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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, 2023
   
☐ 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)

 

Registrant’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 12, 2023, 16,660,171 shares of our common stock, $0.0001 par value, were outstanding.

 

 

 

 

 

 

EASTSIDE DISTILLING, INC.

 

FORM 10-Q

 

March 31, 2023

 

TABLE OF CONTENTS

 

    Page
PART I— FINANCIAL INFORMATION 3
     
Item 1. Financial Statements 3
  Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 3
  Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022 4
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 5
  Notes to the Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4 Controls and Procedures 28
     
PART II— OTHER INFORMATION 29
     
Item 1 Legal Proceedings 29
Item 1A Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Mine Safety Disclosures 29
Item 5. Other Information 30
Item 6. Exhibits 30
     
SIGNATURES 31

 

2
 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

Eastside Distilling, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except shares and per share amounts)

 

   March 31, 2023   December 31, 2022 
Assets   (Unaudited)      
Current assets:          
Cash  $267   $723 
Trade receivables, net   860    876 
Inventories   3,989    4,442 
Prepaid expenses and current assets   941    579 
Total current assets   6,057    6,620 
Property and equipment, net   5,489    5,741 
Right-of-use assets   2,698    2,988 
Intangible assets, net   5,655    5,758 
Other assets, net   354    369 
Total Assets  $20,253   $21,476 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $2,077   $1,728 
Accrued liabilities   1,429    1,509 
Deferred revenue   115    18 
Current portion of secured credit facilities, net of debt issuance costs   3,377    3,442 
Current portion of note payable, related party   4,651    4,598 
Current portion of notes payable   7,749    - 
Current portion of lease liabilities   870    991 
Other current liability, related party   1,024    725 
Total current liabilities   21,292    13,011 
Lease liabilities, net of current portion   1,970    2,140 
Note payable, related party   -    92 
Notes payable, net of current portion   -    7,749 
Total liabilities   23,262    22,992 
           
Commitments and contingencies (Note 13)   -      
           
Stockholders’ equity (deficit):          
Common stock, $0.0001 par value; 35,000,000 shares authorized; 16,660,171 and 16,199,269 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively   2    2 
Preferred stock, $0.0001 par value; 100,000,000 shares authorized; 2,500,000 shares issued and outstanding as of both March 31, 2023 and December 31, 2022   -    - 
Additional paid-in capital   73,646    73,503 
Accumulated deficit   (76,657)   (75,021)
Total stockholders’ equity (deficit)   (3,009)   (1,516)
Total Liabilities and Stockholders’ Equity  $20,253   $21,476 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3
 

 

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three Months Ended March 31, 2023 and 2022

(Dollars and shares in thousands, except per share amounts)

(Unaudited)

 

           
   2023   2022 
         
Sales  $2,879   $3,780 
Less customer programs and excise taxes   26    40 
Net sales   2,853    3,740 
Cost of sales   2,212    2,793 
Gross profit   641    947 
Operating expenses:          
Sales and marketing expenses   511    647 
General and administrative expenses   1,364    1,930 
Loss on disposal of property and equipment   6    - 
Total operating expenses   1,881    2,577 
Loss from operations   (1,240)   (1,630)
Other income (expense), net          
Interest expense   (329)   (406)
Other expense   (29)   - 
Total other expense, net   (358)   (406)
Loss before income taxes   (1,598)   (2,036)
Provision for income taxes   -    - 
Net loss   (1,598)   (2,036)
Preferred stock dividends   (38)   (38)
Net loss attributable to common shareholders  $(1,636)  $(2,074)
           
Basic and diluted net loss per common share  $(0.10)  $(0.14)
Basic and diluted weighted average common shares outstanding   16,475    14,901 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4
 

 

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2023 and 2022

(Dollars in thousands)

(Unaudited)

 

   2023   2022 
Cash Flows From Operating Activities:          
Net loss  $(1,598)  $(2,036)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   407    263 
(Recovery of) bad debt expense   (2)   43 
Loss on disposal of assets   6    - 
Write off of obsolete fixed assets   54    - 
Inventory reserve   (19)   (32)
Stock dividend payable   (38)   (38)
Amortization of debt issuance costs   -    180 
Interest accrued to secured credit facilities   78    50 
Payment of accrued interest on secured credit facilities   (142)   - 
Interest accrued for amounts due to related parties   123    - 
Payment of accrued interest on amounts due to related parties   (141)   - 
Issuance of common stock in exchange for services of related parties   60    207 
Issuance of common stock in exchange for services of third parties   83    119 
Stock-based compensation   -    2 
Changes in operating assets and liabilities:          
Trade receivables, net   -    148 
Inventories   471    457 
Prepaid expenses and other assets   (390)   (924)
Right-of-use assets   290    229 
Accounts payable   350    1,102 
Accrued liabilities   (104)   205 
Other liabilities, related party   279    - 
Deferred revenue   96    - 
Net lease liabilities   (291)   (111)
Net cash used in operating activities   (428)   (136)
           
Cash Flows From Investing Activities:          
Purchases of property and equipment   (28)   (1,389)
Net cash used in investing activities   (28)   (1,389)
           
Cash Flows From Financing Activities:          
Proceeds from note payable, related party   -    2,000 
Payments of principal on secured credit facilities   -    (940)
Payments of principal on notes payable   -    (205)
Net cash provided by financing activities   -    855 
           
Net decrease in cash   (456)   (670)
Cash at the beginning of the period   723    3,276 
Cash at the end of the period  $267   $2,606 
           
Supplemental Disclosure of Cash Flow Information          
Cash paid during the period for interest  $323   $215 
Cash paid for amounts included in measurement of lease liabilities  $318   $177 
           
Supplemental Disclosure of Non-Cash Financing Activity          
Exchange of assets for services  $42   $- 
Right-of-use assets obtained in exchange for lease obligations  $-   $320 
Warrants issued in relation to secured credit facilities  $-   $948 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

1. Description of Business

 

Eastside Distilling (the “Company” or “Eastside Distilling”) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, the Company changed its corporate name to Eastside Distilling, Inc. to reflect the acquisition of Eastside Distilling, LLC. The Company manufactures, acquires, blends, bottles, imports, markets and sells a wide variety of alcoholic beverages under recognized brands. The Company currently employs 49 people in the United States.

 

The Company operates a beverage packaging and services business that operates in the beverage segment. During 2022, the Company made substantial investments to expand its product offerings to include digital can printing in the Pacific Northwest (together Craft Canning + Printing, “Craft C+P”). Craft C+P operates 13 mobile filling lines in Seattle, Washington; Spokane, Washington; and Portland, Oregon. The Company also offers co-packing services in Portland, Oregon offering end-to-end production capabilities.

 

The Company’s spirits’ brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila. The Company sells products on a wholesale basis to distributors in open states and through brokers in control states.

 

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 $76.7 million as of March 31, 2023, having incurred a net loss of $1.6 million during the three months ended March 31, 2023.

 

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. In addition, the Company has been negotiating with creditors to reduce the interest burden and improve cash flow. If the Company is unable to reach an agreement with creditors or 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, 2022 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, 2022 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, 2023, its operating results for the three months ended March 31, 2023 and 2022 and its cash flows for the three months ended March 31, 2023 and 2022. 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, 2022. 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 Craft Canning + Bottling, LLC (doing business as Craft Canning + Printing) and its wholly-owned subsidiary Galactic Unicorn Packaging, LLC (the Company’s newly acquired fixed co-packing assets) and MotherLode LLC. All intercompany balances and transactions have been eliminated on consolidation.

 

6
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(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 $(6,382) due to the reversal of a customer discount and $3,812 for the three months ended March 31, 2023 and 2022, 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 $32,136 and $40,062 for the three months ended March 31, 2023 and 2022, 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, digital media, salary and benefit expenses, travel and entertainment expenses. Sales and marketing costs are expensed as incurred. Advertising and marketing expenses totaled $0.1 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively.

 

7
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

General and Administrative Expenses

 

General and administrative expenses consist of salary and benefit expenses, travel and entertainment expenses for executive and administrative staff, rent and utilities, professional fees, insurance, and amortization and depreciation expense. General and administrative costs are expensed as incurred.

 

Stock-Based Compensation

 

The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest.

 

Concentrations

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of March 31, 2023, one distributor represented 9% of trade receivables. As of December 31, 2022, one distributor represented 15% of trade receivables. Sales to one distributor and one wholesale customer accounted for 37% of consolidated sales for the three months ended March 31, 2023. Sales to one distributor and one wholesale customer accounted for 40% of consolidated sales for the year ended December 31, 2022.

 

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, 2023 and December 31, 2022, 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.

 

8
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

None of the Company’s assets or liabilities were measured at fair value as of March 31, 2023 or December 31, 2022. 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, 2023 and December 31, 2022, the principal amounts of the Company’s notes approximate fair value.

 

Items Measured at Fair Value on a Nonrecurring Basis

 

Certain assets and liabilities acquired in a business acquisition are valued at fair value at the date of acquisition due to having indefinite lives. The Company, on an annual basis, tests the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then the Company will estimate its useful life and amortize the asset over the remainder of its useful life.

 

Inventories

 

Inventories primarily consist of bulk and bottled liquor and raw materials and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (“FIFO”) method. A portion of the Company’s finished goods inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory.

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the life of the lease or the useful lives of the assets, whichever is shorter. The cost and related accumulated depreciation and amortization of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is reported as current period income or expense. The costs of repairs and maintenance are expensed as incurred.

 

Intangible Assets / Goodwill

 

The Company accounts for certain intangible assets at cost. Management reviews these intangible assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative assessment of certain of its intangible assets as of March 31, 2023 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, 2023 and determined that they were not impaired.

 

Comprehensive Income

 

The Company did not have any other comprehensive income items in either the three months ended March 31, 2023 or 2022.

 

9
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

Accounts Receivable Factoring Program

 

The Company has 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 1% 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. The Company factored $0.1 million of invoices and incurred $12,244 in fees associated with the factoring programs during the three months ended March 31, 2023. As of March 31, 2023, the Company had $0.1 million factored invoices outstanding.

 

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.

 

4. Business Segment Information

 

The Company’s internal management financial reporting consists of Craft C+P, Eastside spirits and corporate. Craft C+P offers digital can printing and co-packing services in Portland, Oregon allowing it to offer end-to-end production capabilities. Craft C+P operates 13 mobile lines in Washington and Oregon. The spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila and are sold on a wholesale basis to distributors in open states, and brokers in control states. The Company’s principal area of operation is in the U.S. and has two spirits customers that represents 37% of its revenue. Corporate consists of key accounting personnel and corporate expenses such as public company and board costs, as well as interest on debt.

 

The measure of profitability reviewed is condensed statements of operations and gross margins. 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.

 

10
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

Segment information was as follows for the three months ended March 31, 2023 and 2022:

 

(Dollars in thousands)  2023   2022 
           
Craft C+P          
Sales  $1,456   $1,076 
Net sales   1,477    1,076 
Cost of sales   1,578    1,111 
Gross profit   (101)   (35)
Total operating expenses   749    1,047 
Net loss   (884)   (1,093)
Gross margin   -7%   -3%
           
Interest expense  $4   $11 
Depreciation and amortization   368    221 
Significant noncash items:          
Loss on disposal of property and equipment   6    - 
Stock compensation   -    205 
           
Spirits          
Sales  $1,423   $2,704 
Net sales   1,376    2,664 
Cost of sales   634    1,682 
Gross profit   742    982 
Total operating expenses   522    625 
Net income   221    357 
Gross margin   54%   37%
           
Depreciation and amortization  $39   $42 
Corporate          
Total operating expenses  $610   $905 
Net loss   (935)   (1,300)
           
Interest expense  $325   $395 
Significant noncash items:          
Stock compensation   111    170 

 

Craft C+P’s sales increased due to new digital printing revenues offset by lower mobile revenues. Gross margin decreased compared to the prior year as digital printing continues to ramp up and is not at sufficient capacity to offset related operating expense. The Company also incurred higher raw material costs in the quarter related to digital printing.

 

5. Inventories

 

Inventories consisted of the following:

  

(Dollars in thousands)  March 31,
2023		   December 31,
2022		 
Raw materials  $2,691   $3,127 
Finished goods   1,298    1,315 
Total inventories  $3,989   $4,442 

 

6. Prepaid Expenses and Current Assets

 

Prepaid expenses and current assets consisted of the following:

 

(Dollars in thousands)  March 31,
2023		   December 31,
2022		 
Prepayment of fixed assets  $350   $346 
Prepayment of inventory   302    - 
Other   289    233 
Total prepaid expenses and current assets  $941   $579 

 

11
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

7. Property and Equipment

 

Property and equipment consisted of the following:

 

(Dollars in thousands)  March 31,
2023		   December 31,
2022		 
Furniture and fixtures  $4,073   $4,093 
Digital can printer   4,264    4,216 
Leasehold improvements   1,529    1,529 
Vehicles   222    222 
Total cost   10,088    10,060 
Less accumulated depreciation   (4,599)   (4,319)
Total property and equipment, net  $5,489   $5,741 

 

Purchases of property and equipment totaled $0 million and $1.4 million for the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2022, the Company invested $1.3 million in the digital can printer that was not in operation at quarter-end. Depreciation expense totaled $0.3 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.

 

During the three months ended March 31, 2023, the Company disposed of fixed assets resulting in a loss of $5,901 and wrote off obsolete fixed assets with a net book value of $0.1 million.

 

8. Intangible Assets

 

Intangible assets consisted of the following:

 

(Dollars in thousands)  March 31,
2023		   December 31,
2022		 
Permits and licenses  $25   $25 
Azuñia brand   4,492    4,492 
Customer lists   2,895    2,895 
Total intangible assets   7,412    7,412 
Less accumulated amortization   (1,757)   (1,654)
Intangible assets, net  $5,655   $5,758 

 

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, 2023 and 2022.

 

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 the carrying value of an indefinite life asset is found to be impaired, then the Company will record an impairment loss and reduce the carrying value of the asset.

 

9. Other Assets

 

Other assets consisted of the following:

 

(Dollars in thousands)  March 31,
2023		   December 31,
2022		 
Product branding  $400   $400 
Deposits   256    256 
Total other assets   656    656 
Less accumulated amortization   (302)   (287)
Other assets, net  $354   $369 

 

12
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

As of March 31, 2023, 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 $14,286 for both the three months ended March 31, 2023 and 2022.

 

The deposits represent office lease deposits.

 

10. Leases

 

The Company has various lease agreements in place for facilities, equipment and vehicles. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2027. The Company determines if an arrangement is a lease at inception. As the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate based on information available at commencement to determine the present value of the lease payments. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. As of March 31, 2023, the amount of right-of-use assets and lease liabilities were $2.7 million and $2.8 million, respectively. Aggregate lease expense for the three months ended March 31, 2023 was $0.3 million, consisting of $0.1 million in operating lease expense for lease liabilities and $0.2 million in short-term lease cost.

 

Maturities of lease liabilities as of March 31, 2023 were as follows:

 

(Dollars in thousands)  Operating Leases  

Weighted-

Average

Remaining

Term in Years

 
2023  $833      
2024   797      
2025   795      
2026   632      
2027   141      
Thereafter   -      
Total lease payments   3,198      
Less imputed interest (based on 6.7% weighted-average discount rate)   (358)     
Present value of lease liability  $2,840    3.29 

 

11. Notes Payable

 

Notes payable consisted of the following:

 

(Dollars in thousands)  March 31,
2023		   December 31,
2022		 
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.  $7,749   $7,749 
         
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.  $7,749   $7,749 
Total notes payable   7,749    7,749 
Less current portion   (7,749)   - 
Long-term portion of notes payable  $-   $7,749 

 

13
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

The Company paid $0.1 million and $0.2 million in interest on notes for the three months ended March 31, 2023 and 2022, respectively.

 

Maturities on notes payable as of March 31, 2023 were as follows:

 

(Dollars in thousands)    
2023  $- 
2024   7,749 
2025   - 
2026   - 
2027   - 
Thereafter   - 
Total  $7,749 

 

12. Secured Credit Facilities

 

Note Purchase Agreement

 

On October 7, 2022, the Company entered into a Note Purchase Agreement dated as of October 6, 2022 with Aegis Security Insurance Company (“Aegis”). Pursuant to the Note Purchase Agreement, Aegis purchased from the Company a secured promissory note in the principal amount of $4.5 million (the “Aegis Note”). Aegis paid for the Aegis Note by paying $3.3 million to TQLA to fully satisfy a secured line of credit promissory note that the Company issued to TQLA on March 21, 2022; and the remaining $1.2 million was paid in cash to the Company. The Company pledged substantially all of its assets to secure its obligations to Aegis under the Aegis Note.

 

The Aegis Note bears interest at 9.25% per annum, payable every three months. The principal amount of the Aegis Note and a Commitment Fee of $45,000 will be payable on October 6, 2023. The Company has a conditional right to twice extend the maturity date of the Aegis Note by six months upon payment on each occasion of an extension fee of one percent of the principal balance. As of March 31, 2023, the Company had accrued $0.1 million of interest expense.

 

See additional discussion in Note 16.

 

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.

 

14
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

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. As of March 31, 2023, the Company had accrued $0.1 million of interest expense.

 

All amounts due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional shares), at the option of the holders into the Company’s common stock at a fixed conversion price, which is subject to adjustment as summarized below. The Notes were initially convertible into the Company’s common stock at an initial fixed conversion price of $2.20 per share. This conversion price is subject to adjustment for stock splits, combinations, or similar events, among other adjustments. On April 1, 2022, the Company and the holders agreed to a reduction of the conversion price of the 6% secured convertible promissory notes to $1.30 per share in connection with the Company’s issuance of a common stock purchase warrant to TQLA covering its loan amount of $3.5 million with a common stock value of $1.20 per share.

 

The Company may prepay the Notes at any time in whole or in part by paying a sum of money equal to 100% of the principal amount to be redeemed, together with accrued and unpaid interest, plus a prepayment fee equal to five percent (5%) of the principal amount to be repaid.

 

The Notes contain customary triggering events including but not limited to: (i) failure to make payments when due under the Notes; and (ii) bankruptcy or insolvency of the Company. If a triggering event occurs, each holder may require the Company to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash.

 

The Notes are secured by a subordinated security interest in the Company’s assets pursuant to the terms of a Security Agreement entered into between the Company and the Subscribers.

 

On October 13, 2022, the Company entered into an Amendment Agreement with the holders of the 6% Secured Convertible Promissory Notes. The Amendment Agreement changed the Maturity Date of the Notes from October 18, 2022 to November 18, 2022. In consideration of the extension, the Company issued 96,153 shares of its common stock to each of the Subscribers. The Company is in discussions to further extend the maturity date.

 

13. Commitments and Contingencies

 

Legal Matters

 

On March 1, 2023, Sandstrom Partners, Inc. filed a complaint in the Circuit Court of the State of Oregon for the County of Multnomah alleging the Company failed to pay for its services pursuant to an agreement entered into on October 16, 2019. The complaint seeks damages of $285,000, plus a judicial declaration, due to the Company’s failure to pay for the services. The Company believes that it paid for services rendered and, if any balance is outstanding, it is minimal. The Company intends to defend the case vigorously.

 

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
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

14. 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, 2023 and December 31, 2022.

 

15. Stockholders’ Equity

 

(Shares and dollars in thousands)   Shares     Amount     Shares     Amount      Capital     Deficit    

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  
                                                         
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

    

-

      

-

      

-

      

-

      

-

      

(38

 )     (38 )
Net loss     -       -       -       -       -       (2,036 )     (2,036 )
Balance, March 31, 2022     2,500     $ -       15,086     $ 2     $ 73,278     $ (60,679 )   $ 12,601  

 

  

                                    
  

Series B

Preferred Stock

   Common Stock   Paid-in   Accumulated   Total
Stockholders’ Equity		 
   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance, December 31, 2022   2,500   $-    16,199   $2   $73,503   $(75,021)  $(1,516)
Issuance of common stock for services by third parties   -    -    225    -    83    -    83 
Issuance of common stock for services by employees   -    -    236    -    60    -    60 
Preferred stock dividends   

-

    

-

    

-

    

-

    

-

    

(38

)   

(38

)
Net loss   -    -    -    -    -    (1,598)   (1,598)
Balance, March 31, 2023   2,500   $-    16,660   $2   $73,646   $(76,657)  $(3,009)

 

Issuance of Common Stock

 

During the three months ended March 31, 2023, the Company issued 460,899 shares of common stock to directors and employees for stock-based compensation of $0.1 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 $0.25 to $0.37 per share.

 

During the year ended December 31, 2022, the Company issued 385,306 shares of common stock to directors and 96,153 shares of its common stock to each of the Subscribers of the 6% Secured Convertible Promissory Notes for stock-based compensation of $0.3 million These shares were valued using the closing share price of the Company’s common stock on the date of grant, within the range of $0.28 to $0.96 per share.

 

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.

 

On February 4, 2022, 170,000 shares were issued at $1.21 per share to the Company’s former Chief Executive Officer pursuant to his separation agreement for stock-based compensation of $0.2 million.

 

Issuance of Series B Preferred Stock

 

On October 19, 2021, Company entered into a securities purchase agreement (“Purchase Agreement”) with an accredited investor (“Subscriber”) for its purchase of 2.5 million shares (“Preferred Shares”) of Series B Convertible Preferred Stock (“Series B Preferred Stock”) at a purchase price of $1.00 per Preferred Share, which Preferred Shares are convertible into shares of the Company’s common stock pursuant to the terms and conditions set forth in a Certificate of Designation Establishing Series B Preferred Stock of the Company with an initial conversion price of $3.10 per share. 850,000 shares of common stock were reserved for issuance in the event of conversion of the Preferred Shares.

 

16
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

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, 2022, the Company issued dividends of 460,093 shares of common stock at a VWAP of $0.33 per share. For the three months ended March 31, 2023, 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, 2023, there were 61,752 options and 7,115,483 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, 2023, there were no options outstanding that were not issued under the Plans.

 

A summary of all stock option activity as of and for the three months ended March 31, 2023 is presented below:

   # of Options   Weighted-
Average
Exercise Price		 
Outstanding as of December 31, 2022   51,752   $3.16 
           
Outstanding as of March 31, 2023   51,752   $3.16 
           
Exercisable as of March 31, 2023   51,752   $3.16 

 

The aggregate intrinsic value of options outstanding as of March 31, 2023 was $0. As of March 31, 2023, all 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.

 

17
 

 

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

 

The Company did not issue any additional options during the three months ended March 31, 2023.

 

For the three months ended March 31, 2023 and 2022, net compensation expense related to stock options was $0 and $1,614, respectively.

 

Warrants

 

On March 21, 2022, the Company entered into a promissory note with TQLA LLC to accept a one year loan of $3.5 million. In addition, the Company issued a common stock purchase warrant to TQLA covering the loan amount with a common stock value of $1.20 per share. The note payable was fully repaid in October 2022. The common stock purchase warrant expires in March 2027.

 

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. 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.

 

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 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.

 

A summary of all warrant activity as of and for the three months ended March 31, 2023 is presented below:

 

   Warrants   Weighted-
Average
Remaining
Life (Years)		   Weighted-
Average
Exercise
Price		   Aggregate
Intrinsic
Value		 
Outstanding as of December 31, 2022   4,033,333    3.8   $1.67   $- 
                     
Outstanding as of March 31, 2023   4,033,333    3.8   $1.67   $- 

 

16. Related Party Transactions

 

The following is a description of transactions since January 1, 2022 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.

 

During 2022, the Company entered into a Secured Line of Credit Promissory Note with TQLA LLC and amended it twice for total borrowing of $3.3 million. On October 7, 2022, the Company entered into a Note Purchase Agreement with Aegis Security Insurance Company, and repaid the TQLA Note with a portion of the $4.5 million proceeds. As of March 31, 2023, the principal balance was $4.5 million and is included in note payable, related party on the consolidated balance sheets.

 

Details regarding the Aegis transactions are set forth in Note 12. TQLA LLC is owned by Stephanie Kilkenny and her husband, Patrick Kilkenny. Patrick Kilkenny is also the principal owner of Aegis Security Insurance Company. Stephanie Kilkenny is a member of the Eastside Board of Directors.

 

Short-term Advance

 

During December 2022, LD Investments advanced the Company $0.7 million and an additional $0.3 million during the three months ended March 31, 2023. As of March 31, 2023, the principal balance was $1.0 million and is included in current liability, related party on the consolidated balance sheets. The principal owner of LD Investments is Patrick Kilkenny.

 

18
 

 

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, 2022 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 three segments. Our Craft Canning + Printing (“Craft C+P”) segment provides digital can printing and canning services to the craft beverage industry in Washington and Oregon. In addition to mobile co-packing services we offer co-packing services from a single fixed site in Portland, Oregon. Our Spirits segment manufactures, blends, bottles, markets and sells a wide variety of alcoholic beverages under recognized brands in 30 U.S. states. Our corporate segment consists of key accounting personnel and corporate expenses such as public company and board costs, as well as interest on debt. We employ 49 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. In addition, we offer advanced digital can printing decoration with custom graphics and co-packing services with distinct capability and craftsmanship.

 

Strategy

 

Craft C+P primarily services the craft beer, cider and kombucha beverage segments. Craft C+P offers digital can printing to customers and co-packing services, as well as operates 13 mobile lines in Seattle and Spokane, Washington; and Portland, Oregon. Our spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum and tequila. We sell our products on a wholesale basis to distributors through open states, and brokers in control states.

 

19
 

  

Our strategy is to utilize our public company stature to our advantage and position to expand our two distinct businesses – Craft C+P and Spirits. We look to grow and vertically integrate our Craft C+P business to expand our product offerings and improve our competitive position. Our spirits portfolio is to be positioned as a leading regional craft spirits provider that develops brands, expands geographic presence growing revenue and cash flow. These two segments are detailed below.

 

Segments

 

Craft Canning + Printing

 

Digital Can Printing

 

In April 2022, we initiated operations of an innovative digital can printing facility that allows us to customer-design four sizes of popular aluminum beverage cans. This flexibility allows for custom graphics of limited releases, vintages, partnerships, and special events. This new acquisition of technology gives Craft C+P the ability to offer unparalleled customization and flexibility to craft beverage producers seeking direct printing for canning projects of all sizes, while having a production capacity of over 20 million cans.

 

 

 

 

Co-packing Facility

 

We offer co-packing services for non-alcoholic canned beverages including CBD soda waters in Portland, Oregon through our recent asset acquisition, allowing us to offer end-to-end production capabilities. We are currently the exclusive provider of can printing and co-packing services for a local CBD and wellness water maker.

 

Mobile Canning

 

Our mobile canning business has locations in Washington and Oregon. 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 printing and packaging professionals who show up every day to go above and beyond to get the job done.

 

20
 

 

 

Our Craft mobile team offers a variety of services and products, including:

 

  ● High Mobile Canning Capacity – We operate 13 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.

 

21
 

 

 

  ●

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 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.

 

22
 

 

Spirits

 

Since 2014 we have developed or acquired 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.

 

 

  ●

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.

 

 

 

23
 

 

  ●

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, additive-free 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 – Craft inspired high-quality limited-edition products. which focus on innovation, craftsmanship and curiosity, and creativity.

 

  

Recent Developments

 

During the first quarter of 2023, we grew sales at Craft C+P. During March 2023, we printed over one million cans in the month. Digital printing represents a growing percentage of revenue and we expect that to continue in the foreseeable future. We are continuing to restructure our business to decrease our overhead costs and general and administrative expenses.

 

We have supplemented cash flow with bulk spirit sales, as we have in other quarters. Spirits volumes sold through wholesale declined in the first quarter. We began a restructuring plan to lower costs and prepare the brands for reinvestment. While a substantial amount of our raw materials, such as our whiskey, is owned and not susceptible to price inflation, the prices of shipping and other materials, such as glass, increased through 2022. These challenges are expected to continue through 2023. The decline in sales was partially offset by direct sales of 250 barrels for $0.6 million during 2023.

 

24
 

 

Results of Operations

 

Overview

 

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

 

(Dollars in thousands)  2023   2022   Variance 
Sales  $2,879   $3,780   $(901)
Less customer programs and excise taxes   26    40    (14)
Net sales   2,853    3,740    (887)
Cost of sales   2,212    2,793    (581)
Gross profit   641    947    (306)
Sales and marketing expenses   511    647    (136)
General and administrative expenses   1,364    1,930    (566)
Loss on disposal of property and equipment   6    -    6 
Total operating expenses   1,881    2,577    (696)
Loss from operations   (1,240)   (1,630)   390 
Interest expense   (329)   (406)   77 
Other expense   (29)   -    (29)
Net loss   (1,598)   (2,036)   438 
Preferred stock dividends   (38)   (38)   1 
Net loss attributable to common shareholders  $(1,636)  $(2,074)  $439 
Gross margin   22%   25%   -3%

 

Segment information is as follows for the three months ended March 31, 2023 and 2022:

 

(Dollars in thousands)  2023   2022   Variance 
Craft C+P               
Sales  $1,456   $1,076   $380 
Net sales   1,477    1,076    401 
Cost of sales   1,578    1,111    467 
Gross profit   (101)   (35)   (66)
Total operating expenses   749    1,047    (298)
Net loss  $(884)  $(1,093)  $209 
Gross margin   -7%   -3%   -4%
Spirits            
Sales  $1,423   $2,704   $(1,281)
Net sales   1,376    2,664    (1,288)
Cost of sales   634    1,682    (1,048)
Gross profit   742    982    (240)
Total operating expenses   522    625    (103)
Net income  $221   $357   $(136)
Gross margin   54%   37%   17%
                
Corporate               
Total operating expenses  $610   $905   $(295)
Net loss  $(935)  $(1,300)  $365 

 

25
 

 

Sales

 

Sales were $2.9 million and $3.8 million for the three months ended March 31, 2023 and 2022, respectively.

 

Craft C+P

 

Sales increased for the three month ended March 31, 2023 due to digital can printing sales, partially offset by soft mobile canning sales.

 

Spirits

 

We sold 250 barrels for gross proceeds of $0.6 million for the three months ended March 31, 2023 and 798 barrels for gross proceeds of $1.5 million for the three months ended March 31, 2022. In addition, sales decreased on a quarter-to-quarter basis in the three months ended March 31, 2023, due to two large one-time inventory sales for the three months ended March 31, 2022.

 

Customer programs and excise taxes

 

Customer programs and excise taxes were flat from March 31, 2022.

 

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. Cost of sales were $2.2 million and $2.8 million for the three months ended March 31, 2023 and 2022, respectively.

 

Craft C+P

 

Cost of sales increased for the three month ended March 31, 2023 due to inventory costs, scrap related to the printer and printer depreciation, partially offset by decreased labor costs.

 

Spirits

 

Cost of sales decreased for the three month ended March 31, 2023 due to bulk sales and two large one-time inventory sales in the first quarter of 2022.

 

Gross Profit

 

Gross profit is calculated by subtracting the cost of products sold and services rendered from net sales. Gross profit was $0.6 million and $1.0 million for the three months ended March 31, 2023 and 2022, respectively.

 

Gross margin is gross profit stated as a percentage of net sales. Our gross margin was 22% and 25% for the three months ended March 31, 2023 and 2022, respectively.

 

Craft C+P

 

Craft C+P’s gross margin decreased for the three month ended March 31, 2023 primarily due to the high cost of goods sold.

 

Spirits

 

Gross margin increased for the three month ended March 31, 2023 primarily due to bulk spirits profits.

 

Sales and Marketing Expenses

 

Sales and marketing expenses were $0.5 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively, due to lower marketing costs.

 

26
 

 

General and Administrative Expenses

 

General and administrative expenses were $1.4 million and $1.9 million for the three months ended March 31, 2023 and 2022, respectively, primarily due to decreased professional fees and compensation.

 

Net Income (Loss)

 

Net loss was $1.6 million and $2.0 million for the three months ended March 31, 2023 and 2022, respectively. The primary reason for the reduction in net loss was that decreased barrels sales during the three months ended March 31, 2023 were offset by decreased operating expenses.

 

Preferred Stock Dividends

 

Preferred stock dividends were $37,500 for both the three months ended March 31, 2023 and 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 loans and the sale of convertible debt and equity. We have been dependent on raising capital from debt and equity financings to meet our operating needs.

 

We had an accumulated deficit of $76.7 million as of March 31, 2023, having incurred a net loss of $1.6 million during the three month ended March 31, 2023. As of March 31, 2023, we had $0.3 million of cash on hand with negative working capital of $15.2 million.

 

Our ability to meet our ongoing operating cash needs over the next 12 months depends on receipt of additional financing, which in turn depends on our growing revenues and gross margins, and generating positive operating cash flow, primarily through increased sales, profitable operations, and controlling expenses. None of this is assured, as we currently anticipate recording a net loss for 2023. 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 and take other measures that could impair our ability to be successful.

 

We continue to make substantial investments in Craft C+P, which we believe will deliver improved results during 2023, in part due to our acquisition of a state-of-the-art digital can printer that will add incremental services and revenue.

 

Our cash flow results for the three months ended March 31, 2023 and 2022 were as follows:

 

(Dollars in thousands)  2023   2022 
Net cash flows provided by (used in):          
Operating activities  $(0.4)  $(0.1)
Investing activities  $-   $(1.4)
Financing activities  $-   $0.9 

 

Operating Activities

 

Total cash used in operating activities was $0.4 million during the three month ended March 31, 2023 compared to $0.1 million during the three month ended March 31, 2022. The increase in cash used was primarily attributable to the cash generated by our bulk spirits sales in the first quarter of 2022.

 

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 that was not operational until the second quarter of 2022. Our investing activities in the three months ended March 31, 2023 were negligible.

 

27
 

 

Financing Activities

 

Total cash provided by financing activities was $0.9 million 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. There was no financing activity during the three months ended March 31, 2023.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations is based upon our 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. We base our 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, 2023, 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 assets for impairment. If the carrying value of the indefinite life assets are found to be impaired, then we will record an impairment loss and reduce the carrying value of the asset’s estimate the useful life of the brand and amortize the asset over the remainder of its useful life.

 

We estimate the brand’s fair value using market information to estimate future cash flows 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.

 

As of December 31, 2022, as a result of the review described above, we found the Azuñia brand to be impaired and reduced its carrying cost by $7.5 million.

 

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, 2023.

 

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, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

28
 

 

PART II: OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

On March 1, 2023, Sandstrom Partners, Inc. filed a complaint in the Circuit Court of the State of Oregon for the County of Multnomah alleging the Company failed to pay for its services pursuant to an agreement entered into on October 16, 2019. The complaint seeks damages of $285,000, plus a judicial declaration, due to the Company’s failure to pay for the services. The Company believes that it paid for services rendered and, if any balance is outstanding, it is minimal. The Company intends to defend the case vigorously.

 

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, 2022.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no unregistered sales of equity securities during the first quarter of 2023 that have not been previously reported.

 

The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the first quarter of fiscal year 2023.

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not applicable.

 

29
 

 

ITEM 5 – OTHER INFORMATION

 

None

 

ITEM 6 – EXHIBITS

 

Exhibit No.   Description
     
31.1 *   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 *   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS   Inline XBRL Instance Document
101.SCH   Inline XBRL Taxonomy Schema Linkbase Document
101.CAL   Inline XBRL Taxonomy Calculation Linkbase Document
101.DEF   Inline XBRL Taxonomy Definition Linkbase Document
101.LAB   Inline XBRL Taxonomy Labels Linkbase Document
101.PRE   Inline XBRL Taxonomy Presentation Linkbase Document
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

* Filed herewith.

 

30
 

 

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 12, 2023 By: /s/ Geoffrey Gwin
    Geoffrey Gwin
    Chief Executive Officer
     
Date: May 12, 2023 By: /s/ Geoffrey Gwin
    Geoffrey Gwin
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

31

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