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.