Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
1.
Description of Business
Eastside
Distilling (the “Company” or “Eastside Distilling”) was incorporated under the laws of Nevada in 2004 under the
name of Eurocan Holdings, Ltd. In December 2014, the Company changed its corporate name to Eastside Distilling, Inc. to reflect the acquisition
of Eastside Distilling, LLC. The Company manufactures, acquires, blends, bottles, imports, markets and sells a wide variety
of alcoholic beverages under recognized brands. The Company currently employs 69 people in the United States.
The
Company’s spirits’ brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila. The
Company sells products on a wholesale basis to distributors in open states and brokers in control states.
The
Company operates a mobile craft canning business that primarily services the craft beer and craft cider industries. During 2022, the
Company made substantial investments to expand its product offerings to include digital can printing activities in the Pacific
Northwest (together Craft Canning + Printing, “Craft C+P”). Craft C+P operates 14 mobile filling lines in Seattle,
Washington; Spokane, Washington; Portland, Oregon; and Denver, Colorado. The Company now offers co-packing services in Portland,
Oregon through its recent asset acquisition, allowing it to offer end-to-end production capabilities.
2.
Liquidity
The
Company’s primary capital requirements are for cash used in operating activities and the repayment of debt. Funds for the Company’s
cash and liquidity needs have historically not been generated from operations but rather from loans as well as from convertible debt
and equity financings. The Company has been dependent on raising capital from debt and equity financings to meet the Company’s
operating needs.
The
Company had an accumulated deficit of $62.5
million as of June 30, 2022, having incurred
a net loss of $3.8 million
during the six months ended June 30, 2022. The net loss, combined with a reclassification from current assets to equipment of $4.3 million
in prepayments related to the digital can printer, resulted in a $6.3 million reduction in working capital.
During the six months ended June 30, 2022, the Company raised $3.0
million in additional capital through debt financing. The Company’s ability to meet its ongoing operating cash needs over the
next 12 months depends on growing revenues and gross margins, and generating positive operating cash flow primarily through
increased sales, improved profit growth, and controlling expenses. If the Company is unable to obtain additional financing, or
additional financing is not available on acceptable terms, the Company may seek to sell assets, reduce operating expenses, 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, 2021 were prepared under the assumption that it would
continue operations as a going concern, the report of its independent registered public accounting firm that accompanied the financial
statements for the year ended December 31, 2021 contained a going concern explanatory paragraph in which such firm expressed substantial
doubt about the Company’s ability to continue as a going concern, based on the financial statements at that time. If the Company
cannot continue as a going concern, its stockholders would likely lose most or all of their investment in it.
3.
Summary of Significant Accounting Policies
Basis
of Presentation and Consolidation
The
accompanying unaudited consolidated financial statements for Eastside Distilling, Inc. and subsidiaries were prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information
and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain
information and footnote disclosures normally included in financial statements in accordance with GAAP have been condensed or
eliminated as permitted under the SEC’s rules and regulations. In management’s opinion, the unaudited consolidated
financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present
fairly the Company’s financial position as of June 30, 2022, its operating results for the three and six months ended June 30,
2022 and 2021 and its cash flows for the six months ended June 30, 2022 and 2021. The unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2021. Interim results are not necessarily indicative of the results that may be expected
for an entire fiscal year. The consolidated financial statements include the accounts of Eastside Distilling, Inc.’s
wholly-owned subsidiaries, including, MotherLode LLC, Redneck Riviera Whiskey Co., LLC (a discontinued operation), Craft Canning +
Bottling, LLC (doing business as Craft Canning + Printing) and its wholly-owned subsidiary Galactic Unicorn Packaging LLC (the
Company’s newly acquired fixed co-packing assets) and the Azuñia tequila assets. All intercompany balances and
transactions have been eliminated on consolidation.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
Use
of Estimates
The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue
Recognition
Net
sales include product sales, less excise taxes and customer programs and incentives. The Company recognizes revenue by applying the following
steps in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers:
(1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation
is satisfied.
The
Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment
sale). For consignment sales, which include sales to the Oregon Liquor Control Commission, the Company recognizes sales upon the consignee’s
shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related
merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment or purchase
by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s shipment
to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary
rights of return.
Customer
Programs
Customer
programs, which include customer promotional discount programs, are a common practice in the alcoholic beverage industry. The Company
reimburses wholesalers for an agreed amount to promote sales of products and to maintain competitive pricing. Amounts paid in connection
with customer programs are recorded as reductions to net sales in accordance with ASC 606 - Revenue from Contracts with Customers.
Amounts paid in customer programs totaled $0.1 million and $0.2 million for the six months ended June 30, 2022 and 2021, 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 alcoholic beverages in varying amounts. The Company calculates its excise tax expense based upon
units produced and on its understanding of the applicable excise tax laws. Excise taxes totaled $0.2
million and $0.1 million for the six months ended June 30, 2022 and 2021, respectively.
Cost
of Sales
Cost
of sales consists of all direct costs related to both spirits and canning for service, labor, overhead, packaging, and in-bound freight
charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
Sales
and Marketing Expenses
Sales
and marketing expenses consist of sponsorships, agency fees, social media, salary and benefit expenses, travel and entertainment expenses.
Sales and marketing costs are expensed as incurred. Advertising and marketing expenses totaled $0.4 million and $0.5 million for the
six months ended June 30, 2022 and 2021, respectively.
General
and Administrative Expenses
General
and administrative expenses consist of salary and benefit expenses, travel and entertainment expenses for executive and administrative
staff, rent and utilities, professional fees, insurance, and amortization and depreciation expense. General and administrative costs
are expensed as incurred.
Stock-Based
Compensation
The
Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the
grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally
the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates
the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected
terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded
at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying
stock-based awards vest.
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of June
30, 2022, two distributors represented 23% of trade receivables. As of December 31, 2021, four wholesale customers represented 42% of
trade receivables. Sales to one distributor and one wholesale customer accounted for 49% of consolidated sales for the six months ended
June 30, 2022. Sales to two distributors accounted for 24% of consolidated sales for the six months ended June 30, 2021.
Fair
Value Measurements
GAAP
defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements.
GAAP permits an entity to choose to measure many financial instruments and certain other items at fair value and contains financial statement
presentation and disclosure requirements for assets and liabilities for which the fair value option is elected. As of June 30, 2022 and
December 31, 2021, management has not elected to report any of the Company’s assets or liabilities at fair value under the “fair
value option” provided by GAAP.
The
hierarchy of fair value valuation techniques under GAAP provides for three levels: Level 1 provides the most reliable measure of fair
value, whereas Level 3, if applicable, generally would require significant management judgment. The three levels for categorizing assets
and liabilities under GAAP’s fair value measurement requirements are as follows:
| |
Level
1: |
Fair
value of the asset or liability is determined using cash or unadjusted quoted prices in active markets for identical assets or liabilities. |
| |
|
|
| |
Level
2: |
Fair
value of the asset or liability is determined using inputs other than quoted prices that are observable for the applicable asset
or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in
active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
| |
|
|
| |
Level
3: |
Fair
value of the asset or liability is determined using unobservable inputs that are significant to the fair value measurement and reflect
management’s own assumptions regarding the applicable asset or liability. |
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
None
of the Company’s assets or liabilities were measured at fair value as of June 30, 2022 or December 31, 2021. However, GAAP requires
the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments consist
principally of trade receivables, accounts payable, accrued liabilities, notes payable, and the secured credit facilities. The estimated
fair value of trade receivables, accounts payable, and accrued liabilities approximate their carrying value due to the short period of
time to their maturities. As of June 30, 2022 and December 31, 2021, the principal amounts of the Company’s notes approximate fair
value.
Items
Measured at Fair Value on a Nonrecurring Basis
Certain
assets and liabilities acquired in a business acquisition are valued at fair value at the date of acquisition due to having indefinite
lives. The Company, on an annual basis, tests the indefinite life assets for impairment. If an indefinite life asset is found to be impaired,
then the Company will estimate its useful life and amortize the asset over the remainder of its useful life.
Inventories
Inventories
primarily consist of bulk and bottled liquor and raw materials and are stated at the lower of cost or market. Cost is determined using
an average costing methodology, which approximates cost under the first-in, first-out (“FIFO”) method. A portion of the Company’s
finished goods inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly
monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s
estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related
inventory.
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, ranging from three to seven years. Amortization of leasehold improvements is computed
using the straight-line method over the life of the lease or the useful lives of the assets, whichever is shorter. The cost and related
accumulated depreciation and amortization of property and equipment sold or otherwise disposed of are removed from the accounts and any
gain or loss is reported as current period income or expense. The costs of repairs and maintenance are expensed as incurred.
Intangible
Assets / Goodwill
The
Company accounts for certain intangible assets at cost. Management reviews these intangible assets for probable impairment whenever events
or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management
would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset
and its eventual disposition. If these estimated cash flows were less than the carrying amount, an impairment loss would be recognized
to write down the asset to its estimated fair value. The Company performed a qualitative assessment of certain of its intangible assets
as of June 30, 2022 and determined that they were not impaired.
Long-lived
Assets
The
Company accounts for long-lived assets, including certain intangible assets, at amortized cost. Management reviews long-lived assets
for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If
there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying
amount of the asset, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed
a qualitative assessment of certain of its long-lived assets as of June 30, 2022 and determined that they were not impaired.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
Comprehensive
Income
The
Company did not have any other comprehensive income items for the six months ended June 30, 2022 and 2021.
Accounts
Receivable Factoring Program
During
2021, the Company participated in 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 $0.5 million 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 Topic 860 – Transfers and Servicing, the Company has concluded that these
agreements have met all three conditions identified in ASC Topic 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. In December 2021, the agreement with the co-packing
program expired. The agreement with the spirits program had a zero balance as of June 30, 2022.
Reclassification
of Prior Year Presentation
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on
the reported results of operations.
Recently
Adopted Accounting Pronouncements
In
October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08,
Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, (“ASU 2021-08”) which requires
an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic
606, Revenue Recognition. This ASU is effective for annual and interim periods beginning after December 15, 2022. Early adoption
is permitted. The Company is currently evaluating the effect that ASU 2021-08 will have on its consolidated financial statements and
related disclosures.
In
August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,
(“ASU 2020-06”) which simplifies the accounting for convertible instruments by eliminating the beneficial conversion feature
and cash conversion models. Certain convertible instruments will be accounted for as a single unit of account, unless the conversion
feature requires bifurcation and recognition as a derivative. Additionally, this ASU simplifies the earnings per share calculation, by
eliminating the treasury stock method and requiring entities to use the if-converted method. This guidance is effective for annual periods
beginning after December 31, 2021 with early adoption permitted. The Company early adopted ASU 2020-06 for the year ended December 31,
2021.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”).
The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit
losses and will apply to trade receivables. The new guidance will be effective for the Company’s annual and interim periods beginning
after December 15, 2022. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial
statements.
4.
Discontinued Operations
The
Company reports discontinued operations by applying the following criteria in accordance with ASC Topic 205-20, Presentation of Financial
Statements – Discontinued Operations: (1) Component of an entity; (2) Held for sale criteria; and (3) Strategic shift.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
On
December 31, 2019, management made a strategic shift to focus the Company’s sales and marketing efforts on the nationally branded
product platform, resulting in the decision to close all four of its retail stores in the Portland, Oregon area. The retail stores were
closed or abandoned by March 31, 2020.
On
February 2, 2021, Redneck Riviera Whiskey Co, LLC (“RRWC”) entered into a Termination and Inventory Purchase Agreement (the
“Termination Agreement”) with Rich Marks, LLC, John D. Rich Tisa Trust and Redneck Spirits Group, LLC (collectively the buyers
referred to as “RSG”), pursuant to which, on February 5, 2021, RRWC sold all of its inventory of Redneck Riviera, Granny
Rich, and Howdy Dew distilled spirits products, including finished goods, raw materials, and barrel inventory, as well as all assignable
certificates of label approval/exemption, branding, permits, and registrations relating thereto, for $4.7 million. In addition, the Company
terminated its Amended and Restated License Agreement (the “License Agreement”) dated May 31, 2018 by and among Eastside,
RRWC, Rich Marks, LLC, and John D. Rich TISA Trust U/A/D March 27, 2018, Dwight P. Miles, Trustee in exchange for $3.0 million. In connection
with the Termination Agreement, the Company entered into a Supplier Agreement dated as of February 2, 2021 with RSG, pursuant to which
the Company will produce certain products and perform specified services for RSG for a six (6) month period on the terms and conditions
set forth in the Supplier Agreement. The Company did not incur any penalties as a result of the termination of the License Agreement.
For
the six months ended June 30, 2021, the revenue, expenses and cash flows from retail operations and the RRWC business have been classified
as discontinued operations separately from continuing operations. As of December 31, 2021, there were no assets and liabilities related
to discontinued retail operations and the Redneck Riviera Spirits business.
Income
and expense related to discontinued retail operations and the Redneck Riviera Spirits business were as follows for the six months ended
June 30, 2022 and 2021:
Schedule of Discontinued
Retail Operations
| | |
| | | |
| | |
| (Dollars in
thousands) | |
2022 | | |
2021 | |
| | |
(Unaudited) | | |
(Unaudited) | |
| Sales | |
$ | - | | |
$ | 283 | |
| Less
customer programs and excise taxes | |
| - | | |
| 26 | |
| Net sales | |
| - | | |
| 257 | |
| Cost of sales | |
| - | | |
| 160 | |
| Gross
profit | |
| - | | |
| 97 | |
| Operating expenses: | |
| | | |
| | |
| Sales
and marketing expenses | |
| - | | |
| 22 | |
| General
and administrative expenses | |
| - | | |
| 28 | |
| Total
operating expenses | |
| - | | |
| 50 | |
| Income from operations | |
| - | | |
| 47 | |
| Other income, net | |
| | | |
| | |
| Other income | |
| - | | |
| 989 | |
| Gain
on termination of license agreement | |
| - | | |
| 2,850 | |
| Total
other expense, net | |
| - | | |
| 3,839 | |
| Net
income | |
$ | - | | |
$ | 3,886 | |
5.
Business Segment Information
The
Company’s internal management financial reporting consists of Eastside spirits and Craft C+P. The spirits brands span several
alcoholic beverage categories, including whiskey, vodka, rum, and tequila and are sold on a
wholesale basis to distributors in open states, and brokers in control states. The Company’s principal area of operation is in
the U.S. and has two spirits customers that represents 49%
of its revenue.
Craft C+P offers digital can printing and co-packing services in Portland, Oregon allowing it to offer end-to-end
production capabilities. Craft C+P operates 14 mobile lines in Washington, Oregon and Colorado.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
The
measure of profitability reviewed is condensed statements of operations, and gross margin. These business segments reflect how operations
are managed, operating performance is evaluated and the structure of internal financial reporting. Total asset information by segment
is not provided to, or reviewed by, the chief operating decision maker (“CODM”) as it is not used to make strategic decisions,
allocate resources or assess performance. The accounting policies of the segments are the same as those described for the Company in
the Summary of Significant Accounting Policies in Note 3. Spirits allocates 50% of certain general and administrative expenses to Craft
C+P, which is included in the segments’ financial data below.
Segment
information was as follows for the six months ended June 30, 2022 and 2021:
Schedule
of Segment Information
| | |
| | | |
| | |
| (Dollars in
thousands) | |
2022 | | |
2021 | |
| Spirits | |
| | | |
| | |
| Sales | |
$ | 6,398 | | |
$ | 2,812 | |
| Net sales | |
| 6,192 | | |
| 2,544 | |
| Cost of sales | |
| 3,389 | | |
| 2,082 | |
| Gross
profit | |
| 2,803 | | |
| 462 | |
| Total
operating expenses | |
| 2,561 | | |
| 3,013 | |
| Net income (loss) | |
| (905 | ) | |
| 2,707 | |
| Gross margin | |
| 45 | % | |
| 18 | % |
| | |
| | | |
| | |
| Interest revenue | |
$ | - | | |
$ | - | |
| Interest expense | |
| 1,148 | | |
| 445 | |
| Depreciation and amortization | |
| 82 | | |
| 158 | |
| Income tax expense | |
| - | | |
| - | |
| Significant noncash items: | |
| | | |
| | |
| (Gain)
loss on disposal of property and equipment | |
| (12 | ) | |
| 61 | |
| Forgiveness
of debt - PPP | |
| - | | |
| (1,052 | ) |
| Remeasurement
of deferred consideration | |
| - | | |
| (750 | ) |
| Gain on
disposal of offsite inventory | |
| - | | |
| (1,047 | ) |
| One-time
professional fees | |
| - | | |
| 343 | |
| Stock
compensation | |
| 254 | | |
| 203 | |
| | |
| | | |
| | |
| Craft C+P | |
| | | |
| | |
| Sales | |
$ | 2,505 | | |
$ | 4,049 | |
| Net sales | |
| 2,405 | | |
| 4,049 | |
| Cost of sales | |
| 2,809 | | |
| 3,059 | |
| Gross
profit | |
| (404 | ) | |
| 990 | |
| Total
operating expenses | |
| 2,594 | | |
| 2,131 | |
| Net
loss | |
| (2,919 | ) | |
| (767 | ) |
| Gross margin | |
| -17 | % | |
| 24 | % |
| | |
| | | |
| | |
| Interest revenue | |
$ | - | | |
$ | - | |
| Interest expense | |
| 21 | | |
| 26 | |
| Depreciation and amortization | |
| 604 | | |
| 448 | |
| Significant noncash items: | |
| | | |
| | |
| Loss on disposal of property and equipment | |
| 113 | | |
| - | |
| Forgiveness
of debt - PPP | |
| - | | |
| (396 | ) |
| Stock
compensation | |
| 266 | | |
| 206 | |
Craft
C+P’s gross margin decreased primarily due to lower sales of services, a change in product and service mix, and higher raw material
costs. In addition, Craft C+P’s digital printer commenced operations in April, but the revenues it generated did not exceed the
costs of its start-up during the six months ended June 30, 2022.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
6.
Inventories
Inventories
consisted of the following:
Schedule
of Inventories
| | |
| | | |
| | |
| (Dollars in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
| Raw materials | |
$ | 3,680 | | |
$ | 4,768 | |
| Finished
goods | |
| 1,551 | | |
| 1,742 | |
| Total
inventories | |
$ | 5,231 | | |
$ | 6,510 | |
7.
Prepaid Expenses and Current Assets
Prepaid
expenses and current assets consisted of the following:
Schedule
of Prepaid Expenses and Current Assets
| | |
| | | |
| | |
| (Dollars in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
| Prepayment of
fixed assets | |
$ | 346 | | |
$ | 2,715 | |
| Prepayment of inventory | |
| 305 | | |
| 59 | |
| Other | |
| 98 | | |
| 99 | |
| Total
prepaid expenses and current assets | |
$ | 749 | | |
$ | 2,873 | |
During
the six months ended June 30, 2022, the Company began operations of its new digital can printer resulting in a decrease in prepayment
of fixed assets as the printer was reclassified to property and equipment.
8.
Property and Equipment
Property
and equipment consisted of the following:
Schedule
of Property and Equipment
| | |
| | | |
| | |
| (Dollars in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
| Furniture and
fixtures | |
$ | 4,281 | | |
$ | 3,779 | |
| Digital can printer | |
| 4,216 | | |
| - | |
| Leasehold improvements | |
| 1,526 | | |
| 1,386 | |
| Vehicles | |
| 222 | | |
| 814 | |
| Total cost | |
| 10,245 | | |
| 5,979 | |
| Less
accumulated depreciation | |
| (3,775 | ) | |
| (3,816 | ) |
| Total
property and equipment, net | |
$ | 6,470 | | |
$ | 2,163 | |
Purchases
of property and equipment totaled $2.5 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively. Depreciation
expense totaled $0.5 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively.
During
the six months ended June 30, 2022, the Company disposed of fixed assets with a net book value of $0.1 million resulting in a loss on
disposal of fixed assets of $0.1 million. During the six months ended June 30, 2021, the Company disposed of fixed assets with a net
book value of $0.2 million resulting in a loss on disposal of fixed assets of $0.1 million. As a result of these disposals, the Company
received funds of $0.1 million from the sales of the disposed assets.
During
the six months ended June 30, 2022, the Company entered into a master equity lease agreement with Enterprise FM Trust (“Enterprise”).
Per the agreement, the Company delivered to Enterprise the titles to certain vehicles, which resulted in a loss on disposal of $0.1 million.
In return, the Company directly leases the vehicles from Enterprise, which will also manage the maintenance of the vehicles.
During
the six months ended June 30, 2022, the Company acquired the assets of a production facility for a cash payment of $0.2 million and concessions
on service pricing.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
9.
Intangible Assets
Intangible
assets consisted of the following:
Schedule
of Intangible Assets
| (Dollars in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
| Permits and licenses | |
$ | 25 | | |
$ | 25 | |
| Azuñia brand | |
| 11,945 | | |
| 11,945 | |
| Customer
lists | |
| 2,895 | | |
| 2,895 | |
| Total intangible assets | |
| 14,865 | | |
| 14,865 | |
| Less
accumulated amortization | |
| (1,447 | ) | |
| (1,241 | ) |
| Intangible
assets, net | |
$ | 13,418 | | |
$ | 13,624 | |
The
customer list is being amortized over a seven-year life. Amortization expense totaled $0.2 million for both the six months ended June
30, 2022 and 2021.
The
permits and licenses, and Azuñia brand have all been determined to have an indefinite life and will not be amortized. The Company,
on an annual basis, tests the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then the Company
will estimate its useful life and amortize the asset over the remainder of its useful life.
10.
Other Assets
Other
assets consisted of the following:
Schedule
of Other Assets
| (Dollars in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
| Product branding | |
$ | 400 | | |
$ | 400 | |
| Deposits | |
| 269 | | |
| 286 | |
| Total other assets | |
| 669 | | |
| 686 | |
| Less
accumulated amortization | |
| (258 | ) | |
| (229 | ) |
| Other
assets, net | |
$ | 411 | | |
$ | 457 | |
As
of June 30, 2022, the Company had $0.4 million of capitalized costs related to services provided for the rebranding of its existing product
line. This amount is being amortized over a seven-year life.
Amortization
expense totaled $28,571 for both six months ended June 30, 2022 and 2021.
The
deposits represent office lease deposits.
11.
Leases
The
Company has various lease agreements in place for facilities, equipment and vehicles. Terms of these leases include, in some instances,
scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various
dates through 2027. The Company determines if an arrangement is a lease at inception. 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. As of June 30, 2022, the amount of right-of-use
assets and lease liabilities were $3.2 million and $3.4 million, respectively. Aggregate lease expense for the six months ended June
30, 2022 was $1.1 million, consisting of $0.3 million in operating lease expense for lease liabilities and $0.8 million in short-term
lease cost.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
Maturities
of lease liabilities as of June 30, 2022 were as follows:
Schedule
of Maturities of Operating Lease Liabilities
| (Dollars in
thousands) | | |
Operating
Leases | | |
Weighted-
Average
Remaining Term
in Years | |
| 2022 | | |
$ | 665 | | |
| | |
| 2023 | | |
| 1,091 | | |
| | |
| 2024 | | |
| 730 | | |
| | |
| 2025 | | |
| 725 | | |
| | |
| 2026 | | |
| 602 | | |
| | |
| Thereafter | | |
| 141 | | |
| | |
| Total lease payments | | |
| 3,954 | | |
| | |
| Less
imputed interest (based on 6.7% weighted-average discount rate) | | |
| (547 | ) | |
| | |
| Present
value of lease liability | | |
$ | 3,407 | | |
| 3.77 | |
12.
Notes Payable
Notes
payable consisted of the following:
Schedule
of Notes Payable
| (Dollars in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
| Notes payable
bearing interest at 5.00%. Principal and accrued interest was payable in six equal installments on each six-month anniversary of
the issuance date of January 11, 2019. The notes were secured by the security interests and subordinated to the Company’s senior
indebtedness. | |
$ | - | | |
$ | 124 | |
| Promissory note payable
bearing interest of 5.2%. The note had a maturity of May 2023, but was accelerated to December 30, 2022 in accordance with the forbearance
agreement entered into on May 24, 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule.
The note is secured by the assets of Craft C+P. | |
| 53 | | |
| 79 | |
| Promissory note payable
bearing interest of 4.45%. The note matured in May 2022. Principal and accrued interest were paid in accordance with a monthly amortization
schedule. The note was secured by the assets of Craft C+P and included certain affirmative and financial covenants. | |
| - | | |
| 56 | |
| Promissory
note payable under a revolving line of credit bearing variable interest starting at 3.25%. The
note had a 15-month term with principal and accrued interest due in lump sum in January 2022. The borrowing limit is
$0.5
million. The
note is secured by the assets of Craft C+P and includes certain affirmative and financial covenants. Craft
C+P signed a forbearance agreement with First International Bank (“FIB”) and is in discussions to extend the
maturity. | |
| 500 | | |
| 500 | |
| Promissory
note payable bearing interest of 4.14%. The
note had a maturity of July 2024, but was accelerated to December 30, 2022 in accordance with the forbearance
agreement entered into on May 24, 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule.
The note is secured by the assets of Craft C+P. | |
| 88 | | |
| 108 | |
| Promissory
note payable bearing interest of 3.91%. The
note had a maturity of August 2024, but was accelerated to December 30, 2022 in accordance with the forbearance
agreement entered into on May 24, 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule.
The note is secured by the assets of Craft C+P. | |
| 137 | | |
| 167 | |
| Promissory
note payable bearing interest of 3.96%. The
note had a maturity of November 2024, but was accelerated to December 30, 2022 in accordance with the forbearance
agreement entered into on May 24, 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule.
The note is secured by the assets of Craft C+P. | |
| 152 | | |
| 182 | |
| Promissory
notes payable bearing interest of 6.0%. The notes have a 36-month term with maturity in April 2024. Accrued interest is paid in accordance
with a monthly amortization schedule. | |
| 7,750 | | |
| 7,751 | |
| Total notes payable | |
| 8,680 | | |
| 8,967 | |
| Less
current portion | |
| (931 | ) | |
| (894 | ) |
| Long-term
portion of notes payable | |
$ | 7,749 | | |
$ | 8,073 | |
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
The
Company paid $0.8 million and $0.3 million in interest on notes for the six months ended June 30, 2022 and 2021, respectively.
Maturities
on notes payable as of June 30, 2022 were as follows:
Schedule
of Maturities on Notes Payable
| | |
| | |
| (Dollars in thousands) | |
| |
| 2022 | |
$ | 931 | |
| 2023 | |
| - | |
| 2024 | |
| 7,749 | |
| 2025 | |
| - | |
| 2026 | |
| - | |
| Thereafter | |
| - | |
| Total | |
$ | 8,680 | |
13.
Secured Credit Facilities
6%
Secured Convertible Promissory Notes
On
April 19, 2021, the Company entered into a securities purchase agreement (“Purchase Agreement”) with accredited investors
(“Subscribers”) for their purchase of up to $3.3 million of principal amount of 6% secured convertible promissory notes of
the Company (“Note” or “Notes”), which notes are convertible into shares (“Conversion Shares”) of
the Company’s common stock, par value $0.0001 per share pursuant to the terms and conditions set forth in the Notes with an initial
conversion price of $2.20. In connection with the purchase of such Notes, each Subscriber received a warrant (“Existing Warrant”),
to purchase a number of shares of common stock (“Warrant Shares”) equal to 60% of the principal amount of any Note issued
to such Subscriber divided by the conversion price of the Note issued to such Subscriber, at an exercise price equal to $2.60. In connection
with the Purchase Agreement, the Company entered into a Security Agreement under which it granted the Subscribers a security interest
in certain assets of the Company (the “Security Agreement”) and a Registration Rights Agreement under which the Company agreed
to register for resale the Conversion Shares and the Warrant Shares. Concurrently therewith, the Company and the investors closed $3.3
million of the private offering.
Roth
Capital, LLC acted as placement agent in the private offering, and the Company paid the Placement Agent a cash fee of five percent (5%)
of the gross proceeds therefrom. The Company received $3.1 million in net proceeds from the closing, after deducting the fee payable
to the Placement Agent and the legal fees of the Subscribers in connection with the transaction. The Company used the proceeds to repay
prior outstanding notes payable and for working capital and general corporate purposes.
Interest
on the Notes accrues at a rate of 6% per annum and is payable either in cash or in shares of the Company’s common stock at the
conversion price in the Note on each of the six and twelve month anniversaries of the issuance date and on the maturity date of October
18, 2022. The Company paid $0.2 million in interest during the six months ended June 30, 2022.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
All
amounts due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional
shares), at the option of the holders into the Company’s common stock at a fixed conversion price, which is subject to adjustment
as summarized below. The Notes were initially convertible into the Company’s common stock at an initial fixed conversion price
of $2.20
per share. This conversion price is subject to
adjustment for stock splits, combinations, or similar events, among other adjustments. On April 1, 2022, the Company and the holders
agreed to a reduction of the conversion price of the 6%
secured convertible promissory notes to $1.30
per share in connection with the Company’s
issuance of a common stock purchase warrant to TQLA covering its loan amount of $3.0
million with a common stock value of $1.20
per share.
The
Company may prepay the Notes at any time in whole or in part by paying a sum of money equal to 100% of the principal amount to be redeemed,
together with accrued and unpaid interest, plus a prepayment fee equal to five percent (5%) of the principal amount to be repaid.
The
Notes contain customary triggering events including but not limited to: (i) failure to make payments when due under the Notes; and (ii)
bankruptcy or insolvency of the Company. If a triggering event occurs, each holder may require the Company to redeem all or any portion
of the Notes (including all accrued and unpaid interest thereon), in cash.
The
Notes are secured by a subordinated security interest in the Company’s assets pursuant to the terms of a Security Agreement entered
into between the Company and the Subscribers.
On
July 30, 2021, the Company entered into warrant exercise inducement offer letters (“Inducement Letters”) with the holders
of the Existing Warrants to exercise for cash their Existing Warrants. During the year ended December 31, 2021, the Company received
gross proceeds of $2.4 million on the exercise of the outstanding warrants, and recognized a deemed dividend of $2.3 million based on
the Black Scholes valuation as a result of the higher strike price on the July 2021 issued warrants. See additional discussion in Note
16.
Live
Oak Loan Agreement
On
January 15, 2020, the Company and its subsidiaries entered into a loan agreement (the “Loan Agreement”) between the Company
and Live Oak Banking Company (“Live Oak”), a North Carolina banking corporation (the “Lender”) to refinance existing
debt of the Company and to provide funding for general working capital purposes. Under the Loan Agreement, the Lender committed to make
up to two loan advances to the Company in an aggregate principal amount not to exceed the lesser of (i) $8.0 million and (ii) a borrowing
base equal to 85% of the appraised value of the Company’s eligible inventory of whisky in barrels or totes less an amount equal
to all service fees or rental payments owed by the Company during the 90 day period immediately succeeding the date of determination
to any warehouses or bailees holding eligible inventory (the “Loan”).
The
Loan bore interest at a rate equal to the prime rate plus a spread of 2.49%, adjusted quarterly. Accrued interest was payable monthly,
with the final installment of interest being due and payable on the Maturity Date. The Company was also obligated to pay a servicing
fee, unused commitment fee and origination fee in connection with the Loan. The Company paid $0.1 million in interest during the six
months ended June 30, 2022. In February 2022, the Company paid $0.9 million of the secured credit facility with Live Oak. In June 2022,
the Company paid the remaining balance of $1.9 million.
The
Loan Agreement contained affirmative and negative covenants that include covenants restricting the Company’s ability to, among
other things, incur indebtedness, grant liens, dispose of assets, merge or consolidate, make investments, or enter into restrictive agreements,
subject to certain exceptions.
The
obligations of the Company under the Loan Agreement were secured by substantially all of its spirits respective assets, except for accounts
receivable and certain other specified excluded property.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
The
Loan Agreement included customary events of default that included among other things, non-payment defaults, covenant defaults, inaccuracy
of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults and change in control defaults.
Under certain circumstances, a default interest rate would have applied on all obligations during the existence of an event of default
under the Loan Agreement at a per annum rate equal to 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 exercise price of $3.94 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.
14.
Commitments and Contingencies
Legal
Matters
On
December 15, 2020, Grover Wickersham filed a complaint in the United States District Court for the District Court of Oregon against the
Company. Mr. Wickersham, the former CEO and Chairman of the Board of the Company, has asserted causes of action for fraud in the inducement,
breach of contract, breach of the implied covenant of good faith and fair dealing, defamation, interference with economic advantage,
elder financial abuse, and dissemination of false and misleading proxy materials. The Company disputes the allegations and intends to
defend the case vigorously.
The
Company is not currently subject to any other material legal proceedings; however, it could be subject to legal proceedings and claims
from time to time in the ordinary course of its business, or legal proceedings it considered immaterial may in the future become material.
Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and can divert management
resources.
15.
Net Income (Loss) per Common Share
Basic
income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Potentially dilutive securities consist of the incremental common stock issuable
upon exercise of stock options, convertible notes and warrants. Potentially dilutive securities are excluded from the computation if
their effect is anti-dilutive. There were no anti-dilutive common shares included in the calculation of income (loss) per common share
as of June 30, 2022. As of June 30, 2021, the Company had 2,717,988 dilutive common shares.
16.
Stockholders’ Equity
Schedule
of Stockholders’ Equity
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
Series
B
Preferred Stock | | |
Common
Stock | | |
Paid-in | | |
Accumulated | | |
Total
Stockholders’ | |
| (Shares
and dollars in thousands) | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Equity | |
| Balance,
December 31, 2021 | |
| 2,500 | | |
$ | - | | |
| 14,791 | | |
$ | 1 | | |
$ | 72,003 | | |
$ | (58,605 | ) | |
$ | 13,399 | |
| Beginning
balance | |
| 2,500 | | |
$ | - | | |
| 14,791 | | |
$ | 1 | | |
$ | 72,003 | | |
$ | (58,605 | ) | |
$ | 13,399 | |
| Stock-based
compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3 | | |
| - | | |
| 3 | |
| Issuance
of common stock for services by third parties | |
| - | | |
| - | | |
| 286 | | |
| - | | |
| 230 | | |
| - | | |
| 230 | |
| Issuance
of common stock for services by employees | |
| - | | |
| - | | |
| 170 | | |
| - | | |
| 206 | | |
| - | | |
| 206 | |
| Issuance
of detachable warrants on notes payable | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,454 | | |
| - | | |
| 1,454 | |
| Shares
issued for cash | |
| - | | |
| - | | |
| 200 | | |
| 1 | | |
| 196 | | |
| - | | |
| 197 | |
| Preferred
stock dividends | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (75 | ) | |
| (75 | ) |
| Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (3,824 | ) | |
| (3,824 | ) |
| Balance,
June 30, 2022 | |
| 2,500 | | |
$ | - | | |
| 15,447 | | |
$ | 2 | | |
$ | 74,092 | | |
| $
(62,504) | | |
$ | 11,590 | |
| Ending
balance | |
| 2,500 | | |
$ | - | | |
| 15,447 | | |
$ | 2 | | |
$ | 74,092 | | |
| $
(62,504) | | |
$ | 11,590 | |
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
Issuance
of Common Stock
During
the six months ended June 30, 2022, the Company issued 455,245 shares of common stock to directors and employees for stock-based compensation
of $0.4 million. The shares were valued using the closing share price of the Company’s common stock on the date of grant, within
the range of $0.69 to $1.21 per share. Of these shares, 170,000 were to the Company’s former Chief Executive Officer pursuant to
his separation agreement. On April 5, 2022, the Company sold 200,000 shares of common stock to its Chief Executive Officer for proceeds
of $0.2 million based on the market price of the stock at that date.
During
2021, the Company issued 313,442 shares of common stock to directors and employees for stock-based compensation of $0.6 million. The
shares were valued using the closing share price of the Company’s common stock on the date of grant, within the range of $1.28
to $2.98 per share.
On
February 10, 2021 and April 19, 2021, the Company issued 1.2 million shares and 682,669 shares, respectively, of its common stock (the
“Shares”) to certain affiliates of Intersect pursuant to an Asset Purchase Agreement dated September 12, 2019 by and between
the Company and Intersect in respect of the Azuñia Tequila acquisition at a weighted-average of $4.67 per share and $1.82 per
share, respectively. The Shares constitute the “Fixed Shares” due to Intersect pursuant to the Asset Purchase Agreement.
On
July 30, 2021, the Company entered into Inducement Letters with the holders of the Existing Warrants to exercise their Existing Warrants
and purchased 900,000 shares of common stock for gross proceeds of $2.4 million.
During
2021, the Company sold 1,297,653 shares of common stock for net proceeds of $3.6 million in at-the-market public placements. In addition,
the Company issued 5,000 shares of its common stock upon the exercise of stock options at $1.23 per share.
Issuance
of Series B Preferred Stock
On
October 19, 2021, Company entered into a securities purchase agreement (“Purchase Agreement”) with an accredited investor
(“Subscriber”) for its purchase of 2.5 million shares (“Preferred Shares”) of Series B Convertible Preferred
Stock (“Series B Preferred Stock”) at a purchase price of $1.00 per Preferred Share, which Preferred Shares are convertible
into shares of the Company’s common stock pursuant to the terms and conditions set forth in a Certificate of Designation Establishing
Series B Preferred Stock of the Company with an initial conversion price of $3.10 per share. 850,000 shares of common stock were reserved
for issuance in the event of conversion of the Preferred Shares.
The
Series B Preferred Stock accrues dividends at a rate of 6% per annum, payable annually on the last day of December of each year. Dividends
shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends are payable at the Company’s option either
in cash or “in kind” in shares of common stock; provided, however that dividends may only be paid in cash following the fiscal
year in which the Company has net income (as shown in its audited financial statements contained in its Annual Report on Form 10-K for
such year) of at least $0.5 million. For “in-kind” dividends, holders will receive that number of shares of common stock
equal to (i) the amount of the dividend payment due such stockholder divided by (ii) the volume weighted average price of the common
stock for the 90 trading days immediately preceding a dividend date (“VWAP”). For the year ended December 31, 2021, the Company
issued as dividends 10,670 shares of common stock at a VWAP of $2.57 per share. For the six months ended June 30, 2022, the Company accrued
$0.1 million of preferred dividends.
Stock-Based
Compensation
On
September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). Pursuant to the terms of the plan,
on January 1, 2022 the number of shares available for grant under the 2016 Plan reset to 5,225,141 shares, equal to 8% of the number
of outstanding shares of the Company’s capital stock, calculated on an as-converted basis, on March 31 of the preceding calendar
year, and then added to the prior year plan amount. As of June 30, 2022, there were 51,752 options and 1,818,120 restricted stock units
(“RSUs”) outstanding under the 2016 Plan, with vesting schedules varying between immediate or three (3) years from the grant
date.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
The
Company also issues, from time to time, options that are not registered under a formal option plan. As of June 30, 2022, there were no
options outstanding that were not issued under the Plans.
A
summary of all stock option activity as of and for the six months ended June 30, 2022 is presented below:
Summary
of Stock Option Activity
| | |
#
of Options | | |
Weighted-
Average
Exercise Price | |
| Outstanding
as of December 31, 2021 | |
| 57,586 | | |
$ | 3.29 | |
| | |
| | | |
| | |
| Options
canceled | |
| (5,834 | ) | |
| 4.43 | |
| Outstanding
as of June 30, 2022 | |
| 51,752 | | |
$ | 3.16 | |
| | |
| | | |
| | |
| Exercisable
as of June 30, 2022 | |
| 51,585 | | |
$ | 3.16 | |
On
December 7, 2021, the Company issued 5,000 shares of common stock at $1.23 per share upon the exercise of stock options for proceeds
of $6,150.
The
aggregate intrinsic value of options outstanding as of June 30, 2022 was $0.
As
of June 30, 2022, there were 167 unvested options with an aggregate grant date fair value of $0. The unvested options will vest in accordance
with the vesting schedule in each respective option agreement, which varies between immediate and three years from the grant date. The
aggregate intrinsic value of unvested options as of June 31, 2022 was $0. During the six months ended June 30, 2022, 3,417 options vested.
The
Company uses the Black-Scholes valuation model to measure the grant-date fair value of stock options. The grant-date fair value of stock
options issued to employees is recognized on a straight-line basis over the requisite service period. Stock-based awards issued to nonemployees
are recorded at fair value on the measurement date and are subject to periodic market adjustments as the underlying stock-based awards
vest.
To
determine the fair value of stock options using the Black-Scholes valuation model, the calculation takes into consideration the effect
of the following:
| |
● |
Exercise
price of the option |
| |
● |
Fair
value of the Company’s common stock on the date of grant |
| |
● |
Expected
term of the option |
| |
● |
Expected
volatility over the expected term of the option |
| |
● |
Risk-free
interest rate for the expected term of the option |
The
calculation includes several assumptions that require management’s judgment. The expected term of the options is calculated using
the simplified method described in GAAP. The simplified method defines the expected term as the average of the contractual term and the
vesting period. Estimated volatility is derived from volatility calculated using historical closing prices of common shares of similar
entities whose share prices are publicly available for the expected term of the options. The risk-free interest rate is based on the
U.S. Treasury constant maturities in effect at the time of grant for the expected term of the options.
The
Company did not issue any additional options during the six months ended June 30, 2022.
For
the six months ended June 30, 2022 and 2021, net compensation expense related to stock options was $2,859 and $0.1 million, respectively.
As of June 30, 2022, the total compensation expense related to stock options not yet recognized was approximately $0.1 million, which
is expected to be recognized over a weighted-average period of approximately 0.3 years.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
Warrants
On
March 21, 2022, the Company entered into a promissory note with TQLA to accept a one year loan of $2.0 million with a conditional additional
loan of $1.0 million and a conditional term extension of six months. The loan bears interest at 9.25% and carries a commitment fee of
2.5%. In addition, the Company issued a common stock purchase warrant to TQLA covering the loan amount with a common stock value of $1.20
per share. As of June 30, 2022, the Company has drawn down $3.0 million of the note payable and issued 2.5 million warrants. The estimated
fair value of the warrants of $1.5 million was recorded as debt issuance cost and is being amortized to interest expense over the maturity
period of the promissory note, with $0.4 million recorded during the six months ended June 30, 2022.
The
estimated fair value of the new warrants issued was based on a combination of closing market trading price on the date of issuance for
the public offering warrants, and the Black-Scholes option-pricing model, using the assumptions below:
Schedule
of Weighted-average Assumptions for New Warrants
| Volatility | |
| 75 | % |
| Risk-free
interest rate | |
| 2.5 | % |
| Expected
term (in years) | |
| 5.0 | |
| Expected
dividend yield | |
| - | |
| Fair
value of common stock | |
$ | 0.80 | |
From
April 19, 2021 through May 12, 2021, the Company issued in a private placement Existing Warrants to purchase up to 900,000 shares of
common stock at an exercise price of $2.60 per Warrant Share. The estimated fair value of the warrants of $0.7 million was recorded as
debt issuance cost and is being amortized to interest expense over the maturity period of the secured credit facility, with $0.1 million
recorded during the six months ended June 30, 2022.
On
July 30, 2021, the Company entered into Inducement Letters with the holders of the Existing Warrants whereby such holders agreed to exercise
for cash their Existing Warrants to purchase the 900,000 Warrant Shares in exchange for the Company’s agreement to issue new warrants
(the “New Warrants”) to purchase up to 900,000 shares of common stock (the “New Warrant Shares”). The New Warrants
have substantially the same terms as the Existing Warrants, except that the New Warrants have an exercise price of $3.00 per share and
are exercisable until August 19, 2026. The Company received gross proceeds of $2.4 million on the exercise of the outstanding warrants,
and recognized a deemed dividend of $2.3 million based on the Black Scholes valuation as a result of the higher strike price on the July
2021 issued warrants, which is included in additional paid-in capital in the consolidated balance sheets.
A
summary of all warrant activity as of and for the six months ended June 30, 2022 is presented below:
Summary
of Warrants Activity
| | |
Warrants | | |
Weighted-
Average
Remaining
Life (Years) | | |
Weighted-
Average
Exercise
Price | | |
Aggregate
Intrinsic
Value | |
| Outstanding
as of December 31, 2021 | |
| 1,256,944 | | |
| 4.0 | | |
$ | 3.42 | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
| Granted | |
| 2,500,000 | | |
| 4.6 | | |
| 1.20 | | |
| - | |
| Outstanding
as of June 30, 2022 | |
| 3,756,944 | | |
| 4.2 | | |
$ | 1.86 | | |
$ | - | |
17.
Related Party Transactions
The
following is a description of transactions since January 1, 2021 as to which the amount involved exceeds the lesser of $0.1 million or
one percent (1%) of the average of total assets at year-end for the last two completed fiscal years, which was $0.3 million, and in which
any related person has or will have a direct or indirect material interest, other than equity, compensation, termination and other arrangements.
Eastside
Distilling, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
June
30, 2022
(Unaudited)
On
October 24, 2019, the Company’s Board appointed Stephanie Kilkenny to the Board to fill an existing vacancy on the Board effective
immediately. Stephanie Kilkenny was the former managing director of Azuñia Tequila, and together with her spouse, owns and controls
TQLA, the majority owner of Intersect. Effective June 15, 2020, the Company’s Board appointed Robert Grammen to the Board to fill
an existing vacancy, Mr. Grammen is also a member of Intersect.
In
connection with the acquisition of Azuñia Tequila from Intersect, TQLA was entitled to receive up to 93.88% of the aggregate consideration
payable under the Asset Purchase Agreement. On February 10, 2021 and April 19, 2021, the Company issued 1.2 million shares and 682,669
shares, respectively, of its common stock (the “Shares”) to certain affiliates of Intersect pursuant to an Asset Purchase
Agreement dated September 12, 2019 by and between the Company and Intersect in respect of the Azuñia Tequila acquisition at a
weighted-average of $4.67 per share and $1.82 per share, respectively. The Shares constituted the “Fixed Shares” due to Intersect
pursuant to the Asset Purchase Agreement. As of December 31, 2021, all shares held by TQLA were sold.
On
April 19, 2021, the Company issued $7.8 million in principal amount of promissory notes as the Earnout Consideration. The loans mature
in full on April 1, 2024 and accrue interest at a rate of 6.0% annually. TQLA received a total of 598,223 shares of common stock and
a promissory note in the principal amount of $6.9 million. Robert Grammen received a total of 22,027 shares of the Company’s common
stock and a promissory note in the principal amount of $0.1 million. The notes have a 36-month term with maturity in April 2024. In October
2021, TQLA sold its promissory note in the principal amount of $6.9 million.
On
February 5, 2021, the Company paid other liabilities of $0.7 million due to Intersect and TQLA.
On
March 21, 2022, the Company entered into a note payable with TQLA to accept a one year loan of $2.0 million with a conditional additional
loan of $1.0 million and a conditional term extension of six months. The loan bears interest at 9.25% and carries a commitment fee of
2.5%. In addition, the Company issued a common stock purchase warrant to TQLA covering the loan amount with a common stock value of $1.20
per share. As of June 30, 2022, the Company has drawn down $3.0 million of the note payable and issued 2.5 million warrants.
18.
Subsequent Events
On
August 4, 2022, the Company and TQLA amended and restated the note payable entered into on March 21, 2022 to increase the line of credit
to $3.5 million and issued an additional 416,666 warrants.
The Company is in discussions with FIB to extend the maturity of its line
of credit.