Beeline Holdings, Inc 10-Q for FY2021 Q2
Beeline Holdings, Inc. (BLNE)
About this 10-Q
Beeline Holdings, Inc filed this 10-Q on August 12, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.38M
- down 7.0% from $3.64M a year earlier
- Net loss
- $1.72M
- compared with a net loss of $2.14M a year earlier
- Diluted EPS
- -$0.14
- compared with -$0.22 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the quarterly period ended | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _________________
Commission
File No.:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
Issuer’s
telephone number:
Securities registered pursuant to Section 12(b) of the Act:
| The
| ||||
| (Title of Each Class) | (Trading Symbol) | (Name of Each Exchange on Which Registered) |
Indicate
by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
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).
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of August 12, 2021, shares of our common stock, $0.0001 par value, were outstanding.
EASTSIDE DISTILLING, INC.
FORM 10-Q
June 30, 2021
TABLE OF CONTENTS
| 2 |
PART I: FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
Eastside Distilling, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2021 and December 31, 2020
(Dollars in thousands, except shares and per share amounts)
| June 30, 2021 | December 31, 2020 | |||||||
| Assets | Unaudited | |||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Trade receivables, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and current assets | ||||||||
| Current assets held for sale | - | |||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Other assets, net | ||||||||
| Non-current assets held for sale | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Deferred revenue | - | |||||||
| Current portion of secured credit facilities, net of debt issuance costs | ||||||||
| Deferred consideration for Azuñia acquisition | - | |||||||
| Other current liabilities, related party | - | |||||||
| Current portion of notes payable | ||||||||
| Current portion of lease liabilities | ||||||||
| Current liabilities held for sale | ||||||||
| Total current liabilities | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Secured credit facilities, net of debt issuance costs | - | |||||||
| Notes payable, related parties | - | |||||||
| Notes payable, net of current portion | ||||||||
| Non-current liabilities held for sale | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 12) | - | - | ||||||
| Stockholders’ equity (deficit): | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively |
|
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|
|
|
|
|
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| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2021 and 2020
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Less customer programs and excise taxes | ||||||||||||||||
| Net sales | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| (Gain) loss on disposal of property and equipment | - | ( | ) | ( | ) | |||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | - | - | ||||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) from discontinued operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Basic net income (loss) per common share | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Diluted net income (loss) per common share | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Diluted weighted average common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2021 and 2020
(Dollars in thousands)
(Unaudited)
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net (income) loss from discontinued operations | ( | ) | ||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt expense | ||||||||
| Forgiveness of debt - Paycheck Protection Program | ( | ) | - | |||||
| (Gain) loss on disposal of assets | ( | ) | ||||||
| Remeasurement of deferred consideration | ( | ) | - | |||||
| Lease expense | - | |||||||
| Amortization of debt issuance costs | ||||||||
| Interest accrued to secured credit facilities | - | |||||||
| Issuance of common stock in exchange for services for related parties | ||||||||
| Issuance of common stock in exchange for services for third parties | ||||||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables, net | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid expenses and other assets | ||||||||
| Right-of-use assets | - | |||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities | ( | ) | ||||||
| Other liabilities, related party | ( | ) | - | |||||
| Deferred revenue | ( | ) | ||||||
| Net lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities of discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Proceeds from sale of fixed assets | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash (used in) provided by investing activities of continuing operations | ( | ) | ||||||
| Net cash provided by investing activities of discontinued operations | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from secured credit facilities | ||||||||
| Proceeds from notes payable | - | |||||||
| Payments of principal on secured credit facilities | ( | ) | - | |||||
| Payments of principal on notes payable | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities of continuing operations | ( | ) | ||||||
| Net cash provided by financing activities of discontinued operations | - | - | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net increase in cash | ||||||||
| Cash at the beginning of the period | ||||||||
| Cash at the end of the period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash paid for amounts included in measurement of lease liabilities | $ | $ | ||||||
| Supplemental Disclosure of Non-Cash Financing Activity | ||||||||
| Issuance of common stock pursuant to Azuñia earn-out | $ | $ | ||||||
| Issuance of notes payable pursuant to Azuñia final earn-out | $ | $ | ||||||
| Warrants issued in relation to secured credit facilities | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
1. Description of Business
Eastside Distilling (the “Company” or “Eastside Distilling”) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, the Company changed its corporate name to Eastside Distilling, Inc. to reflect the acquisition of Eastside Distilling, LLC. The Company manufactures, acquires, blends, bottles, imports, exports, markets and sells a wide variety of alcoholic beverages under recognized brands. The Company currently employs 74 people in the United States.
The Company’s brands span several alcoholic beverage categories, including whiskey, vodka, gin, rum, tequila and Ready-to-Drink (RTD). The Company sells products on a wholesale basis to distributors in open states, and brokers in control states, and until March 2020, operated four retail tasting rooms in Portland, Oregon to market our brands directly to consumers. The Company operates a mobile craft canning and bottling business (“Craft Canning”) that primarily services the craft beer and craft cider industries. Craft Canning operates 13 mobile lines in Seattle, Portland and Denver.
2. Liquidity
Historically,
the Company has funded its cash and liquidity needs through operating cash flow, convertible notes, extended credit terms, and equity
financings. As of June 30, 2021, the Company had an accumulated deficit of $
As
of June 30, 2021, the Company had $
3. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements for Eastside Distilling, Inc. and subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements in accordance with GAAP have been condensed or eliminated as permitted under the SEC’s rules and regulations. In management’s opinion, the unaudited consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of June 30, 2021, its operating results for the three and six months ended June 30, 2021 and 2020 and its cash flows for the six months ended June 30, 2021 and 2020. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Interim results are not necessarily indicative of the results that may be expected for an entire fiscal year). The consolidated financial statements include the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiaries, including, MotherLode LLC, Big Bottom Distilling, LLC, Outlandish Beverages LLC, Redneck Riviera Whiskey Co., LLC, and Craft Canning + Bottling, LLC and the Azuñia tequila assets. All intercompany balances and transactions have been eliminated on consolidation.
| 6 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Net sales include product sales, less excise taxes and customer programs and incentives. The Company recognizes revenue by applying the following steps in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
The Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment sales, which include sales to the Oregon Liquor Control Commission (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.
Customer Programs
Customer
programs, which include customer promotional discount programs, customer incentives, and broker commissions, 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 sales and marketing expenses in accordance with ASC 606 - Revenue from Contracts with Customers, based on the nature of
the expenditure. Amounts paid to customers totaled $
Excise Taxes
The
Company is responsible for compliance with the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) regulations, which includes
making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also
impose excise taxes on alcoholic beverages in varying amounts. The Company calculates its excise tax expense based upon units produced
and on its understanding of the applicable excise tax laws. Excise taxes totaled $
| 7 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
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.
Sales and Marketing Expenses
The following expenses are included in sales and marketing expenses in the accompanying consolidated statements of operations: media advertising costs, 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. Sales and marketing costs are expensed as incurred.
General and Administrative Expenses
The following expenses are included in general and administrative expenses in the accompanying consolidated statements of operations: salary and benefit expenses, travel and entertainment expenses for executive and administrative staff, rent and utilities, professional fees, insurance, and amortization and depreciation expense. General and administrative costs are expensed as incurred.
Stock-Based Compensation
The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest. Stock-based compensation was $ million and $ million for the six months ended June 30, 2021 and 2020, respectively.
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
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of June
30, 2021, two distributors represented
Fair Value Measurements
GAAP defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAAP permits an entity to choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation and disclosure requirements for assets and liabilities for which the fair value option is elected. As of June 30, 2021 and December 31, 2020, 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.
| 8 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
The hierarchy of fair value valuation techniques under GAAP provides for three levels: Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, generally would require significant management judgment. The three levels for categorizing assets and liabilities under GAAP’s fair value measurement requirements are as follows:
| Level 1: | Fair value of the asset or liability is determined using cash or unadjusted quoted prices in active markets for identical assets or liabilities. | |
| Level 2: | Fair value of the asset or liability is determined using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. | |
| Level 3: | Fair value of the asset or liability is determined using unobservable inputs that are significant to the fair value measurement and reflect management’s own assumptions regarding the applicable asset or liability. |
None of the Company’s assets or liabilities were measured at fair value as of June 30, 2021 or December 31, 2020. However, GAAP requires the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments consist principally of trade receivables, accounts payable, accrued liabilities, notes payable, and the secured credit facilities. The estimated fair value of trade receivables, accounts payable, and accrued liabilities approximate their carrying value due to the short period of time to their maturities. As of June 30, 2021 and December 31, 2020, the Company’s notes approximate fair value.
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities acquired in a business acquisition are valued at fair value at the date of acquisition.
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 the Company’s finished goods inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the life of the lease or the useful lives of the assets, whichever is shorter. The cost and related accumulated depreciation and amortization of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is reported as current period income or expense. The costs of repairs and maintenance are expensed as incurred.
Intangible Assets / Goodwill
The Company accounts for certain intangible assets at cost. Management reviews these intangible assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative assessment of certain of its intangible assets as of June 30, 2021 and determined that they were not impaired.
| 9 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
Long-lived Assets
The Company accounts for long-lived assets, including certain intangible assets, at amortized cost. Management reviews long-lived assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount of the asset, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative assessment of certain of its long-lived assets as of June 30, 2021 and determined that they were not impaired.
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. As of June 30, 2021 and December 31, 2020, 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
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 2014.
Comprehensive Income
The
Company did
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
| 10 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
Recently Adopted Accounting Pronouncements
None.
4. Discontinued Operations
Discontinued Operations
The Company reports discontinued operations by applying the following criteria in accordance with ASC Topic 205-20 – Presentation of Financial Statements – Discontinued Operations: (1) Component of an entity; (2) Held for sale criteria; and (3) Strategic shift.
On December 31, 2019, management made a strategic shift to focus the Company’s sales and marketing efforts on the nationally branded product platform, resulting in the decision to close all four of its retail stores in the Portland, Oregon area. The retail stores were closed or abandoned by March 31, 2020.
On
February 2, 2021, Redneck Riviera Whiskey Co, LLC (“RRWC”) entered into a Termination and Inventory Purchase Agreement (the
“Termination Agreement”) with Rich Marks, LLC, John D. Rich Tisa Trust and Redneck Spirits Group, LLC (collectively the buyers
referred to as “RSG”), pursuant to which, on February 5, 2021, RRWC sold all of its inventory of Redneck Riviera, Granny
Rich, and Howdy Dew distilled spirits products, including finished goods, raw materials, and barrel inventory, as well as all assignable
certificates of label approval/exemption, branding, permits, and registrations relating thereto, for $
As of and for the six months ended June 30, 2021, the assets, liabilities, revenue, expenses and cash flows from retail operations and the RRWC business have been classified as discontinued operations separately from continuing operations. For comparative purposes, prior period amounts have been reclassified to conform to current period presentation.
Income and expense related to discontinued retail operations and the Redneck Riviera Spirits business were as follows for the six months ended June 30, 2021 and 2020:
Schedule of Discontinued Retail Operations
| (Dollars in thousands) | June 30, 2021 | June 30, 2020 | ||||||
| Sales | $ | $ | ||||||
| Less customer programs and excise taxes | ||||||||
| Net sales | ||||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Sales and marketing expenses | ||||||||
| General and administrative expenses | ||||||||
| Loss on disposal of property and equipment | - | |||||||
| Total operating expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Other expense, net | ||||||||
| Other income | - | |||||||
| Gain on termination of license agreement | - | |||||||
| Total other expense, net | - | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| 11 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
Assets and liabilities related to discontinued retail operations and the Redneck Riviera Spirits business were as follows:
| (Dollars in thousands) | June 30, 2021 | December 31, 2020 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Inventories | $ | $ | ||||||
| Total current assets | - | |||||||
| Right-of-use assets | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | ( | ) | $ | ( | ) | ||
| Current portion of lease liability | ||||||||
| Total current liabilities | ||||||||
| Lease liability - less current portion | ||||||||
| Total Liabilities | $ | $ | ||||||
5. Inventories
Inventories consisted of the following:
Schedule of Inventories
| (Dollars in thousands) | June 30, 2021 | December 31, 2020 | ||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
6. Property and Equipment
Property and equipment consisted of the following:
Schedule of Property and Equipment
| (Dollars in thousands) | June 30, 2021 | December 31, 2020 | ||||||
| Furniture and fixtures | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Vehicles | ||||||||
| Construction in progress | ||||||||
| Total cost | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
| 12 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
Purchases
of property and equipment totaled $
During
the six months ended June 30, 2021, the Company disposed of fixed assets with a net book value of $
7. Intangible Assets
Intangible assets consisted of the following:
Schedule of Intangible Assets
| (Dollars in thousands) | June 30, 2021 | December 31, 2020 | ||||||
| Permits and licenses | $ | $ | ||||||
| Azuñia brand | ||||||||
| Customer lists | ||||||||
| Total intangible assets | ||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
The
customer list is being amortized over a seven-year life. Amortization
expense totaled $
The permits and licenses, and Azuñia brand have all been determined to have an indefinite life and will not be amortized. We do, however, on an annual basis, test the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then we will estimate its useful life and amortize the asset over the remainder of its useful life.
8. Other Assets
Other assets consisted of the following:
Schedule of Other Assets
| (Dollars in thousands) | June 30, 2021 | December 31, 2020 | ||||||
| Product branding | $ | $ | ||||||
| Deposits | ||||||||
| Total other assets | ||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Other assets, net | $ | $ | ||||||
As
of June 30, 2021, the Company had $
Amortization
expense totaled $
The deposits represent office lease deposits.
| 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.
| 13 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
Maturities of lease liabilities as of June 30, 2021 were as follows:
Schedule of Maturities of Operating Lease Liabilities
| (Dollars in thousands) | Operating Leases | Weighted-Average Remaining Term in Years | ||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less imputed interest (based on | ( | ) | ||||||
| Present value of lease liability | $ | |||||||
| 10. | Notes Payable |
Notes payable consisted of the following:
Schedule of Notes Payable
| (Dollars in thousands) | June 30, 2021 | December 31, 2020 | ||||||
| Notes payable bearing interest at | $ | $ | ||||||
| Note payable bearing interest at | ||||||||
| Note payable bearing interest at | ||||||||
| Notes payable bearing interest at | ||||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory note payable under a revolving line of credit bearing variable interest starting at | ||||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory note payable bearing interest of | ||||||||
| Promissory notes payable bearing interest of | ||||||||
| Total notes payable | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| Long-term portion of notes payable | $ | $ | ||||||
The
Company paid $
| 14 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
Maturities on notes payable as of June 30, 2021 were as follows:
Schedule of Maturities on Notes Payable
| (Dollars in thousands) | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | - | |||
| Thereafter | - | |||
| Total | $ | |||
| 11. | Secured Credit Facilities |
6% Secured Convertible Promissory Notes
On
April 19, 2021, the Company entered into a securities purchase agreement (“Purchase Agreement”) with accredited investors
(“Subscribers”) for their purchase of up to $
Roth
Capital, LLC acted as placement agent (the “Placement Agent”) in the private offering, and the Company paid the Placement
Agent a cash fee of five percent (
Interest
on the Notes accrues at a rate of
All
amounts due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional
shares), at the option of the holders into the Company’s common stock at a fixed conversion price, which is subject to adjustment
as summarized below. The Notes are initially convertible into the Company’s common stock at an initial fixed conversion price of
$
| 15 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
The Notes contain customary triggering events including but not limited to: (i) failure to make payments when due under the Notes; and (ii) bankruptcy or insolvency of the Company. If a triggering event occurs, each holder may require the Company to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash.
The Notes are secured by a subordinated security interest in the Company’s assets pursuant to the terms of a Security Agreement entered into between the Company and the Subscribers.
Live Oak Loan Agreement
On
January 15, 2020, the Company and its subsidiaries entered into a loan agreement (the “Loan Agreement”) between
the Company and Live Oak Banking Company (“Live Oak”), a North Carolina banking corporation (the “Lender”)
to refinance existing debt of the Borrowers and to provide funding for general working capital purposes.
The
Loan matured on
The
Loan bears interest at a rate equal to the prime rate plus a spread of
The Loan Agreement contains affirmative and negative covenants that include covenants restricting each Company’s ability to, among other things, incur indebtedness, grant liens, dispose of assets, merge or consolidate, make investments, or enter into restrictive agreements, subject to certain exceptions.
| 16 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
The obligations of the Company under the Loan Agreement are secured by substantially all of its spirits respective assets, except for accounts receivable and certain other specified excluded property.
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
In
connection with the Loan Agreement, the Company issued to the Lender a warrant to purchase up to
| 12. | Commitments and Contingencies |
Legal Matters
On December 15, 2020, Grover Wickersham filed a complaint in the United States District Court for the District Court of Oregon against the Company. Mr. Wickersham, the former CEO and Chairman of the Board of the Company, has asserted causes of action for fraud in the inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, defamation, interference with economic advantage, elder financial abuse, and dissemination of false and misleading proxy materials. The Company disputes the allegations and intends to defend the case vigorously.
The Company is not currently subject to any other material legal proceedings; however, it could be subject to legal proceedings and claims from time to time in the ordinary course of its business, or legal proceedings it considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and can divert management resources.
| 13. | Net Income (Loss) per Common Share |
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted net income 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. As of June 30, 2021, the Company had dilutive common shares. There were dilutive common shares as of June 30, 2020 as the Company reported a net loss.
| 17 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
| 14. | Stockholders’ Equity |
Schedule of Stockholders’ Equity
| Shares | Amount | Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||
| Issuance of warrants for secured credit facility | - | - | - | |||||||||||||||||
| Issuance of common stock for Azuñia initial earn-out | - | - | ||||||||||||||||||
| Issuance of common stock for services by third parties | - | - | ||||||||||||||||||
| Issuance of common stock for services by employees | - | - | ||||||||||||||||||
| Net income attributable to common shareholders | - | - | - | |||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
During
2021, the Company issued shares of common stock to directors and employees for stock-based compensation of $
During
2020, the Company issued shares of common stock to directors, employees and consultants for stock-based compensation of $
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, 2021, the number of shares available for grant under the 2016 Plan reset to shares, equal to
The Company also issues, from time to time, options that are not registered under a formal option plan. As of June 30, 2021, there were no options outstanding that were not issued under the Plans.
Summary of Stock Option Activity
| # of Options | Weighted-Average Exercise Price | |||||||
| Outstanding as of December 31, 2020 | $ | |||||||
| Options granted | ||||||||
| Options canceled | ( | ) | ||||||
| Outstanding as of June 30, 2021 | $ | |||||||
| Exercisable as of June 30, 2021 | $ | |||||||
The aggregate intrinsic value of options outstanding as of June 30, 2021 was $ million.
| 18 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
As of June 30, 2021, there were unvested options with an aggregate grant date fair value of $million. The unvested options will vest over three () years from the grant date. The aggregate intrinsic value of unvested options as of June 30, 2021 was $million. During the six months ended June 30, 2021, 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.
Schedule of Weighted-average Assumptions Used in Black-scholes Valuation Method
| Risk-free interest rate | % | |||
| Expected term (in years) | ||||
| Dividend yield | ||||
| Expected volatility | % |
The weighted-average grant-date fair value per share of stock options granted during the year ended June 30, 2021 was $1.17. The aggregate grant date fair value of the options granted during the six months ended June 30, 2021 was $0 million.
For
the six months ended June 30, 2021 and 2020, net compensation expense related to stock options was $ million and $ million, respectively.
As of June 30, 2021, the total compensation expense related to stock options not yet recognized was approximately $ million, which
is expected to be recognized over a weighted-average period of approximately
Warrants
During
the period ended June 30, 2021, the Company issued an aggregate of
Schedule of Share Based Payment Award Assumptions Used in Black-scholes Valuation Method
| Volatility | % | |||
| Risk-free interest rate | % | |||
| Expected term (in years) | ||||
| Expected dividend yield | ||||
| Fair value of common stock | $ |
| 19 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2021
(Unaudited)
No warrants were exercised during the six months ended June 30, 2021. A summary of activity in warrants was as follows:
Summary of Warrant Activity
| Warrants | Weighted-Average Remaining Life (Years) | Weighted-Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of December 31, 2020 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Outstanding as of June 30, 2021 | $ | $ | ||||||||||||||
15. Related Party Transactions
The
following is a description of transactions since January 1, 2020 as to which the amount involved exceeds the lesser of $
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 units at a per unit price of $. Each unit consists of one share of the Company’s
common stock and a three-year warrant to acquire
On
April 19, 2021, the Company issued $
On February 5, 2021, the
Company repaid other liabilities due to Intersect and TQLA in an amount of $
The Company believes that the foregoing transactions were in its best interests. Consistent with Section 78.140 of the Nevada Revised Statutes, it is the Company’s current policy that all transactions between it and its officers, directors and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders, or are fair to the Company as a corporation as of the time it is authorized, approved or ratified by the Board. The Company will continue to conduct an appropriate review of all related party transactions and potential conflicts of interest on an ongoing basis. The Company’s audit committee has the authority and responsibility to review, approve and oversee any transaction between the Company and any related person and any other potential conflict of interest situation on an ongoing basis, in accordance with Company policies and procedures in effect from time to time.
16. Subsequent Events
Debt extension
| ● | On
January 8, 2021, the Company entered into an amendment to its loan agreement (the “Loan Agreement”) with Live Oak to
extend the maturity date to |
Warrant Exercise
| ● | On
July 30, 2021, | |
| Concurrent with the warrant exercise, the Company issued
new warrants to purchase up to |
| 20 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes. This section of the Quarterly Report includes “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 the following:
| ● | Impact of the COVID-19 pandemic, and the resulting negative economic impact and related governmental actions; | |
| ● | Our ability to secure additional financing and achieve positive 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 approach to product development; | |
| ● | 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, 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 ability to protect our intellectual property, including trademarks and tradenames 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 capacity 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 and/or any potential supply chain disruption; | |
| ● | 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; | |
| ● | Tax rate changes (including excise tax, VAT, tariffs, duties, corporate, individual income, or capital gains), changes in related reserves, or changes in tax rules or accounting standards; | |
| ● | Our ability to expand our business 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; | |
| ● | The possibility of negative publicity related to our company, brands, marketing, personnel, operations, business performance, or prospects | |
| ● | Our ability to attract and retain key board, executive or employee talent; and | |
| ● | Our liquidity and capital needs and ability to meet our liquidity needs and going concern requirements. |
| 21 |
You should not place undue certainty on these forward-looking statements, which speak only as of the date made, and except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that could cause differences include, but are not limited to, customer acceptance risks for current and new brands, reliance on external sources on financing, development risks for new products and brands, dependence on wholesale distributors, inventory carrying issues, fluctuations in market demand and customer preferences, as well as general conditions of the alcohol and beverage industry, and other factors discussed in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2020 entitled “Risk Factors,” and those contained from time to time in our other filings with the Securities and Exchange Commission.
Use of Non-GAAP Financial Information – Certain matters presented in this report, including the information presented in Part I under “Item 2. 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.
Business Overview
Eastside Distilling, Inc. (the “Company,” “Eastside Distilling,” “we,” “us,” or “our,” below) manufactures, acquires, blends, bottles, imports, markets and sells a wide variety of alcoholic beverages under recognized brands. We employ 74 people in the United States.
Our brands span several alcoholic beverage categories, including whiskey, vodka, gin, rum, tequila and Ready-to-Drink (“RTD”). We sell our products on a wholesale basis to distributors in open states and brokers in control states. We operate a mobile craft canning and bottling business (“Craft C+B”) that primarily services the craft beer and craft cider industries. Craft C+B operates 13 mobile lines in Seattle, Washington; Portland, Oregon; and Denver, Colorado.
Principal Spirits Brands and Products During 2021
| ● | Hue-Hue (pronounced “way-way”) Coffee Rum – cold-brewed free-trade, single-origin Arabica coffee beans grown at the Finca El Paternal Estate in Huehuetenango, Guatemala that is sourced and then lightly roasted through Portland Roasting Company. The concentrated brew is then blended with premium silver rum and a trace amount of Demerara sugar, giving our Hue-Hue a natural, deep, smooth richness. | |
| ● | Azuñia Tequila – estate-crafted, smooth, clean craft tequila with authentic flavor from the local terroir. It is the exclusive export of Agaveros Unidos de Amatitán and a second generation, family-owned-and-operated Rancho Miravalle estate, which has created tequila for over 20 years. Made with 100% pure Weber Blue Agave grown in dedicated fields of the Tequila Valley, it is harvested by hand and roasted in traditional clay hornos, and then finished with a natural, open-air fermentation process and bottled on-site in small batches using a consistent process to deliver field-to-bottle quality. |
| 22 |
| ● | Portland Potato Vodka – Portland’s award-winning premium craft vodka. The key to producing our vodka is to distill it four times. While most vodka is made from grain used in whiskey, we use potatoes and natural spring water sourced from the state of Oregon. | |
| ● | Burnside Whiskey –We source the best ingredients available to produce Burnside Whiskey. We develop each blend using the various qualities of Quercus Garryana, the native Oregon Oak. Expanding on our initial experiment in 2012, we made it our mission to turn the Burnside program into a one- of-a-kind oak study. Our blends are all distinctive from one another, and the treatment of oak is equally specific. | |
| ● | Eastside Brands – We make the unique by blending together the unusual, craft inspired, experiential brands and high-quality artisan, in-and-out, seasonal and ongoing limited edition products. Each Eastside-branded product is rare and hard-to-get with a peculiar balance of age and innovation, craftsmanship and curiosity, creativity and restraint. |
Principal Services Provided by Craft Canning and Bottling
Canning
Flexible packaging options in multiple sizes
Nitrogen dosing: Specialized equipment allowing for packaging of still products in addition to carbonated beverages
Velcorin: Specialized equipment that supports microbial control
Label application capabilities
Mobility packaging for clients at their production facility
Full-service packaging provider
Bottling
Supplies all needed packaging and has the ability to package in two primary bottle sizes
Specialized packaging and quality control equipment
We have invested heavily to expand our business through acquisitions and making substantial investments in branding and production; however, we have not achieved profitability. The immediate task at hand is to focus on a new sustainable business strategy. Based on a complete review and analysis of our competitive position, market opportunity and assets, we have identified components of the strategy that we believe would improve operating results. Management believes the following components of the strategy are in place and working:
| ● | Strong spirits brands and products; | |
| ● | Established 3 tier national distributor partnerships; | |
| ● | Strong market position in Oregon, which is benefiting from an industry-wide growth in craft spirits; | |
| ● | Experience in distilling, blending, and barrel aging for craft spirits; | |
| ● | Significantly reduced cash burn rate; | |
| ● | Valuable asset in its employees; and | |
| ● | Craft Canning division benefits from growth and accretive margin expansion opportunities generating cash flow. |
Areas that we need incremental work include the following:
| ● | Effective integration of Azuñia Tequila; | |
| ● | Increased gross margins for our spirits portfolio at industry standards; and | |
| ● | A sustainable strategy, fiscal plan, and predictable results. |
We completed our 3-year strategic plan during the second quarter and will embark on the following:
| ● | Key Strategic Pillars | ||
| ○ | Shift the mix of Craft C+B/Spirits revenue to 75/25; | ||
| ○ | Rapidly build free cash flow from Craft C+B; | ||
| ○ | Build enterprise value via spirits portfolio topline sales; | ||
| ○ | Prioritize speed of execution in all we do without compromising return on investment; | ||
| ○ | Focus on depth versus breadth in our approach to markets and customers; and | ||
| ○ | Attract large core institutional investors for capital, constituency, expertise, and support. | ||
| ● | Financial Targets | ||
| ○ | The plan contemplates revenues approaching $70 million in Year 3 (2024); and | ||
| ○ | Ultimately achieving double digit EBITDA margins. | ||
| ● | Additional Authorized Share Usage | ||
| ○ | The plan allocates 7 million shares for the 3-year capital plan and potential capital raises over the 3-year period; and | ||
| ○ | Additional shares above the 7 million would be used for accretive-bolt-on acquisitions that can catapult the Company to the next level of revenue and value. | ||
| ● | Craft C+B | ||
| ○ | The Craft C+B business will undergo a transformation, expanding mobile reach and adding capability in can printing, pasteurization and a high-speed fixed canning location. | ||
| ● | Spirits | ||
| ○ | The cash flow from Craft C+B will fuel the discretionary spend for Spirits and allow focus on 4 brands (Portland Potato Vodka, Burnside, Eastside Brands and Azuñia) to expand distribution and accelerate growth driving the Company’s enterprise value. | ||
| 23 |
Eastside Distilling is unique in several specific areas: (1) to our knowledge, we are the only craft spirits company listed on Nasdaq, (2) we do not function as a traditional craft distillery with store fronts relying on local sales, (3) we are diversified with our contract manufacturing division, and (4) we have a diversified portfolio of spirits brands. We are similar to other craft distillers in that (1) we have concentrated local volume, (2) we produce small batches and remain within the volume definition of “Craft”, and (3) our brands achieve success through differentiation, discovery and distribution.
The U.S. spirits marketplace is occupied by large multi-national conglomerates with substantially more resources than Eastside Distilling. However, we can use our small size to be fast, focused, flexible in our strategy. If we attempt to grow too quickly, we may lack the underlying strength required to build scale with loyalty via strong unaided awareness and powerfully derived attributes. Moreover, attempting to focus our “frame-of-reference” to compete with the biggest brands in the most expensive venues, is likely to fail without first establishing underlying brand equity.
We will seek to utilize our public company stature to our advantage and position our spirits portfolio as a leading tier 2 spirits provider that develops brands, expands geographic presence and positions for either a sale to the tier 1 suppliers or continued ownership with growth in revenue and cash flow. We will look to grow, and vertically integrate, our Craft Canning portfolio.
Recent Developments
During 2020, Craft Canning experienced an increase in demand and revenue growth as customers were continuing to prefer to fill cans for a wider off-premise usage. In order to meet this demand, we invested in additional canning lines. Throughout 2020, the canning industry faced a shortage of aluminum cans. However, we believe we have sourced enough cans to supply our current business plan. While off-premise business has seen an increase in spirits sales, the customer focus has been on major brands and larger format bottles which we do not currently have on the national platform. Other parts of our business were negatively affected by mandated lockdowns and other related restrictions including a decrease in sales volume in on-premise accounts, where products are typically consumed immediately, such as bars and restaurants. This negative trend has continued through the current period.
In response to the COVID-19 pandemic, we implemented specific measures to reduce the spread of the virus including having our employees work remotely whenever possible, screening visitors and workers before entering facilities, requiring visitors and employees to wear masks, and encouraging social distancing. These preventive measures have been effective as evidenced by the minimal number of COVID-19 cases between our workforce, vendors, and customers.
Available Information
Our executive offices are located at 8911 NE Marx Drive, Suite A2, Portland, Oregon 97220. 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 quarterly report.
| 24 |
Results of Operations
Overview
On February 2, 2021, our subsidiary, Redneck Riviera Whiskey Co, LLC (“RRWC”), entered into a Termination and Inventory Purchase Agreement (the “Termination Agreement”) with Rich Marks, LLC, John D. Rich Tisa Trust and Redneck Spirits Group, LLC (collectively the buyers referred to as “RSG”), pursuant to which, on February 5, 2021, RRWC sold all of its inventory of Redneck Riviera, Granny Rich, and Howdy Dew distilled spirits products, including finished goods, raw materials, and barrel inventory, as well as all assignable certificates of label approval/exemption, branding, permits, and registrations relating thereto, for $4.7 million. In addition, Eastside terminated its Amended and Restated License Agreement (the “License Agreement”) dated May 31, 2018 by and among Eastside, RRWC, Rich Marks, LLC, and John D. Rich TISA Trust U/A/D March 27, 2018, Dwight P. Miles, Trustee in exchange for $3.0 million. In connection with the Termination Agreement, the Company entered into a Supplier Agreement dated as of February 2, 2021 with RSG, pursuant to which the Company will produce certain products and perform specified services for RSG for a six (6) month period on the terms and conditions set forth in the Supplier Agreement. The Company did not incur any penalties as a result of the termination of the License Agreement.
As of and for the six months ended June 30, 2021, the assets, liabilities, revenue, expenses and cash flows from retail operations and the RRWC business have been classified as discontinued operations separately from continuing operations. For comparative purposes, prior period amounts have been reclassified to conform to current period presentation.
Consolidated Statements of Operations Data for the Six Months Ended June 30, 2021 and 2020
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Sales | $ | 6,861 | $ | 6,967 | ||||
| Less customer programs and excise taxes | 411 | 416 | ||||||
| Net sales | 6,450 | 6,551 | ||||||
| Cost of sales | 4,558 | 4,405 | ||||||
| Gross profit | 1,892 | 2,146 | ||||||
| Sales and marketing expenses | 1,411 | 2,483 | ||||||
| General and administrative expenses | 4,112 | 4,443 | ||||||
| (Gain) loss on disposal of property and equipment | 61 | (19 | ) | |||||
| Total operating expenses | 5,584 | 6,907 | ||||||
| Loss from operations | (3,692 | ) | (4,761 | ) | ||||
| Interest expense | (471 | ) | (623 | ) | ||||
| Other income | 2,217 | - | ||||||
| Income (loss) from discontinued operations | 3,886 | (310 | ) | |||||
| Net income (loss) | $ | 1,940 | $ | (5,694 | ) | |||
| Gross margin | 29 | % | 33 | % | ||||
| Non-cash operating income (expenses) | $ | (2,169 | ) | $ | 2,675 | |||
Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
Our sales for the six months ended June 30, 2021 were flat at $6.9 million from $7.0 million for the six months ended June 30, 2020. The following table compares our sales during the six months ended June 30, 2021 and 2020, and excludes the retail tasting room and Redneck Riviera sales that have been classified as discontinued operations:
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||
| Wholesale finished goods | $ | 2,759 | 40 | % | $ | 2,849 | 41 | % | ||||||||
| Canning & Bottling | 4,100 | 60 | % | 4,058 | 58 | % | ||||||||||
| Bulk spirit sales | 2 | 0 | % | 60 | 1 | % | ||||||||||
| Total | $ | 6,861 | $ | 6,967 | ||||||||||||
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Customer Programs and Excise Taxes
Customer programs and excise taxes were flat at $0.4 million for both the six months ended June 30, 2021 and 2020.
Cost of Sales
Cost of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing and/or service labor and overhead, warehousing rent, packaging, and in-bound freight charges. During both the six months ended June 30, 2021 and 2020, cost of sales were flat.
Gross Profit and Gross Margin
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 for the six months ended June 30, 2021 and 2020:
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Gross profit | $ | 1,892 | $ | 2,146 | ||||
| Gross margin | 29 | % | 33 | % | ||||
Our goal is to improve our overall gross margin by increasing the efficiencies and reducing the footprint of our production facility as well as to evaluate the materials in our finished goods to create economies of scale by creating consistency among the dry goods across our brands.
Sales and Marketing Expenses
Sales and marketing expenses for the six months ended June 30, 2021 decreased to $1.4 million, or approximately 43%, from $2.5 million for the six months ended June 30, 2020. This decrease was primarily due to a $0.9 million decrease in compensation related to lower headcount as we focus our sales efforts in markets west of the Rockies and select other regions.
General and Administrative Expenses
General and administrative expenses for the six months ended June 30, 2021 decreased to $4.1 million, or approximately 7%, from $4.4 million for the six months ended June 30, 2020. This decrease was primarily due to a decrease in non-cash expenses related to depreciation and amortization from the Craft Canning acquisition and leasehold improvements to our production facility.
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Other Income (Expense)
Total other income, net, was $2.2 million for the six months ended June 30, 2021 compared to $0 million for the six months ended June 30, 2020 primarily due to forgiveness of our loans under the U.S. government Paycheck Protection Program (“PPP Loans”) and the remeasurement of deferred consideration for the final Azuñia earn-out.
Consolidated Statements of Operations Data for the Three Months Ended June 30, 2021 and 2020
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Sales | $ | 3,618 | $ | 3,834 | ||||
| Less customer programs and excise taxes | 235 | 195 | ||||||
| Net sales | 3,383 | 3,639 | ||||||
| Cost of sales | 2,240 | 2,218 | ||||||
| Gross profit | 1,143 | 1,421 | ||||||
| Sales and marketing expenses | 635 | 970 | ||||||
| General and administrative expenses | 1,901 | 2,287 | ||||||
| (Gain) on disposal of property and equipment | - | (20 | ) | |||||
| Total operating expenses | 2,536 | 3,237 | ||||||
| Loss from operations | (1,393 | ) | (1,816 | ) | ||||
| Interest expense | (345 | ) | (319 | ) | ||||
| Other income | 17 | - | ||||||
| Loss from discontinued operations | (47 | ) | (51 | ) | ||||
| Net loss | $ | (1,768 | ) | $ | (2,186 | ) | ||
| Gross margin | 34 | % | 39 | % | ||||
| Non-cash operating income | 480 | 1,227 | ||||||
Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
Our sales for the three months ended June 30, 2021 were flat at $3.6 million from $3.8 million for the three months ended June 30, 2020. The following table compares our sales during the three months ended June 30, 2021 and 2020, and excludes the retail tasting room and Redneck Riviera sales that have been classified as discontinued operations:
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||||
| Wholesale finished goods | $ | 1,437 | 40 | % | $ | 1,215 | 32 | % | ||||||||
| Canning & Bottling | 2,180 | 60 | % | 2,563 | 67 | % | ||||||||||
| Bulk spirit sales | 1 | 0 | % | 56 | 1 | % | ||||||||||
| Total | $ | 3,618 | $ | 3,834 | ||||||||||||
Customer Programs and Excise Taxes
Customer programs and excise taxes were flat at $0.2 million for both the three months ended June 30, 2021 and 2020.
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Cost of Sales
During both the three months ended June 30, 2021 and 2020, our cost of sales were flat.
Gross Profit and Gross Margin
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 for the three months ended June 30, 2021 and 2020:
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Gross profit | $ | 1,143 | $ | 1,421 | ||||
| Gross margin | 34 | % | 39 | % | ||||
Our gross margin of 34% of net sales for the three months ended June 30, 2021 decreased from our gross margin of 39% for the three months ended June 30, 2020. We restructured our spirit’s go-to-market strategy with additional brands, which affected our gross margin in the second quarter. Craft C+B’s gross margin decreased primarily due to a change in product and services mix and higher raw material costs as a result of supply chain shortages due to COVID-19.
Sales and Marketing Expenses
Sales and marketing expenses for the three months ended June 30, 2021 decreased to $0.6 million, or approximately 35%, from $1.0 million for the three months ended June 30, 2020. This decrease was primarily due to a $0.4 million decrease in compensation related to lower headcount and reductions in unproductive marketing expenses.
General and Administrative Expenses
General and administrative expenses for the three months ended June 30, 2021 decreased to $1.9 million, or approximately 17%, from $2.3 million for the three months ended June 30, 2020. This decrease was primarily due to non-cash expenses related to depreciation and amortization from the Craft C+B acquisition, leasehold improvements to our production facility, and reductions in headcount and professional expenses.
Liquidity and Capital Resources
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 six months ended June 30, 2021 and 2020, we had net income (loss) of $1.9 million and $(5.7) million, respectively, and an accumulated deficit of $52.2 million as of June 30, 2021. We have been dependent on raising capital from debt and equity financings and utilization of our inventory to meet our needs for cash flow used in operating activities. See Notes 10 and 11 to our financial statements for a description of our debt. In addition, for the six months ended June 30, 2021, we consumed $0.4 million of our inventories.
To help ensure adequate liquidity in light of uncertainties posed by the COVID-19 pandemic during 2020, we applied for and received a PPP loan of $1.4 million. During 2021, the Small Business Administration (“SBA”) notified us that it approved our request for full forgiveness of the PPP loan in the principal amount of $1.4 million.
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As of June 30, 2021, we had $1.1 million of cash on hand with working capital of $2.0 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, selling assets 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. See Notes 10 and 11 to our financial statements for a description of our debt. If we are unable to obtain additional financing, or additional financing is not available on acceptable terms, we may seek to sell assets, reduce operating expenses, reduce or eliminate marketing initiatives, and take other measures that could impair our ability to be successful.
Our cash flow related information for the six months ended June 30, 2021 and 2020 was as follows:
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Net cash flows provided by (used in): | ||||||||
| Operating activities | $ | (0.2 | ) | $ | (2.1 | ) | ||
| Investing activities | $ | 3.3 | $ | 0.1 | ||||
| Financing activities | $ | (2.9 | ) | $ | 3.6 | |||
Operating Activities
Total cash used in operating activities was $(0.2) million during the six months ended June 30, 2021 compared to $(2.1) million during the six months ended June 30, 2020. The decrease in cash usage was be primarily attributed to improved management of current assets of $1.8 million.
Investing Activities
Cash provided by investing activities was $3.3 million during the six months ended June 30, 2021 and consisted of $3.3 million received for the Termination Agreement with RSG. During the six months ended June 30, 2020, we incurred capital expenditures of $0.1 million and received proceeds from sales of fixed assets of $0.2 million.
Financing Activities
Total cash used in financing activities was $(2.9) million during the six months ended June 30, 2021 compared to cash provided of $3.6 million during the six months ended June 30, 2020. Net cash flows used in financing activities during the six months ended June 30, 2021 consisted of $3.6 million of payments on principal payments of our secured credit facilities and $2.6 million of payments on principal of notes payable; offset by proceeds from secured credit facilities of $3.3 million. Net cash flows provided by financing activities during the six months ended June 30, 2020 primarily consisted of $6.3 million of proceeds from the establishment of a new secured credit facility; offset by $3.0 million payoff and termination of the existing secured credit facility, $1.4 million of proceeds from the Paycheck Protection Program and $0.1 million in proceeds from debt borrowing on an existing line of credit with our bank.
Lines of Credit
Since 2019, we utilized an existing accounts receivable factoring line of credit with ENGS Commercial Capital, LLC that provides for a minimum of $0.5 million purchased accounts receivable and a maximum of $1.0 million of purchased accounts receivable. The advance rate is 85%, and interest is charged against the greater of $0. 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 period ended June 30, 2021. As of June 30, 2021, the Company had $0.1 million of factored invoices outstanding.
Since 2019, we utilized an existing accounts receivable factoring line of credit with Park Street Financial Services, LLC. The advance rate is 75%, and interest is charged at a rate of 2.4% for the first 30 days plus 1.44% for each additional ten-day period. The Company factored $0.3 million of invoices during the period ended June 30, 2021. As of June 30, 2021, the Company had $0 million of factored invoices outstanding.
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Inventory Line
In January 2020, we and our subsidiaries entered into a loan agreement with Live Oak Banking Company (“Live Oak”) for a loan in an aggregate principal amount not to exceed the lesser of (i) $8.0 million and (ii) a borrowing base of up to 85% of the appraised value of the borrowers’ eligible inventory of whisky in barrels or totes less an amount equal to all service fees or rental payments owed by borrowers during the 90 day period immediately succeeding the date of determination to any warehouses or bailees holding eligible inventory (the “Live Oak Loan”). The Live Oak Loan is secured by all assets of the Company excluding accounts receivable and certain other specified excluded property. The Live Oak Loan bears interest at a variable rate of interest equal to (i) two and 49/100ths percent (2.49%) per annum plus (ii) the Prime Rate as published in The Wall Street Journal, adjusted on a calendar quarterly basis. Interest is payable monthly. Additionally, the Company issued to Live Oak 100,000 warrants to purchase common stock at an exercise price of $3.94 per share. The proceeds of the Live Oak Loan were used to pay off all principal and accrued interest under the TQLA Note of $0.9 million and all principal and interest under loan issued pursuant to that Credit and Security Agreement, by and between the Company and The KFK Children’s Trust, Jeffrey Anderson – Trustee of $3.0 million. As of June 30, 2021, the balance of the Live Oak Loan was $3.0 million.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with United States. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.
Revenue Recognition
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.
Customer Programs
Customer programs, which include customer promotional discount programs, customer incentives, and broker commissions, 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 sales and marketing expenses in accordance with ASC 606 - Revenue from Contracts with Customers, based on the nature of the expenditure. Amounts paid to customers totaled $0.3 million for both the six months ended June 30, 2021 and 2020.
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Excise Taxes
The Company is responsible for compliance with the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) regulations, which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcoholic beverages in varying amounts. The Company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws. Excise taxes totaled $0.1 million for both the six months ended June 30, 2021 and 2020.
Cost of Sales
Cost of sales consists 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.
Sales and Marketing Expenses
The following expenses are included in sales and marketing expenses in the accompanying consolidated statements of operations: media advertising costs, 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. Sales and marketing costs are expensed as incurred.
General and Administrative Expenses
The following expenses are included in general and administrative expenses in the accompanying consolidated statements of operations: salary and benefit expenses, travel and entertainment expenses for executive and administrative staff, rent and utilities, professional fees, insurance, and amortization and depreciation expense. General and administrative costs are expensed as incurred.
Stock-Based Compensation
The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest. Net stock-based compensation was $0.1 million for both the six months ended June 30, 2021 and 2020.
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 as of June 30, 2021 and December 31, 2020.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of June 30, 2021, two distributors represented 23% of trade receivables. As of December 31, 2020, one distributor represented 14% of trade receivables. Sales to two distributors accounted for 24% of consolidated sales for the period ended June 30, 2021. Sales to one distributor accounted for 18% of consolidated sales for the year ended December 31, 2020.
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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 the Company’s finished goods inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
ITEM 4 – CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) that are designed to provide reasonable assurances that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of June 30, 2021.
As of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended June 30, 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings; however, we could be subject to legal proceedings and claims from time to time in the ordinary course of our business, or legal proceedings we considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and divert management resources.
ITEM 1A – RISK FACTORS
There have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 31, 2020 and incorporated therein by reference.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
See Current Report on Form 8-K filed on April 23, 2021 regarding sale of 6% Secured Convertible Promissory Notes and Warrants.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None
ITEM 6 – EXHIBITS
| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| EASTSIDE DISTILLING, INC. | ||
| Date: August 12, 2021 | By: | /s/ Paul Block |
| Paul Block | ||
| Chief Executive Officer, Director | ||
| (Principal Executive Officer) | ||
| Date: August 12, 2021 | By: | /s/ Geoffrey Gwin |
| Geoffrey Gwin | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 34 |
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Paul Block, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q 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 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 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: August 12, 2021
| /s/ Paul Block | |
| Paul Block | |
| Chief Executive Officer and Director |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Geoffrey Gwin, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q 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 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 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: August 12, 2021
| /s/ Geoffrey Gwin | |
| Geoffrey Gwin | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
I, Paul Block, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Eastside Distilling, Inc. on Form 10-Q for the period ended June 30, 2021 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 Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Eastside Distilling, Inc.
Date: August 12, 2021
| By: | /s/ Paul Block | |
| Name: | Paul Block | |
| Title: | Chief Executive Officer |
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
I, Geoffrey Gwin, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Eastside Distilling, Inc. on Form 10-Q for the period ended June 30, 2021 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 Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Eastside Distilling, Inc.
Date: August 12, 2021
| By: | /s/ Geoffrey Gwin | |
| Name: | Geoffrey Gwin | |
| Title: | Chief Financial Officer |