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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
☒ |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
|
|
|
For
the quarterly period ended
March 31,
2022 |
|
|
☐ |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For
the transition period from ______________ to
_________________
Commission
File No.:
001-38182

EASTSIDE DISTILLING, INC.
(Exact
name of registrant as specified in its charter)
Nevada |
|
20-3937596 |
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
2321 NE Argyle Street,
Unit D
Portland,
Oregon
97211
(Address
of principal executive offices)
Issuer’s
telephone number:
(971)
888-4264
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock, $0.0001 par value |
|
EAST |
|
The
Nasdaq Stock Market LLC |
(Title
of Each Class) |
|
(Trading
Symbol) |
|
(Name
of Each Exchange on Which Registered) |
Indicate
by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically,
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ☐ |
Accelerated
filer ☐ |
Non-accelerated filer ☐ |
Smaller
reporting company
☒ |
Emerging
growth company
☐ |
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
As of
May 16, 2022,
15,285,824 shares
of our common stock, $0.0001 par value, were
outstanding.
EASTSIDE
DISTILLING, INC.
FORM
10-Q
March
31, 2022
TABLE
OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
Eastside
Distilling, Inc. and Subsidiaries
Consolidated Balance Sheets
March
31, 2022 and December 31, 2021
(Dollars
in thousands, except shares and per share amounts)
The
accompanying notes are an integral part of these consolidated
financial statements.
Eastside
Distilling, Inc. and Subsidiaries
Consolidated Statements of Operations
For
the Three Months Ended March 31, 2022 and 2021
(Dollars
and shares in thousands, except per share amounts)
(Unaudited)
The
accompanying notes are an integral part of these consolidated
financial statements.
Eastside
Distilling, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For
the Three Months Ended March 31, 2022 and 2021
(Dollars
in thousands)
(Unaudited)
The
accompanying notes are an integral part of these consolidated
financial statements.
Eastside
Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March
31, 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, exports, markets and sells a
wide variety of alcoholic beverages under recognized brands. The
Company currently employs 71 people in the United
States.
The
Company’s spirits’ brands span several alcoholic beverage
categories, including whiskey, vodka, 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 and bottling business
(“Craft C+B”) that primarily services the craft beer and craft
cider industries. Craft C+B operates 16 mobile filling lines in
Seattle, Washington; Spokane, Washington; Portland, Oregon; and
Denver, Colorado. During 2022, the Company made substantial
investments in Craft C+B to expand its product offerings to include
digital can printing activities in the Pacific
Northwest.
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 $60.7 million
as of March 31, 2022, including a net loss of $2.0
million
incurred during the three months ended March 31, 2022, which led to
a reduction of $0.8 million
in working capital. As of March 31, 2022, the Company had
$2.6 million
of cash on hand with working capital of $3.8 million.
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
March 31, 2022, its operating results for the three months ended
March 31, 2022 and 2021 and its cash flows for the three months
ended March 31, 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), and Craft
Canning + Bottling, LLC 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
March
31, 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 $3,812
and
$70,237 for the
three months ended March 31, 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 $40,062 and $24,763
for the three months ended March 31, 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.
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 $0.2
million and $0.3
million for the three months ended March 31, 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.
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
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
March 31, 2022, two distributors represented 18% of trade
receivables. As of December 31, 2021, four wholesale customers
represented 42% of trade
receivables. Sales to one distributor accounted for 25% of consolidated
sales for the three months ended March 31, 2022. Sales to one
wholesale customer accounted for 18% of consolidated
sales for the three months ended March 31, 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 March 31, 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. |
None
of the Company’s assets or liabilities were measured at fair value
as of March 31, 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 March
31, 2022 and December 31, 2021, the Company’s notes approximate
fair value.
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
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 March 31, 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 March 31, 2022 and determined that they
were not impaired.
Comprehensive Income
The
Company did not have
any other comprehensive income items for the three months ended
March 31, 2022 and 2021.
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
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 March 31, 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.
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
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.
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 three months ended March 31, 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 three
months ended March 31, 2022 and 2021:
Schedule of Discontinued Retail
Operations
(Dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Sales |
|
$ |
- |
|
|
$ |
290 |
|
Less customer
programs and excise taxes |
|
|
- |
|
|
|
31 |
|
Net sales |
|
|
- |
|
|
|
259 |
|
Cost of sales |
|
|
- |
|
|
|
162 |
|
Gross profit |
|
|
- |
|
|
|
97 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Sales and
marketing expenses |
|
|
- |
|
|
|
27 |
|
General and
administrative expenses |
|
|
- |
|
|
|
16 |
|
Total operating
expenses |
|
|
- |
|
|
|
43 |
|
Income from operations |
|
|
- |
|
|
|
54 |
|
Other income, net |
|
|
|
|
|
|
|
|
Other income |
|
|
- |
|
|
|
1,029 |
|
Gain on
termination of license agreement |
|
|
- |
|
|
|
2,850 |
|
Total
other expense, net |
|
|
- |
|
|
|
3,879 |
|
Net income |
|
$ |
- |
|
|
$ |
3,933 |
|
5.
Business Segment
Information
The
Company’s internal management financial reporting consists of
Eastside spirits and Craft C+B. The spirits brands span several
alcoholic beverage categories, including whiskey, vodka, gin, rum,
tequila and Ready-to-Drink (“RTD”) 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 one spirits customer that represents 25% of its revenue.
Craft C+B primarily services the craft beer and craft cider
business. Craft C+B operates 16 mobile lines in Seattle,
Washington; Spokane, Washington; Portland, Oregon; and Denver,
Colorado.
The measure of profitability reviewed is a condensed statement 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+B, which is included in the segments’ financial
data below.
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
Segment
information was as follows for the three months ended March 31,
2022 and 2021:
Schedule of Segment
Information
(Dollars in thousands) |
|
2022 |
|
|
2021 |
|
Spirits |
|
|
|
|
|
|
|
|
Sales |
|
$ |
2,704 |
|
|
$ |
1,334 |
|
Net sales |
|
|
2,664 |
|
|
|
1,239 |
|
Cost of sales |
|
|
1,682 |
|
|
|
1,054 |
|
Gross profit |
|
|
982 |
|
|
|
185 |
|
Total operating expenses |
|
|
1,269 |
|
|
|
1,695 |
|
Net income (loss) |
|
|
(682 |
) |
|
|
4,113 |
|
Gross margin |
|
|
37 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
Interest revenue |
|
$ |
- |
|
|
$ |
- |
|
Interest expense |
|
|
395 |
|
|
|
113 |
|
Depreciation and amortization |
|
|
43 |
|
|
|
77 |
|
Income tax expense |
|
|
- |
|
|
|
- |
|
Significant noncash items: |
|
|
|
|
|
|
|
|
Loss on disposal
of property and equipment |
|
|
- |
|
|
|
61 |
|
Forgiveness of
debt - PPP |
|
|
- |
|
|
|
(1,052 |
) |
Remeasurement of
deferred consideration |
|
|
- |
|
|
|
(750 |
) |
Gain on disposal
of offsite inventory |
|
|
- |
|
|
|
(1,047 |
) |
Stock
compensation |
|
|
184 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
Craft C+B |
|
|
|
|
|
|
|
|
Sales |
|
$ |
1,076 |
|
|
$ |
1,909 |
|
Net sales |
|
|
1,076 |
|
|
|
1,909 |
|
Cost of sales |
|
|
1,111 |
|
|
|
1,551 |
|
Gross profit
(loss) |
|
|
(35 |
) |
|
|
358 |
|
Total operating expenses |
|
|
1,308 |
|
|
|
1,147 |
|
Net loss |
|
|
(1,354 |
) |
|
|
(405 |
) |
Gross margin |
|
|
-3 |
% |
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
Interest revenue |
|
$ |
- |
|
|
$ |
- |
|
Interest expense |
|
|
11 |
|
|
|
13 |
|
Depreciation and amortization |
|
|
220 |
|
|
|
223 |
|
Income tax expense |
|
|
- |
|
|
|
- |
|
Significant noncash items: |
|
|
|
|
|
|
|
|
Forgiveness of
debt - PPP |
|
|
- |
|
|
|
(396 |
) |
Stock
compensation |
|
|
191 |
|
|
|
118 |
|
Craft C+B’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+B launched its digital can
printing business subsequent to first quarter ending, however it
continued to incur costs with no associated revenue during the
three months ended March 31, 2022.
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
6.
Inventories
Inventories
consisted of the following:
Schedule of Inventories
(Dollars in thousands) |
|
March 31, 2022
|
|
|
December 31, 2021
|
|
Raw materials |
|
$ |
4,420 |
|
|
$ |
4,768 |
|
Finished
goods |
|
|
1,665 |
|
|
|
1,742 |
|
Total
inventories |
|
$ |
6,085 |
|
|
$ |
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) |
|
March 31, 2022
|
|
|
December 31, 2021
|
|
Prepayment of fixed
assets |
|
$ |
4,435 |
|
|
$ |
2,715 |
|
Prepayment of inventory |
|
|
483 |
|
|
|
59 |
|
Other |
|
|
152 |
|
|
|
99 |
|
Total prepaid
expenses and current assets |
|
$ |
5,070 |
|
|
$ |
2,873 |
|
8.
Property and
Equipment
Property
and equipment consisted of the following:
Schedule of Property and
Equipment
(Dollars in thousands) |
|
March 31, 2022
|
|
|
December 31, 2021
|
|
Furniture and
fixtures |
|
$ |
3,815 |
|
|
$ |
3,779 |
|
Leasehold improvements |
|
|
1,483 |
|
|
|
1,386 |
|
Vehicles |
|
|
814 |
|
|
|
814 |
|
Total cost |
|
|
6,112 |
|
|
|
5,979 |
|
Less
accumulated depreciation |
|
|
(3,961 |
) |
|
|
(3,816 |
) |
Total property
and equipment, net |
|
$ |
2,151 |
|
|
$ |
2,163 |
|
Purchases
of property and equipment totaled $1.4
million
and $15,253
for
the three months ended March 31, 2022 and 2021, respectively.
During the three months ended March 31, 2022, the Company invested
$1.3
million in the digital can printer that was not in operations at
quarter-end. Depreciation expense totaled $0.1 million
and $0.2 million
for the three months ended March 31, 2022 and 2021,
respectively.
During
the three months ended March 31, 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.
9.
Intangible
Assets
Intangible
assets consisted of the following:
Schedule of Intangible
Assets
(Dollars in thousands) |
|
March 31, 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 |
|
|
(1,344 |
) |
|
|
(1,241 |
) |
Intangible
assets, net |
|
$ |
13,521 |
|
|
$ |
13,624 |
|
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
The
customer list is being amortized over a seven-year life.
Amortization expense totaled $0.1 million for both the
three months ended March 31, 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) |
|
March 31, 2022
|
|
|
December 31, 2021
|
|
Product branding |
|
$ |
400 |
|
|
$ |
400 |
|
Deposits |
|
|
268 |
|
|
|
286 |
|
Total other assets |
|
|
668 |
|
|
|
686 |
|
Less
accumulated amortization |
|
|
(244 |
) |
|
|
(229 |
) |
Other assets,
net |
|
$ |
424 |
|
|
$ |
457 |
|
As of
March 31, 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 $0.1
million
for both three months ended March 31, 2022 and 2021.
The
deposits represent office lease deposits.
11.
Leases
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
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 March 31, 2022, the amount of right-of-use assets
and lease liabilities were $3.3
million
and $3.5
million,
respectively. Aggregate lease expense for the year ended March 31,
2022 was $0.3
million,
consisting of $0.3
million
in operating lease expense for lease liabilities and $25,597 in short-term lease
cost.
Maturities
of lease liabilities as of March 31, 2022 were as
follows:
Schedule of Maturities of Operating Lease
Liabilities
(Dollars in thousands) |
|
Operating Leases |
|
|
Weighted-Average
Remaining
Term
in Years
|
|
2022 |
|
$ |
872 |
|
|
|
|
|
2023 |
|
|
1,049 |
|
|
|
|
|
2024 |
|
|
690 |
|
|
|
|
|
2025 |
|
|
685 |
|
|
|
|
|
2026 |
|
|
577 |
|
|
|
|
|
Thereafter |
|
|
139 |
|
|
|
|
|
Total lease payments |
|
|
4,012 |
|
|
|
|
|
Less imputed
interest (based on
6.7% weighted-average discount rate) |
|
|
(524 |
) |
|
|
|
|
Present value
of lease liability |
|
$ |
3,488 |
|
|
|
3.93 |
|
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
12.
Notes
Payable
Notes
payable consisted of the following:
Schedule of Notes Payable
(Dollars in thousands) |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
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 subordinated to the Company’s senior
indebtedness. |
|
$ |
- |
|
|
$ |
124 |
|
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 C+B. |
|
|
67 |
|
|
|
79 |
|
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 C+B and includes certain
affirmative and financial covenants. Craft C+B was not in
compliance with the covenants as of March 31, 2022. |
|
|
28 |
|
|
|
56 |
|
Promissory note payable under a
revolving line of credit bearing variable interest starting at
3.25%.
The note has 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+B and includes certain
affirmative and financial covenants.
Craft C+B was not in compliance with the covenants as of March 31,
2022 and is in discussions with First International Bank (“FIB”) on
a forbearance agreement and amendment extending the
maturity. |
|
|
500 |
|
|
|
500 |
|
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 C+B. |
|
|
98 |
|
|
|
108 |
|
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 C+B. |
|
|
152 |
|
|
|
167 |
|
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 C+B. |
|
|
166 |
|
|
|
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. |
|
|
7,751 |
|
|
|
7,751 |
|
Total notes payable |
|
|
8,762 |
|
|
|
8,967 |
|
Less current
portion |
|
|
(744 |
) |
|
|
(894 |
) |
Long-term
portion of notes payable |
|
$ |
8,018 |
|
|
$ |
8,073 |
|
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
The
Company paid $0.2 million and $0.1 million in interest on notes
for the three months ended March 31, 2022 and 2021,
respectively.
Maturities
on notes payable as of March 31, 2022 were as follows:
Schedule of Maturities on Notes
Payable
(Dollars in thousands) |
|
|
|
2022 |
|
$ |
744 |
|
2023 |
|
|
140 |
|
2024 |
|
|
7,878 |
|
2025 |
|
|
- |
|
2026 |
|
|
- |
|
Thereafter |
|
|
- |
|
Total |
|
$ |
8,862 |
|
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.
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 are 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.
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
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 matured on
January 14, 2021 and
all amounts outstanding under the Loan became due and payable.
On January 8, 2021, the Company entered into an amendment to the
Loan Agreement with Live Oak to extend the maturity date to April
13, 2021. On April 13, 2021, the maturity date was amended to
further extend it to May 13, 2021. On May 11, 2021, the maturity
date was further extended to August 11, 2021 and the maximum loan
balance was amended to the lesser of $3.0 million or the borrowing
base. On August 11, 2021, the maturity date was further extended to
October 11, 2021. On October 11, 2021, the maturity date was
further extended to November 11, 2021. On
February 28, 2022, Live Oak executed a forbearance agreement of the
Loan while the parties finalize an extension of the maturity date.
All other material terms of the Loan Agreement remain unchanged.
The Lender may at any time demand repayment of the Loan in whole or
in part, in which case the Company will be obligated to repay the
Loan (or portion thereof for which repayment is demanded) within 30
days following the date of demand. The Company 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 Company is also obligated to pay a servicing fee, unused
commitment fee and origination fee in connection with the Loan. The
Company paid $43,228
in
interest during the three months ended March 31, 2022. On February
4, 2022, the Company repaid $0.9
million
of the secured credit facility with Live Oak, reducing the
principal balance to $1.9
million
as of March 31, 2022.
The
Loan Agreement contains 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 are 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
March 31, 2022
(Unaudited)
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 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 March 31, 2022. As of March 31, 2021, the Company had
343,405 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 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
Issuance of common stock for services
by third parties |
|
|
- |
|
|
|
- |
|
|
|
125 |
|
|
|
- |
|
|
|
119 |
|
|
|
- |
|
|
|
119 |
|
Issuance of common stock for services
by employees |
|
|
- |
|
|
|
- |
|
|
|
170 |
|
|
|
1 |
|
|
|
206 |
|
|
|
- |
|
|
|
207 |
|
Issuance of detachable warrants on
notes payable |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
948 |
|
|
|
- |
|
|
|
948 |
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,074 |
) |
|
|
(2,074 |
) |
Balance, March
31, 2022 |
|
|
2,500 |
|
|
$ |
- |
|
|
|
15,086 |
|
|
$ |
2 |
|
|
$ |
73,278 |
|
|
$ |
(60,679 |
) |
|
$ |
12,601 |
|
Ending
balance |
|
|
2,500 |
|
|
$ |
- |
|
|
|
15,086 |
|
|
$ |
2 |
|
|
$ |
73,278 |
|
|
$ |
(60,679 |
) |
|
$ |
12,601 |
|
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
Issuance
of Common Stock
During
the three months ended March 31, 2022, the Company issued 294,375
shares of common stock to directors and employees for stock-based
compensation of $0.3 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
$0.96 to $1.21 per share. Of these
shares, 170,000 were
to the Company’s former Chief Executive Officer pursuant to his
separation agreement.
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 and
850,000
shares of common stock were reserved.
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 three months ended March 31, 2022, the Company
accrued $37,500 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
March 31, 2022, there were 57,586 options and 1,657,251 restricted stock
units (“RSUs”) outstanding under the 2016 Plan, with vesting
schedules varying between immediate or three (3) years from the grant
date.
The
Company also issues, from time to time, options that are not
registered under a formal option plan. As of March 31, 2022, there
were no options outstanding that were not issued under the
Plans.
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
A
summary of all stock option activity as of and for the three months
ended March 31, 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 |
|
Outstanding
as of March 31, 2022 |
|
|
57,586 |
|
|
$ |
3.29 |
|
|
|
|
|
|
|
|
|
|
Exercisable
as of March 31, 2022 |
|
|
57,419 |
|
|
$ |
3.28 |
|
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 March 31,
2022 was $0.
As of
March 31, 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 March 31, 2022 was $0. During the three months
ended March 31, 2022, 4,875 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 three
months ended March 31, 2022.
For
the three months ended March 31, 2022 and 2021, net compensation
expense related to stock options was $1,614
and $0.1
million, respectively. As of March 31, 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
0.6 years.
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 will issue a common stock purchase warrant to
TQLA covering the loan amount with a common stock value of
$1.20
per
share. As of March 31, 2022, the Company drew down $2.0
million
of the note payable and issued 1.7
million
warrants. The estimated fair value of the warrants of $0.9 million was
recorded as debt issuance cost and is being amortized to interest
expense over the maturity period of the promissory note, with
$22,944
recorded during the three months ended March 31, 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 |
|
|
2.3 |
% |
Expected term (in years) |
|
|
5.0 |
|
Expected dividend yield |
|
|
- |
|
Fair value of common stock |
|
$ |
0.57 |
|
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
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 three
months ended March 31, 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 three months
ended March 31, 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 |
|
|
1,666,667 |
|
|
|
5.0 |
|
|
|
0.95 |
|
|
|
- |
|
Outstanding as of March 31,
2022 |
|
|
2,923,611 |
|
|
|
4.3 |
|
|
$ |
2.05 |
|
|
$ |
- |
|
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.
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 and he is also a member of Intersect.
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 will issue a common stock purchase warrant to TQLA covering
the loan amount with a common stock value of $1.20 per share. As of
March 31, 2022, the Company drew down $2.0 million of the note payable and
issued 1.7 million
warrants.
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
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 repaid other liabilities due to
Intersect and TQLA in an amount of $0.7
million.
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.
18.
Subsequent
Events
Debt
On
April 19, 2022, the Company drew the conditional $1.0
million
of the loan with TQLA and issued an additional 0.8
million
warrants.
On April 1, 2022, the Company reduced the conversion price of the
6% secured convertible promissory notes to $1.30 per share as a result of
issuing a common stock purchase warrant to TQLA covering its loan
amount of $2.0 million with a common stock
value of $1.20 per share.
On
February 28, 2022, the Company expected a forbearance agreement
with Live Oak while the parties finalize a further extension of the
maturity date of the Live Oak facility. All other material terms of
the Loan Agreement remain unchanged.
Stock Issuances
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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
This
section of the Quarterly Report includes “forward-looking
statements” as that term is defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements give
current expectations or forecasts of future events about the
company or our outlook and involve uncertainties that could
significantly impact results. You can identify forward-looking
statements by the fact they do not relate to historical or current
facts and by the use of words indicating anticipation or
speculation such as “believe,” “expect,” “estimate,” “anticipate,”
“will be,” “should,” “plan,” “project,” “intend,” “could” and
similar words or expressions.
You
should not place undue certainty on these forward-looking
statements, which speak only as of the date made. Except as
required by law, we undertake no obligation to update any
forward-looking statements, whether as a result of new information,
future events, or otherwise. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual
results to differ materially from these forward-looking statements.
Factors that could cause our expectations to be unfulfilled include
those discussed in Item 1A of Part I of our annual report on Form
10-K for the year ended December 31, 2021 entitled “Risk Factors”
as well as factors we have not yet anticipated.
Overview
Eastside
Distilling, Inc. (the “Company,” “Eastside Distilling,” “we,” “us,”
or “our,” below) was incorporated under the laws of Nevada in 2004
under the name of Eurocan Holdings, Ltd. In December 2014, we
changed our corporate name to Eastside Distilling, Inc. to reflect
our acquisition of Eastside Distilling, LLC. We operate in two
segments. Our Spirits segment manufactures, blends, bottles,
markets and sells a wide variety of alcoholic beverages under
recognized brands in 34 U.S. states. Our Craft Canning and Bottling
segment provides canning and bottling services to the craft beer
and cider industries in Washington, Oregon and Colorado. We employ
71 people in the United States.
Mission-What
We Do
Our
mission is to source, make and deliver the best in class,
end-to-end craft spirits brands and product portfolio; and we
contract pack and decorate cans and bottles with distinct
capability and craftsmanship.
Strategy
Our
spirits brands span several alcoholic beverage categories,
including whiskey, tequila and Ready-to-Drink (“RTD”). We sell our
products on a wholesale basis to distributors in open states, and
brokers in control states. Craft Canning + Bottling (“Craft C+B”)
primarily services the craft beer, cider and kombucha business.
Craft C+B operates 16 mobile lines in Seattle and Spokane,
Washington; Portland, Oregon; and Denver, Colorado.
Eastside
Distilling is unique in several specific areas: (1) to our
knowledge, we are the only craft spirits company listed on Nasdaq,
(2) we do not function as a traditional craft distillery with store
fronts relying on local sales, (3) our contract manufacturing
division is diversified, and (4) we have a diversified portfolio of
spirits brands. We are similar to other craft distillers in that
(1) we have concentrated local volume, (2) we produce small batches
and remain within the volume definition of “Craft”, and (3) our
brands achieve success through differentiation, discovery and
distribution.
The
U.S. spirits market is occupied by large multi-national
conglomerates with substantially more resources than Eastside
Distilling. However, we can use our small size to be fast, focused,
and flexible in our strategy. If we attempt to grow too quickly, we
may lack the underlying strength required to build scale with
loyalty via strong unaided awareness and powerfully derived
attributes. Moreover, attempting to focus our “frame-of-reference”
to compete with the biggest brands in the most expensive venues, is
likely to fail unless we first establish underlying brand
equity.
Our
strategy is to utilize our public company stature to our advantage
and position to expand our two distinct businesses – Spirits and
Craft C+B. Our spirits portfolio is to be positioned as a leading
regional craft spirits provider that develops brands, expands
geographic presence and positions for either a sale to a tier 1
supplier or continued ownership with growth in revenue and cash
flow. We look to grow and vertically integrate our Craft C+B
business to expand our product offerings and improve our
competitive position. These two segments are detailed
below.
Segments
Spirits
Over
the years, we have developed, matured, perfected, or acquired then
launched many award-winning spirits while evolving to meet the
growing demand for quality products and services associated with
the burgeoning craft and premium beverage trade. Our portfolio
includes originals like the Quercus garryana barrel-finished
Burnside Whiskey family, Portland Potato Vodka, Hue-Hue Coffee Rum,
and Azuñia Tequilas.
|
● |
Burnside
Whiskey Family – Our Burnside Whiskey Family celebrates the
unique attributes of the native Oregon Oak tree (Quercus
garryana). The unique complexity of each distinct whiskey comes
from blending Oregon Oak barrels of differing sizes, char levels,
and ages. After an initial experiment in 2012, we made it our
mission to turn the Burnside program into a one-of-a-kind oak
study.

|
|
● |
Portland
Potato Vodka – Our award-winning premium craft vodka is
distilled four times to ensure a smooth finish. While most vodka is
made from grain, we source award winning premium potato ethanol and
blend it with pristine water sourced from Oregon.

|
|
● |
Hue-Hue
(pronounced “way-way”) Coffee Rum – Premium silver rum is
blended with concentrated cold-brewed coffee and a small amount of
Demerara sugar. We source fair-trade, single-origin Arabica coffee
beans from the Finca El Paternal Estate in Huehuetenango, Guatemala
that are lightly roasted for us by Portland Coffee
Roasters.

|
|
● |
Azuñia
Tequilas – Smooth, clean, tequilas crafted by Rancho Miravalle,
a second generation, family-owned-and-operated estate, bursting
with authentic flavor from the local terroir of Tequila Valley,
Mexico. 100% pure Weber Blue Agave is harvested by hand, roasted in
traditional clay hornos, and finished with a natural, open-air
fermentation process. It is bottled on-site in small batches using
a consistent process to deliver consistent field-to-bottle quality
and exclusively exported by Agaveros Unidos de Amatitán.

|
|
● |
Eastside
Brands – We make the unique by blending together the unusual,
craft inspired, experiential brands and high-quality artisan,
in-and-out, seasonal and ongoing limited-edition products. Each
Eastside-branded product is rare and hard-to-get with a peculiar
balance of age and innovation, craftsmanship and curiosity,
creativity and restraint.

|
Craft Canning + Bottling
With
10 years of experience in the canning business, we’ve become the
West’s most trusted and premier mobile packaging provider. We serve
locations in Oregon, Washington and Colorado. Our team of
professionals have packaged hundreds of award-winning products
across both established and innovative beverage segments - beer,
wine, cider, RTD cocktails, kombucha, seltzer, and many more. We
use extensive proprietary and data-driven quality control measures
and a robust clean-in-place procedure in order to provide the best
packaging service for our customers. We take great pride in helping
local beverage producers expand their distribution reach by using
our service to offer industry-top quality and branding. Our
greatest asset is the unmatched expertise of our talented group of
packaging professionals who show up every day to go above and
beyond to get the job done.
Our
Craft mobile team offers a variety of services and products,
including:
|
● |
High
Mobile Canning Capacity – We operate 14 Wild Goose MC-250
machines, with the capacity to can over 150,000 barrels per year.
In addition to the canning lines, we use custom in-house designed
fully automated depalletizers and twist rinses. |
|
● |
Large
Craft Volumes – With capabilities of around 600-800 cases per
shift, we can manage any volume. Averaging 40 cans per minute, each
machine can do 100 cases per hour.

|
|
● |
Dedicated
Team – All of our employees are carefully and rigorously
trained. A fully insured workforce is ready to take on any and all
of the customer’s packaging needs. We believe in continuous
improvement, and we understand the value of our clients’ products
and dedicate ourselves to making every run a successful
run.

|
|
● |
Quality
Control – Hach Orbispheres measure our dissolved oxygen (“DO”)
during packaging to ensure the lowest Total Packaged Oxygen for the
customer’s can. We use luminometers and ATP swabs to ensure
sanitation of our equipment. We can provide Zahm & Nagel volume
meters to measure carbon dioxide (“CO2”) volumes in carbonated
products before packaging. As masters of the “double seam” we
frequently take on-site measurements with micrometers. We also
offer CMC Kuhnke technology to generate even more accurate
measurements in the form of visual seam reports.
|
|
● |
Velcorin
and Nitrogen Dosing – We have both velcorin and nitrogen dosing
capabilities that supports microbial control and allows packaging
of still products in addition to carbonated and nitrogenated
beverages.

|
|
● |
Pre-printing
and Outfeed Labeling – Bringing on advanced digital can
printing technology from Hinterkopf in Q2 2022 allows us to offer
customers both world-class aesthetics and full sustainability in an
end-to-end branding and packaging solution, accessible from our
smallest to our largest customers. We also provide outfeed labeling
and the ability to package customer-provided branded cans of all
varieties. |
|
|
|
|
● |
Location
Flexibility – We allow our customers to choose the location of
canning. We bring our mobile equipment to their facility, or our
customers can bring their product to us for co-packing. |
We
secured an innovative printer that will revolutionize the growing
custom canning operation. The new printer, the German-made
Hinterkopf D240.2, is the only one of its kind on the West Coast
and one of ten in the world. The new acquisition gives Craft C+B
the ability to offer unparalleled customization and flexibility to
craft beverage producers seeking direct printing for canning
projects of all sizes. The new printer began operations in April
2022.

We
print 12-ounce or 16-ounce cans in any quantity with any image,
with a minimum order of 400 cans. This flexibility allows for
custom graphics of limited releases, vintages, partnerships, and
special events.
In
connection with the printer, we partnered with a leading can
provider to provide quality canning services from end to end. The
new partnership guarantees a current and future supply of
domestically manufactured Crown cans, cost-effective solutions for
our customers, and improved logistics for beverage
producers.
Recent
Developments
We
faced a number of challenges in both business segments in 2021 that
have continued into 2022. The COVID-19 pandemic has had an enormous
effect on both the mobile canning operation as well as spirits
division. Increased competition, supply change issues and
restructuring activities added to performance challenges in 2021
that have continued into 2022.
The
spirits beverage category saw increased volume in the first quarter
of 2022, however, we did not benefit from this trend due to tough
comparisons as we cycle Azuñia deep discounting that occurred in
the first half of 2021 and the impact of distributor high stock
levels at the end of 2021 resulting from lost distribution and
decreased velocity. In addition, we faced challenges with
distribution partners in the highly restrictive three-tier
distribution system. Finally, we saw cost increases across much of
our direct and indirect costs. While a substantial amount of our
raw materials is owned, such as our whisky, and not susceptible to
price inflation, imported tequila and other materials such as glass
inflated through the year. These increases along with the
aforementioned volume challenges negatively impacted gross margins
resulting in underperforming the 2022 operating plan. This softness
in wholesale sales was offset by the sale of nearly 800 barrels of
rye whiskey sold for $1.5 million.
Craft
C+B also continues to face unique challenges. Beginning mid-year
2020 and throughout 2021, the craft beverage industry faced a
shortage of aluminum cans. Domestic aluminum can manufacturers
continue to make adjustments to manage a supply demand imbalance
into 2022. As a result, buyers of aluminum cans continue to face
uncertainties. We believe we have sourced an adequate supply of
cans with a supply contract with Canadian Canning to supply our
current business plan. In addition, suppliers have successfully
passed through price increases, which we did not immediately pass
through to our customers. Moreover, this period of rapidly
escalating prices left us at a competitive disadvantage to others
that had a superior source of cans. We faced a number of
competitive challenges from customers, which insourced both can
purchasing as well as filling services after the start of the
COVID-19 pandemic.
Results
of Operations
Overview
Three Months Ended March 31, 2022 Compared to the Three Months
Ended March 31, 2021
(Dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
Variance |
|
Sales |
|
$ |
3,780 |
|
|
$ |
3,243 |
|
|
$ |
537 |
|
Less customer
programs and excise taxes |
|
|
40 |
|
|
|
95 |
|
|
|
(55 |
) |
Net sales |
|
|
3,740 |
|
|
|
3,148 |
|
|
|
592 |
|
Cost of sales |
|
|
2,793 |
|
|
|
2,605 |
|
|
|
188 |
|
Gross profit |
|
|
947 |
|
|
|
543 |
|
|
|
181 |
|
Sales and
marketing expenses |
|
|
647 |
|
|
|
857 |
|
|
|
(210 |
) |
General and
administrative expenses |
|
|
1,930 |
|
|
|
1,924 |
|
|
|
6 |
|
Loss
on disposal of property and equipment |
|
|
- |
|
|
|
61 |
|
|
|
(61 |
) |
Total
operating expenses |
|
|
2,577 |
|
|
|
2,842 |
|
|
|
(265 |
) |
Loss from operations |
|
|
(1,630 |
) |
|
|
(2,299 |
) |
|
|
669 |
|
Interest
expense |
|
|
(406 |
) |
|
|
(126 |
) |
|
|
(280 |
) |
Other
income |
|
|
- |
|
|
|
2,200 |
|
|
|
(2,200 |
) |
Loss from continuing operations |
|
|
(2,036 |
) |
|
|
(225 |
) |
|
|
(1,811 |
) |
Income from discontinued
operations |
|
|
- |
|
|
|
3,933 |
|
|
|
(3,933 |
) |
Preferred stock
dividends |
|
|
(38 |
) |
|
|
- |
|
|
|
(38 |
) |
Net income
(loss) |
|
$ |
(2,074 |
) |
|
$ |
3,708 |
|
|
$ |
(5,782 |
) |
Gross margin |
|
|
25 |
% |
|
|
17 |
% |
|
|
8 |
% |
Segment
information was as follows for the three months ended March 31,
2022 and 2021:
(Dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
Variance |
|
Spirits |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
2,704 |
|
|
$ |
1,333 |
|
|
$ |
1,371 |
|
Net sales |
|
|
2,664 |
|
|
|
1,238 |
|
|
|
1,426 |
|
Cost of sales |
|
|
1,682 |
|
|
|
1,054 |
|
|
|
628 |
|
Gross profit |
|
|
982 |
|
|
|
184 |
|
|
|
798 |
|
Total operating
expenses |
|
|
1,269 |
|
|
|
1,696 |
|
|
|
(427 |
) |
Net income (loss) |
|
$ |
(682 |
) |
|
$ |
4,111 |
|
|
$ |
(4,793 |
) |
Gross Margin |
|
|
37 |
% |
|
|
15 |
% |
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Craft C+B |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
1,076 |
|
|
$ |
1,909 |
|
|
$ |
(833 |
) |
Net sales |
|
|
1,076 |
|
|
|
1,909 |
|
|
|
(833 |
) |
Cost of sales |
|
|
1,111 |
|
|
|
1,551 |
|
|
|
(440 |
) |
Gross profit |
|
|
(35 |
) |
|
|
358 |
|
|
|
(393 |
) |
Total operating
expenses |
|
|
1,308 |
|
|
|
1,147 |
|
|
|
161 |
|
Net (loss) |
|
$ |
(1,354 |
) |
|
$ |
(405 |
) |
|
$ |
(949 |
) |
Gross Margin |
|
|
-3 |
% |
|
|
19 |
% |
|
|
-22 |
% |
Sales
Sales
for the three months ended March 31, 2022 increased to $3.8 million
from $3.2 million for the three months ended March 31,
2021.
Sales
of spirits during the quarter increased from sales during the three
months ended March 31, 2021 due to a single sale of 798 barrels of
95% rye whiskey ranging in age from three-year-old to
eight-year-old for gross proceeds of $1.5 million. This was
partially offset by softness in Azuñia volume and corresponding
negative mix impact of $(0.2) million resulting from deep
discounting in the first half of 2021. The following table presents
volumes by nine-liter cases for the three months ended March 31,
2022 and 2021:
9 liter
cases |
|
2022 |
|
|
2021 |
|
|
Variance |
|
Azuñia |
|
|
2,059 |
|
|
|
2,910 |
|
|
|
(851 |
) |
Burnside |
|
|
1,005 |
|
|
|
1,025 |
|
|
|
(21 |
) |
Hue-Hue |
|
|
84 |
|
|
|
121 |
|
|
|
(37 |
) |
PPV |
|
|
4,301 |
|
|
|
4,664 |
|
|
|
(363 |
) |
Eastside Brands |
|
|
68 |
|
|
|
- |
|
|
|
68 |
|
Legacy Brands |
|
|
11 |
|
|
|
175 |
|
|
|
(164 |
) |
|
|
|
7,527 |
|
|
|
8,895 |
|
|
|
(1,368 |
) |
Craft C+B sales decreased due to a combination of factors including
cycling the end of the pandemic where on-premise consumption had
yet to open up in 2021, a trend to insource can purchasing and
filling by larger customers and increased competition.
Customer programs and excise taxes
Customer
programs and excise taxes totaled $0.1 million for both the three
months ended March 31, 2022 and 2021.
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. For the three months ended March 31, 2022,
cost of sales increased to $2.8 million from $2.6 million for the
three months ended March 31, 2021. Spirit’s cost of sales increased
due to higher sales primarily from the sale of our wholesale
spirits. Craft C+B cost of sales decreased due to lower sales and
lower compensation costs.
Gross Profit
Gross profit is calculated by subtracting the cost of products sold
from net sales. Gross profit for the three months ended March 31,
2022 increased to $0.9 million from $0.5 million for the three
months ended March 31, 2021.
Gross
margin is gross profit stated as a percentage of net sales. Our
gross margin of 25% for the three months ended March 31, 2022
increased from our gross margin of 17% for the three months ended
March 31, 2021. Spirits gross margin increased primarily due to the
sale of our wholesale spirits. Craft C+B’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+B
launched its digital can printing business subsequent to first
quarter ending, however it continued to incur costs with no
associated revenue during the three months ended March 31,
2022.
Sales and Marketing Expenses
Sales
and marketing expenses for the three months ended March 31, 2022
decreased to $0.6 million from $0.9 million for the three months
ended March 31, 2021 primarily due to a decrease in marketing spend
and compensation related to lower headcount as we continue to focus
our sales efforts in key markets of Oregon, California, Arizona,
Colorado, Texas, Florida, and Washington.
General and Administrative Expenses
General
and administrative expenses for both the three months ended March
31, 2022 and 2021 were flat at $1.9 million primarily due to
compensation as our overall headcount decreased, offset by rent as
we entered into new leases.
Other Income
Other income was $2.2 million for the three months ended March 31,
2021 and was attributable to the forgiveness of our loans under the
U.S. government Paycheck Protection Program (“PPP Loans”) and the
remeasurement of deferred consideration for the final Azuñia
earn-out.
Net Income (Loss)
Net
loss was $(2.0) million for the three months ended March 31, 2022
from net income of $3.7 million for the three months ended March
31, 2021.
Preferred Stock Dividends
Preferred
stock dividends were $37,500 for the three months ended March 31,
2022 and related to the Series B preferred stock dividend of 6% per
annum.
Liquidity
and Capital Resources
Our
primary capital requirements are for cash used in operating
activities and the repayment of debt. Funds for our cash and
liquidity needs have historically not been generated from
operations but rather from short-term credit in the form of
extended payment terms from suppliers as well as proceeds from the
sale of convertible debt and equity financings. We have been
dependent on raising capital from debt and equity financings to
meet our operating needs.
During
2021, our working capital position improved by $22.0 million,
primarily due to the conversion of a large portion of debt into
equity related to our acquisition of the Azuñia brand. In addition,
during 2021, the Small Business Administration (“SBA”) notified us
that it approved our request for full forgiveness of the PPP Loans
that we took in 2020 in the principal amount of $1.4
million.
For
the three months ended March 31, 2022, we incurred a net loss of $
2.0 million and had an accumulated deficit of $60.7 million. During
the three months ended March 31, 2022, we raised $2.0 million in
additional capital through debt financing to invest in our
three-year growth plan.
We
continue to make substantial investments in Craft C+B, which we
believe will deliver improved results later in 2022, in part due to
our acquisition of a state-of-the-art digital can printer that will
add incremental services and revenue.
As of
March 31, 2022, we had $2.6 million of cash on hand with working
capital of $3.8 million. Our ability to meet our ongoing operating
cash needs over the next 12 months depends on growing revenues and
gross margins, and generating positive operating cash flow,
primarily through increased sales, profitable operations, and
controlling expenses. If we are unable to obtain additional
financing, or additional financing is not available on acceptable
terms, we may seek to sell assets, reduce operating expenses,
reduce or eliminate marketing initiatives.
Our
cash flow results for the three months ended March 31, 2022 and
2021 were as follows:
(Dollars in thousands) |
|
2022 |
|
|
2021 |
|
Net cash flows provided by (used
in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(0.1 |
) |
|
$ |
1.4 |
|
Investing activities |
|
$ |
(1.4 |
) |
|
$ |
3.4 |
|
Financing activities |
|
$ |
0.9 |
|
|
$ |
(3.6 |
) |
Operating
Activities
Total cash used in operating activities was $0.1 million during the
three months ended March 31, 2022 compared to cash provided of $1.4
million during the three months ended March 31, 2021. The decrease
in cash was primarily attributable to an increase in prepaid
expenses related to our strategy to shift Craft C+B to offer
digital can printing services in the Pacific Northwest.
Investing
Activities
Total cash used in investing activities was $1.4 million during the
three months ended March 31, 2022 representing our investment in
digital can printing equipment, compared to cash provided of $3.4
million during the three months ended March 31, 2021, which
consisted of $3.4 million received for the Termination Agreement
with RSG.
Financing
Activities
Total cash provided by financing activities was $0.9 million during
the three months ended March 31, 2022 compared to cash used of $3.6
million during the three months ended March 31, 2021. Net cash
flows provided by financing activities during the three months
ended March 31, 2022 consisted of the proceeds from a note payable
with a related party of $2.0 million; offset by $0.9 million of
principal payments of our secured credit facilities and $0.2
million of payments on principal of notes payable. Net cash flows
used in financing activities during the three months ended March
31, 2021 consisted of $3.4 million of payments reducing the balance
of our secured trade credit facility and $0.2 million of payments
reducing the principal balance of notes payable.
Lines
of Credit
From
2019 until December 2021, we utilized an existing accounts
receivable factoring line of credit with ENGS Commercial Capital,
LLC (“ENGS”) that provided for a minimum of $0.5 million purchased
accounts receivable and a maximum of $1.0 million of purchased
accounts receivable. The advance rate was 85%, and interest was
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. The Company factored $2.4 million of invoices
during the year ended December 31, 2021. In December 2021, our
agreement with ENGS expired and we are no longer factoring Craft
C+B receivables.
Since
2019, we utilized an existing accounts receivable factoring line of
credit with Park Street Financial Services, LLC. The advance rate
is 75%, and interest is charged at a rate of 2.4% for the first 30
days plus 1.44% for each additional ten-day period. The Company
factored $0.3 million of invoices during the year ended December
31, 2021. As of March 31, 2022, the Company had no factored
invoices outstanding.
Inventory
Line
In January 2020, we and our subsidiaries entered into a loan
agreement with Live Oak Banking Company (“Live Oak”) for a loan in
an aggregate principal amount not to exceed the lesser of (i) $8.0
million and (ii) a borrowing base of up to 85% of the appraised
value of the borrowers’ eligible inventory of whisky in barrels or
totes less an amount equal to all service fees or rental payments
owed by borrowers during the 90 day period immediately succeeding
the date of determination to any warehouses or bailees holding
eligible inventory (the “Live Oak Loan”). The Live Oak Loan is
secured by all assets of the Company excluding accounts receivable
and certain other specified excluded property. The Live Oak Loan
bears interest at a variable rate of interest equal to (i) two and
49/100ths percent (2.49%) per annum plus (ii) the Prime Rate as
published in The Wall Street Journal, adjusted on a calendar
quarterly basis. Interest is payable monthly. Additionally, the
Company issued to Live Oak 100,000 warrants to purchase common
stock at an exercise price of $3.94 per share. The proceeds of the
Live Oak Loan were used to pay off all principal and accrued
interest under the TQLA Note of $0.9 million and all principal and
interest under loan issued pursuant to that Credit and Security
Agreement, by and between the Company and The KFK Children’s Trust,
Jeffrey Anderson – Trustee of $3.0 million. The loan matured on
November 11, 2021. On February 28, 2022, Live Oak and the Company
entered into a forbearance agreement while the parties finalize a
further extension of the maturity date. On February 4, 2022, we
repaid $0.9 million of the loan, reducing the principal balance to
$1.9 million as of March 31, 2022.
Critical
Accounting Policies
The
discussion and analysis of the Company’s financial condition and
results of operations is based upon its consolidated financial
statements, which have been prepared in accordance with United
States. generally accepted accounting principles. The preparation
of these financial statements requires us to make significant
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. These items are monitored and
analyzed by management for changes in facts and circumstances, and
material changes in these estimates could occur in the future.
Changes in estimates are recorded in the period in which they
become known. The Company bases its estimates on historical
experience and various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from
our estimates if past experience or other assumptions do not turn
out to be substantially accurate.
In
connection with the preparation of our financial statements for the
three months ended March 31, 2022, there was one accounting
estimate we made that was subject to a high degree of uncertainty
and was critical to our results, as follows:
Intangible Assets
On
September 12, 2019, we purchased the Azuñia brand, the direct sales
team, existing product inventory, supply chain relationships and
contractual agreements from Intersect Beverage, LLC, an importer
and distributor of tequila and related products. The Azuñia brand
has been determined to have an indefinite life and will not be
amortized. We do, however, on an annual basis, test the indefinite
life for impairment. If the indefinite life is found to be
impaired, then we will estimate its useful life and amortize the
asset over the remainder of its useful life.
We
estimate the brand’s fair value using discounted estimated future
cash flows or market information and will impair it when its
carrying amount exceeds its estimated fair value, in which case we
will write it down to its estimated fair value. We consider market
values for similar assets when available. Considerable management
judgment is necessary to estimate fair value, including making
assumptions about future cash flows, net sales and discount
rates.
We
have the option, before quantifying the fair value, to evaluate
qualitative factors to assess whether it is more likely than not
that our brand is impaired. If we determine that is not the case,
then we are not required to quantify the fair value. That
assessment also takes considerable management judgment.
Based
on our assumptions, we believe that, as of March 31, 2022, the
Azuñia brand was not impaired.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably
likely to have a material current or future effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
As a
“smaller reporting company” as defined by Item 10 of Regulation
S-K, we are not required to provide information required by this
item.
ITEM 4 – CONTROLS AND PROCEDURES
We
maintain disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(“Exchange Act”) that are designed to provide reasonable assurances
that the information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the
SEC rules and forms and that such information is accumulated and
communicated to management, including the Chief Executive Officer
and the Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.
We
conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange
Act)), under the supervision and with the participation of
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company’s disclosure
controls and procedures (as defined in Rule 13a-15(e)) as of the
end of the period covered by this report. Based on the evaluation,
the Chief Executive Officer and Chief Financial Officer has
concluded that these disclosure controls and procedures were
effective as of March 31, 2022.
There
were no changes in internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) during the quarter
ended March 31, 2022, that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART II: OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
On
December 15, 2020, Grover Wickersham filed a complaint in the
United States District Court for the District Court of Oregon
against the Company. Mr. Wickersham, the former CEO and Chairman of
the Board of the Company, has asserted causes of action for fraud
in the inducement, breach of contract, breach of the implied
covenant of good faith and fair dealing, defamation, interference
with economic advantage, elder financial abuse, and dissemination
of false and misleading proxy materials. The Company disputes the
allegations and intends to defend the case vigorously.
We
are not currently subject to any other material legal proceedings;
however, we could be subject to legal proceedings and claims from
time to time in the ordinary course of our business, or legal
proceedings we considered immaterial may in the future become
material. Regardless of the outcome, litigation can, among other
things, be time consuming and expensive to resolve, and divert
management resources.
ITEM 1A – RISK FACTORS
There
have been no material changes in our risk factors from those
previously disclosed in our annual report on Form 10-K for the year
ended December 31, 2021 and incorporated therein by
reference.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not
applicable.
ITEM 5 – OTHER INFORMATION
None
ITEM 6 – EXHIBITS
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
EASTSIDE
DISTILLING, INC. |
|
|
|
Date:
May 16, 2022 |
By: |
/s/
Geoffrey Gwin |
|
|
Geoffrey
Gwin |
|
|
Chief
Executive Officer |
|
|
|
Date:
May 16, 2022 |
By: |
/s/
Geoffrey Gwin |
|
|
Geoffrey
Gwin |
|
|
Chief
Financial Officer |
|
|
(Principal
Financial and Accounting Officer) |
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