Beeline Holdings, Inc 10-K for FY2019
Beeline Holdings, Inc. (BLNE)
About this 10-K
Beeline Holdings, Inc filed this 10-K on March 30, 2020, covering the fiscal year ended December 31, 2019 (FY2019).
Headline figures
Fiscal year ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $15.6M
- up 154.7% from $6.12M a year earlier
- Net loss
- $16.91M
- compared with a net loss of $9.05M a year earlier
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to _____________
Commission File Number 000-54959
EASTSIDE DISTILLING, INC.
(Name of small business issuer as specified in its charter)
| Nevada | 20-3937596 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1001 SE Water Avenue, Suite 390
Portland, Oregon 97214
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (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) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: Yes [ ] No [X]
Indicate by check mark whether the registrant(1) has filed all reports required 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 day. Yes [X] 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 [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 if the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] | |
| Non-accelerated filer [ ] | Smaller reporting company [X] | |
| 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 [X]
The aggregate market value of the voting stock held by non-affiliates of the registrant at June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter was $37,101,492 based on the last reported sales price of the registrant’s common stock as reported by the Nasdaq Stock Market on that date.
As of March 30, 2020, 9,762,728 shares of our common stock were outstanding.
Documents Incorporated by Reference: None.
EASTSIDE DISTILLING, INC.
FORM 10-K
December 31, 2019
TABLE OF CONTENTS
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Eastside Distilling, Inc., is referred to herein as “Eastside,” “EAST,” “the Company,” “us,” or “we.”
Cautionary Note Regarding Forward-Looking Statements
The statements in this section and other sections of this Form 10-K include “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 and involve uncertainties that could significantly impact results. Forward-looking statements give current expectations or forecasts of future events about the company or our outlook. You can identify forward-looking statements by the fact they do not relate to historical or current facts and by the use of words such as “believe,” “expect,” “estimate,” “anticipate,” “will be,” “should,” “plan,” “project,” “intend,” “could” and similar words or expressions. Examples include, among others, statements about:
| ● | Our ability to achieve any financing and working capital; | |
| ● | General industry, market and economic conditions (including consumer spending patterns and preferences) and our expectations regarding growth in the markets in which we operate; | |
| ● | Our ability to introduce competitive new products on a timely basis and continue to make investments in product development and our expectations regarding the effect of new products on our operating results; | |
| ● | Our realizing the results of our competitive strengths and ability to compete with other producers and distributors of alcoholic beverage products; | |
| ● | Our continuing to focus on and ability to realize our strategic objectives; | |
| ● | Our intention to implement actions to improve profitability, manage expenses, increase sales and utilize inventory and accounts receivable balances to help satisfy our working capital needs; | |
| ● | Our continuing to follow our product approach; | |
| ● | Our expectation regarding product pricing and our ability to market to premium and super-premium segments of the market; | |
| ● | Our ability to retain, market and grow our existing brands, including Redneck Riviera Whiskey and Azuñia tequila and the effect that may have on other brands, and our ability to profitably sell our brands; | |
| ● | Our ability to financially support the brands in the market; | |
| ● | Our advertising and promotional expenses, including our expectation that we will recoup 50% of certain advertising, promotional and selling expenses for Redneck Riviera Whiskey upon the eventual sale of the brand by the licensor; | |
| ● | Our expectation that the maturity of the $0.25 million promissory note that we entered into with a private investor will be extended to December 31, 2020. | |
| ● | Our ability to protect our intellectual property, including trademarks related to our brands; | |
| ● | The effects of competition and consolidation in the markets in which we operate; | |
| ● | The ability of our production capabilities to support our business and operations and production strategy, including our ability to continue to expand our production capabilities to meet demand or outsource production to lower cost of goods sold; | |
| ● | Our expectations regarding our supply chain, including our ongoing relationships with certain key suppliers; | |
| ● | Our ability to cultivate our distribution network and maintain relationships with our major distributors; | |
| ● | Our ability to utilize our existing distribution pipelines and channels to grow other brands in our portfolio; | |
| ● | Changes in applicable laws, policies and the application of, regulations and taxes in jurisdictions in which we operate and the impact of newly enacted laws; | |
| ● | Our production facility, aging warehouse or supply chain disruption; | |
| ● | Tax rate changes (including excise tax, VAT, tariffs, duties, corporate, individual income, or capital gains) or changes in related reserves, changes in tax rules or accounting standards; | |
| ● | Our ability to expand our company and brand offerings by acquisitions, including our ability to identify, complete, and finance acquisitions, and our ability to integrate and realize the benefits of our acquisitions; | |
| ● | Our ability to position our brands as attractive acquisition candidates; | |
| ● | Our ability to realize the anticipated benefits of our canned beverage, mobile canning and bottling operations and expected growth in the canned beverages industry; | |
| ● | Negative publicity related to our company, brands, marketing, personnel, operations, business performance, or prospects | |
| ● | Our ability to attract and retain key executive or employee talent; | |
| ● | Our liquidity and capital needs and ability to meet our liquidity needs and going concern requirements; and | |
| ● | Our operations, financial performance and results of operations. |
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Forward-looking statements are based on assumptions and on known risks and uncertainties. Although we believe we have been prudent in our assumptions, any or all of our forward-looking statements may prove to be inaccurate, and we can make no guarantees about our future performance. Should known or unknown risks or uncertainties materialize, or underlying assumptions prove inaccurate, actual results could materially differ from past results and/or those anticipated, estimated or projected.
We undertake no obligation to provide updates to forward-looking statements to the public, whether as a result of new information, future events or otherwise. You should, however, consult any subsequent disclosures we make in our filings with the United States Securities and Exchange Commission (“SEC”) on Form 10-Q or Form 8-K.
You should review the “Risk Factors” set forth elsewhere in this Annual Report for a cautionary discussion of certain risks, uncertainties and assumptions that we believe are significant to our business and may effect forward looking statements.
Use of Non-GAAP Financial Information – Certain matters discussed in this report, including the information presented in Part II under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” include measures that are not measures of financial performance under U.S. Generally Accepted Accounting Principles (GAAP). These non-GAAP measures should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP, and also may be inconsistent with similarly titled measures presented by other companies. In Part II under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we present the reasons we use these measures under the heading of “Non-GAAP Financial Measures,” and reconcile these measures to the most closely comparable GAAP measures under the heading “Results of Operations – Year-Over-Year Comparisons.”
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 manufacture, acquire, blend, bottle, import, export, market and sell a wide variety of alcoholic beverages under recognized brands. We employ 89 people in the United States.
Our brands span several alcoholic beverage categories, including bourbon, American whiskey, vodka, gin, rum, tequila and Ready-to-Drink (RTD). We sell our products on a wholesale basis to distributors, and until March 2020, we operated four retail tasting rooms in Portland, Oregon to market our brands directly to consumers.
| Principal Brands | |
| Gin | |
| Big Bottom The Ninety One Gin | |
| Big Bottom Navy Strength | |
| Big Bottom Barrel Finished Gin | |
| Big Bottom London Dry Gin | |
| Rum | |
| Hue-Hue Coffee Rum | |
| Tequila | |
| Azuñia Blanco Organic Tequila | |
| Azuñia Reposado Organic Tequila | |
| Azuñia Añejo Tequila | |
| Azuñia Black, 2-Year, Extra-Aged, Private Reserve Añejo Tequila | |
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| Vodka | |
| Portland Potato Vodka | |
| Portland Potato Vodka - Marionberry | |
| Portland Potato Vodka - Habanero | |
| Whiskey | |
| Redneck Riviera Whiskey | |
| Redneck Riviera Whiskey - Granny Rich Reserve | |
| Burnside Oregon Oaked Rye Whiskey | |
| Burnside West End Blend Whiskey | |
| Burnside Goose Hollow Bourbon | |
| Burnside Oregon Oaked Bourbon | |
| Burnside Buckman RSV 10 Year Bourbon | |
| Marionberry Whiskey | |
| Big Bottom Barlow Whiskey | |
| Big Bottom Barlow Port Whiskey | |
| Big Bottom Delta Rye | |
| Big Bottom American Single Malt | |
| Big Bottom Zin Cask Bourbon | |
| Barrel Hitch American Whiskey | |
| Special | |
| Advocaat Holiday Egg Nog | |
| Ready-to-Drink | |
| Redneck Riviera Howdy Dew! | |
| Portland Mule - Original | |
| Portland Mule - Marionberry | |
Operating as a small business in a large, international spirits marketplace occupied by large multi-national conglomerates, we seek to utilize our size and our public company stature to our advantage and position Eastside Distilling as a leading tier 2 spirits provider by acquiring and developing brands, growing them to a national presence and positioning them for sale to the tier 1 suppliers to the market. This strategy was demonstrated by the launch of our Redneck Riviera Brand (RRW) in conjunction with our branding partners, Sandstrom Partners in 2018. This demonstrated how our team can leverage its position to launch nascent or new brands and grow them more quickly than the tier 1 larger conglomerates because we are able to focus and dedicate more of our attention to developing innovative products. Our RRW brand went from idea, to market roll-out in less than nine months and achieved national distribution in 49 states in 18 months. In September 2019, we acquired the Azuñia tequila brand and have begun to distribute this brand through our national platform.
In May 2017, we used our shares to acquire 90% of Big Bottom Distilling, LLC (“BBD”), known for its award-winning, super-premium gins and whiskeys, and American Single Malt Whiskey. BBD’s super-premium spirits give us a presence at the “ultra-premium segment” of the market. In December 2018, we acquired the remaining 10% of BBD. In September 2019, we also acquired the high-end, luxury tequila brand, Azuñia, to complement our portfolio and provide us with a larger established brand in the high-growth tequila category. In addition, through MotherLode Craft Distillery (“MotherLode”), our wholly owned subsidiary acquired in March 2017 and Craft Canning + Bottling, LLC (formerly known as Craft Canning, LLC) (“Craft Canning”), which we acquired in January 2019, we provide contract bottling, canning, and packaging services for existing and emerging beer, wine and spirits producers. We have used our mobile canning operations to profit from the rapid growth in the canned beverages industry (beer, wine, spirit-based RTD’s).
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Market Opportunity
Large and Growing Global and Domestic Markets
The global spirits market is very large and according to Statista, a leading business data platform, the spirit market generates total revenues in excess of $400 billion annually, growing at a moderate estimated rate of 2-4% annually.
According to the Distilled Spirits Council of the U.S. (DISCUS), distilled spirits sales in the U.S. were up 5.3% in 2019, increasing by $1.5 billion, to a new record of $29 billion. Key spirits category drivers of sales growth in 2019 included: American whiskey, up 10.8 % or $387 million to $4 billion; rye was an important component of the overall American whiskey category growth with sales up 14.7 % or $30 million, reaching $235 million; tequila/mezcal, up 12.4 % or $372 million to $3.4 billion; mezcal surpassed $100 million in sales for the first time totaling $105 million. Pre-mixed cocktails were up 7.5 % or $25 million to $351 million. Volumes rose by 3.3% to a record 239 million cases, an increase of 7.6 million cases from 2018. The trend underscored the decades long trend in market premiumization as consumers shifted their purchases toward more expensive spirits, resulting in a faster rate of growth in revenue over the rate of growth in physical shipments. According to DISCUS, in 2019, the spirits industry again gained market share over beer and wine sales. Revenues grew by half a percent to 37.8% of the total beverage alcohol market. This was the 10th year of market share gains for the spirits industry. Each percentage point gain in market share is worth $770 million in additional revenue to the industry.
Key Growth Trends that We Target
High-End and Super-Premium – The high-end and super-premium spirit products, across most categories, exhibited strong growth trends in 2019. The 2019 revenues for those price points increased 7.6% and 7.9%, respectively, and by 8.0% and 7.0% in volume.
Millennials – Generally, “Millennials” (individuals born between the early 1980s and the mid-1990s) value “authenticity” and are inspired by travel and like to try new products and seek new experiences, according to a survey by BeverageDaily.com. Millennials tend to drink a broader range of spirit types (vodka, rum, tequila, whiskey, gin) than prior generations, and Millennials consume more expensive spirits than their predecessors. These individuals are often attracted to vintage spirits and cocktails with nostalgic followings, such as throwbacks to the 1950s like rye whiskey, bourbon and the Manhattan cocktail. According to Barclays Research, millennials increasingly prefer spirits over beer and wine, and flavored spirits in particular. In addition, according to DISCUS, millennials are more willing than prior generations to purchase premium spirits and continue to gravitate toward high-end and super premium spirits.
Our Strategy
Our overall strategy is to become a “house of brands” that is designed to drive industry leading growth at the tier 2 level and shareholder value by acquiring nascent brands, rebranding them with the services of Sandstrom Partners and introducing those brands to the market on our national distribution platform. We aim to grow our brands to be an attractive acquisition candidate for the tier 1 producers in the spirits industry and ultimately sell those brands and use the proceeds of the brand sales to duplicate the process.
Our goal is to have brand representation in all classes of spirits and Ready-to-Drink (RTD) beverages, and distribution channels in both spirits and beer that crosses all classes of trade primarily focused on the off-premise trade.
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| Off-Premise Distribution Chassis | ||||||||||||
| Product Class | Fulfillment & Logistics | Distributer Network | Points of Distribution | Whiskey | Gin | Rum | Vodka | Tequila | Cordial | Spirit Based RTD | Wine Based RTD | Malt Based RTD |
| Bottled Spirits | Park Street/OLCC | RNDC/Youngs Market | Corporate Liquor | √ | √ | √ | √ | |||||
| Club | √ | |||||||||||
| Boutique | √ | |||||||||||
| Grocery | √ | √ | √ | √ | ||||||||
| Drug | √ | |||||||||||
| Independent | √ | √ | √ | √ | ||||||||
| Convenience Store | ||||||||||||
| Online | √ | √ | √ | |||||||||
| Canned RTD’s | TBD | Beer Network - TBD | Corporate Liquor | |||||||||
| Grocery | ||||||||||||
| Drug | ||||||||||||
| Independent | ||||||||||||
| Online | ||||||||||||
| Convenience Store | ||||||||||||
| On-Premise Distribution Chassis | ||||||||||||
| Product Class | Fulfillment & Logistics | Distributer Network | Points of Distribution | Whiskey | Gin | Rum | Vodka | Tequila | Cordial | Spirit Based RTD | Wine Based RTD | Malt Based RTD |
| Bottled Spirits | Park Street/OLCC | RNDC/Youngs Market | Corporate Accounts | √ | √ | √ | ||||||
| Bar | √ | √ | √ | |||||||||
| Restaurants | √ | √ | √ | |||||||||
| Online | √ | √ | √ | |||||||||
To help achieve our strategy, we are focused on:
| ● | Identifying and completing strategic brand development in-house and acquisitions that fill out our product portfolio and/or our distribution strategy; | |
| ● | Achieving world-class spirit rebranding with the collaboration of Sandstrom Partners; | |
| ● | Achieving brand penetration through our national distribution platform; |
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| ● | maximizing our margins through targeted cost leverage utilizing both in-house and outsourced production strategies; | |
| ● | monetizing our diverse and growing branded-product portfolio through brand sales; and | |
| ● | building this process into a system whereby we can repeat the above process to the benefit of its shareholders. | |
Our Strengths
We believe the following competitive strengths will help enable the implementation of our growth strategies:
| ● | Award-Winning, Diverse Product Line: We have a diverse product line, currently offering over twenty premium craft spirit brands, many of which have won awards for taste and/or product design. According to a study by the American Craft Spirits Association, the U.S. craft spirits volume of cases sold experienced a compound annual growth rate of over 25% between 2010 and 2017 and saw an increase in market share from 0.8% to 3.2% during that period. Our sales of premium brands have increased over 1,000% since 2010. We believe our diverse, recognized product line in this growing market will enable us to establish a presence in new geographic markets and enable us to procure additional distributors for our products. | |
| ● | Experienced Distilling and Blending Experts: We believe that our team of expert blenders and distillers, with highly regarded “palates” and experience is important to us maintaining a high-quality, artisanal character to our products as well as adding to our consumer appeal. | |
| ● | Experienced Marketing and Branding: Our strong relationship with Sandstrom Partners, an internationally known spirit branding firm, provides us with strong expertise and capabilities with respect to marketing and branding, a critical element in a large consumer market, such as spirits. | |
| ● | Key Distribution Relationships: We have distribution arrangements with several of the largest wine and spirits distributors in the United States, such as RNDC and Young’s Market. We have also engaged Park Street, a provider of back-office administrative and logistical services for alcohol and beverage distributors, in order to keep our overhead low by managing our shipping and logistics to the market. We believe these relationships will help accomplish our goal of having our premium spirits sold and distributed nationwide. | |
| ● | Expanded Production: With the recent (January 2019) acquisition of Craft Canning along with our substantial investments already made during 2017 and 2018, we believe that our production capabilities have been significantly enhanced to support both our Eastside branded products as well as our private-label operations. | |
| ● | Outsourced Production for High Volume Brands: When the production of our brands reach higher volumes or in package sizes not conducive to our in-house production capabilities, we will look to outsource our production to lower our cost of goods. |
Our Product Approach
Our approach to our craft spirits involves five important aspects:
| ● | Commitment to Quality: We create and deliver high-quality, innovative products targeted at growing markets. | |
| ● | Authentic Yet Scalable: We believe our approach to production allows us to produce or have our products produced cost effectively at scale, while keeping flavor profiles consistent. | |
| ● | Unique Talent and Experience: Every spirit reflects the creativity of our entire team. |
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| ● | Extensive Spirit Portfolio: Many craft distillers have only a few products; we currently have over 30 products in our brand families, which we believe affords us the opportunity to target a broader range of consumers with our brands. | |
| ● | Generate Customer Loyalty: These factors attract loyal and enthusiastic customers and major distributors for our products. |
Production and Supply
We achieve various complex flavor profiles through one or more of the following techniques: infusion of fruit, addition of various natural flavoring substances, and, in the case of rums and whiskeys, aging of the brands in various types of casks for extended periods of time, as well as the blending of several rums or whiskeys to achieve a unique flavor profile for each brand. After we complete the distillation, purification and flavoring processes, we bottle or can the various liquids. This involves several important stages, including bottle and label design and procurement, filling of the bottles and packaging the bottles in various configurations for shipment.
We rely on a limited number of suppliers for the sourcing of our spirit products and raw materials, including our distillate products and other ingredients. These suppliers consist of third-party producers in the U.S and Mexico. Other than our 20-year exclusive agreement with Agaveros Unidos de Amatitan, SA. de CV., we do not have long-term, written agreements with any of our suppliers. However, we believe that we have consistent and reliable third-party sources for the needed materials. We produce and bottle all our spirits for distribution, regardless of whether the distillation phase of the process was at our facility or at one of our suppliers. During 2018 and 2019, we procured a significant portion of our outside base distillate from MGP Ingredients and we intend to continue to actively rely on this supplier.
As of September 12, 2019, in conjunction with the acquisition of the Azuñia tequila brand, we assumed the 20-year exclusive purchase agreement with Agaveros Unidos de Amatitan, SA. de CV. The exclusivity is based on minimum purchase volumes, fixed pricing for each of different presentations of tequila and specific cash terms.
Distribution Network
Since 2018 with the introduction of Redneck Riviera Whiskey, we developed a national distribution network and currently have distribution and brokerage relationships with third-party distributors in 49 U.S. states.
U.S. Distribution
Producers and importers of beverage alcohol in the United States must sell their products through a three-tier distribution system. Typically, a brand is first sold to a network of distributors, or wholesalers, covering the United States, in either “open” states or “control” states. In the 33 open states, the distributors are generally large, privately-held companies. In the 17 control states, the states themselves function as the distributor, and regulate suppliers, including our company. The distributors and wholesalers in turn sell to individual retailers, such as liquor stores, restaurants, bars, supermarkets and other outlets licensed to sell alcoholic beverages. In larger states, such as New York, more than one distributor may handle a brand in separate geographical areas. In control states, importers sell their products directly to state liquor authorities, which distribute the products and either operate retail outlets or license the retail sales function to private companies, while maintaining strict control over pricing and profit.
The U.S. spirits industry has consolidated dramatically over the last ten years due to merger and acquisition activity. Eight major spirits companies currently dominate the industry, each of which owns and operates its own importing businesses. All companies, including these large companies, are required by law to sell their products through wholesale distributors in the United States. The major companies continue to exert increasing influence over the regional distributors and as a result, it has become increasingly difficult for smaller companies to get their products recognized by distributors.
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Importation
We hold the federal importer and wholesaler license required by the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury Department and the requisite state licenses within the states we conduct business.
Our inventory is maintained in offsite bonded warehouses at our producers, our bonded warehouses in Milwaukie, Oregon and Hillsboro, Oregon and at bonded warehouses managed by Park Street, our fulfillment and logistics partner. We also typically have inventory in transit that we ship nationally by our network of licensed and bonded carriers.
Wholesalers and Distributors
In the United States, we are required by law to use state-licensed distributors or, in the control states, state-owned agencies performing this function, to sell our brands to retail outlets. As a result, we depend on distributors for sales, product placement and retail store penetration. All of the distributors that we currently work with also distribute our competitors’ products and brands. As a result, we must foster and maintain our relationships with our distributors. Through our internal sales team, we have established relationships for our brands with wholesale distributors in the forty-nine states we sell our products, and our products are sold in the U.S. by these wholesale distributors, as well as by various state beverage alcohol control agencies.
Other Sources of Revenue
Retail Stores
During 2019 we had four retail stores in the Portland, Oregon area that provided us with additional opportunities for sampling and sales of our products. In January 2020, we announced that we will be closing our retail stores. Effective March 23, 2020, all of these stores have been closed.
Significant Customers
Sales to one customer, the Oregon Liquor Control Commission, accounted for approximately 16% and 30% of our consolidated sales for the years ended December 31, 2019 and 2018, respectively.
Sales Team
We have a total sales force of approximately 24 people, with an average of over ten years of industry experience with premium beverage alcohol brands.
Our sales personnel are engaged in the day-to-day management of our distributors, which includes setting quotas, coordinating promotional plans for our brands, maintaining adequate levels of stock, brand education and training and sales calls with distributor personnel. Our sales team also maintains relationships with key chain and retail customers through independent sales calls. They also schedule promotional events, create local brand promotion plans, host in-store tastings, where permitted, and provide wait staff and bartender training and education for our brands.
In addition, we have also engaged Park Street Imports, a provider of back-office administrative, fulfillment, and logistical services for alcohol and beverage distributors, which services include state compliance, logistics planning, order processing, order fulfillment, distributor chargeback and bill-support management and certain accounting and reporting services. In addition, Park Street Imports provides a factoring service that Eastside distilling can take advantage of to improve cash flow.
Advertising, Marketing and Promotion
To build our brands, we must effectively communicate with three distinct audiences: distributors, retail trade and end consumers. Advertising, marketing and promotional activities help to establish and reinforce the image of our brands in our efforts to build substantial brand value.
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In late 2016, to aid us in this strategy, we retained Sandstrom Partners, a Portland-based firm specializing in spirits branding, and tasked them with reviewing our current product portfolio, as well as our new ideas, and advising us on marketing, creation of brand awareness and product positioning, locally and nationally. We are using Sandstrom’s full range of brand development services, including research, strategy, brand identity, package design, environments, advertising as well as digital design and development. During 2017, Sandstrom Partners re-branded our key Burnside whiskey brand as well as developed the branding for “Redneck Riviera” brand. Throughout 2018-2019 Sandstrom Partners was focused on a number of new and existing (re-branded) product efforts. Some of those have now been launched including Hue Hue, Granny Rich, and the more recent Portland Mule and Howdy Dew RTD products. Sandstrom Partners is currently working on the Azuñia tequila brand.
We use a range of marketing strategies and tactics to build brand equity and increase sales, including consumer and trade advertising, price promotions, point-of-sale materials, event sponsorship, in-store and off-premise promotions and public relations, as well as a variety of other traditional and non-traditional marketing techniques, including social media marketing, to support our brands.
Besides traditional advertising, we also employ three other marketing methods to support our brands: public relations, event sponsorships and tastings. Our significant U.S. public relations efforts have helped gain editorial coverage for our brands, which increases brand awareness. Event sponsorship is an economical way for us to have influential consumers taste our brands. We actively contribute product to trend-setting events where our brand has exclusivity in the brand category. We also conduct in-store promotions at our off-premise accounts.
We support our brand marketing efforts with an assortment of point-of-sale materials. The combination of trade and consumer programs, supported by attractive point-of-sale materials, also establishes greater credibility for us with our distributors and retailers.
Intellectual Property
Trademarks are an important aspect of our business. We sell our products under a number of trademarks, which we own or use under license, including the Redneck Rivera trademark, which is owned by Rich Marks and described above under “Item 1 - Business - Our Brands”. Our brands are protected by trademark registrations or are the subject of pending applications for trademark registration in the U.S. where we distribute, or plan to distribute, our brands. The trademarks may be registered in the names of our subsidiaries. In the U.S., trademark registrations need to be renewed every ten years. We expect to register our trademarks in additional markets as we expand our distribution territories.
Seasonality
Our business has historically followed the spirits industry seasonality trends with peak sales generally occurring in the fourth calendar quarter, primarily due to seasonal holiday buying. However, as our business has evolved and as we continue to expand our footprint in the national distribution platform, our sales growth has been more dependent on the timing of successful sales efforts and shipment of product to customers, but there remains a concentration of buying and stocking our chains ahead of the holiday season.
Competition
Our industry is highly competitive. We believe that we compete on the basis of quality, price, brand recognition and distribution strength. Our premium brands compete with other alcoholic and nonalcoholic beverages for consumer purchases, retail shelf space, and wholesaler attention. We compete with numerous tier 1 multinational producers and distributors of beverage alcohol products, many of which have greater resources than us.
Over the past ten years, the U.S. wine and spirits industry has undergone dramatic consolidation and realignment of brands and brand ownership. The number of major importers in the U.S. has declined significantly. Today, we believe eight major companies dominate the market: Diageo PLC, Pernod Ricard S.A., Bacardi Limited, Brown-Forman Corporation, Beam Suntory Inc., Davide Campari Milano-S.p.A., and Remy Cointreau S.A. These competitors have substantially greater resources than we do.
We believe we are a leading tier 2 participant that is in a prime position to partner with small-to-mid-size spirit brands as opposed to the major importers and tier 1 multinationals. Despite our relative capital position and resources, we have been able to compete with these larger companies in pursuing agency distribution agreements and acquiring brands by being more responsive to private and family-owned brands, offering flexible transaction structures. Given our size relative to our major tier 1 competitors, most of which have multi-billion dollar operations, we believe that we can provide greater focus on smaller brands and tailor transaction structures based on individual brand owner preferences. However, our relative capital position and resources may limit our marketing capabilities, our ability to expand into new markets and our negotiating ability with our distributors.
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By focusing on the premium and super-premium segments of the market, which typically have higher prices per case and gross profit margins, and having an established, experienced sales force, we believe we are able to gain relatively significant attention from our distributors for a company of our size. Also, the continued consolidation among the major companies is expected to create an opportunity for small to mid-size wine and spirits companies, such as Eastside to penetrate markets, as the major companies contract their portfolios to focus on fewer brands.
Government Regulation
We are subject to the jurisdiction of the Federal Alcohol Administration Act, U.S. Customs laws, and the Alcoholic Beverage Control laws of all fifty states, among many other regulations.
The U.S. Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau regulates the production, blending, bottling, sales and advertising and transportation of alcohol products. Also, each state regulates the advertising, promotion, transportation, sale and distribution of alcohol products within its jurisdiction. We are also required to conduct business in the U.S. only with holders of licenses to import, warehouse, transport, distribute and sell spirits.
We are subject to U.S. regulations on the advertising, marketing and sale of beverage alcohol. These regulations range from a complete prohibition of the marketing of alcohol in some states to restrictions on advertising style, media and messages.
Labeling of spirits is also regulated in many markets, varying from health warning labels to importer identification, alcohol strength and other consumer information. All beverage alcohol products sold in the U.S. must include warning statements related to risks of drinking beverage alcohol products.
In the U.S. control states, the state liquor commissions act in place of distributors and decide which products are to be purchased and offered for sale in their respective states. Products are selected for purchase and sale through listing procedures which are generally made available to new products only at periodically scheduled listing interviews. Consumers may purchase products not selected for listings only through special orders, if at all.
The distribution of alcohol-based beverages is also subject to extensive federal and state taxation in the U.S. and internationally. Most foreign countries impose excise duties on wines and distilled spirits, although the form of such taxation varies from a simple application on units of alcohol by volume to intricate systems based on the imported or wholesale value of the product. Several countries impose additional import duty on distilled spirits, often discriminating between categories in the rate of such tariffs. Once we begin distributing our products internationally, import and excise duties could have a significant effect on our sales, both through reducing the consumption of alcohol and through encouraging consumer switching into lower-taxed categories of alcohol.
Employees
As of March 30, 2020, we have 89 employees, 23 of whom were in sales and marketing, 58 in production/canning/bottling, and 8 whom were in administration. All employees are full-time. We will continue to monitor our staffing in light of the impacts of the coronavirus and streamlining on our operations for working capital needs.
Geographic Information
Eastside currently sells its products in 49 states, as well as in Ontario, Canada.
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The statements in this section describe the most significant risks to our business and should be considered carefully in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Notes to Consolidated Financial Statements” to this Annual Report on Form 10-K, as well as our other disclosures in this Annual Report. We may have other risks that we have not yet identified or that we currently believe are immaterial but may become material.
RISKS RELATING TO OUR BUSINESS
We require additional capital, which we may not be able to obtain on acceptable terms, or at all. Our inability to access or raise such capital, as needed, on beneficial terms or at all could restrict our future growth and severely limit our operations.
We require additional capital in order to continue our operations, and failure to obtain such additional capital could limit our operations and our growth, including our ability to continue to develop, grow and maintain existing brands, service our debt and other obligations, maintain adequate inventory levels, fund potential acquisitions of new brands, maintain existing distribution relationships and retail channels, penetrate new markets, attract new customers and enter into new distribution relationships. We have not generated sufficient cash from operations to finance additional capital needs, and we will need to raise additional funds through private or public equity and/or debt financing. We cannot assure you that additional financing will be available to us on acceptable terms or at all. Because we have collateralized our assets and secured debt, our ability to obtain additional debt financing by offering security to lenders may be limited. If additional capital is either unavailable or cost prohibitive, our operations and growth may be limited, and we may need to change our business strategy to slow the rate of, or eliminate, our expansion or to reduce or curtail our operations. Also, any additional financing we undertake could impose covenants upon us that restrict our operating flexibility, and, if we issue equity securities to raise capital, our existing shareholders may experience dilution and the new securities may have rights, preferences and privileges senior to those of our common stock.
If our brands do not achieve more widespread consumer acceptance, our sales, growth, and profitability may be limited.
Although certain of our brands continue to achieve acceptance, most of our brands are relatively new and have not achieved national brand recognition. We have not yet had success growing a brand to a sufficient level to realize profitability and be in a position to sell the brand for a profit. Also, brands we may develop and/or acquire in the future may not establish widespread brand recognition. Accordingly, if consumers do not accept our brands at scale, our sales will be limited and we will not be able to penetrate our markets.
In addition, our profitability depends in part on achieving scale. We will need to achieve wider market acceptance of our brands and materially increase sales and gain profitability.
We have incurred significant operating losses every quarter since our inception and anticipate that we will continue to incur significant operating losses in the future.
We believe that we will continue to incur net losses for the foreseeable future as we expect to make continued significant investment in product development, sales and marketing, brand support and to incur significant administrative expenses as we seek to grow our brands. We also anticipate that our cash needs will exceed our income from sales for the foreseeable future. Some of our products may never achieve widespread market acceptance and may not generate sales and profits to justify our investment in them. Also, we may find that our expansion plans are more costly than we anticipate and that they do not ultimately result in commensurate increases in our sales or profits, which would further increase our losses. We expect we will continue to experience losses and negative cash flow, some of which could be significant. Results of operations will depend upon numerous factors, some of which are beyond our control, including market acceptance of our products, new product introductions and competition. We also incur substantial operating expenses at the corporate level, including costs directly related to being a reporting company with the SEC. For the year ended December 31, 2019, we reported a net loss of $16.9 million. As of December 31, 2019, we had an accumulated deficit since inception of $44.2 million.
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The success of our Redneck Riviera brand is dependent on our relationship with and on the reputation and popularity of singer and songwriter John Rich. Any adverse reactions to publicity relating to Mr. Rich, or the loss of his services and relationship, could adversely affect our revenues of the Redneck Riviera brand and results of operations as well as our ability to maintain our consumer base and brand reputation.
In October 2017, we were granted an exclusive license for the use of the Redneck Riviera brand for spirits-based products. The Redneck Riviera trademark is owned by Rich Marks, which is controlled by John Rich, a “multiple platinum” country music singer and songwriter who performs with the “Big & Rich” band. Beginning in 2020, we will be required to meet certain levels of case sales, and if such sale levels are not met, Rich Marks will have the right to terminate the license.
In addition, the success of Redneck Riviera Whiskey may be negatively impacted by a number of factors, including the reputation and popularity of Mr. Rich. Mr. Rich’s reputation may be harmed due to factors outside of our control, which could negatively impact our brand image and have a material adverse effect on our business. If we fail to maintain and enhance the Redneck Riviera brand, or if excessive expenses are incurred in an effort to do so, our business, financial condition and results of operations could be materially and adversely affected.
In addition, if our relationship with Mr. Rich deteriorates, our reputation and operating results may be adversely affected. In late 2019, we amended our license agreement related to the Redneck Riviera trademark in part because of our desire to continue to motive Mr. Rich to use exceptional efforts to promote the RRW brand and a recognition of our ongoing relationship. The license agreement generally provides, among other things, that we may not take any action which is harmful or potentially harmful to Mr. Rich’s or the brand’s reputation. The license agreement also provides for other termination rights related to our solvency, providing reports and other matters.
If we are unable to maintain our current associations with Mr. Rich at a reasonable cost, or we experience an unplanned interruption or termination of our collaboration, we could lose the benefits of this relationship and the return on our substantial investment in the brand.
We must attract new Board members to provide valuable contributions to the Company and ensure that we meet Nasdaq independence requirements. In addition, new directors will not be voted on by stockholders until our Annual Meeting in 2020.
At our Annual Meeting held on August 8, 2019, four members of our Board who were nominees resigned and/or did not get re-elected. Those directors comprised all but one of our nominated independent directors and comprised all of the members of our independent Board committees. As a result, at such time, we did not comply with the independence requirements of Nasdaq, the exchange on which we list our common stock. We appointed several new directors and re-gained compliance with the Nasdaq independence requirements in September 2019, although we again fell out of compliance on November 12, 2019 due to a director resignation and the appointment of Lawrence Firestone, a then-independent director, as our Chief Executive Officer. We promptly came back into compliance on November 18, 2019, however, future non-compliance with Nasdaq listing rules could result in our delisting. In addition, our corporate governance and risk and strategic oversight will suffer until we have a sufficient number of talented independent directors to our Board, including those with industry experience. In addition, because we added new directors after our Annual Meeting and needed to appoint additional directors to regain compliance, the new directors will serve without shareholder approval until our Annual Meeting in 2020.
Executive departures and any other failure to attract or retain key executive or employee talent, or further changes in our talent, could adversely affect our business.
Our success depends upon the efforts and abilities of our senior management team, other key employees, and a high-quality employee base, as well as our ability to attract, motivate, reward, and retain them. If we or one of our executive officers or significant employees terminates her or his employment, we may not be able to replace their expertise, fully integrate new personnel or replicate the prior working relationships, and the loss of their services might significantly delay or prevent the achievement of our business objectives. Qualified individuals with the breadth of skills and experience in our industry that we require are in high demand, and we may incur significant costs to attract them. We do not maintain and do not intend to obtain key person insurance on the life of any executive or employee. Difficulties in hiring or retaining key executive or employee talent, or the unexpected loss of experienced employees could have an adverse impact our business performance. In addition, we could experience business disruption and/or increased costs related to organizational changes, reductions in workforce, or other cost-cutting measures.
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We recently experienced significant changes to our executive leadership team. In May 2019, our Chief Executive Officer announced his transition to Executive Chairperson, stepping down from his dual role as Chairman and Chief Executive Officer, and has since that time left our Board. Our Chief Financial Officer, Steven Shum, was appointed as Interim Chief Executive Officer, but resigned as Interim Chief Executive Officer effective October 7, 2019 and announced his resignation as Chief Financial Officer effective as of November 14, 2019 and G. Stuart Schreiner was appointed as Interim Chief Financial Officer, effective February 28, 2020. Effective November 12, 2019, Lawrence Firestone was appointed as our Chief Executive Officer. This executive leadership transition has the potential to disrupt our operations and relationships with employees, customers, suppliers, and investors. In addition, Mr. Firestone had no prior experience in our industry. Our future operating results depend substantially upon the continued service of our key personnel and in significant part upon our ability to attract and retain qualified management personnel. If we are unable to mitigate these or other similar risks, our business activity could be disrupted, and our financial condition and results of operations could be materially adversely affected.
We depend on a limited number of suppliers. Failure to obtain satisfactory performance from our suppliers or loss of our existing suppliers could cause us to lose sales, incur additional costs and lose credibility in the marketplace.
We depend on a limited number of third-party suppliers for the sourcing of the raw materials for all of our products, including our distillate products and other ingredients. Azuñia, in particular, is sourced from a single supplier in Mexico. Other than our long-term exclusive agreement with Agaveros Unidos de Amatitan, SA. de CV. for the Azuñia tequila brand, we do not have long-term, written agreements with any of our suppliers. The termination of our relationships or an adverse change in the terms of these arrangements (including with Agaveros Unidos) could have a negative impact on our business. If our suppliers increase their prices, we may not be able to secure alternative suppliers, and may not be able to raise the prices of our products to cover all or even a portion of the increased costs. Also, our suppliers’ failure to perform satisfactorily or handle increased orders, delays in shipments of products from suppliers or the loss of our existing suppliers, especially our key suppliers, could cause us to fail to meet orders for our products, lose sales, incur additional costs and/or expose us to product quality issues. In turn, this could cause us to lose credibility in the marketplace and damage our relationships with distributors, ultimately leading to a decline in our business and results of operations. If we are not able to renegotiate these contracts on acceptable terms or find suitable alternatives, our business, financial condition or results of operations could be negatively impacted.
Our contract with Agaveros Unidos runs through July 2039 and has set pricing for the tequila and bottling services they provide. The contract includes an exclusivity clause. We are committed to purchase 24,000 9-liter cases in 2020 and 35,000 9-liter cases in 2021. We have no expressed commitments beyond 2021. A breach of this contract, including minimum purchase commitments, could lead to a $2 million penalty and termination of the contract, and result in a failure of the Azuñia brand.
Our outstanding debt could reduce our strategic flexibility and liquidity and may have other adverse effects on our results of operations.
We have incurred significant debt under promissory notes and inventory financing lines. Much of our debt is secured by our bulk spirit inventory and other assets, including our Craft Canning business. Our ability to meet our debt service obligations depends upon our operating and financial performance, which is subject to general economic and competitive conditions and to financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to service our debt, we may need to sell inventory and other material assets, restructure or refinance our debt, or seek additional equity capital. Prevailing economic conditions and global credit markets could adversely impact our ability to do so.
Our debt agreements contain limits on our ability to, among other things, incur additional debt, grant liens, undergo certain fundamental changes, make investments, and dispose of inventory. We are also required to maintain compliance with a total leverage ratio and an interest coverage ratio and for our secured inventory to have a market value relative to our outstanding debt balance.
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The amount and terms of our debt, could have important consequences, including the following:
| ● | prematurely pay down our outstanding debt balance if the market value of our bulk spirits falls and we need to remain within our borrowing base covenants; | |
| ● | we may be more vulnerable to economic downturns, less able to withstand competitive pressures, and less flexible in responding to changing business and economic conditions; | |
| ● | we may be more limited in our ability to execute on our strategy and have flexibility to operate or restructure our business; | |
| ● | our cash flow from operations may be allocated to the payment of outstanding debt and not to developing and growing our brands; | |
| ● | we might not generate sufficient cash flow from operations or other sources to enable us to meet our payment obligations under the facility and to fund other liquidity needs; | |
| ● | an inability to incur additional debt, including for working capital, acquisitions, or other needs. |
If we breach a loan covenant or miss a payment, the lenders could accelerate the repayment of debt and foreclose on our inventory and other assets. We might not have sufficient assets to repay our debt upon acceleration. If we are unable to repay or refinance the debt upon acceleration or at maturity, the lenders could initiate a bankruptcy proceeding against us or collection proceedings with respect to our assets securing the facility, which could materially decrease the value of our common stock.
We depend on our independent wholesale distributors to distribute our products. The failure or inability of even a few of our distributors to distribute our products adequately within their territories could harm our sales and result in a decline in our results of operations.
We are required by law to use state-licensed distributors or, in 17 states known as “control states,” state-owned agencies performing this function, to sell our products to retail outlets, including liquor stores, bars, restaurants and national chains in the United States. We have established relationships for our brands with a limited number of wholesale distributors; however, failure to maintain those relationships could significantly and adversely affect our business, sales and growth. We currently distribute our products in 49 states.
Over the past decade there has been increasing consolidation, both intrastate and interstate, among distributors. As a result, many states now have only two or three significant distributors. Also, there are several distributors that now control distribution for several states. If we fail to maintain good relations with a distributor, our products could, in some instances be frozen out of one or more markets entirely. The ultimate success of our products also depends in large part on our distributors’ ability and desire to distribute our products to our desired U.S. target markets, as we rely significantly on them for product placement and retail store penetration. In addition, all of our distributors also distribute competitive brands and product lines. We cannot assure you that our U.S. distributors will continue to purchase our products, commit sufficient time and resources to promote and market our brands and product lines or that they can or will sell them to our desired or targeted markets. If they do not, our sales will be harmed, resulting in a decline in our results of operations.
We rely on a few key distributors, and the loss of any one key distributor would substantially reduce our revenues.
We currently derive a significant amount of our revenues from a few major distributors. A significant decrease in business from or loss of any of our major distributors could harm our financial condition by causing a significant decline in revenues attributable to such distributors. Sales to two distributors accounted for approximately 25% and 42% of our consolidated sales for 2019 and 2018, respectively. While we believe our relationships with our major distributors are good, we do not have long-term contracts with any of them and purchases generally occur on an order-by-order basis. If we experience a significant decrease in sales to any of our major distributors and are unable to replace such sales volume with orders from other customers, our sales may decrease which would have a material adverse financial effect on our results of operations and financial condition.
The sales of our products could decrease significantly if we cannot secure and maintain listings in the control states.
In the control states, the state liquor commissions act in place of distributors and decide which products are to be purchased and offered for sale in their respective states. Products selected for listing in control states must generally reach certain volumes and/or profit levels to maintain their listings. Products in control states are selected for purchase and sale through listing procedures, which are generally made available to new products only at periodically scheduled listing interviews. Products not selected for listings can only be purchased by consumers in the applicable control state through special orders, if at all. If, in the future, we are unable to maintain our current listings in the control states, or secure and maintain listings in those states for any additional products we may develop or acquire, sales of our products could decrease significantly, which would have a material adverse financial effect on our results of operations and financial condition.
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We must maintain a relatively large inventory of our products to support customer delivery requirements, and if this inventory is out of stock, lost due to foreclosure, theft, fire or other damage or becomes obsolete, our results of operations would be negatively impacted.
We maintain relatively large inventories of our product aging in barrels, as well as, to meet customer delivery requirements. We have used our barreled spirits inventory at market value as collateral in our financing. If we do not timely make payments on our financing obligations, or we breach our covenants in any financing document, including maintaining loan-to-value ratios, the lenders may foreclose and take possession of our inventory. In addition, this inventory is always at risk of loss due to theft, fire, evaporation, spoilage or other damage, and any such loss, whether insured against or not, could cause us to fail to meet our orders and harm our sales and operating results. Also, our inventory may become obsolete as we introduce new products, cease to produce old products or modify the design of our products’ packaging, which would increase our operating losses and negatively impact our results of operations.
If we are unable to identify and successfully acquire additional brands that are complementary to our existing portfolio, our growth will be limited, and, even if additional brands are acquired, we may not realize anticipated benefits, due to market acceptance, integration difficulties or other operating issues.
A component of our growth strategy may be the acquisition of additional brands that are complementary to our existing portfolio through the acquisition of such brands or their corporate owners, directly as brand acquisitions or through mergers, joint ventures, long-term exclusive distribution arrangements and/or other strategic relationships. For example, in September 2019, we acquired the high-end, luxury tequila brand, Azuñia, to complement our portfolio and provide us with a brand in the high-growth tequila category. In addition, we acquired MotherLode in March 2017, which provides contract canning, bottling and packaging services for existing and emerging spirits producers, and in January 2019, we completed the acquisition of Craft Canning, which significantly adds to our contract canning, bottling and packaging services. If we are unable to identify or have the financial ability to acquire suitable brand candidates and successfully execute our acquisition strategy, our growth will be limited. In addition, our entry into and expansion of our contract bottling, canning, and packaging services as a result of our acquisitions of MotherLode and Craft Canning may not be successful, and we may not realize the benefits of these co-packing operations and may face certain risks, including safety concerns, product contamination, and equipment malfunctions or breakdowns, among other things associated with our manufacturing operations. In addition, if our bottling, canning, or packaging services fail to meet our customers’ expectations, or there is an overall decline in demand for bottling, canning, or packaging services, our reputation, business, results of operations and financial condition could be adversely affected.
If we are successful in acquiring additional brands or related service businesses, we may still fail to achieve our target margins or maintain profitability levels that would justify our investment in those additional brands or services or fail to realize operating and economic efficiencies or other planned benefits with respect to those additional brands or services. For Craft Canning, we will need to provide increased capital to expand operations and for Azuñia we will need to increase our gross profit margins substantially, grow sales, reduce cost and leverage distribution to become cash flow positive.
The addition of new products or businesses entails numerous risks with respect to integration and other operating issues, any of which could have a detrimental effect on our results of operations and/or the value of our equity. These risks include, but are not limited to:
| ● | difficulties in assimilating acquired operations or products, including failure to realize synergies; | |
| ● | failure to realize or anticipate benefits or to execute on our planned strategy for the acquired brand or business; | |
| ● | unanticipated costs that could materially adversely affect our results of operations; | |
| ● | negative effects on reported results of operations from acquisition-related charges and amortization of acquired intangibles; |
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| ● | diversion of management’s attention from other business concerns; | |
| ● | adverse effects on existing business relationships with suppliers, distributors and retail customers; | |
| ● | risks of entering new markets or markets in which we have limited prior experience; and | |
| ● | the potential inability to retain and motivate key employees of acquired businesses. |
Our ability to grow through the acquisition of additional brands is also dependent upon identifying acceptable acquisition targets and opportunities, our ability to consummate prospective transactions on favorable terms, or at all, and the availability of capital to complete the necessary acquisition arrangements. We intend to finance our brand acquisitions through a combination of our available cash resources, third-party financing and, in appropriate circumstances, the further issuance of equity and/or debt securities. Acquiring additional brands could have a significant effect on our financial position and could cause substantial fluctuations in our quarterly and yearly operating results. Also, acquisitions could result in the recording of significant goodwill and intangible assets on our financial statements, the amortization or impairment of which would reduce reported earnings in subsequent years.
Our failure to protect our trademarks and trade secrets could compromise our competitive position and decrease the value of our brand portfolio.
Our business and prospects depend in part on our ability to develop favorable consumer recognition of our brands and trademarks. Although we apply for registration of our brands and trademarks, they could be imitated in ways that we cannot prevent. Also, we rely on trade secrets and proprietary know-how, concepts and formulas. Our methods of protecting this information may not be adequate. Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future and result in a judgment or monetary damages being levied against us. We do not maintain non-competition agreements with all of our key personnel or with some of our key suppliers. If competitors independently develop or otherwise obtain access to our trade secrets, proprietary know-how or recipes, the appeal, and thus the value, of our brand portfolio could be reduced, negatively impacting our sales and growth potential.
A failure of one or more of our key or service product information technology systems, cyber-security breach or cyber-related fraud could have a material adverse impact on our business.
We rely on information technology (“IT”) systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), and software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist us in the management of our business.
Increased IT security threats and more sophisticated cyber-crime pose a potential risk to the security of our IT systems, networks, and services, as well as to the confidentiality, availability, and integrity of our data. If the IT systems, networks, or service providers we rely upon fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information, due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our business continuity plans do not effectively address these failures on a timely basis, we may suffer interruptions in our ability to manage operations and reputational, competitive and/or business harm, which may adversely affect our business operations and/or financial condition. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, customers, suppliers or consumers. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and IT systems.
We may not be able to collect on notes receivable.
We currently have secured notes receivables from a Canadian online seller of spirits that mature in 2020. If the debtor fails to pay the note receivable on the maturity date we may incur costs related to collections, foreclosure and ultimately declare the debt uncollectable.
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We are subject to litigation risks.
From time to time, we may become involved in various litigation matters and claims, including employment, regulatory proceedings, administrative proceedings, governmental investigations, and contract disputes. We may face potential claims or liability for, among other things, breach of contract, defamation, libel, fraud, or negligence. We may also face employment-related litigation, including claims of age discrimination, sexual harassment, gender discrimination, immigration violations, or other local, state, and federal labor law violations. For instance, two former employees have made claims that our current and former management engaged in gender discrimination and sexually harassing manner. Because of the uncertain nature of litigation and insurance coverage decisions, the outcome of such actions and proceedings cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, cash flows, reputation, brand identity and the trading price of our securities. Any such litigation, with or without merit, could also result in substantial expenditures of time and money, and divert attention of our management team from other tasks important to the success of our business.
If we fail to manage growth effectively or prepare for product scalability, it could have an adverse effect on our employee efficiency, product quality, working capital levels and results of operations.
Any significant growth in the market for our products or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. During any period of growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees. Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the marketing of the products we sell, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.
RISKS RELATED TO OUR INDUSTRY
Demand for our products may be adversely affected by many factors, including changes in consumer preferences and trends.
Consumer preferences may shift due to a variety of factors, including changes in demographic and social trends, public health initiatives, product innovations, changes in vacation or leisure, dining and beverage consumption patterns and a downturn in economic conditions, any or all of which may reduce consumers’ willingness to purchase distilled spirits or cause a shift in consumer preferences toward beer, wine or non-alcoholic beverages or other products. Our success depends in part on fulfilling available opportunities to meet consumer needs and anticipating changes in consumer preferences with successful new products and product innovations.
A limited or general decline in consumption in one or more of our product categories could occur in the future due to a variety of factors, including:
| ● | a general decline in economic or geopolitical conditions; | |
| ● | changing consumer preferences, including to other beverage products or alternatives to alcoholic beverages; | |
| ● | concern about the health consequences of consuming beverage alcohol products and about drinking and driving; |
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| ● | a general decline in the consumption of beverage alcohol products in on-premises establishments, which may result from smoking bans and stricter laws relating to driving while under the influence of alcohol; | |
| ● | consumer dietary preferences favoring lighter, lower calorie beverages such as diet soft drinks, sports drinks and water products; | |
| ● | increased federal, state, provincial and foreign excise or other taxes on beverage alcohol products and possible restrictions on beverage alcohol advertising and marketing; | |
| ● | increased regulation placing restrictions on the purchase or consumption of beverage alcohol products or increasing prices due to the imposition of duties or excise taxes; | |
| ● | inflation; and | |
| ● | wars, pandemics, weather and natural or man-made disasters. |
In addition, our continued success depends, in part, on our ability to develop new products to meet consumer needs and anticipate changes in consumer preferences. The launch and ongoing success of new products are inherently uncertain, especially with regard to their appeal to consumers. The launch of a new product can give rise to a variety of costs, and an unsuccessful launch, among other things, can affect consumer perception of existing brands and our reputation. Unsuccessful implementation or short-lived popularity of our product innovations may result in inventory write-offs and other costs.
In addition, the legalization of marijuana in any of the jurisdictions in which we sell our products may result in a reduction in sales. Studies have shown that sales of alcohol may decrease in jurisdictions where marijuana has been legalized (e.g. California, Colorado, Washington, Nevada, Alaska, Illinois, Vermont, Massachusetts, Maine, Michigan and Oregon). As a result, marijuana sales may adversely affect our sales and profitability.
We face substantial competition in our industry and many factors may prevent us from competing successfully.
We compete on the basis of product taste and quality, brand image, price, service and ability to innovate in response to consumer preferences. The global spirits industry is highly competitive and is dominated by several large, well-funded international companies. Many of our current and potential competitors have longer operating histories and have substantially greater financial, sales, marketing and other resources than we do, as well as larger installed customer bases, greater name recognition and broader product offerings. Some of these competitors can devote greater resources to the development, promotion, sale and support of their products. As a result, it is possible that our competitors may either respond to industry conditions or consumer trends more rapidly or effectively or resort to price competition to sustain market share, which could adversely affect our sales and profitability.
Our business may be disrupted by crisis such as the Covid-19 pandemic.
Our business is suspectable to disruption from any number of possible crisis. The impact of business and government responses to the Covid-19 pandemic has had a significant impact on the operations and financial condition of many businesses. Those include employees being required to work remotely, not travel and otherwise alter their normal working conditions. Businesses have been closed, including establishments that sell our products, and supply chains and manufacturing have been disrupted. Consumers buying habits have shifted to buying larger package of spirits (e.g. 1.75 liter) sized packages, which we do not sell in our mainstream brands. These and other impacts from the Covid-19 and any other similar crisis could have a material impact on our operations and financial results.
Class actions or other litigation relating to alcohol abuse or the misuse of alcohol could adversely affect our business.
Our industry faces the possibility of class action or similar litigation alleging that the continued excessive use or abuse of beverage alcohol has caused death or serious health problems or related to the labelling of our products. It is also possible that governments could assert that the use of alcohol has significantly increased government-funded healthcare costs. Litigation or assertions of this type have adversely affected companies in the tobacco industry, and it is possible that we, as well as our suppliers, could be named in litigation of this type.
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Also, lawsuits have been brought in a number of states alleging that beverage alcohol manufacturers and marketers have improperly targeted underage consumers in their advertising. Plaintiffs in these cases allege that the defendants’ advertisements, marketing and promotions violate the consumer protection or deceptive trade practices statutes in each of these states and seek repayment of the family funds expended by the underage consumers. While we have not been named in these lawsuits, we could be named in similar lawsuits in the future. Any class action or other litigation asserted against us could be expensive and time-consuming to defend against, depleting our cash and diverting our personnel resources and, if the plaintiffs in such actions were to prevail, our business could be harmed significantly.
Regulatory decisions and legal, regulatory and tax changes could limit our business activities, increase our operating costs and reduce our margins.
Our business is subject to extensive government regulation. This may include regulations regarding production, distribution, marketing, advertising and labeling of beverage alcohol products. We are required to comply with these regulations and to maintain various permits and licenses. We are also required to conduct business only with holders of licenses to import, warehouse, transport, distribute and sell beverage alcohol products. We cannot assure you that these and other governmental regulations applicable to our industry will not change or become more stringent. Moreover, because these laws and regulations are subject to interpretation, we may not be able to predict when and to what extent liability may arise. Additionally, due to increasing public concern over alcohol-related societal problems, including driving while intoxicated, underage drinking, alcoholism and health consequences from the abuse of alcohol, various levels of government may seek to impose additional restrictions or limits on advertising or other marketing activities promoting beverage alcohol products. Failure to comply with any of the current or future regulations and requirements relating to our industry and products could result in monetary penalties, suspension or even revocation of our licenses and permits. Costs of compliance with changes in regulations could be significant and could harm our business, as we could find it necessary to raise our prices in order to maintain profit margins, which could lower the demand for our products and reduce our sales and profit potential.
Also, the distribution of beverage alcohol products is subject to extensive taxation (at both the federal and state government levels), and beverage alcohol products themselves are the subject of national import and excise duties in most countries around the world. An increase in taxation or in import or excise duties could also significantly harm our sales revenue and margins, both through the reduction of overall consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol. Although we expect a significantly positive impact on our operating results from the enactment of the Craft Modernization and Tax Reform Act of 2017, which was part of the 2017 federal tax legislation that went into effect on January 1, 2018, resulting from the lowering of the federal excise tax on spirits for the first 100,000 proof gallons per year from $13.50 to $2.70 per gallon, there can be no assurance this revised tax rate will remain in effect after the extension period ending December 31, 2020.
We could face product liability or other related liabilities that increase our costs of operations and harm our reputation. In addition, our insurance coverage might not be adequate.
Although we maintain liability insurance and will attempt to limit contractually our liability for damages arising from our products, these measures may not be sufficient for us to successfully avoid or limit product liability or other related liabilities. Our product liability insurance coverage is limited to $2 million per occurrence and $5 million in the aggregate and our general liability umbrella policy is capped at $2 million, which may be insufficient. Further, any contractual indemnification and insurance coverage we have from parties supplying our products is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by these suppliers. In any event, extensive product liability claims could be costly to defend and/or costly to resolve and could harm our reputation or business.
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Contamination of our products and/or counterfeit or confusingly similar products could harm the image and integrity of, or decrease customer support for, our brands and decrease our sales.
The success of our brands depends upon the positive image that consumers have of them. Contamination, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for our brands, could affect the demand for our products. Contaminants in raw materials purchased from third parties and used in the production of our products or defects in the distillation and fermentation processes could lead to low beverage quality, as well as illness among, or injury to, consumers of our products and could result in reduced sales of the affected brand or all of our brands and potentially serious damage to our reputation for product quality, as well as product liability claims. Also, to the extent that third parties sell products that are either counterfeit versions of our brands or brands that look like our brands, consumers of our brands could confuse our products with products that they consider inferior. This could cause them to refrain from purchasing our brands in the future and in turn could impair our brand equity and adversely affect our sales and operations.
In addition, we also provide contract bottling, canning, and packaging services for existing and emerging beer, wine and spirits producers through our subsidiaries MotherLode and Craft Canning. Beer and wine products produced by third parties may be more susceptible to contamination than the distilled products that we produce, due to the lower alcohol content.
Adverse public opinion about alcohol could reduce demand for our products.
Anti-alcohol groups have, in the past, advocated successfully for more stringent labeling requirements, higher taxes and other regulations designed to discourage alcohol consumption. In addition, recent developments in the industry may compel us to identify the source and location of our distillate products and notify the consumer of whether the product was distilled by us. More restrictive regulations, negative publicity regarding alcohol consumption and/or changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease sales and consumption of alcohol and thus the demand for our products. This could, in turn, significantly decrease both our revenues and our revenue growth, causing a decline in our results of operations.
RISKS RELATED TO OUR COMMON STOCK
Our common stock is thinly traded, and investors may be unable to sell some or all of their shares at the price they would like, or at all, and sales of large blocks of shares may depress the price of our common stock.
Our common stock has historically been sporadically or “thinly-traded,” meaning that the number of persons interested in purchasing shares of our common stock at prevailing prices at any given time may be relatively small or non-existent. As a consequence, there may be periods of several days or more when trading activity in shares of our common stock is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. This could lead to wide fluctuations in our share price. Investors may be unable to sell their common stock at or above their purchase price, which may result in substantial losses. Also, as a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of shares of our common stock in either direction. The price of shares of our common stock could, for example, decline precipitously in the event a large number of shares of our common stock is sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb such sales without adverse impact on its share price.
Sales of our stock or use of our stock to satisfy obligations may impact the market price of our common stock and cause substantial dilution.
We likely will need to raise additional capital, which might be in the form of an equity offering. Future sales of substantial amounts of our common or preferred stock, including shares that we may issue upon exercise of warrants or conversion of preferred stock, could adversely affect the market price of our common stock. Further, if we raise additional funds through the issuance of equity, the percentage ownership of our stockholders will be reduced and cause substantial dilution to current stockholders.
We pay certain of our consultants and business partners in our common stock, and sometimes settle debts with common stock. We also pay executive compensation in the form of equity. These payments are based on the dollar value of what is owed, rather than a fixed number of shares. Continued use of our stock in this manner, especially if our stock price is trading at a low price, may cause dilution to our shareholders and could adversely affect the market price of our common stock.
A decline in the price of our common stock could affect our ability to raise working capital and adversely impact our ability to continue operations.
A further decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. A decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plans and operations, including our ability to develop new services and continue our current operations. If our common stock price further declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.
If we are unable to continue as a going concern, our securities will have little or no value.
We have incurred operating losses since our inception, and we expect to continue to incur significant expenses and operating losses for the foreseeable future. Our financial statements have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm included in its opinion for the years ended December 31, 2019 and 2018 an explanatory paragraph referring to our net loss from operations and net capital deficiency and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. If we are unable to generate sufficient cash from operations or obtain additional financing in the future, we might not be able to continue as a going concern. There are no assurances that such financing, if necessary, will be available to us at all or will be available in sufficient amounts or on reasonable terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we are unable to generate additional funds in the future through financings, sales of our products or from other sources or transactions, we will exhaust our resources and will be unable to continue operations. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us.
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Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock.
In August 2017, our shares of common stock began trading on the Nasdaq Capital Market. If we fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements. As of August 8, 2019, we failed to comply with Nasdaq’s requirement to have a majority independent Board and independent audit and compensation committees. Although we regained compliance with the Nasdaq listing requirements in September 2019, we again fell out of compliance on November 12, 2019 due to a director resignation and the appointment of Lawrence Firestone, a then-independent director, as our Chief Executive Officer. We promptly came back into compliance on November 18, 2019.
While our warrants are outstanding, it may be more difficult to raise additional equity capital.
We currently have non-trading, privately issued common stock warrants to purchase 736,559 shares of common stock. During the term that our warrants are outstanding, the holders of the warrants will be given the opportunity to profit from a rise in the market price of our common stock. We may find it more difficult to raise additional equity capital while we have warrants outstanding. We might issue additional warrants along with a future financing.
We do not expect to pay dividends for the foreseeable future.
For the foreseeable future, it is anticipated that earnings, if any, that may be generated from our operations will be used to finance our operations and that cash dividends will not be paid to holders of common stock.
Our largest stockholders have the power to significantly influence our decisions and their interests may conflict with ours or yours in the future.
We have several stockholders owning near or over 5% of our outstanding common stock, according to public filings. In addition, Stephanie Kilkenny, a member of our Board of Directors together with her spouse, owns and controls TQLA, LLC (“TQLA”), the majority owner of Intersect Beverage, LLC. In connection with the acquisition of Azuñia Tequila from Intersect Beverage, LLC, TQLA may receive a substantial number of shares payable under the asset purchase agreement in 2021, subject to a limitation under Nasdaq rules if the share issuance would require a shareholder vote (e.g., we anticipate that the share issuance will be limited 19.99% of our outstanding). Certain of our officers and directors, such as our CEO Mr. Firestone, and our Director Jack Peterson (through his relationship with Sandstrom Partners), may become significant stockholders through the payment of equity compensation.
Accordingly, as a result of their direct and indirect beneficial ownership, the foregoing stockholders may be able to exercise substantial control and more directly influence our affairs and business, including any determination with respect to a change in control, future issuances of common stock or other securities, declaration of dividends on the common stock and the election of directors. The stockholders may have interests that differ from the interests of other stockholders.
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We have the ability to issue additional shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause your investment to be diluted. However, if we fail to obtain shareholder approval for additional authorized common stock, our financing alternatives will be limited.
Our Articles of Incorporation authorize the Board to issue up to 15,000,000 shares of common stock and up to 100,000,000 shares of preferred stock. The power of the Board to issue shares of common stock, preferred stock or warrants or options to purchase shares of common stock or preferred stock is generally not subject to stockholder approval. Accordingly, any additional issuances of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting your investment, and the new securities may have rights, preferences and privileges senior to those of our common stock.
We have over 11,000,000 shares of common stock outstanding or subject to warrants or other convertible securities. We are limited to issuing up to 15,000,0000 shares of common stock. The limited number of available shares of common stock constrains our ability to conduct equity offerings or engage in financing transactions that may have an equity component. In addition, this limitation will constrain our ability to grant equity incentives, which could result in a failure to align management to shareholder objectives or to be able to retain and motivate key personnel.
By issuing preferred stock, we may be able to delay, defer, or prevent a change of control.
Our Articles of Incorporation permit us to issue, without approval from our stockholders, a total of 100,000,000 shares of preferred stock. Our Board may determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series. It is possible that our Board, in determining the rights, preferences and privileges to be granted when the preferred stock is issued, may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights of the holders of our common stock.
We face risks related to compliance with corporate governance laws and financial reporting standards.
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), as well as related rules and regulations implemented by the SEC and the Public Company Accounting Oversight Board, require compliance with certain corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting (“SOX 404”), has materially increased our legal and financial compliance costs and made some activities more time-consuming, burdensome and expensive. Although we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate or may not operate effectively. Any failure to comply with the requirements of SOX 404, our ability to remediate any material weaknesses that we may identify during our compliance program, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under SOX 404. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock, and we could be subject to regulatory sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
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We leased the following properties as of December 31, 2019:
| Location | Principal Activities | Sq Ft | Expiration | |||
| 1512 SE 7th Ave., Portland, OR 97214 | Retail Operation | 1,300 | 3/31/2021* | |||
| 9585 SW Washington Square Rd., Portland, OR 97223 | Retail Operation | 885 | 3/31/2020* | |||
| 1422 NW 23rd Ave., Portland, OR 97210 | Retail Operation | 1,000 | 12/31/2023* | |||
| 1200 SE 82nd Ave., Suite 2024, Happy Valley, OR 97086 | Retail Operation | 683 | 3/31/2020* | |||
| 21420-D NW Nicholas Ct., Hillsboro, OR 97214 | Distilling, Bottling, Warehousing | 6,040 | 6/30/2020** | |||
| 10100 SE Main St., Milwaukie, OR 97222 | Distilling, Blending, Bottling, Warehousing | 29,960 | 10/31/2021 | |||
| 1001 SE Water Ave., Suite 390, Portland, OR 97214 | Corporate Headquarters | 3,050 | 6/30/2020*** | |||
| 8911 NE Marx Dr., Suite A2, Portland, OR 97230 | Craft Canning Operation | 17,400 | 6/30/2020 | |||
| 4701 Colorado Ave. South, Suite B, Seattle, WA 98134 | Craft Canning Operation | 6,800 | Month-to-month | |||
| 6035 East 76th Ave., Suite G-I, Commerce City, CO 80022 | Craft Canning Operation | 4,500 | 8/31/2020 | |||
| 321 S Vermont Ave., Glendora, CA 91741 | Sales Office | 2,000 | 2/29/2020 | |||
| 5365 Pine Ave., Chino Hills, CA 91709 | Sales Office | 3,155 | Month-to-month |
* Retail operations were permanently closed on March 23, 2020. Leases scheduled to expire after operations cease will either be bought out with a termination fee or will remain empty until a sub-lease arrangement can be completed.
** Distilling operations are scheduled to move to the Milwaukie, Oregon production facility in the second quarter of 2020, and the lease is expected to terminate on June 30, 2020.
*** The lease at Water Avenue has been to be extended to December 31, 2020.
We are party to the legal proceeding described below. In addition, 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.
On October 22, 2019, a complaint was filed against the Company in the Circuit Court of Oregon, County of Multnomah by two former employees, Laurie Branch and Justina Thoreson. The complaint also named as defendants certain current and former officers and employees of the Company. The complaint is captioned Branch et al. v. Eastside Distilling, Inc. et al., case number 19-CV-45716, and alleged, among other things, that the Company and certain current and former officers and employees engaged in sex discrimination, retaliation for reporting sexual discrimination, sexual harassment, and aiding and abetting unlawful discrimination. As relief, the complaint sought among other things, monetary damages of up to $560,000 and attorneys and experts’ fees. This litigation was successfully mediated on March 20, 2020 and is in final stages of settlement. The Company’s insurer accepted initial defense of this matter, with a reservation of rights. The Company is responsible for $100,000 retention per claim.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the Nasdaq Capital Market (“Nasdaq”) under the symbol “EAST.”
Shareholders
Our shares of common stock are issued in registered form. The registrar and transfer agent for our shares of common stock is Transfer Online, Inc. 512 SE Salmon Street, Portland, OR 97214 (Telephone: (503) 227-2950).
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As of March 30, 2020, there were 9,762,728 shares of our common stock outstanding, which were held by approximately 95 record stockholders. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of shares of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividend Policy
We have not paid cash dividends on our common stock since our inception, and we do not contemplate paying dividends in the foreseeable future.
Recent Sales of Unregistered Securities
The following lists set forth information regarding all securities sold or granted by us within the past year that were not registered under the Securities Act of 1933, as amended (the “Securities Act”), and the consideration, if any, received by us for such securities:
| ● | In January 2019, the Company issued warrants to purchase 30,000 common shares at an exercise price of $7.75 per share to a related party consultant. |
| ● | In January 2019, the Company issued 338,212 shares of common stock as consideration in exchange for the acquisition of Craft Canning on January 11, 2019. In addition, we issued a warrant to purchase 146,262 shares of common stock at a price of $7.80 per share and exercise period for three years. The warrant is subject to the continuation of a consulting agreement and is not part of the purchase price of the acquisition. |
| ● | In September 2019, the Company issued 280,555 units (the “Units”) in a private offering at a per Unit price of $4.50 per share, resulting in net cash proceeds of $1,262,497. Each Unit consists of one share of Eastside’s common stock and a three-year warrant to acquire 0.5 shares of common stock at an exercise price of $5.50 per share. |
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, general solicitation or any public offering, and the Registrant believes each transaction was exempt from the registration requirements of the Securities Act, as stated above. The Registrant believes that the Section 4(a)(2) or Rule 506(b) of Regulation D exemption applies to the transactions described above because such transactions were predicated on the fact that the issuances were made only to investors who (i) confirmed to the Registrant in writing that they are accredited investors, or if not accredited, have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of their investment; and (ii) either received adequate business and financial information about the Registrant or had access, through their relationships with the Registrant, to such information. Furthermore, the Registrant affixed appropriate legends to the share certificates and instruments issued in each foregoing transaction setting forth that the securities had not been registered and the applicable restrictions on transfer.
Repurchase of Securities
None.
Item 6. SELECTED FINANCIAL DATA
This selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our Consolidated Financial Statements and the accompanying Notes contained in “Item 8. Financial Statements and Supplementary Data.”
| Years Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Consolidated Statements of Operations Data: | ||||||||||||||||||||
| Sales | $ | 17,021,484 | $ | 7,204,302 | $ | 3,791,382 | $ | 3,042,527 | $ | 2,326,664 | ||||||||||
| Less excise taxes, customer programs and incentives | $ | 1,424,860 | $ | 1,080,792 | $ | 1,180,386 | $ | 934,221 | $ | 624,046 | ||||||||||
| Net sales | $ | 15,596,624 | $ | 6,123,510 | $ | 2,610,996 | $ | 2,108,306 | $ | 1,702,618 | ||||||||||
| Gross profit | $ | 5,456,961 | $ | 2,310,201 | $ | 976,927 | $ | 827,962 | $ | 832,228 | ||||||||||
| Total operating expenses | $ | 19,172,118 | $ | 10,571,208 | $ | 5,806,802 | $ | 5,125,923 | $ | 4,373,746 | ||||||||||
| Loss from operations | $ | (13,715,157 | ) | $ | (8,261,007 | ) | $ | (4,829,875 | ) | $ | (4,297,961 | ) | $ | (3,541,518 | ) | |||||
| Net loss | $ | (16,908,104 | ) | $ | (9,047,669 | ) | $ | (5,277,917 | ) | $ | (5,199,619 | ) | $ | (3,601,066 | ) | |||||
| Basic and diluted weighted average common shares outstanding | 9,275,696 | 6,074,489 | 3,717,956 | 1,247,281 | 45,750,363 | |||||||||||||||
| Basic and diluted net loss per common share | $ | (1.82 | ) | $ | (1.49 | ) | $ | (1.42 | ) | $ | (4.21 | ) | $ | (0.08 | ) | |||||
| Gross margin | 35 | % | 38 | % | 37 | % | 39 | % | 49 | % | ||||||||||
| Redneck Riviera Whiskey reimbursable marketing expenses | $ | 2,359,907 | $ | 1,266,769 | ||||||||||||||||
| Non-cash operating expenses | $ | 7,482,085 | $ | 2,539,889 | $ | 1,649,186 | $ | 1,065,455 | $ | 938,414 | ||||||||||
| Consolidated Balance Sheets Data: | ||||||||||||||||||||
| Total assets | $ | 35,865,863 | $ | 26,357,808 | $ | 9,028,965 | $ | 2,547,988 | $ | 1,291,858 | ||||||||||
| Total long-term liabilities | $ | 22,394,943 | $ | 5,234,106 | $ | 2,161,760 | $ | 427,756 | $ | 17,842 | ||||||||||
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this Form 10-K and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, results of operations, and financial position. Examples include those statements set forth above prior to “Item 1. Business - Cautionary Note Regarding Forward-Looking Statements.” These statements are based on the Company’s current expectations and estimates as to prospective events and circumstances about which the Company can give no assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect future events or circumstances. Forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include the factors set forth above and the other information set forth in this Form 10-K.
Overview
Eastside Distilling (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 manufacture, acquire, blend, bottle, import, export, market and sell a wide variety of alcoholic beverages under recognized brands. We currently employ 89 people in the United States.
Our brands span several alcoholic beverage categories, including bourbon, American whiskey, vodka, gin, rum, tequila and Ready-to-Drink (RTD). We sell our products on a wholesale basis to distributors, and until March 2020, we operated four retail tasting rooms in Portland, Oregon to market our brands directly to consumers.
| Principal Brands | |
| Gin | |
| Big Bottom The Ninety One Gin | |
| Big Bottom Navy Strength | |
| Big Bottom Barrel Finished Gin | |
| Big Bottom London Dry Gin | |
| Rum | |
| Hue-Hue Coffee Rum | |
| Tequila | |
| Azuñia Blanco Organic Tequila | |
| Azuñia Reposado Organic Tequila | |
| Azuñia Añejo Tequila | |
| Azuñia Black, 2-Year, Extra-Aged, Private Reserve Añejo Tequila | |
| Vodka | |
| Portland Potato Vodka | |
| Portland Potato Vodka - Marionberry | |
| Portland Potato Vodka - Habanero | |
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| Whiskey | |
| Redneck Riviera Whiskey | |
| Redneck Riviera Whiskey - Granny Rich Reserve | |
| Burnside Oregon Oaked Rye Whiskey | |
| Burnside West End Blend Whiskey | |
| Burnside Goose Hollow Bourbon | |
| Burnside Oregon Oaked Bourbon | |
| Burnside Buckman RSV 10 Year Bourbon | |
| Marionberry Whiskey | |
| Big Bottom Barlow Whiskey | |
| Big Bottom Barlow Port Whiskey | |
| Big Bottom Delta Rye | |
| Big Bottom American Single Malt | |
| Big Bottom Zin Cask Bourbon | |
| Barrel Hitch American Whiskey | |
| Special | |
| Advocaat Holiday Egg Nog | |
| Ready-to-Drink | |
| Redneck Riviera Howdy Dew! | |
| Portland Mule - Original | |
| Portland Mule - Marionberry | |
Operating as a small business in a large, international spirits marketplace occupied by large multi-national conglomerates, we seek to utilize our size and our public company stature to our advantage and position Eastside Distilling as a leading tier 2 spirits provider by acquiring and developing brands, growing them to a national presence and positioning them for sale to the tier 1 suppliers to the market. This strategy was demonstrated by the launch of our Redneck Riviera Brand (RRW) in conjunction with our branding partners, Sandstrom Partners in 2018. This demonstrated how our team can leverage its position to launch nascent or new brands and grow them more quickly than the tier 1 larger conglomerates because we are able to focus and dedicate more of our attention to developing innovative products. Our RRW brand went from idea, to market roll-out in less than nine months and achieved national distribution in 49 states in 18 months. In September 2019, we acquired the Azuñia tequila brand and have begun to distribute this brand through our national platform.
In May 2017, we used our shares to acquire 90% of Big Bottom Distilling, LLC (“BBD”), known for its award-winning, super-premium gins and whiskeys, and American Single Malt Whiskey. BBD’s super-premium spirits give us a presence at the “ultra-premium segment” of the market. In December 2018, we acquired the remaining 10% of BBD. In September 2019, we also acquired the high-end, luxury tequila brand, Azuñia, to complement our portfolio and provide us with a larger established brand in the high-growth tequila category. In addition, through MotherLode Craft Distillery (“MotherLode”), our wholly-owned subsidiary acquired in March 2017 and Craft Canning + Bottling, LLC (formerly known as Craft Canning, LLC) (“Craft Canning”), which we acquired in January 2019, we provide contract bottling, canning, and packaging services for existing and emerging beer, wine and spirits producers. We intend to use our mobile canning operations to profit from the rapid growth in the canned beverages industry (beer, wine, spirit-based RTD’s).
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Recent Developments
Introduction of new Redneck Riviera Whiskey “Granny Rich Reserve”. In February 2019, we announced the introduction of its newest product under the Redneck Riviera trademark - Redneck Riviera Whiskey “Granny Rich Reserve”. Representing the first line extension with the Redneck Riviera Brand, Granny Rich Reserve is a premium priced blend of traditional corn whiskey, aged three years or more, blended with American single malt aged at least four years.
Introduction of new Portland Mule Ready-to-Drink (RTD) Cocktail. In January 2019, we announced our landmark entry into the fast growing Ready-to-Drink (RTD) market with the introduction of the Portland Mule Ready-to-Drink Cocktail. Portland Mule comes in a 250ml, or 8.4 oz can, designed by the award-winning design team at Sandstrom Partners, and has a 10.5% alcohol by volume. In August 2019, we announced the Portland Mule – Marionberry flavor Ready-to-Drink Cocktail.
Acquisition of Craft Canning & Bottling – creates significant increase in canning operations. In January 2019, we completed the acquisition of Portland-based Craft Canning + Bottling (“Craft Canning”) a leading provider of mobile canning and bottling services in Oregon, Washington and Colorado. Craft Canning will combine operations with Eastside’s MotherLode co-packing subsidiary, positioning the combined business unit to be a preeminent local provider to the fast-growing wine and Ready-to-Drink (RTD) cocktail segments.
Acquisition of the high-end, luxury tequila brand, Azuñia. In September 2019, we completed the acquisition of Azuñia Tequila from Intersect Beverage. Azuñia Tequila offers four premium tequila products; Blanco Organic Tequila, Reposado Organic Tequila, Añejo Tequila, and Azuñia Black Tequila. Primarily sold into on-premise locations throughout the western and southeastern United States. The Azuñia tequila brand provides Eastside Distilling with a second national anchor brand, along with Eastside’s Redneck Riviera Whiskey portfolio.
Introduction of new Redneck Riviera “Howdy Dew!” In October 2019, we announced the Redneck Riviera Ready-to-Drink Cocktail “Howdy Dew!”. Representing the second line extension with the Redneck Riviera Brand, Howdy Dew! comes in a 12 oz can, designed by the award-winning design team at Sandstrom Partners, and has a 5.5% alcohol by volume.
Available Information
Our executive offices are located at 1001 SE Water Ave, Suite 390, Portland, Oregon 97214. Our telephone number is (971) 888-4264 and our internet address is www.eastsidedistilling.com. The information on, or that may be, accessed from our website is not part of this annual report.
Results of Operations
Overview
| Consolidated Statements of Operations Data: | 2019 | 2018 | Variance | % Change | ||||||||||||
| Sales | $ | 17,021,484 | $ | 7,204,302 | $ | 9,817,182 | 136.3 | % | ||||||||
| Less excise taxes, customer programs and incentives | 1,424,860 | 1,080,792 | 344,068 | 31.8 | % | |||||||||||
| Net sales | 15,596,624 | 6,123,510 | 9,473,114 | 154.7 | % | |||||||||||
| Cost of sales | 10,139,663 | 3,813,309 | 6,326,354 | 165.9 | % | |||||||||||
| Gross profit | 5,456,961 | 2,310,201 | 3,146,760 | 136.2 | % | |||||||||||
| Advertising, promotional and selling expenses | 7,500,501 | 4,345,210 | 3,107,667 | 71.5 | % | |||||||||||
| General and administrative expenses | 11,538,438 | 6,225,998 | 5,733,080 | 92.1 | % | |||||||||||
| Loss on disposal of property and equipment | 133,179 | - | 133,179 | - | ||||||||||||
| Total operating expenses | 19,172,118 | 10,571,208 | 8,973,926 | 84.9 | % | |||||||||||
| Loss from operations | (13,715,157 | ) | (8,261,007 | ) | (5,827,166 | ) | 70.5 | % | ||||||||
| Interest expense | 523,391 | 789,362 | (265,971 | ) | (33.7 | )% | ||||||||||
| Other expense (income) | (2,669,556 | ) | 2,700 | (2,672,256 | ) | (98,972.4 | )% | |||||||||
| Net loss | $ | (16,908,104 | ) | $ | (9,047,669 | ) | $ | (8,233,451 | ) | 91.0 | % | |||||
| Gross margin | 35 | % | 38 | % | -3 | % | ||||||||||
| Redneck Riviera Whiskey reimbursable marketing expenses | $ | 2,359,907 | $ | 1,266,769 | - | - | ||||||||||
| Net loss attributable to retail operations | $ | (427,000 | ) | (187,000 | ) | |||||||||||
| Non-cash operating expenses | $ | 7,482,085 | $ | 2,539,889 | $ | 2,606,711 | 102.6 | % | ||||||||
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Throughout 2018 and 2019, Eastside Distilling has transformed from a small regional craft distiller serving the northwest, principally Oregon, to a tier 2 nationally recognized purveyor of high quality above premium spirit brands throughout the United States with distribution in the major chains and retail outlets covering 49 states. We grew both organically and through acquisitions as we grew Redneck Riviera Whiskey from zero at the beginning of 2018 to approximately 27,000 cases for 2019 in less than two years. Additionally, we introduced three brand extensions and completed two acquisitions in 2019, as we acquired the business of Craft Canning and the Azuñia tequila brand, adding growth in spirits and non-spirits sales during 2019.
We continue to expand our points of distribution to drive continued growth as we now have over 10,000 points of distribution for Redneck Riviera Whiskey alone, which we consider to be our gateway to grow our other brands on a national platform. We believe we are also positioned to simplify our business model and manage both an in-house and outsourced scalable production model and outsourced fulfillment and logistics to keep up with demand. Our mission is to become “the” tier 2 house of national brands in the spirits industry with national distribution and a host of brands growing from near zero to in the range of 100,000 cases annually, leading to potential opportunities to sell our most mature brands to the tier 1 spirits houses.
On December 9, 2019, Redneck Riviera Whiskey Co., LLC, a Tennessee limited liability company (“Licensee”) and a wholly-owned subsidiary of Eastside Distilling, Inc., executed a First Amendment (the “First Amendment”) to the Amended and Restated License Agreement (the “License Agreement”), among Rich Marks, LLC, a Delaware limited liability company (“Licensor”), Licensee, John D. Rich tisa Trust u/a/d March 27, 2018, Dwight P. Wiles, Trustee, and Eastside Distilling, Inc. (the “Company). Under the License Agreement, the Licensor is required to reimburse the Licensee for 50% of the designated marketing expenses incurred. The reimbursement is payable upon the sale of the brand within the term of the agreement, which is 10 years, with a renewable option for any additional 10 years, by the licensor, and is thus deemed to be a contingent asset. For the years ended December 31, 2019 and 2018, the 50% Redneck Riviera marketing expense reimbursement was $2.4 million and $1.2 million, respectively.
(Dollars in thousands)
| 2019 | 2018 | |||||||||||||||
| Company | Reimbursable RRW Marketing | Company | Reimbursable RRW Marketing | |||||||||||||
| Excise taxes, customer programs and incentives | 1,425 | 179 | 1,081 | 82 | ||||||||||||
| Advertising, promotional and selling expenses | 7,501 | 2,181 | 4,345 | 1,185 | ||||||||||||
| Total | 8,926 | 2,360 | 5,426 | 1,267 | ||||||||||||
On December 31, 2019, management made a strategic shift to focus the Company’s sale 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. This decision does not meet the criteria for reporting discontinued operations until the retail stores are closed / abandoned, which is planned to occur by March 31, 2020. As a result, the retail operations will not be reported as discontinued operations as of December 31, 2019. The table below show results of retail operations compared to total company operations for 2019 and 2018.
(Dollars in thousands)
| 2019 | 2018 | |||||||||||||||
| Company | Retail | Company | Retail | |||||||||||||
| Sales | $ | 17,021 | $ | 1,113 | $ | 7,204 | $ | 1,213 | ||||||||
| Less excise taxes, customer programs and incentives | 1,425 | 459 | 1,081 | 406 | ||||||||||||
| Cost of sales | 10,140 | 278 | 3,813 | 303 | ||||||||||||
| Gross profit | 5,457 | 376 | 2,310 | 504 | ||||||||||||
| Operating expenses | 19,172 | 803 | 10,571 | 691 | ||||||||||||
| Loss from operations | $ | (13,715 | ) | (427 | ) | $ | (8,261 | ) | (187 | ) | ||||||
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Our sales for the year ended December 31, 2019 increased to $17.0 million, or approximately 136%, from $7.2 million for the year ended December 31, 2018.
| 2019 | 2018 | |||||||||||||||
| Wholesale | $ | 7,481,760 | 44 | % | $ | 4,354,351 | 50 | % | ||||||||
| Private Label (Co-packing) | 8,427,121 | 49 | % | 1,636,183 | 34 | % | ||||||||||
| Retail / Special Events | 1,112,603 | 7 | % | 1,213,768 | 16 | % | ||||||||||
| Total | $ | 17,021,484 | 100 | % | $ | 7,204,302 | 100 | % | ||||||||
Our overall 2019 sales was primarily driven by increases in wholesale sales and co-packing. Wholesale sales increased primarily due to increased points of distribution of the Redneck Riviera Whiskey products, which drove brand sales to $3.8 million in 2019 from $2.3 million in 2018, the acquisition Azuñia tequila brand, which accounted for a $1.1 million increase over last year, as well as continued growth within the Pacific Northwest, which increased to $3.5 million in 2019 from $3.1 million in 2018. Our private label sales increased due to the acquisition of Craft Canning and also benefited from our periodic bulk spirit sales during the year. Finally, our retail operations experienced a decline due to the decision to discontinue event activities outside our retail stores during 2019, with the plan to discontinue all remaining retail store operations by the end of the first quarter of 2020.
Excise taxes, customer programs and incentives for the year ended December 31, 2019 increased to $1.4 million, or approximately 32%, from $1.1 million for the comparable 2018 period. The increase is attributable to the higher federal excise taxes as a result of the increase in spirit shipments from our production facility above 100,000 proof gallons, as well as an increase in customer programs and incentives due to increased distribution. The customer programs and incentives for Redneck Riviera Whiskey in 2019 was $0.4 million compared to $0.1 million in 2018 for which 50% of these charges are expected to be reimbursed upon the eventual sale of the brand by the licensor if the licensing agreement remains in force.
Cost of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and inbound freight charges. During the year ended December 31, 2019, cost of sales increased to $10.1 million, or approximately 166%, from $3.8 million for the year ended December 31, 2018. The increase is attributable to the costs associated with our increased sales in the period, as well as higher manufacturing overhead related to increased facilities costs. In addition, during 2019 we wrote-off $0.3 million of obsolete inventory. The cost of sales we reported in both 2019 and 2018, are based on small production lots. Our objective is to achieve economies of scale as we continue to scale our operations and therefore drive improvement in our per unit cost of sales, which is likely to include expanding our outsourced production.
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Gross profit is calculated by subtracting the cost of products sold from net sales. Gross margin is gross profits stated as a percentage of net sales.
The following table compares our gross profit and gross margin in the years ended December 31, 2019 and 2018:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Gross profit | $ | 5,456,961 | $ | 2,310,201 | ||||
| Gross margin | 35 | % | 38 | % | ||||
Our gross margin of 35% of net sales in the year ended December 31, 2019 decreased from our gross margin of 38% for the year ended December 31, 2018 primarily due to a change in product and services mix, higher raw material costs, higher facilities costs due to the manufacturing footprint relative to current volume, and obsolete inventory write-off. The gross margin of the Azuñia tequila products in the fourth quarter was significantly lower than our corporate average for the spirits products and therefore accounts for 2% of the decline in gross margin from 2018 to 2019. Our goal is to improve our overall gross margin by increasing the efficiencies of our production facility and evaluate outsourced production as a means to lower cost of goods sold. As we generate increased volumes, our margins may continue to fluctuate as a result of other key factors: raw material costs which tend to fluctuate, product and service sales mix and the related customer programs and incentives, which are subject to seasonal fluctuations and the competitive environments.
Advertising, promotional and selling expenses for the year ended December 31, 2019 increased to $7.5 million or approximately 72% from $4.3 million for the year ended December 31, 2018. This increase is primarily due to our increased sales compensation of $2.9 million in 2019 from $1.5 million in 2018 as we increased our national sales force and as a result of the Azuñia acquisition. The advertising, promotional and selling expenses for Redneck Riviera Whiskey in 2019 was $4.0 million compared to $2.3 in 2018 for which 50% of these charges are expected to be reimbursed upon the eventual sale of the brand by the licensor if the licensing agreement remains in force.
(Dollars in thousands)
| General and administrative category | 2019 | 2018 | ||||||
| Compensation and benefits | $ | 3,202 | $ | 1,161 | ||||
| Stock-based compensation & stock for services | 1,623 | 1,677 | ||||||
| Depreciation and amortization | 1,697 | 365 | ||||||
| Legal | 1,034 | 373 | ||||||
| Rent, insurance and other | 3,982 | 2,650 | ||||||
| Total general and administrative expense | $ | 11,538 | $ | 6,226 | ||||
General and administrative expenses for the year ended December 31, 2019 increased to $11.5 million, or approximately 85%, from $6.2 million for the year ended December 31, 2018. This increase is primarily due to increased headcount from the acquisitions and the associated compensation and benefits, higher depreciation and amortization from the Craft Canning and Azuñia acquisitions, and certain one-time costs related to bonuses paid, legal expenses, and acquisition-related expenses.
Total other expense, net was $3.2 million for the year ended December 31, 2019, compared to $0.8 million for the year ended December 31, 2018, an increase of 306%. This increase was due to revaluation of the Azuñia acquisition partially offset by a decrease in interest expense.
Net loss available to common shareholders during the year ended December 31, 2019 was $16.9 million as compared to a loss of $9.0 million for the year ended December 31, 2018. The increase in our net loss was primarily attributable to our greater operating expenses as advertising, promotional and selling expenses grew 72% from the prior year as the promotional expenses to support Redneck Riviera grew in connection with the growth in national distribution, and general and administrative expenses grew in both cash and non-cash expenses as the Azuñia acquisition added amortization of intangibles added to the non-cash expenses and professional fees added to the cash expenses in 2019. The growth in operating expenses was partially offset by an increase in gross profit.
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Liquidity and Capital Resources
Year Ended December 31, 2019
Our primary capital requirements are for cash used in operating activities, the financing of inventories, and financing acquisitions. 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 from convertible debt and equity financings.
For the years ended December 31, 2019 and 2018, we incurred net losses of approximately $16.9 million and $9.0 million respectively and as of December 31, 2019, we had an accumulated deficit of approximately $44.2 million. We have been dependent on raising capital from debt and equity financings to meet our needs for cash flow used in operating activities. For the year ended December 31, 2019, we raised approximately $2.5 million in additional capital through equity and debt financing (net of repayments). See Notes 10 and 11 to our financial statements for a description of our debt.
At December 31, 2019, we had $0.3 million of cash on hand with a positive working capital of $8.3 million. Our ability to meet our ongoing operating cash needs over the next 12 months depends on reducing our operating costs, raising additional debt or equity capital and generating positive operating cash flow, primarily through increased sales, improved profit growth and controlling expenses. We intend to implement actions to improve profitability, by managing expenses while continuing to increase sales. Additionally, we are seeking to leverage our large inventory balances and our accounts receivable balance to help satisfy its working capital needs over the next 12 months. See Notes 10, 11 and 18 to our financial statements for a description of our debt and the debt refinancing initiatives completed in the first quarter of 2020. 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 or reduce or eliminate marketing initiatives, and take other measures that could impair our ability to be successful.
Our cash flow related information for the years 2019 and 2018 is as follows:
| 2019 | 2018 | |||||||
| Net cash flows provided by (used in): | ||||||||
| Operating activities | $ | (9,132,302 | ) | $ | (13,918,429 | ) | ||
| Investing activities | $ | (3,626,423 | ) | $ | (1,296,410 | ) | ||
| Financing activities | $ | 2,459,141 | $ | 23,271,401 | ||||
Operating Activities
Total cash used from operating activities was $9.1 million compared to $13.9 million in 2018. The decrease in cash usage can be primarily attributed to a $0.3 million decrease in accounts receivable, and a $1.2 million increase in accounts payable and accrued liabilities, partially offset by a $0.4 million inventory build which consisted of an increase of $2.3 million of finished goods inventory, with $1.1 million of that increase resulting from the Azuñia acquisition, and $1.1 million from our inventory build up to support Redneck Riviera.
In 2018, the inventory build was $7.0 million which was principally raw spirit inventory. Accounts receivable increased $0.2 million and a $0.2 million increase in accrued liabilities was partially offset by a $0.7 million increase in accounts payable.
Investing Activities
Cash used in investing activities consists primarily of acquisitions and purchases of property and equipment. We incurred capital expenditures of $3.6 million and $1.3 million in 2019 and 2018, respectively. The increase in cash usage can largely be attributed to the $1.5 million Craft Canning acquisition, net of cash acquired, in January 2019, and the further buildout and equipment additions to our primary production facility in Milwaukie, Oregon.
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Financing Activities
Our operating losses and working capital needs were primarily funded by existing cash on hand and $2.5 million in proceeds from the issuance of common stock and debt (net of repayments). Net cash flows provided by financing activities during 2018 were from $8.7 million in proceeds from the sale of common stock, $3.6 million in proceeds from the issuance of notes, $2.9 million net proceeds from the secured credit facility and warrant exercises of $8 million, partially offset by principal payments on notes of $0.5 million.
Common Stock Financings
In September 2019, the Company issued 280,555 units (the “Units”) in a private offering at a per Unit price of $4.50 per share, resulting in net cash proceeds of $1.3 million. Each Unit consists of one share of the Company’s common stock and a three-year warrant to acquire 0.5 shares of common stock at an exercise price of $5.50 per share.
Promissory Notes
During 2019, we executed two promissory notes totaling $0.6 million with a financial institution. The promissory notes bear interest at 3.91% - 3.96% per annum. The notes have 60-month terms with maturities in August 2024 – November 2024. Principal and accrued interest are paid in accordance with monthly amortization schedules. The notes are secured by the assets of Craft Canning.
During 2019, we executed a promissory note for $0.25 million with a private investor. The promissory note bears interest at 5.0% per annum. The note matured on December 31, 2019 and is in default. We anticipate the note to be extended until December 31, 2020.
During 2019, we issued to TQLA a Secured Line of Credit Promissory Note (the “TQLA Note”) for a revolving line of credit in the aggregate principal amount of $2.0 million. The TQLA Note was scheduled to mature on April 15, 2020 and may be prepaid in whole or in part at any time without penalty or premium. As of December 31, 2019, the Company had borrowed $0.9 million on the TQLA Note. The TQLA Note was repaid in its entirety on January 16, 2019.
Lines of Credit
During 2019, we entered into a Factoring Agreement with ENGS Commercial Capital, LLC that provides for a minimum of $0.5 million purchased accounts receivable and a maximum of $2.0 million purchased accounts receivable. The advance rate is 85%, and 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. The Company factored $0.7 million of invoices during the year ended December 31, 2019. At December 31, 2019, the Company had $0.4 million factored invoices outstanding.
During 2019, we utilized an existing accounts receivable factoring line of credit with Park Street Financial Services, LLC. The advance rate is 75%, and interest is charged at a rate of 2.4% for the first 30 days plus 1.44% for each additional ten-day period. The Company factored $1.5 million of invoices during the year ended December 31, 2019. At December 31, 2019, the Company had $0.1 million factored invoices outstanding.
Inventory Line
In January 2020 we and our subsidiaries entered into a loan agreement with Live Oak Banking Company (“Live Oak”) for a loan in an aggregate principal amount not to exceed the lesser of (i) $8,000,000 and (ii) a borrowing base equal to 85% of the appraised value of the borrowers’ eligible inventory of whisky in barrels or totes less an amount equal to all service fees or rental payments owed by borrowers during the 90 day period immediately succeeding the date of determination to any warehouses or bailees holding eligible inventory (the “Live Oak Loan”). The Live Oak Loan is secured by all asset of the Company excluding accounts receivable and certain other specified excluded property. The Live Oak Loan bears interest at a variable rate of interest equal to (i) two and 49/100ths percent (2.49%) per annum plus (ii) the Prime Rate as published in The Wall Street Journal, adjusted on a calendar quarterly basis. Interest is payable monthly. Additionally, the Company issued to Live Oak 100,000 warrants to purchase common stock at an initial exercise price of $3.9425 per share. The proceeds of the Live Oak Loan have been used to pay off all principal and accrued interest under the TQLA Note of $0.9 million and all principal and interest under loan issued pursuant to that Credit and Security Agreement, by and between the Company and The KFK Children’s Trust, Jeffrey Anderson – Trustee of $3.0 million. As of March 30, 2020, the balance of the Live Oak Loan is $6.5 million and has been fully drawn upon.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with United States. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. The more judgmental estimates are summarized below. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.
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Revenue Recognition
Net sales includes 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 (OLCC), the Company recognizes sales upon the consignee’s shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary rights of return. The Company excludes sales tax collected and remitted to various states from sales and cost of sales. Sales from items sold through the Company’s retail locations are recognized at the time of sale.
Sales received from online merchants who sell discounted gift certificates for the Company’s merchandise and tastings is deferred until the customer has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier.
Customer Programs and Incentives
Customer programs and incentives, which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcoholic beverage industry. The Company makes these payments to customers and incurs these costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net sales or as advertising, promotional and selling expenses in accordance with ASC 606 - Revenue from Contracts with Customers, based on the nature of the expenditure. Amounts paid to customers totaled $0.6 million and $0.4 million in 2019 and 2018, respectively. The customer programs and incentives for Redneck Riviera Whiskey in 2019 were $0.4 million, compared to $0.1 million in 2018, for which 50% of these charges are expected to be reimbursed upon the eventual sale of the brand by the licensor while the licensing agreement is in effect.
Cost of Sales
Cost of sales consists of the finished spirits imported from Mexico for the Azuñia tequila brand, costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs.
Advertising, Promotional and Selling Expenses
The following expenses are included in advertising, promotional and selling expenses in the accompanying consolidated statements of operations: media advertising costs, special event costs, tasting room costs, sales and marketing expenses, promotional costs of value added packaging, salary and benefit expenses, travel and entertainment expenses for the sales, brand and sales support workforce and promotional activity expenses. Advertising, promotional and selling costs are expensed as incurred. Advertising, promotional and selling expense was $7.5 million and $4.3 million in 2019 and 2018, respectively. The advertising, promotional and selling expense for Redneck Riviera Whiskey in 2019 was $4.0 million compared to $2.3 in 2018 for which 50% of these charges are expected to be reimbursed upon the eventual sale of the brand by the licensor while the licensing agreement is in effect.
Shipping and Fulfillment Costs
Freight costs incurred related to shipment of merchandise from the Company’s distribution facilities to customers are recorded in cost of sales.
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Cash and Cash Equivalents
Cash equivalents are considered to be highly liquid investments with maturities of three months or less at the time of the purchase. The Company had no cash equivalents at December 31, 2019 and December 31, 2018.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At December 31, 2019, two distributors represented 40% of trade receivables. At December 31, 2018, two distributors represented 37% of trade receivables. Sales to one distributor accounted for 16% of consolidated sales for the year ended December 31, 2019. Sales to two distributors accounted for 42% of consolidated sales for the year ended December 31, 2018.
Inventories
Inventories primarily consist of bulk spirits, packaging supplies, and finished goods which 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 our 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. The Company has recorded write-downs of inventory of $0.3 million and $Nil for the years ended December 31, 2019 and 2018, respectively.
Excise Taxes
The Company is responsible for compliance with the Alcohol, Tobacco Tax and Trade Bureau (“TTB”) regulations, which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcoholic beverages in varying amounts. The Company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws. Excise taxes totaled $0.8 million and $0.7 million in 2019 and 2018, respectively.
Stock-Based Compensation
The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest. Net stock-based compensation was $0.7 million and $0.7 million in 2019 and 2018, respectively.
Going Concern
Although our audited financial statements for the year ended December 31, 2019 were prepared under the assumption that we would continue our operations as a going concern, the report of our independent registered public accounting firm that accompanies our financial statements for the year ended December 31, 2019 contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern, based on the financial statements at that time. Specifically, as noted above, we have incurred operating losses since our inception, and even though we have reduced our operating expenses and increased our available capacity under our lines of credit, and have large inventory balances to drawn from, we expect to continue to incur significant expenses and operating losses for the foreseeable future. These prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us.
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 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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Item 8. FINANCIAL STATEMENTS SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Eastside Distilling, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Eastside Distilling, Inc. (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this.
/s/ M&K CPAS, PLLC
We have served as the Company’s auditor since 2017.
Houston, TX
March 30, 2020
| 36 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2019 and 2018
| December 31, 2019 | December 31, 2018 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 343,293 | $ | 10,642,877 | ||||
| Trade receivables | 1,326,067 | 1,064,078 | ||||||
| Inventories | 12,393,235 | 11,017,459 | ||||||
| Prepaid expenses and current assets | 407,524 | 765,146 | ||||||
| Total current assets | 14,470,119 | 23,489,560 | ||||||
| Property and equipment, net | 4,773,528 | 1,758,130 | ||||||
| Right-of-use assets | 742,808 | - | ||||||
| Intangible assets, net | 14,674,790 | 285,676 | ||||||
| Goodwill | 28,182 | 28,182 | ||||||
| Other assets, net | 1,176,436 | 796,260 | ||||||
| Total Assets | $ | 35,865,863 | $ | 26,357,808 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,937,426 | $ | 1,984,690 | ||||
| Accrued liabilities | 896,059 | 386,166 | ||||||
| Deferred revenue | 1,734 | 1,728 | ||||||
| Current portion of notes payable | 1,819,172 | - | ||||||
| Current portion of lease liability | 483,211 | - | ||||||
| Total current liabilities | 6,137,602 | 2,372,584 | ||||||
| Lease liability – less current portion | 387,623 | - | ||||||
| Secured trade credit facility, net of debt issuance costs | 2,961,566 | 2,934,106 | ||||||
| Deferred consideration for Azuñia acquisition (Long Term) | 15,451,500 | - | ||||||
| Notes payable - less current portion and debt discount | 3,594,254 | 2,300,000 | ||||||
| Total liabilities | $ | 28,532,545 | $ | 7,606,690 | ||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Series A convertible preferred stock, $0.0001 par value; 3,000 shares authorized; 0 and 0 shares issued and outstanding at December 31, 2019 and 2018 | - | - | ||||||
| Common stock, $0.0001 par value; 15,000,000 shares authorized; 9,675,028 and 8,764,085 shares issued and outstanding at December 31, 2019 and 2018, respectively | $ | 967 | $ | 876 | ||||
| Additional paid-in capital | 51,566,438 | 45,888,872 | ||||||
| Accumulated deficit | (44,234,087 | ) | (27,138,630 | ) | ||||
| Total Stockholders’ Equity | 7,333,318 | 18,751,118 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 35,865,863 | $ | 26,357,808 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 37 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended December 31, 2019 and 2018
| 2019 | 2018 | |||||||
| Sales | $ | 17,021,484 | $ | 7,204,302 | ||||
| Less excise taxes, customer programs and incentives | 1,424,860 | 1,080,792 | ||||||
| Net sales | 15,596,624 | 6,123,510 | ||||||
| Cost of sales | 10,139,663 | 3,813,309 | ||||||
| Gross profit | 5,456,961 | 2,310,201 | ||||||
| Operating expenses: | ||||||||
| Advertising, promotional and selling expenses | 7,500,501 | 4,345,210 | ||||||
| General and administrative expenses | 11,538,438 | 6,225,998 | ||||||
| Loss on disposal of property and equipment | 133,179 | - | ||||||
| Total operating expenses | 19,172,118 | 10,571,208 | ||||||
| Loss from operations | (13,715,157 | ) | (8,261,007 | ) | ||||
| Other income (expense), net | ||||||||
| Interest expense | (523,391 | ) | (789,362 | ) | ||||
| Other income (expense) | (2,669,556 | ) | 2,700 | |||||
| Total other expense, net | (3,192,947 | ) | (786,662 | ) | ||||
| Loss before income taxes | (16,908,104 | ) | (9,047,669 | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net loss | (16,908,104 | ) | (9,047,669 | ) | ||||
| Basic and diluted net loss per common share | $ | (1.82 | ) | $ | (1.49 | ) | ||
| Basic and diluted weighted average common shares outstanding | 9,275,696 | 6,074,489 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 38 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Stockholder’s Equity
Years ended December 31, 2019 and 2018
| Convertible Series A Preferred Stock | Common Stock | Paid-in | Accumulated | Total Stockholders’ | Non-controlling interest in consolidated | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | entities | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2017 | - | $ | - | 4,889,745 | $ | 489 | $ | 23,223,435 | $ | (18,090,961 | ) | $ | 5,132,963 | $ | 15,585 | $ | 5,148,548 | |||||||||||||||||||
| Issuance of common stock, net of expenses. | - | - | 1,480,250 | 148 | 8,678,975 | - | 8,679,123 | - | 8,679,123 | |||||||||||||||||||||||||||
| Issuance of common stock from warrant exercise for cash, net of expenses | - | - | 1,521,312 | 152 | 8,004,029 | - | 8,004,181 | - | 8,004,181 | |||||||||||||||||||||||||||
| Issuance of common stock for services by third parties | - | - | 81,708 | 8 | 412,823 | - | 412,831 | - | 412,831 | |||||||||||||||||||||||||||
| Issuance of common stock for services by employees | - | - | 79,734 | 8 | 712,461 | - | 712,469 | - | 712,469 | |||||||||||||||||||||||||||
| Issuance of common stock in exchange of debt | - | - | 672,273 | 67 | 3,722,821 | - | 3,722,888 | - | 3,722,888 | |||||||||||||||||||||||||||
| Issuance of common stock for purchase of remaining 10% of Big Bottom LLC | - | - | 3,122 | - | 19,294 | - | 19,294 | 19,294 | ||||||||||||||||||||||||||||
| Acquisition of remaining non-controlling interest in Big Bottom Distilling, Inc | - | - | - | - | - | - | - | (15,585 | ) | (15,585 | ) | |||||||||||||||||||||||||
| Issuance of detachable warrants on notes payable | - | - | - | - | 351,548 | - | 351,548 | - | 351,548 | |||||||||||||||||||||||||||
| Stock option exercises | - | - | 35,941 | 4 | 105,940 | - | 105,944 | - | 105,944 | |||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 863,262 | - | 863,262 | - | 863,262 | |||||||||||||||||||||||||||
| Net issuance to settle RSUs | - | - | - | - | (205,716 | ) | - | (205,716 | ) | - | (205,716 | ) | ||||||||||||||||||||||||
| Net loss attributable to common shareholders | - | - | - | - | - | (9,047,669 | ) | (9,047,669 | ) | - | (9,047,669 | ) | ||||||||||||||||||||||||
| Balance December 31, 2018 | - | $ | - | 8,764,085 | $ | 876 | $ | 45,888,872 | $ | (27,138,630 | ) | $ | 18,751,118 | $ | - | $ | 18,751,118 | |||||||||||||||||||
| Issuance of common stock, net of expenses. | - | - | 280,555 | 28 | 1,262,469 | - | 1,262,497 | - | 1,262,497 | |||||||||||||||||||||||||||
| Issuance of common stock for services by third parties | - | - | 87,150 | 9 | 597,912 | - | 597,921 | - | 597,921 | |||||||||||||||||||||||||||
| Issuance of common stock for services by employees | - | - | 203,949 | 20 | 1,055,818 | - | 1,055,838 | - | 1,055,838 | |||||||||||||||||||||||||||
| Issuance of common stock for purchase of Craft Canning + Bottling, LLC | - | - | 338,212 | 34 | 2,079,970 | - | 2,080,004 | - | 2,080,004 | |||||||||||||||||||||||||||
| Stock option exercises | - | - | 1,077 | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 761,800 | - | 761,800 | - | 761,800 | |||||||||||||||||||||||||||
| Net issuance to settle RSUs | - | - | - | - | (94,403 | ) | - | (94,403 | ) | - | (94,403 | ) | ||||||||||||||||||||||||
| Adjustment to accumulated deficit for adoption of ASC 842 | - | - | - | - | - | (187,353 | ) | (187,353 | ) | - | (187,353 | ) | ||||||||||||||||||||||||
| Contributed capital | - | - | - | - | 14,000 | - | 14,000 | - | 14,000 | |||||||||||||||||||||||||||
| Net loss attributable to common shareholders | - | - | - | - | - | (16,908,104 | ) | (16,908,104 | ) | - | (16,908,104 | ) | ||||||||||||||||||||||||
| Balance December 31, 2019 | - | $ | - | 9,675,028 | $ | 967 | $ | 51,566,438 | $ | (44,234,087 | ) | $ | 7,333,318 | $ | - | $ | 7,333,318 | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 39 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 2019 and 2018
| 2019 | 2018 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (16,908,104 | ) | $ | (9,047,669 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,696,755 | 364,813 | ||||||
| Loss on disposal of fixed assets | 133,179 | - | ||||||
| Loss on remeasurement of deferred consideration | 2,670,408 | - | ||||||
| Lease expense | 562,095 | - | ||||||
| Amortization of debt issuance costs | 27,460 | 392,230 | ||||||
| Bad debt expense | 71,032 | - | ||||||
| Issuance of common stock in exchange for services for related parties | 1,055,839 | 712,469 | ||||||
| Issuance of common stock in exchange for services for 3rd parties | 597,921 | 412,831 | ||||||
| Stock-based compensation | 667,397 | 657,546 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables | 292,695 | (748,757 | ) | |||||
| Inventories | (384,926 | ) | (6,966,177 | ) | ||||
| Prepaid expenses and other assets | (73,774 | ) | (625,750 | ) | ||||
| Accounts payable | 721,123 | 721,209 | ||||||
| Accrued liabilities | 435,504 | 208,677 | ||||||
| Deferred revenue | (51,994 | ) | 149 | |||||
| Net lease liabilities | (644,912 | ) | - | |||||
| Net cash used in operating activities | (9,132,302 | ) | (13,918,429 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Acquisition of business, net of cash acquired | (1,449,917 | ) | - | |||||
| Purchases of property and equipment | (2,176,506 | ) | (1,296,410 | ) | ||||
| Net cash used in investing activities | (3,626,423 | ) | (1,296,410 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from common stock, net of issuance costs | 1,262,497 | 8,679,123 | ||||||
| Proceeds from option exercise | - | 105,944 | ||||||
| Proceeds from warrant exercise | - | 8,004,181 | ||||||
| Contributed capital | 14,000 | - | ||||||
| Payments of principal on notes payable | (607,056 | ) | (514,867 | ) | ||||
| Proceeds from notes payable | 1,789,700 | - | ||||||
| Proceeds from convertible notes payable, net of issuance costs | - | 3,630,000 | ||||||
| Proceeds from notes payable, warrants issued | - | 447,020 | ||||||
| Proceeds from secured credit facility, net of issuance costs of $80,000 | - | 2,920,000 | ||||||
| Net cash provided by financing activities | 2,459,141 | 23,271,401 | ||||||
| Net increase (decrease) in cash | (10,299,584 | ) | 8,056,562 | |||||
| Cash - beginning of year | 10,642,877 | 2,586,315 | ||||||
| Cash - end of year | $ | 343,293 | $ | 10,642,877 | ||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during the year for interest | $ | 371,189 | $ | 293,342 | ||||
| Cash paid for amounts included in measurement of lease liabilities | $ | 754,643 | $ | - | ||||
| Supplemental Disclosure of Non-Cash Financing Activity | ||||||||
| Acquisition of remaining non-controlling interest in Big Bottom Distilling, LLC | $ | - | $ | 15,585 | ||||
| Deferred consideration for the acquisition of Azuñia | $ | 12,781,092 | $ | - | ||||
| Common stock issued in exchange of notes payable | $ | - | $ | 3,722,888 | ||||
| Fixed assets acquired through financing | $ | 300,000 | $ | - | ||||
| Issuance of debt discount | $ | - | $ | 351,548 | ||||
| Right-of-use assets obtained in exchange for lease obligations | $ | 1,257,371 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 40 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
1. Description of Business
Eastside Distilling 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 manufacture, acquire, blend, bottle, import, export, market and sell a wide variety of alcoholic beverages under recognized brands. We employ 89 people in the United States.
Our brands span several alcoholic beverage categories, including bourbon, American whiskey, vodka, gin, rum, tequila and Ready-to-Drink (RTD). We sell our products on a wholesale basis to distributors, and until March 2020, we operated four retail tasting rooms in Portland, Oregon to market our brands directly to consumers.
| Principal Brands | |
| Gin | |
| Big Bottom The Ninety One Gin | |
| Big Bottom Navy Strength | |
| Big Bottom Barrel Finished Gin | |
| Big Bottom London Dry Gin | |
| Rum | |
| Hue-Hue Coffee Rum | |
| Tequila | |
| Azuñia Blanco Organic Tequila | |
| Azuñia Reposado Organic Tequila | |
| Azuñia Añejo Tequila | |
| Azuñia Black, 2-Year, Extra-Aged, Private Reserve Añejo Tequila | |
| Vodka | |
| Portland Potato Vodka | |
| Portland Potato Vodka - Marionberry | |
| Portland Potato Vodka - Habanero | |
| Whiskey | |
| Redneck Riviera Whiskey | |
| Redneck Riviera Whiskey - Granny Rich Reserve | |
| Burnside Oregon Oaked Rye Whiskey | |
| Burnside West End Blend Whiskey | |
| Burnside Goose Hollow Bourbon | |
| Burnside Oregon Oaked Bourbon | |
| Burnside Buckman RSV 10 Year Bourbon | |
| Marionberry Whiskey | |
| Big Bottom Barlow Whiskey | |
| Big Bottom Barlow Port Whiskey | |
| Big Bottom Delta Rye | |
| 41 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
1. Description of Business (Continued)
| Big Bottom American Single Malt | |
| Big Bottom Zin Cask Bourbon | |
| Barrel Hitch American Whiskey | |
| Special | |
| Advocaat Holiday Egg Nog | |
| Ready-to-Drink | |
| Redneck Riviera Howdy Dew! | |
| Portland Mule - Original | |
| Portland Mule - Marionberry | |
Operating as a small business in a large, international spirits marketplace occupied by large multi-national conglomerates, we seek to utilize our size and our public company stature to our advantage and position Eastside Distilling as a leading tier 2 spirits provider by acquiring and developing brands, growing them to a national presence and positioning them for sale to the tier 1 suppliers to the market. This strategy was demonstrated by the launch of our Redneck Riviera Brand (RRW) in conjunction with our branding partners, Sandstrom Partners in 2018. This demonstrated how our team can leverage its position to launch nascent or new brands and grow them more quickly than the tier 1 larger conglomerates because we are able to focus and dedicate more of our attention to developing innovative products. Our RRW brand went from idea, to market roll-out in less than nine months and achieved national distribution in 49 states in 18 months. In September 2019, we acquired the Azuñia tequila brand and have begun to distribute this brand through our national platform.
In May 2017, we used our shares to acquire 90% of Big Bottom Distilling, LLC (“BBD”), known for its award-winning, super-premium gins and whiskeys, and American Single Malt Whiskey. BBD’s super-premium spirits give us a presence at the “ultra-premium segment” of the market. In December 2018, we acquired the remaining 10% of BBD. In September 2019, we also acquired the high-end, luxury tequila brand, Azuñia, to complement our portfolio and provide us with a larger established brand in the high-growth tequila category. In addition, through MotherLode Craft Distillery (“MotherLode”), our wholly-owned subsidiary acquired in March 2017 and Craft Canning + Bottling, LLC (formerly known as Craft Canning, LLC) (“Craft Canning”), which we acquired in January 2019, we provide contract bottling, canning, and packaging services for existing and emerging beer, wine and spirits producers. We have used our mobile canning operations to profit from the rapid growth in the canned beverages industry (beer, wine, spirit-based RTD’s).
2. Liquidity
Historically, the Company has funded its cash and liquidity needs through operating cash flow convertible notes, extended credit terms, and equity financings. For the years ended December 31, 2019 and 2018, the Company incurred a net loss of approximately $16.9 million and $9.0 million, respectively, and has an accumulated deficit of approximately $44.2 million as of December 31, 2019. The Company has been dependent on raising capital from debt and equity financings to meet its needs for cash flow used in operating activities. For the year ended December 31, 2019, we raised approximately $2.5 million in additional capital through equity and debt financing (net of repayments).
At December 31, 2019, we had $0.3 million of cash on hand with a positive working capital of $8.3 million. Our ability to meet our ongoing operating cash needs over the next 12 months depends on reducing our operating costs, raising additional debt or equity capital and generating positive operating cash flow, primarily through increased sales, improved profit growth and controlling expenses. We intend to implement actions to improve profitability, by managing expenses while continuing to increase sales. Additionally, we are seeking to leverage our large inventory balances and our accounts receivable balance to help satisfy its working capital needs over the next 12 months. See Notes 10, 11 and 18 to our financial statements for a description of our debt and the debt refinancing initiatives completed in the first quarter of 2020. 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 or reduce or eliminate marketing initiatives, and take other measures that could impair our ability to be successful.
Although our audited financial statements for the year ended December 31, 2019 were prepared under the assumption that we would continue our operations as a going concern, the report of our independent registered public accounting firm that accompanies our financial statements for the year ended December 31, 2019 contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern, based on the financial statements at that time. Specifically, as noted above, we have incurred operating losses since our inception, and even though we have reduced our operating expenses and increased our available capacity under our lines of credit, and have large inventory balances to drawn from, we expect to continue to incur significant expenses and operating losses for the foreseeable future. These prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us.
| 42 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
3. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying 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). The consolidated financial statements include the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiaries, including, MotherLode, BBD, Outlandish, LLC, Redneck Riviera Whiskey Co., LLC, Craft Canning (beginning as of January 11, 2019) and the Azuñia tequila assets (beginning September 12, 2019). All intercompany balances and transactions have been eliminated in consolidation.
Segment Reporting
The Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company has one business activity, packaging, producing, marketing and distributing alcoholic beverages and operates as one segment. The Company’s chief operating decision makers, its chief executive officer, president and chief financial officer, review the Company’s operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Net sales includes 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 (OLCC), the Company recognizes sales upon the consignee’s shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary rights of return. The Company excludes sales tax collected and remitted to various states from sales and cost of sales. Sales from items sold through the Company’s retail locations are recognized at the time of sale.
Revenue received from online merchants who sell discounted gift certificates for the Company’s merchandise and tastings at its tasting rooms, is deferred until the customer has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier.
Customer Programs and Incentives
Customer programs and incentives, which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcoholic beverage industry. The Company makes these payments to customers and incurs these costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net sales or as advertising, promotional and selling expenses in accordance with ASC 606 - Revenue from Contracts with Customers, based on the nature of the expenditure. Amounts paid to customers totaled $0.6 million and $0.4 million in years 2019 and 2018, respectively, of which $0.4 million compared to $0.1 million in 2018 are included in the 50% Redneck Riviera Whiskey Marketing reimbursement and are expected to be collected upon the sale of the Redneck Riviera Brand by the licensor if sold while the licensing agreement is in effect. The reimbursement is payable upon the sale of the brand within the term of the agreement, which is 10 years, with a renewable option for any additional 10 years, by the licensor.
Advertising, Promotional and Selling Expenses
The following expenses are included in advertising, promotional and selling expenses in the accompanying consolidated statements of operations: media advertising costs, special event costs, tasting room costs, sales and marketing expenses, promotional costs of value added packaging, salary and benefit expenses, travel and entertainment expenses for the sales, brand and sales support workforce and promotional activity expenses. Advertising, promotional and selling costs are expensed as incurred. Advertising, promotional and selling expense totaled $7.5 million and $4.3 million in years 2019 and 2018, respectively, of which 2019 was $4.0 million compared to $2.3 in 2018 are included in the 50% Redneck Riviera Whiskey Marketing reimbursement and are expected to be collected upon the sale of the Redneck Riviera Brand by the licensor if sold while the licensing agreement is in effect. The reimbursement is payable upon the sale of the brand within the term of the agreement, which is 10 years, with a renewable option for any additional 10 years, by the licensor.
| 43 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Cost of Sales
Cost of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs.
Shipping and Fulfillment Costs
Freight costs incurred related to shipment of merchandise from the Company’s distribution facilities to customers are recorded in cost of sales.
Cash and Cash Equivalents
Cash equivalents are considered to be highly liquid investments with maturities of three months or less at the time of the purchase. The Company had no cash equivalents at December 31, 2019 and 2018.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At December 31, 2019, two distributors represented 40% of trade receivables. At December 31, 2018, two distributors represented 37% of trade receivables. Sales to one distributor accounted for 16% of consolidated sales for the year ended December 31, 2019. Sales to two distributors accounted for 42% of consolidated sales for the year ended December 31, 2018.
Fair Value Measurements
GAAP defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAAP permits an entity to choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation and disclosure requirements for assets and liabilities for which the fair value option is elected. At December 31, 2019 and December 31, 2018, 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 at December 31, 2019 or 2018. 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, note payable, and convertible note payable. The estimated fair value of trade receivables, accounts payable, and accrued liabilities approximates their carrying value due to the short period of time to their maturities. At December 31, 2019 and December 31, 2018, the Company’s notes are payable at fixed rates and their carrying value approximates fair value.
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities acquired in a business acquisition are valued at fair value at the date of acquisition.
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Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Inventories
Inventories primarily consist of bulk and bottled liquor and merchandise and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (FIFO) method. A portion of inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. The Company recorded write-downs of inventory of $0.3 million and $Nil for the years ended December 31, 2019 and 2018, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the life of the lease or the useful lives of the assets, whichever is shorter. The cost and related accumulated depreciation and amortization of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is reported as current period income or expense. The costs of repairs and maintenance are expensed as incurred.
Intangible Assets / Goodwill
The Company accounts for long-lived assets, including property and equipment and intangible assets, at amortized cost. Management reviews long-lived assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative assessment of goodwill at December 31, 2019 and determined that goodwill was not impaired.
Long-lived Assets
The Company accounts for long-lived assets, including property and equipment, at amortized cost. Management reviews long-lived assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount of the asset, an impairment loss would be recognized to write down the asset to its estimated fair value.
Income Taxes
The provision for income taxes is based on income and expenses as reported for financial statement purposes using the “asset and liability method” for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. At December 31, 2019 and 2018, the Company established valuation allowances against its net deferred tax assets.
Income tax positions that meet the “more-likely-than-not” recognition threshold are measured at the largest amount of income tax benefit that is more than 50 % likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized income tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized income tax benefits would be classified as additional income taxes in the accompanying consolidated statements of operations. There were no unrecognized income tax benefits, nor any interest and penalties associated with unrecognized income tax benefits, accrued or expensed at and for the years ended December 31, 2019 and 2018.
The Company files federal income tax returns in the United States. and various state income tax returns. The Company is no longer subject to examinations by the related tax authorities for the Company’s U.S. federal and state income tax returns for years prior to 2012.
Comprehensive Income
The Company does not have any reconciling other comprehensive income items for the for the years ended December 31, 2019 and 2018, respectively.
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Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Excise Taxes
The Company is responsible for compliance with the TTB regulations, which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcoholic beverages in varying amounts. The Company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws. Excise taxes totaled $0.8 million and $0.7 million in years 2019 and 2018, respectively.
Stock-Based Compensation
The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest. Stock-based compensation was $0.7 million and $0.7 million in fiscal years 2019 and 2018, respectively.
Accounts Receivable Factoring Program
The Company has entered into two accounts receivable factoring programs. One for its spirits customers (the “spirits program”) and another for its co-packing customers (the “co-packing program”). Under the programs, the Company has the option to sell certain customer account receivables in advance of payment for 75% (spirits program) or 85% (co-packing program) of the amount due. When the customer remits payment, the Company receives the remaining balance. For the spirits program, interest is charged on the advanced 75% payment at a rate of 2.4% for the first 30 days plus 1.44% for each additional ten-day period. For the co-packing program, interest is charged against the greater of $500,000 or the total funds advanced at a rate of 5% plus the prime rate published in the Wall Street Journal. Under the terms of both agreements, the factoring provider has full recourse against the Company should the customer fail to pay the invoice. In accordance with ASC 860, we have concluded that these agreements have met all three conditions identified in ASC 860-10-40-5 (a) – (c) and have accounted for this activity as a sale. Given the quality of the factored accounts, the Company has not recognized a recourse obligation. In certain limited instances, the Company may provide collection services on the factored accounts but does not receive any fees for acting as the collection agent, and as such, the Company has not recognized a service obligation asset or liability. The Company factored $2.2 million of invoices and incurred $0.1 million in fees associated with the factoring programs during the year ended December 31, 2019. At December 31, 2019, the Company had $0.6 million factored invoices outstanding.
Discontinued Operations
The Company reports discontinued operations by applying the following criteria in accordance with Accounting Standards Codification (“ASC”) Topic 205-20 – Presentation of Financial Statements – Discontinued Operations: (1) Component of an entity; (2) Held for sale criteria; (3) Strategic shift. On December 31, 2019, management made a strategic shift to focus the Company’s sale 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. Although this decision meets the criteria (1) and (3) for reporting discontinued operations, it does not meet the (2) Held for sale criteria until the retail stores are closed / abandoned, which is planned to occur by March 31, 2020. As a result, the retail operations will not be reported as discontinued operations as of December 31, 2019.
Recently Adopted Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) and in November 2016 issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). The new standards are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and amend the existing accounting standards for the statement of cash flows. The amendments provide guidance on the following nine cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; separately identifiable cash flows and application of the predominance principle; and restricted cash. The adoption of ASU 2016-15 and ASU 2016-18 on January 1, 2018 did not have a material effect on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, which superseded virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. ASU 2014-09 is to be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. The Company elected to apply ASU 2014-09 with a cumulative effect adjustment to retained earnings. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 deferred the effective date of ASU 2014-09 for one year, making it effective for the year beginning December 31, 2017, with early adoption permitted as of January 1, 2017. The Company adopted ASU 2014-09 as of January 1, 2018. The Company does not believe the adoption of ASU 2014-09 had any material impact on its consolidated financial statements.
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Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
| - | A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and | |
| - | A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. |
Under the new guidance, lessor accounting will be largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and ASU No. 2014-09, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842). This guidance provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. In addition, this ASU provides a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease and instead account for the lease as a single component if both the timing and pattern of transfer of the nonlease component(s) are the same, and if the lease would be classified as an operating lease. These amendments have the same effective date as ASU 2016-02. On January 1, 2019, the Company adopted the new accounting standard using the modified retrospective approach and elected to not adjust comparative periods. Upon adoption, the Company recognized right-of-use assets of $0.9 million, lease liabilities of $1.1 million, and a net adjustment to retained earnings of $0.2 million. The Company considers the impact of the adoption to be immaterial to its consolidated financial statements on an ongoing basis.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU 2018-07, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard became effective on January 1, 2019 and should be applied to all new awards granted after the date of adoption. The Company adopted ASU 2018-07 as of January 1, 2019. The Company does not believe the adoption of ASU 2018-07 had any material impact on its consolidated financial statements.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Current guidance requires that companies compute the implied fair value of goodwill under Step 2 by performing procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. ASU 2017-04 will require companies to perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and will be applied prospectively. Early adoption of this standard is permitted. The Company is currently in the process of evaluating the impact of ASU 2017-04 on its consolidated financial statements.
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Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
4. Business Acquisitions
During the fiscal year 2019, the Company completed the following acquisitions:
Craft Canning + Bottling
On January 11, 2019, the Company completed the acquisition of Craft Canning + Bottling, LLC (“Craft Canning”), a Portland, Oregon-based provider of bottling and canning services. The Company’s consolidated financial statements for the year ended December 31, 2019 include Craft Canning’s results of operations from the acquisition date of January 11, 2019 through December 31, 2019. The Company’s consolidated financial statements reflect the final purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date.
The following allocation of the purchase price is as follows:
| Consideration given: | ||||
| 338,212 shares of common stock valued at $6.10 per share | $ | 2,080,004 | ||
| Cash | 2,003,200 | |||
| Notes payable | 761,678 | |||
| Total value of acquisition | $ | 4,844,882 | ||
| Assets and liabilities acquired: | ||||
| Cash | $ | 553,283 | ||
| Trade receivables, net | 625,717 | |||
| Inventories, net | 154,824 | |||
| Prepaid expenses and current assets | 250 | |||
| Property and equipment, net | 1,839,486 | |||
| Right-of-use assets | 232,884 | |||
| Intangible assets - customer list | 2,895,318 | |||
| Other assets | 26,600 | |||
| Accounts payable | (231,613 | ) | ||
| Accrued liabilities | (74,389 | ) | ||
| Deferred revenue | (52,000 | ) | ||
| Lease liabilities | (256,375 | ) | ||
| Notes payable | (869,103 | ) | ||
| Total | $ | 4,844,882 |
Intangible assets are recorded at estimated fair value, as determined by management based on available information. The fair value assigned to the customer list intangible asset was determined through the use of the income approach, specifically the relief from royalty and the multi-period excess earning methods. The major assumptions used in arriving at the estimated identifiable intangible asset value included management’s estimates of future cash flows, discounted at an appropriate rate of return which is based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the tangible assets that are expected to contribute directly or indirectly to future cash flows. The customer relationships estimated useful life is seven years.
The Company incurred Craft Canning-related acquisition costs of $0.1 million during the year ended December 31, 2019 that have been recorded in general and administrative expenses on the consolidated statements of operations. The results of the Craft Canning acquisition are included in our consolidated financial statements from the date of acquisition through December 31, 2019. The sales and net income (including transaction costs) of Craft Canning operations included in our consolidated statements of operations were $7.1 million and $0.4 million, for the period from January 11, 2019 through December 31, 2019.
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Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Azuñia Tequila
On September 12, 2019, the Company completed the acquisition of the Azuñia Tequila brand, the direct sales team, existing product inventory, supply chain relationships and contractual agreements from Intersect Beverage, LLC, an importer and distributor of tequila and related products. The Company’s consolidated financial statements as of and for the year ended December 31, 2019 include the Azuñia Tequila assets and results of operations. For the year ended December 31, 2019, the Azuñia Tequila results of operations are included from the acquisition date of September 12, 2019 through December 31, 2019.
The acquisition was structured as an all-stock transaction, provided that the Company may, at its election, pay a portion of the consideration in cash or by executing a three-year promissory note if the issuance of stock would require the Company to hold a vote of its stockholders under the applicable Nasdaq rules. Subject to compliance with applicable Nasdaq rules, the initial consideration, will be payable approximately 18 months following the closing and will consist of 850,000 shares of the Company’s common stock at a stipulated value of $6.00 per share, 350,000 shares of the Company’s common stock based on the Company’s stock price twelve months after the close of the transaction, and additional shares based on the Azuñia business achieving certain revenue targets and the Company’s stock price 18 months after the close of the transaction. The Company has also agreed to issue additional stock consideration (subject to compliance with applicable Nasdaq rules) of up to $1.5 million upon the Azuñia business achieving revenue of at least $9.45 million in the period commencing on the 13th month following the closing and ending on the 24th month following the closing.
The Company’s consolidated financial statements reflect the final purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired based upon their estimated fair values on the acquisition date. The Company estimated the purchase price based on weighted probabilities of future results and recorded deferred consideration payable of $12.8 million on the acquisition date that will be remeasured to fair value at each reporting date until the contingencies are resolved, with the changes in fair value recognized in earnings. The Company remeasured the deferred consideration payable for the period ended December 31, 2019 and increased the liability by $2.7 million to a balance of $15.5 million.
The following allocation of the purchase price is as follows:
| Consideration given: | ||||
| Deferred consideration payable | $ | 12,781,092 | ||
| Total value of acquisition | $ | 12,781,092 | ||
| Assets acquired: | ||||
| Inventories, net | $ | 836,026 | ||
| Intangible assets - brand | 11,945,066 | |||
| Total | $ | 12,781,092 |
Intangible assets are recorded at estimated fair value, as determined by management based on available information. The fair value assigned to the brand intangible asset was determined through the use of the market approach. The major assumptions used in arriving at the estimated identifiable intangible asset value included category averages for comparable acquisitions, including multiples of annual sales and dollars per case sold. The Company used an estimated brand useful life of seven years for these accounting purposes.
The Company incurred Azuñia Tequila-related acquisition costs of $0.2 million during the year ended December 31, 2019 that have been recorded in general and administrative expenses on the consolidated statements of operations. The results of the Azuñia Tequila asset acquisition are included in our consolidated financial statements from the date of acquisition through December 31, 2019. The sales of Azuñia Tequila products included in our consolidated statements of operations were $1.1 million for the period from September 12, 2019 through December 31, 2019.
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Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations for the years ended December 31, 2019 and 2018 assume that both acquisitions of Craft Canning + Bottling and Azuñia Tequila were completed on January 1, 2018:
| 2019 | 2018 | |||||||
| Pro forma sales | $ | 19,868,484 | $ | 16,088,104 | ||||
| Pro forma net loss | (20,350,193 | ) | (10,868,474 | ) | ||||
| Pro forma basic and diluted net loss per share | $ | (2.19 | ) | $ | (1.69 | ) | ||
Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results. The share and per share data have been retroactively reflected for the acquisitions.
5. Inventories
Inventories consist of the following at December 31:
| 2019 | 2018 | |||||||
| Raw materials | $ | 9,336,304 | $ | 10,347,616 | ||||
| Finished goods | 3,056,931 | 669,843 | ||||||
| Total inventories | $ | 12,393,235 | $ | 11,017,459 | ||||
The $2.3 million increase of finished goods inventory includes $1.0 million of inventory acquired from the Azuñia brand acquisition and $1.1 million inventory build to support Redneck Riviera. Raw materials inventories decreased by $1.0 million notwithstanding the fact that it includes an additional $0.5 million increase related to the Craft acquisition and $0.2 million related to the Azuñia brand acquisition.
6. Property and Equipment
Property and equipment consists of the following at December 31:
| 2019 | 2018 | |||||||
| Furniture and fixtures | $ | 4,558,362 | $ | 1,148,540 | ||||
| Leasehold improvements | 1,750,833 | 477,184 | ||||||
| Vehicles | 689,930 | 49,483 | ||||||
| Construction in progress | 98,252 | 425,851 | ||||||
| Total cost | 7,097,377 | 2,101,058 | ||||||
| Less accumulated depreciation | (2,323,849 | ) | (342,928 | ) | ||||
| Total property and equipment, net | $ | 4,773,528 | $ | 1,758,130 | ||||
Purchases of property and equipment totaled $2.2 million and $1.3 million for the years ended December 31, 2019 and 2018, respectively. Depreciation expense totaled $1.2 million and $0.3 million for the years ended December 31, 2019 and 2018, respectively. Losses totaled $0.1 million on vehicles that were disposed of in 2019.
7. Intangible Assets and Goodwill
Intangible assets and goodwill at December 31, 2019 and December 31, 2018 consisted of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Permits and licenses | $ | 25,000 | $ | 25,000 | ||||
| Azuñia brand | 11,945,066 | - | ||||||
| Customer lists | 3,246,748 | 351,430 | ||||||
| Goodwill | 28,182 | 28,182 | ||||||
| Total intangible assets and goodwill | 15,244,996 | 404,612 | ||||||
| Less accumulated amortization | (542,024 | ) | (90,754 | ) | ||||
| Intangible assets and goodwill - net | $ | 14,702,972 | 313,858 | |||||
Amortization expense totaled $0.4 million and $0.1 million for the years ended December 31, 2019 and 2018, respectively. The permits and license, Azuñia brand and goodwill have all been determined to have indefinite life and will not be amortized. The customer list is being amortized over a seven-year life.
| 50 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
8. Other Assets
Other assets consist of the following at December 31:
| 2019 | 2018 | |||||||
| Product branding | $ | 809,000 | $ | 525,000 | ||||
| Investment in online company | - | 300,000 | ||||||
| Notes Receivable | 450,000 | - | ||||||
| Deposits | 53,542 | 29,297 | ||||||
| Total other assets | 1,312,542 | 854,297 | ||||||
| Less accumulated amortization | (136,106 | ) | (58,037 | ) | ||||
| Other assets - net | $ | 1,176,436 | $ | 796,260 | ||||
As of December 31, 2019, the Company had $0.8 million of capitalized costs related to services provided for the rebranding of its existing product line and branding of new product lines. This amount is being amortized over a seven-year life. The Company has notes receivable totaling $450,000. These notes bear interest at 5.00% and mature on August 25, 2020. The remaining deposits of $0.1 million represent office and retail space lease deposits.
Amortization expense totaled $0.1 million and $0.1 million for the years ended December 31, 2019 and 2018, respectively.
9. 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 2023. 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. Based on the present value of the lease payments for the remaining lease term of the Company’s existing leases, the Company recognized right-of-use assets of $0.9 million, lease liabilities of $1.1 million, and a net adjustment to retained earnings of $0.2 million upon adoption on January 1, 2019. Right-of-use assets and lease liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of December 31, 2019, the right-of-use assets and lease liabilities were $0.7 million and $0.9 million, respectively. 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. Aggregate lease expense for the year ended December 31, 2019 was $0.9 million, consisting of $0.6 million in lease expense for lease liabilities recorded on the Company’s balance sheet and $0.3 million in short-term lease expense.
Maturities of lease liabilities as of December 31, 2019 are as follows:
| Operating Leases | Weighted-Average Remaining Term in Years |
|||||||
| 2020 | $ | 549,116 | ||||||
| 2021 | 299,352 | |||||||
| 2022 | 37,477 | |||||||
| Thereafter | 38,564 | |||||||
| Total lease payments | 924,509 | |||||||
| Less imputed interest (based on 6.3% weighted- average discount rate | (53,675 | ) | ||||||
| Present value of lease liability | $ | 870,834 | 1.9 | |||||
| 51 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
10. Notes Payable
Notes payable as of December 31, 2019 and December 31, 2018 consists of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Notes payable bearing interest at 5.00%. The notes’ principal, plus any accrued and unpaid interest is due May 1, 2021. Interest is paid monthly. | 2,300,000 | 2,300,000 | ||||||
| Notes payable bearing interest at 5.00%. The notes’ principal, plus any accrued and unpaid interest is due December 31, 2019. | 254,075 | - | ||||||
| Notes payable bearing interest at 5.00%. Principal and accrued interest is payable in six equal installments on each six-month anniversary of the issuance date of January 11, 2019. The notes are secured by the security interests and subordinated to the Company’s senior indebtedness. | 649,774 | - | ||||||
| Promissory note payable bearing interest of 5.2%. The note has a 46-month term with maturity in May 2023. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft Canning. | 176,571 | - | ||||||
| Promissory note payable bearing interest of 4.45%. The note has a 34-month term with maturity in May 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft Canning and includes debt covenants requiring a Current Ratio of 1.75 to 1.00 and a Debt Service Coverage Ratio of 1.25 to 1.00. Craft Canning must also provide annual financial statements and tax returns. Craft Canning was in compliance with all debt covenants as of December 31, 2019. | 265,509 | - | ||||||
| Promissory note payable under a revolving line of credit bearing variable interest starting at 5.5%. The note has a 12-month term with principal and accrued interest due in lump sum in July 2020. The borrowing limit is $250,000. The note is secured by the assets of Craft Canning. | 50,000 | - | ||||||
| Promissory note payable bearing interest of 4.14%. The note has a 60-month term with maturity in July 2024. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft Canning. | 183,202 | - | ||||||
| Promissory note payable bearing interest of 3.91%. The note has a 60-month term with maturity in August 2024. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft Canning. | 281,802 | - | ||||||
| Promissory note payable bearing interest of 3.96%. The note has a 60-month term with maturity in November 2024. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft Canning. | 295,463 | - | ||||||
| Secured line of credit promissory note for a revolving line of credit in the aggregate principal amount of $2,000,000. The Note matures on April 15, 2020 and may be prepaid in whole or in part at any time without penalty or premium. Repayment of the Note is subject to acceleration in the event of an event of default. The Company may use the proceeds to purchase tequila for its Azuñia product line and for general corporate purposes, as approved by the Holder. The obligations of the Company under the Note are secured by certain inventory of the Company and its subsidiaries and the Company’s membership interests in Craft Canning. In addition, the Note is guaranteed by the Company’s subsidiaries Craft Canning and Big Bottom Distilling. The Note and the accompanying guaranty restrict Craft Canning from incurring any new indebtedness, other than trade debt incurred in the ordinary course of business, until the Note is repaid in full. The obligations under the Note are subordinate and junior in right and priority of payment to the Company’s obligations under the Company’s Credit and Security Agreement with the KFK Children’s Trust dated May 10, 2018. | 946,640 | - | ||||||
| Promissory notes payable bearing interest between 2.99% - 3.14%. The notes have 60-month terms with maturity dates between February 2019 – June 2020. Principal and accrued interest are paid monthly. The notes are secured by the specific vehicle underlying the loan. | 10,390 | - | ||||||
| Total notes payable | 5,413,426 | 2,300,000 | ||||||
| Less current portion | (1,819,172 | ) | - | |||||
| Long-term portion of notes payable | $ | 3,594,254 | $ | 2,300,000 | ||||
The company paid $0.2 million and $0.2 million in interest on notes during 2019 and 2018 respectively.
Maturities on notes payable as of December 31, 2019, are as follows:
Year ending December 31:
| 2020 | $ | 1,819,172 | ||
| 2021 | 2,871,525 | |||
| 2022 | 399,138 | |||
| Thereafter | 323,591 | |||
| $ | 5,413,426 |
| 52 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
11. Secured Credit Facility
On May 10, 2018, the Company entered into a credit and security agreement (the “Credit and Security Agreement”), by and between the Company and The KFK Children’s Trust, Jeffrey Anderson – Trustee (the “Lender”). Pursuant to the Credit and Security Agreement, the Lender will make loans to the Company in an aggregate principal amount not to exceed $3,000,000 (the “Loans”). The Loans are secured by all of the Company’s bulk whiskey, bourbon and rye inventory held in third-party storage facilities (“Specified Inventory”). The Company may borrow 80% of the value of the Specified Inventory it is able to purchase under the Credit and Security Agreement.
The proceeds of the Loans are to be used by the Company to purchase the Specified Inventory for use in distilling and producing its spirits products, and for no other purpose.
The Loans have an annual interest rate of 7.00%. The Company will pay accrued and unpaid interest on the Loans, for the period commencing on the date each such Loan is made and continuing until each such Loan is paid in full. During 2019, The Company paid $0.2 million in interest on the Loans. The Company must pay the outstanding principal amount of the Loans in a one-time payment on the termination date of the Credit and Security Agreement (June 10, 2021), or earlier pursuant to other provisions thereof. The Company may prepay the Loans or any portion thereof at any time, and from time to time, without premium or penalty. As of December 31, 2019, the Company has borrowed the full $3 million available under the agreement. The Loans were paid in full on January 30, 2020.
The current market value of the Company’s bulk whiskey, bourbon and rye inventories must be at least 120% of the outstanding Loan balance. In addition, the Credit and Security Agreement contains other customary covenants including, among other things, certain restrictions on incurring indebtedness.
12. Income Taxes
The provision for income taxes results in effective tax rates which are different than the federal income tax statutory rate. The provision (benefit) for income taxes for the years ended December 31, 2019 and 2018 were as follows, assuming a 21% federal effective tax rate. The Company also has a state tax rate for Oregon, of 6.6% for both December 31, 2019 and 2018.
| 2019 | 2018 | |||||||
| Expected federal income tax benefit | $ | (3,389,519 | ) | $ | (1,774,610 | ) | ||
| State income taxes after credits | (1,140,554 | ) | (597,146 | ) | ||||
| Change in valuation allowance | 4,530,073 | 2,371,756 | ||||||
| Total provision for income taxes | $ | - | $ | - | ||||
The components of the net deferred tax assets and liabilities at December 31 consisted of the following:
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 12,751,273 | $ | 7,780,105 | ||||
| Stock-based compensation | 807,587 | 623,386 | ||||||
| Total deferred tax assets | 12,558,860 | 8,403,491 | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation and amortization | (834,160 | ) | (208,864 | ) | ||||
| Total deferred tax liabilities | (834,160 | ) | (208,864 | ) | ||||
| Valuation allowance | (12,724,700 | ) | (8,194,627 | ) | ||||
| Net deferred tax assets | $ | - | - | |||||
At December 31, 2019, the Company has a cumulative net operating loss carryforward (NOL) of approximately $37.8 million, to offset against future income for federal and state tax purposes. These federal and state NOLs can be carried forward for 20 and 15 years, respectively. The federal NOLs begin to expire in 2034, and the state NOLs begin to expire in 2029. The utilization of the net operating loss carryforwards may be subject to substantial annual limitation due to ownership change provisions of the Internal Revenue Code of 1986 (as amended, the Internal Revenue Code) and similar state provisions. In general, if the Company experiences a greater than 50 percentage aggregate change in ownership of certain significant stockholders over a three-year period (a “Section 382 ownership change”), utilization of its pre-change NOL carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code (and similar state laws). The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization and may be substantial.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Due to the uncertainty of the realizability of the deferred tax assets, management has determined a full valuation allowance is appropriate.
| 53 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
13. Commitments and Contingencies
| 54 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Legal Matters
We are party to the material legal proceeding described below. In addition, 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.
On October 22, 2019, a complaint was filed against the Company in the Circuit Court of Oregon, County of Multnomah by two former employees, Laurie Branch and Justina Thoreson. The complaint also named as defendants certain current and former officers and employees of the Company. The complaint is captioned Branch et al. v. Eastside Distilling, Inc. et al., case number 19-CV-45716, and alleged, among other things, that the Company and certain current and former officers and employees engaged in sex discrimination, retaliation for reporting sexual discrimination, sexual harassment, and aiding and abetting unlawful discrimination. As relief, the complaint sought, among other things, monetary damages of up to $560,000 and attorneys and experts’ fees. This litigation was successfully mediated on March 20, 2020 and is in final stages of settlement. The Company’s insurer accepted initial defense of this matter, with a reservation of rights. The Company is responsible for $100,000 retention per claim.
| 55 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
14. Net Loss per Common Share
Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted net loss per common share is computed by dividing net loss by the sum of the weighted average number of common shares outstanding and the potential number of any dilutive common shares outstanding during the period. Potentially dilutive securities consist of the incremental common stock issuable upon exercise of stock options and convertible notes. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. There were no dilutive common shares at December 31, 2019 and 2018. The numerators and denominators used in computing basic and diluted net loss per common share in 2019 and 2018 are as follows:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net loss available to common shareholders (numerator) | $ | (16,908,104 | ) | $ | (9,047,669 | ) | ||
| Weighted average shares (denominator) | 9,275,696 | 6,074,489 | ||||||
| Basic and diluted net loss per common share | $ | (1.82 | ) | $ | (1.49 | ) | ||
15. Stockholder’s Equity
Issuance of Common Stock
During 2019, the Company issued 291,099 shares of common stock to directors, employees and consultants for stock-based compensation of $1,653,759. The shares were valued using the closing share price of the Company’s common stock on the date of grant, within the range of $3.68 to $6.13 per share.
In September 2019, the Company issued 280,555 units (the “Units”) in connection with a private offering at a per Unit price of $4.50 per share, resulting in net proceeds of $1,262,497. Each Unit consists of one share of Eastside’s common stock and a three-year warrant to acquire 0.5 shares of common stock at an exercise price of $5.50 per share.
In April 2019, the Company issued 1,077 shares of common stock in connection with existing option exercises at an exercise price of $3.99.
On January 11, 2019, the Company issued 338,212 shares of common stock in connection with the acquisition of Craft Canning for a total consideration of $2,080,004.
On December 31, 2018, the Company issued 3,122 shares in connection with the purchase of the remaining 10% interest in BBD.
On November 20, 2018, the Company issued 1,235,000 shares of common stock at $6.50 per share in connection with an underwritten public offering for net proceeds of approximately $7.2 million. On December 19, 2018 an additional 185,250 shares were issued as part of the overallotment for additional proceeds of approximately $1.1 million.
During 2018, the Company issued 1,345,978 shares of common stock at $5.40 per share in connection with the exercise of warrants for cash proceeds of $7,268,281, and 500,000 shares of common stock at $5.40 per share in connection with the exercise of warrants in exchange for a reduction in outstanding note principal of $2,700,000.
On September 25, 2018, the Company issued 120,000 shares of common stock at $5.40 per share in connection with the exercise of underwriter warrants. The warrants were part of units, and each unit consisted of one share of common stock and one common stock warrant exercisable at $5.40 per share.
In July 2018, the Company issued 167,273 shares of common stock at $6.00 per share in exchange for outstanding note principal and interest. The conversion was within the terms of the original note agreement and no gain or loss was recorded.
During 2018, the Company issued 115,334 shares of common stock at an average of $5.35 per share in connection with the exercise of warrants for proceeds of $617,004. In addition, the Company issued 59,308 shares of common stock at an average of approximately $4.05 per share in exchange for services rendered.
During 2018, the Company issued 79,734 shares of common stock to directors and employees for stock-based compensation of $712,469. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $3.99 - $8.50 per share.
During 2018, the Company issued 35,941 shares of common stock in connection with existing option exercises, at an average exercise price of $4.56.
During 2018, the Company issued 27,400 shares of common stock to consultants in exchange for services. The shares were valued using the closing share price of our common stock on the date of grant, with a range of $3.99 - $7.72 per share, for a total value of $162,378.
| 56 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
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, 2019, the number of shares available for grant under the 2016 Plan reset to 1,991,350 shares, equal to 8% of the number of outstanding shares of the Company’s capital stock, calculated on an as-converted basis, on December 31 of the preceding calendar year, and then added to the prior year plan amount. As of December 31, 2019, there were 825,659 options and 527,337 restricted stock units (“RSUs”) issued under the 2016 Plan, with vesting schedules varying between immediate and five (5) years from the grant date.
On January 29, 2015, our Board of Directors adopted the 2015 Stock Incentive Plan (the “2015 Plan”). The total number of shares available for the grant of either stock options or compensation stock under the plan is 50,000 shares, subject to adjustment. At December 31, 2019, there were 19,584 options issued under the Plan outstanding, with vesting schedules varying between immediate and one (1) year from the grant date, which options vest at the rate of at least 25% in the first year, starting 6-months after the grant date, and 75% in year two.
A summary of all stock option activity at and for the years ended December 31, 2019 and 2018 is presented below:
| # of Options | Weighted- Average Exercise Price | |||||||
| Outstanding at December 31, 2017 | 369,006 | $ | 6.47 | |||||
| Options granted | 654,000 | 5.47 | ||||||
| Options exercised | (48,715 | ) | 4.56 | |||||
| Options canceled | (78,433 | ) | 4.86 | |||||
| Outstanding at December 31, 2018 | 895,858 | $ | 5.62 | |||||
| Options granted | 79,000 | 5.01 | ||||||
| Options exercised | (3,167 | ) | 4.04 | |||||
| Options canceled | (187,590 | ) | 4.61 | |||||
| Outstanding at December 31, 2019 | 784,101 | $ | 5.65 | |||||
| Exercisable at December 31, 2019 | 556,420 | $ | 5.59 | |||||
The aggregate intrinsic value of options outstanding at December 31, 2019 was $Nil, compared to $558,278 at December 31, 2018.
At December 31, 2019, there were 227,681 unvested options with an aggregate grant date fair value of $582,209. The unvested options will vest in accordance with the vesting schedule in each respective option agreement, which varies between immediate and five (5) years from the grant date. The aggregate intrinsic value of unvested options at December 31, 2019 was $Nil. During the year ended December 31, 2019, 193,072 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 following weighted-average assumptions were used in the Black-Scholes valuation model for options granted during the year ended December 31, 2019:
| Risk-free interest rate | 2.22 | % | ||
| Expected term (in years) | 6.50 | |||
| Dividend yield | - | |||
| Expected volatility | 31 | % |
The weighted-average grant-date fair value per share of stock options granted during the year ended December 31, 2019 was $1.83. The aggregate grant date fair value of the 79,000 options granted during the year ended December 31, 2019 was $142,189.
For the twelve months ended December 31, 2019, net compensation expense related to stock options was $759,385. At December 31, 2019, the total compensation expense related to stock options not yet recognized is approximately $582,209, which is expected to be recognized over a weighted-average period of approximately 1.80 years.
| 57 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Warrants
During the twelve months ended December 31, 2019, the Company issued an aggregate of 316,540 common stock warrants, consisting of 146,262 in connection with the acquisition of Craft Canning on January 11, 2019, 140,278 in connection with the private equity offering in September 2019, and 30,000 to a related party consultant. The Company has determined the warrants should be classified as equity on the consolidated balance sheet as of December 31, 2019. The estimated fair value of the warrants at issuance was $297,417, 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 weighted-average assumptions below:
| Volatility | 31 | % | ||
| Risk-free interest rate | 2.16 | % | ||
| Expected term (in years) | 2.78 | |||
| Expected dividend yield | - | |||
| Fair value of common stock | $ | 5.61 |
No warrants were exercised during the twelve months ended December 31, 2019.
A summary of activity in warrants is as follows:
| Warrants | Weighted Average Remaining Life | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2018 | 1,083,435 | 1.04 years | $ | 6.83 | $ | - | ||||||||||
| Twelve months ended December 31, 2019: | ||||||||||||||||
| Granted | 316,540 | 2.14 years | $ | 6.78 | $ | - | ||||||||||
| Exercised | - | - | $ | - | - | |||||||||||
| Forfeited and cancelled | (663,416 | ) | - | $ | 6.61 | - | ||||||||||
| Outstanding at December 31, 2019 | 736,559 | 1.18 years | $ | 6.95 | $ | - | ||||||||||
| 16. | Related Party Transactions |
The following is a description of transactions since January 1, 2018 as to which the amount involved exceeds the lesser of $120,000 or one percent (1%) of the average of our total assets at year-end for the last two completed fiscal years which was $176,934 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 August 9, 2018, Grover Wickersham, the former Executive Chairperson of our Board through August 9, 2019 and his affiliates exercised 55,555 warrants acquired in connection with the Company’s 2017 unit offering at an exercise price of $5.40 per share, for total proceeds of approximately $300,000.
On June 11, 2019, our Board appointed Owen Lingley to the Board to fill an existing vacancy on the Board effective immediately. Owen Lingley is the founder of Craft Canning, LLC, which was acquired by the Company on January 11, 2019 and subsequently changed its name to Craft Canning + Bottling LLC. In connection with the acquisition of Craft Canning, Mr. Lingley received $1,843,200 in cash, 338,212 shares of common stock of the Company and a promissory note in the aggregate principal amount of $731,211, which bears interest at a rate of 5% per annum and matures on January 11, 2022. The shares acquired by Mr. Lingley in connection with the acquisition of Craft Canning are subject to a one-year lock-up restriction and have “piggyback” registration rights effective after the one-year lock-up.
In addition, the Company also issued to Mr. Lingley a warrant to purchase 146,262 shares of common stock of the Company at $7.80 per share and an exercise period of three years. The shares of common stock issuable upon exercise of the warrant will be subject to the same “piggyback” registration rights as the shares received in connection with the acquisition of Craft Canning, described above.
Following the acquisition of Craft Canning, Mr. Lingley became non-executive Chairman of Craft Canning and is party to a consulting agreement with the Company. Under his consulting agreement with the Company, Mr. Lingley receives annual cash compensation of $75,000 per year.
On March 29, 2018, June 22, 2018 and July 10, 2018, Paul F. Shoen, who was elected to the Board in August 2019, purchased from us promissory notes having an aggregate principal amount of $363,930, $500,000 and $197,020, respectively. The promissory notes bear interest at a rate of 5% per annum, payable monthly on the last day of the month. In August 2018, we repaid a total of $572,912 of the principal balance outstanding under the notes. In September 2018, Mr. Shoen sold an additional $300,000 of the outstanding principal amount. The entire amount of the remaining principal and any accrued and unpaid interest is due and payable on May 1, 2021. $188,037 currently remains outstanding on the notes.
On October 24, 2019, our 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, LLC (“TQLA”), the majority owner of Intersect Beverage, LLC. In connection with the acquisition of Azuñia Tequila from Intersect Beverage, LLC, TQLA is entitled to receive up to 93.88% of the aggregate consideration payable under the asset purchase agreement. Subject to compliance with applicable Nasdaq rules, aggregate the initial consideration will be payable approximately 18 months following the closing and will consist of 850,000 shares of Company common stock at a stipulated value of $6.00 per share, 350,000 shares of Company common stock based on the Company’s stock price twelve months after the close of the transaction, and additional shares based on the Azuñia business achieving certain revenue targets and the Company’s stock price 18 months after the close of the transaction. The Company has also agreed to issue additional stock consideration (subject to compliance with applicable Nasdaq rules) of up to $1.5 million upon the Azuñia business achieving revenue of at least $9.45 million in the period commencing on the 13th month following the closing and ending on the 24th month following the closing.
In addition, on September 16, 2019, the Company entered into a Subscription Agreement with Stephanie Kilkenny’s spouse, Patrick J. Kilkenny as Trustee For Patrick J. Kilkenny Revocable Trust (the “Kilkenny Trust”), in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated thereunder, pursuant to which the Company agreed to issue and sell to the Kilkenny Trust an aggregate of 55,555 units at a per unit price of $4.50. Each unit consists of one share of the Company’s common stock and a three-year warrant to acquire 0.5 shares of common stock at an exercise price of $5.50 per share.
Effective November 29, 2019, the Company issued to TQLA, LLC, a California limited liability company (“Holder”), a Secured Line of Credit Promissory Note (the “Note”) for a revolving line of credit in the aggregate principal amount of $2,000,000. The Note matures on April 15, 2020 and may be prepaid in whole or in part at any time without penalty or premium. Repayment of the Note is subject to acceleration in the event of an event of default. The Company may use the proceeds to purchase tequila for its Azuñia product line and for general corporate purposes, as approved by the Holder. As of December 31, 2019, the Company has borrowed $946,640 on the Note. Stephanie Kilkenny, a director of the Company, owns and controls TQLA, LLC with her spouse. The Company’s Audit Committee approved the transaction. The Note was paid in full in early 2020.
| 58 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
| 17. | Subsequent Events |
On January 15, 2020, the Company entered into a loan agreement (the “Loan Agreement”) between the Company and its wholly-owned subsidiaries MotherLode LLC, an Oregon limited liability company, Big Bottom Distilling, LLC, an Oregon limited liability company, Craft Canning + Bottling, LLC, an Oregon limited liability company, Redneck Riviera Whiskey Co., LLC, a Tennessee limited liability company, and Outlandish Beverages LLC, an Oregon limited liability company (collectively, the “Borrowers” and each a “Borrower”) and Live Oak Banking Company, a North Carolina banking corporation (“Lender”) to refinance existing debt of the Borrowers and to provide funding for general working capital purposes. Under the Loan Agreement, Lender has committed to make up to two loan advances to the Borrowers in an aggregate principal amount not to exceed the lesser of (i) $8,000,000 and (ii) a borrowing base equal to 85% of the appraised value of the Borrowers’ eligible inventory of whisky in barrels or totes less an amount equal to all service fees or rental payments owed by Borrowers during the 90 day period immediately succeeding the date of determination to any warehouses or bailees holding eligible inventory (the “Loan”).
The Loan matures on January 14, 2021 (the “Maturity Date”). On the Maturity Date, all amounts outstanding under the Loan will become due and payable. The Lender may at any time demand repayment of the Loan in whole or in part, in which case the Borrowers will be obligated to repay the Loan (or portion thereof for which repayment is demanded) within 30 days following the date of demand. The Borrowers may prepay the Loan, in whole or in part, at any time without penalty or premium.
The Loan bears interest at a rate equal to the prime rate plus a spread of 2.49%, adjusted quarterly. Accrued interest is payable monthly, with the final installment of interest being due and payable on the Maturity Date. The Borrowers are also obligated to pay a servicing fee, unused commitment fee and origination fee in connection with the Loan.
The Loan Agreement contains affirmative and negative covenants that include covenants restricting each Borrower’s ability to, among other things, incur indebtedness, grant liens, dispose of assets, merge or consolidate, make investments, or enter into restrictive agreements, subject to certain exceptions.
The obligations of the Borrowers under the Loan Agreement are secured by substantially all of their respective assets, except for accounts receivable and certain other specified excluded property.
The Loan Agreement includes customary events of default that include among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults and change in control defaults. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Loan Agreement at a per annum rate equal to 2.00% above the applicable interest rate.
In connection with the Loan Agreement, Company issued to Lender a warrant to purchase up to 100,000 shares of the Company’s common stock at an initial exercise price of $3.9425 per share (the “Warrant”). The Warrant expires on January 15, 2025. In connection with the issuance of the Warrant, the Company granted the Lender piggy-back registration rights with respect to the shares of common stock issuable upon exercise of the Warrant, subject to certain exceptions.
On January 16, 2020, in connection with the Company’s consummation of the Loan Agreement, Eastside repaid in full and terminated the Secured Line of Credit Promissory Note that Eastside had issued to TQLA, LLC (“Holder”) on November 29, 2019 (the “TQLA Note”). Since Eastside repaid the TQLA Note in full prior to its maturity date, the Common Stock Purchase Warrant that Eastside had issued to Holder on November 29, 2019 will not be exercisable and is cancelled. No prepayment or early termination penalties were incurred by Eastside as a result of repaying the TQLA Note.
On January 12, 2020, the Company issued 87,700 shares of common stock under the 2016 Plan to directors, employees and consultants for stock-based compensation of $280,640. The shares were valued used the closing share price of the Company’s common stock on the date of the grant, $3.20 per share
| 59 |
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. These disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019 using the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management has concluded that we maintained effective internal control over financial reporting as of December 31, 2019.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we, engaged our independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
No changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
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Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The following is a brief description of the principal occupation and recent business experience of each of our executive officers and directors and their ages as of March 30, 2020:
| Name | Age | Position | ||
| Paul Shoen (1)(2)(3) | 63 | Director | ||
| Geoffrey Gwin (1)(2)(3) | 52 | Director | ||
| Jack Peterson | 55 | Director | ||
| Stephanie Kilkenny (1)(2)(3) | 48 | Director | ||
| Lawrence Firestone | 62 | Chief Executive Officer | ||
| G. Stuart Schreiner | 65 | Interim Chief Financial Officer | ||
| Robert Manfredonia | 55 | President | ||
| Melissa Heim | 36 | Executive Vice President Operations and Master Distiller |
(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the nominating and corporate governance committee.
Our board of directors currently consists of five members. All directors hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification, or removal. Board vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority vote of the directors then in office, even if less than a quorum, or by a sole remaining director. Our board may establish the authorized number of directors from time to time by resolution.
Our executive officers are each appointed by the board and serve at the board’s discretion.
There are no family relationships among our officers or directors.
Executive Officers
Lawrence Firestone has served as our Chief Executive Officer since November 13, 2020 and has served as a director since September 19, 2019. Mr. Firestone has over 39 years of enterprise, operations and financial management experience in both public and private companies, with tenures as CEO, CFO and COO across multiple industry sectors. Mr. Firestone most recently served as Executive Vice President and Chief Financial Officer of Akonni Biosystems, a privately-held developer of molecular diagnostic platforms; and as Chairman of FirePower Technology, a privately held manufacturer of ATX power supplies for the IT and instrumentation markets. In the public company sector, Mr. Firestone has served as Chief Executive Officer of Qualstar Corporation, Chief Financial Officer of Advanced Energy Industries, and Chief Financial Officer of Applied Films Corporation. He has served on numerous Boards including those of Qualstar, CVD Equipment, Amtech Systems, and Hyperspace Communications. Mr. Firestone received his Bachelor of Science in Business Administration with a concentration in Accounting from Slippery Rock University of Pennsylvania.
G. Stuart Schreiner was appointed Interim Chief Financial Officer as of March 3, 2020. Mr. Schreiner has been a financial consultant with Tatum, LLC, C-Squared Solutions and GSS Consulting LLC since 2002. During and prior to that time, he has additionally held various senior level positions, including Director of Finance or Chief Financial Officer, with Hands-On Labs, Inc., Melco Industries, Inc., AirCell, Inc., Nathan Wechsler CPA, Cablecom-General, Translogic Corporation, Fischer Imaging, and Century International. Mr. Schreiner is a Certified Public Accountant (inactive) and has a B.S. in Accounting, with Honors from Bentley College.
Robert Manfredonia has served as our President since December 6, 2018. Mr. Manfredonia has over 26 years of experience helping liquor companies drive new business growth, distributor focus and forging strong relationships with external business partners. In April 2018, Mr. Manfredonia joined us from Russian Standard, where he was Vice President in charge of National Accounts. As our Vice President of National Accounts, Mr. Manfredonia was in charge of selling the Company’s Redneck Riviera Whiskey product to ‘big box’ retailers including Costco, Kroger, Albertsons, Walmart, CVS, Winn Dixie, Spec’s (Texas), Jewel Osco, ABC Liquors (Florida) and other significant accounts. He started his career as a sales manager with Southern Wine & Spirits. From 2012 through 2015, he was co-founder of Diamond Brands Inc., where he led the concept development, research and development, and bringing to market of a French sparkling wine. From 2007 through 2012, he was Western Division Director for Duvel Moortgat USA, where he had oversight of six breweries, five European, and U.S. management of 106 distributors. Prior to 2007, Mr. Manfredonia worked for Miller Brewing Company as a Division Director of International Brands. His oversight included nine urban centers and 52 distributors with a fiscal 2006 revenue increase of 42%. He served as a logistics specialist in the United States Air Force from 1984 through 1989, serving in Asia and Europe.
Melissa Heim has served as our master distiller since June 2012 and has been a professional producer of spirits for 11 years. In November 2016, she was appointed our Executive Vice President Operations. We believe Ms. Heim was one of the first female master distillers and blenders west of the Mississippi River. Prior to joining us, she apprenticed at and then served as head distiller at Rogue Distillery and Public House in Portland’s Pearl District, holding the latter position from 2008 to 2010. Also, Ms. Heim co-founded and served as president of the Clear Boots Society, an organization that supports women’s leadership in the spirits industry. Ms. Heim studied Liberal Arts with emphasis on English at the University of Oregon. Ms. Heim is a current board member and Treasurer for the Women Distillers Guild, a member of the Craft Spirit Steering Committee for the international association Women of the Vine and Spirits, a member in good standing with the American Distilling Institute since 2014, a member in good standing with the American Craft Spirits Association since 2014, was named as one of the beverage industry’s top 40 under 40 tastemakers in 2017 and holds certification of advanced blending, maturation and warehousing techniques for spirits.
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Non-Employee Directors
Paul Shoen was appointed to our Board of Directors in June 2019 and has served as Chairman since August 2019. Mr. Shoen is a private investor and also founded and has served as the Chairman of Pantechnicon Aviation, Ltd., a company that buys and sells aircraft, since 1995. Although he is no longer associated with Amerco, Inc., over a 15-year period, Mr. Shoen served as a member of various Boards of Directors at the parent and subsidiary levels of Amerco, including the operational, real estate and insurance companies. He also served in various executive capacities within Amerco, including President and Vice-President of U-Haul International. Mr. Shoen also served on the Board of Directors of Paulson Capital Corp. from 1998 until its acquisition by VBI Vaccines Inc. in 2014. Mr. Shoen attended College of the Holy Cross where he earned a B.A. in Psychology. He has also taken graduate-level business courses at the University of Chicago. We believe that Mr. Shoen’s experience on other company boards and as a private investor is valuable to our Board.
Jack Peterson was appointed to our Board of Directors in August 2017. Since May 2007, Mr. Peterson has been the President of Sandstrom Partners, a brand development company that focuses on the creation and revitalization of thought leading brands such as Bulleit Bourbon, St-Germain, Stillhouse Whiskey, Miller Brewing, Pernod Ricard and Aviation Gin. In addition to Eastside, clients of the firm include Bacardi, Pernod Ricard, Brown Foreman and Diageo. From March 1996 to April 2007, Mr. Peterson was President of Borders, Perrin, Norrander, a full-service advertising agency in Portland, OR. Previously, Mr. Peterson served as account director and account executive at several advertising agencies including Hal Riney & Partners in San Francisco. Mr. Peterson holds a B.A. from the University of Minnesota. Because of his professional experience in brand development and establishing brand equity, and his contacts within the spirits industry, we believe Mr. Peterson is a valuable member of our board of directors.
Geoffrey Gwin was appointed to our Board of Directors in August 2019. Mr. Gwin is currently a Member of Quad Capital Management Advisors, LLC and the Managing Member of Group G Capital Partners, LLC. Mr. Gwin is the Chairman of the Board of Directors of SMArtX Advisory Solutions, Inc., a private company offering technology solutions to wealth advisors, RIA’s and other financial services firms. Mr. Gwin formed Group G Capital Partners, LLC in 2003 and has continuously managed its related strategies as its Chief Investment Officer. Mr. Gwin has held positions at Symphony Asset Management, BHF-BANK Aktiengesellschaft, and Citibank, Inc. over the last two decades. Mr. Gwin holds a Bachelor of Science in Business from Wake Forest University and is a Charter Financial Analyst. Mr. Gwin’s experience in asset management and the financial service sector provides a valuable perspective to the board.
Stephanie Kilkenny was appointed to our Board of Directors in October 2019. Ms. Kilkenny was the former managing director of Azuñia Tequila, and together with her spouse, owns and controls TQLA, LLC (“TQLA”), the majority owner of Intersect Beverage, LLC. Ms. Kilkenny holds a BS Psychology from Ursinus College in Pennsylvania and relocated to CA immediately upon earning her degree. She began her post-college career in Client Services at the corporate offices of Mail Boxes Etc. and as an Operations Manager at the corporate offices of Insurance Express Services. After a few years in the corporate world, Ms. Kilkenny returned to the classroom to study photography and acquire an AA Interior Design from Mesa College; and then opened her own photography and design firm, Adair Interiors, LLC. Stephanie currently serves as Board President of the Lucky Duck Foundation, a non-profit organization that has raised over $10 million dollars for various charitable organizations since Ms. Killkenny and her husband Patrick founded it in 2005. In 2017, The Lucky Duck Foundation narrowed its focus to alleviating the suffering of San Diego County’s homeless population. Their annual Swing & Soiree event has raised over $1 million dollars per year for the past 5 years. We believe Ms. Kilkenny adds value to the board because of her experience as managing director of Azuñia Tequila.
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Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past ten years:
| ● | has had any bankruptcy petition filed by or against any business of which he was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time; | |
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); | |
| ● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; | |
| ● | been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| ● | been subject or a party to or any other event requiring disclosure under Item 401(f) of Regulation S-K. |
Family Relationships
None.
Board Committees
In September 2016, our Board of Directors established the following standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The Board of Directors determined that establishing standing audit, compensation, and nominating and corporate governance committees is an important element of sound corporate governance.
Audit Committee
Our audit committee oversees the engagement of our independent public accountants, reviews our audited financial statements, meets with our independent public accountants to review internal controls and reviews our financial plans. Our audit committee currently consists of Geoffrey Gwin, who is the chair of the committee, Stephanie Kilkenny and Paul Shoen. Each of Messrs. Gwin, Shoen and Kilkenny has been determined by our Board of Directors to be independent in accordance with Nasdaq and SEC standards. Our Board of Directors has also designated Mr. Gwin as an “audit committee financial expert” as the term is defined under SEC regulations and has determined that Mr. Gwin possesses the requisite “financial sophistication” under applicable Nasdaq rules. The audit committee operates under a written charter which is available on our website at https://www.eastsidedistilling.com/investors Both our independent registered accounting firm and internal financial personnel will regularly meet with our audit committee and have unrestricted access to the audit committee. Each member of the audit committee is able to read and understand fundamental financial statements, including our consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows. Further, no member of the audit committee has participated in the preparation of our consolidated financial statements, or those of any of our current subsidiaries, at any time during the past three years.
Compensation Committee
Our compensation committee reviews and recommends policies, practices and procedures relating to compensation for our directors, officers and other employees and advising and consulting with our officers regarding managerial personnel and development. Our compensation committee currently consists of Stephanie Kilkenny, who is the chair of the committee, Geoffrey Gwin and Paul Shoen, each of whom has been determined by our Board of Directors to be independent in accordance with Nasdaq standards. Each member of our compensation committee is also a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended. The compensation committee operates under a written charter which is available on the Company’s website at https://www.eastsidedistilling.com/investors.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee (“Nominating Committee”) evaluates the composition, size and governance of our Board of Directors and its committees, evaluating and recommending candidates for election to our Board of Directors, establishing a policy for considering stockholder nominees and reviewing our corporate governance principles and providing recommendations to the Board of Directors. Our nominating committee currently consists of Paul Shoen, who is the chair of the committee, Geoffrey Gwin and Stephanie Kilkenny, each of whom has been determined by our Board of Directors to be independent in accordance with Nasdaq standards. The Nominating Committee operates under a written charter which is available on the Company’s website at https://www.eastsidedistilling.com/investors
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Director Nomination Process
The Nominating Committee identifies director nominees by first considering those current members of the Board of Directors who are willing to continue in service. Current members of the Board of Directors with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination, balancing the value of the skills and experiences of the current members and the value of continuity of service by existing members of the Board of Directors with that of obtaining a new perspective or skills and experiences. If any member of the Board of Directors does not wish to continue in service, if the nominating committee or the Board of Directors decides not to re-nominate a member for reelection, if the nominating committee or the Board of Directors decided to fill a director position that is currently vacant or if the nominating committee or the Board of Directors decides to recommend that the size of the Board of Directors be increased, the nominating committee identifies the desired skills needed by the board and will evaluate the experience of a new nominee in light of the criteria described above. Current members of the Board of Directors and management are polled for suggestions as to individuals meeting the Board of Directors’ criteria. Research may also be performed to identify qualified individuals and, if appropriate, the nominating committee may engage a search firm. Nominees for director are selected by a majority of the members of the Board of Directors, with any current directors who may be nominees themselves abstaining from any vote relating to their own nomination. All of our directors participated in the consideration of the director nominees for election at the Annual Meeting. Although the nominating committee and the Board of Directors do not have a formal diversity policy, the Board of Directors instructed the nominating committee to consider such factors as it deems appropriate to develop a Board and committees that are diverse in nature and comprised of experienced and seasoned advisors. Factors considered by the nominating committee include judgment, knowledge, skill, diversity (including factors such as race, gender and experience), integrity, experience with businesses and other organizations of comparable size, including experience in the spirits industry, business, finance, administration or public service, the relevance of a candidate’s experience to our needs and experience of other board members, familiarity with national and international business matters, experience with accounting rules and practices, the desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members, and the extent to which a candidate would be a desirable addition to the Board of Directors and any committees of the Board of Directors.
In addition, directors are expected to be able to exercise their best business judgment when acting on behalf of us and all stockholders, act ethically at all times and adhere to the applicable provisions of our code of business conduct and ethics. Other than consideration of the foregoing and applicable SEC and Nasdaq requirements, unless determined otherwise by the Nominating Committee, there are no stated minimum criteria, qualities or skills for director nominees. However, the Nominating Committee may also consider such other factors as it may deem are in the best interests of us and all stockholders. In addition, at least one member of the Board of Directors serving on the audit committee should meet the criteria for an “audit committee financial expert” having the requisite “financial sophistication” under applicable Nasdaq and SEC rules, and a majority of the members of the Board of Directors should meet the definition of “independent director” under applicable Nasdaq rules.
The Nominating Committee and the Board of Directors may consider suggestions for persons to be nominated for director that are submitted by stockholders. The Nominating Committee will evaluate stockholder suggestions for director nominees in the same manner as it evaluates suggestions for director nominees made by management, then-current directors or other appropriate sources. Stockholders suggesting persons as director nominees should send information about a proposed nominee to our Secretary at our principal executive offices as referenced above at least 90 days before the anniversary of the prior year’s annual stockholder meeting. This information should be in writing and should include a signed statement by the proposed nominee that he or she is willing to serve as a director of Eastside Distilling, Inc., a description of the proposed nominee’s relationship to the stockholder and any information that the stockholder feels will fully inform the Board of Directors about the proposed nominee and his or her qualifications. The Board of Directors may request further information from the proposed nominee and the stockholder making the recommendation. In addition, a stockholder may nominate one or more persons for election as a director at our annual meeting of stockholders.
General Stockholder Communications
Stockholders can send communications to the Board of Directors by sending a certified or registered letter to the Chairman of the Board, care of the Secretary, at our main business address set forth above. Communications that are threatening, illegal, or similarly inappropriate, and advertisements, solicitations for periodical or other subscriptions, and other similar communications will generally not be forwarded to the Chairman.
Code of Ethics
We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors. We will provide to any person without charge, upon request, a copy of our code of business conduct and ethics. Requests may be directed to our principal executive offices at 1001 SE Water Avenue, Suite 390, Portland, Oregon 97214. Also, a copy of our code of business conduct and ethics is available on our website. We will disclose, on our website, any amendment to, or a waiver from, a provision of our Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of the Code of Business Conduct and Ethics enumerated in applicable rules of the SEC.
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Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or paid to our Named Executive Officers for services rendered during the fiscal years ended December 31, 2019, and 2018.
| 2019 Summary Compensation Table | ||||||||||||||||||||||||||||
| Name and Position | Year | Salary | Bonus | Stock Awards | Option Awards | All Other Compensation | Total ($) | |||||||||||||||||||||
| Lawrence Firestone | 2019 | $ | 28,846 | $ | $ | 28,846 | ||||||||||||||||||||||
| Chief Executive Officer, Director (Since November 2019) | ||||||||||||||||||||||||||||
| Grover T. Wickersham | 2019 | $ | 57,692 | $ | 150,000 | $ | $ | 207,692 | ||||||||||||||||||||
| Chief Executive Officer, Director (Until May 10, 2019) | 2018 | $ | 120,000 | $ | 123,750 | $164,314 | (3) | $318,545 | (1) | $ | $ | 726,609 | ||||||||||||||||
| Robert Manfredonia | 2019 | $ | 150,000 | $ | 50,000 | $150,514 | (2) | $ | $ | 350,514 | ||||||||||||||||||
| President (Since December 2018) | 2018 | $ | 109,615 | $ | $50,000 | (6) | $204,625 | (5) | $ | $ | 364,240 | |||||||||||||||||
| Steve Shum | 2019 | $ | 152,885 | $ | 142,115 | $111,700 | (4) | $ | $ | 406,700 | ||||||||||||||||||
| Interim Chief Executive Officer (May 2019-November 2019) and Chief Financial Officer, (Until November 2019) | 2018 | $ | 135,000 | $ | 132,250 | $164,314 | (8) | $318,545 | (7) | $ | $ | 750,109 | ||||||||||||||||
| Melissa Heim | 2019 | $ | 102,000 | $ | $ | 102,000 | ||||||||||||||||||||||
| Executive V.P. Operations and Master Distiller | 2018 | $ | 87,289 | $ | 10,000 | $19,950 | (10) | $68,575 | (9) | $ | $ | 185,814 | ||||||||||||||||
| (1) | Amounts reflect the aggregate grant date fair value of the 115,000 shares of common stock underlying the stock options granted on three separate dates of grant (with exercise prices of $3.92, $3.99 and $7.87 per share, respectively) without regards to forfeitures, computed in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). This amount does not reflect the actual economic value realized by the named executive officer. The options issued vest monthly over a 2 or 3-year period. The assumptions used to calculate the value of the stock options are set forth in Note 15 in the Notes to Consolidated Financial Statements on page 56. |
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| (2) | Amounts reflect the aggregate grant date fair value of the 27,461 restricted stock units calculated based on the closing sales price reported on the Nasdaq Capital Market on the respective dates of grant ($6.03, $5.17, and $4.88 per share, respectively) without regards to forfeitures. | |
| (3) | Amounts reflect the aggregate grant date fair value of 24,098 restricted stock units calculated based on the closing sales price reported on the Nasdaq Capital Market on the respective dates of grant ($3.99, $7.19, and $7.69 per share, respectively) without regards to forfeitures. | |
| (4) | Amounts reflect the aggregate grant date fair value of 20,000 restricted stock units calculated based on the closing sales price reported on the Nasdaq Capital Market on the respective dates of grant ($6.00 and $5.17) without regards to forfeitures. | |
| (5) | Amounts reflect the aggregate grant date fair value of the 75,000 shares of common stock underlying the stock options granted on two separate dates of grant (with exercise prices of $7.05 and $7.87 per share, respectively) without regards to forfeitures, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the named executive officer. The options issued vest monthly over a 3-year period. The assumptions used to calculate the value of the stock options are set forth in Note 15 in the Notes to Consolidated Financial Statements on page 56. | |
| (6) | Amounts reflect the aggregate grant date fair value of 6,696 restricted stock units calculated based on the closing sales price reported on the Nasdaq Capital Market on the respective dates of grant ($7.05, and $7.94 per share, respectively) without regards to forfeitures. | |
| (7) | Amounts reflect the aggregate grant date fair value of the 115,000 shares of common stock underlying the stock options granted on three separate dates of grant (with exercise prices of $3.92, $3.99 and $7.87 per share, respectively) without regards to forfeitures, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the named executive officer. The options issued vest monthly over a two or three-year period. The assumptions used to calculate the value of the stock options are set forth in Note 14 in the Notes to Consolidated Financial Statements on page 56. | |
| (8) | Amounts reflect the aggregate grant date fair value of 24,098 restricted stock units calculated based on the closing sales price reported on the Nasdaq Capital Market on the respective dates of grant ($3.99, $7.19, and $7.69 per share, respectively) without regards to forfeitures. | |
| (9) | Amounts reflect the aggregate grant date fair value of the 25,000 shares of common stock underlying the stock option on the date of grant (with an exercise price of $3.99 per share) without regards to forfeitures, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the named executive officer. The options issued vest quarterly over a three-year period. The assumptions used to calculate the value of the stock options are set forth in Note 15 in the Notes to Consolidated Financial Statements on page 56. | |
| (10) | Amounts reflect the aggregate grant date fair value of 5,000 restricted stock units calculated based on the closing sales price reported on the Nasdaq Capital Market on the dates of grant ($3.99 per share) without regards to forfeitures. |
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All Other Compensation
None
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2019 Grants of Plan-Based Awards
The following table sets forth information concerning the number of shares of common stock underlying restricted stock unit awards and stock options granted to the Named Executive Officers in the year ended December 31, 2019.
| All Other Stock Awards: | All Other Option Awards: | |||||||||||||||||
| Name | Grant Date | Number of Shares of Stock or Units (#) | Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Share) | Grant Date Fair Value of Stock and Option Awards (1) | |||||||||||||
| Steve Shum | 04/10/2019 | 10,000 | (2) | $ | 60,000 | |||||||||||||
| 08/29/2019 | 10,000 | (2) | $ | 51,700 | ||||||||||||||
| Robert Manfredonia | 04/08/2019 | 12,522 | (2) | $ | 75,500 | |||||||||||||
| 8/29/2019 | 7,254 | (2) | $ | 37,500 | ||||||||||||||
| 10/18/2019 | 7,685 | (2) | $ | 37,500 | ||||||||||||||
| (1) | Represents the grant date fair value of each equity award calculated in accordance with ASC 718. | |
| (2) | RSUs vested immediately. |
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Outstanding Equity Awards at 2019 Fiscal Year-End
The following table sets forth all outstanding equity awards made to each of the Named Executive Officers that are outstanding as of December 31, 2019.
| Option Awards (1) | ||||||||||||||||
| Name | Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | |||||||||||
| Grover T. Wickersham | 10/13/2016 | 35,000 | (1) | — | $ | 5.40 | 10/13/2026 | |||||||||
| 04/05/2017 | 33,334 | (2) | $ | 4.80 | 04/05/2027 | |||||||||||
| 09/15/2017 | 16,667 | (3) | 3,333 | $ | 3.78 | 09/15/2027 | ||||||||||
| 01/08/2018 | 50,000 | (2) | $ | 3.92 | 01/08/2028 | |||||||||||
| 01/11/2018 | 16,667 | (3) | 8,333 | $ | 3.99 | 01/08/2028 | ||||||||||
| 10/15/2018 | 16,667 | (3) | 23,333 | $ | 7.87 | 10/15/2028 | ||||||||||
| Melissa Heim | 03/25/2015 | 417 | (3) | — | $ | 105.00 | 03/25/2025 | |||||||||
| 09/20/2016 | 10,000 | (3) | $ | 4.80 | 09/20/2026 | |||||||||||
| 12/30/2016 | 3,334 | (3) | $ | 5.94 | 12/30/2016 | |||||||||||
| 03/14/2017 | 1,667 | (3) | $ | 4.50 | 03/14/2027 | |||||||||||
| 09/15/2017 | 10,000 | (3) | $ | 3.78 | 09/15/2027 | |||||||||||
| 01/11/2018 | 14,583 | (3) | 10,417 | $ | 3.99 | 01/11/2028 | ||||||||||
| Steven Shum | 10/1/2015 | 14,167 | (4) | — | $ | 27.00 | 10/1/2020 | |||||||||
| 9/20/2016 | 20,000 | (3) | $ | 4.80 | 10/1/2026 | |||||||||||
| 03/14/2017 | 1,667 | (3) | $ | 4.50 | 03/14/2027 | |||||||||||
| 01/08/2018 | 50,000 | (2) | $ | 3.92 | 01/08/2028 | |||||||||||
| 01/11/2018 | 16,667 | (3) | 8,333 | $ | 3.99 | 01/08/2028 | ||||||||||
| 10/15/2018 | 16,667 | (3) | 23,333 | $ | 7.87 | 10/15/2028 | ||||||||||
| Robert Manfredonia | 04/02/2018 | 25,000 | (3) | 25,000 | $ | 7.05 | 04/02/2028 | |||||||||
| 10/15/2018 | 8,333 | (3) | 16,667 | $ | 7.87 | 10/15/2028 | ||||||||||
| (1) | Options vest monthly over a 6-month period. | |
| (2) | Options vest quarterly over 2-year period | |
| (3) | Options vest quarterly over 3-year period | |
| (4) | Options vest over a 2-year period with 25% vesting in the first year following date of grant, with no options vesting during the first 6-months and 1/24th per month and 75% vesting in the second year following date of grant (3/48th/month). |
Employment Agreements
We have agreements with certain of our named executive officers, which include provisions regarding post-termination compensation. We do not have a formal severance policy or plan applicable to our executive officers as a group. The following summaries of the employment agreements are qualified in their entirety by reference to the text of the employment agreements, as amended, which have been filed as Exhibits to this Annual Report on Form 10-K.
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Employment Agreement with Melissa Heim
On February 27, 2015, we entered into an employment agreement with Melissa Heim. The agreement has been extended until February 27, 2021.
The agreement contains the following provisions among other customary terms: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with her employment; (ii) paid vacation leave; (iii) medical, dental and life insurance benefits and (iv) 36-month non-compete/non-solicitation terms; (v) Ms. Heim is not entitled to increased severance in connection with a change of control.
Employment Agreement with Robert Manfredonia
Effective December 6, 2018, the Company entered into an Amended and Restated Employment Agreement with Mr. Manfredonia. The agreement is for an initial term ending on December 5, 2021 and provides for an annual base salary during the term of the agreement of $150,000. Mr. Manfredonia is eligible to receive a bonus of $100,000 per annum, which would be subject to Company results and individual performance. In addition, the Company will recommend to the compensation committee that it grant Mr. Manfredonia $37,500 worth of restricted stock units within the first 5 days of the completion of each quarter. Each award will be immediately vested and will be subject to the terms and conditions of the 2016 Equity Incentive Plan. Further, Mr. Manfredonia may be eligible to receive stock option grants pursuant to the 2016 Equity Incentive Plan, subject to the discretion of compensation committee. The agreement also contains the following provisions: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment, along with a $500 per month car allowance; (ii) benefits and perquisites available to other senior executives of the Company; and (iii) a severance payment upon termination without cause.
Employment Agreement with Lawrence Firestone
On November 13, 2019, we entered into an employment agreement with Mr. Firestone. The agreement terminates on 12/31/2020. Under the Employment Agreement, Mr. Firestone will initially receive an annual base salary of $250,000 in cash. The Company will also grant Mr. Firestone the equivalent of $100,000 of restricted stock units (“RSUs”), based on the Company’s customary determination of the applicable stock price at the time of grant. Twenty-five percent (25%) of the award will vest on each of March 31, June 30 and September 30, 2020 and the first anniversary of the effective date of the Employment Agreement. Mr. Firestone will also be eligible to receive a target incentive payment of 100% of his annual base salary beginning in 2020, paid 50% in RSUs and 50% in cash. Actual payments will be determined based on a combination of the Company’s results and individual performance against the applicable performance goals established by the Compensation Committee of the Board. Mr. Firestone will also receive (i) a signing bonus of $50,000, which he may elect to receive up to 50% in cash and 50% in fully vested stock of the Company, and (ii) other benefits that are generally available to other executive officers of the Company. Mr. Firestone will be entitled to certain severance benefits if he is terminated without cause, or resigns for good reason (in each case, as defined in the Employment Agreement), including, among other things, one year of annual base salary, one year of continued health benefits coverage and one year of continued vesting of RSUs.
Employment Agreement with Steve Shum
In 2015, we entered into an employment agreement with Mr. Shum, which was amended in 2016. The agreement annually renews for one-year terms. The Agreement was terminated upon termination of Mr. Shum’s employment in on November 14, 2019.
The agreement contained the following provisions among other terms: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment; (ii) vacation leave; (iii) medical, dental and life insurance benefits; (iv) 36-month non-compete/non-solicitation terms; and (v) a severance payment equal to six months of base salary upon termination without cause (as defined in the agreement). Mr. Shum was not entitled to increased severance in connection with a change of control.
Executive Chairperson Agreement with Grover Wickersham
On May 13, 2019, the company entered into an executive chairperson agreement with Mr. Wickersham. The agreement was terminated when Mr. Wickersham left the board on August 8, 2019.
The agreement contained the following provisions among other terms: (i) annual Board fee of $185,000 payable in monthly installments; (ii) eligibility to receive up to 5,000 restricted stock units with the amounts, if any, to be determined at the discretion of the Company’s Compensation Committee at its annual meeting; (iii) reimbursement for out of pocket cost of healthcare insurance, at the same rate he was paying prior to this agreement; (iv) eligibility for discretionary bonuses and eligibility to receive equity grants based his assistance in the company transitions, the amount, if any also to be determined by the Company’s Compensation Committee; (v) eligibility to receive equity grants based his assistance in the company transitions, the amount, if any also to be determined by the Company’s Compensation Committee; (vi) reimbursement for reasonable and documented expenses approved by the executive officer of the Company and (vii) continued compensation described above until the first anniversary of the Company’s 2019 annual meeting under the assumption Mr. Wickersham is elected by shareholders to the Board of the Company but the Board does not elect Mr. Wickersham as Chairperson, or terminates the Executive Chairperson Agreement, or terminates Mr. Wickersham from the Executive Chairperson position, or materially alters Mr. Wickersham’s overall duties as set forth in the Executive Chairperson Agreement.
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Potential Payments upon Termination
Under the terms of the employment agreements for Mr. Firestone, Ms. Heim and Mr. Manfredonia, they are each entitled to a severance payment of six (6) month’s salary at the then-applicable base salary rate in the event that we terminate their employment without cause.
The following table sets forth quantitative information with respect to potential payments to be made to Mr. Firestone, Ms. Heim and Mr. Manfredonia upon termination without cause. The potential payments are based on the terms of Mr. Firestone’s, Ms. Heim’s and Mr. Manfredonia’s employment agreements discussed above. For a more detailed description of the employment agreements for Mr. Firestone, Ms. Heim and Mr. Manfredonia, see the “Employment Agreements” section above.
| Name | Potential Payment upon Termination Without Cause |
|||
| Lawrence Firestone | $ | 354,041 | (2) | |
| Robert Manfredonia | $ | 75,000 | (1)(3) | |
| Melissa Heim | $ | 51,000 | (1)(4) |
| (1) | Employee entitled to six months’ severance at the then applicable base salary rate. |
| (2) | Based on Mr. Firestone’s current annual base salary of $350,000, $250,000 paid in cash and $100,000 paid in company stock and one year of health benefits coverage. |
| (3) | Based on Mr. Manfredonia’s current annual base salary of $150,000. |
| (4) | Based on Ms. Heim’s current annual base salary. |
Compensation of Directors
2019 Director Compensation
During 2018, the Board of Directors established an annual compensation program for the directors that includes; 1) an annual retainer of $16,000 paid in cash in quarterly installments, 2) $5,000 in stock awards per quarter, 3) $2,500 cash payment for each board chair, which will be paid annually at the beginning of the year, 4) 1,000 for in-person board meetings and $500 for telephonic board meetings and 5) 5,000 stock options per year.
In October of 2019 the annual compensation program was updated to include; 1) an initial board election RSU grant of $5,000, paid one time upon appointment or election, 2) board chair premium of $5,000 and 3) annual committee member fees of $20,000.
Other than Grover Wickersham and Lawrence Firestone, who each received compensation as an executive officer as well as with respect to his service as director as described above, the following table sets forth information regarding compensation earned by or paid to our non-employee directors during the year ended December 31, 2019.
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| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) (6) | Option Awards ($) | Total ($) | ||||||||||||
| Trent D. Davis(3) | $ | 55,500 | (11) | $ | 30,008 | $ | - | $ | 85,008 | |||||||
| Michael M. Fleming(3) | $ | 33,000 | (8) | $ | 30,008 | - | $ | 63,008 | ||||||||
| Jack Peterson | $ | 47,167 | (7) | $ | 30,008 | - | $ | 77,175 | ||||||||
| Shelly A. Saunders(1) | $ | 5,000 | $ | - | - | $ | 5,000 | |||||||||
| Matthew Szot(3) | $ | 33,000 | (8) | $ | 30,008 | - | $ | 63,008 | ||||||||
| Patrick Crowley(3) | $ | 22,000 | (10) | $ | - | - | $ | 22,000 | ||||||||
| David Holmes(3) | $ | 26,000 | (2) | $ | 40,002 | - | $ | 66,002 | ||||||||
| Owen Lingley(5) | $ | 29,000 | (9) | $ | - | - | $ | 29,000 | ||||||||
| Paul Shoen | $ | 30,500 | (12) | $ | - | - | $ | 30,500 | ||||||||
| Shawn Willard (4) | $ | 25,000 | (13) | $ | - | - | $ | 25,000 | ||||||||
| Geoffrey Gwin | $ | 27,500 | (14) | $ | - | - | $ | 27,500 | ||||||||
| Stephanie Kilkenny | $ | 17,000 | (15) | $ | - | - | $ | 17,000 | ||||||||
| (1) | Resigned from Board of Directors effective March 19, 2019. | |
| (2) | Elected to receive 5,579 RSUs in lieu of cash for $21,000 earned fees. The aggregate-grant date fair value of 5,579 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $21,000. The RSUs were fully vested upon grant. | |
| (3) | Resigned from Board of Directors effective August 8, 2019. | |
| (4) | Resigned from Board of Directors effective November 12, 2019. | |
| (5) | Resigned from Board of Directors effective November 18, 2019. | |
| (6) | As of December 31, 2019, there were no unvested RSUs held by each non-employee directors. | |
| (7) | Elected to receive 11,929 RSUs in lieu of cash for $42,167 earned fees. The aggregate-grant date fair value of 11,929 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $42,167. The RSUs were fully vested upon grant. | |
| (8) | Elected to receive 6,509 RSUs in lieu of cash for $24,500 earned fees. The aggregate-grant date fair value of 6,509 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $24,500. The RSUs were fully vested upon grant. | |
| (9) | Elected to receive 8,408 RSUs in lieu of cash for $29,000 earned fees. The aggregate-grant date fair value of 8,408 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $29,000. The RSUs were fully vested upon grant. | |
| (10) | Elected to receive 4,517 RSUs in lieu of cash for $17,000 earned fees. The aggregate-grant date fair value of 4,517 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $17,000. The RSUs were fully vested upon grant. | |
| (11) | Elected to receive 12,354 RSUs in lieu of cash for $46,500 earned fees. The aggregate-grant date fair value of 12,354 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $46,500. The RSUs were fully vested upon grant. | |
| (12) | Elected to receive 9,531 RSUs in lieu of cash for $30,500 earned fees. The aggregate-grant date fair value of 9,531 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $30,500. The RSUs were fully vested upon grant. | |
| (13) | Elected to receive 7,813 RSUs in lieu of cash for $25,000 earned fees. The aggregate-grant date fair value of 7,813 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $25,000. The RSUs were fully vested upon grant. | |
| (14) | Elected to receive 8,594 RSUs in lieu of cash for $27,500 earned fees. The aggregate-grant date fair value of 8,594 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $27,500. The RSUs were fully vested upon grant. | |
| (15) | Elected to receive 5,313 RSUs in lieu of cash for $17,000 earned fees. The aggregate-grant date fair value of 5,313 RSUs, valued using the closing stock price as reported on the Nasdaq Capital Market on the respective dates of grant was $17,000. The RSUs were fully vested upon grant. |
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The following table sets forth information as of March 30, 2020 as to each person or group who is known to us to be the beneficial owner of more than 5% of our outstanding voting securities and as to the security and percentage ownership of each of our executive officers and directors and of all of our officers and directors as a group. As of March 30, 2020, we had 9,672,028 shares of common stock outstanding.
Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder.
Shares of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of the date of March 30, 2020 are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
| Number of | ||||||||
| Common | ||||||||
| Shares | ||||||||
| Name And | Beneficially | Percentage | ||||||
| Address (1) | Owned | Owned | ||||||
| 5% Stockholders: | ||||||||
| Quad Capital Management Advisors (2) | 797,258 | 8.24 | % | |||||
| Orca Investment Management (3) | 641,216 | 6.63 | % | |||||
| ARS Investment Partners LLC (4) | 645,509 | 6.67 | % | |||||
| Officers and Directors: | ||||||||
| Grover T. Wickersham (5) | 430,536 | (6) | 4.37 | % | ||||
| Jack Peterson | 95,117 | (7) | 1.00 | % | ||||
| Paul Shoen | 110,689 | * | ||||||
| Geoff Gwin | 11,929 | * | ||||||
| Lawrence Firestone | 22,016 | * | ||||||
| Stephanie Kilkenny | 60,868 | (8) | * | |||||
| Melissa Heim | 42,663 | (9) | * | |||||
| Robert Manfredonia | 76,571 | (10) | * | |||||
| Steven Shum | 42,896 | * | ||||||
| All directors and executive officers as a group (9 persons) | 1,336,766 | 13.82 | % | |||||
| (1) | Unless otherwise noted, the address is c/o Eastside Distilling, Inc., 1002 SE Water Avenue, Suite 390., Portland, Oregon 97214. | |
| (2) | The address is 90 Park Avenue, Floor 5, New York, NY 10016. Quad Capital Management Advisors (“Quad”) is a Delaware limited liability company. Geoffrey Gwin (“Gwin”), a director of the Company, is an ordinary member of Quad and the managing member of one of the Accounts sub-advised by Quad. Gwin is the managing member to Group G Capital Partners, LLC (“Group G”) a Delaware limited liability company, and investment adviser to Group G Investments, LP. Group G beneficially owns 107,196 shares of Common Stock, acquired in the ordinary course of business. Gwin disclaims beneficial ownership of these securities except to the extent of any pecuniary interest therein. | |
| (3) | The address is 2250 Aviation Drive, Suite 3, Roseburg, Oregon 97470 | |
| (4) | The address is 500 Fifth Avenue, 14th Floor, New York, New York 10110 | |
| (5) | Includes 157,037 shares of Common Stock owned directly by Mr. Wickersham as of July 31, 2019. In addition, Mr. Wickersham serves as the trustee of the Lindsay Anne Wickersham 1999 Irrevocable Trust (the “Irrevocable Trust”) and is a co-trustee and a lifetime beneficiary of the Grover T. and Jill Z. Wickersham 2000 Charitable Remainder Trust (the “CRUT”). The Irrevocable Trust owned 45,856 shares of Common Stock, and the CRUT owned 60,370 shares of Common Stock, as of July 31, 2019. Because Mr. Wickersham exercises voting and dispositive power over the securities owned by the Irrevocable Trust and the CRUT, he may be deemed to be the beneficial owner of the securities owned by such entities pursuant to Rule 13d-3(a) promulgated under the Act. He disclaims beneficial ownership of all of the securities owned by the Irrevocable Trust and all of the securities owned by the CRUT, except to the extent of his vested interest in the CRUT. | |
| (6) | Includes (i) 15,189, shares of common stock issuable upon exercise of currently-exercisable warrants and (ii) 152,084 shares of common stock issuable upon exercise of stock options exercisable on or before May 18, 2020. | |
| (7) | Includes (i) 30,383 shares of common stock held directly or indirectly by Mr. Peterson and (ii) 45,359 shares of common stock owned by Sandstrom Partners, of which Mr. Peterson is the current CEO (iii) 19,375 shares of common stock issuable upon exercise of stock options exercisable on or before May 18, 2020. | |
| (8) | Includes 55,555 shares held directly by Patrick J. Kilkenny, Trustee of the Patrick J. Kilkenny Revocable Trust. Mr. Kilkenny is the spouse of the Reporting Person. | |
| (9) | Includes 43,335 shares issuable upon exercise of stock options exercisable on or before May 18, 2020. | |
| (10) | Includes 45,833 shares issuable upon exercise of stock options exercisable on or before May 18, 2020. |
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Securities Authorized for Issuance Under Equity Compensation Plans. The following provides information concerning compensation plans under which our equity securities are authorized for issuance as of December 31, 2019:
Equity Compensation Plan Information
| (a) | (b) | (c) | ||||||||||
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted- average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|||||||||
| Equity compensation plans approved by security holders (1) (2) | 784,101 | $ | 5.65 | 668,770 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 784,101 | $ | 5.65 | 668,770 | ||||||||
| (1) | 2015 Stock Incentive Plan. On January 29, 2015, our Board of Directors adopted the 2015 Stock Incentive Plan (the “2015 Plan”). The total number of shares available for the grant of either stock options or compensation stock under the 2015 Plan is 50,000 shares, subject to adjustment. At December 31, 2019, there were 19,584 options issued under the Plan outstanding, with vesting schedules varying between immediate and, one (1) year from the grant date, which options vest at the rate of at least 25% in the first year, starting six months after the grant date, and 75% in year two. | |
| (2) | 2016 Stock Incentive Plan. On September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). The total number of shares available for the grant of either stock options or compensation stock under the 2016 Plan was initially set at 166,667 shares, subject to adjustment. On January 1, 2017 and pursuant to the plan provisions, the number of shares available for grant under the 2016 Plan reset to 307,139 shares, equal to 8% of the number of outstanding shares of the Company’s capital stock, calculated on an as-converted basis, on December 31 of the preceding calendar year. On October 18, 2017, the Board of Directors approved amendments to the 2016 Plan to (i) increase the number of shares of the common stock that may be issued under the 2016 Plan (the “Aggregate Limit”) by an additional 192,861 shares of common stock, for a total of 500,000 shares of common stock, (ii) increase the number of shares of common stock that may be granted to any participant pursuant to options to purchase common stock and stock appreciation rights under the 2016 Plan in any one year period (the “Individual Option Limit”) from 8,333 shares to 200,000 shares, (iii) increase the number of shares of common stock that may be granted to any participant pursuant to other awards (the “Individual Award Limit”) under the 2016 Plan in any one year period from 8,333 shares to 200,000 shares and (iv) increase the number of shares of common stock that may be paid to any one participant under the 2016 Plan for a performance period pursuant to performance compensation awards under the 2016 Plan (the “Individual Performance Award Limit”) from 8,333 shares to 200,000 shares, which amendments were adopted and approved at the December 2017 meeting of stockholders. On January 1, 2018, pursuant to the plan provisions, the number of shares available for grant under the 2016 Plan further reset to 1,131,880 shares. On January 1, 2019, pursuant to the plan provisions, the number of shares available for grant under the 2016 Plan further reset to 1,991,350 shares. The exercise price per share of each stock option shall not be less than 100 % of the fair market value of the Company’s common stock on the date of grant. At December 31, 2019, there were 825,659 options and 527,337 restricted stock units (“RSUs”) issued under the 2016 Plan, with vesting schedules varying between immediate and five (5) years from the grant date. |
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The following is a description of transactions since January 1, 2018 as to which the amount involved exceeds the lesser of $120,000 or one percent (1%) of the average of our total assets at year-end for the last two completed fiscal years and in which any related person has or will have a direct or indirect material interest, other than equity and other compensation, termination and other arrangements which are described above under the headings “Compensation of Directors” and “Executive Compensation.” As of the date of this Annual Report on Form 10-K, there are no proposed transactions as described in the foregoing sentence.
Jack Peterson
On August 23, 2017, our Board appointed Jack Peterson to the Board to fill an existing vacancy on the Board effective immediately. Mr. Peterson is also the President of Sandstrom Partners. We issued 10,025 shares valued at $40,000 (at the time of issuance) to Sandstrom Partners in 2018. On August 11, 2018, we issued 42,000 shares of common stock to Sandstrom in connection with the exercise of their 42,000 warrants in exchange for services rendered. In 2018, we paid $140,000 in cash and issued 10,025 shares of common stock to Sandstrom for work performed. In 2019, we paid $220,000 in cash and issued 61,600 shares of common stock to Sandstrom for work performed. In addition, Sandstrom Partner’s continued engagement with the Company may result in the issuance of a meaningful amount of additional shares for the payment of services during fiscal year 2020, depending in part on our stock price at issuance.
Grover Wickersham
On December 29, 2017, the Grover T. Wickersham Employees’ Profit Sharing Plan (“PSP”), an entity affiliated with our former Chief Executive Officer and Chairman, Grover Wickersham, purchased from us a promissory note bearing interest at the rate of 8% per annum (a “Promissory Note”) for aggregate consideration of $464,750. Interest is paid monthly. The Promissory Note is due on June 30, 2019 or in the event the Company completes a private or public offering of its equity or debt securities in which the gross amount raised in such financing is at least $2.0 million (a “Future Financing”), all amount due under this Promissory Note shall become due and payable within five (5) business days of the final closing of such Future Financing. In lieu of receiving the cash repayment of amounts due under this Promissory Note in connection with a Future Financing, at the option of PSP, the principal amount due and payable may be used to purchase the securities offered in the Future Financing. PSP used a balance of $379,750 to purchase the Company’s new private offering of notes with warrants. The remaining principal balance of $85,000 was paid in April 2018. The new promissory notes bear interest at 8% per annum, payable monthly on the last day of the month. The entire amount of principal and any accrued and unpaid interest is due and payable on May 1, 2021. In conjunction with this new offering, PSP was issued 37,975 warrants, exercisable at $5.40 per share. On August 9, 2018, PSP exercised the 37,975 warrants at $5.40 per share in exchange for a reduction in outstanding note principal due. $174,685 remained outstanding on the note.
On December 29, 2017, the Grover T. and Jill Z. Wickersham 2000 Charitable Remainder Trust (the “Wickersham Trust”) purchased from us a promissory note bearing interest at the rate of 8% per annum (a “Promissory Note”) for aggregate consideration of $179,300. Interest is paid monthly. The Promissory Note is due on June 30, 2019 or in the event the Company completes a private or public offering of its equity or debt securities in which the gross amount raised in such financing is at least $2.0 million (a “Future Financing”), all amount due under the Promissory Note shall become due and payable within five (5) business days of the final closing of such Future Financing. In lieu of receiving the cash repayment of amounts due under the Promissory Note in connection with a Future Financing, at the option of Wickersham Trust, the principal amount due and payable may be used to purchase the securities offered in the Future Financing. During the first quarter of 2018, the Wickersham Trust used the balance to purchase the Company’s new private offering of notes with warrants. The new promissory notes bear interest at 8% per annum, payable monthly on the last day of the month. The entire amount of principal and any accrued and unpaid interest is due and payable on May 1, 2021. In conjunction with this new offering, the Wickersham Trust was issued 17,930 warrants, exercisable at $5.40 per share. On August 9, 2018, the Wickersham Trust exercised the 17,930 warrants at $5.40 per share in exchange for a reduction in outstanding note principal due. $82,478 remained outstanding on the note.
Stephanie Kilkenny
Stephanie Kilkenny was appointed to the Board in accordance with the terms of the Asset Purchase Agreement, dated September 12, 2019 (the “Asset Purchase Agreement”), between the Company and Intersect Beverage, LLC, a California limited liability company (“Intersect”), pursuant to which the Company acquired substantially all of the assets of Intersect (the “Purchased Assets”), an importer and distributor of tequila and related products (the “Transaction”) under the brand name “Azuñia”. The Transaction closed on September 12, 2019. In connection with the Transaction, TQLA is entitled to up to 93.88% of the aggregate consideration payable under the Asset Purchase Agreement. The aggregate consideration payable under the Asset Purchase Agreement includes that number of shares of common stock of the Company, cash payments and/or promissory notes comprising (i) 1,200,000 shares of the Company’s common stock (the “Fixed Number of Shares”) and, (ii) to the extent certain revenue targets are achieved, the Initial Earnout Consideration (as defined below) and the Subsequent Earnout Consideration (as defined below) The Fixed Number of Shares will be issued 540 days following the closing date of the Transaction as follows: 850,000 shares of the Company’s common stock will be issued at a stipulated value of $6.00 per share, equivalent to $5,100,000, and the remaining 350,000 shares of the Company’s common stock will be issued at a stipulated value equal to the 20-day volume-weighted average closing price of Company common stock on September 12, 2020. In addition, upon the acquired business (which is comprised of Intersect’s business of importing and distributing tequila and related products (the “Business”)) achieving gross revenues of $3.24 million or more during the first eighteen months following closing date of the Agreement, the Company will issue as further consideration (the “Initial Earnout Consideration”) additional shares of Company common stock at a price per share equal to the 20-day volume-weighted average closing price of the Company’s common stock on the eighteen-month anniversary of the closing date of the Transaction. The number of additional shares of the Company’s common stock to be issued will be based upon a multiple of gross revenue of the Business, ranging from 3.30 to 3.50, and less the aggregate stipulated dollar value of the Fixed Number of Shares previously paid.
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If the gross revenue of the acquired Business for the period commencing on the first day of the thirteenth month following the closing date of the Transaction and ending on the last day of the twenty-fourth month following the closing date of the Transaction (the “Subsequent Earnout Period”) equals or exceeds $9.45 million, the Company will pay to the members of Intersect, including up to 93.88% to TQLA, $1,500,000, either in cash or a number of shares equal to (x) $1.5 million divided by (y) the 20-day volume-weighted average closing price of the Company’s common stock on the last day of the Subsequent Earnout Period, rounded down to the nearest whole number of shares of the Company’s common stock (the “Subsequent Earnout Consideration”).
Notwithstanding anything set forth in the Asset Purchase Agreement, the Company will not be required to issue shares of common stock if, in order for the Company to issue sufficient shares to pay any portion of the aggregate consideration under the Agreement, the Company would be required to hold a vote of the Company’s stockholders pursuant to Nasdaq Listing Rules (i.e. the number of shares of common stock of the Company issuable under the Agreement would exceed 19.9% of the Company’s outstanding common stock). In the event that the Company would be required to hold a vote of the Company’s stockholders pursuant to Nasdaq Listing Rules, the Company may, at its election, issue only that number of shares of common stock which does not require such vote, and instead pay any remaining portion of the aggregate consideration in the form of cash or as a promissory note with a three-year maturity that bears interest at a rate of 6% per annum.
Any shares issued by the Company under the Asset Purchase Agreement will be issued, at the Company’s election, either (i) as registered shares under the Securities Act of 1933, as amended (the “Securities Act”) or (ii) as unregistered shares in an issuance exempt from registration under Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder. If the Company issues unregistered shares, the Company will file a re-sale registration statement on Form S-3 with the Securities and Exchange Commission for a secondary offering covering the resale of the unregistered shares. Such registration statement will be filed no later than 30 days following the date of payment of the Initial Earnout Consideration and will be amended within 30 days following the issuance of any Subsequent Earnout Consideration.
In addition, TQLA is obligated to reimburse the Company for approximately $430,000 in certain expenses associated with the transaction.
On September 16, 2019, the Company entered into a Subscription Agreement with Mrs. Kilkenny’s spouse, Patrick J. Kilkenny as Trustee For Patrick J. Kilkenny Revocable Trust (the “Kilkenny Trust”) in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated thereunder, pursuant to which the Company agreed to issue and sell to the Kilkenny Trust an aggregate of 55,555 units (the “Units”) at a per unit price of $4.50. Each Unit consists of one share of the Company’s common stock and a three-year warrant to acquire 0.5 shares of common stock at an exercise price of $5.50 per share.
Effective November 29, 2019, the Company issued to TQLA, a Secured Line of Credit Promissory Note (the “Note”) for a revolving line of credit in the aggregate principal amount of $2,000,000. The Note matures on April 15, 2020 and may be prepaid in whole or in part at any time without penalty or premium. Repayment of the Note is subject to acceleration in the event of an event of default. The Company may use the proceeds to purchase tequila for its Azuñia product line and for general corporate purposes, as approved by TQLA. As of December 31, 2019, the Company borrowed $946,640 on the Note. The Note was repaid in full on January 16, 2020.
We believe that the foregoing transactions were in our best interests. Consistent with Section 78.140 of the Nevada Revised Statutes, it is our current policy that all transactions between us and our 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 us as a corporation as of the time it is authorized, approved or ratified by the board. We will conduct an appropriate review of all related party transactions on an ongoing basis, and, where appropriate, we will utilize our audit committee for the review of potential conflicts of interest.
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Director Independence
Generally, under the listing requirements and rules of Nasdaq, independent directors must comprise a majority of a listed company’s board of directors. Our Board of Directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Our Board of Directors has determined that Paul Shoen, Geoff Gwin and Stephanie Kilkenny are independent within the meaning of Nasdaq listing standards. Accordingly, a majority of our directors is independent, as required under applicable Nasdaq rules. In making this determination, our Board of Directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. In making this determination, the Board of Directors considered all transactions set forth under “Certain Relationships and Related Transactions” above.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
M&K CPAS, PLLC (“M&K”) billed us $35,000 in progress fees for our 2019 annual audit, $15,450 in fees for the completion of our 2018 audit, and $22,000 and $7,000 in fees for the review of our quarterly financial statements in 2019 and 2018, respectively.
Audit Related Fees
We paid fees to M&K for assurance and related services of $22,900 and $30,500 related to other SEC filings in 2019 and 2018, respectively.
Tax Fees
For the years ended each of December 31, 2019 and 2018, the aggregate fees billed for tax compliance, by M&K were $0.
Pre-Approval Policies and Procedures
We have implemented pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, our audit committee pre-approves all services to be provided by M&K LLP and the estimated fees related to these services.
All audit, audit related, and tax services were pre-approved by the audit committee, which concluded that the provision of such services by M&K LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. Our pre-approval policies and procedures provide for the audit committee’s pre-approval of specifically described audit, audit-related, and tax services on an annual basis, but individual engagements anticipated to exceed pre-established thresholds must be separately approved. The policies and procedures also require specific approval by the audit committee if total fees for audit-related and tax services would exceed total fees for audit services in any fiscal year. The policies and procedures authorize the audit committee to delegate to one or more of its members pre-approval authority with respect to permitted services.
| (a) | Exhibits |
EXHIBIT INDEX
| 77 |
* ** |
Filed herewith. Confidential status has been requested for certain portions of this exhibit pursuant to a Confidential Treatment Request filed April 2, 2017. Such provisions have been separately filed with the Commission. |
| *** | Certain confidential portions were omitted as identified therein because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed. |
| + | Indicates a management contract or compensatory plan. |
| 78 |
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.
| EASTSIDE DISTILLING, INC. | ||
| By: | /s/ Lawrence Firestone | |
| Lawrence Firestone | ||
| Chief Executive Officer, Director | ||
| (Principal Executive Officer) | ||
| By: | /s/ G. Stuart Schreiner | |
| G. Stuart Schreiner | ||
| Interim Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this amended report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
| Signatures | Title | Date | ||
| /s/ Lawrence Firestone | Chief Executive Officer, | March 30, 2020 | ||
| Lawrence Firestone | and Director | |||
| (Principal Executive Officer) | ||||
| /s/ G. Stuart Schreiner | Interim Chief Financial Officer | March 30, 2020 | ||
| G. Stuart Schreiner | (Principal Financial and Accounting Officer) | |||
| /s/ Paul Shoen | Director | March 30, 2020 | ||
| Paul Shoen | ||||
| /s/ Geoff Gwin | Director | March 30, 2020 | ||
| Geoff Gwin | ||||
| /s/ Stephanie Kilkenny | Director | March 30, 2020 | ||
| Stephanie Kilkenny | ||||
| /s/ Jack Peterson | Director | March 30, 2020 | ||
| Jack Peterson |
| 79 |
Exhibit 4.6
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
The following description of the registered securities of Eastside Distilling, Inc. (‘we”, “us”, “our” or the “Company”) is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Amended and Restated Articles of Incorporation and the amendments thereto (collectively, the “Articles of Incorporation”) and our Amended and Restated Bylaws (collectively, the “Bylaws”), each of which is incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.5 is a part. We encourage you to read our Articles of Incorporation, our Bylaws and the applicable provisions of The Nevada Revised Statutes (the “NRS”), for additional information.
Authorized Shares
Our authorized capital stock consists of 15,000,000 shares of common stock, par value $0.0001 per share and 100,000,000 shares of preferred stock, par value of $0.0001 per share. As of March 30, 2020, we have 9,762,728 shares of common stock and no shares of preferred stock outstanding. Our common stock is our only class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
Common Stock
Holders of our common stock are entitled to one vote per share on all matters subject to stockholder vote. Holders of our common stock do not have cumulative voting rights.
If the Board of Directors were to declare a dividend out of funds legally available therefor, all of the outstanding shares of common stock would be entitled to receive such dividend ratably.
If our business was liquidated or dissolved, holders of shares of common stock would be entitled to share ratably in assets remaining after satisfaction of our liabilities, subject to any preference rights of holders of indebtedness or outstanding preferred stock.
The holders of shares of common stock have no preemptive, conversion, redemption or sinking fund rights.
Anti-takeover Effects of Certain Provisions of our Articles of Incorporation and Bylaws
Authorized but Unissued Securities
The existence of authorized but unissued shares of common stock may enable our Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a merger, tender offer or otherwise.
In addition, the Board of Directors is authorized from time to time to establish one or more series of preferred stock and to determine and prescribe the voting powers, distinguishing designations, preferences, limitations, restrictions and relative rights of the preferred stock before issuance of any shares of that class and of any series of preferred stock before issuance of shares of that series.
The issuance of preferred stock may delay, deter or prevent a change in control. We believe that our Board of Directors’ ability to issue preferred stock on such a wide variety of terms will enable the preferred stock to be used for important corporate purposes, such as financing acquisitions or raising additional capital. However, were it inclined to do so, our Board of Directors could issue all or part of the preferred stock with, among other things, substantial voting power or advantageous conversion rights. This preferred stock could be issued to persons deemed by our Board of Directors likely to support our current management in a context for control of us, either as a precautionary measure or in response to a specific takeover threat.
No Cumulative Voting
Our Articles of Incorporation do not grant holders of the common stock the right to vote cumulatively. The absence of cumulative voting could have the effect of preventing stock holding a minority of the Company’s shares from obtaining representation on the Board of Directors.
Notice Provisions Relating to Stockholder Proposals and Nominees
Our Bylaws contain provisions requiring stockholders to give advance written notice to the Company of a proposal or director nomination in order to have that proposal or nominee considered at the annual meeting of stockholders. A stockholder’s notice must be delivered no later than ninety (90) days nor earlier than one hundred twenty (120) days prior to the first anniversary of the preceding year’s annual meeting (provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder must be so delivered not earlier than one hundred twenty (120) days prior to such annual meeting and not later than ninety (90) days prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Company).
Calling a Stockholder Meeting
Special meetings of stockholders for any purpose or purposes may be called at any time by the entire Board of Directors, any two directors or the President of the Company. Special meetings may not be called by any other person or persons.
Nevada Anti-Takeover Laws
We have not opted out of Nevada’s Business Combinations Statute and Control Share Acquisition Statute in our Articles of Incorporation, and as a result, both statutes may have the effect of delaying or making it more difficult to effect a change in control of the Company, to the extent applicable to us.
Business Combinations Act
Nevada’s “combinations with interested stockholders” statutes (NRS 78.411 through 78.444, inclusive) prohibit specified types of business “combinations” between certain Nevada corporations and any person deemed to be an “interested stockholder” for two years after such person first becomes an “interested stockholder” unless the corporation’s board of directors approves the combination (or the transaction by which such person becomes an “interested stockholder”) in advance, or unless the combination is approved by the board of directors and sixty percent of the corporation’s voting power not beneficially owned by the interested stockholder, its affiliates and associates. Further, in the absence of prior approval certain restrictions may apply even after such two-year period. However, these statutes do not apply to any combination of a corporation and an interested stockholder after the expiration of four years after the person first became an interested stockholder.
For purposes of these statutes, an “interested stockholder” is any person who is (A) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (B) an affiliate or associate of the corporation and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term “combination” is sufficiently broad to cover most significant transactions between a corporation and an “interested stockholder.”
The provisions of the NRS relating to combinations with interested stockholders could have the effect of delaying, deferring or preventing a change in our control or the removal of our existing management.
Control Share Acquisitions
The “control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS, which apply only to Nevada corporations with at least 200 stockholders of record, including at least 100 stockholders of record who are Nevada residents, and which conduct business directly or indirectly in Nevada, prohibit an acquirer, under certain circumstances, from voting its shares of a target corporation’s stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s disinterested stockholders. The statute specifies three thresholds: (a) one-fifth or more but less than one-third, (b) one-third but less than a majority, and (c) a majority or more, of the outstanding voting power. Once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become “control shares” and such control shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who do not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters’ rights.
Listing
Our common stock is traded on the Nasdaq Stock Market under the trading symbol “EAST”.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Transfer Online, Inc.
| - 2 - |
Exhibit 4.7
THIS WARRANT AND THE SECURITIES PURCHASABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT, OR UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT.
WARRANT TO PURCHASE STOCK
| Corporation: | Eastside Distilling Inc. (the “Company”) | |
| Number of Shares: | 100,000 | |
| Class of Stock: | Common Stock | |
| Initial Exercise Price: | $3.9425 per share | |
| Issue Date: | January 15, 2020 | |
| Expiration Date: | January 15, 2025 | |
| Credit Facility: | This Warrant to Purchase Stock is issued in connection with that certain Loan Agreement of even date herewith by and among Live Oak Banking Company, the Company and certain subsidiaries of the Company party thereto. |
This Warrant to Purchase Stock (this “Warrant”) certifies that, for good and valuable consideration, the receipt of which is hereby acknowledged, Live Oak Banking Company or its assignee (“Holder”) is entitled to purchase the number of fully paid and nonassessable shares (the “Shares”) of the class of securities (“Class”) of the Company at the initial exercise price per Share (the “Warrant Price”) all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.
ARTICLE
1
EXERCISE
1.1 Method of Exercise. Holder may at any time and from time to time exercise this Warrant, in whole or in part, by delivering to the Company the original of this Warrant together with a duly executed Notice of Exercise in substantially the form attached hereto as Appendix A and, unless Holder is exercising this Warrant pursuant to a cashless exercise set forth in Section 1.2, a check, wire transfer of same-day funds (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased.
1.2 Cashless Exercise. On any exercise of this Warrant, in lieu of payment of the aggregate Warrant Price in the manner as specified in Section 1.1 above, but otherwise in accordance with the requirements of Section 1.1, Holder may elect to receive Shares equal to the value of this Warrant, or portion hereof as to which this Warrant is being exercised (a “Cashless Exercise”). Thereupon, the Company shall issue to Holder such number of fully paid and non-assessable Shares as are computed using the following formula:
| X = | Y(A-B)/A |
where:
| X = | the number of Shares to be issued to Holder; | |
| Y = | the number of Shares with respect to which this Warrant is being exercised (inclusive of the Shares surrendered to the Company in payment of the aggregate Warrant Price); | |
| A = | the Fair Market Value (as determined pursuant to Section 1.3 below) of one Share; and | |
| B = | the Warrant Price. |
1.3 Fair Market Value. The fair market value (the “Fair Market Value”) of a Share as of a particular date shall mean the average of the closing prices of such security’s sales on a national securities exchange, the Nasdaq Select Global Market, the Nasdaq Global Market, the Nasdaq Capital Market, the OTC Bulletin Board or another nationally recognized trading system, in each such case averaged over a period of five (5) days consisting of the day prior to the day as of which Fair Market Value is being determined and the five (5) consecutive business days prior to such day. If at any time such security is not listed on a national securities exchange, the Nasdaq Select Global Market, the Nasdaq Global Market, the Nasdaq Capital Market, the OTC Bulletin Board or another nationally recognized trading system as of the applicable exercise date, the “Fair Market Value” shall be the fair value thereof as determined in good faith by the Company’s Board of Directors; provided, that if Holder disagrees with the Board of Directors’ determination of such fair market value, the Company and Holder shall negotiate in good faith for 15 days to determine such Fair Market Value. If at the end of such 15-day period, the parties are unable to reach agreement with respect to such Fair Market Value, then they shall select a mutually acceptable independent third party appraiser of national standing (the “Independent Appraiser”). The Independent Appraiser’s appraisal shall be the Fair Market Value and shall be binding on the Company and Holder. The cost of the Independent Appraiser, if any, shall be shared equally among the Company and Holder. Notwithstanding the foregoing, in the event of an automatic exercise immediately prior to a Cash Acquisition (as defined below) pursuant to Section 1.6(b), the Fair Market Value of a Share shall mean the value of the cash consideration payable per Share pursuant to the terms of such Cash Acquisition, which amount shall assume the full payout of any contingent right to future payments of cash.
1.4 Delivery of Certificate and New Warrant. Within a reasonable time after Holder exercises this Warrant in the manner set forth in Section 1.1 or 1.2 above, the Company shall deliver to Holder a certificate or book entry notations representing the Shares issued to Holder upon such exercise and, if this Warrant has not been fully exercised and has not expired, a new warrant of like tenor representing the Shares not so acquired.
1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company shall, at its expense and within a reasonable time, execute and deliver, in lieu of this Warrant, a new warrant of like tenor.
1.6 Treatment of Warrant Upon Acquisition of the Company.
(a) Acquisition. For the purpose of this Warrant, “Acquisition” means any transaction or series of related transactions involving: (i) the sale, lease, exclusive license, or other disposition of all or substantially all of the assets of the Company; (ii) any merger or consolidation of the Company into or with another person or entity (other than a merger or consolidation effected exclusively to change the Company’s domicile), or any other corporate reorganization, in which the stockholders of the Company in their capacity as such immediately prior to such merger, consolidation or reorganization, own less than a majority of the Company’s (or the surviving or successor entity’s) outstanding voting power immediately after such merger, consolidation or reorganization; or (iii) any sale or other transfer by the stockholders of the Company of shares representing at least a majority of the Company’s then-total outstanding combined voting power.
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(b) Treatment of Warrant upon Cash/Public Acquisition. In the event of an Acquisition in which the consideration to be received by the Company’s stockholders consists solely of cash and/or a contingent right to future payments of cash (such as earnout payments and contingent value rights and excluding, for the avoidance of doubt, equity or other securities issued by the Company or any other person) (a “Cash Acquisition”), and the Fair Market Value of one Share as determined in accordance with Section 1.3 above would be greater than the Warrant Price in effect on such date immediately prior to such Cash Acquisition, and Holder has not exercised this Warrant pursuant to Section 1.1 above as to all Shares, then this Warrant shall automatically be deemed to be exercised pursuant to Section 1.2 above as to all remaining Shares effective immediately prior to and contingent upon the consummation of a Cash Acquisition. In connection with such Cashless Exercise, Holder shall be deemed to have restated each of the representations and warranties in Section 4.1 of this Warrant as of the date thereof and the Company shall promptly notify Holder of the number of Shares (or such other securities) issued upon exercise. In the event of a Cash Acquisition where the Fair Market Value of one Share as determined in accordance with Section 1.3 above would be less than the Warrant Price in effect immediately prior to such Cash Acquisition, then this Warrant will expire immediately prior to the consummation of such Cash Acquisition.
(c) Treatment of Warrant upon non-Cash Acquisition. Upon the closing of any Acquisition other than a Cash Acquisition defined above, the acquiring, surviving or successor entity shall assume the obligations of this Warrant, and this Warrant shall thereafter be exercisable for the same securities and/or other property as would have been paid for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on and as of the closing of such Acquisition, subject to further adjustment from time to time in accordance with the provisions of this Warrant.
ARTICLE
2
ADJUSTMENTS TO THE SHARES
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend or distribution on the outstanding shares of the Class payable in common stock or other securities or property (other than cash), then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without additional cost to Holder, the total number and kind of securities and property which Holder would have received had Holder owned the Shares of record as of the date the dividend or distribution occurred. If the Company subdivides the outstanding shares of the Class by reclassification or otherwise into a greater number of shares, the number of Shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares of the Class are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased.
2.2 Reclassification, Exchange or Substitution. Upon any event whereby all of the outstanding shares of the Class are reclassified, exchanged, combined, substituted, or replaced for, into, with or by Company securities of a different class and/or series, then from and after the consummation of such event, this Warrant will be exercisable for the number, class and series of Company securities that Holder would have received had the Shares been outstanding on and as of the consummation of such event, and subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, combinations, substitutions, replacements or other similar events.
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2.3 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, Class and/or number of Shares, the Company, at the Company’s expense, shall notify Holder in writing within a reasonable time setting forth the adjustments to the Warrant Price, Class and/or number of Shares and facts upon which such adjustment is based. The Company shall, upon written request from Holder, furnish Holder with a certificate of its Chief Financial Officer, including computations of such adjustment and the Warrant Price, Class and number of Shares in effect upon the date of such adjustment.
2.4 Fractional Shares. No fractional Share shall be issuable upon exercise of this Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional Share interest arises upon any exercise of the Warrant, the Company shall eliminate such fractional Share interest by paying Holder in cash the amount computed by multiplying the fractional interest by the difference of (i) the Fair Market Value (as determined in accordance with Section 1.3 above) of a full Share, less (ii) the then-effective Warrant Price.
ARTICLE
3
REPRESENTATIONS AND COVENANTS OF THE COMPANY
3.1 Representations and Warranties. The Company hereby represents and warrants to Holder as follows:
(a) The initial Warrant Price referenced on the first page of this Warrant is equal to 125% of the average closing price for shares of the Class on the Nasdaq Capital Market for the five (5) trading days prior to the date of this Warrant.
(b) All Shares which may be issued upon the exercise of this Warrant, and all securities, if applicable, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. The Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued capital stock such number of securities as will be sufficient to permit the exercise in full of this Warrant and, if applicable, the conversion of the Shares into common stock or other securities.
3.2 Notice of Certain Events. The Company shall provide Holder with not less than 10 days prior written notice of, including a description of the material facts surrounding, any of the following events: (a) the record date with respect to any declaration of any dividend or distribution upon the outstanding shares of the Class, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) the record date with respect to any offering for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) any reclassification, exchange, combination, substitution, reorganization or recapitalization of the outstanding shares of the Class; (d) an Acquisition or the liquidation, dissolution or winding up of the Company; (e) the merger or consolidation with or into any other corporation or other entity, or sale, lease, license, or conveyance of all or substantially all of its assets, or liquidation, dissolution or winding up; or (f) the filing of a registration statement in connection with the Company’s offering and sale of its securities to the public pursuant to an effective registration statement under the Act.
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3.3 Registration Right.The Company hereby agrees that if the Company or any successor proposes to file a registration statement under the Act relating to a public offering of its shares of common stock under the Act (whether for its own benefit or for the holders of any of its equity securities or otherwise), it shall promptly offer to include and shall include, at Holder’s request given within twenty (20) days after such offer is made by the Company, all or any portion of the securities underlying this Warrant in such registration statement at the expense of the Company (excluding any underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Holder’s securities, and any fees and disbursements of counsel for Holder). Notwithstanding the foregoing, this Section 3.3 will not apply to the filing of a registration statement (i) relating to any employee benefit plan under Form S-8 or similar form (ii) with respect to any corporate reorganization or other transaction under Rule 145 of the Act (including Form S-4) or (iii) in which the only securities being registered are securities issuable upon conversion of debt securities that are also being registered. The Company shall have the right to terminate or withdraw any registration initiated by it before the effective date of such registration, whether or not Holder has elected to include the securities underlying this Warrant in such registration. Notwithstanding anything to the contrary herein, the Company shall not be required to include any of the securities underlying this Warrant in any underwritten offering unless the Holder accepts the terms of the underwriting as agreed upon between the Company and its underwriters. If the total number of securities, including the securities underlying this Warrant to be included in such offering exceeds the number of securities to be sold that the underwriters in their reasonable discretion determine is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including the securities underlying this Warrant, which the underwriters advise the Company in writing will not jeopardize the success of the offering. Upon request by the Company, Holder shall furnish to the Company such information regarding itself, the securities underlying this Warrant held by it, and the intended method of disposition of such securities as is reasonably required to effect the registration of such securities.
ARTICLE
4
REPRESENTATIONS OF THE HOLDER
4.1 Representations and Warranties. Holder represents and warrants to the Company as follows:
(a) This Warrant and the securities to be acquired upon exercise of this Warrant by Holder are being acquired for investment for Holder’s account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Act. Holder also represents that it has not been formed for the specific purpose of acquiring this Warrant or the Shares.
(b) Holder understands that an investment in this Warrant and its underlying securities involves substantial risk. Holder has experience as an investor in securities of companies and acknowledges that Holder can bear the economic risk of such Holder’s investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons.
(c) Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Act.
(d) Holder understands that this Warrant and the Shares issuable upon exercise hereof have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Shares issued upon any exercise hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available. Holder is aware of the provisions of Rule 144 promulgated under the Act.
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ARTICLE
5
MISCELLANEOUS
5.1 Term: Exercise Upon Expiration. This Warrant is exercisable in whole or in part, at any time and from time to time on or before the Expiration Date set forth above.
5.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form:
THIS WARRANT AND THE SECURITIES PURCHASABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT, OR UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT.
5.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee. The Company may, as a condition of such transfer or assignment, require (i) that Holder furnish to the Company a written opinion of counsel, which opinion and counsel are reasonably acceptable to the Company, to the effect that such transfer or assignment may be made without registration under the Act, (ii) that Holder or the transferee execute and deliver to the Company an investment letter in form and substance reasonably acceptable to the Company and (iii) that the transferee be an “accredited investor” as defined in Rule 501(a) promulgated under the Act; provided that no such opinion, letter or status as an “accredited investor” shall be required in connection with a transfer (x) pursuant to Rule 144 under the Act, (y) of Shares that have been registered under the Act or (z) to an affiliate of Holder.
5.4 Transfer Procedure. Subject to the provisions of Section 5.3, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder, if applicable). No surrender or reissuance shall be required for a transfer to an affiliate of Holder.
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5.5 Market Stand-Off. Holder hereby agrees that it shall not offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any securities of the Company or enter into any swap, hedging or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any securities of the Company held by such (other than those included in the registration) for a period specified by the representative of the underwriters of the Company’s common stock or other securities not to exceed one hundred eighty (180) days following the effective date of any registration statement of the Company filed under the Act for the registration of Shares (or such other period as may be requested by the Company or an underwriter to accommodate regulatory restrictions including, but not limited to, FINRA Rule 2241, if applicable, or any similar or successor provisions or amendments thereto). Holder hereby agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter that are consistent with the foregoing or that are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of the Company’s common stock (or other securities of the Company), Holder shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company’s securities pursuant to a registration statement filed under the Act. The obligations described in this Section 5.5 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to an SEC Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the securities underlying this Warrant subject to the foregoing restriction until the end of such one hundred eighty (180) days or other period. Holder agrees that any permitted transferee or assignee of this Warrant or the securities underlying this Warrant shall be bound by this Section 5.5. Notwithstanding the foregoing, the restrictions set forth in this Section 5.5 shall be applicable to the Holder only if all officers and directors of the Company are subject to the same restrictions.
5.6 Notices. All notices and other communications from the Company to Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or Holder, as the case may be, in writing by the Company or such Holder from time to time. All notices to Holder shall be addressed as follows:
Live Oak Banking Company
1741 Tiburon Drive
Wilmington, NC 28403
Attention: CFO
5.7 Amendments. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.
5.8 Regulatory Compliance. The Company will work in good faith with Holder to limit or restrict any voting rights Holder or its assignee may have upon exercise of this Warrant to the extent that Holder, in its sole discretion, determines that it may be necessary or advisable to limit such voting rights in order to comply with the Federal Deposit Insurance Act, Chapter 53C of the North Carolina General Statutes, the Bank Holding Company Act of 1956 and any other applicable banking laws and any regulations implementing the foregoing, in each case as such laws and regulations may be amended from time to time. Notwithstanding the foregoing, in no event shall the Company be obligated to amend its Articles of Formation or Bylaws or take any other action that would require any filings with the Securities and Exchange Commission or notice to or approval of any stock exchange in connection with the foregoing.
5.9 Surrender. Upon written notice by Holder to the Company, Holder may surrender this Warrant, in whole or in part. In the case of a surrender in whole of this Warrant, this Warrant shall be void and no longer of any force and effect. In the case of a partial surrender of this Warrant, within a reasonable time after the Company receives notice of such partial surrender, the Company shall deliver to Holder a new warrant of like tenor representing the portion of the Warrant not so surrendered.
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5.10 Attorneys’ Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.
5.11 Counterparts; Facsimile/Electronic Signatures. This Warrant may be executed in counterparts, all of which together shall constitute one and the same instrument. Any signature page delivered electronically or by facsimile shall be binding to the same extent as an original signature page with regards to any agreement subject to the terms hereof or any amendment thereto.
5.12 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to its principles regarding conflicts of law.
5.13 Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE FOLLOWS.]
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Signature Page to Warrant to Purchase Stock
IN WITNESS WHEREOF, the undersigned has executed this Warrant to Purchase Stock as of the date set forth above.
| EASTSIDE DISTILLING INC. | ||
| By: | /s/ Lawrence Firestone | |
| Name: | Lawrence Firestone | |
| Title: | CEO | |
Acknowledged and agreed:
LIVE OAK BANKING COMPANY
| By: | /s/ Roxana Rice | |
| Name: | Roxana Rice | |
| Title: | Vice President |
Appendix A
NOTICE OF EXERCISE
[1. The undersigned hereby elects to purchase ______________ shares of common stock of Eastside Distilling Inc. pursuant to the terms of the attached warrant, and tenders herewith payment of the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached warrant into shares in the manner specified in Section 1.2 of the attached warrant. This conversion is exercised with respect to ______________ of the shares covered by the warrant.]
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates (or book entry notations) representing said shares in the name of the undersigned or in such other name as is specified below:
| (Holder’s Name) | |
| (Address) |
Live Oak Banking Company or Registered Assignee
| (Signature) | |
| (Date) |
Exhibit 4.8
THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”). EXCEPT AS OTHERWISE SET FORTH HEREIN, NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR, AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE, CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SUCH ACT.
THIS WARRANT IS NOT EXERCISABLE UNTIL THE EFFECTIVE DATE (AS DEFINED BELOW).
COMMON STOCK PURCHASE WARRANT
EASTSIDE DISTILLING, INC.
Right to Purchase Warrant Shares
THIS CERTIFIES THAT, for value received, TQLA, LLC, a California limited liability company or its registered assigns, is entitled to purchase from Eastside Distilling, Inc., a Nevada corporation (the “Company”), at any time or from time to time during the period specified in Paragraph 2 hereof, that number of shares of common stock of the Company par value $0.0001 per share (“Common Stock”) equal to forty percent (40%) of the aggregate principal amount then outstanding under that Secured Promissory Note dated as of the date hereof in favor of TQLA, LLC (the “Note”) as of the Effective Date (as defined below) divided by the lesser of (a) the volume-weighted average closing price in U.S. dollars for the Common Stock of the Company for the twenty (20) consecutive trading days immediately preceding the Effective Date or (b) 90% of the per share price paid by any investor that purchases shares of Common Stock in any equity financing consummated while the Note remains outstanding (such price, the “Warrant Issuance Price”) rounded down to the nearest whole number of shares, at an exercise price per share equal to the Warrant Issuance Price (the “Exercise Price”); The term “Warrant Shares,” as used herein, refers to the shares of Common Stock purchasable hereunder. The Warrant Shares and the Exercise Price are subject to adjustment as provided in Paragraph 4 hereof.
This Warrant is subject to the following terms, provisions, and conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares. Subject to the provisions hereof, this Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant, together with a completed exercise agreement in the form attached hereto (the “Exercise Agreement”), to the Company during normal business hours on any business day at the Company’s principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), and upon payment to the Company in reduction of Company’s obligation to TQLA, LLC, under the Note, in cash, by certified or official bank check or by wire transfer for the account of the Company of the Exercise Price for the Warrant Shares specified in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to be issued to the holder hereof or such holder’s designee, as the record owner of such shares, as of the close of business on the date on which this Warrant shall have been surrendered, the completed Exercise Agreement shall have been delivered, and payment shall have been made for such shares as set forth above. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the holder hereof within a reasonable time, not exceeding five (5) business days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of such holder or such other name as shall be designated by such holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of such certificates, deliver to the holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised.
Notwithstanding anything in this Warrant to the contrary, in no event shall the holder of this Warrant be entitled to exercise this Warrant for a number of shares of Common Stock that would require the Company to hold a vote of the Company’s stockholders pursuant to Nasdaq Listing Rules (i.e. the number of shares Common Stock issuable under this Warrant will not exceed 19.9% of the Company’s outstanding shares of Common Stock).
2. Period of Exercise. This Warrant is not exercisable unless and until the Company fails to pay the entire amount of outstanding principal and any remaining accrued interest on the Note in full on or prior to the Maturity Date (as defined in the Note) (the day following the Maturity Date, the “Effective Date”). This Warrant is exercisable at any time or from time to time on or after the Effective Date and before 6:00 p.m., New York, New York time on the fifth (5th) anniversary of the Effective Date (the “Exercise Period”). If the Note is paid in full on or prior to the Maturity Date, this Warrant will be deemed immediately cancelled without any further action.
3. Certain Agreements of the Company. The Company hereby covenants and agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in accordance with the terms of this Warrant, be validly issued, fully paid, and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof.
(b) Reservation of Shares. During the Exercise Period, the Company shall at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant.
(c) Certain Actions Prohibited. The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant.
(d) Successors and Assigns. This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation, or acquisition of all or substantially all the Company’s assets.
4. Antidilution Provisions. During the Exercise Period, the Exercise Price and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Paragraph 4. In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up to the nearest cent.
(a) Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a greater number of shares, then, after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a smaller number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionately increased.
(b) Consolidation, Merger or Sale. In case of any consolidation of the Company with, or merger of the Company into any other corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then as a condition of such consolidation, merger or sale or conveyance, adequate provision will be made whereby the holder of this Warrant will have the right to acquire and receive upon exercise of this Warrant in lieu of the shares of Common Stock immediately theretofore acquirable upon the exercise of this Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon exercise of this Warrant had such consolidation, merger or sale or conveyance not taken place. In any such case, the Company will make appropriate provision to ensure that the provisions of this Paragraph 4 hereof will thereafter be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise of this Warrant.
(c) Distribution of Assets. In case the Company shall declare or make any distribution of its assets (including cash) to all holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise, then, after the date of record for determining shareholders entitled to such distribution, but prior to the date of distribution, the holder of this Warrant shall be entitled upon exercise of this Warrant for the purchase of any or all of the shares of Common Stock subject hereto, to receive the amount of such assets which would have been payable to the holder had such holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such distribution.
(d) Notice of Adjustment. Upon the occurrence of any event which requires any adjustment of the Exercise Price, then, and in each such case, the Company shall give notice thereof to the holder of this Warrant, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.
(e) Minimum Adjustment of Exercise Price. No adjustment of the Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price.
(f) No Fractional Shares. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the Market Price of a share of Common Stock on the date of such exercise.
(g) Other Notices. In case at any time:
(1) the Company shall declare any dividend upon the Common Stock payable in shares of stock of any class or make any other distribution (including dividends or distributions payable in cash out of retained earnings) to the holders of the Common Stock;
(2) the Company shall offer for subscription pro rata to the holders of the Common Stock any additional shares of stock of any class or other rights;
(3) there shall be any capital reorganization of the Company, or reclassification of the Common Stock, or consolidation or merger of the Company with or into, or sale of all or substantially all its assets to, another corporation or entity; or
(4) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant (a) notice of the date on which the books of the Company shall close or a record shall be taken for determining the holders of Common Stock entitled to receive any such dividend, distribution, or subscription rights or for determining the holders of Common Stock entitled to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, notice of the date (or, if not then known, a reasonable approximation thereof by the Company) when the same shall take place. Such notice shall also specify the date on which the holders of Common Stock shall be entitled to receive such dividend, distribution, or subscription rights or to exchange their Common Stock for stock or other securities or property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding-up, as the case may be. Such notice shall be given at least 30 days prior to the record date or the date on which the Company’s books are closed in respect thereto. Failure to give any such notice or any defect therein shall not affect the validity of the proceedings referred to in clauses (1), (2), (3) and (4) above.
(h) Certain Definitions.
(1) “Market Price,” as of any date, (i) means, with respect to shares of Common Stock, the volume-weighted average closing price in U.S. dollars for the shares of the Common Stock on the Nasdaq stock market for the twenty (20) consecutive trading days immediately preceding such date, or (ii) if market value cannot be calculated as of such date on any of the foregoing basis, the Market Price shall be the fair market value as reasonably determined in good faith by the Board of Directors of the Company. The manner of determining the Market Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder.
(2) “Common Stock,” for purposes of this Paragraph 4, includes the Common Stock, par value $.0001 per share, and any additional class of stock of the Company having no preference as to dividends or distributions on liquidation, provided that the shares purchasable pursuant to this Warrant shall include only shares of Common Stock, par value $.0001 per share, in respect of which this Warrant is exercisable, or shares resulting from any subdivision or combination of such Common Stock, or in the case of any reorganization, reclassification, consolidation, merger, or sale of the character referred to in Paragraph 4(b) hereof, the stock or other securities or property provided for in such Paragraph.
5. Issue Tax. The issuance of certificates for Warrant Shares upon the exercise of this Warrant shall be made without charge to the holder of this Warrant or such shares for any issuance tax or other costs in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the holder of this Warrant.
6. No Rights or Liabilities as a Shareholder. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company. No provision of this Warrant, in the absence of affirmative action by the holder hereof to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
7. Transfer, Exchange, and Replacement of Warrant.
(a) Restriction on Transfer. This Warrant and the rights granted to the holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed assignment in the form attached hereto, at the office or agency of the Company referred to in Paragraph 7(e) below, provided, however, that any transfer or assignment shall be subject to the conditions set forth in Paragraph 7(f) hereof. Until due presentment for registration of transfer on the books of the Company, the Company may treat the registered holder hereof as the owner and holder hereof for all purposes, and the Company shall not be affected by any notice to the contrary.
(b) Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at the office or agency of the Company referred to in Paragraph 7(e) below, for new Warrants of like tenor representing in the aggregate the right to purchase the number of shares of Common Stock which may be purchased hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by the holder hereof at the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of this Warrant in connection with any transfer, exchange, or replacement as provided in this Paragraph 7, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses (other than legal expenses, if any, incurred by the holder or transferees) and charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Paragraph 7.
(e) Register. The Company shall maintain, at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of this Warrant.
(f) Exercise or Transfer Without Registration. If, at the time of the surrender of this Warrant in connection with any exercise, transfer, or exchange of this Warrant, this Warrant (or, in the case of any exercise, the Warrant Shares issuable hereunder), shall not be registered under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such exercise, transfer, or exchange, (i) that the holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel, which opinion and counsel are acceptable to the Company, to the effect that such exercise, transfer, or exchange may be made without registration under said Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an “accredited investor” as defined in Rule 501(a) promulgated under the Securities Act; provided that no such opinion, letter or status as an “accredited investor” shall be required in connection with a transfer pursuant to Rule 144 under the Securities Act. The first holder of this Warrant, by taking and holding the same, represents to the Company that such holder is an “accredited investor” as defined in Rule 501(a) promulgated under the Securities Act and is acquiring this Warrant for investment purposes and not with a view to the distribution thereof.
8. Notices. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the holder of this Warrant shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to such holder at the address shown for such holder on the books of the Company, or at such other address as shall have been furnished to the Company by notice from such holder. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Company shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to the office of the Company at 1001 SE Water Avenue, Suite 390, Portland, Oregon 97214 Attention: Chief Executive Officer, or at such other address as shall have been furnished to the holder of this Warrant by notice, or at such other address as shall have been furnished to the holder of this Warrant by notice from the Company. Any such notice, request, or other communication may be sent by facsimile, but shall in such case be subsequently confirmed by a writing personally delivered or sent by certified or registered mail or by recognized overnight mail courier as provided above. All notices, requests, and other communications shall be deemed to have been given either at the time of the receipt thereof by the person entitled to receive such notice at the address of such person for purposes of this Paragraph 8, or, if mailed by registered or certified mail or with a recognized overnight mail courier upon deposit with the United States Post Office or such overnight mail courier, if postage is prepaid and the mailing is properly addressed, as the case may be.
9. Governing Law. THIS WARRANT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN COUNTY OF SAN DIEGO, CALIFORNIA, WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS WARRANT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS WARRANT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.
10. Miscellaneous.
(a) If the resale of the Warrant Shares by the holder is not registered pursuant to an effective registration statement under the Securities Act and this Warrant is exercised in whole or in part, then each certificate representing Warrant Shares issued upon the exercise of this Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form:
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES LAWS, AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) AN EXEMPTION FROM SUCH REGISTRATION EXISTS AND THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.”
(b) Amendments. This Warrant and any provision hereof may only be amended by an instrument in writing signed by the Company and the holder hereof.
(c) Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for purposes of reference only and shall not affect the meaning or construction of any of the provisions hereof.
(d) Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Warrant will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Warrant, that the holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Warrant and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer.
| EASTSIDE DISTILLING, INC. | ||
| By: | /s/ Lawrence Firestone | |
| Name: | Lawrence Firestone | |
| Title: | CEO | |
Dated as of November 29, 2019
FORM OF EXERCISE AGREEMENT
Dated: ________ __, 20__
| To: |
The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to purchase ________ shares of Common Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by such Warrant in reduction of Company’s obligation to TQLA, LLC, under the Note, in cash or by certified or official bank check in the amount of $_________. Please issue a certificate or certificates for such shares of Common Stock in the name of and pay any cash for any fractional share to:
| Name: | ||
| Signature: | ||
| Address: | ||
| Note: | The above signature should correspond exactly with the name on the face of the within Warrant, if applicable. |
and, if said number of shares of Common Stock shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned covering the balance of the shares purchasable thereunder less any fraction of a share paid in cash.
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers all the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered thereby set forth herein below, to:
| Name of Assignee | Address | No of Shares | ||
, and hereby irrevocably constitutes and appoints ___________________________________ as agent and attorney-in-fact to transfer said Warrant on the books of the within-named corporation, with full power of substitution in the premises.
Dated:________ __, 20__
In the presence of:
| Name: | ||
| Signature: | ||
| Title of Signing Officer or Agent (if any): | ||
| Address: | ||
| Note: | The above signature should correspond exactly with the name on the face of the within Warrant, if applicable. |
Exhibit 10.19
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT MARKED BY [***] HAS BEEN OMITTED BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF PUBLICLY DISCLOSED.
FIRST AMENDMENT TO AMENDED AND RESTATED LICENSE AGREEMENT
This FIRST Amendment TO AMENDED AND RESTATED LICENSE AGREEMENT (the “First Amendment”), is made and entered into effective this 6th day of December, 2019, by and between RICH MARKS, LLC, a Delaware limited liability company (“Licensor”), REDNECK RIVIERA WHISKEY CO., LLC, a Tennessee limited liability company (“Licensee”), JOHN D. RICH TISA TRUST U/A/D MARCH 27, 2018, DWIGHT P. WILES, TRUSTEE (“Trust”), and EASTSIDE DISTILLING, INC. (“Former Licensee”).
Licensor, Licensee, Former Licensee and Trust entered into that certain Amended and Restated License Agreement, dated May 31, 2018 (the “Original Agreement”), and now desire to amend the Original Agreement as is set forth in this First Amendment.
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth in this First Amendment, the adequacy and sufficiency of which are hereby acknowledged, the parties hereto, each intending to legally be bound, do hereby covenant and agree as follows:
I. Capitalized Terms. All terms used in this First Amendment with an initial capital letter that are not otherwise defined herein shall have the meanings ascribed to such terms in the Original Agreement.
II. Amendment to Section 20(c). Section 20(c) of the Original Agreement is hereby deleted in its entirety and the following Section 20(c) is hereby inserted in lieu thereof:
“c. IP Sale. In the event of a sale of the Authorized Property by Licensor during the Term (an ‘IP Sale’), Licensor shall (or cause Trust to, as applicable) remit to Licensee:
| (i) | Upon the consummation of such IP Sale, fifty percent (50%) of those out-of-pocket marketing expenses (and, for avoidance of doubt, not in respect of payments of Flat Fees) approved by Licensor in each case in writing, which were expended by Licensee solely in promoting the Distilled Spirits Products hereunder from the period commencing on the Effective Date and ending on the closing of the IP Sale (the ‘Marketing Reimbursement’), except that, any marketing expenses incurred by Licensee after September 15, 2019 shall not include sales salaries and benefits and only include out-of-pocket marketing expenses related to Redneck Riviera Whiskey; and |
| (ii) | A sales bonus (the ‘Sales Bonus’) based on the percentage set forth on Exhibit C attached hereto and hereby incorporated herein by this reference (the “Applicable Percentage”) of the Net Purchase Price (as defined below), which is actually received by Licensor or Trust (without duplication) as part such IP Sale, subject to the terms and conditions hereof. Notwithstanding the foregoing, the Applicable Percentage shall only apply to that amount actually received at closing or, but subject to the below, based on an installment sale by Licensor respecting the IP Sale and shall not include any amounts respecting artist endorsement or non-compete payments, costs and/or expenses incurred in consummating the IP sale, taxes and the like, including any such amounts paid or owing to any unaffiliated third party as part of, or in connection with, or paid to a third-party respecting indemnification claims made by the purchaser, as part of or in connection with any such IP Sale (including through payments from holdbacks and/or escrows) (the ‘Net Purchase Price’). Notwithstanding the foregoing, in the event the IP Sale was primarily sourced (e.g., if the purchaser in the IP Sale is attributable to the sources and/or contacts of Licensor and/or its affiliates) through the efforts of Licensor, the Net Purchase Price shall not include any amounts respecting earn-outs after the initial closing, pay-outs after the initial closing, deferred payments and/or other similar payments based on future performance or successes of any kind or nature (the “Deferred Payments”). Further, in the event that the foregoing purchase and sale also contemplates the sale of any other intellectual property owned and/or held by Licensor and/or Artist, directly or indirectly (e.g., ‘REDNECK RIVIERA’ in IC 25), then only that part of the Net Purchase Price directly and solely applicable and allocable to the Authorized Property actively under license hereunder (e.g., the Initial Products only if Licensee is manufacturing and causing the active distribution of same at the time of such IP Sale) shall be considered in computing the Sales Bonus hereunder in accordance with Exhibit C. |
Notwithstanding anything in this Section 20(c)(ii) to the contrary, no Deferred Payment amount will be excluded from the determination of Net Purchase Price if the exclusion of same would result in Licensee receiving a Sales Bonus of less than [***]; provided, however, in no event shall the total amount of Sale Bonus paid by Licensor or Trust as part of any IP Sale, if Licensee participated in any Deferred Payment as a result of this paragraph, equal more than [***]. For example only, if the consideration payable in the IP Sale equaled $[***], Licensee would be entitled to [***] ([***] times [***]%), irrespective of whether any portion of the Deferred Payment would have otherwise been excluded from Net Purchase Price under this Section 20(c)(ii) (e.g., because of such Deferred Payments).
iii. Six Month Termination Window. Notwithstanding anything contained herein to the contrary, in the event that an IP Sale is consummated during the Six Month Termination Window, Licensee shall not be entitled to any Sales Bonus or other amount whatsoever.”
III. Amendment. The Original Agreement is hereby amended by deleting the chart title phrase “Bonus Amount Tier of Net Purchase Price” on Exhibit C thereof in its entirety and hereby replacing such phrase with the chart title phrase “Amount of Net Purchase Price” in lieu thereof.
IV. Affirmation and Counterparts. Except as expressly amended herein, the Original Agreement, and each of the parties’ respective obligations, duties and responsibilities under the Original Agreement, shall remain in full force and effect. This First Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one and the same instrument. Signatures transmitted by facsimile shall be deemed an original.
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By signing below, the parties hereby acknowledge acceptance of the terms and conditions set forth in this First Amendment.
LICENSOR:
RICH MARKS, LLC |
LICENSEE:
REDNECK RIVIERA WHISKEY CO., LLC | |||
| By: | /s/ John D. Rich | By: | /s/ Lawrence Firestone | |
| (authorized signatory) | (authorized signatory) | |||
| Print name: | John D. Rich | Print name: | Lawrence Firestone | |
| Title: | CEO | Title: | CEO |
TRUST:
JOHN D. RICH TISA TRUST U/A/D MARCH 27, 2018, DWIGHT P. WILES, TRUSTEE |
FORMER LICENSEE:
EASTSIDE DISTILLING, INC. | |||
By: |
/s/ Dwight P. Wiles | By: | /s/ Lawrence Firestone | |
| (authorized signatory) | (authorized signatory) | |||
| Print name: | Dwight P. Wiles | Print name: | Lawrence Firestone | |
| Title: | Trustee | Title: | CEO |
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Exhibit C
Applicable Percentages
| Amount of Net Purchase Price** | Applicable Percentage | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] | |
| [***] | [***] |
**For clarity, the amounts in this table are not cumulative. For example only, if the Net Purchase Price equaled [***], the Sales Bonus would be [***].
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Exhibit 10.29
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE LAW, AND NO INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR AN EXEMPTION THEREFROM.
SECURED LINE OF CREDIT PROMISSORY NOTE
| $2,000,000.00 | November 29, 2019 |
Portland, Oregon
FOR VALUE RECEIVED, EASTSIDE DISTILLING, INC., a Nevada corporation (the “Company”), hereby promises to pay to the order of TQLA, LLC, a California limited liability company (“Holder”), the aggregate principal amount up to Two Million Dollars ($2,000,000.00), together with interest thereon as set forth in this Secured Promissory Note (this “Note”).
1. Payments and Advances.
(a) Interest Rate. The unpaid principal balance of this Note will bear interest at the following rates: (i) 7% per annum until January 15, 2020; and (ii) 11% per annum after January 15, 2020. Interest shall commence with the date hereof and shall continue on the outstanding principal amount of this Note until this Note is paid or otherwise satisfied in full. Interest will be computed on the basis of a 365-day year and the actual days elapsed and will be compounded quarterly. If any Event of Default, as defined in Section 2, occurs, then during the continuance of the Event of Default, all principal under this Note shall bear interest on each day outstanding at the lesser of (i) eighteen percent (18%) per annum compounded quarterly or (ii) the highest lawful rate in effect on such day (i) and (ii) apply the “Default Rate.”
(b) Repayment of Principal and Interest.
(i) All payments of interest and principal on the Note shall be in lawful money of the United States of America by wire transfer of immediately available funds to the Holder’s account at a bank specified by Holder in writing to the Payor from time to time. All payments on this Note under this Section 1(b) will be applied to accrued and unpaid interest and thereafter to outstanding principal. Whenever any payment hereunder shall be stated to be due on a day other than a business day, such payment will be made on the next succeeding business day, and such extension of time will in such case be included in the computation of payment of interest.
(ii) All unpaid principal, together with any then unpaid and accrued interest, will be due and payable in cash on April 15, 2020 (the “Maturity Date”). Accrued interest will be paid in arrears in cash on the last business day of each month commencing on the first such date to occur after the date of this Note.
(c) Prepayment. The Company may prepay this Note at any time in whole or in part, without the consent of Holder and without premium or penalty.
(d) Advances. This Note evidences a revolving line of credit. The single advances made pursuant to the Note shall be deemed principal under this Note. It is unnecessary for the Company to execute any further notes to evidence the obligation of the Company to pay the amount of the single advance together with interest thereon as provided in this Note. A representative designated in writing by Holder shall have the sole discretion to approve these requests on behalf of Holder. Within two (2) business days of the Company’s delivery of a borrowing request in substantially the form set forth in Exhibit A or otherwise in a form reasonably acceptable to Holder, Holder shall deposit such advance in immediately available funds in an account designated by the Company in writing; provided that Holder shall have no obligation to advance funds if: (a) the Company is in default under the terms of this Note; (b) the Company has applied funds provided pursuant to this Note for purposes other than those set forth in a borrowing request approved by Holder in accordance with Section 5; (c) the outstanding principal totals Two Million and No Dollars ($2,000,000) or more; or (d) Holder in good faith believes itself insecure.
2. Default.
(a) Event of Default. The occurrence of any of the following will constitute an “Event of Default” under this Note:
(i) The Company fails to pay timely amounts when due under this Note, and such failure continues for ten (10) days following written notice of non-payment; provided that notice of non-payment shall not be required as a condition to an Event of Default if the Company fails to pay Holder the entire amount of outstanding principal and any remaining accrued interest in full on or prior to the Maturity Date;
(ii) The Company files any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law or any other law for the relief of, or relating to, debtors, now or hereafter in effect, or makes any assignment for the benefit of creditors;
(iii) An involuntary petition is filed against the Company (unless such petition is dismissed or discharged within sixty (60) days under any bankruptcy statute now or hereafter in effect), or a custodian, receiver, trustee, assignee for the benefit of creditors (or other similar official) is appointed to take possession, custody or control of any property of the Company;
(iv) Company breaches any representation or warranty in any material respect or otherwise fails to perform or observe any covenant or agreement in any material respect set forth in this Note and such failure continues for twenty (20) days following written notice from Holder;
(v) Craft Canning + Bottling, LLC (“Craft Canning”) or Big Bottom Distilling, LLC (“Big Bottom”) breaches any representation or warranty in any material respect or otherwise fails to perform or observe any covenant or agreement in any material respect set forth in that Secured Guaranty dated as of the date hereof between Craft Canning, Big Bottom and Holder, and such failure continues for twenty (20) days following written notice from Holder;
(vi) The sale, transfer, pledge, hypothecation or liquidation of all or subsequently all of the assets or equity securities of Company; or
(vii) Company is liquidated or winds up its affairs.
(b) Rights of Holder Upon Default. If there shall be any Event of Default under Section 2(a)(i), after the expiration of any required notice or cure period, this Note shall accelerate and all unpaid principal and interest, if any, shall become immediately due and payable upon notice of acceleration from Holder to the Company. In addition, if Company fails to pay the entire amount of outstanding principal and any remaining accrued interest in full on or prior to the Maturity Date, that Common Stock Purchase Warrant dated as of the date hereof issued by the Company to Holder shall become effective and immediately exercisable with no further action on the part of Holder. If there shall be any Event of Default under Sections 2(a)(ii) or 2(a)(iii), this Note shall immediately accelerate and all unpaid principal and interest, if any, shall become immediately due and payable without any requirement of notice from Holder to the Company. Upon an Event of Default, Holder may exercise any right, power or remedy permitted to it by law or this Note, including foreclosure of the collateral secured by this Note.
3. Security Interests; Liens. In order to secure payment of the obligations evidenced by this Note, the Company hereby grants to Holder (a) a first priority security interest in all of the Company’s right, title and interest in and to its existing or hereafter acquired or arising finished spirits inventory, including Azunia, at the Park Street facility or other locations (a current inventory list is set forth Exhibit B), (b) a security interest in all of the Company’s right, title and interest in and to all barreled spirits inventory, now existing or hereafter acquired or arising, located at the Company’s Milwaukee facility or other locations (a current inventory list is set forth as Exhibit C); provided that such security interest will be second priority to the indebtedness described in Section 4 and (c) a security interest in all of the Company’s right, title and interest in and to its membership interests in Craft Canning + Bottling, LLC, which membership interests shall be provided to Holder in certificated form accompanied by a separate indorsement authorizing Holder to name the transferee. Holder shall have all of the rights and remedies of a secured party under the Oregon Uniform Commercial Code and all other applicable law, all of which rights and remedies shall be cumulative and nonexclusive to the extent permitted by law. The Company irrevocably authorizes Holder at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto which Holder deems necessary or appropriate to perfect the security interests hereby granted.
4. Subordination of Secured Interest. The security interest granted under Section 3(b) is hereby expressly subordinated in priority to any liens created under the Credit and Security Agreement with the KFK Children’s Trust dated May 10, 2018 (“KFK Agreement”). The outstanding principal balance under the KFK Agreement is $3,000,000 as of December 1, 2019, which balance accrues interest at the rate of 7% per annum (subject to increase upon an Event of Default (as defined therein)) and is required to be paid no later than June 10, 2023. Holder agrees that the obligations under this Note are subordinate and junior in right and priority of payment to the Company’s obligations under the KFK Agreement. The Company agrees that it shall not amend the KFK Agreement to increase the Company’s obligations under the agreement without the prior written consent of Holder.
5. Use of Proceeds. The Company shall use the proceeds of this Note for the purchase of Azuñia inventory and other general corporate purposes as set forth in a borrowing request, which shall be subject to Holder’s approval (not to be unreasonably withheld, conditioned or delayed).
6. Restriction on Further Indebtedness. The Company agrees that unless Holder shall otherwise consent in writing, it shall cause Craft Canning not to create, incur, assume or in any manner become liable in respect of, or suffer to exist, any indebtedness other than (a) indebtedness incurred or guaranteed by Craft Canning in effect as of the date hereof, (b) trade debt incurred in the ordinary course of business, and (iii) indebtedness that is expressly subordinate and junior in right and priority of payment to the Note that is reasonably satisfactory in form and substance to Holder.
7. Other Provisions.
(a) Cancellation. After all principal and interest owed on this Note have been paid in full, this Note will automatically be deemed canceled, will be surrendered to the Company for cancellation, and will not be re-issued.
(b) Waivers and Amendments. This Note may not be amended or modified, nor may any of its terms be waived, except by a written instrument signed by the Company and Holder.
(c) Severability. If any provision of this Note is determined to be invalid, illegal or unenforceable, in whole or in part, the validity, legality and enforceability of any of the remaining provisions or portions of this Note will not in any way be affected or impaired thereby and this Note will nevertheless be binding between the Company and Holder.
(d) Governing Law. This Note will be governed by and interpreted in accordance with the internal laws of the State of California. In any action brought or arising out of this Note, the Company and Holder hereby consent to the jurisdiction of any federal or state court having proper venue within the San Diego County, State of California and also consent to the service of process by any means authorized by California law.
(e) Attorney Fees.
(i) Company and all other parties liable for the payment under this Note agrees to pay Holder’s collection expenses, attorney fees and paralegal fees which may be incurred in the collection of any amount due hereunder or enforcement or interpretation of any or all of Company’s duties hereunder or any guaranty related to Company’s duties hereunder, or any part hereof or thereof, whether or not suit is instituted, and if suit is instituted, to pay all such collection expenses, court costs, attorney fees and paralegal fees as may be determined by the trial court or any appellate courts. In the event Holder is made a party to any action or litigation resulting from the indebtedness evidenced by this Note, Company shall indemnify and vigorously defend Holder with respect thereto, with counsel acceptable to Holder, and shall further reimburse Holder for any costs, attorney fees and paralegal fees incurred with respect to such proceeding. Company further agrees to pay any attorney fees, paralegal fees or costs incurred by Holder with respect to Company’s obligations hereunder in connection with any action or proceeding to enforce any creditor’s rights associated with any collateral securing this Note, or with respect to any bankruptcy, receivership or insolvency proceedings of Company or any guarantor of Company’s obligations hereunder, whether judicial or otherwise, including but not limited to fees incurred in litigating issues peculiar to federal bankruptcy law;
(ii) Company agrees to reimburse Holder for all costs, attorney fees, and paralegal fees incurred by Holder in the research, review, negotiation, and drafting of this Promissory Note, the Secured Guaranty, the Common Stock Purchase Warrant, and any other documents or matters related to this $2,000,000 loan transaction. Company shall reimburse Holder by payment in cash or certified check within seven (7) days of written request, including via email.
(f) Jury Trial Waiver. Holder and the Company each hereby waive any right to trial by jury of any claim (including cross-claims and counterclaims) it may have against each other under, in connection with, or related to this Note.
(g) Binding Effect. This Note will be binding upon, and will inure to the benefit of, the Company and Holder and their respective successors and assigns.
(h) Notices. Any notice required or desired to be served, given or delivered hereunder must be in writing and in the form and manner specified below, and must be addressed to the party to be notified as follows:
| If to the Company: | EASTSIDE DISTILLING, INC. 1001 SE Water Avenue Suite 390 Portland, OR 97214 Attention: Chief Executive Officer Email: Notices@eastsidedistilling.com | |
If to Holder:
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TQLA, LLC 2008 Seaview Avenue Del Mar, CA 92104 Email: pkilkenny@yahoo.com | |
| With a copy to: | Russell R. Kilkenny Scarborough, McNeese, Oelke & Kilkenny PC 5 Centerpointe Drive, Suite 240 Lake Oswego, OR 97035 Email: rrk@smoklaw.com |
or to such other address as each party designates to the other by notice in the manner herein prescribed. Any notice given under this Note shall be in writing and delivered in person, via email, or other form of electronic delivery, sent by documented overnight delivery service or mailed by certified or registered mail, postage prepaid, to the appropriate party or parties at the addresses referenced above or the electronic email address, or to such other address as the parties may hereinafter designate. Unless otherwise specified in this Note, all such notices and other written communications shall be effective (and considered received for purposes of this Note) (a) if delivered by hand, upon delivery, (b) if by email or other form of electronic delivery, on the next business day, (c) if sent by documented overnight delivery service, on the date delivered, or (d) if mailed via first-class regular mail, two (2) days after depositing in the U.S. Mail.
(i) Transfer of Note. This Note has not been registered under the Act or applicable state law, and no interest or participation herein may be sold, distributed, assigned, offered, pledged or otherwise transferred unless there is an effective registration statement under the Act and applicable state securities laws covering any such transaction or an exemption therefrom and upon approval by the Company. In the event this Note is transferred in accordance with this Section 7(h), the new holder shall be deemed to be the “Holder” with respect to the provisions of this Note.
(j) Headings. Section headings used in this Note have been set forth herein for convenience of reference only and do not affect the interpretation of this Note.
(k) Counterparts. This Note may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Note by signing any such counterpart.
[Remainder of Page Left Intentionally Blank; Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have caused this Subordinated Secured Promissory Note to be executed as of the day and year first written above.
| HOLDER: TQLA, LLC | COMPANY: EASTSIDE DISTILLING, INC. | |||
| By: | /s/ Patrick J. Kilkenny | By: | /s/ Lawrence Firestone | |
| Name: | Patrick J. Kilkenny | Name: | Lawrence Firestone | |
| Title: | Member | Title: | Chief Executive Officer | |
FACTORING AND SECURITY AGREEMENT
THIS FACTORING AND SECURITY AGREEMENT is made as of 2/4/2019 by and between Eastside Distilling, Inc., a Nevada Corporation (“Seller”) and ENGS COMMERCIAL CAPITAL, LLC (“Purchaser”).
1. Definitions and Index to Definitions. The following terms used herein shall have the following meaning. All capitalized terms not herein defined shall have the meaning set forth in the Uniform Commercial Code:
1.1 “Active Account Debtor” - An Account Debtor of Seller which owes a Purchased Account to Purchaser.
1.2 “Affiliate” - With respect to any Person, each other Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.
1.3 “Avoidance Claim” - Any claim that any payment received by Purchaser is avoidable under the Bankruptcy Code or any other debtor relief statute.
1.4 “Balance Subject to Discount” - The difference between the unpaid Face Amount of Purchased Accounts and the Reserve Account.
1.5 “Business Day” - A day on which a bank is open for business in the Chosen State.
1.6 “Chosen State: - Alabama.
1.7 “Clearance Days” - Three Business Days for checks drawn on banks located within the Chosen State and for electronic funds transfers, and five Business Days for all other payments.
1.8 “Closed” - A Purchased Account is closed upon receipt of full payment by Purchaser from a Payor or from the Seller (including its being charged to the Reserve account).
1.9 “Collateral”- All Seller’s now owned and hereafter acquired Accounts, Chattel Paper, Inventory, Equipment, Instruments, Investment Property, Documents, Letter of Credit Rights, Commercial Tort Claims and General Intangibles.
1.10 “Collection Services” — See Section 10.1.2. hereof.
1.11 “Complete Termination” — Complete Termination occurs upon satisfaction of the following conditions:
1.11.1 Payment in full of all Obligations of Seller to Purchaser;
1.11.2 If Purchaser has issued or caused to be issued guarantees, promises, or letters of credit on behalf of Seller, acknowledgement from any beneficiaries thereof that Purchaser or any other issuer has no outstanding direct or contingent liability therein.
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1.11.3 Seller has executed and delivered to Purchaser a general release in the form of Exhibit 1.11.3. attached hereto.
1.12 “Default Discount Rate” — The Discount Rate plus the Default Spread.
1.13 “Default Spread” — 5.0%.
1.14 “Discount” - The product of the Discount Rate multiplied by the average daily Balance Subject to Discount.
1.15 “Discount Rate” -The Prime Rate plus the Spread.
1.16 “Early Termination Date” - The earlier of:
1.16.1 The Termination Date set forth in a Notice of Termination; or
1.16.2 At the option of Purchaser, the date on which Seller commits an Event of Default.
1.17 “Early Termination Fee” - 2.0% of the Maximum Amount.
1.18 “Eligible Account” - An Account that is acceptable for purchase as determined by Purchaser in the exercise of its reasonable sole credit or business judgment.
1.19 “Events of Default” - See Section 16.1.
1.20 “Exposed Payments” - With respect to an Account which Seller has repurchased or could be required to repurchase hereunder, payments received by Purchaser from or for the account of a Payor that has become subject to a bankruptcy proceeding, to the extent such payments cleared the Payor’s deposit account within ninety days of the commencement of said bankruptcy case.
1.21 “Face Amount” - The face amount due on an Account at the time of purchase.
1.22 “Initial Term” - A one year period, computed from the date on which Purchaser first purchases an Account hereunder.
1.23 “Invoice” - The document that evidences or is intended to evidence an Account. Where the context so requires, reference to an Invoice shall be deemed to refer to the Account to which it relates.
1.24 “Late Payment Date” - Ninety days from the date on which a Purchased Account was Purchased.
1.25 “Maximum Amount” - $2,000,000
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1.26 “Minimum Monthly Net Funds Employed Balance “- $500,000
1.27 “Misdirected Payment Fee”-
1.27.1. 15% of the amount of any payment (but in no event less than $1,000) on account of a Purchased Account (and, after the occurrence of an Event of Default, payments on accounts of any Account) which has been received by Seller or a third party and not paid by Seller to Purchaser, as the case may be, on the next Business Day following the date of receipt by Seller or the date of Seller’s knowledge of receipt by such third party; or
1.27.2. 30% of the amount of any such payment which has been received by Seller or any third party as a result of any action taken by Seller to cause such payment to be made to Seller or any third party.
1.28 “Notice of Termination” - A notice sent by the Seller to the Purchaser in the form of Exhibit 1.28. evidencing Seller election to terminate this Agreement.
1.29 “Obligations” - All present and future obligations owing by Seller to Purchaser whether arising hereunder or otherwise, and whether arising before, during or after the commencement of any bankruptcy case in which Seller is a Debtor.
1.30 “Parties” - Seller and Purchaser.
1.31 “Payor” - An Account Debtor or other obligor on an Account, or entity making payment thereon for the account of such party.
1.32 “Permitted Termination Period” - The period between sixty days and ninety days immediately prior to the end of a Term.
1.33 “Person” - Any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.
1.34 “Prime Rate” - The lesser of (i) 5%; and (ii) the “prime rate” as published in the Wall Street Journal.
1.35 “Purchase Date” - The date on which Seller has been advised in writing that Purchaser has agreed to purchase an Account.
1.36 “Purchased Accounts” - Accounts purchased hereunder which have not been Closed.
1.37 “Renewal Term” - 1 year.
1.38 “Repurchased” - An Account has been repurchased when Seller has paid to Purchaser the then unpaid Face Amount.
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1.39 “Required Reserve Amount” - The Reserve Percentage multiplied by the unpaid balance of Purchased Accounts.
1.40 “Reserve Account” - A bookkeeping account on the books of the Purchaser representing the portion of the Purchase Price which has not been paid by Purchaser to Seller, maintained by Purchaser to ensure Seller’s performance with the provisions hereof.
1.41 “Reserve Percentage” - 15%.
1.42 “Reserve Shortfall” - The amount by which the Reserve Account is less than the Required Reserve Amount.
1.43 “Schedule of Accounts” - A form supplied by Purchaser from time to time wherein Seller lists such of its Accounts as it requests that Purchaser purchase under the terms of this Agreement.
1.44 “Servicing Fee” - The product of the Service Fee Rate multiplied by the Balance Subject to Discount.
1.45 “Service Fee Rate” - 0.60% charged monthly in arrears on the average monthly NFE.
1.46 “Spread” - 2.0%.
1.47 “Term” - The Initial Term or a Renewal Term, as the case may be.
1.48 “Termination Date” - The earlier of (i) the Early Termination Date, or (ii) the end of the last Term which was not extended under Section 19 hereof.
1.49 “UCC” - The Uniform Commercial Code as adopted in the Chosen State.
2. Sale; Purchase Price; Billing
2.1 Assignment and Sale.
2.1.1 Seller shall offer to sell to Purchaser as absolute owner, with full recourse, such of Seller’s Accounts as are listed from time to time on Schedules of Accounts.
2.1.2 Purchaser will advise Seller, in writing, as to which of Seller’s Accounts have become Purchased Accounts.
2.1.3 Each Schedule of Accounts shall be accompanied by such documentation supporting and evidencing the Account, as Purchaser shall from time to time request.
2.1.4 Purchaser may, but need not purchase from Seller such Accounts as Purchaser determines to be Eligible Accounts.
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2.1.5 Purchaser does not intend to purchase any Account which will cause the unpaid balance of Purchased Accounts to exceed the Maximum Amount.
2.1.6 Purchaser shall pay the Purchase Price, of any Purchased Account, less any amounts due to Purchaser from Seller, within two Business Days of the Purchase Date, whereupon the Accounts shall be deemed purchased hereunder.
2.2 Billing.
2.2.1 Purchaser may send a monthly statement to all Payors itemizing their account activity during the preceding billing period. All Payors will be instructed to make payments to Purchaser.
3. Reserve Account.
3.1 Seller shall pay to Purchaser on demand the amount of any Reserve Shortfall.
3.2 Except during any period in which an Event of Default remains uncured, Purchaser shall, upon Seller’s request, pay to Seller any amount by which the Reserve Account exceeds the Required Reserve Amount (“Excess Reserves”).
3.3 Upon termination of this Agreement or upon the occurrence of any Event of Default, these payments by Purchaser to Seller shall be made no more frequently than once a month.
3.4 Purchaser may charge the Reserve Account with any Obligation.
3.5 Purchaser may pay any amounts due Seller hereunder by a credit to the Reserve Account.
3.6 Except as provided in Section 3.2. Purchaser may retain the Reserve Account until Complete Termination.
4. Exposed Payments.
4.1 Upon termination of this Agreement Seller shall pay to Purchaser (or Purchaser may retain with notice to Seller), to hold in a non-segregated non-interest bearing account the amount of all Exposed Payments (the “Preference Reserve”).
4.2 Purchaser may charge the Preference Reserve with the amount of any Exposed Payments that Purchaser pays to the bankruptcy estate of the Payor that made the Exposed Payment, on account of a claim asserted under Section 547 of the Bankruptcy Code.
4.3 Purchaser shall refund to Seller from time to time that balance of the Preference Reserve for which a claim under Section 547 of the Bankruptcy Code can no longer be asserted due to the passage of the statute of limitations, settlement with the bankruptcy estate of the Payor or otherwise.
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5. Authorization for Purchases.
5.1 Subject to the terms and conditions of this Agreement, Purchaser is authorized to purchase Accounts upon telephonic, facsimile or other instructions received from anyone purporting to be an officer, employee or representative of Seller.
6. Fees and Expenses.
6.1 Seller shall pay to Purchaser:
6.1.1 Discount. The Discount, on the first day of the month following the month in which it accrues.
6.1.2 Servicing Fee. The Servicing Fee, on the first day of the month following the month in which such it accrues.
6.1.3 Origination Fee. The Origination Fee, on the first of the Initial Term and each Renewal Term.
6.1.4 Minimum Monthly Fee. Any amount by which the fees earned in any month (prorated for partial months) are less than the Minimum Monthly Balance subject to Discount pursuant to Sections 6.1.1 and 6.1.2, to be paid on the first day of the following month.
6.1.5 Misdirected Payment Fee. Any Misdirected Payment Fee immediately upon its accrual. It is recognized that the costs imposed upon Purchaser by the Seller’s action or inaction resulting in the imposition of this fee are difficult to ascertain, and this fee represents the good faith effort to compensate Purchaser without imposing upon the parties the expensive burden of litigating that cost, and is the agreed liquidated damages with result therefrom.
6.1.6 Early Termination Fee. The Early Termination Fee, in the event that the Early Termination Date is earlier than the Permitted Termination Period, whether or not Seller actually terminates this Agreement on the Early Termination Date shall be payable on the Early Termination Date.
6.1.7 Out-of-pocket Expenses. The out-of-pocket expenses directly incurred by Purchaser in the administration of this Agreement such as wire transfer fees, postage and audit fees. Seller shall not be required to pay for more than four audits per twelve-month period.
6.1.8 Payment by Credit Card. In the event a Payor makes a payment to Purchaser using a credit card, Purchaser shall credit to the obligation of the Account Debtor the amount credited to Purchaser by Purchaser’s credit card processor, net of any processing fees.
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7. Repurchase Of Accounts.
7.1 Seller shall repurchase, by payment of the then unpaid Face Amount thereof, together with any unpaid fees relating to the Purchased Account on demand, or, at Purchaser’s option, by Purchaser’s charge to the Reserve Account:
7.1.1 Any Purchased Account, the payment of which has been disputed by the Payor or the Account Debtor obligated thereon, Purchaser being under no obligation to determine the bona fides of such dispute;
7.1.2 Any Purchased Account regarding which Seller has breached any warranty as set forth in the Section 14.4.
7.1.3 Any Purchased Account owing from an Account Debtor or Payor which (i) in Purchaser’s reasonable credit judgment has become insolvent or (ii) which has indicated an inability or unwillingness to pay the Purchased Account when due;
7.1.4 All Purchased Accounts upon the occurrence of an Event of Default, or upon the Termination Date of this Agreement; and
(a) Any Purchased Account that remains unpaid beyond the Late Payment Date.
8. Security Interest.
8.1 As collateral securing the Obligations, with respect to the Collateral:
8.1.1 Grants to Purchaser a continuing first priority security interest in the Collateral.
9. Clearance Days.
9.1 For all purposes under this Agreement, Clearance Days will be added to the date on which Purchaser receives any payment.
10. Authorization to Purchaser.
10.1 Seller irrevocably authorizes Purchaser at Seller’s expense, to exercise at any time any of the following powers until all of the Obligations have been paid in full:
10.1.1 Receive, take, endorse, assign, deliver, accept and deposit, in the name of Purchaser or Seller, proceeds of any Collateral;
10.1.2 Take or bring, in the name of Purchaser or Seller, all steps, actions, suits or proceedings deemed by Purchaser necessary or desirable to effect collection of or other realization upon Purchaser’s Accounts in accordance with applicable law;
10.1.3 With respect to any of the following established or issued for the benefit of Seller, either individually or as a member of a class or group, file any claim under (i) any bond or (ii) under any trust fund.
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10.1.4 Pay any sums necessary to discharge any lien or encumbrance which is senior to Purchaser’s security interest in any Collateral, which sums shall be included as Obligations hereunder, and in connection with which sums the Default Discount Rate shall accrue and shall be immediately due and payable on the Balance Subject to Discount;
10.1.5 Reserved
10.1.6 Notify any Payor obligated with respect to any Account, that the underlying Account has been assigned to Purchaser by Seller and that payment thereof is to be made to the order of and directly and solely to Purchaser;
10.1.7 Communicate directly with Seller’s Payors to verify the amount and validity of any Account created by Seller.
10.1.8 During the continuation of an Event of Default:
(a) Reserved;
(b) Settlement of Claims:
(i) In its own name or on behalf of Seller, with Seller to be bound thereby, extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions (collectively, a “Settlement”), any and all Accounts and discharge or release any Account Debtor or other obligor (including filing of any public record releasing any lien granted to Seller by such Account Debtor), without affecting any of the Obligations;
All Settlements shall be presumed to be commercially reasonable, and the burden of proof shall be on Seller with respect thereto.
10.1.9 File any initial financing statements and amendments thereto that:
(a) Indicate the collateral as all Accounts, including but not limited to Accounts consisting of Proceeds of Inventory, or words of similar effect;
(b) Contain any other information required by part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether the Seller is an organization, the type of organization, and any organization identification number issued to the Seller and, (ii) in the case of a financing statement filed as a fixture filing or indicating collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the collateral relates
10.2 Seller authorizes Purchaser to accept, endorse and deposit on behalf of Seller any checks tendered by an Account Debtor “in full payment” of its obligation to Seller. Seller shall not assert against Purchaser any claim arising therefrom, irrespective of whether such action by Purchaser effects an accord and satisfaction of Seller’s claims, under §3-311 of the Uniform Commercial Code, or otherwise.
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10.3 Purchaser shall, upon Seller’s written request with respect to specific Account Debtors, and immediately after the occurrence of an Event of Default Purchaser may without Seller’s request, perform Accounts collection services on Seller’s behalf, which services may include, but are not limited to, (1) communicating with Account Debtors, (2) reviewing public records and credit reports, and (3) the bringing (in Purchaser’s or Seller’s name at Seller’s sole expense), actions deemed appropriate by Purchaser to effect collection of Seller’s Accounts (“Collection Services”). Upon such request, or immediately after the occurrence of an Event of Default, Seller shall be deemed to have authorized Purchaser to perform Collection Services.
11. ACH Authorization.
11.1 In order to satisfy any of the Obligations, Seller authorizes Purchaser to initiate electronic debit or credit entries through the ACH system to any deposit account maintained by Seller.
12. Covenants By Seller.
12.1 After written notice by Purchaser to Seller, and automatically, without notice, after an Event of Default, Seller shall not (a) grant any extension of time for payment of any of its Accounts, (b) compromise or settle any of its Accounts for less than the full amount thereof, (c) release in whole or in part any Payor, or (d) grant any credits, discounts, allowances, deductions, return authorizations or the like with respect to any of the Accounts.
12.2 Books and Records; Inspection; Audits.
12.2.1 Seller shall at all times maintain complete, accurate and current books and records, including a general ledger and subsidiary ledgers, cash receipts and disbursement journals, sales journals, and such other records as a business such as Seller shall reasonably maintain, in accordance with the standards set forth in Section 727(a)(3) of the United States Bankruptcy Code.
12.2.2 From time to time as requested by Purchaser, at the sole expense of Seller, Purchaser shall have access, during reasonable business hours if prior to an Event of Default and at any time if on or after of an Event of Default, to all premises where Collateral is located for the purposes of inspecting (and removing, if after the occurrence of an Event of Default) any of the Collateral, including Seller’s books and records, and Seller shall permit Purchaser to make copies of such books and records or extracts therefrom as Purchaser may request.
12.2.3 Seller irrevocably authorizes all accountants and third parties employed by Seller to disclose and deliver to Purchaser at Seller’s expense all financial information, books and records, work papers, management reports and other information in their possession relating to Seller.
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12.3 Before sending any Invoice to an Account Debtor, Seller shall mark same with such notice of assignment as Purchaser may require.
12.4 Seller shall pay when due all payroll and other taxes, and shall provide proof thereof to Purchaser in such form as Purchaser shall reasonably require.
12.5 Seller may create, incur, assume or permit to exist any lien upon or with respect to any assets in which Purchaser now or hereafter holds a security interest on either of the following conditions:
12.5.1 With the prior written consent of Purchaser, which consent will not be unreasonably withheld so long as the subordinate secured party and Purchaser enter into a consent agreement acceptable to Purchaser, or
12.5.2 [Reserved
12.6 Notwithstanding Seller’s obligation to pay the Misdirected Payment Fee, Seller shall pay to Purchaser on the next banking day following the date of receipt by Seller the amount of:
12.6.1 Any payment on account of a Purchased Account.
12.6.2 After the occurrence of an Event of Default, any payment on account of any Account.
12.7 The funds received by Seller as described in Section 12.6. shall be held by Seller in trust for Purchaser and shall not be commingled with any funds of Seller.
12.8 Avoidance Claims.
12.8.1 Seller shall indemnify Purchaser from any loss arising out of the assertion of any Avoidance Claim and shall pay to Purchaser on demand the amount thereof
12.8.2 Seller shall notify Purchaser within two Business Days of it becoming aware of the assertion of an Avoidance Claim.
12.8.3 This provision shall survive termination of this Agreement.
12.9 In the event that Purchaser sends a notice of assignment to a Payor obligated with respect to any Account pursuant to Section 10.1.6. :
12.9.1 Seller shall not direct such Payor to pay such Account to Seller or any other entity or individual, or undermine or interfere with such notice of assignment in any manner.
12.9.2 Seller agrees that a violation of this Section 12.9. will put the value of the Collateral at risk and will cause irreparable harm to Purchaser and, therefore, Purchaser shall be entitled to temporary and permanent injunctive relief to prevent such violation without the necessity of proving that actual damages are not an adequate remedy and Purchaser will be entitled to any proceeds of a Accounts received by Seller as a result of such violation.
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13. Account Disputes.
13.1 Seller shall notify Purchaser promptly of and, if requested by Purchaser, will settle all disputes concerning any Purchased Account, at Seller’s sole cost and expense. Purchaser may, but is not required to, attempt to settle, compromise, or litigate (collectively, “Resolve”) the dispute upon such terms, as Purchaser in its sole discretion deem advisable, for Seller’s account and risk and at Seller’s sole expense. Upon the occurrence of an Event of Default Purchaser may Resolve such issues with respect to any Account of Seller.
14. Representation and Warranties. Seller represents and warrants that: 14.1. It is fully authorized to enter into this Agreement and to perform hereunder; 14.2. This Agreement constitutes its legal, valid and binding obligation; and 14.3. Seller is solvent and in good standing in the jurisdiction of its organization. 14.4. The Purchased Accounts are and will remain:
14.1.1 Bona fide existing obligations created by the sale and delivery of goods or the rendition of services in the ordinary course of Seller’s business;
14.1.2 To the best of Seller’s knowledge, unconditionally owed and will be paid to Purchaser without defenses, disputes, offsets, counterclaims, or rights of return or cancellation.
14.1.3 Not sales to any Affiliate of Seller.
14.1.4 “Arm’s length” transactions.
14.2 Seller has not received notice or otherwise learned of actual or imminent bankruptcy, insolvency, or material impairment of the financial condition of any applicable Account Debtor regarding Purchased Accounts.
15. Disclaimer of Liability.
15.1 In no event will Purchaser be liable to Seller for any lost profits, lost savings or other consequential, incidental or special damages resulting from or arising out of or in connection with this agreement, the transactions or relationships contemplated hereby or purchaser’s performance or failure to perform hereunder, even if purchaser has been advised of the possibility of such damages.
16. Default.
16.1 Events of Default.
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16.1.1 The following events will constitute an Event of Default hereunder:
(a) Seller defaults in the payment of any Obligations or in the performance of any provision hereof or of any other agreement now or hereafter entered into with Purchaser, or any warranty or representation contained herein proves to be false in any material way. Seller shall have a period of five (5) business days after notice from Purchaser in which to cure such Event of Default only if such Event of Default is capable of being cured. If Seller fails to completely cure such Event of Default within the five day period, Seller shall have no right to cure thereafter absent Purchaser’s written consent;
(b) Seller or any guarantor of the Obligations voluntarily initiates any debtor-relief proceedings or involuntarily becomes subject to any debtor-relief proceedings not discharged in 30 days; or
(c) Any such guarantor fails to perform or observe any of such Guarantor’s obligations to Purchaser or shall notify Purchaser of its intention to rescind, modify, terminate or revoke any guaranty of the Obligations, or any such guaranty shall cease to be in full force and effect for any reason whatever.
16.2 Waiver of Notice. PURCHASER’S FAILURE TO CHARGE OR ACCRUE INTEREST OR FEES AT ANY “DEFAULT” OR “PAST DUE” RATE SHALL NOT BE DEEMED A WAIVER BY PURCHASER OF ITS CLAIM THERETO.
16.3 Effect of Default.
16.3.1 Upon the occurrence of any Event of Default:
(a) Purchaser may immediately terminate this Agreement, at which time all Obligations shall immediately become due and payable without notice;
(b) Discount shall accrue and be payable at the Default Discount Rate on the Balance Subject to Discount.
(c) The Early Termination Fee shall become immediately due and payable without notice.
17. Account Stated.
17.1 Purchaser shall render to Seller a statement, either in tangible form or available on line, setting forth the transactions arising hereunder.
17.2 Each statement shall be considered correct and binding upon Seller as an account stated, except to the extent that Purchaser receives, within sixty days after the mailing of such statement or its becoming available on line, written notice from Seller of any specific exceptions by Seller to that statement, and then it shall be binding against Seller as to any items to which it has not objected.
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18. Amendment and Waiver.
18.1 Only a writing signed by all parties hereto may amend this Agreement. No failure or delay in exercising any right hereunder shall impair any such right that Purchaser may have, nor shall any waiver by Purchaser hereunder be deemed a waiver of any default or breach subsequently occurring. Purchaser’s rights and remedies herein are cumulative and not exclusive of each other or of any rights or remedies that Purchaser would otherwise have.
19. Termination; Effective Date.
19.1 This Agreement will be effective on the date it is signed by the Parties, shall continue until the end of the Initial Term, and shall be automatically extended for successive Renewal Terms unless Seller shall provide a Notice of Termination at least sixty days prior to the intended termination date, whereupon this Agreement shall terminate on the end of the then existing Initial Term or Renewal Term, as applicable.
19.2 This Agreement will also terminate if Seller delivers a Notice of Termination to Purchaser, subject to Sections 19.3 and 19.4 and payment of the Early Termination Fee.
19.3 The Notice of Termination shall not be effective unless all Obligations have been paid to Purchaser on or before the termination date set forth therein.
19.4 Any attempted termination of this Agreement other than as set forth herein shall be ineffective, and this Agreement shall continue in full force and effect as if such attempted termination was not made.
20. No Lien Termination without Release.
20.1 In recognition of the Purchaser’s right to have its attorneys’ fees and other expenses incurred in connection with this Agreement secured by the Collateral, notwithstanding payment in full of all Obligations by Seller, Purchaser shall not be required to record any terminations or satisfactions of any of Purchaser’s liens on the Collateral unless and until Complete Termination has occurred. Seller understands that this provision constitutes a waiver of its rights under §9513 of the UCC.
21. Conflict.
21.1 Unless otherwise expressly stated in any other agreement between Purchaser and Seller, if a conflict exists between the provisions of this Agreement and the provisions of such other agreement, the provisions of this Agreement shall control.
22. Severability.
22.1 In the event any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, then such provision shall be ineffective only to the extent of such prohibition or invalidity, and the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.
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23. Relationship of Parties.
23.1 Notwithstanding that the Purchaser has the rights of a Secured Party, the relationship of the parties hereto shall not be that of lender and borrower.
23.2 Purchaser is and shall not be a fiduciary of the Seller, although Seller may be a fiduciary of the Purchaser.
24. Attorneys’ Fees.
24.1 Seller agrees to reimburse Purchaser on demand for:
24.1.1 The actual amount of all costs and expenses, including attorneys’ fees, which Purchaser has incurred or may incur in negotiating, preparing, or administering this Agreement and any documents prepared in connection herewith;
24.1.2 The actual amount of all costs and expenses, including attorneys’ fees, which Purchaser may incur in connection with any federal or state insolvency proceeding commenced by or against Seller, including those:
(a) Arising out the automatic stay,
(b) Seeking dismissal or conversion of the bankruptcy proceeding, or
(c) Opposing confirmation of Seller’s plan thereunder.
24.2 In the event that any Party finds it necessary to retain counsel in connection with the interpretation, defense, or enforcement of this agreement, the prevailing Party shall recover its reasonable attorney’s fees and expenses from the unsuccessful Party. It shall be presumed (subject to rebuttal only by the introduction of competent evidence to the contrary) that the amount recoverable is the amount billed to the prevailing Party by its counsel and that such amount will be reasonable if based on the billing rates charged to the prevailing party by its counsel in similar matters.
24.3 In the event that Seller asserts a claim against Purchaser hereunder, it shall do so in writing prior to and as a condition of the commencement of any litigation by Seller, setting forth the specific amount of Seller’s claim against Purchaser (the “Damage Claim”). If any dispute resolution process results in a judgment or award against Purchaser of less the Damage Claim, the court is requested to find that Purchaser was the prevailing party for the purposes of this Section.
25. Entire Agreement.
25.1 No promises of any kind have been made by Purchaser or any third party to induce Seller to execute this Agreement. No course of dealing, course of performance or trade usage, and no parole evidence of any nature, shall be used to supplement or modify any terms of this Agreement.
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26. Choice of Law.
26.1 This Agreement and all transactions contemplated hereunder and/or evidenced hereby shall be governed by, construed under, and enforced in accordance with the internal laws of the Chosen State.
27. Jury Trial Waiver.
27.1 IN RECOGNITION OF THE HIGHER COSTS AND DELAY WHICH MAY RESULT FROM A JURY TRIAL, THE PARTIES HERETO WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING HEREUNDER, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY FURTHER WAIVES ANY RIGHT TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
28. Venue; Jurisdiction.
28.1 Any suit, action or proceeding arising hereunder, or the interpretation, performance or breach hereof, including an action in tort, shall, if Purchaser so elects, be instituted in any court sitting in the Chosen State, in the city in which Purchaser’s chief executive office is located, or if none, any court sitting in the Chosen State (the “Acceptable Forums”). Seller agrees that the Acceptable Forums are convenient to it, and irrevocably submits to the jurisdiction of the Acceptable Forums and waives any and all objections to jurisdiction or venue.
28.2 Should such proceeding be initiated in any other forum, Seller waives any right to oppose any motion or application made by Purchaser to transfer such proceeding to an Acceptable Forum.
29. Time of the Essence.
29.1 It is agreed that time is of the essence in all matters herein.
30. Service of Process.
30.1 Seller agrees that Purchaser may effect service of process upon Seller by regular mail at the address set forth herein or at such other address as may be reflected in the records of Purchaser, or at the option of Purchaser by service upon Seller’s agent for the service of process.
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31. Assignment.
31.1 Purchaser may assign its rights and delegate its duties hereunder. Upon such assignment, Seller shall be deemed to have attorned to such assignee and shall owe the same obligations to such assignee and shall accept performance hereunder by such assignee as if such assignee were Purchaser.
32. Counterparts.
32.1 This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if all signatures were upon the same instrument.
32.2 Delivery of an executed counterpart of the signature page to this Agreement by facsimile shall be effective as delivery of a manually executed counterpart of this Agreement, and any party delivering such an executed counterpart of the signature page to this Agreement by facsimile to any other party shall thereafter also promptly deliver a manually executed counterpart of this Agreement to such other party, provided that the failure to deliver such manually executed counterpart shall not affect the validity, enforceability, or binding effect of this Agreement.
33. Notice.
33.1 All notices required to be given to any party other than Purchaser shall be deemed given upon the first to occur of:
33.1.1 Transmittal by electronic means to a receiver under the control of such party, or
33.1.2 Actual receipt by such party or an employee or agent of such party.
33.2 All notices to Purchaser shall be deemed given upon actual receipt by a responsible officer of Purchaser.
33.3 For the purposes hereof, notices hereunder shall be sent to the following addresses, or to such other addresses as each such party may in writing hereafter indicate:
| SELLER | |
| Address: | 1001 SE Water Avenue |
| Suite 390 | |
| Portland, OR 97214 | |
| Officer: | Lawrence Firestone, CEO |
| Email address: | lfirestone@eastsidedistilling.com |
| PURCHASER | |
| Address: | 3000 Riverchase Galleria |
| Suite 800 | |
| Birmingham, AL 35244 | |
| Officer: | Tania Daniel |
| Email address: | tdaniel@engscapital.com |
IN WITNESS WHEREOF, the Parties have executed this agreement on the day and year first above written.
| SELLER: | EASTSIDE DISTILLING, INC. | |
| By: | /s/ Lawrence Firestone | |
| Name: | Lawrence Firestone | |
| Title: | CEO | |
| PURCHASER: | ENGS COMMERCIAL CAPITAL, LLC | |
| By: | /s/ Tania Daniel | |
| Name: | Tania Daniel | |
| Title: | Managing Director |
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EXHIBIT 1.11.3.
GENERAL RELEASE
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and adequacy of which are hereby acknowledged, the undersigned and each of them (collectively “Releasor”) hereby forever releases, discharges and acquits ENGS COMMERCIAL CAPITAL, LLC (“Releasee”), its parent, directors, shareholders, agents and employees, of and from any and all claims of every type, kind, nature, description or character, and irrespective of how, why, or by reason of what facts, whether heretofore existing, now existing or hereafter arising, or which could, might, or may be claimed to exist, of whatever kind or name, whether known or unknown, suspected or unsuspected, liquidated or unliquidated, each as though fully set forth herein at length, to the extent that they arise out of or are in way connected to or are related to that certain Factoring and Security Agreement dated________________.
Releasor agrees that the matters released herein are not limited to matters which are known or disclosed, and the Releasor waives any and all rights and benefits which it now has, or in the future may have.
Releasor acknowledges that factual matters now unknown to it may have given or may hereafter give rise to Claims which are presently unknown, unanticipated and unsuspected, and it acknowledges that this Release has been negotiated and agreed upon in light of that realization and that it nevertheless hereby intends to release, discharge and acquit the Releasee from any such unknown Claims.
Acceptance of this Release shall not be deemed or construed as an admission of liability by any party released.
In the event of any litigation arising out of or related to this Release, the prevailing party shall recover its reasonable attorney’s fees and expenses from the unsuccessful party. It shall be presumed (subject to rebuttal only by the introduction of competent evidence to the contrary) that the amount recoverable is the amount billed to the prevailing party by its counsel and that such amount will be reasonable if based on the billing rates charged to the prevailing party by its counsel in similar matters.
Releasor acknowledges that either (a) it has had advice of counsel of its own choosing in negotiations for and the preparation of this release, or (b) it has knowingly determined that such advice is not needed.
| DATED: | ||
| Entity Releasor: | Eastside Distilling, Inc. | |
| By: | ||
| Name: | ||
| Title: | ||
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EXHIBIT 1.28.
Engs Commercial Capital, LLC
3000 Riverchase Galleria, Suite 800
Birmingham, AL 35244
| Re: | Factoring And Security Agreement Dated__________________(the “Agreement”) |
Ladies and Gentlemen:
Please be advised that we are exercising our option to terminate the Agreement on __(date to be supplied in original) and this shall be the Early Termination Date set forth in the Agreement. As a consequence of such election, we are obligated to pay to you the Early Termination Fee as set forth in the Agreement.
| Very truly yours, | ||
| Eastside Distilling, Inc. | ||
| By: | ||
| Title: | ||
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Exhibit 10.31
LOAN AGREEMENT
THIS LOAN AGREEMENT (“Loan Agreement” or “Agreement”) is made this 15th day of January, 2020, by and between Eastside Distilling Inc., a Nevada corporation, whose address is 1001 SE Water Avenue, Suite 390, Portland, OR 97214 (“Eastside”), MotherLode LLC, an Oregon limited liability company, whose address is 1001 SE Water Avenue, Suite 390, Portland, OR 97214 (“MotherLode”), Big Bottom Distilling, LLC, an Oregon limited liability company, whose address is 1001 SE Water Avenue, Suite 390, Portland, OR 97214 (“Big Bottom”), Craft Canning + Bottling, LLC, an Oregon limited liability company, whose address is 1001 SE Water Avenue, Suite 390, Portland, OR 97214 (“Craft”), Redneck Riviera Whiskey Co., LLC, a Tennessee limited liability company, whose address is 1001 SE Water Avenue, Suite 390, Portland, OR 97214 (“Redneck”) and Outlandish Beverages LLC, an Oregon limited liability company, whose address is 1001 SE Water Avenue, Suite 390, Portland, OR 97214 (“Outlandish” and together with Eastside, MotherLode, Big Bottom, Craft and Redneck, collectively, the “Borrowers,” and each, a “Borrower”), and Live Oak Banking Company, a North Carolina banking corporation, with an address of 1741 Tiburon Drive, Wilmington, North Carolina 28403 (“Lender”).
RECITALS OF FACTS
A. Borrowers are engaged in the business of the production of crafted, small batch spirits for sale and distribution.
B. Borrowers have requested that Lender make loans to Borrowers to refinance existing debt and for working capital purposes, and Lender is willing to make such loans pursuant to the terms of the Loan Documents.
NOW, THEREFORE, incorporating the Recitals of Facts set forth above and in consideration of the mutual agreements herein contained, the parties agree as follows:
AGREEMENTS
SECTION One. DEFINITIONS.
1.01 Certain Specific Terms. For purposes of this Loan Agreement, the following terms shall have the following meanings:
“ABC Licenses” means all licenses required by any state alcohol beverage commission in connection with Borrowers’ business.
“Acceptable Inventory” means Borrowers’ Inventory of whiskey in barrels or totes (a) in which Lender holds a valid, perfected first security interest, and (b) in which, in the reasonable judgment of Lender at the time an extension of credit is requested based upon such Inventory and at all times thereafter while an extension of credit remains outstanding, is in good, undamaged condition and is not obsolete or otherwise unmarketable in the ordinary course of business as a result of type, category, quality and/or quantity.
“Account” or “Accounts Receivable” means, in addition to the definition of account as contained in the Uniform Commercial Code, the right of the Borrowers to receive payment for goods sold which are not evidenced by an instrument or chattel paper, whether or not it has been earned by performance.
“Affiliate” means (a) any officer, director or manager of any Person, (b) any other Person or entity that controls, is controlled by or is under common control with any Person, and (c) any Person or entity that directly or indirectly owns ten percent (10%) or more of any Person.
“Anti-Corruption Laws” means all laws, rules, and regulations of any jurisdiction applicable to any Borrower or their Affiliates from time to time concerning or relating to bribery or corruption.
“Big Bottom” has the meaning assigned to such term set forth in the introductory paragraph to this Loan Agreement.
“Board” means the Board of Governors of the Federal Reserve System of the United States of America.
“Borrower” and “Borrowers” have the meanings provided in the introductory paragraph of this Loan Agreement.
“Borrower Representative” means Eastside.
“Borrowing Base” means, as to the Borrowers, an amount equal to:
| (a) | on the Closing Date, sixty-five percent (65%) of the Inventory Value, as reasonably determined by Lender, of Borrowers’ Eligible Inventory, based upon Lender’s limited preliminary appraisal report; and | |
| (b) | after receipt of Lender’s full appraisal report, eighty-five percent (85%) of the Inventory Value, as reasonably determined by Lender, of Borrowers’ Eligible Inventory, based upon Lender’s fully completed appraisal report; |
minus, an amount equal to all service fees or rental payments owed by Borrowers during the ninety (90) day period immediately succeeding the date of determination to any warehouses or bailees holding Eligible Inventory, as determined by Lender in its reasonable discretion; provided, that Lender may, in its good faith reasonable business judgment, make changes to applicable standards of eligibility, advance rates and reserves for any assets in the Borrowing Base (i) upon the occurrence and during the continuance of an Event of Default or (ii) in order to mitigate the impact of events, conditions, contingencies, or risks which may adversely affect the Inventory Value identified from an unsatisfactory field exam conducted by Lender pursuant to Section 5.10, which changes shall be effective immediately after the Lender shall have delivered notice of such changes to the Borrower Representative.
“Borrowing Base Certificate” means a certificate substantially in the form of Exhibit A attached hereto (with such changes therein as may be required by the Lender to reflect the components of the Borrowing Base as provided for hereunder from time to time), executed by the chief financial officer of the Borrower Representative.
“Business Day” means any day which is not a Saturday, Sunday or a day on which Lender is authorized or obligated by law, executive order or governmental decree to be closed.
“Change in Control” means, an event or series of events by which:
(a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the U.S. Securities and Exchange Commission thereunder as in effect on the date hereof), of Equity Interests representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of Eastside; or
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(b) Eastside ceases to own, directly or indirectly, 100% of the Equity Interests of MotherLode, Big Bottom, Craft, Redneck and Outlandish (except pursuant to a transaction permitted under this Agreement).
“Closing Date” means the date on which all Loan Documents have been executed and delivered to and accepted by Lender, all conditions precedent to funding set forth in Section 3 have been satisfied or waived by the Lender.
“Collateral” means collectively all assets of the Borrowers, excluding Accounts Receivable.
“Contractual Obligations” means, as applied to any Person, any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject including, without limitation, the Loan Documents.
“Craft” has the meaning assigned to such term set forth in the introductory paragraph to this Loan Agreement.
“Debt” means with respect to the Borrowers, without duplication, (a) indebtedness for borrowed money or for the deferred purchase price of property or services including debt instruments (except any such balance that constitutes an account payable to a trade creditor created, incurred, assumed or guaranteed by such Person in the ordinary course of business of such Person in connection with obtaining goods, materials or services that is not overdue by more than one hundred twenty (120) days unless the trade payable is being contested in good faith), (b) obligations as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (c) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise assure a creditor against loss in respect of, indebtedness or obligations of the kinds referred to in clause (a) or (b) above, and (d) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA.
“Default” means any event or condition which, with the giving or receipt of notice or lapse of time or both, would constitute an Event of Default hereunder.
“Demand Date” means the date that is 30 days following the date Lender makes demand on Borrowers for payment in full of all Indebtedness, which demand may be made by Lender at any time.
“Disposal” means the intentional or unintentional abandonment, discharge, deposit, injection, dumping, spilling, leaking, storing, burning, thermal destruction, or placing of any Hazardous Substance so that it or any of its constituents may enter the environment.
“Eastside” has the meaning assigned to such term set forth in the introductory paragraph to this Loan Agreement.
“Eligible Inventory” means, as of the date of determination thereof, inventory identified on Schedule 1.01(a) attached hereto and deemed by the Lender in its reasonable discretion to be Acceptable Inventory eligible for inclusion in the calculation of the Borrowing Base. Without limiting the generality of the foregoing, unless otherwise approved in writing by the Lender, none of the following shall be deemed to be Eligible Inventory:
| (a) | Inventory that is not owned by a Borrower free of any title defect or any Liens or interests of others, except for the Lien in favor of the Lender and statutory liens or Permitted Liens; |
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| (b) | Inventory that is located in a public warehouse or in the possession of a bailee or in a facility leased by a Borrower or any of its Affiliates unless the applicable warehouseman, bailee or lessor (and its mortgagee, if any), has delivered to the Lender a waiver and/or collateral access agreement and such other documentation as the Lender may reasonably require; | |
| (c) | Inventory that is covered by a negotiable document of title (such as a bill of lading or warehouse receipt); | |
| (d) | Inventory that is in transit; | |
| (e) | Inventory that is not held for sale or use in the ordinary course of the Borrowers’ business and is not of good and merchantable quality; | |
| (f) | Inventory that is not located in the United States of America (excluding territories and possessions thereof); | |
| (g) | Inventory that is unsalable, damaged, defective, recalled or used, or Inventory that has been returned by the buyer unless such returned items are of good and merchantable quality and held for resale by a Borrower in the ordinary course of business; | |
| (h) | Inventory that has been manufactured to the specifications of a particular customer and is not saleable in the ordinary course of business; | |
| (i) | Inventory that contains or bears any intellectual property rights licensed to a Borrower unless the Lender is satisfied in its sole and absolute discretion that it may sell or otherwise dispose of such inventory without (i) infringing the rights of such licensor, (ii) violating any contract with such licensor, or (iii) incurring any liability with respect to payment of royalties other than royalties incurred pursuant to sale of such Inventory under the current licensing agreement; | |
| (j) | Inventory that is the subject of a consignment by a Borrower as consignor; | |
| (k) | Inventory that is “private label”; and | |
| (l) | Inventory that does not comply with any representation or warranty contained in this Agreement or any other Loan Document with respect to Inventory in general, or to such Inventory in particular. |
“Environmental Laws” means all federal, state, and local environmental, land use, zoning, health, chemical use, safety and sanitation laws, statutes, ordinances, regulations, codes, and rules relating to the protection of the environment and/or governing the use, storage, treatment, generation, transportation, processing, handling, production, or disposal of Hazardous Substances and the policies, guidelines, procedures, interpretations, decisions, orders, and directives of federal, state, and local governmental agencies and authorities with respect thereto.
“Environmental Permits” means all licenses, permits, approvals, authorizations, consents, or registrations required by any applicable Environmental Laws and all applicable judicial and administrative orders in connection with ownership, lease, purchase, transfer, closure, use, and/or operation of any property owned, leased, or operated by a Borrower and/or as may be required for the storage, treatment, generation, transportation, processing, handling, production, or disposal of Hazardous Substances.
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“Equity Interests” means the membership interests, partnership interests or capital stock of any class or any other equity interest or securities of any Person and options, warrants and other rights to acquire membership interests, partnership interests or capital stock of any class or any other equity interest of such Person.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.
“Event of Default” means an Event of Default or Events of Default as defined in Section Seven.
“Excluded Account” means (a) any deposit account, securities account, commodities account or other account of any Borrower to the extent solely and exclusively used for payment of payroll, employee benefits and withholding taxes, (b) any deposit account, securities account, commodities account or other account of any Borrower to the extent solely and exclusively used to hold any cash or cash equivalents pledged as a Permitted Lien, and (c) deposit accounts of any Borrower which do not hold more than $5,000 in the aggregate at any time.
“Financial Statements” means the unaudited consolidated balance sheets and income statements of Eastside as of September 30, 2019.
“Fiscal Quarter” means each of the three-month fiscal periods of the Borrowers, ending on March 31, June 30, September 30, and December 31, respectively, in any Fiscal Year of the Borrower.
“Fiscal Year” means the twelve-month fiscal period of the Borrowers, commencing on January 1 and ending on the next ensuing December 31.
“GAAP” means generally accepted accounting principles, being those principles of accounting set forth in pronouncements of the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, or which have other substantial authoritative support and are applicable in the circumstances as of the date of a report, consistently applied from period to period.
“Hazardous Substances” means, without limitation, any explosives, radon, radioactive materials, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum products, methane, hazardous materials, hazardous wastes, hazardous or toxic substances, and any other material defined as a hazardous substance in Section 101(14) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601(14).
“Indebtedness” means all outstanding amounts owed by Borrowers to Lender, secured by the Security Interest and any other collateral document, together with all other amounts due, or which may become due, including but not limited to interest, under this Loan Agreement or any of the Loan Documents. EACH BORROWER HEREBY ACKNOWLEDGES THAT SUCH AMOUNTS MAY CAUSE THE OUTSTANDING OBLIGATIONS TO LENDER TO EXCEED THE MAXIMUM OUTSTANDING AMOUNT UNDER THE NOTE, AND CONFIRMS AND AGREES THAT THIS LOAN AGREEMENT IS INTENDED TO AND SHALL SECURE ALL SUCH EXCESS AMOUNTS TO THE EXTENT AUTHORIZED IN THE LOAN DOCUMENTS.
“Inventory” means the inventory of the Borrowers and includes all “inventory” as defined in the UCC as in effect in the State as of the date of this Loan Agreement.
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“Inventory Value” means, with respect to Inventory of any Person, the orderly liquidation value thereof as determined in a manner acceptable to the Lender by an appraiser acceptable to the Lender, net of all costs of liquidation thereof.
“Investment” means the purchase or acquisition of any Equity Interests in any other Person, any loan, advance, or extension of credit (excluding accounts receivable arising in the ordinary course of business) to any other Person, contribution to the capital of any other Person, or the acquisition of substantially all of the assets of any other Person.
“Knowledge” means actual or constructive knowledge of any executive officer or financial officer of a Borrower, after reasonable investigation.
“Lender” has the meaning assigned to such term set forth in the introductory paragraph to this Loan Agreement.
“Loan” has the meaning assigned to it in Section 2.01 of this Loan Agreement.
“Loan Agreement” means this Loan Agreement by and among Borrowers and Lender.
“Loan Documents” means this Loan Agreement, the Note, the Security Agreement, the Trademark Security Agreement, the Warrant, and all other agreements and documents now or hereafter required to be executed by any Borrower in favor of Lender and related to the Indebtedness, including, without limitation, collateral documents, letter of credit agreements, account control agreements, acceptance credit agreements, security agreements, pledges, guaranties, mortgages, title insurance, assignments, and subordination agreements.
“Material Adverse Effect” means any change resulting in a material adverse effect on (a) the business, properties, operations, or financial condition of the Borrowers, taken as a whole, (b) the ability of any Borrower to pay or perform its obligations, liabilities and Indebtedness under any of the Loan Documents as such payment or performance becomes due in accordance with the terms thereof, or (c) the rights, powers and remedies of Lender under any Loan Document or the validity, legality or enforceability thereof.
“Maturity Date” means the earlier of (a) January 14, 2021, (b) the Demand Date, and (c) that date on which the Lender accelerates the maturity of the Loan in accordance with Section Seven hereof.
“Maximum Loan Availability” means the lesser of (a) $8,000,000, and (b) the Borrowing Base.
“MotherLode” has the meaning assigned to such term set forth in the introductory paragraph to this Loan Agreement.
“Note” means that certain Promissory Note issued to the Lender evidencing the Loan, in form and substance acceptable to the Lender, and includes all renewals, modifications, extensions, substitutions and replacements thereof.
“OFAC” means the Office of Foreign Assets Control of the United States Department of the Treasury.
“Outlandish” has the meaning assigned to such term set forth in the introductory paragraph to this Loan Agreement.
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“PACA” means the Perishable Agricultural Commodities Act or any similar state law.
“Permitted Liens” means (a) liens existing as of the date of this Loan Agreement and disclosed in the Financial Statements or on Schedule 1.01(b) attached hereto; (b) liens for taxes, assessments, or other governmental charges not delinquent or being contested in good faith and by appropriate proceedings and with respect to which reserves have been taken by a Borrower to the extent required by GAAP; (c) landlords’ and lessors’ liens in respect of rent which have been subordinated to the Indebtedness to the satisfaction of the Lender or liens in respect of pledges or deposits under worker’s compensation, unemployment insurance, social security laws, or similar legislation (other than ERISA), or in connection with appeal and similar bonds incidental to litigation; (d) liens of mechanics, materialmen, warehousemen, carriers, or other like liens securing obligations incurred in the ordinary course of business that are not yet due and payable or delinquent or are subject to contest by proper proceedings; (e) liens arising solely by virtue of any statutory or common law provision relating to banker’s liens, rights of set off, or similar rights and remedies as to deposited funds; (f) liens created by PACA; (g) the lien of ENGS Commercial Capital, LLC on Borrowers’ Accounts; (h) liens securing Debt permitted by Section 6.01(c), and (i) liens constituting a renewal, extension, or replacement of any Permitted Lien.
“Person” means and includes natural persons, corporations, limited liability companies, limited partnerships, limited liability partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof and their respective permitted successors and assigns (or in the case of a governmental person, the successor functional equivalent of such Person).
“Real Property Lease” means any leases and other similar agreements, whether now existing or hereafter entered into, for space in or of any real property, including all lease guaranties related thereto, as the same may be amended or modified from time to time.
“Redneck” has the meaning assigned to such term set forth in the introductory paragraph to this Loan Agreement.
“Sanctioned Country” means, at any time, a country or territory which is the subject or target of any Sanctions.
“Sanctioned Person” means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by OFAC or the U.S. Department of State, (b) any Person operating, organized or resident in a Sanctioned Country, or (c) any Person owned or controlled by any such Person or Persons described in the foregoing clauses (a) or (b).
“Sanctions” means economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by the U.S. government, including those administered by OFAC or the U.S. Department of State.
“Schedule” means any schedule executed in connection with, and which is a part of, this Loan Agreement.
“Security Agreement” means that certain Security Agreement executed by Borrowers in favor of Lender pursuant to this Loan Agreement, in form and substance acceptable to the Lender, and includes all renewals, modifications, extensions, substitutions and replacements thereof.
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“Security Interest” means the security interest granted to Lender by Borrowers as described in the Security Agreement, or a security interest within the meaning of the UCC, as appropriate.
“State” means the state of New York.
“Subsidiary” means, with respect to any Person, any corporation, partnership, joint venture or other business entity (whether now existing or hereafter organized or acquired) over which the Person exercises control, provided that it shall be conclusively presumed that the Person exercises control over any such entity (a) if more than 50% of the Equity Interests in such entity are owned by the Person, directly or indirectly; or (b) if at least a majority of the securities of each class having ordinary voting power for the election of directors (other than securities which have such power only by reason of the happening of a contingency) at the time as of which the determination is being made, is owned, beneficially and of record, by such Person or by one or more of the other Subsidiaries of such Person or by any combination thereof.
“Trademark Security Agreement” means that certain Trademark Security Agreement executed by certain Borrowers in favor of Lender pursuant to this Loan Agreement, in form and substance acceptable to the Lender, and includes all renewals, modifications, extensions, substitutions and replacements thereof.
“TTB Permits” means all required permits of the Alcohol and Tobacco Tax and Trade Bureau for any Borrower’s business.
“UCC” means the Uniform Commercial Code, as in effect in the State on the date hereof.
“Warrant” means the Warrant to Purchase Stock to be issued by Eastside to Lender pursuant to this Loan Agreement, in form and substance acceptable to the Lender, and includes all renewals, modifications, extensions, substitutions and replacements thereof.
1.02 Singulars and Plurals. Unless the context otherwise requires, words in the singular include the plural, and in the plural include the singular.
1.03 UCC Definitions. All terms used herein without definition which are defined by the UCC shall have the meanings assigned to them by the UCC unless and to the extent varied by this Loan Agreement.
1.04 Delaware Division. For all purposes under the Loan Documents, in connection with any division or plan of division under Delaware law (or any comparable event under a different jurisdiction’s laws): (a) if any asset, right, obligation or liability of any Person becomes the asset, right, obligation or liability of a different Person, then it shall be deemed to have been transferred from the original Person to the subsequent Person, and (b) if any new Person comes into existence, such new Person shall be deemed to have been organized on the first date of its existence by the holders of its Equity Interests at such time.
SECTION Two. LOAN.
2.01 The Commitment. Subject to the terms and conditions of the Loan Documents, and so long as no Default or Event of Default exists, Lender has committed to make up to two loan advances to Borrowers for the purposes set forth in the Recitals, to be delivered to Borrowers, all in an aggregate principal amount not to exceed, at any one time outstanding, the Maximum Loan Availability (the “Loan”). The Loan will be made in two advances; the initial advance shall be made on the Closing Date, and the second advance shall be made within sixty (60) days after the Closing Date. No additional loan advances shall be made to Borrower.
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2.02 Funding the Loan. Each loan advance hereunder shall be made by depositing the same to the checking account of Borrower Representative, or in such other manner as Borrower Representative and Lender may agree in writing from time to time. Borrower Representative shall provide Lender with at least one (1) Business Day’s written notice of the requested advance, specifying the date and amount of the advance, together with a completed Borrowing Base Certificate. Lender shall, on or after 1:00 P.M. (Eastern Time) of the advance date, make the amount of the requested advance available to Borrowers, provided all conditions precedent to such advance have been met or satisfied. Each requested loan advance hereunder shall be in the minimum amount of $50,000.00 and multiples of $50,000.00 in excess thereof.
2.03 The Note and Interest. All advances with respect to the Loan shall be evidenced by the Note. The unpaid principal balance of the Note shall bear interest from the Closing Date on disbursed and unpaid principal balances (calculated on a year of 360 days) at a variable rate of interest equal to (i) two and 49/100ths percent (2.49%) per annum plus (ii) the Prime Rate as published in The Wall Street Journal, adjusted on a calendar quarterly basis. Each change in the rate of interest shall become effective, without notice to Borrowers, on the first day of each calendar quarter. The interest rate as of the date hereof is 7.24%. Interest shall be payable monthly on the fifth (5th) day of each month, with the final installment of interest and principal being due and payable on the Maturity Date, or on such earlier date as the Loan becomes due and payable. NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT OR ANY OTHER INSTRUMENT OR DOCUMENT, ALL INDEBTEDNESS UNDER THIS AGREEMENT IS DUE AND PAYABLE WITHIN 30 DAYS FOLLOWING DEMAND BY THE LENDER, WHICH MAY BE MADE BY LENDER AT ANY TIME.
2.04 Prepayment of Loan.
(a) Borrowers may voluntarily prepay the outstanding principal amount of the Note, in whole or in part, at any time, from time to time, each such prepayment to include accrued and unpaid interest thereon, if any, to the applicable date of prepayment (together with reasonable and documented out-of-pocket costs and expenses, including, without limitation, reasonable documented fees, charges and disbursements of counsel). Advances repaid may not be reborrowed.
(b) If on any day the sum of the aggregate outstanding principal balance of the advances and other financial accommodations hereunder shall exceed the Maximum Loan Availability, Borrowers shall, within three Business Days following written request by Lender, prepay such advances and other financial accommodations by an amount equal to such excess.
2.05 Payment and Computation.
(a) Business Day. Whenever any payment to be made hereunder shall be stated to be due on other than a Business Day, such payment may be made on the next succeeding Business Day, unless such Business Day falls in the next succeeding calendar month, in which case, such payment shall be made on the preceding Business Day. Any such alteration of time shall, in such case, be included in the computation of payment of interest. All payments (including prepayments) made by Borrowers on account of principal of or interest on the loans hereunder shall be made without set-off or counterclaim on the date such payment is due, to Lender, in each case in lawful money of the United States of America and in immediately available funds.
(b) Debiting of Account. The Lender may, and Borrowers authorize the Lender to, debit any account and/or certificate of deposit maintained by any Borrower with the Lender for the amount of any payment, as and when such payment becomes due hereunder, whether such payment is for accrued interest, principal, or expense, even if debiting such account results in a loss or reduction of interest to Borrowers or the imposition of a penalty. Such authorization shall not affect the Borrowers’ obligation to pay when due all amounts payable hereunder, whether or not there are sufficient funds in any accounts of Borrowers. The foregoing rights of the Lender to debit any Borrower’s accounts shall be in addition to, and not in limitation of, any rights of set-off which the Lender may have hereunder or under any Loan Document.
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(c) Use of Proceeds of the Loan. The proceeds of the Loan shall be used by Borrowers to refinance existing debt and to fund general working capital of Borrowers.
(d) Servicing Fee. Borrowers shall pay to Lender a servicing fee with respect to the Loan in the amount of (i) the then outstanding principal balance of the Loan, times (ii) 0.50%, calculated as of, and due, annually on each anniversary of the Closing Date.
(e) Unused Loan Fee. Borrowers shall pay to Lender an unused line fee of one quarter of one percent (0.25%) per annum of the difference between (i) the Loan commitment and (ii) the average daily balance of Loan advances outstanding for each quarter, which fee shall be fully earned by Lender and payable quarterly in arrears on the first Business Day of each quarter; provided, however, that no unused line fee will accrue after the making of the second advance pursuant to Section 2.01.
(f) Computation. Interest and any fees or compensation based upon a per annum rate shall be calculated on the basis of a 360 day year for the actual number of days elapsed.
(g) Authorized Advances. Borrowers hereby irrevocably request and authorize Lender to make an advance hereunder to the extent of any fees or interest due from time to time under this Agreement or any other Loan Documents and to apply the proceeds of such advances to such fees or interest. The foregoing shall not obligate Lender to make any such advance and Borrowers shall remain obligated to pay said fees and interest when due.
2.06 Demand Loan. Borrowers expressly acknowledge and agree that the Loan is and shall at all times be payable ON DEMAND by Lender, and that if Lender shall so demand repayment, payment will be due on the date that is 30 days following the date on which Lender demands repayment. Borrowers further acknowledge that it is a necessary inducement to Lender to make any advance hereunder that Borrowers grant Lender the unconditional right in Lender’s sole discretion to demand payment in whole or in part of the principal of and accrued interest on the Loan or of any other demand obligations, which right Borrowers expressly grant whether or not Borrowers are then in compliance with the provisions hereof. If any of the Events of Default set forth in Section Seven below shall occur and be continuing, Lender may, but shall not be obligated to, make such demand; such events are set forth only for purposes of illustrating certain circumstances in which Lender may, but shall not be obligated to, make such demand. Such circumstances are not exclusive and shall not limit Lender’s right of demand in any other circumstances in which Lender may exercise Lender’s right of demand including, without limitation, when Lender deems that Lender is insecure or that the prospects for timely or full payment or performance of any of Borrowers’ obligations have been impaired.
SECTION Three. CONDITIONS PRECEDENT TO CLOSING AND LOAN ADVANCES.
3.01 Conditions Precedent to Closing. The obligation of Lender to accept the Note and make advances pursuant to the Loan hereunder on the Closing Date is subject to the condition precedent that Lender shall have received, on or before the Closing Date, all of the following in form and substance satisfactory to Lender:
(a) The Note;
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(b) The Security Agreement, Trademark Security Agreement and all other Loan Documents, on forms acceptable to Lender;
(c) Lender shall have received and approved executed copies of any Real Property Leases of real property used by Borrowers in connection with their business;
(d) Certified resolutions of each Borrower, authorizing the execution and delivery of the Note, and the execution and delivery of this Loan Agreement and the other Loan Documents, and a certificate of good standing for each Borrower, from the state of its organization, together with a copy of its organizational documents;
(e) A certificate from an insurance broker, satisfactory to Lender, setting forth the information concerning insurance which is required by Section 5.03 of this Loan Agreement;
(f) Executed ACH debit authorization forms;
(g) A certificate of the Secretary or other officer or manager of each Borrower, dated the date hereof, as to the incumbency and signature of the officers executing each of the Loan Documents and any other document to be delivered pursuant to any of such documents, together with evidence of the incumbency of such Secretary or other officer or manager;
(h) A certificate of each Borrower signed by its president, chief executive officer or chief financial officer (in such officer’s capacity as an officer of such Borrower and not in his or her personal capacity) stating that to the best of his knowledge after diligent investigation: (a) as of the date hereof and giving effect to any Loan, no Default or Event of Default exists hereunder; and (b) all of such Borrower’s representations and warranties contained in this Agreement and the other Loan Documents are presently true and correct in all material respects.
(i) Copies of all consents, licenses, and approvals required in connection with the execution, delivery, performance, validity, and enforceability of this Agreement, the Note and other Loan Documents, and such consents, licenses, and approvals shall be in full force and effect and be reasonably satisfactory in form and substance to Lender and its counsel.
(j) Copies, in form and substance reasonably satisfactory to Lender, of written or other advice relating to such corporate status, financing statement, tax lien, judgment, and other searches as Lender may reasonably require.
(k) (i) A copy of the certificate of incorporation or organization of each Borrower, certified by the Secretary of State of the state of its organization; (ii) a certificate of such Secretary of State, dated as of a recent date, as to the good standing (or the equivalent) of each Borrower and attaching the charter documents of each Borrower on file in the office of such Secretary of State; and (iii) a certificate of the Secretary dated the Closing Date and certifying with respect to each Borrower (A) that attached thereto is a true and complete copy of the By-laws or Operating Agreement of each Borrower, as in effect on the date of such certification, and (B) that the certificate of incorporation or organization of each Borrower has not been amended since the date of the last amendment thereto indicated on the certificate of the Secretary of State furnished pursuant to clause (i) above.
(l) Borrowers shall have paid all of the fees and expenses of Lender and Lender’s counsel which are occasioned in connection with the preparation of this Agreement, and all other Loan Documents and the closing of the transactions contemplated hereby and thereby.
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(m) Borrowers shall deliver a payoff letter from First Republic Bank to Lender;
(n) Eastside shall have delivered to Lender the Warrant, duly executed and delivered by Eastside;
(o) Warehouse lien waivers with respect to warehouse facilities where any of Borrowers’ Eligible Inventory is located, in form acceptable to Lender;
(p) An opinion letter from counsel to the Borrowers covering such items as reasonably requested by Lender and its counsel;
(q) A completed Borrowing Base Certificate, in form acceptable to Lender; and
(r) Such other information and documentation as Lender shall deem to be necessary or desirable in connection with the funding of the Loan.
3.02 Conditions Precedent to All Advances. The obligation of Lender to make any advances or other financial accommodation hereunder is subject to fulfillment of the following additional conditions precedent, to the reasonable satisfaction of counsel to Lender:
(a) Representations and Warranties. The representations and warranties made by Borrowers herein or in any other of the Loan Documents or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith shall be correct in all material respects on and as of the date of each loan or other financial accommodation hereunder, after giving effect to such loan or other financial accommodation hereunder, as if made on and as of such date, except to the extent such representations and warranties specifically relate to an earlier date, in which case, such representations and warranties were correct in all material respects on and as of such earlier date.
(b) No Default. No Event of Default has occurred, and no Default has arisen and is continuing on the date the loan or other financial accommodation hereunder is to be made, after giving effect to the loan or other financial accommodation hereunder.
(c) Litigation. No suit, action, investigation, inquiry, or other proceeding by any governmental authority or other Person or any other legal or administrative proceeding shall be pending or threatened which (i) questions the validity or legality of the transactions contemplated by this Agreement, or (ii) seeks damages in connection therewith and which, in the reasonable judgment of Lender, (x) involves a significant risk of a preliminary or permanent injunction or other order by a state or federal court which would prevent, or require rescission of, the transactions contemplated by this Agreement, or (y) in the case of any action or proceeding which seeks monetary damages involves a significant risk of resulting in substantial financial liability of more than $100,000 to any Borrower and/or Lender.
(d) Material Adverse Effect. No Material Adverse Effect shall have occurred since the date of the most recent financial statements of any Borrower furnished to Lender.
3.03 Post-Closing Matters.
(a) Within forty five (45) days of the Closing Date, Borrowers and any applicable depository institution shall have executed all documents required by Lender granting Lender control (as defined in the UCC) over Borrowers’ deposit accounts not maintained with Lender (other than Excluded Accounts).
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(b) Within ninety (90) days of the Closing Date, if required by Lender, Borrowers and each applicable landlord with respect to any Real Property Lease shall have executed and delivered to Lender a subordination, estoppel and attornment agreement and/or landlord waiver, in a form acceptable to Lender.
SECTION Four. REPRESENTATIONS AND WARRANTIES.
Borrowers, jointly and severally, represent to Lender that:
4.01 Organization. Eastside is a corporation duly organized, validly existing and in good standing under the laws of its state of formation; and has the power and authority to own its properties and assets and is duly qualified to carry on its business in every jurisdiction wherein such qualification is necessary. Each of MotherLode, Big Bottom, Craft, Redneck and Outlandish is a limited liability company duly organized, validly existing and in good standing (or the equivalent) under the laws of its state of formation; and has the power and authority to own its properties and assets and is duly qualified to carry on its business in every jurisdiction where the failure to so qualify could reasonably be expected to have a Material Adverse Effect on such Borrower.
4.02 Power and Authority of Borrower. The execution, delivery and performance of this Loan Agreement, the Note, the Security Agreement and all other documents required by Lender have been duly authorized by each Borrower and will not violate any provision of law, any order of any court or other agency of government, the organizational documents of Borrowers, any provision of any indenture, agreement or other instrument to which any Borrower is a party, or by which any Borrower’s properties or assets are bound, or be in conflict with, result in a breach or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of Borrowers (other than the security interests in favor of Lender).
4.03 Title to Assets. Borrowers have good and marketable title to all their properties and assets, and except for Permitted Liens, and the security interests in favor of Lender, all such properties and assets are free and clear of mortgages, pledges, liens, charges and other encumbrances.
4.04 Litigation. Except as set forth on Schedule 4.04, there is no action, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency now pending, or, to the knowledge of any Borrower, threatened against or affecting any Borrower, or any properties or rights of Borrowers, which, if adversely determined, would materially and adversely affect the financial or any other condition of any Borrower.
4.05 Taxes. Borrowers have filed or caused to be filed all federal, state or local tax returns which are required to be filed, and have paid all taxes as shown on said returns or on any assessment received by any Borrower, to the extent that such taxes have become due, except to the extent such taxes are being contested in good faith and by appropriate proceedings and with respect to which reserves have been taken by a Borrower to the extent required by GAAP.
4.06 Financial Statements.
(a) The Financial Statements fairly present in all material respects the financial condition of Eastside and its consolidated subsidiaries, including each of the Borrowers, and the Financial Statements have been prepared in accordance with GAAP (subject in the case of quarterly financials to changes resulting from normal year-end adjustments and the absence of footnotes). As of the date of this Loan Agreement, there has not been any adverse material change in the financial conditions of any Borrower since October 25, 2019.
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(b) Borrowers have no liabilities of a type required by GAAP to be disclosed on Eastside’s consolidated balance sheet other than (i) liabilities that are accrued or reserved against in the Financial Statements, and (ii) liabilities incurred in the ordinary course of business consistent with past practice since the date of the Financial Statements.
(c) Borrowers maintain a system of internal controls over financial reporting which is designed to provide reasonable assurance regarding the reliability of financial reporting.
(d) Except as set forth on Schedule 4.06(f) attached hereto, there are no off balance sheet transactions, arrangements or relationships attributable to the businesses of Borrowers, including any joint ventures, obligations, partnership agreements or similar contracts relating to any transactions, contracts or relationships between any Borrower, on the one hand, and any Affiliate of any Borrower, including any structured finance, special purpose or limited purpose entity, on the other hand.
(e) The projections delivered by Borrowers to Lender on the Closing Date were prepared reasonably and in good faith, it being acknowledged and agreed that forward-looking information and projections are not a guarantee of future performance, and actual results may differ from the forward-looking information or projections.
(f) Since September 30, 2019, there have been no events or changes in facts or circumstances affecting Borrowers or any of their respective businesses that have resulted (or reasonably would be expected to result), either individually or in the aggregate, in a Material Adverse Effect.
4.07 No Default. No Borrower is in default in the performance, observance or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument to which any of them are a party, which could reasonably be expected to materially and adversely affect the business or operations of any Borrower.
4.08 [Reserved].
4.09 ERISA. Each Borrower is in compliance in all material respects with all applicable provisions of the ERISA and all other laws, state or federal, applicable to any employees’ retirement plan maintained or established by it.
4.10 Subsidiaries. Eastside owns 100% of the Equity Interests of MotherLode, Big Bottom, Craft, Redneck and Outlandish. MotherLode, Big Bottom, Craft, Redneck and Outlandish do not own all or a substantial part of the Equity Interests in any other corporation (or other form of business organization).
4.11 Hazardous Substances. No Hazardous Substances (except in amounts and concentrations which comply with Environmental Law) are located on or have been stored, processed or disposed of on or released or discharged (including ground water contamination) from any property leased by any Borrower, and no above ground or underground storage tanks exist on such property, in each case, in a manner that violates any Environmental Laws in any material respects. No private or governmental lien or judicial or administrative notice or action related to Hazardous Substances or other environmental matters has been filed and remains effective against any property leased by any Borrower or otherwise issued or received by any Borrower. Each Borrower is in material compliance with all applicable Environmental Laws, and has all Environmental Permits required for its operations.
4.12 Compliance With Wage Laws. All inventory of Borrowers has been produced in compliance with the minimum wage and overtime pay provisions of the Fair Labor Standards Act in all material respects.
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4.13 Reaffirmation. Each and every request for an advance or other financial accommodation hereunder shall be deemed as an affirmation by Borrowers that no Default nor Event of Default exists hereunder and that the representations and warranties contained in this Section Four are true and accurate in all material respects as of the date of each such request.
4.14 Leased Real Property. Schedule 4.14 contains a list and brief description of each Real Property Lease pursuant to which any Borrower is the lessor or the lessee (or has an equivalent interest in the case of usufructs or other arrangements which may not be leases under applicable law) of any real property. As to each Real Property Lease, (a) no Borrower has either delivered or received notice that any material breach or Event of Default exists, and (b) no condition or event has occurred that with the giving of notice, the lapse of time, or both would constitute a material breach or Event of Default by any Borrower or any other person or entity.
4.15 Place of Business; Location of Inventory.
(a) Unless otherwise disclosed to Lender in writing after the Closing Date, each Borrower’s chief executive office is at the address specified as such in the first paragraph of this Loan Agreement unless Borrower Representative provides Lender written notice of any change therein at least thirty (30) days prior to such change.
(b) Each Borrower’s records concerning the Collateral are kept at the address or addresses specified in the first paragraph of this Loan Agreement unless Borrower Representative provides Lender written notice of any change therein at least thirty (30) days prior to such change.
(c) Borrowers maintain Inventory at the locations set forth on Schedule 4.15 attached hereto.
4.16 Contracts.
(a) No Borrower has agreed nor consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a lien which is not a Permitted Lien.
(b) The contracts entered into between Borrowers and their third party distributors (“Distributor Contracts”) are listed on Schedule 4.16(b) attached hereto. Each Distributor Contract is valid and binding on such Borrower and, to such Borrower’s Knowledge, its customer in accordance with its terms and is in full force and effect. No Borrower nor, to any Borrower’s Knowledge, any other party thereto is in breach of or default under (or is alleged to be in breach of or default under) in any material respect, or has provided or received any notice of any intention to terminate, any Distributor Contract. No event or circumstance has occurred that, with notice or lapse of time or both, would constitute an Event of Default under any Distributor Contract or result in a termination thereof or would cause or permit the acceleration or other changes of any right or obligation or the loss of any benefit thereunder. There are no material disputes pending or, to any Borrower’s Knowledge, threatened under any Distributor Contracts.
(c) No Borrower is a party to any collective bargaining agreement or, except as listed on Schedule 4.16(c) attached hereto, to any existing or threatened (in writing) labor dispute or controversies.
4.17 Anti-Corruption Laws and Sanctions. None of (i) any Borrower or, to the knowledge of any such Borrower, any of its respective directors, officers or employees, or (ii) to the knowledge of any such Borrower, any agent of such Borrower that will act in any capacity in connection with or benefit from the credit facilities established hereby, is a Sanctioned Person. No Loan, use of proceeds, or other transaction contemplated by this Agreement or the other Loan Documents will violate Anti-Corruption Laws or applicable Sanctions. No part of the proceeds of the Loan will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate of political office, or anyone else in an official capacity, in order to obtain, retain, direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.
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SECTION Five. AFFIRMATIVE COVENANTS OF BORROWERS.
The Borrowers, jointly and severally, covenant and agree that Borrowers, individually and/or collectively (as the context requires), will from the date hereof and until payment in full of the principal of and interest on the Loan, unless Lender shall otherwise consent in writing, such consent to be at the discretion of Lender:
5.01 Business and Existence. Perform all things necessary to preserve and keep in full force and effect its existence and comply with all laws applicable to it in all material respects; provided, however, that any Borrower may voluntarily dissolve if all of its assets are transferred to other Borrowers (excluding Craft).
5.02 Maintain Property. Maintain, preserve and protect all material franchises, and material tradenames and preserve all the remainder of its material properties used or useful in the conduct of its business; preserve all the remainder of its material properties used or useful in the conduct of its business and keep the same in good repair, working order and condition (other than wear and tear occurring in the ordinary course of business), and from time to time make, or cause to be made, all needed, proper and cost-justified repairs, renewals, replacements, betterments and improvements thereto so that the business carried on in connection therewith may be properly conducted at all times.
5.03 Insurance. At all times maintain in some company or companies (having a Best’s rating of A+ or better):
| (i) | Comprehensive public liability insurance covering claims for bodily injury, death, and property damage, with a minimum limit of $1,000,000.00; | |
| (ii) | Hazard insurance insuring Borrowers’ property and assets against loss by fire (with extended coverage) and against such other hazards and perils (including but not limited to loss by windstorm, hail, explosion, riot, aircraft, smoke, vandalism, malicious mischief and vehicle damage) as Lender may reasonably require, for the amount of the replacement cost of such property and assets, all such insurance to be issued in such form, with such deductible provision, as shall be satisfactory to Lender; | |
| (iii) | If any of the Collateral is or will be located in an area designated by the Director of the Federal Emergency Management Agency as a Special Flood Hazard Area Zone, a flood insurance policy in form and substance satisfactory to Lender; | |
| (iv) | Worker’s compensation insurance in an amount meeting all state requirements, with an insurance company satisfactory to Lender; | |
| (v) | Business personal property insurance on the business contents of in the amount of the replacement cost of the Collateral; and |
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| (vi) | Such other insurance as may, from time to time, be reasonably required by Lender against other insurance hazards which at the time are commonly insured against in the case of premises similarly situated, due regard being or to be given to the height or type of building, its location, construction, use and occupancy. |
All policies of liability insurance shall name Lender as an additional insured, as its interests may appear, and all policies of hazard insurance shall name Lender as loss payee. All insurance provided for in this Section shall be effected under valid and enforceable policies. Prior to the Closing Date, and at all relevant times during the term hereof, Borrowers shall cause a certificate evidencing same to be delivered to Lender. All policies of insurance provided for in this Section shall, to the extent obtainable, contain clauses or endorsements to the effect that such policies shall not be changed or canceled without at least thirty (30) days’ prior written notice to Lender.
5.04 Obligations, Taxes and Liens. Pay all of its indebtedness and obligations promptly in accordance with normal terms and practices of its business and pay and discharge or cause to be paid and discharged promptly all taxes, assessments, and governmental charges or levies imposed upon it or upon any of its income, profits, or properties, real, personal or mixed, or upon any part thereof, before the same shall become in default, as well as all lawful claims for labor, materials, and supplies which otherwise, if unpaid, could reasonably be expected to become a lien or charge upon such properties or any part thereof; provided, however, that Borrowers shall not be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, trade payable, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings, and Lender shall be furnished, if Lender shall so request, bond or other security protecting it against loss in the event that such contest should be adversely determined.
5.05 Financial Reports and Other Data. Furnish to Lender as soon as available, and in any event: (A) within ninety (90) days after the end of each Fiscal Year, a consolidated balance sheet and statement of income and surplus of Eastside and its Subsidiaries which have been certified by an independent certified public accountant, showing the financial condition of Eastside and its Subsidiaries, on a consolidated basis, at the close of such Fiscal Year and the results of operations during such year; (B) within forty five (45) days after the end of each of the first three Fiscal Quarters of each Fiscal Year, consolidated financial statements for Eastside and its Subsidiaries, certified by the President or Treasurer or other appropriate financial officer of Eastside as fairly presenting in all material respects the financial condition, results of operations and cash flows of Eastside and its Subsidiaries in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes, such balance sheets to be as of the end of such Fiscal Quarter, and such statements of income and surplus to be for the period from the beginning of the Fiscal Year to the end of such Fiscal Quarter, in each case subject only to audit and year-end adjustment; (C) within thirty (30) days after the end of each calendar month, consolidated financial statements for Eastside and its Subsidiaries, certified by the President or Treasurer or other appropriate financial officer of Eastside as fairly presenting in all material respects the financial condition, results of operations and cash flows of Eastside and its Subsidiaries in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes, such balance sheets to be as of the end of such calendar month, and such statements of income and surplus to be for the period from the beginning of the Fiscal Year to the end of such calendar month, in each case subject only to audit and year-end adjustment; (D) within thirty (30) days after the end of each Fiscal Year, board-approved quarterly projections of Eastside and its Subsidiaries (income statement and balance sheet); (E) within forty five (45) days after the end of each Fiscal Quarter, an Accounts Receivable aging report, accounts payable aging report, and Inventory report (including a listing of any warehouses or bailees holding Eligible Inventory) for the Borrowers; (F) concurrently with the delivery of the financial statements required by subsection (C) above, a compliance certificate executed by the President or Treasurer of Borrower Representative or other financial officer satisfactory to Lender in the form of Exhibit B attached hereto and made a part hereof; (G) updated financial statements and/or balance sheets from time to time upon Lender’s request; and (H) within thirty (30) days after the end of each calendar month, bank statements for all deposit accounts of Borrowers maintained outside of Live Oak Bank. All financial statements prepared and provided to Lender pursuant to this Section 5.05 shall be prepared in accordance with GAAP, subject, in the case of unaudited financial statements, to normal year-end audit adjustments and the absence of footnotes. Documents required to be delivered pursuant to the terms hereof (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which Borrower posts such documents, or provides a link thereto, on Borrower’s website on the internet at Borrower’s website address.
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5.06 Taxes. Promptly pay and discharge all of its material taxes, assessments, and other governmental charges prior to the date on which penalties are attached thereto, establish adequate reserves for the payment of such taxes, assessments, and other governmental charges to the extent required by GAAP, make all required withholding and other tax deposits, and, upon request, provide Lender with receipts or other proof that such taxes, assessments, and other governmental charges have been paid in a timely fashion.
5.07 Reserved.
5.08 Notice of Default. Promptly, and in any event within 5 Business Days of any Borrower’s first knowledge thereof, furnish Lender with written notice of the occurrence of any event or the existence of any event, circumstance, or condition which constitutes or upon notice, lapse of time, or both, would constitute an Event of Default under the terms of this Loan Agreement.
5.09 Inventory in Possession of Third Parties. If any Inventory remains in the hands or control of any of Borrowers’ agents, finishers, contractors, or processors, or any other third party, notify such party of Lender’s Security Interest in the Inventory and shall use commercially reasonable efforts to obtain such agreements and documents from such third parties with respect to such Inventory as reasonably requested by Lender.
5.10 Verification and Valuation of Collateral. Lender shall have the right to verify all or any Collateral in any manner and through any medium Lender may consider appropriate, and Borrowers agree to furnish all assistance and information and perform any acts which Lender may reasonably request in connection therewith. Borrowers agree to furnish Lender from time to time upon request, statements and schedules further identifying and describing the Collateral and such other information, reports and evidence concerning the Collateral as Lender may reasonably request, all in reasonable detail. Lender shall have the right to receive a third party valuation of all or any Collateral (i) up to two (2) times during each year following the Closing Date, (ii) upon and during the continuance of an Event of Default, and (iii) at Lender’s sole cost and expense, at any other time as Lender may request. Such valuations shall be (a) requested by and prepared for Lender; (b) completed by an appraiser approved by Lender; and (c) completed within five (5) business days to the extent commercially practicable. Lender will conduct a field exam within ninety (90) days of the Closing Date and at least once per year thereafter. Lender retains the rights to perform additional field exams at its discretion and, unless an Event of Default has occurred and is continuing, at its sole cost and expense.
5.11 Litigation.
(a) Promptly notify Lender in writing of any litigation, proceeding, or counterclaim against, or of any investigation of any Borrower if: (i) the outcome of such litigation, proceeding, counterclaim, or investigation could reasonably be expected to have a Material Adverse Effect; or (ii) such litigation, proceeding, counterclaim, or investigation questions the validity of any Loan Document or any action taken, or to be taken, pursuant to any Loan Document.
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(b) Furnish to Lender such information regarding any such litigation, proceeding, counterclaim, or investigation as Lender shall request, provided, however, that Borrowers will not be required to furnish any information if, based on the advice of counsel, withholding such information is required to preserve the attorney-client or other legal privilege.
5.12 Compliance with Laws and Contractual Obligations. Comply with all applicable laws, rules, regulations, and other legal requirements with respect to its business and the use, maintenance, and operation of the real and personal property owned or leased by it in the conduct of its business if noncompliance would reasonably be expected to have a Material Adverse Effect. Borrowers shall comply with the obligations, covenants and conditions contained in all Contractual Obligations if noncompliance would reasonably be expected to have a Material Adverse Effect.
5.13 Maintenance of Property. Maintain its property, including, without limitation, the Collateral, in good condition, working order and repair, ordinary wear and tear excepted, and shall prevent the Collateral, or any part thereof, from being or becoming an accession to other goods not constituting Collateral.
5.14 Licenses, Permits, Etc. Maintain or obtain all franchises, grants, authorizations, licenses, permits, easements, consents, certificates, and orders, necessary to conduct its business in compliance with applicable laws, including but not limited to TTB Permits and ABC Licenses.
5.15 Other Information. Provide such additional information as Lender may from time to time reasonably request regarding the financial and business affairs of Borrowers, provided, however, that Borrowers will not be required to provide any information if, based on the advice of counsel, withholding such information is required to preserve the attorney-client or other legal privilege.
5.16 Power of Attorney. Hereby appoints and constitutes Lender its lawful attorney-in-fact with full power of substitution to, upon the occurrence and during the continuance of an Event of Default, endorse such Borrower’s name on any checks, notes, acceptances, drafts or any other instrument or document requiring said endorsement and to sign such Borrower’s name on any invoice or bills of lading relating to any Account, or drafts against its customers, or schedules or confirmatory assignments on Accounts, prepare, execute, file, record or deliver financing statements, continuation statements, termination statements, statements of assignment, applications for registration, or similar instruments to perfect, preserve, or release Lender’s interests in the Collateral, cause any Collateral to be transferred to Lender’s name or the name of Lender’s nominee, and to do all things and execute all documents in the name of such Borrower or otherwise, in each case, as Lender deems necessary, proper or convenient in order to preserve, perfect, or enforce its rights in the Collateral; it being understood and agreed that this power of attorney shall be coupled with an interest and cannot be revoked.
5.17 [Reserved].
5.18 [Reserved].
5.19 [Reserved].
5.20 Payments on Collateral. If any Borrower receives any payments or remittances on Eligible Inventory, such Borrower agrees to receive any and all such payments and remittances on Eligible Inventory, including cash, checks, drafts, notes, acceptances, or other forms of payment, in trust for Lender and to deliver such payments to Lender in the identical form in which they were received, together with any necessary endorsement in favor of Lender and with collection reports in form satisfactory to Lender.
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5.21 Application of Payments. All proceeds of any Eligible Inventory which are delivered to or otherwise received by Lender for application to the loans provided for herein shall be deemed received as of the date of actual receipt by Lender, and shall be applied by Lender on account of the Indebtedness upon Lender’s receipt of same; provided, however, that no checks, drafts, or other Instruments received by Lender shall constitute payment to Lender unless and until such item of payment has actually been collected by Lender. For the sole purpose of calculation of interest due to Lender from Borrowers, all such proceeds and other payments on account of the loans provided for in this Agreement, irrespective of the type or form of payment thereof shall not be considered applied on account of the Indebtedness until three (3) Business Days after Lender’s application of same to the Indebtedness.
SECTION Six. NEGATIVE COVENANTS OF BORROWERS.
Each Borrower, jointly and severally, covenants and agrees that it will not, directly or indirectly, at all times from and after the Closing Date, unless Lender shall otherwise consent in writing, such consent to be at the discretion of Lender:
6.01 Debt. Incur, create, assume or permit to exist any Debt or liability for borrowed money, or on account of deposit, advance or progress payments under contracts, or any other indebtedness or liability, including, but not limited to, indebtedness evidenced by notes, bonds, debentures or similar obligations, except:
(a) Indebtedness to Lender arising under this Loan Agreement and evidenced by the Note;
(b) Debt owing to ENGS Commercial Capital, LLC in a principal amount not to exceed $3,000,000, which is secured by Borrowers’ Accounts only;
(c) capital leases and other Debt incurred to finance the acquisition, construction or improvement of any equipment or capital assets in an aggregate principal amount not to exceed $2,000,000 at any time outstanding;
(d) unsecured intercompany Debt of one Borrower to another Borrower;
(e) Debt listed on Schedule 6.01(d) attached hereto;
(f) trade accounts payable, taxes payable, deferred sales, accrued employees’ bonuses and withheld amounts, accrued liabilities with respect to short-term obligations incurred by Borrowers in the normal course of operating their businesses, provided that the amount of such obligations shall not be unduly large, in the reasonable judgment of Lender, considering the size and nature of Borrowers’ businesses, and provided that Borrowers shall not be in default with respect to any of such obligations;
(g) any replacement, refinancing, refunding, renewal or extension of any of the foregoing permitted Debt, provided that the principal amount thereof does not exceed the principal amount of the Debt so replaced, refinanced, refunded, renewed or extended except by an amount equal to unpaid accrued interest plus other reasonable amounts paid, and fees and expenses reasonably incurred, in connection with such replacement, refinancing, refunding, renewal or extension.
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6.02 Mortgages, Liens, Etc. Create, assume or suffer to exist any mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever, other than Permitted Liens, on any of its assets, now or hereafter owned.
6.03 Guaranties. Guarantee or otherwise in any way become or be responsible for the indebtedness or obligations of any other Person (other than another Borrower so long as the underlying Debt is otherwise permitted pursuant to Section 6.01 above), by any means whatsoever, whether by agreement to purchase the indebtedness of any other Person or agreement for the furnishing of funds to any other Person through the purchase of goods, supplies or services (or by way of stock purchase, capital contribution, advance or loan) for the purpose of paying or discharging the indebtedness of any other Person, or otherwise, except for the endorsement of negotiable instruments by the Borrowers in the ordinary course of business for collection.
6.04 Sale of Assets. Sell, lease, transfer or dispose of all or a substantial part of its assets, excluding sales of Inventory, other than Eligible Inventory, in the normal course of business.
6.05 Consolidation or Merger; Acquisition of Assets. Enter into any transaction of merger or consolidation, acquire any other business or corporation, or acquire all or substantially all of the property or assets of any other Person (except that a Borrower may merge or consolidate with, or be acquired by, another Borrower).
6.06 Loans and Investments. Make any loans to or investments in, or purchase any stock, other securities or evidence of indebtedness of any person, except as follows: (i) direct obligations of the United States of America or obligations for which the full faith and credit of the United States of America is pledged to provide for the payment of principal and interest, (ii) marketable securities issued by an agency of the United States government, (iii) commercial paper rated A-1 by Standard and Powers corporation, or P-1 by Moody’s Investors Service, Inc., (iv) certificates of deposit of or bankers’ acceptances accepted by domestic commercial banks in the United States of America having a combined capital and surplus of at least $90,000,000.00, (v) repurchase agreements of any of the foregoing or (vi) investments in another Borrower.
6.07 [Reserved].
6.08 [Reserved].
6.09 Salaries. Either individually or in the aggregate, pay salaries, fees, bonuses or other forms of compensation to its Affiliates or members of the families of the Affiliates of any Borrower in excess of the amounts, taken as a whole, paid by businesses of similar size and conducting similar business activities.
6.10 Contracts Prohibiting Compliance. Enter into any contract or other agreement which would prohibit or in any way restrict the ability of any Borrower to comply with the provisions of this Loan Agreement.
6.11 [Reserved].
6.12 Loans to Officers and Employees. Shall not permit or allow loans to officers and employees of Borrowers, in the aggregate, to exceed the amount of the loans to officers and employees reflected on Borrowers’ Financial Statements, if any.
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6.13 Prohibited Use of Loans. No portion of any advance or any Loan made hereunder shall be used for any purpose not expressly permitted under Section Two of this Agreement. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations T, U and X. No Borrower will request any Loan, nor shall any Borrower use, and each Borrower shall ensure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Loan (a) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (b) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, or (c) in any manner that would result in the violation of any Sanctions applicable to any party hereto.
6.14 USA Patriot Act. No Loan Party shall (a) be or become subject at any time to any law, regulation, or list of any government agency (including, without limitation, the U.S. Office of Foreign Asset Control list) that prohibits or limits Lender from making any advance or extension of credit to Borrowers or from otherwise conducting business with any Borrower, or (b) fail to provide documentary and other evidence of any Borrower’s identity as may be requested by Lender at any time to enable Lender to verify any Borrower’s identity or to comply with any applicable law or regulation, including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. § 5318.
6.15 Special Covenants as to Assets. Until satisfaction in full of all Indebtedness of Borrowers to Lender and until termination of this Agreement: (A) no Eligible Inventory shall be stored with a bailee, warehouseman, or similar party without Lender’s prior written consent and, if Lender gives such consent, Borrowers will concurrently therewith cause any such bailee, warehouseman, or similar party to issue and deliver to Lender, in form and substance acceptable to Lender, warehouse receipts therefor in Lender’s name; (B) Borrowers will not hold any goods belonging to third parties or in which other parties have an interest, including any goods sold on a bill and hold basis, except as set forth on Schedule 6.15; (C) Borrowers will not purchase or otherwise hold goods on a consignment basis except as set forth on Schedule 6.15; (D) none of Borrowers’ Inventory will be of a nature that contains any labels, trademarks, trade names, or other identifying characteristics which are the property of third parties, and the use of which by Borrowers is in violation of the rights of such third parties or a violation of any license, royalty, or similar agreements with any third parties; (E) except as set forth on Schedule 6.15, Borrowers will not allow any Eligible Inventory of Borrowers to be held by any Person in the future without the prior written consent of Lender; (F) except upon prior written notice to Lender, Borrowers will not in the future purchase any Inventory except in the ordinary course of business from Persons customarily in the business of selling such Inventory; (G) Borrowers will not, without prior written consent of Lender, remove the Eligible Inventory from its present location, except for the removal of Eligible Inventory upon its sale; and (H) Borrowers will not cause any surety bonds to be issued on its behalf in connection with any contracts or purchase orders except upon not less than ten (10) days prior written notice to Lender.
SECTION Seven. EVENTS OF DEFAULT.
An “Event of Default” shall exist if any of the following shall occur:
7.01 Payment of Principal, Interest. Borrowers default in the prompt payment as and when due (whether by reason of demand, acceleration, maturity or otherwise) of the principal of or interest on the Loan, or (if there is any applicable cure period regarding such default) such default is not cured within the applicable cure period, or in the prompt payment when due of any other indebtedness, liabilities, or obligations to Lender, whether now existing or hereafter created or arising, direct or indirect, absolute or contingent; or
7.02 Payment of Other Obligations. Any Borrower shall default with respect to any other agreement to which it is a party or with respect to any other indebtedness in a principal amount of at least $250,000 when due or the performance of any other obligation incurred in connection with any such indebtedness for borrowed money, if the effect of such default is to accelerate the maturity of such indebtedness, or if the effect of such default is to permit the holder thereof to cause such indebtedness to become due prior to its stated maturity; or
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7.03 Representation or Warranty. Any representation or warranty made by a Borrower herein, or in any report, certificates, financial statement or other writing furnished in connection with or pursuant to this Loan Agreement shall prove to be false, misleading or incomplete in any material respect on the date as of which made; or
7.04 Covenants. Any Borrower shall default in the performance or observance of any covenant, agreement or undertaking on the part of it to be performed or observed, whether contained herein or in any other instrument or document which now or hereafter evidences, secures or relates to all or any part of the Loan and such default continues unremedied for a period of 30 days after written notice to Borrowers by Lender; provided, however, that no such grace period shall apply to any default of a covenant contained in the Security Agreement or Section 5.01, Section 5.03, Section 5.05, Section 5.08 or Section 6 hereof; or
7.05 Bankruptcy, Etc. Any Borrower shall make an assignment for the benefit of creditors, file a petition in bankruptcy, petition or apply to any tribunal for the appointment of a custodian, receiver or a trustee for it or a substantial part of its or his assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or if there shall have been filed any such petition or application, or any such proceeding shall have been commenced against any Borrower, in which an order for relief is entered or which remains undismissed for a period of sixty (60) days or more; or any Borrower by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or any trustee for it or any substantial part of any of its properties, or shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of sixty (60) days or more; or any Borrower shall generally not pay its debts as such debts become due;
7.06 Change in Control. There shall occur a Change in Control; or
7.07 Collateral; Impairment. There shall occur with respect to the Collateral any (i) fraud; (ii) misappropriation, conversion or diversion; (iii) levy, seizure, or attachment; or (iv) material loss, theft, or damage not covered by insurance that, in each case, could reasonably be expected to cause or result in a Material Adverse Effect.
Upon the occurrence of any event, circumstance or condition which constitutes or would with the giving of notice, lapse of time, or both constitute an Event of Default, as specified herein, the Lender shall, at its option, be relieved of any obligation to make further loan advances or extensions of credit under this Loan Agreement, and if such event, circumstance or condition becomes an Event of Default, Lender may, at its option, thereupon declare the entire Loan to be immediately due and payable for all purposes, and may exercise all rights and remedies available to it under the Security Agreement or any other instrument or document which secures the Loan, or available at law or in equity.
SECTION Eight. MISCELLANEOUS.
8.01 Amendments. The provisions of the Loan Documents, or any instrument or document executed pursuant hereto or securing the Loan, may be amended or modified only by an instrument in writing signed by the parties hereto.
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8.02 Notices. All notices and other communications provided for hereunder (except for routine informational communications) shall be in writing and shall be mailed, certified mail, return receipt requested, sent by recognized national overnight courier service, or delivered, addressed to the Borrower Representative or Lender (or other holder of the Note) at such party’s address as set forth in the first paragraph of this Agreement, or to any such person at such other address as shall be designated by such person in a written notice to the other parties hereto complying as to delivery with the terms of this Section 8.02. All such notices and other communications shall be effective (i) if mailed, when received or three (3) business days after mailing, whichever is earlier; or (ii) if sent by overnight courier service, on the first business day after sending, or (iii) if delivered, upon delivery.
8.03 No Waiver, Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Lender, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Waiver of any right, power or privilege hereunder or under any instrument or document now or hereafter securing the indebtedness evidenced hereby or under any guaranty at any time given with respect thereto is a waiver only as to the specified item. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by laws.
8.04 Survival of Agreements. All agreements, representations and warranties made herein shall survive the delivery of the Note. This Loan Agreement shall be binding upon, and inure to the benefit of the parties hereto and their respective heirs, successors, and assigns, except that the Borrowers shall not have the right to assign their rights hereunder or any interest therein.
8.05 Liens; Setoff by Lender. Borrowers hereby grant to Lender a continuing lien, as security for the Note and all other indebtednesses and obligations of Borrowers to the Lender, upon any of their monies, securities and other property and the proceeds thereof, now or hereafter held by Lender or in transit to Lender, and also upon any and all deposits (general or special, matured or unmatured) and credits of Borrowers against the Lender, at any time existing. Upon the occurrence of an Event of Default, Lender is hereby authorized at any time and from time to time, without notice to Borrowers, to set off, appropriate, and apply any and all items hereinabove referred to against any or all indebtednesses of Borrowers to Lender.
8.06 Governing Law. This Loan Agreement shall be governed and construed in accordance with the laws of the State of New York.
8.07 Execution in Counterparts. This Loan Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument.
8.08 Terminology; Section Headings. All personal pronouns used in this Loan Agreement whether used in the masculine, feminine, or neuter gender, shall include all other genders; the singular shall include the plural, and vice versa. Section headings are for convenience only and neither limit nor amplify the provisions of this Loan Agreement.
8.09 Enforceability of Agreement. Should any one or more of the provisions of this Loan Agreement be determined to be illegal or unenforceable, all other provisions, nevertheless, shall remain effective and binding on the parties hereto.
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8.10 Fees and Expenses; Indemnity.
(a) Borrowers, jointly and severally, agree to pay or reimburse Lender for the actual out-of-pocket expenses, including reasonable counsel fees and fees of any accountants, inspectors or other similar experts, as deemed necessary by Lender, incurred by Lender in connection with the development, preparation, execution, amendment, recording, administration or enforcement of, or the preservation of any rights under this Loan Agreement, the Note, and any other instrument or document which now or hereafter secures the Loans. In addition, the Borrowers, jointly and severally, agree to pay to Lender the following:
| (i) | a loan origination fee of $40,000.00; | |
| (ii) | valuations of Collateral conducted pursuant to Section 5.10(i) and (ii); and | |
| (iii) | all other costs and expenses as set forth in the commitment letter with respect to the Loan issued by Lender. |
(b) Borrowers, jointly and severally, agree to indemnify and hold harmless the Lender, its Affiliates and the directors, officers, employees, partners, agents, trustees, administrators, managers, advisors and representatives of it and its Affiliates (each, an “Indemnified Party”) from and against, any and all claims, damages, losses, liabilities and related expenses (including the reasonable fees, charges and disbursements of counsel), incurred by any Indemnified Party or asserted against any Indemnified Party by any Person arising out of, in connection with, or by reason of:
| (i) | the execution or delivery of any Loan Document or any agreement or instrument contemplated in any Loan Document, the performance by the parties thereto of their respective obligations under any Loan Document or the consummation of the transactions contemplated by the Loan Documents; | |
| (ii) | any Loan or the actual or proposed use of the proceeds therefrom; | |
| (iii) | any actual or alleged presence or release of Hazardous Substance on or from any property currently or formerly owned or operated by any Borrower; or | |
| (iv) | any actual or prospective claim, investigation, litigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, and regardless of whether any Indemnified Party is a party thereto; |
provided that, such indemnity shall not be available to any Indemnified Party to the extent that such claims, damages, losses, liabilities or related expenses (A) are determined by a court of competent jurisdiction by final and non-appealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnified Party or (B) result from a claim brought by a Borrower against any Indemnified Party for breach in bad faith of such Indemnified Party’s obligations under any Loan Document, if a court of competent jurisdiction has rendered a final and non-appealable judgment in favor of such Borrower on such claim.
(c) Each Borrower agrees, to the fullest extent permitted by applicable law, not to assert, and hereby waives, any claim against any Indemnified Party, on any theory of liability, for special, indirect, consequential or punitive damages (including any loss of profits or anticipated savings), as opposed to actual or direct damages, resulting from this Agreement or any other Loan Document or arising out of such Indemnified Party’s activities in connection herewith or therewith (whether before or after the Closing Date).
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(d) All amounts due under Section 8.10(b) shall be payable not later than 15 days after demand is made for payment by the Lender.
(e) Each Borrower agrees that it will not settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding in respect of which indemnification or contribution could be sought under Section 8.10(b) (whether or not any Indemnified Party is an actual or potential party to such claim, action or proceeding) without the prior written consent of the applicable Indemnified Party, unless such settlement, compromise or consent includes an unconditional release of such Indemnified Party from all liability arising out of such claim, action or proceeding, which consent shall not be unreasonably withheld or delayed.
8.11 Time of Essence. Time is of the essence as to the Borrowers’ obligations under this Loan Agreement, the Note and the other instruments and documents executed and delivered in connection herewith.
8.12 Confidentiality. Lender agrees to maintain the confidentiality of the Information (as defined below) and to not use the Information for any purpose except in connection with the Loan Documents, except that Information may be disclosed (i) to its and its Affiliates’ directors, officers, employees, and agents, including accountants, legal counsel and other professionals, experts or advisors, or to any credit insurance provider relating to the Borrowers and their obligations, in each case whom it reasonably determines needs to know such information in connection with this Loan Agreement and the transactions contemplated hereby and who are informed of the confidential nature of such Information and instructed to keep such Information confidential, (ii) to the extent requested by any rating agency or regulatory authority, examiner regulating banks or banking, or other self-regulatory authority having or claiming oversight over the Lender or any of its Affiliates, (iii) pursuant to the order of any court or administrative agency or in any pending legal, judicial or administrative proceeding, or otherwise as required by applicable laws or regulations or by any subpoena or similar legal process based on the advice of counsel (in which case the Lender agrees, to the extent permitted by applicable law, to inform the Borrower promptly thereof), (iv) to any other party to this Loan Agreement, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Loan Agreement or the enforcement of rights hereunder, (vi) subject to an agreement containing provisions substantially the same as those of this Section, to (A) any assignee of or participant in, or any prospective assignee of or prospective participant in, any of its rights or obligations under this Loan Agreement or (B) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (vii) with the consent of the Borrowers, or (viii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this Section, (B) becomes available to the Lender on a nonconfidential basis from a source other than the Borrower or (C) is independently developed by the Lender se. In addition, the Lender may disclose the existence of this Loan Agreement and information about this Loan Agreement to market data collectors, similar service providers to the lending industry and service providers to the Lender in connection with the administration of this Loan Agreement, the other Loan Documents and the Loans. For the purposes of this Section, “Information” means all memoranda, reports or other information received from or on behalf of the Borrowers relating to the Borrowers or their businesses, other than any such information that is available to the Lender on a nonconfidential basis prior to disclosure by the Borrowers. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
8.13 WAIVER OF RIGHT TO TRIAL BY JURY/JURISDICTION. EACH PARTY TO THIS AGREEMENT HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALING OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS EVIDENCE OF SUCH AGREEMENT.
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EACH BORROWER AGREES THAT THE STATE COURTS LOCATED IN NEW HANOVER COUNTY, NORTH CAROLINA, AND THE FEDERAL COURTS LOCATED IN THE EASTERN DISTRICT OF NORTH CAROLINA, HAVE JURISDICTION OVER ANY AND ALL ACTIONS AND PROCEEDINGS INVOLVING THIS AGREEMENT OR ANY OTHER AGREEMENT MADE IN CONNECTION HEREWITH AND SUCH BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES TO SUBMIT TO THE JURISDICTION OF SUCH COURTS FOR PURPOSES OF ANY SUCH ACTION OR PROCEEDING. EACH BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION THAT SUCH BORROWER MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING, INCLUDING ANY CLAIM THAT SUCH COURT IS AN INCONVENIENT FORUM, AND CONSENTS TO SERVICE OF PROCESS PROVIDED THE SAME IS IN ACCORDANCE WITH THE TERMS HEREOF. FINAL JUDGMENT IN ANY SUCH PROCEEDING AFTER ALL APPEALS HAVE BEEN EXHAUSTED OR WAIVED SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT. NOTHING IN THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT LENDER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST ANY BORROWER OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.
8.14 Patriot Act. Lender hereby notifies Borrowers that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies each Borrower, which information includes the name and address of Borrowers and other information that will allow Lender to identify Borrowers in accordance with the Act.
8.15 Borrower Representative. Eastside is hereby appointed by each of the Borrowers as its contractual representative hereunder and under each other Loan Document, and each of the Borrowers irrevocably authorizes the Borrower Representative to act as the contractual representative of such Borrower, and the Borrower Representative agrees to act as such contractual representative. The Borrowers hereby empower and authorize the Borrower Representative, on behalf of the Borrowers, to execute and deliver to Lender, the Loan Documents and all related agreements, certificates, documents, or instruments as shall be necessary or appropriate to effect the purposes of the Loan Documents and to receive notices on their behalf. Each Borrower agrees that any action taken by the Borrower Representative or the Borrowers in accordance with the terms of this Agreement or the other Loan Documents, and the exercise by the Borrower Representative of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Borrowers. Lender, and its officers, directors, agents or employees, shall not be liable to the Borrower Representative or any Borrower for any action taken or omitted to be taken by the Borrower Representative or the Borrowers pursuant to this appointment under this Agreement.
[Signatures are on the following page(s)]
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Signature Page to Loan Agreement
IN WITNESS WHEREOF, Borrowers and the Lender have executed this Loan Agreement, or caused this Loan Agreement to be executed by their respective officers, duly authorized so to do, all as of the day and year first above written.
| BORROWERS: | |||
| EASTSIDE DISTILLING INC. | |||
| By: | /s/ Lawrence Firestone | ||
| Name: | Lawrence Firestone | ||
| Title: | CEO | ||
| REDNECK RIVIERA WHISKEY CO., LLC | |||
| By: | Eastside Distilling Inc., its sole Member | ||
| By: | /s/ Lawrence Firestone | ||
| Name: | Lawrence Firestone | ||
| Title: | CEO | ||
| MOTHERLODE LLC | |||
| By: | Eastside Distilling Inc., its sole Member | ||
| By: | /s/ Lawrence Firestone | ||
| Name: | Lawrence Firestone | ||
| Title: | CEO | ||
| BIG BOTTOM DISTILLING, LLC | |||
| By: | Eastside Distilling Inc., its Manager | ||
| By: | /s/ Lawrence Firestone | ||
| Name: | Lawrence Firestone | ||
| Title: | CEO | ||
Signature Page to Loan Agreement
| OUTLANDISH BEVERAGES LLC | |||
| By: | Eastside Distilling Inc., its sole Member | ||
| By: | /s/ Lawrence Firestone | ||
| Name: | Lawrence Firestone | ||
| Title: | CEO | ||
| CRAFT CANNING + BOTTLING, LLC | |||
| By: | Eastside Distilling Inc., its sole Member | ||
| By: | /s/ Lawrence Firestone | ||
| Name: | Lawrence Firestone | ||
| Title: | CEO | ||
| LENDER: | |||
| LIVE OAK BANKING COMPANY | |||
| By: | /s/ Roxana J. Rice | ||
| Name: | Roxana J. Rice | ||
| Title: | Vice President | ||
EXHIBIT A
Form of Borrowing Base Certificate
[Date]
Live Oak Banking Company
1741 Tiburon Drive
Wilmington, NC 28403
Ladies and Gentlemen:
In order to induce you to make, or continue to make, loan advances to Eastside Distilling, Inc., a Nevada corporation (“Eastside”), the Borrower Representative for MotherLode LLC, an Oregon limited liability company (“MotherLode”), Big Bottom Distilling, LLC, an Oregon limited liability company (“Big Bottom”), Craft Canning + Bottling, LLC, an Oregon limited liability company (“Craft”), Redneck Riviera Whiskey Co., LLC, a Tennessee limited liability company (“Redneck”) and Outlandish Beverages LLC, an Oregon limited liability company (“Outlandish” and together with Eastside, MotherLode, Big Bottom, Craft and Redneck, collectively, the “Borrowers”) pursuant to that certain Loan Agreement (the “Loan Agreement”) between you and Borrowers, and the Note (as defined in the Loan Agreement), the undersigned, as Borrower Representative hereby certifies that on the ____ day of ___________, 20__, the Inventory Value of Borrowers’ Inventory was as follows:
| Finished Whiskey in Barrels or Totes | $_______________ |
The Inventory Value has been calculated based on the definition of Inventory Value in the Loan Agreement, subject to your determination of Inventory Value.
The undersigned further certifies that the Borrowers’ Inventory is subject to a valid and effective security interest in your favor, and other than the Permitted Liens (as such term is defined in the Loan Agreement), there are no liens upon, claims to, or security interests in any Inventory, except for the security interest in your favor.
Based upon the forgoing, Borrower Representative hereby submits this Certificate for a loan advance based upon the Inventory Value as follows:
| (a) | for the initial advance as of the Closing Date: | |||
| Inventory Value X 65%: | $________________ | |||
| (b) | for the advance after receipt of the final appraisal: | |||
| Inventory Value X 85%: | $________________ | |||
| (c) | Less reserves: | $________________ | ||
| (d) | Lesser
of (a) or (b), as applicable, minus (c), or $8,000,000.00: |
$________________ | ||
| (e) | Less aggregate of outstanding principal advances: | $________________ | ||
| (f) | Current Loan Availability: (d) minus (e): |
$________________ | ||
| (g) | Request for loan advance | $________________ |
Attached hereto as “Exhibit A to Borrowing Base Certificate” is the Inventory Report to substantiate the amounts contained herein.
Sincerely,
EASTSIDE DISTILLING INC.
| By: | ||
| Name: | ||
| Title: |
Exhibit A to Borrowing Base Certificate
See attached.
EXHIBIT B
Form of Compliance Certificate
| TO: LIVE OAK BANKING COMPANY | Date: _________________ |
FROM: EASTSIDE DISTILLING INC., as Borrower Representative
The undersigned authorized officer of Eastside Distilling Inc., a Nevada corporation (“Borrower Representative”), as Borrower Representative for the Borrowers (as defined below), certifies that under the terms and conditions of the Loan Agreement (the “Loan Agreement”), dated as of January ___, 2020, by and among Borrower Representative, MotherLode LLC, an Oregon limited liability company (“MotherLode”), Big Bottom Distilling, LLC, an Oregon limited liability company (“Big Bottom”), Craft Canning + Bottling, LLC, an Oregon limited liability company (“Craft”), Redneck Riviera Whiskey Co., LLC, a Tennessee limited liability company (“Redneck”) and Outlandish Beverages LLC, an Oregon limited liability company (“Outlandish” and together with Borrower Representative, MotherLode, Big Bottom, Craft and Redneck, collectively, the “Borrowers”), and Live Oak Banking Company (the “Lender”):
(1) Borrowers are in complete compliance for the period ending _______________ with all required covenants under the Loan Agreement except as noted below; (2) there are no existing Events of Default; (3) all representations and warranties in the Loan Agreement are true and correct in all material respects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; (4) Borrowers, and each of their Subsidiaries, have timely filed all required tax returns and reports, and Borrowers have timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrowers except as otherwise permitted pursuant to the terms of Section 5.06 of the Loan Agreement; and (5) no liens have been levied or claims made against Borrowers or any of their Subsidiaries relating to unpaid employee payroll or benefits of which Borrowers have not previously provided written notification to the Lender.
Attached are the required documents supporting the certification for the period identified above. The undersigned certifies that these are prepared in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrowers are not in compliance with any of the terms of the Loan Agreement, and that compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Loan Agreement.
Please indicate compliance status by circling Yes/No under “Complies” column.
| Reporting Covenants | Required | Complies |
| Monthly
financial statements with Compliance Certificate |
Monthly within 30 days | Yes No |
| Quarterly financial statements | Quarterly within 45 days | Yes No |
| Annual financial statements | FYE within 90 days | |
| A/R & A/P Agings | Quarterly within 45 days | Yes No |
| Inventory Reports (including locations of Eligible Inventory) | Quarterly within 45 days | Yes No |
| Board projections | FYE within 30 days | Yes No |
Other Matters
Have there been any amendments of or other changes to the capitalization table of Borrowers or to the organizational or operating documents of Borrowers or any of their Subsidiaries? If yes, provide copies of any such amendments or changes with this Compliance Certificate.
The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)
| EASTSIDE
DISTILLING INC., as Borrower Representative |
BANK USE ONLY | ||||
| Received by: | |||||
| AUTHORIZED SIGNER | |||||
| By: | Date: | ||||
| Name: | |||||
| Title: | Verified: | ||||
| AUTHORIZED SIGNER | |||||
| Date: | |||||
| Compliance Status: | Yes No |
Exhibit 10.32
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT MARKED BY [***] HAS BEEN OMITTED BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF PUBLICLY DISCLOSED.
EXCLUSIVE PURCHASE AGREEMENT ENTERED INTO BY:
AGAVEROS UNIDOS DE AMATITAN, SA. DE CV., AND INTERSECT BEVERAGE, LLC.
EXCLUSIVE PURCHASE AGREEMENT ENTERED INTO BY AND BETWEEN THE BUSINESS CORPORATION NAMED AGAVEROS UNIDOS DE AMATITAN, S.A. DE C.V. REPRESENTED ON THIS OCCASION BY ITS SOLE DIRECTOR AND C.E.O. SALVADOR RIVERA CARDONA, HEREINAFTER “THE SELLER”, AND THE BUSINESS CORPORATION NAMED INTERSECT BEVERAGE, LLC., REPRESENTED ON THIS OCCASION BY ITS LEGAL REPRESENTATIVE
STEPHANIE KILKENNY, HEREINAFTER “THE BUYER”, ACCORDING TO THE FOLLOWING STATEMENTS AND ARTICLES:
STATEMENTS
| I. | Salvador Rivera Cardona states that, Agaveros Unidos de Amatitan, SA de CV, is a business corporation duly and legally incorporated under Mexican law, as evidenced with a certified copy of the respective Title Deed instrument and that its corporate purpose includes the processing, production and bottling of Tequila, beverages in general especially alcoholic and any other kind as well as the purchase, sale, importation, exportation, consignment, distribution, commission agency and/or outsourcing for third parties as well as the transportation of the above products to anywhere in the Mexican Republic or abroad, among other activities. | |
| II. | Salvador Rivera Cardona states that he has the faculties and powers of a Legal Representative bestowed by Agaveros Unidos de Amatitan, SA DE CV, which has not been cancelled or modified in any way. | |
| III. | Salvador Rivera Cardona states that the registered address of Agaveros Unido s de Amatitan, SA DE CV is in the plant with no number of Rancho Miravalle, in the town of Amatitan, State of Jalisco Mexico. | |
| IV. | Salvador Rivera Cardona states that Agaveros Unidos de Amatitan, SA de CV, has approximately nine hundred hectares of land cultivated or available for cultivating Agave for Tequila that will be responding the obligations acquired by THE SELLER under this agreement. Also states that Agaveros Unidos de Amatitan, SA de CV has its own financial means and the technical and human elements as well as the administrative organization necessary to carry out acts of commerce and in general to perform any obligations arising under this Agreement. | |
| V. | Salvador Rivera Cardona states that it is in the best interest of Agaveros Unidos de Amatitan, SA DE CV to enter into this exclusive purchase agreement. | |
| VI. | THE BUYER states through its legal representative, it is an American business corporation, incorporated according to the laws of The United States of America, which it evidences with the proper document. | |
| VII. | Stephanie Kilkenny, states that she is a United States citizen, and the legitimate representative of THE BUYER, with sufficient powers and faculties to enter into this agreement, according to the respective certified copy, and that her powers have not been restricted or cancelled in any way. | |
| VIII. | THE BUYER states that their principal place of business is in 321 S. Vermont Ave, Glendora, CA 91741, United States of America. | |
| IX. | THE BUYER states that it has the infrastructure, economic and human resources, and sufficient experience to enter into this agreement. | |
| X. | THE SELLER and THE BUYER states that it is their desire to enter into this agreement because it is in their respective best interests as merchants and, pursuant to the above statements; both parties submit this agreement to the following: |
| 1| Page |
EXCLUSIVE PURCHASE AGREEMENT ENTERED INTO BY:
AGAVEROS UNIDOS DE AMATITAN, SA. DE CV., AND INTERSECT BEVERAGE, LLC.
ARTICLES
ONE.- ACKNOWLEDGMENT: Both parties state for all legal effects, that they acknowledge each other’s capacity to enter into this Agreement.
TWO.- PURPOSE OF THE AGREEMENT: THE SELLER is bound to sell to THE BUYER the product processed by THE SELLER which is alcoholic beverage identified as TEQUILA, in the different make-ups and presentations according to THE BUYER’S interest, and in terms and conditions specified in this agreement. Parties agree that the Tequila that will be purchased under this agreement will show or use the trademark AZUNIA which is a registered trademark property of THE BUYER.
THREE.- EXCLUSIVITY AGREEMENT: Both parties agree that their main intention for entering into this agreement is for THE BUYER to exclusively purchase from THE SELLER, the Tequila subject matter of this agreement. Both parties understand that with this purchase contract for tequila THE SELLER is obligated to sell to THE BUYER the forecasted liters of tequila annually in its various/diverse presentations. And THE BUYER is committed to purchase in a annually way, according to the forecast established in this agreement the amount of liters in it’s various presentations, subject to a 20% variation in accordance to the terms and conditions which is established as follows.
Annual Forecast for the next two years:
Calendar year 2020 = [***] liters
Calendar year 2021= [***] liters
Parties understand and expressly agree, that THE BUYER cannot and will not purchase any Tequila from other producers of Tequila for the trademark AZUNIA, this means that any Tequila with the trademark AZUNIA, must be produced by Agaveros Unidos de Amatitan, SA de CV. Breach of this obligation shall be a cause for termination of this agreement and compensation payment agreed in article Eighteen of this agreement will proceed. In the other hand, THE SELLER will not compromise any of its production of Agave Tequilana Weber, for producing other Tequila Brands, except THE SELLER’s own brands, until the annual forecast is completed, this means, that only when the annual forecast is cover, THE SELLER can produce Tequila for other brands and companies.
Parties agree, that in case that THE BUYER does not meet the annual forecasts, THE SELLER will be free to terminate this agreement, and since the nine hundred hectares of Agave production will be backing up the annual forecasts, and since THE SELLER will entirely compromise the production of Agave Tequilana Weber to fulfill this agreement, if THE BUYER does not meet the annual forecast, THE SELLER can terminate this agreement and THE BUYER will pay compensation agreed in article Eighteen of this agreement.
Both parties agree that THE BUYER will exclusively purchase Tequila from THE SELLER including for any other brand, except for the Brand TEQUILA REGIONAL, which it is already being purchased by THE BUYER from other producer. Breach of this obligation will cause the termination of this agreement and compensation payment sett led in article Eighteen of this agreement.
PRODUCT: Both parties understand that the forecasted liters of Tequila will be bottled in: Blanco, Reposado, Anejo (aged) and Black 2-Year, by which the SELLER must provide bottles in 1 liter or 750 Mis. and 50 Mis., and all the necessary bottling (bottles, labels,etc) and packing materials, which THE BUYER must provide.
| 2| Page |
EXCLUSIVE PURCHASE AGREEMENT ENTERED INTO BY:
AGAVEROS UNIDOS DE AMATITAN, SA. DE CV., AND INTERSECT BEVERAGE, LLC.
FOUR.- INFORMATION OF ANNUAL FORECAST: Both parties agree that THE BUYER must provide an annual forecast for the following year’s not mentioned in article Three of this agreement, projected annual sales must be settled or provided by THE BUYER for as long as this contract is effective, in order to ensure production to fulfill the BUYER’S requirements. Parties agree that THE BUYER must consider the need of buying Prime Tequila Blanco with the sufficient time for proper maturation for Tequila “Aiiejo” and “Black 2 Year’’.
Such forecast shall be provided by the BUYER within the first 15 fifteen days of the month of December of each year and for the following year, so THE SELLER can review such forecast in time, in order to forecast proper inventory levels for the following year and ensure to have the necessary raw materials.
FIVE.- INTELECTUAL PROPERTY: THE BUYER declares and THE SELLER recognizes that, THE BUYER is the owner of the brand AZUNIA, which is a register trademark in class 33 before the Mexican trademark authority, and also registered before the United States Patent and Trademark Office USPTO. The Product that will be delivered to THE BUYER will show the brand AZUNIA.
THE SELLER acknowledges that the brand AZUNIA is owned by THE BUYER as well as trade names and commercial slogans related to AZUNIA; therefore, THE SELLER does not acquire any rights to the brands due to entering into this agreement.
THE SELLER itself or any affiliated or subsidiary in which it holds any proportion of equity is bound not to register an identical or similar brand in any country in the world that may lead to confusion with the brands, trade names and commercial slogans proprietary to THE BUYER and that distinguish the products subject of this Agreement.
THE SELLER will cooperate in defending the brand (AZUNIA), trade names and commercial slogans, cooperation will be limited solely to giving THE BUYER notice about any news of third parties violating the rights derived from using or registering the brand AZUNIA.
SIX.- ASSIGNMENT AGREEMENT: Parties agree that they will not be able to transfer their rights or obligations regarding this agreement without the previous and written consent of the other party.
Parties agree, that in case THE BUYER would like to sell or’ sell the AZUNIA Brand for Tequila to a third party during the term if this contract, the said third party, will be forced to sign another agreement with all the terms and conditions of this agreement .. In case that the third party who acquires the AZUNIA brand , does not sign a written agreement in the same terms of this agreement with THE SELLER, in a period of 30 days, THE BUYER will pay compensation agreed in article Eighteen of this agreement to THE SELLER. Therefore this agreement will terminate.
SEVEN.- PRICE: Both parties agree, in the price of the product (Tequila AZUNIA brand) as follows:
| TEQUILA BLANCO TEQUILA REPOSADO TEQUILA ANEJO (aged) TEQUILA BLACK 2· YEAR | $[***] US DOLLARS PER LITER | |
| $[***] US DOLLARS PER LITER | ||
| $ [***] US DOLLARS PER LITER | ||
| $[***] US DOLLARS PER LITER |
| 3| Page |
EXCLUSIVE PURCHASE AGREEMENT ENTERED INTO BY:
AGAVEROS UNIDOS DE AMATITAN, SA. DE CV., AND INTERSECT BEVERAGE, LLC.
Parties agree that the prices previously set, are only for the Tequila and the bottling and packing, since all the materials such as bottles, bottle caps, labels, boxes, packing materials, etc, will be provided by THE BUYER.
EIGHT ..- PRICE REVIEW: Parties agree that the prices mentioned above are largely factored on the price of agave, which is established by the supply and demand thereof, therefore the prices established in Section Seven will be reviewed by the parties every thirty days due to the changes/fluctuations in the price of agave.
The parties agree that the prices mentioned above in Section Seven reflects the current price at the time of execution of this agreement, and that the prices will be amended in the event of an increase or decrease in the price of agave used in the product of tequila. For avoidance of confusion, the amendment of price will be directly related to the cost of Agave Tequilana Weber, which represents the major cost of the product. The amendment of prices will be reviewed and agreed to by both parties taking into consideration said fluctuation of Agave Tequilana Weber.
NINE.- METHOD AND PLACE OF PAYMENTS: Both parties recognize and acknowledge that the BUYER will pay the SELLER the prices mentioned in article Seven of this agreement as follows:
| ● | Fifty percent (50%} payment at the moment of placing the order of the product and 50% fifty percent upon delivery to Buyer. Delivery in THE SELLER’s facility in terms of article thirteen of this agreement. | |
| ● | The payment must be made via wire transfer to a bank account BBVA BANCOMER, in an account designated by THE SELLER. |
Only after receiving the first payment placing the order, THE SELLER will be obligated to start the productions of the product in terms of the order placed by THE BUYER. If THE BUYER fails to fulfill the obligation of payment as mentioned in this agreement, THE SELLER will not have any obligation to receive any other order set by THE BUYER until payment is made.
Once THE SELLER receives the first partial payment, this is 50% of the total invoice, the original shipping documents will be sent by courier to THE BUYER’s address, but the product will not be delivered until the full payment is made.
TEN.- BILLING: Both parties agree that THE SELLER once receiving payment from the BUYER, will provide an invoice which will meet all legal requirements.
ELEVEN.- TAXES: Each party is liable for paying its respective. taxes’ as provided by law on any income generated by this Agreement, and releases the other party from any liability in this regard.
TWELVE.- ORDERS: THE BUYER shall submit to THE SELLER, written orders for the product(s) with corresponding specifications regarding the Product 30 calendar days prior to the delivery date, and THE SELLER will send the respective pro forma invoice to THE BUYER in acceptance and as acknowledgment of receipt via e-mail or any other electronic method, as long as there is no doubt of the communication.
PRODUCT or PRODUCTS, in accordance with paragraphs above, Product or Products is designated as Tequila with registered trademark: “AZUNIA”, in Class 33 to protect Tequila. THE SELLER will deliver to THE BUYER, Tequila in different presentations as THE BUYER indicates according to article Seven of this agreement, and the Tequila will be bottled and packed in the materials that THE BUYER shall provide for such matter.
| 4| Page |
EXCLUSIVE PURCHASE AGREEMENT ENTERED INTO BY:
AGAVEROS UNIDOS DE AMATITAN, SA. DE CV., AND INTERSECT BEVERAGE, LLC.
THIRTEEN.- PRODUCT DELIVERY DATE: Parties agree that the delivery of the product(s) subject hereof will be EXWORKS loading location. For the purposes of this agreement and to establish the parties’ liability, risks and expenses related to the delivery of the products, the parties accept and acknowledge that the agreed delivery term is EXWORKS loading location in Rancho Miravalle in the town of Amatitan, State of Jalisco Mexico under international trade terms, in a period no longer than 30 days at the latest after the order is placed by THE BUYER, and once the order is approved and accepted by THE SELLER; therefore, said purchase order and acknowledgment of receipt must exist according to article Twelve of this agreement, in order to prepare delivery within the established period.
FOURTEEN.- PRODUCT RECEIVING: Both parties agree that once the Product is delivered or ready to deliver, THE BUYER has a 10 days period to pick up the Product from THE SELLER’s facility after he is notified of the delivery, for the purpose of this agreement, it would be understood that THE BUYER has received the Product, and any damage or loss will be his responsibility if the Product is not picked up on the mentioned period of time.
THE BUYER will cover the cost of an insurance to cover any risk in store and custody of the Product TEQUILA in THE SELLER’S facilities, as well as insurance for any risks of accidents or loss, of bottling and labeling supplies that may occur in THE SELLER’s facility, since THE SELLER will execute the process of bottling and labeling under this contract.
FIFTEEN.- MERCHANDISE QUALITY: THE SELLER must at all time guarantee the quality of Tequila. Characteristics, flavor, and color levels of the tequila will be maintained. THE BUYER and THE SELLER will agree to a quality control system to ensure only the agreed upon quality is delivered to THE BUYER. THE SELLER assumes any and all liability for correct alcohol percentage and volume as printed on the bottle.
Both parties agree that THE SELLER will be liable for product quality, so after the product has been shipped (delivered), THE BUYER will be liable for any cases of alteration, adulteration and similar cases after receiving the product as mentioned in article Fourteen of this agreement.
SIXTEEN.- MERCHANDISE PACKAGING: Both Parties agree that in order to guarantee Merchandise Packing, bottles and all packaging materials of products said hereof may not be changed without a 90 calendar day notice period and agreement thereof between parties. THE SELLER must properly pack the Product for its safe shipping and handling.
SEVENTEEN ..- LABELING RULES: THE SELLER will not be responsible for any breach of labeling rules that THE BUYER must comply, since the labels will be provided by !HE BUYER. THE SELLER will be responsible for any breach of labeling rules regarding Mexican legislation; therefore THE SELLER will give notice to THE BUYER of any legal requirements regarding labeling, since Tequila is a Government Protected Product under the Protected Designation of Origin PDO of Tequila.
EIGHTEEN.- COMPENSATION: Both parties agree that in case of breach of obligations established in Articles Three and Six of this agreement by THE BUYER, THE BUYER will be bound to pay a compensation to THE SELLER in the agreed amount of USD$ 2,000,000.00 ( TWO MILLION OF DOLLARS OF THE UNITED STATES OF AMERICA UNITED STATES CURRENCY).
NINTEEN.- CONFIDENTIALITY INDUSTRIAL SECRET: Both parties agree that during the term of this agreement and afterwards that neither party will disclose the other party’s confidential Information that could constitute an industrial secret or use confidential Information and/or Industrial Secret for purposes other than those provided by this Agreement. Parties must keep proper secrets and confidentiality with respect to the information and documents related to this Agreement.
TWENTY.- TERM: Both Parties agree that this Agreement will be effective and will be enforced for a period of twenty (20) years starting from the date of signing this agreement.
| 5| Page |
EXCLUSIVE PURCHASE AGREEMENT ENTERED INTO BY:
AGAVEROS UNIDOS DE AMATITAN, SA. DE CV., AND INTERSECT BEVERAGE, LLC.
This agreement will not be automatically renewed. If the parties are interested in continuing their commercial relationship, a new written agreement must be signed by both parties. Any mutually agreed addendums and or reveal to extend the term of this contract will be in written and signed by both parties and become part of this document.
This agreement constitutes the entire agreement between the Parties and revokes and ends any other agreement, contract or oral/written statement regarding the purchase of Tequila between the Parties. Any prior agreements or covenant, if any, is hereby canceled, and all claims and demands thereon are hereby fully paid and exempted. Specially this agreement ends and revokes the agreement the Parties signed on the date of January 02, 2013 regarding the purchase of Tequila for AZUNIA trademark.
Notwithstanding the term of this agreement, Parties will have the right to terminate this agreement In the event of acts of God or force majeure leading to a lack of material, it is understood that THE SELLER may have a supply scarcity problem without prejudice for neither THE SELLER nor THE BUYER. In this case Parties will agree how to comply the pending obligations in order to terminate this agreement.
This agreement will be reviewed by the buyer and seller within ninety days of completion to complement the details that would have been required in said contract.
TWENTY-ONE.- TERMINATION DUE TO BREACH: Either party has the right to terminate this agreement in case one of them breaches its obligations and fails to take measures to cure said breach within 15 calendar days following the notice, or requirement that the other party will do to proceed to ‘rectify the breach. Termination due to Breach will proceed and parties will agree the way to comply their pending prior obligations or those already placed under this agreement. In case of breach from THE BUYER of the obligations agreed in articles Three and Six of this agreement, termination will proceed and compensation payment will be mandatory according to article Eighteen of this agreement.
TWENTY-TWO.- SURVIVING OBLIGATIONS: The cancellation or termination of this Agreement will not affect the validity and enforceability of prior assumed obligations in any way or those that, established by the nature hereof or by provision of law or by the will of the parties, may be enforced after the cancellation or termination of this Agreement. ,..
TWENTY-THREE.- INDEPENDENT CONTRACTOR: THE SELLER is aware and agrees that this is a business agreement; therefore, there is no employer-employee relation with THE BUYER since it is not subordinated to THE SELLER, and since both parties work independently.
The employees, factor’s or sales clerks used by THE BUYER to perform this Agreement will be directly dependent on THE BUYER; therefore, in the event of any kind of labor, civil or any other kind of claim, THE BUYER will assume its responsibility and is bound to hold THE SELLER harmless in the event of any claim filed against THE SELLER.
TWENTY-FOUR.- EVENTS OF FORCE MAJEURE: Neither party will be liable for damages or losses resulting from acts of God or force majeure, acts by government authorities nor labor strikes.
TWENTY-FIVE.- AMENDMENTS: This Agreement may only be modified or amended with a written document signed by the parties. If any provision of this Agreement is deemed unlawful or unenforceable for any· reason, the other provisions hereof will not be affected. The failure or delay of any of the parties in exercising any of its rights or authority set forth herein will not be construed as a waiver of said right or authority.
| 6| Page |
EXCLUSIVE PURCHASE AGREEMENT ENTERED INTO BY:
AGAVEROS UNIDOS DE AMATITAN, SA. DE CV., AND INTERSECT BEVERAGE, LLC.
TWENTY-SIX.- SEVERABILITY: If any provision of this Agreement is deemed invalid for any reason, said invalidity will not affect the other provisions hereof if the Agreement can still be effective despite the exclusion of the invalid provision with respect to the parties’ material intentions; therefore, the provisions of this Agreement are declared severable.
TWENTY-SEVEN.- NOTICES: The notices required hereby will be in writing and delivered in person or by first-class courier service. Also, the notices can be by e-mails or any other electronic methods, as long as the notice is confirmed by parties and there is no doubt of communication. For personal deliveries of notices under this agreement, Parties point the following addresses:
Agaveros Unidos de Amatitan, SA DE CV Rancho Miravalle Sin Numero Amatitan, Jalisco Mexico
2.- Intersect Beverage, LLC
321 S. Vermont Ave. Glendora, CA 91741 USA
TWENTY EIGHT.- LANGUAGE: This Agreement is executed in two languages, one in English and another in Spanish, both of which shall bind the Parties hereto and constitute one and the same legal instrument; and both parties agree to its scope and contents provided; however, in case of doubt as to its interpretation between the English version and the Spanish version, the Spanish version shall prevail in all cases.
TWENTY-NINE.- INSOLVENCY: Either party may terminate this Agreement early with no need of a prior court order in the event that one of them is declared in bankruptcy, or files for voluntary bankruptcy, a meeting of creditors or any other evidence of insolvency.
THIRTY.- ECONIMIC RESOURCES: Parties state that the resources which both will enter and execute all terms of this agreement, are of legal origin from activities carried out legally and within the framework of the Federal Law for the prevention and identification of operations with resources of illicit origin.
THIRTY-ONE.- CONSENT VICES: Both parties expressly represent that there is no error or any excess or inadequacy of consideration or fraud or coercion in this Agreement and in general no defect in consent exists; therefore, the parties are bound by each and every article and expressly waive any actions leading to the cancellation hereof.
THIRTY-TWO.- HEADINGS: The headings included in this contract are only for reference and have no legal effects on the terms, conditions and obligations of this contract.
THIRTY-THREE.- COMPETENT JURISDICTION. The parties in this agreement expressly agree that in case of a dispute or controversy arising out of or relating to this agreement that cannot be settled amicably by the parties, shall be finally settled by court, subject to the jurisdiction of the civil and/or commerce courts in Guadalajara State of Jalisco in Mexico, waiving to any other jurisdiction that could be applicable in accordance with their present or future domicile or otherwise.
Having read and agreed upon this Agreement, certain about its legal scope, it is executed in the City of Guadalajara, State of Jalisco Mexico on the sixteen day of august, two thousand and nineteen.
| 7| Page |
EXCLUSIVE PURCHASE AGREEMENT ENTERED INTO BY:
AGAVEROS UNIDOS DE AMATITAN, SA. DE CV., AND INTERSECT BEVERAGE, LLC.
| ‘‘THE BUYER” | “THE SELLER” | |
| /s/ Stephanie Kilkenny | /s/ Salvador Rivera Cardona | |
| Intersect Beverage LLC. | Agaveros Unidos de Amatitan, SA de CV. | |
| Stephanie Kilkenny. | Salvador Rivera Cardona | |
| 321 Vermont Ave. | Rancho Miravalle S/N | |
| Glendora, CA. 91741 | Amatitan, Jalisco Mexico. | |
| USA. |
| 8| Page |
Exhibit 10.33
ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT
This ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT (the “Agreement”) is made and entered into as of September __, 2019, among Intersect Beverage, LLC, a California limited liability company (“Assignor”), Eastside Distilling, Inc., a Nevada corporation (“Assignee”), and Agaveros Unidos de Amatian, S.A. de C.V., a Mexican corporation of Amatian, Mexico (“Agaveros”).
WHEREAS, Assignor and Agaveros are parties to that certain Contract to Buy and Sell, dated January 2, 2013, as amended and restated by that certain Exclusive Purchase Agreement between the parties dated as of August 16, 2019 (as amended, the “Agaveros Agreement”);
WHEREAS, Assignor and Assignee are parties to that certain Asset Purchase Agreement dated as of September __, 2019 (the “Purchase Agreement”), pursuant to which Assignee has purchased the Purchased Assets (as defined in the Purchase Agreement), Assigned Contracts (as defined in the Purchase Agreement), and Assumed Liabilities (as defined in the Purchase Agreement);
WHEREAS, one of the Assigned Contracts and Assumed Liabilities is the Agaveros Agreement;
WHEREAS, under the Agaveros Agreement, Agaveros must give written consent to any assignment of the Agaveros Agreement; and
WHEREAS, Agaveros has agreed to consent to the assignment contemplated under this Agreement and desires to provide such consent.
NOW, THEREFORE, for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:
1. Capitalized Terms. Capitalized terms used but not defined herein shall have the meanings for such terms that are set forth in the Purchase Agreement.
2. Assignment and Assumption of Agaveros Agreement. Subject to the terms and conditions of the Purchase Agreement, effective as of the Closing (the “Effective Time”):
a. Assignor hereby sells, assigns, transfers, conveys, and delivers (collectively, the “Assignment”) to Assignee all of Assignor’s right, title, benefit, privileges and interest in and to the Agaveros Agreement, as an Assigned Contract and Assumed Liability with respect to obligations arising after the Effective Time, in accordance with and subject to the terms of the Purchase Agreement; and
b. Assignee hereby accepts the Assignment and assumes and agrees to observe and perform all of the duties, obligations, terms, provisions and covenants, and to pay and discharge all of the liabilities of Assignor to be observed, performed, paid or discharged, in each case, to the extent arising at and from the Effective Time, in connection with the Agaveros Agreement, as an Assigned Contract and Assumed Liability in accordance with the Purchase Agreement.
| PAGE 1 – ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT |
3. Consent by Agaveros.
a. As required under Section 6 of the Agaveros Agreement, by its signature below, Agaveros hereby irrevocably consents to the assignment of the Agaveros Agreement to Assignee as contemplated under the Purchase Agreement.
b. Agaveros acknowledges and agrees that the requirements of the Agaveros Agreement with respect to the Assignment, including any requirements under Section 6 and any requirement that Assignee enter into a separate agreement with Agaveros, are hereby satisfied.
c. Agaveros acknowledges and agrees that the Assignment shall be effective as of the Closing, and at such time, the Agaveros Agreement shall remain in full force and effect.
4. Acknowledgement. Agaveros and Assignor hereby acknowledge, agree, represent and warrant that as of the Effective Time:
| a. | The Agaveros Agreement is in full force and effect; and | |
| b. | Each of Agaveros and Assignor have fulfilled all of their respective obligations under the Agaveros Agreement and are not aware of any breach of the Agaveros Agreement by the other party. Agaveros and Assignor understand and agree that Assignee shall not assume any Liability under the Agaveros Agreement to the extent arising prior to the Effective Time. |
5. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
| PAGE 2 – ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT |
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
| ASSIGNOR: | ||
| INTERSECT BEVERAGE, LLC | ||
| By: | /s/ Patrick J. Kilkenny | |
| Name: | Patrick J. Kilkenny | |
| Title: | President | |
| ASSIGNEE: | ||
| EASTSIDE DISTILLING, INC. | ||
| By: | /s/ Steven Shum | |
| Name: | Steven Shum | |
| Title: | Interim Chief Executive Officer and Chief Financial Officer | |
| AGAVEROS: | ||
| AGAVEROS UNIDOS DE AMATIAN, S.A. DE C.V. | ||
| By: | /s/ Salvador Rivera Cardona | |
| Name: | Salvador Rivera Cardona | |
| Title: | Chief Executive Officer | |
| SIGNATURE PAGE – ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT |
Exhibit 10.34
CFO CONSULTING AGREEMENT
CFO CONSULTING AGREEMENT dated as of March 2, 2020 (this “Agreement”), between Eastside Distilling, Inc., a Oregon corporation (the “Company”), and Glenn Stuart Schreiner doing business as GSS Consulting, LLC. (the “Consultant”).
WHEREAS, the Company desires to engage Consultant to provide consulting services, upon the terms and subject to the conditions hereinafter set forth; and
WHEREAS, the Consultant has agreed to provide such consulting services, upon the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the above premises and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows:
| 1. | Independent Consultant. The Company hereby engages the Consultant, and the Consultant will serve the Company, as a consultant. During the term of this Agreement, the Consultant will serve as the non-employee interim chief financial officer (“CFO”) of the Company on a part-time basis. The Company confirms that the Consultant has been appointed as the interim CFO of the Company and will remain as an executive officer of the Company during the term of this Agreement. |
| 2. | Duties, Term, and Compensation. The Consultant’s duties, term of engagement, compensation and provisions for payment thereof are detailed in the attached Exhibit A, which may be amended in writing from time to time by the Consultant and agreed to by the Company, and which collectively are hereby incorporated by reference. |
| 3. | Expenses. During the term of this Agreement, the Consultant shall invoice and the Company shall reimburse the Consultant for all reasonable and approved out-of-pocket expenses which are incurred in connection with the performance of the duties hereunder. |
| 4. | Confidentiality. The Consultant acknowledges that during the engagement he will have access to and become acquainted with various trade secrets, inventions, innovations, processes, information, records and specifications owned or licensed by the Company and/or used by the Company in connection with the operation of its business including, without limitation, the Company’s business and product processes, methods, customer lists, accounts and procedures. The Consultant agrees that he will not disclose any of the aforesaid, directly or indirectly, or use any of them in any manner, either during the term of this Agreement or at any time thereafter, except as required in the course of this engagement with the Company. All files, records, documents, blueprints, specifications, information, letters, notes, media lists, original artwork/creative, notebooks, and similar items relating to the business of the Company, whether prepared by the Consultant or otherwise coming into his possession, shall remain the exclusive property of the Company. The Consultant shall not retain any copies of the foregoing without the Company’s prior written permission. Upon the expiration or earlier termination of this Agreement, or whenever requested by the Company, the Consultant shall immediately deliver to the Company all such files, records, documents, specifications, information, and other items in his possession or under his control. |
| 5. | Conflicts of Interest; Non-hire Provision. The Consultant represents that he is free to enter into this Agreement, and that this engagement does not violate the terms of any agreement between the Consultant and any third party. Further, the Consultant, in rendering his duties shall not utilize any invention, discovery, development, improvement, innovation, or trade secret in which he does not have a proprietary interest. During the term of this agreement, the Consultant shall devote as much of his productive time, energy and abilities to the performance of his duties hereunder as is necessary to perform the required duties in a timely and productive manner. The Company acknowledges that this Agreement only obligates the Consultant to serve approximately 60 percent of his working time with the Company, that the Consultant has other commitments. The Consultant is expressly free to perform services for other parties while performing services for the Company. |
| 6. | Indemnification and D&O Insurance: The Company agrees to defend, indemnify (including, without limitation, by providing for the advancement of expenses and reasonable attorneys’ fees) and hold harmless the Consultant for any and all acts taken or omitted to be taken by the Consultant hereunder (except for bad faith, gross negligence or willful misconduct) as if the Consultant was an officer of the Company as provided in the charter and bylaws of the Company in accordance with the same terms, conditions, limitations, standards, duties, rights and obligations as an officer. The provisions of this Section shall survive any termination of this Agreement. In addition, until the five (5) year anniversary of the termination or expiration of this Agreement, the Company shall maintain in effect liability insurance coverage for the Consultant (as an insured person) with respect to his service under this Agreement, on the same or more favorable terms and conditions (from the perspective of the Consultant) as under the liability insurance policies of the Company in effect as of the date of this Agreement. |
| 7. | Merger. This Agreement shall not be terminated by the merger or consolidation of the Company into or with any other entity. |
| 8. | Termination. The Company may terminate this Agreement at any time by 15 days’ written notice to the Consultant. |
| 9. | Independent Consultant. This Agreement shall not render the Consultant an employee, partner, agent of, or joint venture with the Company for any purpose. The Consultant is and will remain an independent Consultant in his relationship to the Company. The Company shall not be responsible for withholding taxes with respect to the Consultant’s compensation hereunder. The Consultant shall have no claim against the Company hereunder or otherwise for vacation pay, sick leave, retirement benefits, social security, worker’s compensation, health or disability benefits, unemployment insurance benefits, or employee benefits of any kind. |
| 10. | Successors and Assigns. All of the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, if any, successors, and assigns. |
| 11. | Choice of Law. The laws of the state of Colorado shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereto. |
| 12. | Arbitration. Any controversies arising out of the terms of this Agreement or its interpretation shall be settled in Denver, Colorado in accordance with the rules of the American Arbitration Association, and the judgment upon award may be entered in any court having jurisdiction thereof. |
| 13. | Headings. Section headings are not to be considered a part of this Agreement and are not intended to be a full and accurate description of the contents hereof. |
| 14. | Waiver. Waiver by one party hereto of breach of any provision of this Agreement by the other shall not operate or be construed as a continuing waiver. |
| 15. | Assignment. The Consultant shall not assign any of his rights under this Agreement, or delegate the performance of any of his duties hereunder, without the prior written consent of the Company. |
| 16. | Notices. Any and all notices, demands, or other communications required or desired to be given hereunder by any party shall be in writing and shall be validly given or made to another party if personally served, or if deposited in the United States mail, certified or registered, postage prepaid, return receipt requested. If such notice or demand is served personally, notice shall be deemed constructively made at the time of such personal service. If such notice, demand or other communication is given by mail, such notice shall be conclusively deemed given five days after deposit thereof in the United States mail addressed to the party to whom such notice, demand or other communication is to be given as follows: |
| If to the Consultant: | Glenn Stuart Schreiner | ||
| 6865 W. 56th Ave #8-107 | |||
| Arvada, CO 80002 | |||
| stuart.schreiner@gmail.com |
| If to the Company: | Eastside Distilling, Inc. | ||
| Attn: Lawrence Firestone, CEO | |||
| 1001 SE Water Avenue Suite #390 | |||
| Portland, OR 97214 | |||
| lfirestone@eastsidedistilling.com |
Any party hereto may change its address for purposes of this paragraph by written notice given in the manner provided above.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written.
| Eastside Distilling | ||
| By: | /s/ Lawrence Firestone CEO | |
| Lawrence Firestone CEO | ||
| GSS Consulting, LLC | ||
| By: | /s/ Glenn Stuart Schreiner | |
| Glenn Stuart Schreiner Principal | ||
SCHEDULE A
DUTIES, TERM, AND COMPENSATION
| DUTIES: | The Consultant will perform all duties typically required of a Chief Financial Officer, including, but not limited to accounting oversight, preparation of quarterly and annual financial statements and other filings as may be required and coordination with Company’s independent public accountants with respect to quarterly reviews and annual audits. |
He will report directly to Lawrence Firestone, CEO and to any other party designated by Lawrence Firestone in connection with the performance of the duties under this Agreement and shall fulfill any other duties reasonably requested by the Company and agreed to by the Consultant.
| TERM: | This engagement shall commence upon execution of this Agreement and shall continue in full force and effect for a term mutually agreeable to both parties, unless terminated earlier by operation of and in accordance with this Agreement. |
COMPENSATION:
As compensation for the services rendered pursuant to this Agreement, Company shall pay Consultant $125.00 per hour.
Exhibit 21.1
SUBSIDIARIES OF
EASTSIDE DISTILLING, INC.
Big Bottom Distillery, LLC
Craft Canning + Bottling, LLC
MotherLode Craft Distillery, LLC
Outlandish, LLC
Redneck Riviera Whiskey Co., LLC
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference of our report dated March 30, 2020 relating to our audits of the consolidated financial statements of Eastside Distilling, Inc. that appear in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
| /s/ M&K CPAS, PLLC | |
| www.mkacpas.com | |
| Houston, Texas | |
| March 30, 2020 |
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lawrence Firestone, certify that:
1. I have reviewed this Annual Report on Form 10-K of Eastside Distilling, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I area have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2020
| /s/ Lawrence Firestone | |
| Lawrence Firestone | |
| Chief Executive Officer and Director |
Exhibit 31.2
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, G. Stuart Schreiner, certify that:
1. I have reviewed this Annual Report on Form 10-K of Eastside Distilling, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2020
| /s/ G. Stuart Schreiner | |
| G. Stuart Schreiner | |
| Interim Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Lawrence Firestone, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Eastside Distilling, Inc. on Form 10-K for the period ended December 31, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Eastside Distilling, Inc.
Date: March 30, 2020
| By: | /s/ Lawrence Firestone | |
| Name: | Lawrence Firestone | |
| Title: | Chief Executive Officer and Director |
I, G. Stuart Schreiner, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Eastside Distilling, Inc. on Form 10-K for the period ended December 31, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Eastside Distilling, Inc.
Date: March 30, 2020
| By: | /s/ G. Stuart Schreiner | |
| Name: | G. Stuart Schreiner | |
| Title: | Interim Chief Financial Officer |