
(Unaudited)
1.
|
Description
of Business
|
Eastside
Distilling (the “Company,” “Eastside,” “Eastside Distilling,”, below) was incorporated under
the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, the Company changed its corporate
name to Eastside Distilling, Inc. to reflect its acquisition of Eastside Distilling, LLC. Eastside Distilling is a manufacturer
and marketer of nationally recognized alcoholic beverage brand and as Craft Canning + Bottling the West coast leader in premier
mobile packaging. The Company currently employs 82 people in the United States.
The
Company manufactures, acquires, blends, bottles, imports and
markets a wide variety of crafts spirits and cocktails under recognized brands which the Company sells on a wholesale
basis to distributors. The Company’s portfolio consists of high-growth alcoholic beverage products complemented by
high-end, luxury spirits, including bourbon, American whiskey, vodka, gin, rum, tequila and cocktails. In addition, the Company
specializes in mobile canning and independent bottling of spirits.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
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 $7.5 million for the nine months ended September 30, 2020 and has an
accumulated deficit of $51.7 million as of September 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 nine months ended September 30, 2020, the Company raised approximately $3.2 million in additional capital through debt
financing (net of repayments).
At
September 30, 2020, the Company had $1 million of cash on hand with a negative working capital of $16.6 million. The
Company’s ability to meet its ongoing operating cash needs over the next 12 months depends on reducing its
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. The Company intend
to implement actions to improve profitability by managing expenses while continuing to increase sales. See Notes 10 and 11 to
the financial statements for a description of our debt and the debt refinancing initiatives completed in the first half
of 2020. If the Company is unable to obtain additional financing, or additional financing is not available on acceptable
terms, it may seek to sell assets, reduce operating expenses or reduce or eliminate marketing initiatives, and take other
measures that could impair its ability to be successful.
Although
the Company’s audited financial statements for the year ended December 31, 2019 were prepared under the assumption
that the Company would continue its 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 the Company’s ability to continue as a going concern, based
on the financial statements at that time. Specifically, as noted above, the Company has incurred operating losses since
our inception, and even though the Company has reduced its operating expenses and increased its available
capacity under its lines of credit, and has large inventory balances from which to draw, the Company expects
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 the Company’s financial condition. If the
Company cannot continue as a going concern, its 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 management’s 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 the Company’s financial position as of September 30, 2020, its operating results for the
nine months ended September 30, 2020 and 2019 and its cash flows for the nine months ended September 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
September
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 $0.7 million and $0.4 million for the nine months ended September
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 $0.2
million for the nine months ended September 30, 2020 and 2019, respectively.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
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, 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 $3.7 million and $4.4 million for the nine months ended September 30, 2020 and 2019,
respectively.
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 $6.9 million and $8.6 million for the nine months ended September 30,
2020 and 2019, respectively, of which $2.7 million and $2.4 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 $0.9 and $1.3
million for the nine months ended September 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 sales 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 period, 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 period
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
September
30, 2020
(Unaudited)
Income
and expense related to discontinued retail operations for the nine months ended September 30, 2020 and 2019:
|
|
September
30,
2020
|
|
|
September
30,
2019
|
|
Sales
|
|
$
|
148,490
|
|
|
$
|
711,616
|
|
Less customer
programs and excise taxes
|
|
|
46,342
|
|
|
|
266,785
|
|
Net sales
|
|
|
102,148
|
|
|
|
444,831
|
|
Cost of sales
|
|
|
64,101
|
|
|
|
213,485
|
|
Gross profit
|
|
|
38,047
|
|
|
|
231,346
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
expenses
|
|
|
2,534
|
|
|
|
21,670
|
|
General and administrative
expenses
|
|
|
168,299
|
|
|
|
546,788
|
|
Loss
on disposal of property and equipment
|
|
|
75,829
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
246,662
|
|
|
|
568,458
|
|
Loss from operations
|
|
|
(208,615
|
)
|
|
|
(337,112
|
)
|
Assets
and liabilities related to discontinued retail operations
|
|
September
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 assets
|
|
|
103,476
|
|
|
|
164,952
|
|
Other assets
|
|
|
3,189
|
|
|
|
10,855
|
|
Total Assets
|
|
$
|
106,665
|
|
|
$
|
336,758
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
(12,748
|
)
|
|
$
|
56,241
|
|
Accrued liabilities
|
|
|
-
|
|
|
|
7,763
|
|
Deferred revenue
|
|
|
-
|
|
|
|
1,734
|
|
Current
portion of lease liability
|
|
|
30,003
|
|
|
|
59,540
|
|
Total current liabilities
|
|
|
17,255
|
|
|
|
125,278
|
|
Lease Liability
- less current portion
|
|
|
78,658
|
|
|
|
112,760
|
|
Total liabilities
|
|
$
|
95,913
|
|
|
$
|
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 September 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 September
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
September
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 September 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 September 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 nine months ended September 30, 2020 and no write-downs of inventory for the nine
months ended September 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 September 30, 2020 and determined that goodwill was not impaired.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
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 September 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 nine months ended September 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 nine months ended September 30, 2020 and 2019.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
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 $6.7 million of invoices
and incurred $0.14 million in fees associated with the factoring programs during the nine months ended September 30, 2020. At
September 30, 2020, the Company had $0.9 million factored invoices outstanding.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
30, 2020
(Unaudited)
Recently
Adopted Accounting Pronouncements
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
September
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 nine months
ended September 30, 2020 include Craft Canning’s results of operations. For the nine months ended September 30, 2019, Craft
Canning’s results of operations are included from the acquisition date of January 11, 2019 through September 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
allocation of the purchase price is as follows:
Consideration given:
|
|
|
|
338,212 shares of common
stock valued at $6.15 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 nine months ended September 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 the Company’s consolidated financial statements from the date of acquisition through September 30, 2020. The revenue
and net profit of Craft operations included in our condensed consolidated statements of operations were $6.7 million and $0.7
million, for the nine months ended September 30, 2020. The revenue and net income (including transaction costs) of Craft operations
included in the Company’s condensed consolidated statements of operations were $5.9 million and $0.5 million for
the period from January 11, 2019 through September 30, 2019.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
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 nine months ended September 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 nine-month period ended September 30, 2020.
The
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 the Company’s consolidated financial statements
for the nine months ended September 30, 2020. The sales of Azuñia Tequila products included in the Company’s
condensed consolidated statements of operations were $2.4 million for the nine months ended September 30, 2020.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
30, 2020
(Unaudited)
Pro
Forma Financial Information
The
following unaudited pro forma consolidated results of operations for the nine months ended September 30, 2019 assume that both
acquisitions of Craft Canning + Bottling and Azuñia Tequila were completed on January 1, 2019:
|
|
2019
|
|
Pro forma sales
|
|
$
|
14,536,214
|
|
Pro forma net
loss
|
|
|
(9,766,420
|
)
|
Pro forma basic
and diluted net loss per share
|
|
$
|
(0.82
|
)
|
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)
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Raw materials
|
|
$
|
8,677
|
|
|
$
|
9,336
|
|
Finished goods
|
|
|
1,648
|
|
|
|
2,995
|
|
Total inventories
|
|
$
|
10,325
|
|
|
$
|
12,331
|
|
6.
|
Property
and Equipment
|
Property
and equipment consist of the following:
(Dollars
in thousands)
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Furniture and fixtures
|
|
$
|
4,369
|
|
|
$
|
4,464
|
|
Leasehold improvements
|
|
|
1,640
|
|
|
|
1,654
|
|
Vehicles
|
|
|
779
|
|
|
|
690
|
|
Construction
in progress
|
|
|
53
|
|
|
|
98
|
|
Total cost
|
|
|
6,841
|
|
|
|
6,906
|
|
Less accumulated
depreciation
|
|
|
(3,474
|
)
|
|
|
(2,219
|
)
|
Property and
equipment - net
|
|
$
|
3,367
|
|
|
$
|
4,687
|
|
Purchases
of property and equipment totaled $0.4 million and $2.3 million for the nine months ended September 30, 2020 and September 30,
2019, respectively. Depreciation expense totaled $1.4 million and $0.6 million for the nine months ended September 30, 2020 and
September 30, 2019, respectively. Gain on disposal of fixed assets totaled $0.1 for the nine months ended September 30, 2020 compared
to nil for the same period last year.
7.
|
Intangible
Assets and Goodwill
|
Intangible
assets and goodwill at September 30, 2020 and December 31, 2019 consist of the following:
(Dollars
in thousands)
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Permits and licenses
|
|
$
|
25
|
|
|
$
|
25
|
|
Azuñia brand
|
|
|
11,945
|
|
|
|
11,945
|
|
Customer lists
|
|
|
2,896
|
|
|
|
3,247
|
|
Goodwill
|
|
|
28
|
|
|
|
28
|
|
Total intangible assets and goodwill
|
|
|
14,894
|
|
|
|
15,245
|
|
Less accumulated
amortization
|
|
|
(724
|
)
|
|
|
(542
|
)
|
Intangible assets
and goodwill - net
|
|
$
|
14,170
|
|
|
|
14,703
|
|
Amortization
expense totaled $0.4 million and $0.5 million for the nine months ended September 30, 2020 and September 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 lists are being amortized over a seven-year life. In the third quarter of 2020 it was determined that
the customer list associated with the MotherLode, LLC acquisition no longer had value and was written off. The net value of the
MotherLode, LLC customer list at the time of the write down was $176,971.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
30, 2020
(Unaudited)
Other
assets consist of the following:
(Dollars
in thousands)
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Product branding
|
|
$
|
949
|
|
|
$
|
809
|
|
Notes receivable
|
|
|
-
|
|
|
|
450
|
|
Deposits
|
|
|
60
|
|
|
|
43
|
|
Total other assets
|
|
|
1,009
|
|
|
|
1,302
|
|
Less accumulated
amortization
|
|
|
(219
|
)
|
|
|
(136
|
)
|
Other assets
- net
|
|
$
|
790
|
|
|
$
|
1,166
|
|
As
of September 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 $0.08 million and $0.05 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.
In
September 2020, the Company had received the remaining balance of the notes receivable from Wineonline.com.
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 2025. The Company determines if an arrangement is a lease at inception. The Company does
not currently have any finance leases. 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. Right-of-use
assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
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. In September 2020, the Company entered into two new lease agreements
for canning and bottling production facilities in Seattle and Denver. Both leases contain fixed payments that increase over the
term of their respective agreement. As of September 30, 2020, the amount of right-of-use assets and lease liabilities were
both $1.4 million. Aggregate lease expense for the nine months ended September 30, 2020 was $0.5 million, consisting of
$0.4 million in operating lease expense for lease liabilities and $0.1 million in short-term lease cost.
Maturities
of lease liabilities as of September 30, 2020 are as follows:
|
|
Operating
Leases
|
|
|
Weighted-
Average Remaining Term in Years
|
|
2020
|
|
$
|
158,821
|
|
|
|
|
|
2021
|
|
|
580,380
|
|
|
|
|
|
2022
|
|
|
353,509
|
|
|
|
|
|
2023
|
|
|
266,045
|
|
|
|
|
|
Thereafter
|
|
|
250,798
|
|
|
|
|
|
Total lease payments
|
|
|
1,609,553
|
|
|
|
|
|
Less imputed interest
(based on 6.6% weighted- average discount rate
|
|
|
(184,796
|
)
|
|
|
|
|
Present value
of lease liability
|
|
$
|
1,424,757
|
|
|
|
3.4
|
|
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
30, 2020
(Unaudited)
Notes
payable consists of the following:
|
|
September
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.
|
|
|
1,049,317
|
|
|
|
-
|
|
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.
|
|
|
395,437
|
|
|
|
-
|
|
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.
|
|
|
125,000
|
|
|
|
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.
|
|
|
367,138
|
|
|
|
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.
|
|
|
141,362
|
|
|
|
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 September 30, 2020.
|
|
|
189,045
|
|
|
|
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.
|
|
|
155,728
|
|
|
|
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.
|
|
|
239,979
|
|
|
|
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.
|
|
|
254,100
|
|
|
|
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.
The Note was paid in full in July 2020.
|
|
|
-
|
|
|
|
10,390
|
|
Total notes payable
|
|
|
5,358,106
|
|
|
|
5,413,426
|
|
Less current portion
|
|
|
(4,010,887
|
)
|
|
|
(1,819,172
|
)
|
Long-term portion
of notes payable
|
|
$
|
1,347,219
|
|
|
$
|
3,594,254
|
|
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
30, 2020
(Unaudited)
The
Company paid $0.2 million and $0.1 million in interest on notes for the nine months ended September 30, 2020 and 2019, respectively.
Maturities
on notes payable as of September 30, 2020, are as follows:
Year
ending December 31:
2020
|
|
$
|
503,689
|
|
2021
|
|
|
4,079,584
|
|
2022
|
|
|
701,242
|
|
Thereafter
|
|
|
323,591
|
|
|
|
$
|
5,608,106
|
|
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 $0.3 million in interest
as of September 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 the Company owed 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 September 30, 2020. The
Company complied with these conditions and was compliant with the terms of the Loan Agreement and Modification as of November
12, 2020.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
30, 2020
(Unaudited)
12.
|
Commitments
and Contingencies
|
Legal
Matters
The
Company is not currently subject to any material legal proceedings;
however, it could be subject to legal proceedings and claims from time to time in the ordinary course of its business,
or legal proceedings it considered immaterial may in the future become material. Regardless of the outcome, litigation
can, among other things, be time consuming and expensive to resolve, and can divert management resources.
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 September 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 September 30
|
|
|
|
2020
|
|
|
2019
|
|
Net loss attributable to
Eastside Distilling, Inc. common shareholders (numerator)
|
|
$
|
(1,767,021
|
)
|
|
$
|
(3,544,357
|
)
|
Weighted average
shares (denominator)
|
|
|
10,103,936
|
|
|
|
9,255,347
|
|
Basic and
diluted net loss per common share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.38
|
)
|
|
|
Nine
months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net loss attributable to
Eastside Distilling, Inc. common shareholders (numerator)
|
|
$
|
(7,461,985
|
)
|
|
$
|
(9,436,225
|
)
|
Weighted average
shares (denominator)
|
|
|
9,947,208
|
|
|
|
9,155,397
|
|
Basic and
diluted net loss per common share
|
|
$
|
(0.75
|
)
|
|
$
|
(1.03
|
)
|
|
|
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
|
|
|
170,944
|
|
|
|
17
|
|
|
|
234,039
|
|
|
|
-
|
|
|
|
234,056
|
|
Issuance of common stock for services
by employees
|
|
|
303,280
|
|
|
|
30
|
|
|
|
468,132
|
|
|
|
-
|
|
|
|
468,162
|
|
Amortization of non-deal warrant grants
|
|
|
-
|
|
|
|
-
|
|
|
|
18,791
|
|
|
|
-
|
|
|
|
18,791
|
|
Issuance of warrants for secured credit
facility
|
|
|
-
|
|
|
|
-
|
|
|
|
97,800
|
|
|
|
-
|
|
|
|
97,800
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
223,816
|
|
|
|
-
|
|
|
|
223,816
|
|
Net loss attributable
to common shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,461,985
|
)
|
|
|
(7,461,985
|
)
|
Balance, September
30, 2020
|
|
|
10,149,252
|
|
|
$
|
1,014
|
|
|
$
|
52,609,016
|
|
|
$
|
(51,696,072
|
)
|
|
$
|
913,958
|
|
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
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.
On
July 17, 2020, the Company issued 73,010 shares of common stock under the 2016 Equity Incentive Plan to directors and employees
for stock-based compensation of $87,000. The shares were valued using the closing share price of the Company’s common stock
on the date of the grant, $1.08 per share.
On
July 24, 2020, the Company issued 19,955 shares of common stock under the 2016 Equity Incentive Plan to employees for stock-based
compensation of $38,125. The shares were valued using the closing share price of the Company’s common stock on the date
of the grant, $1.22 per share.
On
August 21, 2020, the Company issued 19,955 shares of common stock under the 2016 Equity Incentive Plan to employees for stock-based
compensation of $43,125. The shares were valued using the closing share price of the Company’s common stock on the date
of the grant, $1.38 per share.
On
September 8, 2020, the Company issued 19,294 shares of common stock under the 2016 Equity Incentive Plan to employees for stock-based
compensation of $42,188. The shares were valued using the closing share price of the Company’s common stock on the date
of the grant, $1.35 per share.
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 September 30, 2020, there have been 640,825
options and 1,061,174 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 September 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 September 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 nine months ended September 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 September 30, 2020
|
|
|
566,100
|
|
|
$
|
5.22
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2020
|
|
|
454,767
|
|
|
$
|
5.05
|
|
The
aggregate intrinsic value of options outstanding at September 30, 2020 was $0.
At
September 30, 2020, there were 113,833 unvested options with an aggregate grant date fair value of $278,660. 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 September 30, 2020 was $0. During the nine
months ended September 30, 2020, 69,431 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
September
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 nine months ended September 30, 2020.
For
the nine months ended September 30, 2020 and 2019, total stock compensation expense related to stock options was $223,816 and
$596,852, respectively. At September 30, 2020, the total compensation cost related to stock options not yet recognized is approximately
$935,755, which is expected to be recognized over a weighted-average period of approximately 2.11 years.
Warrants
During
the nine months ended September 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 $73,350 recorded
in the nine months ended September 30, 2020. Warrants issued to three shareholders during 2017 and 2018 vest quarterly for 3 years
and resulted in $18,791 worth of amortization expense for the nine months ending September 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 nine months ended September 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
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
|
4.79
years
|
|
|
$
|
3.94
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited and
cancelled
|
|
|
(556,281
|
)
|
|
|
0.53
years
|
|
|
$
|
7.51
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
280,278
|
|
|
|
2.84
years
|
|
|
$
|
4.76
|
|
|
$
|
-
|
|
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
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, the Company’s 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, the Company’s 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 had 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.
In
August 2020, the Company entered into discussions with Intersect Beverage, LLC (“Intersect”) and TQLA, LLC to address
potential changes to the deferred consideration for the Azuñia acquisition and received a deposit of $250,000 in cash.
No assurances can be given the discussions with Intersect will lead to a final agreement in which case the Company would have
to return the cash deposit.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
September
30, 2020
(Unaudited)
The
Company believes that the foregoing transactions were in its
best interests. Consistent with Section 78.140 of the Nevada Revised Statutes, it is the Company’s current policy
that all transactions between it and its 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 the Company as a corporation as of the time it is authorized, approved or ratified by the Board. The Company
will continue to conduct an appropriate review of all related party transactions and potential conflicts of interest on an ongoing
basis. The Company’s 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
October 29, 2020, the Company announced its intent to divest its Redneck Riviera Spirits business. The Company signed a non-binding
term sheet between Eastside and Rich Marks, LLC, Redneck Riviera Whiskey Co, LLC, John D. Rich Tisa Trust and Redneck Spirits
Group, LLC (collectively the buyers referred to as “RSG”). RSG will pay a termination fee as well as purchase certain
assets from the Company which could include raw materials and finished goods. The total consideration is estimated to be $8.1
million inclusive of a $3 million dollar termination fee and the remainder of proceeds from selling RSG raw materials and finished
goods. The divesture is subject to negotiation and execution of definitive agreements.
In
November 2020, Intersect Beverage, LLC (“Intersect”) and TQLA, LLC (“TQLA”) sent the Company a second
deposit bringing the total outstanding amount deposited to $500,000. No assurances can be given the Company’s discussions
with Intersect and TQLA will lead to a final agreement to change the deferred consideration for the Azuñia acquisition,
nor that the deposits will be applied to that Agreement. If the Company is unable to reach a satisfactory agreement with Intersect
and TQLA it would be required to return the cash deposit.
On
October 31, 2020, the Company consolidated its headquarters with the Craft Canning + Bottling office and operating facility in
Portland, Oregon.