S-1/A 1 forms-1a.htm

 

As filed with the U.S. Securities and Exchange Commission on July 7, 2017.

 

Registration No. 333-215848

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 2 TO

 

FORM S-1

 

 REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

EASTSIDE DISTILLING, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   2080   20-3937596

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

2150 SE Hanna Harvester Drive

Portland, Oregon 97222

(971) 888-4264

(Address, including zip code and telephone number, including area code, of registrant’s principal place of business)

 

 

 

Grover T. Wickersham

Chief Executive Officer

Eastside Distilling, Inc.

2150 SE Hanna Harvester Drive

Portland, Oregon 97222

(971) 888-4264

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

 

Andrew W. Shawber

Summit Law Group, PLLC

315 Fifth Ave South, Suite 1000

Seattle, Washington 98104

(206) 676-7000

Michael T. Raymond

Bradley J. Wyatt

Dickinson Wright PLLC

2600 W. Big Beaver Rd., Suite 300

Troy, Michigan 48084

(248) 433-7200

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. [  ]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”).

 

Large accelerated Accelerated Non-accelerated filer [  ] Smaller reporting Emerging growth
filer [  ] filer [  ] (Do not check if a smaller company [X] company [X]
    reporting 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 pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of

securities to be registered

 

Proposed

maximum

aggregate

offering price(1)(2)

   

Amount of

registration fee(3)

 
Common Stock, $0.0001 par value per share (4)   $ 6,900,000     $ 799.71  
Underwriters’ Warrants to Purchase Common Stock (5)     -       -  
Common stock Underlying Underwriters’ Warrants, $0.0001 par value per share (6)   $ 600,000     $ 69.54  
Total Registration Fee:   $ 7,500,000     $ 869.25  

 

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act.
   
(2) Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issuable to prevent dilution resulting from stock splits, stock dividends or similar transactions.
   
(3) Calculated under Section 6(b) of the Securities Act as .0001159 of the proposed maximum aggregate offering price.
   
(4) Includes the aggregate offering price of additional shares that the underwriters have the right to purchase from the Registrant, if any.
   
(5) In accordance with Rule 457(g) under the Securities Act, because the shares of the registrant’s common stock underlying the underwriters’ warrants are being registered, no separate registration fee is required with respect to the warrants registered hereby.
   
(6) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. We have agreed to issue warrants exercisable at any time, and from time to time, in whole or in part, during the four year period commencing one year from the effective date of this offering, representing 7% of the securities issued in this offering, or Underwriters’ Warrants, to Aegis Capital Corp. The Underwriters’ Warrants are exercisable at a per share exercise price equal to 110% of the public offering price. The initial issuance of the Underwriters’ Warrants and resales of shares of common stock issuable upon exercise of the Underwriters’ Warrants are registered hereby. See “Underwriting – Underwriters’ Warrants.”

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 
 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Preliminary Prospectus

 

SUBJECT TO COMPLETION, DATED

July 7, 2017

 

1,500,000 Shares

 

 

Common Stock

 

We are offering shares of our common stock. Our common stock is currently quoted on the OTC Markets (QB Marketplace Tier) under the symbol “ESDI.” On July 5, 2017, the reported closing sale price of our common stock on the OTC Markets was $6.00 per share. We have applied to list our common stock on the NASDAQ Capital Market under the symbol “ESDI.”

 

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act and will be subject to reduced public company reporting requirements. See “Prospectus Summary – Implications of Being an Emerging Growth Company” on page 5 of this prospectus.

 

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 8 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

   Per Share   Total 
Public offering price  $   $ 
Underwriting discount  $   $ 
Proceeds to us, before expenses  $   $ 

 

We refer you to “Underwriting” beginning on page 78 of this prospectus for additional information regarding total underwriting compensation.

 

We have granted the underwriters an option to purchase up to an additional 225,000 shares at the public offering price less the underwriting discount.

 

Delivery of the shares will be made on or about                , 2017.

 

Aegis Capital Corp.

 

The date of this prospectus is               , 2017.

 

 
 

 

 

   
  

 

TABLE OF CONTENTS

 

    Page
Prospectus Summary   1
The Offering   6
Summary Financial Data   7
Risk Factors   8
Special Note Regarding Forward-Looking Statements and Industry Data   21
Use of Proceeds   22
Dividend Policy   22
Capitalization   23
Selected Consolidated Financial Data   26
Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
Business   39
Management   50
Executive and Director Compensation   54
Certain Relationships and Related Party Transactions   63
Principal Stockholders   66
Description of Capital Stock   68
Shares Eligible for Future Sale   73
Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock   75
Underwriting   78
Legal Matters   83
Experts   83
Where You Can Find Additional Information   83
Index to the Consolidated Financial Statements   F-1

 

We have not authorized anyone to provide you with any information or to make any representation, other than those contained in this prospectus or any free writing prospectus we have prepared. We take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only in circumstances and in jurisdictions where it is lawful to so do. The information contained in this prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

Neither we nor any of the underwriters have done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

 

This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 
 

 

 

PROSPECTUS SUMMARY

 

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, including the Sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes, before deciding to buy shares of our common stock. All share-related and per-share information in this prospectus has been adjusted to give effect to the 1-for-20 and the 1-for-3 reverse stock splits of our common stock effected on October 18, 2016 and June 15, 2017, respectively. All references in this prospectus to “Eastside,” “Eastside Distilling,” “the Company” “we” “us” and “our” refer to Eastside Distilling, Inc. and our consolidated subsidiary.

 

Overview

 

We are an Oregon-based producer and marketer of craft spirits, founded in 2008. Our products span several alcoholic beverage categories, including bourbon, American whiskey, vodka, and rum. Unlike many, if not most, distillers, we operate several retail tasting rooms in Oregon to market our brands directly to consumers. Our growth strategy is to build on our local base in the Pacific Northwest and expand selectively to other markets by using major spirits distributors, such as Southern Glazer Wines and Spirits, and regional distributors that focus on craft brands. As a small business in the large, international spirits marketplace populated with massive conglomerates, we are innovative in exploiting new trends with our products, for example, our Coffee Rum with cold brew coffee and low sugar and our gluten-free potato vodka. In December 2016 we retained Sandstrom Partners (an internationally known spirit branding firm that branded St Germain and Bulleit Bourbon) to guide our marketing strategy and branding. Sandstrom Partners subsequently became an investor in our Company. We seek to be both a leader in creating spirits that offer better value than comparable spirits, for example our value-priced Portland Potato Vodka, and an innovator in creating imaginative spirits that offer a unique taste experience, for example our cold-brewed Coffee Rum, Oregon oak aged whiskeys, Marionberry Whiskey and Peppermint Bark holiday liqueur. On May 1, 2017, we acquired 90% of the ownership of Big Bottom Distillery (“BBD”) for its excellent, award winning range of super premium gins and whiskeys, including The Ninety One Gin, Navy Strength Gin, Oregon Gin, Delta Rye and initial production of American Single Malt Whiskey. BBD’s super premium spirits will expand our tasting room offerings and give us a presence at the “high end” of the market. In addition, through MotherLode, our wholly-owned subsidiary acquired in March 2017, we also provide contract bottling and packaging services for existing and emerging spirits producers, some of whom contract with us to blend or distill spirits. As a publicly-traded craft spirit producers, we have access to the public capital markets to support our long-term growth initiatives, including strategic acquisitions.

 

Market Opportunity

 

Large and Growing Global and Domestic Markets

 

The global spirits market generated total revenues of $316 billion in 2013, representing a compound average growth rate (CAGR) of 3.4% between 2009 and 2013, according to MarketLine. The performance of the market is forecasted to accelerate with an anticipated CAGR of 4.2% for the five year period 2013-2018, which is expected to increase revenues generated by this market to approximately $388 billion by the end of 2018.

 

The U.S. spirits market had total revenues of $24.1 billion in 2015, representing a 25% increase since 2010, according to the Distilled Spirits Council of the United States (DISCUS). The domestic market share of spirits compared to beer and wine was at a record 35.4% in 2015 according to DISCUS, representing more than a 2% gain over beer and wine in terms of market share since 2010.

 

Key Growth Trends That we Target

 

Craft – The market share of “craft” distillers (defined as any producer that bottles less than 100,000 cases annually) has doubled over the last two years, and is projected to reach 8% by 2020, according to BNP Paribas.

 

Women – The United States Alcohol and Tobacco Tax and Trade Bureau (the “TTB”), Park Street Imports, LLC (“Park Street”) and the US Census Bureau estimate that 37% of all U.S. whiskey drinkers are women.

 

Millennials – Generally, millennials (individuals born between the early 1980s and the mid-1990s) value “authenticity” and are inspired by travel, like to try new products and seek new experiences, according to a survey by BeverageDaily.com. Millennials tend to drink a broader range of spirit types (vodka, rum, tequila, whiskey, gin) than prior generations and Millennials consume more expensive spirits than their predecessors. These individuals are often attracted to vintage spirits and cocktails with nostalgic followings, such as throwbacks to the 1950’s like rye whiskey, bourbon, and the Manhattan cocktail. According to Barclays Research, millennials increasingly prefer spirits over beer and wine, and flavored spirits in particular. In addition, according to DISCUS, millennials are more willing than prior generations to purchase premium spirits.

 

 

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Flavored – According to DISCUS, flavored spirits sales continue to grow faster than the overall spirits market, and flavored whiskey, which is especially appealing to younger drinkers and women, is the fastest growing flavored spirit category.

 

International – The demand for U.S.-produced spirits abroad is increasing significantly. U.S. spirit exports nearly doubled over the past decade to $1.56 billion in 2015, and whiskey exports were up approximately 5.4% in 2015 compared to 2014. The largest export markets for U.S. spirits include the United Kingdom, Canada, Germany, Australia, and Japan.

 

Our Strategy

 

Our objective is to build Eastside Distilling into a profitable spirits company, with a distinctive portfolio of premium and high-end spirits brands that have national, and even international, consumer appeal and following. To help achieve this, we expect to:

 

Target Industry Growth Trends. Demand for U.S.-produced premium and high-end craft spirits, particularly whiskeys, has been increasing among millennials and women. We endeavor to capitalize on these trends by developing products that appeal to changing demographics, as typified by our Master Distiller, Melissa Heim, whom we believe is the first female commercial master distiller and blender west of the Mississippi River.

 

Be Experimental. We are not afraid to take chances with innovative product offerings that we believe the larger and more bureaucratic companies that populate the industry cannot easily launch. We want to produce and deliver quality products that offer consumers “something different,” such as value or uniqueness, and we want to convey that message with new packaging developed by our spirits branding firm, Sandstrom Partners.

 

Be Local. Be true to our Oregon and Pacific Northwest “roots” by shunning artificial additives, using locally sourced ingredients such as our high-quality water and Oregon oak, and relying on skilled local artisans. During 2016, we experienced a 45% increase in wholesale sales in Oregon and were the third largest spirits producer in that state. In addition, we recently extended our Pacific Northwest focus with our first shipments to Alaska during the first quarter of 2017.

 

Expand Geographically and Online. We are building brand awareness and driving sales in multiple geographic markets, with the use of social media (Twitter, Facebook, and YouTube). We are partnering with retailers that market heavily online and investing resources into e-commerce and digital marketing.

 

Provide Value. We target the high-growth premium ($12-20 per bottle) and high-end ($20-30 per bottle) market segments with premium quality at attractive pricing. In the super premium category (above $50 per bottle), we intend to have limited production offerings that we believe also deliver exceptional value.

 

Use Sales Networks of Major U.S. Spirits Distributors. We have established and will continue to build relationships with the major wine and spirit wholesalers to distribute our products into the largest spirits markets in the United States.

 

Increase Production. We expect our production of cases to increase each year for the next three years. We believe our increased production capacity will make us more attractive to distribution partners and will also facilitate additional revenues, cost savings and profits.

 

Leverage Access to Public Capital Markets. The public capital markets facilitate funding access for our long-term growth initiatives, including potential strategic acquisitions.

 

Our Strengths

 

We believe the following competitive strengths will help enable the implementation of our growth strategies:

 

Award Winning Diverse Product Line: We have a diverse product line currently offering over a dozen premium craft spirits, many of which have won awards for taste and/or product design. According to a study by the American Craft Spirits Association, the U.S. craft spirits volume of cases sold experienced a compound annual growth rate of 27.4% between 2010 and 2015, and saw an increase in market share from 0.8% to 2.2% during that period. Our sales of premium brands have increased over 1,000% since 2010. We believe our diverse, recognized product line in this growing market will enable us to establish a presence in new geographic markets and enable us to procure additional distributors for our products.

 

Key Relationships: We have distribution arrangements with several of the largest wine and spirits distributors in the United States, such as Southern Glazer. We have also engaged Park Street, a provider of back-office administrative and logistical services for alcohol and beverage distributors. We believe these relationships will help accomplish our goal of having our premium spirits sold and distributed nationwide.

 

Experienced Master Distiller. Our master distiller, Melissa “Mel” Heim, whom we believe is the first female commercial master distiller and blender west of the Mississippi River, is an important factor in distinguishing our brands. We believe that Ms. Heim’s highly regarded “palate” is important to us maintaining a high quality artisanal character to our products as well as adding to our consumer appeal.

 

 

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Our Product Approach

 

Our approach to our craft spirits involves five important aspects:

 

Commitment to Quality: We create and deliver high-quality, innovative products targeted at growing markets.

 

Authentic yet Scalable: We believe our approach to production allows us to produce our products at scale while keeping flavor profiles consistent.

 

Unique Talent and Experience: Every spirit reflects the creativity of our entire team.

 

Extensive Spirit Portfolio: Many craft distillers have only one to three products; we have over a dozen, which we believe affords us the opportunity to target a broader range of consumers with our brands.

 

Generate Customer Loyalty: These factors attract loyal and enthusiastic customers and major distributors for our products.

 

Our Brands

 

We develop, produce and market the premium brands listed below.

 

Burnside Bourbon. We develop, market and produce two premium, barrel–aged bourbons: Burnside Bourbon and Oregon Oak Burnside Bourbon. Our Burnside Bourbon is aged in oak barrels, is 96 proof and won a Gold Medal in the MicroLiquor Spirit Awards in 2014, and another from Beverage Tasting Institute. Our Oregon Oak Burnside Bourbon is produced in limited quantities and aged for an additional 90 days in heavily charred Oregon oak barrels, and we consider it an “ultra-premium” brand. Our Burnside Bourbon brands accounted for approximately 40%, 35% and 40% of our revenues for years 2016, 2015 and 2014, respectively. Case volume of our Burnside Bourbon increased by 163% from 2014 to 2016, compared to a 12% increase for the bourbon industry in general during the same period.

 

Barrel Hitch American Whiskey. We develop, market and produce two premium whiskeys: Barrel Hitch American Whiskey and Barrel Hitch Oregon Oaked Whiskey. Our Barrel Hitch American Whiskey is 80 proof and won a triple-Gold Medal and best of show in the MicroLiquor Spirit Awards in 2015. Our Oregon Oak version is produced in limited quantities and aged for an additional 90 days in heavily charred Oregon oak barrels, and we consider it an “ultra-premium” brand. Our whiskey brands were introduced in July 2015 and accounted for approximately 17% and 7% of our revenues for years 2016 and 2015, respectively.

 

Premium Vodka. We develop, market and produce a premium potato vodka under the brand name Portland Potato Vodka which is distilled from potatoes rather than grain and as such is gluten-free. Our Portland Potato Vodka was awarded a silver medal from the American Wine Society and a gold medal from the Beverage Tasting Institute, which also gave it a “Best Buy” rating. Our Portland Potato Vodka accounted for approximately 13%, 14% and 30% of our revenues for years 2016, 2015 and 2014, respectively. Case volume of our Portland Potato Vodka increased by 185% from 2014 to 2016, compared to a 4% increase for the vodka industry in general during the same period.

 

Distinctive Specialty Whiskeys. We develop, market and produce two distinctive specialty whiskeys: Cherry Bomb Whiskey and Marionberry Whiskey. Our Cherry Bomb Whiskey combines handcrafted small batch whiskey with a blast of real Oregon cherries. Our Cherry Bomb Whiskey won a gold medal from the American Wine Society and was also awarded a gold medal for taste and a silver medal for package design in the MicroLiquor Spirit Awards. Our Marionberry whiskey combines Oregon marionberries (a hybrid blackberry) with premium aged whiskey and was awarded two silver medals in the MicroLiquor Spirit Awards for taste and package design. Our specialty whiskeys accounted for approximately 12%, 15%, and 10% of our revenues for years 2016, 2015, and 2014, respectively.

 

Below Deck Rums. We develop, market and produce four rums under the Below Deck brand name: Below Deck Silver Rum, Below Deck Spiced Rum, Below Deck Coffee Rum and Below Deck Ginger Rum. Below Deck’s Silver Rum is our original rum. Below Deck Spiced Rum is double-distilled from molasses and infused with exotic spices and won a triple gold medal for taste and a bronze medal for package design in the MicroLiquor Spirit Awards. Our Below Deck Coffee Rum is double-distilled and infused with coffee flavors from Arabica bean and won a silver medal at the San Francisco World Spirits Competition. Below Deck Ginger Rum is infused with natural ginger. Our Below Deck Rums accounted for approximately 10%, 12% and 10% of our revenues for years 2016, 2015 and 2014, respectively.

 

Seasonal/Limited Edition Spirits. In addition to our premium bourbons, whiskeys, rum and vodka, we create seasonal and limited-edition handmade products such as Advocaat (eggnog) Liqueur, Peppermint Bark Liqueur, Bier Schnapps and Holiday Spiced Liqueur. Our Seasonal/Limited Edition Spirits accounted for approximately 6%, 10% and 10% of our revenues for years 2016, 2015 and 2014, respectively.

 

BBD Spirits. We also acquired several other brands as a result of our acquisition of BBD in May 2017. The extensive BBD product portfolio includes several craft spirits that we believe are highly complementary to our product line, including The Ninety One Gin, Navy Strength Gin (114 proof) and Delta Rye (111 proof) rye whiskey, among others. Inspired by the craft spirits movement in Oregon, Big Bottom Distilling’s small-batch, hand-crafted spirits provide consumers with unique takes on traditional spirits.

 

MotherLode Acquisition

 

On March 8, 2017, we acquired MotherLode LLC (“MotherLode”), a Portland, Oregon based provider of bottling services and production support to craft distilleries. Since its founding in 2014, the mission of MotherLode has been to enable craft distillers to increase their production and extend their product lines, reducing cost and increasing efficiency, thereby freeing them to focus on their craft. The typical MotherLode customer is a distillery of small batch, hand-crafted spirits, or a premium craft spirit sold as a private label.

 

 

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We plan to relocate much of our own operations to MotherLode’s facility and expand our manufacturing resources. Plans are in place for a pneumatic bottling line, which we anticipate could result in a five-time increase in bottling rate and provide us with an opportunity for large-volume spirit handling capability.

 

In addition to bottling services for distillers and other producers of spirits, MotherLode bottles “private label” craft spirits for customers who have on-premise or off-premise licenses, including retail and liquor stores, bars, restaurants, events, and businesses that want to take advantage of the benefits that come from having their brand clearly printed on a label. MotherLode’s craft spirits can also be private labeled for corporate gifts, wedding, birthdays and other personal events.

 

Other Sources of Revenue

 

Special Events

 

We also generate revenues from participating in special events (such as farmer’s markets, trade shows, hosting private tastings, etc.). We offer tastings as well as sell merchandise and bottle sales and have generated as much as $95,000 in revenues from these special events in a single month, during the winter holiday season (November/December). In addition to the revenues these events generate, we value the immediate customer feedback during these activities which is instrumental in creating better products and testing new flavors.

 

Retail Stores and Kiosks

 

We have three retail stores in shopping centers in the Portland, Oregon area that provide us with additional revenues for sales of our products. In December 2014, we opened a 1,200 square foot retail store in Clackamas Town Center (Happy Valley Town Center) and in January 2015, entered into a lease for 3,100 square feet of retail space in the Washington Square Center in Portland. We also had two additional holiday season retail locations within high-traffic shopping malls in the Portland metro region during 2015. For the 2016 holiday season, we replaced the Washington Square Mall storefront with a kiosk location. We intend to maintain these retail stores and kiosks to build local brand awareness and direct-to-consumer retail sales. Some of these stores will contain in-store tastings, which we believe will lead to additional product purchases.

 

Risk Factors

 

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” beginning on page 8 of this prospectus. These risks include, among others, the following:

 

If our brands do not achieve more widespread consumer acceptance, our growth may be limited.

 

We have incurred significant operating losses every quarter since our inception and anticipate that we will continue to incur significant operating losses in the future.

 

We may require additional capital, which we may not be able to obtain on acceptable terms. Our inability to raise such capital, as needed, on beneficial terms or at all could restrict our future growth and severely limit our operations.

 

We depend on a limited number of suppliers. Failure to obtain satisfactory performance from our suppliers or loss of our existing suppliers could cause us to lose sales, incur additional costs and lose credibility in the marketplace.

 

We depend on our independent wholesale distributors to distribute our products. The failure or inability of even a few of our distributors to adequately distribute our products within their territories could harm our sales and result in a decline in our results of operations.

 

We rely on a few key distributors, and the loss of any one key distributor would substantially reduce our revenues.

 

The sales of our products could decrease significantly if we cannot secure and maintain listings in the control states.

 

We must maintain a relatively large inventory of our products to support customer delivery requirements, and if this inventory is lost due to theft, fire or other damage or becomes obsolete, our results of operations would be negatively impacted.

 

If we are unable to identify and successfully acquire additional brands that are complementary to our existing portfolio, our growth will be limited, and, even if additional brands are acquired, we may not realize planned benefits due to integration difficulties or other operating issues.

 

Our failure to protect our trademarks and trade secrets could compromise our competitive position and decrease the value of our brand portfolio.

 

A failure of one or more of our key information technology systems, networks, processes, associated sites or service providers could have a material adverse impact on our business.

 

 

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Our failure to attract or retain key executive or employee talent could adversely affect our business.

 

Management turnover may create uncertainties and could harm our business.

 

If we fail to manage growth effectively or prepare for product scalability, it could have an adverse effect on our employee efficiency, product quality, working capital levels and results of operations.

 

Demand for our products may be adversely affected by many factors, including changes in consumer preferences and trends.

 

We face substantial competition in our industry and many factors may prevent us from competing successfully.

 

● Adverse public opinion about alcohol could reduce demand for our products.

 

Implications of Being an Emerging Growth Company

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and therefore we have elected to comply with certain reduced disclosure and regulatory requirements for this prospectus and future filings, including only presenting two years of audited financial statements and related financial information, not having our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and not holding a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these reduced requirements until we are no longer an “emerging growth company.” Under Section 107(b) of the JOBS Act, “emerging growth companies” may take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

 

Corporate and Other Information

 

We were incorporated in Nevada in February 2004 under the name Eurocan Holdings, Ltd. In December 2014, we changed our corporate name to Eastside Distilling, Inc. to reflect our then recent acquisition of Eastside Distilling, LLC. Our principal executive offices are located at 2150 SE Hanna Harvester Drive, Portland, OR 97222, and our telephone number is (971) 888-4264. Our corporate website address is www.eastsidedistilling.com. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

 

Share decrease and reverse stock split

 

On June 14, 2017, we filed a certificate of change with the Nevada Secretary of State pursuant to Nevada Revised Statutes 78.209 to (i) decrease our authorized common stock from 45,000,000 to 15,000,000 shares and (ii) effectuate a 1-for-3 reverse stock split of our outstanding common stock. The certificate of change was filed with an effective date of June 15, 2017. Pursuant to the Nevada Revised Statutes, our Board of Directors was authorized to effectuate the reverse stock split without stockholder approval where such split is accomplished with a concurrent proportional decrease in the Company’s authorized common stock. Prior to the reverse split, 9,939,649 shares of common stock were issued and outstanding. After the reverse split, 3,313,217 shares of common stock were issued and outstanding (excluding adjustment for settlement of fractional shares which were rounded up to the nearest whole share). All share and per share amounts in this prospectus are shown on a post-reverse stock split basis.

 

 

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The Offering

 

  Common stock offered by us  

1,500,000 Shares

 
         
 

Issue price

  $     per share  
         
  Common stock to be outstanding after this offering  

4,840,782 Shares(1)

 
         
  Option to purchase additional shares  

We have granted to the underwriters an option to purchase up to an additional 225,000 shares to cover over-allotments.

 
         
  Use of proceeds   We estimate that our net proceeds from this offering will be approximately $                million, or approximately $                million, if the underwriters’ option to purchase additional shares of our common stock is exercised in full, in each case based on an assumed offering price of $                per share, and after deducting estimated underwriting discounts and offering expenses.  
         
      We intend to use the net proceeds from this offering to purchase raw materials and produce our products, to pay accounts payable and accrued expenses, to retire outstanding promissory notes and for working capital and other general corporate purposes. See “Use of Proceeds” on page 22 of this prospectus for more information.  
         
  Risk factors   You should read the “Risk Factors” section beginning on page 8 of this prospectus for a discussion of certain of the factors to consider carefully before deciding to purchase any shares of our common stock.  
         
  Dividend policy  

Dividends on our common stock may be declared and paid when and as determined by our Board of Directors. We have not paid and do not expect to pay dividends on our common stock for the foreseeable future.

 
         
  OTCQB Market; Listing Application  

Our common stock is currently quoted on the OTC Markets (QB Marketplace Tier) under the symbol “ESDI.” We have applied to list our common stock on the NASDAQ Capital Market under the symbol “ESDI.”

 

 

 

(1) The number of shares of our common stock to be outstanding after this offering is based on 3,340,782 shares of common stock outstanding as of July 3, 2017, which excludes:

 

● 309,509 shares of common stock issuable upon the exercise of stock options outstanding as of July 3, 2017, at a weighted average exercise price of $7.17 per share;

 

● 1,131,077 shares of common stock issuable upon the exercise of outstanding common stock warrants as of July 3, 2017 at a weighted-average exercise price of $6.88 per share;

 

● 105,000 shares issuable upon the exercise of warrants to be issued to the underwriters as compensation in connection with this offering; and

 

● 182,224 shares of common stock reserved for future issuance under our 2016 Equity Incentive Plan.

 

Unless otherwise indicated, all information contained in this prospectus assumes no exercise by the underwriters of the option to purchase up to an additional 225,000 shares of our common stock.

 

 

 6 
   

 

 

Summary Consolidated Financial Data

 

You should read this summary financial data below together with our financial statements and related notes, “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The summary financial data included in this section are not intended to replace our financial statements and related notes.

 

The summary consolidated statements of operations data for the years ended December 31, 2015 and 2016 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The summary consolidated balance sheet data at December 31, 2015 and 2016 are derived from our audited condensed consolidated financial statements appearing elsewhere in this prospectus. In our opinion, the unaudited condensed consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements and include all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of such financial data. Our historical results are not necessarily indicative of the results that may be expected in the future and results of interim periods are not necessarily indicative of the results for the full year.

 

Consolidated Statements of Operations Data:

 

     Years Ended December 31,   Three Months Ended March 31, 
     2015   2016   2016   2017 
  Sales  $2,326,664   $3,042,527   $621,882   $829,669 
  Less excise taxes, customer programs and incentives   624,046    934,221    167,120    217,188 
  Net sales   1,702,618    2,108,306    454,762    612,481 
  Selling, general and administrative expenses   4,373,746    5,125,923    1,042,214    1,148,062 
  Other income (expense), net   (59,548)   (901,658)   (171,058)   (43,324)
  Net loss   (3,601,066)   (5,199,619)   (1,014,679)   (901,818)
  Dividends on convertible preferred stock       (51,674)       (5,037)
  Net loss attributable to common stockholders   (3,601,066)   (5,251,293)   (1,014,679)   (906,855)
                       

Consolidated Balance Sheet Data:

 

     At December 31,       
     2015   2016   March 31, 2017   
                 
  Total assets  $1,291,858   $2,547,988   $2,947,838   
  Total liabilities   2,355,471    1,415,155    1,051,211   
  Stockholders’ equity (deficit)   (1,063,613)   1,132,833    1,896,627   
                    

 

 7 
   

 

RISK FACTORS

 

Investing in our common stock involves a number of risks. You should not invest unless you are able to bear the complete loss of your investment. In addition to the risks and investment considerations discussed elsewhere in this prospectus, the following factors should be carefully considered by anyone purchasing the securities offered by this prospectus. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline and investors could lose all or a part of the money paid to buy our common stock.

 

RISKS RELATING TO OUR BUSINESS

 

If our brands do not achieve more widespread consumer acceptance, our growth may be limited.

 

Although our brands have achieved acceptance in the Pacific Northwest, most of our brands are relatively new and have not achieved extensive national brand recognition. Also, brands we may develop and/or acquire in the future are unlikely to establish widespread brand recognition. Accordingly, if consumers do not accept our brands, we will not be able to penetrate our markets and our growth may be limited.

 

We have incurred significant operating losses every quarter since our inception and anticipate that we will continue to incur significant operating losses in the future.

 

We believe that we will continue to incur net losses for the foreseeable future as we expect to make continued significant investment in product development and sales and marketing and to incur significant administrative expenses as we seek to grow our brands. We also anticipate that our cash needs will exceed our income from sales for the foreseeable future. Some of our products may never achieve widespread market acceptance and may not generate sales and profits to justify our investment therein. Also, we may find that our expansion plans are more costly than we anticipate and that they do not ultimately result in commensurate increases in our sales, which would further increase our losses. We expect we will continue to experience losses and negative cash flow, some of which could be significant. Results of operations will depend upon numerous factors, some of which are beyond our control, including market acceptance of our products, new product introductions and competition. We also incur substantial operating expenses at the corporate level, including costs directly related to being a reporting company with the U.S. Securities and Exchange Commission (the “SEC”). For the year ended December 31, 2016, we reported a net loss of $5.2 million. As of December 31, 2016, we had an accumulated deficit since inception of $12.8 million.

 

We may require additional capital, which we may not be able to obtain on acceptable terms. Our inability to raise such capital, as needed, on beneficial terms or at all could restrict our future growth and severely limit our operations.

 

We have limited capital compared to other companies in our industry. This may limit our operations and growth, including our ability to continue to develop new and existing brands, service our debt obligations, maintain adequate inventory levels, fund potential acquisitions of new brands, penetrate new markets, attract new customers and enter into new distribution relationships. If we do not generate sufficient cash from operations to finance additional capital needs, we will need to raise additional funds through private or public equity and/or debt financing. We cannot assure you that, if and when needed, additional financing will be available to us on acceptable terms or at all. If additional capital is needed and either unavailable or cost prohibitive, our operations and growth may be limited as we may need to change our business strategy to slow the rate of, or eliminate, our expansion or reduce or curtail our operations. Also, any additional financing we undertake could impose covenants upon us that restrict our operating flexibility, and, if we issue equity securities to raise capital our existing stockholders may experience dilution and the new securities may have rights, preferences and privileges senior to those of our common stock.

 

 8 
   

 

We depend on a limited number of suppliers. Failure to obtain satisfactory performance from our suppliers or loss of our existing suppliers could cause us to lose sales, incur additional costs and lose credibility in the marketplace.

 

We depend on a limited number of third-party suppliers for the sourcing of the raw materials for all of our products, including our distillate products and other ingredients. These suppliers consist of third-party producers in the U.S. We do not have long-term written agreements with any of our suppliers. The termination of our relationships or an adverse change in the terms of these arrangements could have a negative impact on our business. If our suppliers increase their prices, we may not be able to secure alternative suppliers, and may not be able to raise the prices of our products to cover all or even a portion of the increased costs. Also, our suppliers’ failure to perform satisfactorily or handle increased orders, delays in shipments of products from suppliers or the loss of our existing suppliers, especially our key suppliers, could cause us to fail to meet orders for our products, lose sales, incur additional costs and/or expose us to product quality issues. In turn, this could cause us to lose credibility in the marketplace and damage our relationships with distributors, ultimately leading to a decline in our business and results of operations. If we are not able to renegotiate these contracts on acceptable terms or find suitable alternatives, our business could be negatively impacted.

 

We depend on our independent wholesale distributors to distribute our products. The failure or inability of even a few of our distributors to adequately distribute our products within their territories could harm our sales and result in a decline in our results of operations.

 

We are required by law to use state-licensed distributors or, in 18 states known as “control states,” state-owned agencies performing this function, to sell our products to retail outlets, including liquor stores, bars, restaurants and national chains in the U.S. We have established relationships for our brands with a limited number of wholesale distributors; however, failure to maintain those relationships could significantly and adversely affect our business, sales and growth. We currently distribute our products in 22 states – Oregon, Washington, California, Florida, Nevada, Texas, Virginia, Indiana, Illinois, New York, New Jersey, Massachusetts, Connecticut, Minnesota, Georgia, Pennsylvania, Rhode Island, New Hampshire, Maine, Vermont, Idaho and Maryland. Over the past decade there has been increasing consolidation, both intrastate and interstate, among distributors. As a result, many states now have only two or three significant distributors. Also, there are several distributors that now control distribution for several states. If we fail to maintain good relations with a distributor, our products could in some instances be frozen out of one or more markets entirely. The ultimate success of our products also depends in large part on our distributors’ ability and desire to distribute our products to our desired U.S. target markets, as we rely significantly on them for product placement and retail store penetration. In addition, all of our distributors also distribute competitive brands and product lines. We cannot assure you that our U.S. alcohol distributors will continue to purchase our products, commit sufficient time and resources to promote and market our brands and product lines or that they can or will sell them to our desired or targeted markets. If they do not, our sales will be harmed, resulting in a decline in our results of operations.

 

We rely on a few key distributors, and the loss of any one key distributor would substantially reduce our revenues.

 

We currently derive a significant amount of our revenues from a few major distributors. A significant decrease in business from or loss of any of our major distributors could harm our financial condition by causing a significant decline in revenues attributable to such distributors. For the years ended December 31, 2016 and 2015, sales to one distributor (Oregon Liquor Control Commission) accounted for 32% and 32% of revenues, respectively. While we believe our relationships with our major distributors are good, we do not have long-term contracts with any of them and purchases generally occur on an order-by-order basis. If we experience a significant decrease in sales to any of our major distributors, and are unable to replace such sales volume with orders from other customers, our sales may decrease which would have a material adverse financial effect on our results of operations and financial condition.

 

The sales of our products could decrease significantly if we cannot secure and maintain listings in the control states.

 

In the control states, the state liquor commissions act in place of distributors and decide which products are to be purchased and offered for sale in their respective states. Products selected for listing in control states must generally reach certain volumes and/or profit levels to maintain their listings. Products in control states are selected for purchase and sale through listing procedures which are generally made available to new products only at periodically scheduled listing interviews. Products not selected for listings can only be purchased by consumers in the applicable control state through special orders, if at all. If, in the future, we are unable to maintain our current listings in the control states, or secure and maintain listings in those states for any additional products we may develop or acquire, sales of our products could decrease significantly which would have a material adverse financial effect on our results of operations and financial condition.

 

 9 
   

 

We must maintain a relatively large inventory of our products to support customer delivery requirements, and if this inventory is lost due to theft, fire or other damage or becomes obsolete, our results of operations would be negatively impacted.

 

We must maintain relatively large inventories of our products to meet customer delivery requirements. We are always at risk of loss of that inventory due to theft, fire or other damage, and any such loss, whether insured against or not, could cause us to fail to meet our orders and harm our sales and operating results. Also, our inventory may become obsolete as we introduce new products, cease to produce old products or modify the design of our products’ packaging, which would increase our operating losses and negatively impact our results of operations.

 

If we are unable to identify and successfully acquire additional brands that are complementary to our existing portfolio, our growth will be limited, and, even if additional brands are acquired, we may not realize anticipated benefits due to integration difficulties or other operating issues.

 

A component of our growth strategy may be the acquisition of additional brands that are complementary to our existing portfolio through acquisitions of such brands or their corporate owners, directly or through mergers, joint ventures, long-term exclusive distribution arrangements and/or other strategic relationships. For example, in May 2017, we acquired 90% of the ownership of BBD for its excellent, award winning range of super premium gins and whiskeys, and we acquired MotherLode in March 2017, which provides contract bottling and packaging services for existing and emerging spirits producers, some of whom contract with us to blend or distill spirits. If we are unable to identify suitable brand candidates and successfully execute our acquisition strategy, our growth will be limited. Also, even if we are successful in acquiring additional brands, we may not be able to achieve or maintain profitability levels that justify our investment in, or realize operating and economic efficiencies or other planned benefits with respect to, those additional brands. The addition of new products or businesses entails numerous risks with respect to integration and other operating issues, any of which could have a detrimental effect on our results of operations and/or the value of our equity. These risks include:

 

  difficulties in assimilating acquired operations or products;
     
  unanticipated costs that could materially adversely affect our results of operations;
     
  negative effects on reported results of operations from acquisition-related charges and amortization of acquired intangibles;
     
  diversion of management’s attention from other business concerns;
     
  adverse effects on existing business relationships with suppliers, distributors and retail customers;
     
  risks of entering new markets or markets in which we have limited prior experience; and
     
  the potential inability to retain and motivate key employees of acquired businesses.

 

Our ability to grow through the acquisition of additional brands will also be dependent upon the availability of capital to complete the necessary acquisition arrangements. We intend to finance our brand acquisitions through a combination of our available cash resources, third party financing and, in appropriate circumstances, the further issuance of equity and/or debt securities. Acquiring additional brands could have a significant effect on our financial position, and could cause substantial fluctuations in our quarterly and yearly operating results. Also, acquisitions could result in the recording of significant goodwill and intangible assets on our financial statements, the amortization or impairment of which would reduce reported earnings in subsequent years.

 

 10 
   

 

Our failure to protect our trademarks and trade secrets could compromise our competitive position and decrease the value of our brand portfolio.

 

Our business and prospects depend in part on our ability to develop favorable consumer recognition of our brands and trademarks. Although we apply for registration of our brands and trademarks, they could be imitated in ways that we cannot prevent. Also, we rely on trade secrets and proprietary know-how, concepts and formulas. Our methods of protecting this information may not be adequate. Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future and result in a judgment or monetary damages being levied against us. We do not maintain non-competition agreements with all of our key personnel or with some of our key suppliers. If competitors independently develop or otherwise obtain access to our trade secrets, proprietary know-how or recipes, the appeal, and thus the value, of our brand portfolio could be reduced, negatively impacting our sales and growth potential.

 

A failure of one or more of our key information technology systems, networks, processes, associated sites or service providers could have a material adverse impact on our business.

 

We rely on information technology (IT) systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist us in the management of our business. The various uses of these IT systems, networks and services include, but are not limited to: hosting our internal network and communication systems; ordering and managing materials from suppliers; supply/demand planning; production; shipping product to customers; hosting our branded websites and marketing products to consumers; collecting and storing customer, consumer, employee, investor, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing, and sharing confidential and proprietary research, business plans, and financial information; complying with regulatory, legal or tax requirements; providing data security; and handling other processes necessary to manage our business.

 

Increased IT security threats and more sophisticated cyber-crime pose a potential risk to the security of our IT systems, networks, and services, as well as the confidentiality, availability, and integrity of our data. If the IT systems, networks, or service providers we rely upon fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information, due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our business continuity plans do not effectively address these failures on a timely basis, we may suffer interruptions in our ability to manage operations and reputational, competitive and/or business harm, which may adversely affect our business operations and/or financial condition. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, customers, suppliers or consumers. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and IT systems.

 

Our failure to attract or retain key executive or employee talent could adversely affect our business.

 

Our success depends upon the efforts and abilities of our senior management team, other key employees, and a high-quality employee base, as well as our ability to attract, motivate, reward, and retain them. In particular, we rely on the skills and expertise of our Master Distiller, Melissa Heim, whom we believe is the first female commercial master distiller and blender west of the Mississippi River, and her knowledge of our business and industry would be difficult to replace. If Ms. Heim or one of our executive officers or significant employees terminates her or his employment, we may not be able to replace their expertise, fully integrate new personnel or replicate the prior working relationships, and the loss of their services might significantly delay or prevent the achievement of our business objectives. Qualified individuals with the breadth of skills and experience in our industry that we require are in high demand, and we may incur significant costs to attract them. We do not maintain and do not intend to obtain key man insurance on the life of any executive or employee. Difficulties in hiring or retaining key executive or employee talent, or the unexpected loss of experienced employees could have an adverse impact our business performance. In addition, we could experience business disruption and/or increased costs related to organizational changes, reductions in workforce, or other cost-cutting measures.

 

 11 
   

 

Management turnover may create uncertainties and could harm our business.

 

We have recently experienced significant changes in our executive leadership. Specifically, Stephen Earles resigned as Chief Executive Officer in November 2016 and resigned as President and from our Board of Directors in January 2017. Changes to strategic or operating goals, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult as the new executives gain detailed knowledge of our operations, and friction can result from changes in strategy and management style. Management turnover inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. Until we integrate new personnel, and unless they are able to succeed in their positions, we may be unable to successfully manage and grow our business, and our financial condition and profitability may suffer.

 

Further, to the extent we experience additional management turnover, competition for top management is high and it may take months to find a candidate that meets our requirements. If we are unable to attract and retain qualified management personnel, our business could suffer.

 

If we fail to manage growth effectively or prepare for product scalability, it could have an adverse effect on our employee efficiency, product quality, working capital levels and results of operations.

 

Any significant growth in the market for our products or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. During any period of growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.

 

Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the marketing of the products we sell, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.

 

 12 
   

 

RISKS RELATED TO OUR INDUSTRY

 

Demand for our products may be adversely affected by many factors, including changes in consumer preferences and trends.

 

Consumer preferences may shift due to a variety of factors including changes in demographic and social trends, public health initiatives, product innovations, changes in vacation or leisure, dining and beverage consumption patterns and a downturn in economic conditions, which may reduce consumers’ willingness to purchase distilled spirits or cause a shift in consumer preferences toward beer, wine or non-alcoholic beverages. Our success depends in part on fulfilling available opportunities to meet consumer needs and anticipating changes in consumer preferences with successful new products and product innovations.

 

A limited or general decline in consumption in one or more of our product categories could occur in the future due to a variety of factors, including:

 

a general decline in economic or geopolitical conditions;

 

concern about the health consequences of consuming beverage alcohol products and about drinking and driving;

 

a general decline in the consumption of beverage alcohol products in on-premise establishments, such as may result from smoking bans and stricter laws relating to driving while under the influence of alcohol;

 

consumer dietary preferences favoring lighter, lower calorie beverages such as diet soft drinks, sports drinks and water products;

 

increased federal, state, provincial and foreign excise or other taxes on beverage alcohol products and possible restrictions on beverage alcohol advertising and marketing;

 

increased regulation placing restrictions on the purchase or consumption of beverage alcohol products or increasing prices due to the imposition of duties or excise tax;

 

inflation; and

 

wars, pandemics, weather and natural or man-made disasters.

 

In addition, our continued success depends, in part, on our ability to develop new products to meet consumer needs and anticipate changes in consumer preferences. The launch and ongoing success of new products are inherently uncertain especially with regard to their appeal to consumers. The launch of a new product can give rise to a variety of costs and an unsuccessful launch, among other things, can affect consumer perception of existing brands and our reputation. Unsuccessful implementation or short-lived popularity of our product innovations may result in inventory write-offs and other costs.

 

We face substantial competition in our industry and many factors may prevent us from competing successfully.

 

We compete on the basis of product taste and quality, brand image, price, service and ability to innovate in response to consumer preferences. The global spirits industry is highly competitive and is dominated by several large, well-funded international companies. Many of our current and potential competitors have longer operating histories and have substantially greater financial, sales, marketing and other resources than we do, as well as larger installed customer bases, greater name recognition and broader product offerings. Some of these competitors can devote greater resources to the development, promotion, sale and support of their products. As a result, it is possible that our competitors may either respond to industry conditions or consumer trends more rapidly or effectively or resort to price competition to sustain market share, which could adversely affect our sales and profitability.

 

In addition, the legalization of marijuana in any of the jurisdictions in which we sell our products may result in a reduction in sales. Studies have shown that sales of alcohol may decrease modestly in jurisdictions where marijuana has been legalized (Colorado, Washington and Oregon). As a result, marijuana sales may adversely affect our sales and profitability.

 

 13 
   

 

Adverse public opinion about alcohol could reduce demand for our products.

 

Anti-alcohol groups have, in the past, advocated successfully for more stringent labeling requirements, higher taxes and other regulations designed to discourage alcohol consumption. In addition, recent developments in the industry may compel us to identify the source and location of our distillate products, and notify the consumer of whether the product was distilled by us. More restrictive regulations, negative publicity regarding alcohol consumption and/or changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease sales and consumption of alcohol and thus the demand for our products. This could, in turn, significantly decrease both our revenues and our revenue growth, causing a decline in our results of operations.

 

Class action or other litigation relating to alcohol abuse or the misuse of alcohol could adversely affect our business.

 

Our industry faces the possibility of class action or similar litigation alleging that the continued excessive use or abuse of beverage alcohol has caused death or serious health problems, or related to the labelling of our products. It is also possible that governments could assert that the use of alcohol has significantly increased government funded health care costs. Litigation or assertions of this type have adversely affected companies in the tobacco industry, and it is possible that we, as well as our suppliers, could be named in litigation of this type.

 

Also, lawsuits have been brought in a number of states alleging that beverage alcohol manufacturers and marketers have improperly targeted underage consumers in their advertising. Plaintiffs in these cases allege that the defendants’ advertisements, marketing and promotions violate the consumer protection or deceptive trade practices statutes in each of these states and seek repayment of the family funds expended by the underage consumers. While we have not been named in these lawsuits, we could be named in similar lawsuits in the future. Any class action or other litigation asserted against us could be expensive and time-consuming to defend against, depleting our cash and diverting our personnel resources and, if the plaintiffs in such actions were to prevail, our business could be harmed significantly.

 

Regulatory decisions and legal, regulatory and tax changes could limit our business activities, increase our operating costs and reduce our margins.

 

Our business is subject to extensive government regulation. This may include regulations regarding production, distribution, marketing, advertising and labeling of beverage alcohol products. We are required to comply with these regulations and to maintain various permits and licenses. We are also required to conduct business only with holders of licenses to import, warehouse, transport, distribute and sell beverage alcohol products. We cannot assure you that these and other governmental regulations applicable to our industry will not change or become more stringent. Moreover, because these laws and regulations are subject to interpretation, we may not be able to predict when and to what extent liability may arise. Additionally, due to increasing public concern over alcohol-related societal problems, including driving while intoxicated, underage drinking, alcoholism and health consequences from the abuse of alcohol, various levels of government may seek to impose additional restrictions or limits on advertising or other marketing activities promoting beverage alcohol products. Failure to comply with any of the current or future regulations and requirements relating to our industry and products could result in monetary penalties, suspension or even revocation of our licenses and permits. Costs of compliance with changes in regulations could be significant and could harm our business, as we could find it necessary to raise our prices in order to maintain profit margins, which could lower the demand for our products and reduce our sales and profit potential.

 

Also, the distribution of beverage alcohol products is subject to extensive taxation (at both the federal and state government levels), and beverage alcohol products themselves are the subject of national import and excise duties in most countries around the world. An increase in taxation or in import or excise duties could also significantly harm our sales revenue and margins, both through the reduction of overall consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol.

 

 14 
   

 

We could face product liability or other related liabilities that increase our costs of operations and harm our reputation.

 

Although we maintain liability insurance and will attempt to limit contractually our liability for damages arising from our products, these measures may not be sufficient for us to successfully avoid or limit liability. Our product liability insurance coverage is limited to $1 million per occurrence and $5 million in the aggregate and our general liability umbrella policy is capped at $15 million. Further, any contractual indemnification and insurance coverage we have from parties supplying our products is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by these suppliers. In any event, extensive product liability claims could be costly to defend and/or costly to resolve and could harm our reputation.

 

Contamination of our products and/or counterfeit or confusingly similar products could harm the image and integrity of, or decrease customer support for, our brands and decrease our sales.

 

The success of our brands depends upon the positive image that consumers have of them. Contamination, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for our brands, could affect the demand for our products. Contaminants in raw materials purchased from third parties and used in the production of our products or defects in the distillation and fermentation processes could lead to low beverage quality as well as illness among, or injury to, consumers of our products and could result in reduced sales of the affected brand or all of our brands. Also, to the extent that third parties sell products that are either counterfeit versions of our brands or brands that look like our brands, consumers of our brands could confuse our products with products that they consider inferior. This could cause them to refrain from purchasing our brands in the future and in turn could impair our brand equity and adversely affect our sales and operations.

 

RISKS RELATED TO OUR COMMON STOCK

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Investors may find our common stock less attractive because we rely on these exemptions; which may result in a less active trading market for our common stock, making our stock price more volatile.

 

There is a limited trading market for our common stock and our common stock is subject to volatility risks.

 

Our common stock is quoted on the OTCQB under the symbol “ESDI” and has limited trading history. The OTCQB market is an inter-dealer market that provides much less oversight and regulation as compared to the major exchanges (NYSE, NASDAQ), and is subject to abuses, volatilities and shorting. Trading on the OTCQB is frequently highly volatile, with low trading volume. There is currently no broadly followed and established trading market for our common stock. An established trading market for our common stock may never develop, in which case it could be difficult for stockholders to sell their stock. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces the liquidity of the shares traded. Any last reported sale prices may not be a true market-based valuation of the common stock. We have experienced significant fluctuations in the price and trading volume of our common stock, which may be caused by factors relating to our business and operational results and/or factors unrelated to our company, including general market conditions.

 

 15 
   

 

The market price of our common stock may be volatile and subject to fluctuations in response to factors. The stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, the operating and stock performance of other companies that investors may deem as comparable and news reports relating to trends in the marketplace, among other factors. Significant volatility in the market price of our common stock may arise due to factors such as:

 

  our developing business;
     
  relatively low price per share;
     
  relatively low public float;
     
  variations in quarterly operating results;
     
  general trends in the industries in which we do business;
     
  the number of holders of our common stock; and
     
  the interest of securities dealers in maintaining a market for our common stock.

 

As long as there is only a limited public market for our common stock, the sale of a significant number of shares of our common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered, and could cause a severe decline in the price of our common stock.

 

Our common stock is thinly traded, and investors may be unable to sell some or all of their shares at the price they would like, or at all, and sales of large blocks of shares may depress the price of our common stock.

 

Our common stock has historically been sporadically or “thinly-traded,” meaning that the number of persons interested in purchasing shares of our common stock at prevailing prices at any given time may be relatively small or nonexistent. As a consequence, there may be periods of several days or more when trading activity in shares of our common stock is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. This could lead to wide fluctuations in our share price. Investors may be unable to sell their common stock at or above their purchase price, which may result in substantial losses. Also, as a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of shares of our common stock in either direction. The price of shares of our common stock could, for example, decline precipitously in the event a large number of share of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its share price.

 

Our common stock is considered to be a “penny stock” and, as such, the market for our common stock may be further limited by certain SEC rules applicable to penny stocks.

 

As long as the price of our common stock remains below $5 per share or we have net tangible assets of $2,000,000 or less, our shares of common stock are likely to be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations make it more difficult for brokers to sell our shares of our common stock and limit the liquidity of our securities.

 

 16 
   

 

Although we intend to apply to list our common stock on a national securities exchange, our common stock may never be listed on a major stock exchange.

 

We currently do not satisfy the initial listing standards of a national or other securities exchange. We presently anticipate that the proceeds from this offering and corresponding impact on our stockholders’ equity and other factors will be sufficient to meet the initial listing standards of the NASDAQ Capital Market. However, we cannot guarantee that such listing standards will be met as a result of this offering. If we do not meet the initial listing standards of a major stock exchange, our common stock will continue to be quoted on the OTCQB or another over-the-counter quotation system. In those venues, our stockholders may find it difficult to obtain accurate quotations as to the market value of their shares of our common stock, and may find few buyers to purchase their stock and few market makers to support its price. We cannot ensure that in the future we will ever satisfy the initial listing standards of any national securities exchange or that our common stock will be accepted for listing on any such exchange. Should we fail in the future to satisfy the initial listing standards of such exchanges, or our common stock is otherwise rejected for listing, the trading price of our common stock could suffer, the trading market for our common stock may continue to be less liquid and the price may be subject to increased volatility.

 

A decline in the price of our common stock could affect our ability to raise working capital and adversely impact our ability to continue operations.

 

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. A decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plans and operations, including our ability to develop new services and continue our current operations. If our common stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.

 

Transfers of our securities may be restricted by virtue of state securities “blue sky” laws that prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.

 

Transfers of our common stock may be restricted under the securities laws or securities regulations promulgated by various states and foreign jurisdictions, commonly referred to as “blue sky” laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.

 

We do not expect to pay dividends for the foreseeable future.

 

For the foreseeable future, it is anticipated that earnings, if any, that may be generated from our operations will be used to finance our operations and that cash dividends will not be paid to holders of common stock.

 

Our officers and directors collectively own a substantial portion of our outstanding common stock, and as long as they do, they may be able to control the outcome of stockholder voting.

 

Grover Wickersham, our chairman and chief executive officer, is the beneficial owner of approximately 14.6% of the outstanding shares of our common stock as of March 31, 2017. Accordingly, he may be able to control us and direct our affairs and business, including any determination with respect to a change in control, future issuances of common stock or other securities, declaration of dividends on the common stock and the election of directors.

 

We have the ability to issue additional shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause your investment to be diluted.

 

Our Articles of Incorporation authorizes the Board of Directors to issue up to 15,000,000 shares of common stock and up to 100,000,000 shares of preferred stock. The power of the Board of Directors to issue shares of common stock, preferred stock or warrants or options to purchase shares of common stock or preferred stock is generally not subject to stockholder approval. Accordingly, any additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting your investment, and the new securities may have rights, preferences and privileges senior to those of our common stock.

 

 17 
   

 

By issuing preferred stock, we may be able to delay, defer, or prevent a change of control.

 

Our Articles of Incorporation permits us to issue, without approval from our stockholders, a total of 100,000,000 shares of preferred stock. Our Board of Directors may determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series. It is possible that our Board of Directors, in determining the rights, preferences and privileges to be granted when the preferred stock is issued, may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights of the holders of our common stock.

 

If we fail to remain current on our reporting requirements, we could be removed from the OTCQB Tier of the OTC Markets, which would further limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

 

Companies quoted on the OTCQB must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges on the OTCQB. If we fail to remain current on our reporting requirements, we could be removed from the OTCQB, which would result in our securities be quoted on a lesser tier of the OTC Markets. As a result, the market liquidity for our securities could be adversely affected. In addition, we may be unable to get re-quoted on the OTCQB, which may have an adverse material effect on our Company.

 

We face risks related to compliance with corporate governance laws and financial reporting standard.

 

The Sarbanes-Oxley Act of 2002, as well as related rules and regulations implemented by the SEC and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting (“Section 404”), will materially increase the Company’s legal and financial compliance costs and make some activities more time-consuming, burdensome and expensive. Although we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate or may not operate effectively. Any failure to comply with the requirements of Section 404, our ability to remediate any material weaknesses that we may identify during our compliance program, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock and we could be subject to regulatory sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

 18 
   

 

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

 

As a public company, we incur significant legal, accounting and other expenses that we would not incur as a private company, including costs associated with public company reporting requirements. We also incur costs associated with the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented or to be implemented by the SEC. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to continue to increase our legal and financial compliance costs and to make some activities, such as internal control over financial reporting, more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

 

Substantial sales of our stock may impact the market price of our common stock.

 

Future sales of substantial amounts of our common stock, including shares that we may issue upon exercise of options and warrants, could adversely affect the market price of our common stock. In addition, several of our existing stockholders are parties to registration rights agreements with us, and we have agreed to file a registration statement with respect to their shares as soon as possible after the closing of this offering and to use our commercially best efforts to cause the registration statement to be declared effective as soon as possible thereafter. Upon effectiveness of any such registration statement, the registered shares held by such stockholders shall no longer be deemed “restricted securities,” and such holders shall be able to freely transfer their shares without the restrictions that are otherwise imposed on privately issued securities. As a result, there may be an increase the number of shares being sold by our existing stockholders, which may further adversely impact the market price of our common stock. Moreover, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock, the percentage ownership of our stockholders will be reduced and the price of our common stock may fall.

 

There are limitations in connection with the availability of quotes and order information on the OTC Markets, and delays in order communication may occur.

 

Trades and quotations on the OTC Markets involve a manual process and the market information for such securities cannot be guaranteed. Also, quote information, or even firm quotes, may not be available. In addition, electronic processing of orders is not available for securities traded on the OTC Markets and high order volume and communication risks may prevent or delay the execution of OTC Markets trading orders. The manual execution process and lack of automated order processing may affect the timeliness of trade execution, order execution reporting, delivery of legal trade confirmation and the availability of firm quotes for shares of our common stock. This may result in the failure of a limit order to execute or the execution of a market order at a significantly different price. Consequently, one may not be able to sell shares of our common stock at the optimum trading prices.

 

There is a risk of market fraud on the OTC Markets.

 

OTC Markets securities are frequent targets of fraud or market manipulation. Not only because of their generally low price, but also because the OTC Markets reporting requirements for these securities are less stringent than for listed or NASDAQ traded securities, and no exchange requirements are imposed. Dealers may dominate the market and set prices that are not based on competitive forces. Individuals or groups may create fraudulent markets and control the sudden, sharp increase of price and trading volume and the equally sudden collapse of the market price for shares of our common stock.

 

 19 
   

 

There is a limitation in connection with the editing and canceling of orders on the OTC Markets.

 

Orders for OTC Markets securities may be canceled or edited like orders for other securities, however, all requests to change or cancel an order must be submitted to, received and processed by the OTC Markets. Due to the manual order processing involved in handling OTC Markets trades, order processing and reporting may be delayed, and stockholders may not be able to cancel or edit their orders. Consequently, stockholders may not be able to sell their shares of our common stock at the optimum trading prices.

 

Increased dealer compensation could adversely affect our stock price.

 

The dealer’s compensation, or “spread” (the difference between the bid and ask prices), may be large and may result in substantial losses to the seller of shares of our common stock on the OTC Markets if the stock must be sold immediately. Further, purchasers of shares of our common stock may incur an immediate “paper” loss due to the price spread. Moreover, dealers trading on the OTC Markets may not have a bid price for shares of our common stock on the OTC Markets. Due to the foregoing, demand for shares of our common stock on the OTC Markets may be decreased or eliminated.

 

 20 
   

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

  Estimates of our expenses, capital requirements and need for additional financing;
     
  Our use of proceeds from this offering;
     
  Our financial performance;
     
  Developments and projections relating to our competitors and our industry; and
     
  Our ability to develop, market and sell our products at commercially reasonable values.

 

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. You should not rely upon forward-looking statements as predictions of future events. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risks and uncertainties.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, after the date of this prospectus, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise.

 

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research surveys and studies conducted by third parties. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the market definitions we use are appropriate, neither such research nor these definitions have been verified by any independent source.

 

 21 
   

 

USE OF PROCEEDS

 

We estimate that our net proceeds from the sale of shares of our common stock in this offering will be approximately $             million (or $             million if the underwriters exercise in full their option to purchase additional shares from us), in each case, based on the assumed public offering price of $             per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed public offering price of $             per share, would increase (decrease) our net proceeds, assuming that the number of common shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and offering expenses, by $             million.

 

We intend to use the net proceeds of this offering as follows:

 

  Approximately $1 million to acquire raw materials (distillate and others) to produce our products;
     
  Approximately $350,000 to retire outstanding notes; and
     
  The remainder to fund working capital and general corporate purposes.

 

The expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures will depend on numerous factors, including the progress of our product development efforts and market acceptance of our products. As a result, our management will have broad discretion in applying the net proceeds from this offering. Pending the use of proceeds described above, we intend to invest the net proceeds from this offering in interest-bearing, investment-grade securities.

 

We believe that the net proceeds from this offering, together with our existing cash resources, will be sufficient to enable us to fund our operations for at least 12 months following the completion of this offering. We have based this estimate on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect.

 

To the extent the underwriters exercise their over-allotment option to purchase shares, the additional net proceeds we may receive therefrom will be added to working capital.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our Board of Directors may deem relevant.

 

 22 
   

 

CAPITALIZATION

 

The following table sets forth our capitalization at March 31, 2017, as follows:

 

● on an actual (post-reverse stock split) basis;

 

● on a pro forma basis to reflect transactions subsequent to March 31, 2017, including the issuance of 337,331 shares of our common stock in private placements and for consulting services, upon exercise of warrants and stock options, upon conversion of remaining shares of series A convertible preferred stock, and the issuance of $1,400,000 in convertible notes; and

 

● on a pro forma as adjusted basis to reflect, in addition to the pro forma adjustments noted above, the sale of 1,500,000 shares of our common stock in this offering at the public offering price of $             per share, after deducting the underwriting discounts and commissions and estimated offering expenses.

 

Our capitalization following the closing of this offering will be adjusted based on the actual public offering price and other terms of the offering determined at pricing. You should read this information together with our audited consolidated financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the heading “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    March 31, 2017  
                Pro Forma  
    Actual     Pro Forma     As Adjusted  
                   
Cash and cash equivalents   $ 883,715     $ 3,093,715     $    
Notes payable, less current portion and debt discount     365,160       1,765,160          
                         
Stockholders’ equity:                        
Series A convertible preferred stock, $0.0001 par value, 3,000 shares authorized, 50 shares outstanding actual; no shares outstanding pro forma and pro forma as adjusted (liquidation value of $125,000 actual and $0 pro forma and pro forma as adjusted)     49,426              
Common stock, $0.0001 par value, 15,000,000 shares authorized, 3,003,451 shares outstanding actual; 3,340,782 shares outstanding pro forma; and 4,840,782 shares outstanding pro forma as adjusted     300       334          
Additional paid-in-capital     15,566,800       16,957,519          
Accumulated deficit     (13,719,899 )     (13,719,899 )        
Total stockholders’ equity     1,896,627       3,237,953          
Total capitalization   $ 3,145,502     $ 8,096,828     $    

 

 23 
   

 

DILUTION

 

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our common stock after this offering.

 

Our historical net tangible book value (deficit) as of March 31, 2017 was approximately $1,523,125, or $0.51 per share of common stock on a post-reverse split basis. Our historical net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities, which are not included within stockholders’ deficit. Historical net tangible book value (deficit) per share is our historical net tangible book value (deficit) divided by the number of shares of common stock outstanding as of March 31, 2017.

 

Pro forma net tangible book value as of March 31, 2017 is our historical net tangible book value, plus the effect of (i) the sale of shares of our common stock in this offering at the public offering price of $            per share, after deducting underwriting discounts and commissions and estimated offering expenses. This amount represents an immediate increase in pro forma net tangible book value of $            per share to our existing stockholders, and an immediate dilution of $            per share to new investors purchasing common stock in this offering.

 

The following table illustrates this dilution on a per share basis to new investors:

 

Public offering price per share  $ 
Historical net tangible book value (deficit) per share as of March 31, 2017  $0.51 
Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering     
Pro forma net tangible book value per share, after this offering     
Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering  $  

 

A $1.00 increase (decrease) in the offering price of $     per share would increase (decrease) our as adjusted pro forma net tangible book value by $     million, the as adjusted pro forma net tangible book value per share after the offering by $     per share and the dilution per share to the new investors purchasing our shares in this offering by $    per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts, commissions, and estimated offering expenses payable by us.

 

If the underwriters exercise in full their option to purchase additional shares of our common stock, the pro forma net tangible book value per share, as adjusted to give effect to the offering, would be $            per share, and the dilution in pro forma net tangible book value per share to new investors participating in this offering would be $            per share.

 

The following table presents, on a pro forma basis as of March 31, 2017, the differences between the number of common shares purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us by existing stockholders and the new investors purchasing common stock in this offering at the public offering price of $            per share, after deducting underwriting discounts, commissions, and estimated offering expenses payable by us.

 

   Shares Purchased   Total Consideration   Average Price 
   Number   Percent   Amount   Percent   Per Share 
Existing stockholders       %  $    %  $ 
New investors        100.0%        100.0%     
Totals        100.0%       $100.0%  $ 

 

If the underwriters exercise in full their option to purchase additional shares of our common stock from us, our existing stockholders would own             % and our new investors would own             % of the total number of shares of our common stock outstanding upon completion of this offering. In this event, the total consideration paid by our existing stockholders would be $0, or 0%, and the total consideration paid by our new investors would be $            , or 100%.

 

A $1.00 increase (decrease) in the offering price of $     per share would increase (decrease) total consideration by new investors by $     million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The foregoing tables and calculations as of March 31, 2017 exclude the following potentially dilutive shares of common stock:

 

● 309,509 shares of common stock issuable upon the exercise of stock options outstanding as of July 3, 2017, at a weighted average exercise price of $7.17 per share;

 

● 1,131,077 shares of common stock issuable upon the exercise of outstanding common stock warrants as of July 3, 2017 at a weighted-average exercise price of $6.88 per share;

 

● 105,000 shares issuable upon the exercise of warrants to be issued to the underwriters as compensation in connection with this offering; and

 

● 182,224 shares of common stock reserved for future issuance under our 2016 Equity Incentive Plan.

 

To the extent that any outstanding common stock options and common stock warrants are exercised or there are additional issuances of common stock options, common stock warrants or shares of our common stock in the future, there will be further dilution to investors participating in this offering.

 

 24 
   

 

MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

 

Market and Other Information

 

Our common stock trades on the OTC Markets (QB Marketplace Tier) under the symbol “ESDI.” Very limited trading of our common stock has occurred during the past two years; therefore, only limited historical price information is available. The table below sets forth the high and low closing bid prices of our common stock for the last two fiscal years, as reported by OTC Markets Group Inc. and represents inter-dealer quotations, without retail mark-up, mark-down or commission and may not be reflective of actual transactions. We effected a 1-for-20 reverse stock split on October 18, 2016 and a 1-for-3 reverse stock split on June 15, 2017. All quotations noted in the table prior to those dates have been adjusted to reflect the impact of the reverse stock splits.

 

We consider our stock to be “thinly traded” and any reported sale prices may not be a true market-based valuation of our stock. Some of the bid quotations from the OTC Bulletin Board set forth below may reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.

 

    High     Low  
             
Year Ended December 31, 2016                
First Quarter   $ 18.00     $ 8.97  
Second Quarter   $ 9.84     $ 2.79  
Third Quarter   $ 6.30     $ 4.80  
Fourth Quarter   $ 7.35     $ 4.50  
                 
Year Ended December 31, 2015                
First Quarter   $ 126.00     $ 105.00  
Second Quarter   124.20     92.40  
Third Quarter   133.80     17.94  
Fourth Quarter   $ 29.40     $ 9.60  

 

We have applied to list our common stock on the NASDAQ Capital Market under the symbol “ESDI.”

 

Our shares of common stock are issued in registered form. The registrar and transfer agent for our shares of common stock is Pacific Stock Transfer Company, 4045 South Spencer Street, Suite 403, Las Vegas, NV 89119; telephone: (702) 361-3033; facsimile: (800) 785-7782).

 

As of July 3, 2017, there were 3,340,782 shares of our common stock outstanding, which were held by approximately 137 record stockholders. On July 5, 2017, the last reported sale price of our common stock on the OTCQB was $6.00 per share. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of shares of common stock whose shares are held in the names of various security brokers, dealers and registered clearing agencies.

 

 25 
   

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

You should read the selected consolidated financial data below in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included in this prospectus.

 

The selected consolidated statements of operations data for the years ended December 31, 2015 and 2016, and the selected consolidated balance sheet data as of December 31, 2015 and 2016, are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results are not necessarily indicative of the results to be expected for the full year.

 

Selected Consolidated Statements of Operations Data:

 

    Years Ended December 31,     Three Months Ended March 31,  
    2015     2016     2016     2017  
Sales   $ 2,326,664     $ 3,042,527     $ 621,882     $ 829,669  
Less excise taxes, customer programs and incentives     624,046       934,221       167,120       217,188  
Net sales     1,702,618       2,108,306       454,762       612,481  
Gross Profit     832,228       827,962       198,593       289,568  
Selling, general and administrative expenses     4,373,746       5,125,923       1,042,214       1,148,062  
Loss from operations     (3,541,518 )     (4,297,961 )     (843,621 )     (858,494 )
Other income (expense), net     (59,548 )     (901,658 )     (171,058 )     (43,324 )
Provision for income taxes                        
Net loss     (3,601,066 )     (5,199,619 )     (1,014,679 )     (901,818 )
Dividends on convertible preferred stock           (51,674 )           (5,037 )
Net loss attributable to common stockholders     (3,601,066 )     (5,251,293 )     (1,014,679 )     (906,855 )
Basic and diluted net loss per common share     (4.72 )     (4.21 )     (1.34 )     (0.35 )

 

Selected Consolidated Balance Sheet Data:

 

   At December 31,     
   2015   2016   March 31, 2017 
             
Total current assets  $1,130,853   $2,400,772   $2,386,376 
Total assets   1,291,858    2,547,988    2,947,838 
Total current liabilities   2,337,629    987,399    686,051 
Total liabilities   2,355,471    1,415,155    1,051,211 
Accumulated deficit   (7,561,751)   (12,813,044)   (13,719,899)
Stockholders’ equity (deficit)   (1,063,613)   1,132,833    1,896,627 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Selected Consolidated Financial Data” and our financial statements and related notes appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

 

Corporate Overview

 

We are an Oregon-based producer and marketer of craft spirits, founded in 2008. Our products span several alcoholic beverage categories, including bourbon, American whiskey, vodka and rum. Unlike many, if not most, distillers, we operate several retail tasting rooms in Oregon to market our brands directly to consumers. Our growth strategy is to build on our local base in the Pacific Northwest and expand selectively to other markets by using major spirits distributors, such as Southern Glazer Wines and Spirits, or regional distributors that focus on craft brands. As a small company in the large, international spirits marketplace filled with massive conglomerates, we are innovative in exploiting new trends with our products, for example, our coffee rum with cold-brew coffee and low sugar, and our gluten-free potato vodka. In December 2016 we retained Sandstrom Partners (an internationally known spirit branding firm that branded St Germain and Bulleit Bourbon) to guide our marketing strategy and branding. Sandstrom Partners subsequently became an investor in us. We seek to be a leader in creating spirits that offer better value than comparable spirits, for example our value priced Burnside Bourbon and Portland Potato Vodka, and an innovator in creating imaginative spirits that offer a unique taste experience, for example our coffee rum, Oregon oak aged whiskeys, Marionberry Whiskey and Peppermint Bark holiday liqueur. In May 2017, we acquired Big Bottom Distillery (“BBD”) for its excellent, award winning range of super premium gins and whiskeys, including Navy Proof Gin, Oregon Gin, Delta Rye and initial production of American Single Malt whiskey. BBD’s super premium spirits will expand our tasting room offerings and give us a presence at the “high end” of the market. In addition, through MotherLode, our wholly-owned subsidiary acquired in March 2017, we also provide contract bottling and packaging services for existing and would be spirits producers, some of whom contract with us to blend or distill spirits. As a publicly-traded craft spirit producers, we have access to the public capital markets to support our long-term growth initiatives, including strategic acquisitions.

 

We were incorporated in Nevada in February 2004 under the name Eurocan Holdings, Ltd. Until October 2014, Eurocan Holdings operated solely as an online marketing and media solutions firm specializing in digital interactive media, which business was conducted through Eurocan’s wholly-owned subsidiary, Michael Williams Web Design Inc. (“MWW”).

 

Our sales during the first quarter of 2017 increased 33% over the prior year, primarily due to three factors: 1) increased wholesale sales traction within the Pacific Northwest; 2) the acquisition of MotherLode and the expansion of our private label business; and 3) the addition of a new retail location in February 2017. The Oregon market continues to experience strong year-over-year growth. During the first quarter of 2017, Oregon represented approximately 78% of sales, compared to 2016 where Oregon represented approximately 58% of sales. National distribution sales were flat quarter-over-quarter, but we anticipate making strong sales progress in new markets and for such markets to represent a larger percentage of our overall sales.

 

We have also invested heavily in our infrastructure (facilities, people, and marketing programs) in order to support our planned expansion and believe we are well positioned to experience further improved performance throughout the balance of 2017.

 

Components of our Statements of Operations

 

Sales, Excise Taxes and Cost of Sales

 

Our sales consist primarily of sales of our 14 branded products to wine and spirits wholesale distributors. We also sell directly to consumers at our retail locations and kiosks, all of which are currently located in the Portland, Oregon area, in our tasting rooms, at our facilities, and through online sales. In addition, we periodically hold special events, such as tastings and private functions, where we may also sell merchandise and bottle sales directly to consumers. Sales to distributors will continue to account for a majority of our sales for the foreseeable future.

 

We are required to pay excise taxes imposed by the United States Alcohol and Tobacco Tax and Trade Bureau (the “TTB”) as well as excise taxes of the individual states into which we sell our products, the amount of which varies from state to state. Net sales is calculated by reducing total sales by excise taxes, and customer programs and incentives expenses.

 

Cost of sales consists of the costs of ingredients used in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging and in-bound freight charges.

 

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Expenses

 

Advertising, promotion and selling expenses

 

Advertising costs are expensed as incurred and are included in advertising, promotional and selling expenses in the accompanying statements of operations. Customer programs and incentives, which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcohol beverage industry. We make these payments to customers and incur these costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net sales or as advertising, promotional and selling expenses in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 605-50, Revenue Recognition- Customer Payments and Incentives, based on the nature of the expenditure.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, consulting, accounting, and audit services. We expect that our general and administrative expenses will increase in future periods as we continue our efforts to expand our operations.

 

Other Expense

 

Other expense varies from period to period and can include such items as amortization of a beneficial conversion feature on convertible notes payable, amortization of debt issuance costs and interest expense.

 

Results of Operations

 

Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016

Our sales for the three months ended March 31, 2017 increased to $829,669, or approximately 33%, from $621,882 for the three months ended March 31, 2016. The following table compares our sales in the three months ended March 31, 2017 and 2016:

 

   Three Months Ended March 31, 
   2017       2016     
Wholesale  $429,902    52%  $384,493    62%
Private Label   115,870    14%   -    - 
Retail / Special Events   283,897    34%   237,329    38%
Total  $829,669    100%  $621,882    100%

 

The increase in sales in the three months ended March 31, 2017 is primarily attributable to three factors: 1) increased wholesale sales traction within the Pacific Northwest; 2) the acquisition of Motherlode in March 2017, and the expansion of our private label business; and 3) the addition of a new retail location in February 2017.

 

Excise taxes, customer programs and incentives for the three months ended March 31, 2017 increased to $217,188, or approximately 30%, from $167,120 for the comparable 2016 period. The increase is attributable to the increase in liquor sales due to our increased distribution and sales traction during the period.

 

During the three months ended March 31, 2017, cost of sales increased to $322,913, or approximately 26%, from $256,169 for the three months ended March 31, 2016. The increase is primarily attributable to the costs associated with our increased liquor sales in the period. We believe that the costs of sales reported in both 2017 and 2016 are not typical of our expected future results because the product costs in both periods are based on smaller production lots, and do not reflect the economies of scale that we anticipate as we move into our new production facility later in 2017 and continue to scale our operations.

 

Gross profit is calculated by subtracting the cost of sales from net 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. Gross margin is gross profits stated as a percentage of net sales.

 

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The following table compares our gross profit and gross margin in the three months ended March 31, 2017 and 2016:

 

   Three Months Ended March 31, 
   2017   2016 
         
Gross profit  $289,568   $198,593 
Gross margin   47%   44%

 

Our gross margin of 47% in the three months ended March 31, 2017 increased from our gross margin of 44% for the three months ended March 31, 2016 primarily due to product mix, as the private label products typically have a higher gross margin.

 

Advertising, promotional and selling expenses for the three months ended March 31, 2017 increased to $386,132 or approximately 147%, from $156,203 for the three months ended March 31, 2016. This increase is primarily due to our efforts to expand our product sales both regionally, in the Pacific Northwest, and in target national markets.

 

General and administrative expenses for the three months ended March 31, 2017 decreased to $726,396, or approximately 18%, from $886,011 for the three months ended March 31, 2016. This decrease is primarily due to decreased management headcount and tighter expense controls, offset by an increase of $52,819 in stock-based compensation expense in 2017.

 

In the three months ended March 31, 2017, we had a $35,534 loss on disposal of property and equipment, primarily related to the write-off of construction-in-process on our primary facility due to the early lease termination agreement we were able to execute in February 2017.

 

Net total other expenses were $43,324 for the three months ended March 31, 2017, compared to $171,058 for the three months ended March 31, 2016. This decrease of 75% was primarily due to lower interest expense resulting from the conversion of outstanding debt into common stock in December 2016.

 

Net loss attributable to common stockholders during the three months ended March 31, 2017 was $906,855 as compared to a loss of $1,014,679 for the three months ended March 31, 2016. The reduction in our net loss was primarily attributable to our increased sales and gross margin, as well as decreased general and administrative expenses and interest expense during 2017, which amounts were offset by higher advertising, promotional and selling expenses and a one-time loss on the disposal of property and equipment.

 

Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

 

Our sales for the year ended December 31, 2016 increased to $3,042,527, or approximately 31%, from $2,326,664 for the year ended December 31, 2015, as follows:

 

   2016   % Sales   2015   % Sales 
Wholesale  $1,858,472    61%  $982,469    42%
Retail / Special Events   1,184,055    39%   1,344,195    58%
Total  $3,042,527    100%  $2,326,664    100%

 

The increase in sales in the year ended 2016 is primarily attributable to our increased national distribution, as well as further wholesale sales traction within the Pacific Northwest. Retail/special events sales declined during the year primarily due to the fact that one of our three stores was closed during part of the year (March through November 2016).

 

Excise taxes, customer programs, and incentives for the year ended December 31, 2016 increased to $934,221, or approximately 50%, from $624,046 for the year ended December 31, 2015. The increase is attributable to the increase in liquor sales, due to our increased distribution and sales traction during the year. In addition, customer programs and incentives increased due to our increased national distribution.

 

During the year ended December 31, 2016, cost of sales increased to $1,280,344, or approximately 47%, from $870,390 for the year ended December 31, 2015. The increase is primarily attributable to the costs associated with our increased liquor sales in the year. We believe that the cost of sales we reported for both 2016 and 2015, however, are not typical of our expected future results, because the product costs in both years are based on smaller production lots, and do not reflect the economies of scale that we anticipate as we move into our new production facility in mid-2017 and continue to scale our operations.

 

Gross profit is calculated by subtracting the cost of sales from net 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. Gross margin is gross profits stated as a percentage of net sales.

 

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The following table compares our gross profit and gross margin in the years ended December 31, 2016 and 2015:

 

   Year Ended December 31, 
   2016   2015 
         
Gross profit  $827,962   $832,228 
Gross margin   39%   49%

 

Our gross margin of 39% of net sales in the year ended December 31, 2016 declined from our gross margin of 49% for the year ended December 31, 2015, primarily due to higher customer programs and incentives from the national product expansion, higher raw material costs experienced during the year and to a lesser extent product mix.

 

Advertising, promotional and selling expenses for the year ended December 31, 2016 increased to $1,244,152, or approximately 35%, from $923,310 for the year ended December 31, 2015. This increase is primarily due to our efforts to expand our product sales nationally. Advertising expense was approximately $297,000 and $389,000 for the years ended December 31, 2016 and 2015, respectively. Amounts paid to customers in connection with customer programs and incentives totaled $136,786 and $3,184 in 2016 and 2015, respectively.

 

General and administrative expenses for the year ended December 31, 2016 increased to $3,881,771, or approximately 13%, from $3,450,436 for the year ended December 31, 2015. This increase is primarily due to increased legal, accounting, and professional costs related to our various financing efforts in 2016, and higher stock-based compensation expense in 2016.

 

Other expense was $901,658 for the year ended December 31, 2016, compared to $59,548 for the year ended December 31, 2015, an increase of 1414%. This increase was primarily due to an increase in interest expense and amortization of debt discounts of $512,479 pertaining to our 2016 debt financings.

 

Net loss available to common stockholders during the year ended December 31, 2016 was $5,251,293 as compared to a loss of $3,601,066 for the year ended December 31, 2015. Our net loss was primarily attributable to our increased selling, general and administrative expenses relating to increased national sales distribution expenses, as well as increased legal, accounting and professional costs during 2016.

 

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Liquidity and Capital Resources

 

Our primary capital requirements are for the financing of inventories and cash used in operating activities. Funds for such purposes have historically not been generated from operations but rather from short-term credit in the form of extended payment terms from suppliers, and from convertible debt and equity financings.

 

For the three months ended March 31, 2017 and 2016, we incurred a net loss of approximately $0.9 and $1.0 million, respectively, and had an accumulated deficit of approximately $13.7 million as of March 31, 2017. For the years ended December 31, 2016 and 2015, we incurred a net loss of approximately $5.3 and $3.6 million, respectively, and had an accumulated deficit of approximately $12.8 million as of December 31, 2016. For the three months ended March 31, 2017, we raised approximately $1.0 million from convertible debt and equity financings. For the year ended December 31, 2016, we raised approximately $5.9 million from convertible debt and equity financings.

 

At March 31, 2017, we had approximately $0.9 million of cash on hand with positive working capital of $1.7 million. In the long term, our ability to meet our ongoing operating cash needs will be dependent on generating positive operating cash flow, primarily through increased sales, improved profit growth and controlling expenses. During the fourth quarter 2016 and in the first half of 2017, we have taken actions to improve profitability, reduce headcount, reduce rent, reduce professional fees and increase sales. Through July 3, 2017, we raised an additional $2,210,000 in cash through equity and debt financings. In addition, in March 2017, we acquired for equity a small distillery bottling and production support business that we expect will improve operating results. Management believes that cash on hand and proceeds from the most recent equity financing will be sufficient to meet our cash needs over the next twelve months.

 

The following table summarizes our sources and uses of cash for each of the periods presented:

 

   Year Ended   Three Months Ended 
   December 31,   March 31, 
   2015   2016   2016   2017 
Cash used in operating activities  $(1,187,778)  $(4,954,671)  $(271,477)  $(1,126,203)
Cash used in investing activities   (50,076)   (9,202)   (6,954)   (32,569)
Cash provided by financing activities   296,881    5,910,622    149,914    954,421 
Net increase (decrease) in cash and cash equivalents  $(940,973)  $946,749   $(128,517)  $(204,351)

 

Operating Activities

 

In the three months ended March 31, 2017, net loss plus non-cash adjustments used were approximately $0.6 million compared to $0.7 million used in 2016. The decrease in cash usage can be primarily attributed to the lower net loss incurred in 2017 as compared to 2016. Non-cash adjustments in the aggregate were approximately $33,000 lower in 2017. In addition, there was a $0.1 million increase in inventory and a $0.5 million reduction in accrued liabilities in 2017.

 

In 2016, net loss plus non-cash adjustments used in operating activities were approximately $4.2 million compared to $2.7 million used in 2015. The increase can be primarily attributed to the increased net loss incurred in 2016 as compared to 2015. Non-cash adjustments in the aggregate were about $0.1 million higher in 2016. In addition, inventory increased by $0.1 million, accounts receivable increased by $0.2 million, and accrued liabilities increased by $0.4 million in 2016, offset by a $0.8 million decrease in accounts payable.

 

In 2015, inventory increased by $0.3 million offset by increases in accounts payable of $1.1 million and accrued liabilities of $0.5 million, and a reduction of prepaid expenses and other assets of $0.2 million.

 

Investing Activities

 

Cash used in investing activities consists primarily of purchases of property and equipment. Capital expenditures of $39,631 and $6,954 were incurred in the three months ended March 31, 2017 and 2016, respectively. Capital expenditures of $9,202 and $50,076 were incurred in 2016 and 2015, respectively.

 

Financing Activities

 

During the three months ended March 31, 2017, operating losses and working capital needs discussed above were met by raising equity financing from the issuances of common stock with proceeds of $0.8 million and from the exercise of warrants with proceeds of $0.2 million. Net cash flows provided by financing activities in the three months ended March 31, 2016 primarily consisted of $0.2 million in deposits in connection with our preferred stock offering.

 

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During 2016, operating losses and working capital needs were met by raising debt and equity financing from the issuances of preferred stock with proceeds of $0.4 million, common stock with proceeds of $3.0 million, and convertible notes payable with proceeds of $1.7 million, and from the exercise of warrants with proceeds of $0.7 million, offset by payments on convertible notes payable of $0.1 million.

 

Accounts Receivable Factoring Program

 

Prior to May 2017, we used an accounts receivable factoring program with certain customer accounts. Under this program, we had the option to sell those customer receivables in advance of payment for 75% of the amount due. When the customer remits payment, we then received the remaining 25%. We were charged interest on the advanced 75% payment at a rate of 1.5% per month. Under the terms of the agreement with the factoring provider, any factored invoices had recourse should the customer fail to pay the invoice. Thus, we recorded factored amounts as a liability until the customer remits payment and we received the remaining 25% of the non-factored amount. We did not factor any invoices during the period ended March 31, 2017. At March 31, 2017, we had factored invoices outstanding of $59,547, and we incurred fees associated with the factoring program of $2,582 during the three months ended March 31, 2017. During the three months ended March 31, 2016, we factored invoices totaling $117,933 and received total proceeds of $88,450. At March 31, 2016, we had factored invoices outstanding of $79,120, and we incurred fees associated with the factoring program of $4,269 during the three months ended March 31, 2016. As of May 10, 2017, we terminated our factoring program.

 

2017 Financing Activities

 

We recently concluded an equity financing of 400,000 units at $3.90 per unit, with each unit consisting of one share of common stock and one three-year common stock purchase warrant exercisable at $7.50 per share (subject to adjustment), for total proceeds of $1,560,000 in cash. The financing closed in several phases: (1) on March 31, 2017, on which date we issued 192,308 shares of our common stock for $750,000 in cash and warrants to purchase 192,308 shares of common stock, (2) on several dates between April 3, 2017 and May 4, 2017, during which period we issued 85,594 shares of our common stock for $333,815 in cash and warrants to purchase 85,594 shares of common stock, and (3) on several dates between May 5, 2017 and June 4, 2017, during which period we issued 122,098 shares of our common stock for $476,185 in cash and warrants to purchase 122,098 shares of common stock.

 

On several dates between April 21, 2017 and June 30, 2017, we issued an aggregate of $1,400,000 convertible promissory notes to accredited investors. The notes have a maturity date of three years from the date of issuance, and bear interest at the rate of five percent (5%) per annum. The notes have an automatic conversion feature upon the closing (or first in a series of closings) of the next equity financing in which we sell shares of its equity securities for an aggregate consideration of at least $4,000,000 at a purchase price of at least $7.50. The outstanding principal and unpaid accrued interest on the notes shall be automatically converted into equity securities at a price equal to 80% of the price paid per share by the investors in the next equity financing or $6.00, whichever is lower, provided, however, that in no event shall the conversion price be less than $6.00. The notes have a voluntary conversion feature where the investor may convert, in whole or in part, at any time at the conversion rate of $6.00.

 

In March 2017, we issued 19,795 shares of common stock to four third-party consultants in exchange for services rendered.

 

In March 2017, we issued 575 shares of common stock to employees for stock-based compensation of $2,517.

 

On March 8, 2017, we completed the acquisition of MotherLode. We issued 86,667 shares of common stock to the owners of MotherLode as consideration for the acquisition. Based on the closing share price of our common stock of $4.35 on March 8, 2017, the value of the transaction was $377,000.

 

In March 2017, we issued 22,436 shares of common stock upon conversion of 8% convertible promissory notes with an aggregate principal amount converted of $87,500.

 

In March 2017, we issued 83,334 shares of common stock upon conversion of 250 shares of preferred stock.

 

From January 15, 2017 through February 16, 2017, we received warrant exercises and subscription documents totaling $159,250 for 40,834 shares issued.

 

From January 4, 2017 to January 22, 2017, we sold 15,000 shares of common stock to accredited investors at a price of $3.90 per share for aggregate cash proceeds of $58,500.

 

2016 Note and Warrant Financing

 

On June 30, 2016, we issued $200,000 of principal amount of 8% promissory notes and warrants to purchase shares of our common stock to three accredited investors. The aggregate gross proceeds from the sale of the notes and warrants were $200,000. The notes have a 2-year maturity dates and bear interest at eight percent (8%) per annum. The notes were issued with warrants to purchase up to 33,334 shares of our common stock at an exercise price of $6.00 per share. The number of warrant shares underlying each warrant are equal to the principal amount of the promissory note subscribed for by the investor multiplied by one-half (0.5). The warrants will be exercisable for three (3) years after the closing date. The proceeds were used for working capital and general corporate purposes.

 

From July 1, 2016 to September 30, 2016, we issued $1,050,000 of principal amount of 8% promissory notes and warrants to purchase shares of our common stock to six accredited investors. The aggregate gross proceeds from the sale of the notes and warrants were $1,050,000. The notes have a 2-year maturity date and bear interest at eight percent (8%) per annum. The notes were issued with warrants to purchase up to 175,000 shares of our common stock at an exercise price of $6.00 per share. The number of warrant shares underlying each warrant are equal to the principal amount of the promissory note subscribed for by the investor multiplied by one-half (0.5). The warrants will be exercisable for three (3) years after the closing date. The proceeds were used for working capital and general corporate purposes.

 

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From October 19, 2016 to November 21, 2016, we issued $450,000 of principal amount of 8% promissory notes and warrants to purchase shares of our common stock to accredited investors. The aggregate gross proceeds from the sale of the notes and warrants were $450,000. The notes have a 2-year maturity date and bear interest at the eight percent (8%) per annum. The notes were issued with warrants to purchase up to 75,000 shares of our common stock at an exercise price of $6.00 per share. The number of warrant shares underlying each warrant are equal to the principal amount of the promissory note subscribed for by the investor multiplied by one-half (0.5). The warrants will be exercisable for three (3) years after the closing date. The proceeds were used for working capital and general corporate purposes.

 

2016 Common Stock and Warrant Unit Financing

 

From June 4, 2016 to June 22, 2016, we conducted closings for the sale of 666,667 units (“Common Units”) to accredited investors at a price of $3.00 per Common Unit for an aggregate cash purchase price of $2,000,000. Each Common Unit consists of (i) one share of our common stock and (ii) one warrant, exercisable for 3-years, to purchase one (1) share of common stock at an exercise price of $6.00 per whole share.

 

We used approximately $100,000 of the proceeds received to prepay in full a 14% Secured Convertible Promissory Note dated May 13, 2016 in the original principal amount of $219,200. The prepayment amount for this note was reduced as a result of the note holder’s conversion of principal under this note into shares of our common stock following receipt of the prepayment notice, as permitted under the terms of such note. We used approximately $307,986 to prepay in full that certain 14% Secured Convertible Promissory Note dated May 13, 2016 in the original principal amount of $302,647 and approximately $130,552 to repay in full the remaining amounts due under that certain 5% Convertible Promissory Note in the original principal amount of $150,000. The remaining proceeds were used for inventory purchases and for working capital and general corporate purposes.

 

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2016 Series A Convertible Preferred Stock and Warrant Financing

 

From April 4, 2016 to June 17, 2016, we conducted closings for 972 units (“Units”) to 15 accredited investors and one unaccredited investor at a price of $1,000 per Unit for an aggregate purchase price of $972,000, of which (i) 499 Units were purchased for $499,000 in cash (ii) 423 Units were purchased by certain of our officers in consideration of $423,000 accrued and unpaid salary and (iii) 50 Units were purchased in consideration of cancellation of $50,000 of outstanding indebtedness. Each Unit consists of (i) one share of our series A convertible preferred stock convertible into shares of our common stock. at a rate of $4.50 per share and (ii) one warrant, exercisable for 3-years, to purchase six hundred sixty-seven (667) shares of our common stock at an exercise price of $6.00 per whole share. We received gross proceeds of $499,000 from the sale of the 499 Units for cash. We used $35,920 of these proceeds as payment for non-exclusive placement agent fees to FINRA registered broker-dealers. In addition, approximately $20,000 was used to repay outstanding indebtedness under 5% promissory notes. The remaining proceeds were used for working capital and general corporate purposes and to fund growth opportunities.

 

Convertible Notes

 

On September 10, 2015, we issued and sold a convertible promissory note bearing interest at 14% per annum in the principal amount of $275,000 to WWOD Holdings, LLC, an accredited investor (“WWOD”). This note initially had a maturity date of May 10, 2016 and an original issue discount of $33,500. We received gross proceeds of $241,500, and, after paying the investors expenses, we received net proceeds of $239,000, which proceeds were used for working capital and general corporate purposes. The conversion price for this note was equal to the lesser of (i) the fixed conversion price (currently $9.00) or (ii) 65% of the lowest trading price of our common stock during the 5-trading days prior to conversion. This note contained certain covenants and restrictions including, among others, that for so long as this note is outstanding we will not incur indebtedness, permit liens, pay dividends or dispose of certain assets. Events of default under the note include, among others, failure to pay principal or interest on the note or comply with certain covenants under the note. The note is secured by all of our assets.

 

On April 14, 2016, we entered into an amendment agreement with WWOD and a new investor, MR Group I, LLC (“Investor”), pursuant to which we issued and sold to Investor a convertible promissory note dated April 18, 2016, bearing interest at 14% per annum in the principal amount of $300,000 (the “Additional Note”). The Additional Note had a maturity date of January 18, 2017 and an original issue discount of $100,000. We received gross proceeds from the Investor of $200,000. After paying $15,000 of the Investor’s expenses, we received net proceeds of $185,000, which were used for working capital and general corporate purposes. Concurrent with the Investor’s purchase of the Additional Note, WWOD contributed the WWOD Note to Investor (the WWOD Note and the Additional Note, the “Notes”). Following issuance of the Additional Note, the aggregate principal amount of Notes was $575,000, both of which are now held by the Investor. We agreed to repay the Additional Note in six installments (“Amortization Payments”) at set forth in the Amortization Schedule attached to the Additional Note beginning 30th day after issuance and each 30-days thereafter. However, failure to make any Amortization Payment will not be deemed an event of default under the Additional Note. In addition, the Additional Note can be prepaid at any time until the date immediately preceding the maturity date. The Additional Note is convertible into common stock at a conversion price is equal to the lesser of (i) the fixed conversion price (currently $24.00) or (ii) 65% of the lowest trading price of our common stock during the 5-trading days prior to conversion. The Additional Note contains certain covenants and restrictions including, restrictions on our ability to incur indebtedness, permit liens, pay dividends or dispose of certain assets. Events of default under the Additional Note include, among others, failure to pay principal or interest on the note or comply with certain covenants under the Additional Note.

 

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On May 13, 2016, we entered into Exchange Agreement (the “Exchange Agreement”) with the Investor pursuant to which we: (i) issued Investor a 14% secured convertible promissory note dated May 13, 2016 in the aggregate principal amount of $219,200 with an August 31, 2016 maturity date (the “May Note”) in exchange for the WWOD Note and (ii) issued Investor a 14% secured convertible promissory note dated May 13, 2016 in the aggregate principal amount of $302,647 with an April 30, 2017 maturity date (the “Second Note,” together with the May Note, the “Exchange Notes”) in exchange for the Initial Note. In the event that we consummate the additional proposed $2 million financing with Investor for which we have executed a non-binding term sheet (the “Subsequent Placement”), $200,000 of aggregate principal of the Second Note, together with any accrued, and unpaid, interest then outstanding or any additional amounts due and payable as a result of an event of default under the Second Note, shall be applied, on a dollar-for-dollar basis, to reduce the purchase price of the Investor in such Subsequent Placement and upon the closing of such Subsequent Placement and such application, the remainder of the Second Note then outstanding shall be deemed cancelled for no additional consideration.

 

In connection with the issuance of the Exchange Notes, we entered into a Security and Pledge Agreement dated May 13, 2016 pursuant to which the Exchange Notes were secured by all of our assets. The Exchange Notes can be prepaid at any time until the date immediately preceding their respective maturity dates. The Exchange Notes are convertible into common stock at a conversion price equal to the lesser of (i) the Fixed Conversion Price (currently $9.00 for the May Note and $24.00 for the Second Note); or (ii) 65% of the lowest trading price of our common stock during the (i) 5-trading days prior to conversion (for conversions on or before May 22, 2016, or (ii) 10-trading days prior to conversion (for conversions after May 22, 2016). The Exchange Note contains certain covenants and restrictions including, restrictions on our ability to incur indebtedness, permit liens, pay dividends or dispose of certain assets. Events of default under the Exchange Notes include, among others, failure to pay principal or interest on the note or comply with certain covenants under the note. We will be required to repay the Exchange Notes at 133% upon an event of default. We prepaid each of the Exchange Notes in June 2016.

 

On June 13, 2014, we issued Crystal Falls Investments, LLC a demand promissory note in the amount of approximately $150,000, which note was amended on September 19, 2014 to a 5% convertible promissory note. The amended note bore interest at 5% per annum and had a maturity date of June 13, 2015. This note was repaid in full on July 1, 2016.

 

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Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. The more judgmental estimates are summarized below. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from the Company’s estimates if past experience or other assumptions do not turn out to be substantially accurate.

 

Revenue Recognition

 

Net sales includes product sales, less excise taxes, customer programs and incentives. we record revenue when all four of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

 

We recognize 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), we recognize 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. We exclude sales tax collected and remitted to various states from sales and cost of sales. Sales from items sold through our retail location are recognized at the time of sale.

 

Sales received from online merchants who sell discounted gift certificates for our merchandise and tastings is deferred until the customer has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier.

 

Customer Programs and Incentives

 

Customer programs and incentives, which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcohol beverage industry. We make these payments to customers and incur 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 revenue or as advertising, promotional and selling expenses in accordance with ASC Topic 605-50, Revenue Recognition- Customer Payments and Incentives, based on the nature of the expenditure. Amounts paid to customers totaled $40,772 and $8,712 for the three months ended March 31, 2017 and 2016, respectively.

 

Shipping and Fulfillment Costs

 

Freight costs incurred related to shipment of merchandise from our distribution facilities to customers are recorded in cost of sales.

 

Concentrations

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of trade receivables. At March 31, 2017, three distributors represented 79% of trade receivables. At December 31, 2016, three distributors represented 91% of trade receivables. Sales to three customers accounted for approximately 57% of consolidated sales for the three months ended March 31, 2017. Sales to one distributor, the OLCC, accounted for approximately 32% of consolidated sales for the three months ended March 31, 2017.

 

Inventories

 

Inventories primarily consist of bulk and bottled liquor and merchandise and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (FIFO) method. A portion of inventory is held by the OLCC on consignment until it is sold to a third party. We regularly monitor inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on our estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. We have recorded no write-downs of inventory for the three months ended March 31, 2017 and 2016.

 

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Advertising

 

Advertising costs are expensed as incurred and are included in advertising, promotional and selling expenses in the accompanying statements of operations. Advertising expenses were $386,132 and $156,203 for the three months ended March 31, 2017 and 2016, respectively.

 

Excise Taxes

 

We are responsible for compliance with the TTB regulations which includes making timely and accurate excise tax payments. We are subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying amounts. We calculate our excise tax expense based upon units produced and on our understanding of the applicable excise tax laws. Excise taxes totaled $176,416 and $158,408 in the three months ended March 31, 2017 and 2016, respectively.

 

Stock-Based Compensation

 

We recognize as compensation expense all stock-based awards issued to employees in accordance with the fair value recognition provisions of Accounting Standards Codification Topic 718, Compensation - Stock Compensation. 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 as the underlying stock-based awards vest. Stock-based compensation was $374,687 and $140,370 in 2016 and 2015, respectively, and $158,658 and $105,839 in the three months ended March 31, 2017 and 2016, respectively.

 

Off-Balance Sheet Arrangements

 

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.

 

Related Party Transactions

 

We had no related party transactions during the three months ended March 31, 2017. During the three months ended March 31, 2016, our chief executive officer paid expenses on behalf of us with his personal credit card. These related party advances do not bear interest and are payable on demand. At March 31, 2016, the balance due to the chief executive officer was approximately $95,000, and is included in accounts payable on the accompanying condensed consolidated balance sheets.

 

Subsequent Events

 

On May 1, 2017, we announced the acquisition of a majority stake in BBD. Pursuant to the agreement governing the acquisition of BBD, we agreed to exchange 28,096 shares of our common stock for 90% of the outstanding limited liability company units of BBD. Following the acquisition of BBD, we will maintain the independence of BBD as a separate entity underneath our operational umbrella. We and BBD will benefit from brand synergies because of the limited overlap with our products. We will devote sales, marketing, financial capital and production resources to expanding BBD’s business, which in 2016 had total revenues of approximately $201,000.

 

On April 24, 2017, we issued 16,667 shares of its common stock upon conversion of 50 shares of preferred stock. As of April 24, 2017, we have no shares of preferred stock outstanding.

 

On April 21, 2017, we completed a $500,000 convertible note purchase agreement with an accredited investor. The note has a maturity date of April 3, 2020, and bears interest at the rate of five percent (5%) per annum. The note has an automatic conversion feature upon the closing (or first in a series of closings) of the next equity financing, in which we sell shares of its equity securities for an aggregate consideration of at least $4,000,000 at a purchase price of at least $7.50. The outstanding principal and unpaid accrued interest on the note shall be automatically converted into equity securities at a price equal to 80% of the price paid per share by the investors in the next equity financing or $6.00, whichever is lower, provided, however, that in no event shall the conversion price be less than $6.00. The note has a voluntary conversion feature where the investor may convert, in whole or in part, at any time at the conversion rate of $6.00.

 

On April 5, 2017, our board approved an incentive option grant to Mr. Grover Wickersham totaling 33,334 shares with an exercise price of $4.80 per share. In addition, the board approved a restricted stock unit grant of 33,334 shares of common stock that vested on April 5, 2017, of which 10,217 shares were not issued in order to satisfy Mr. Wickersham’s personal tax withholding responsibility.

 

On April 3, 2017, we issued 8,334 shares of common stock to a third-party consultant in exchange for services rendered.

 

From April 3, 2017 to May 4, 2017, we issued 85,594 shares of common stock for $333,815 in cash, including warrants to purchase 85,594 shares of common stock.

 

On April 2, 2017 and April 18, 2017, the independent directors, Messrs. Trent Davis and Michael Fleming, respectively, each exercised 4,630 stock options to purchase common stock at an exercise price of $5.40 per share.

 

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Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standard Boards (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09, Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and we have adopted ASU 2016-09 as of March 31, 2017.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

 

  A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and
     
  A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the impact ASU 2016-02 will have on our condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. ASU 2014-09 is to be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. We will elect to apply the impact (if any) of applying ASU 2014-09 to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU 2015-14 defers the effective date of ASU 2014-09 for one year, making it effective for the year beginning December 31, 2017, with early adoption permitted as of January 1, 2017. We currently expect to adopt ASU 2014-09 in the first quarter of 2018. We do not expect adoption of ASU 2014-09 to have a material impact on our consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern. The new guidance explicitly requires that management assess an entity’s ability to continue as a going concern and may require additional detailed disclosures. ASU 2014-15 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We have adopted it as of December 31, 2016.

 

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. ASU 2015-11 is part of the FASB’s initiative to simplify accounting standards. The guidance requires an entity to recognize inventory within scope of the standard at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. ASU 2015-11 will be effective prospectively for the year beginning January 1, 2017. We have adopted it as of March 31, 2017.

 

In April 2015, the FASB issued ASU 2015-03, simplifying the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015 and early application is permitted. We have early adopted it as of December 31, 2015.

 

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BUSINESS

 

Overview

 

We are an Oregon-based producer and marketer of craft spirits, founded in 2008. Our products span several alcoholic beverage categories, including bourbon, gin, American whiskey, rye, vodka, and rum. Unlike many, if not most distillers, we operate several retail tasting rooms in Oregon to market our brands directly to consumers. Our growth strategy is to build on our local base in the Pacific Northwest and expand selectively to other markets by using major spirits distributors, such as Southern Glazer Wines and Spirits, or regional distributors that focus on craft brands.

 

As a small business in the large, international spirits marketplace populated with massive conglomerates, we rely heavily on creativity to create innovative products. In December 2016 we retained Sandstrom Partners, the internationally known sprits branding firm that branded St Germain and Bulleit Bourbon, to assist us in our mission, and it became an investor in our Company. We seek to be a leader in creating spirits that offer better value than comparable spirits, for example our value priced Burnside Bourbon and Portland Potato Vodka, and an innovator in creating imaginative spirits that offer a unique taste experience, for example our cold-brewed coffee rum, Oregon oak aged whiskeys, Marionberry Whiskey and Peppermint Bark holiday liqueur. On May 1, 2017, we acquired Big Bottom Distillery for its excellent, award winning range of super premium gins and whiskeys, including Navy Proof Gin, Oregon Gin, Delta Rye and initial production of American Single Malt whiskey. BBD’s super premium spirits will expand our tasting room offerings and give us a presence at the “high end” of the market. Also, through MotherLode, our wholly-owned subsidiary acquired on March 8, 2017, we also provide contract bottling and packaging services for existing and would be spirits producers, some of whom might also contract with us to blend or distill spirits.

 

We also intend to capitalize on our uniqueness as a publicly-traded craft spirit producer, with access to the public markets, to support our growth, including by making strategic acquisitions.

 

Recent Events

 

MotherLode Acquisition

 

On March 8, 2017, we acquired MotherLode, a Portland, Oregon-based provider of bottling services and production support to craft distilleries. Since its founding in 2014,the mission of MotherLode has been to enable craft distillers to increase their production and extend their product lines, reducing cost and increasing efficiency, thereby freeing them to focus on their craft. The typical MotherLode customer is a distillery of small batch, hand-crafted spirits, or a premium craft spirit sold as a private label.

 

Big Bottom Distilling Acquisition

 

On May 1, 2017 we acquired 90% of the ownership of Big Bottom Distilling (“BBD”), a Hillsboro, Oregon-based distiller and producer of super premium gins, whiskeys, brandies, rum, and vodka. The extensive BBD product portfolio includes several craft spirits that we believe are highly complementary to our product line, including The Ninety One Gin, Navy Strength Gin (114 proof), and Delta Rye (111 proof) rye whiskey, among others. Inspired by the craft spirits movement in Oregon, BBD’s small-batch, hand-crafted spirits provide consumers with unique takes on traditional spirits. The spirits portfolio created by Ted Pappas and lead distiller Travis Schoney, formerly of High West Distilling of Park City, Utah, has won awards for such specialty finished whiskeys as the Barlow Trail Port Cask Finished Whiskey. BBD craft spirits are primarily distributed in Oregon, California and Illinois. We intend to distribute BBD products using our own distribution base and sales team, on a selective basis, in the U.S. and Canada. We intend to collaborate with BBD on expanding the production of BBD’s super-premium American Single Malt Whiskey, made with malted Pacific Northwest barley, fermented and distilled entirely on premises (i.e., in bond).

 

Retention of Sandstrom Partners

 

In late 2016, with the goal of increasing our brand value and accelerating sales, we retained Sandstrom Partners, a Portland-based firm specializing in spirits branding, and tasked them with reviewing our current product portfolio, as well as our new ideas, and advising us on marketing, creation of brand awareness and product positioning, locally and nationally. We intend to use Sandstrom’s full range of brand development services, including research, strategy, brand identity, package design, environments, advertising as well as digital design and development. Sandstrom Partners is recognized as preeminent in spirits brand development and their work appears in most national and international design competitions. Some of Sandstrom Partners current and past spirit branding clients include St-Germain, Brown-Forman, Brown Forman/Chambord, Old Forester, Stillhouse Distilling, Aviation Gin, Diageo, Bulleit Bourbon, Miller Brewing, Pernod Ricard, Bacardi Oakheart. Sandstrom’s approach to spirits marketing typically involves telling a compelling story whose plot is transmitted in every consumer communication: from the name, to the package, point-of-sale, web, and advertising. We anticipate that Sandstrom will begin to impact our packaging design in the second half of 2017.

 

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Market Opportunity

 

Large and Growing Global and Domestic Markets

 

The global spirits market generated total revenues of $316 billion in 2013, representing a compound average growth rate (CAGR) of 3.4% between 2009 and 2013, according to MarketLine. The performance of the market is forecasted to accelerate with an anticipated CAGR of 4.2% for the five-year period 2013-2018, which is expected to increase revenues generated by this market to approximately $388 billion by the end of 2018.

 

The U.S. spirits market had total revenues of $24.1 billion in 2015, representing a 25% increase since 2010, according to the Distilled Spirits Council of the United States (DISCUS). The domestic market share of spirits compared to beer and wine was at a record 35.4% in 2015 according to DISCUS, representing more than a 2% gain over beer and wine in terms of market share since 2010.

 

Key Growth Trends That We Target

 

Craft – The market share of “craft” distillers (defined as any producer that bottles less than 100,000 cases annually) has doubled over the last two years, and is projected to reach 8% by 2020, according to BNP Paribas.

 

Women – The United States Alcohol and Tobacco Tax and Trade Bureau (“TTB”), Park Street Imports, LLC (“Park Street”) and the US Census Bureau estimate that 37% of all U.S. whiskey drinkers are women.

 

Millennials – Generally, millennials (individuals born between the early 1980s and the mid-1990s) value “authenticity” and are inspired by travel, like to try new products and seek new experiences, according to a survey by BeverageDaily.com. Millennials tend to drink a broader range of spirit types (vodka, rum, tequila, whiskey, gin) than prior generations and consume more expensive spirits than their predecessors. These individuals are often attracted to vintage spirits and cocktails with nostalgic followings, such as throwbacks to the 1950’s like rye whiskey, bourbon, and the Manhattan cocktail. According to Barclays Research, millennials increasingly prefer spirits over beer and wine, and flavored spirits in particular. In addition, according to DISCUS, millennials are more willing than prior generations to purchase premium spirits.

 

Flavored – According to DISCUS, flavored spirits sales continue to grow faster than the overall spirits market, and flavored whiskey, which is especially appealing to younger drinkers and women, is the fastest growing flavored spirit category.

 

International – The demand for U.S.-produced spirits abroad is increasing significantly. U.S. spirit exports nearly doubled over the past decade to $1.56 billion in 2015, and whiskey exports were up approximately 5.4% in 2015 compared to 2014. The largest export markets for U.S. spirits include the United Kingdom, Canada, Germany, Australia, and Japan.

 

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Our Strategy

 

Our objective is to build Eastside Distilling into a profitable spirits company, with a distinctive portfolio of premium and high-end spirits brands that have national, and even international, consumer appeal and following. To help achieve this, we expect to:

 

●     Target Industry Growth Trends. Demand for U.S.-produced premium and high-end craft spirits, particularly whiskeys, has been increasing among millennials and women. We endeavor to capitalize on these trends by developing products that appeal to changing demographics, as typified by our Master Distiller, Melissa Heim, whom we believe is the first female commercial master distiller and blender west of the Mississippi River.

 

●     Be Experimental. We are not afraid to take chances with innovative product offerings that we believe the larger and more bureaucratic companies that populate the industry cannot easily launch. We want to produce and deliver quality products that offer consumers “something different,” such as value or uniqueness, and we want to convey that message with new packaging developed by our spirits branding firm, Sandstrom Partners.

 

●     Be Local. Be true to our Oregon and Pacific Northwest “roots” by shunning artificial additives, using locally sourced ingredients such as our high-quality water and Oregon oak, and relying on skilled local artisans. During 2016, we experienced a 45% increase in wholesale sales and were the third largest spirits producer in that state. In addition, we recently extended our Pacific Northwest focus with our first shipments to Alaska during the first quarter of 2017.

 

●     Expand Geographically and Online. We are building brand awareness and driving sales in multiple geographic markets with the use of social media (Twitter, Facebook, and YouTube). We are partnering with retailers that market heavily online and investing resources into e-commerce and digital marketing.

 

●     Provide Value. We target the high-growth premium ($12-20 per bottle) and high-end ($20-30 per bottle) market segments with premium quality at attractive pricing. In the super premium category (above $50 per bottle), we intend to have limited production offerings that we believe also deliver exceptional value.

 

●     Use Sales Networks of Major U.S. Spirits Distributors. We have established and will continue to build relationships with the major wine and spirit wholesalers to distribute our products into the largest spirits markets in the United States.

 

●    Increase Production. We expect our production of cases to increase each year for the next three years. We believe our increased production capacity will make us more attractive to distribution partners and will also facilitate additional revenues, cost savings and profits.

 

●    Leverage Access to Public Company Markets. The public capital markets facilitate funding access for our long-term growth initiatives, including continuing to make strategic acquisitions.

 

Our Strengths

 

We believe the following competitive strengths will help enable the implementation of our growth strategies:

 

●     Award Winning Diverse Product Line. We have a diverse product line currently offering of more than a dozen premium craft spirits, many of which have won awards for taste and/or product design. According to a study by the American Craft Spirits Association, the U.S. craft spirits volume of cases sold experienced a compound annual growth rate of 27.4% between 2010 and 2015, and saw an increase in market share from 0.8% to 2.2% during that period. Our sales of premium brands have increased over 1,000% since 2011. We believe our diverse, recognized product line in this growing market will enable us to establish a presence in new geographic markets and enable us to procure additional distributors for our products.

 

●     Key Relationships. We have distribution arrangements with several of the largest wine and spirits distributors in the United States, such as Southern Glazer. We have also engaged Park Street, a provider of back-office administrative and logistical services for alcohol and beverage distributors. We believe these relationships will help accomplish our goal of having our premium spirits sold and distributed nationwide.

 

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Experienced Master Distiller. Our master distiller, Melissa “Mel” Heim, whom we believe is the first female commercial master distiller and blender west of the Mississippi River, is an important factor in distinguishing our brands. We believe that Ms. Heim’s highly regarded “palate” is important to us maintaining a high quality artisanal character to our products as well as adding to our consumer appeal.

 

Our Product Approach

 

Our approach to our craft spirits involves five important aspects:

 

Commitment to Quality. We create and deliver high-quality, innovative products targeted at growing markets.

 

Authentic yet Scalable. We believe our approach to production allows us to produce our products at scale while keeping flavor profiles consistent.

 

Unique Talent and Experience. Every spirit reflects the creativity of our entire team;

 

Extensive Spirit Portfolio. Many craft distillers have only one to three products; we have over a dozen, which we believe affords us the opportunity to target a broader range of consumers with our brands.

 

Generate Customer Loyalty. These factors attract loyal and enthusiastic customers and major distributors for our products.

 

Our Brands

 

We develop, produce and market the premium brands listed below.

 

Burnside Bourbon. We develop, market and produce two premium, barrel–aged bourbons: Burnside Bourbon and Oregon Oak Burnside Bourbon. Our Burnside Bourbon is aged in oak barrels, is 96 proof and won a Gold Medal in the MicroLiquor Spirit Awards in 2014, and another from Beverage Tasting Institute. Our Oregon Oak Burnside Bourbon is produced in limited quantities and aged for an additional 90 days in heavily charred Oregon oak barrels and we consider it an “ultra-premium” brand. Our Burnside Bourbon brands accounted for approximately 40%, 35% and 40% of our revenues for years 2016, 2015 and 2014, respectively. Case volume of our Burnside Bourbon increased by 163% from 2014 to 2016, compared to a 12% increase for the bourbon industry in general during the same period.

 

Barrel Hitch American Whiskey. We develop, market and produce two premium whiskeys: Barrel Hitch American Whiskey and Barrel Hitch Oregon Oaked Whiskey. Our Barrel Hitch American Whiskey is 80 proof and won a triple-Gold Medal and best of show in the MicroLiquor Spirit Awards in 2015. Our Oregon Oak version is produced in limited quantities and aged for an additional 90 days in heavily charred Oregon oak barrels, and we consider it an “ultra-premium” brand. Our whiskey brands were introduced in July 2015 and accounted for approximately 17% and 7% of our revenues for 2016 and 2015, respectively.

 

Premium Vodka. We develop, market and produce a premium potato vodka under the brand name Portland Potato Vodka which is distilled from potatoes rather than grain and as such is gluten-free. Our Portland Potato Vodka was awarded a silver medal from the American Wine Society and a gold medal from the Beverage Tasting Institute, which also gave it a “Best Buy” rating. Our Portland Potato Vodka accounted for approximately 13%, 14% and 30% of our revenues for years 2016, 2015 and 2014, respectively. Case volume of our Portland Potato Vodka increased by 185% from 2014 to 2016, compared to a 4% increase for the vodka industry in general during the same period.

 

Distinctive Specialty Whiskeys. We develop, market and produce two distinctive specialty whiskeys: Cherry Bomb Whiskey and Marionberry Whiskey. Our Cherry Bomb Whiskey combines handcrafted small batch whiskey with a blast of real Oregon cherries. Our Cherry Bomb Whiskey won a gold medal from the American Wine Society and was also awarded a gold medal for taste and a silver medal for package design in the MircroLiquor Spirit Awards. Our Marionberry whiskey combines Oregon marionberries (a hybrid blackberry) with premium aged whiskey and was awarded two silver medals in the MicroLiquor Spirit Awards for taste and package design. Our specialty whiskeys accounted for approximately 12%, 15% and 10% of our revenues for years 2016, 2015 and 2014, respectively.

 

Below Deck Rums. We develop, market and produce four rums under the Below Deck brand name: Below Deck Silver Rum, Below Deck Spiced Rum, Below Deck Coffee Rum and Below Deck Ginger Rum. Below Deck’s Silver Rum is our original rum. Below Deck Spiced Rum is double-distilled from molasses and infused with exotic spices and won a triple gold medal for taste and a bronze medal for package design in the MicroLiquor Spirit Awards. Our Below Deck Coffee Rum is double-distilled and infused with coffee flavors from Arabica bean and won a silver medal at the San Francisco World Spirits Competition. Below Deck Ginger Rum is infused with natural ginger. Our Below Deck Rums accounted for approximately 10%, 12% and 10% of our revenues for years 2016, 2015 and 2014, respectively.

 

Seasonal/Limited Edition Spirits. In addition to our premium bourbons, whiskeys, rum and vodka, we create seasonal and limited-edition handmade products such as Advocaat (eggnog) Liqueur, Peppermint Bark Liqueur, Bier Schnapps and Holiday Spiced Liqueur. Our Seasonal/Limited Edition Spirits accounted for approximately 6%, 10% and 10% of our revenues for years 2016, 2015 and 2014 respectively.

 

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Brands Acquired as part of the Acquisition of Big Bottom Distilling. As a result of our acquisition of BBD in May 2017, we acquired the following additional brands:

 

Barlow Trail American Blended Whiskey is a proprietary blend of three well-aged whiskeys. It exhibits subtle floral notes with hints of salted caramel and vanilla along with just the right amount of oak and spice. This whiskey received the following awards: Gold Medal Winner at 2014 Great American Distiller’s Festival; Silver Medal Winner at 2015 Great American Spirits Festival and 2014 Washington Cup Spirits Competition.

 

Barlow Trail, Port Cask Finish is a proprietary American blended whiskey finished in 10-year tawny port barrels for about six months. It presents a bright, sweet berry and citrus nose. On the palate it showcases a fresh, ripe berry followed by a small hint of peppery spice that gives way to a very smooth, rich and malty quality from the port casks. The product has received the following awards: Gold Medal Winner at 2015 Great American Spirits Festival; First Place Winner at 2015 Best of the NW: SIP NW Spirits Competition “Best Whiskey”; Silver Medal Winner at 2015 American Craft Spirits Association (ACSA) Awards.

 

Delta Rye is a harmonious blend of spicy Indiana distilled straight rye whiskey with a slightly sweeter Canadian distilled three year old rye whiskey. This rye blend exhibits intense spice with hints of citrus and mint while it finishes with some vanilla and bold oak. Proofed at 111, the full flavors of these two rye whiskeys create a perfect balance for the most discerning palate.

 

The Ninety One Gin contains 16 botanicals that offer a complex bouquet of floral qualities complementing the juniper. A slightly sweet gin with non-traditional gin characteristics, the Ninety One Gin has received the following awards: Gold Medal at 2015 American Craft Spirits (ACSA) Awards; Gold Medal at 2015 Great American Spirits Festival; 92 Score by Wine Enthusiast in 2015; Bronze Medal at 2015 San Francisco World Spirits Competition; and Third Place at 2015 Best of the NW: SIP NW Spirits Competition “Best Gin.”

 

Big Bottom Navy Strength Gin is a 114 proof gin containing the same 16 botanicals as the Ninety One Gin. It presents a slightly heavier juniper bouquet than the Ninety One Gin with a delicate hint of lemongrass and citrus. This Navy Strength Gin offers a balanced spice throughout the palate followed by a mild head and crisp finish, and received a Bronze Medal at the 2015 Washington Cup Spirits Competition.

 

Starka is traditional aged vodka based on a recipe dating back to the 15th century in Eastern Europe. Aged for 12 months in Zinfandel casks that also contained bourbon. The result is a remarkable Starka offering a fresh old twist to the world of vodka.

 

Barrel Aged Gin undergoes a solera process with the use of 3 different woods in our whiskey barrels – Oregon oak, Hungarian oak and North American white oak, and received a Silver Medal at the 2016 Berlin International Spirits Competition.

 

Brandies. The 2015 Oregon Apple Brandy is a blend of 5 Oregon apple varietals giving it a more complex fruit quality. This brandy exhibits crisp red apples with autumn spices and the essence of vanilla. A special blend of in-house yeast strains gives way to darker fruit esters allowing for a creamy spiced caramelized apple finish. The 2015 Oregon Apple Brandy received a Gold Medal at the 2015 Great American Spirits Festival.

 

The 2015 Oregon Pear Brandy is made from a blend of Asian pears that were grown and hand harvested from the Willamette Valley, and received the following awards: Gold Medal at the 2015 Great American Spirits Festival and a Bronze Medal at the 2015 Washington Cup Spirits Competition.

 

Calhoun Brothers Aged Rum is a 4-year old rum, further aged in Big Bottom bourbon barrels creating a perfect balance of sweetness and complex spice. The initial aroma of caramelized sugar, bourbon and molasses is followed by warm spices of cinnamon, cloves, nutmeg and allspice resulting in a smooth, rich and full finish. Awards: Gold Medal Winner at 2015 Great American Spirits Festival.

 

Other Sources of Revenue

 

Special Events

 

We also generate revenues from participating in special events (such as farmer’s markets, trade shows, hosting private tastings, etc.). We offer tastings as well as sell merchandise and bottle sales and have generated as much as $95,000 in revenues from these special events in a single month during the winter holiday season. In addition to the revenues these events generate, we value the immediate customer feedback during these activities which is instrumental in creating better products and testing new flavors.

 

Retail Stores and Kiosks

 

We have three retail stores in shopping centers in the Portland, Oregon area that provide us with additional revenue from sales of our products. In December 2014, we opened a 1,200 square foot retail store in Clackamas Town Center (Happy Valley Town Center) and in January 2015, entered into a lease for 3,100 square feet of retail space in the Washington Square Center in Portland. We also had two additional holiday season retail locations within high-traffic shopping malls in the Portland metro region during 2015. For the 2016 holiday season, we replaced the Washington Square Mall storefront with a kiosk location. We intend to maintain these retail stores and kiosks to build local brand awareness and direct-to-consumer retail sales. Some of these stores will contain in-store tastings, which we believe will lead to additional product purchases.

 

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Production and Supply

 

There are several steps in the production and supply process for beverage alcohol products. First, all spirits products are produced through a multi-stage distillation process that converts basic ingredients, such as grain, sugar cane or agave, into alcohol, which is the “distillate.” Many of our products, including those produced by BBD, contain distillates sourced from other distillers. In fact, with the exception of our American malt whiskey, which is distilled by us, our bourbon and whiskey products typically originate with distilleries in Tennessee, Kentucky or Indiana and in some cases Canada. We currently source both full strength distillates and barrel strength distillates (barrel strength has a lower alcohol by volume (ABV) due to evaporation). The sourcing of spirits is commonplace in the spirits industry.

Next, the alcohol is processed and/or aged by us in various ways depending on the requirements of the specific brand. For our vodka, this processing is designed to remove all other chemicals, so that the resulting liquid will be odorless and colorless, and have a smooth quality with minimal harshness. Achieving a high level of purity involves a series of distillations and filtration processes. For our

spirits brands, rather than removing flavor, we utilize one or more of the following techniques to achieve various complex flavor profiles: infusion of fruit, addition of various flavoring substances, and, in the case of rums and whiskeys, aging of the brands in various types of casks for extended periods of time, and/or blending several rums or whiskeys to achieve a unique flavor profile for each brand.

After the distillation, purification and flavoring processes are completed, the resulting beverage alcohol products are bottled by us. This involves several important stages, including bottle and label design and procurement, filling of the bottles and packaging the bottles in various configurations for shipment. 

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We rely on a limited number of suppliers for the sourcing of our spirit distillates and other raw materials. We believe that we have consistent and reliable third party sources for spirit distillates. 

Distribution Network

 

We believe that the distribution network that we have developed with our sales team and our independent distributors and brokers is one of our key strengths. We currently have distribution and brokerage relationships with third-party distributors in 22 U.S. states.

 

U.S. Distribution

 

Producers of beverage alcohol products in the U.S., such as us, must sell their products through a three-tier distribution system, specifically, producers of alcohol must first sell it to a network of distributors, or wholesalers, covering the U.S., in either “open” states or “control” states. In the 33 open states, the distributors are generally large, privately-held companies. In the 18 control states, the states themselves function as the distributor, and regulate producers such as us. The distributors and wholesalers in turn sell to individual retailers, such as liquor stores, restaurants, bars, supermarkets and other outlets licensed to sell beverage alcohol. In larger states, such as New York, more than one distributor may handle a brand in separate geographical areas. In control states, importers sell their products directly to state liquor authorities, which distribute the products and either operate retail outlets or license the retail sales function to private companies, while maintaining strict control over pricing and profit.

 

The U.S. spirits industry has consolidated dramatically over the last ten years due to merger and acquisition activity. There are currently eight major spirits companies, each of which own and operate their own importing businesses. All companies, including these large companies, are required by law to sell their products through wholesale distributors in the U.S. The major companies are exerting increasing influence over the regional distributors and as a result, it has become more difficult for smaller companies to get their products recognized by the distributors.

 

Importation

 

We hold the federal importer and wholesaler license required by the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury Department, and the requisite state licenses within the states we conduct business.

 

Our inventory is maintained in our warehouse and shipped nationally by our network of licensed and bonded carriers.

 

Wholesalers and Distributors

 

As noted above, in the U.S., we are required by law to use state-licensed distributors or, in the control states, state-owned agencies performing this function, to sell our brands to retail outlets. As a result, we depend on distributors for sales, for product placement and for retail store penetration. We have no distribution agreements or minimum sales requirements with any of our U.S. alcohol distributors, and they are under no obligation to place our products or market our brands. All of the distributors also distribute our competitors’ products and brands. As a result, we must foster and maintain our relationships with our distributors. Through our internal sales team, we have established relationships for our brands with wholesale distributors in the 22 states we sell our products, and our products are sold in the U.S. by seven wholesale distributors, as well as by various state beverage alcohol control agencies.

 

Significant Customers

 

Sales to one distributor, the Oregon Liquor Control Commission, accounted for approximately 32% our consolidated sales for each of fiscal years 2016 and 2015.

 

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Sales Team

 

Our sales force has an average of over ten years of industry experience with premium beverage alcohol brands. Our sales personnel are engaged in the day-to-day management of our distributors, which includes setting quotas, coordinating promotional plans for our brands, maintaining adequate levels of stock, brand education and training and sales calls with distributor personnel. Our sales team also maintains relationships with key retail customers through independent sales calls. They also schedule promotional events, create local brand promotion plans, host in-store tastings, where permitted, and provide wait staff and bartender training and education for our brands.

 

In addition, we have also engaged Park Street Imports, a provider of back-office administrative and logistical services for alcohol and beverage distributors, which services include state compliance, logistics planning, order processing, distributor chargeback and bill-support management and certain accounting and reporting services.

 

Advertising, Marketing and Promotion

 

To build our brands, we must effectively communicate with three distinct audiences: our distributors, the retail trade and the end consumer. Advertising, marketing and promotional activities help to establish and reinforce the image of our brands in our efforts to build substantial brand value. We intend to stay true to our roots as a local Portland-based craft spirit company, while identifying and capitalizing on trends within the booming craft spirits industry.

 

As mentioned above, in late 2016 we retained Sandstrom Partners, a Portland-based firm specializing in spirits branding, to review our current product portfolio, as well as our new ideas, and advise us on marketing, creation of brand awareness and product positioning, locally and nationally.

 

We use a range of marketing strategies and tactics to build brand equity and increase sales, including consumer and trade advertising, price promotions, point-of-sale materials, event sponsorship, in-store and on-premise promotions and public relations, as well as a variety of other traditional and non-traditional marketing techniques, including social media marketing, to support our brands.

 

Besides traditional advertising, we also employ other marketing methods to support our brands: public relations, event sponsorships and tastings. Our U.S. public relations efforts have helped gain editorial coverage for our brands, which increases brand awareness. Event sponsorship is an economical way for us to have influential consumers taste our brands. We actively contribute product to trend-setting events where our brand has exclusivity in the brand category. We also conduct hundreds of in-store and on-premise promotions each year.

 

Intellectual Property

 

Trademarks are an important aspect of our business. We sell our products under a number of trademarks, which we own or use under license. Our brands are protected by trademark registrations or are the subject of pending applications for trademark registration in the U.S where we distribute, or plan to distribute, our brands. The trademarks may be registered in the names of our subsidiaries. In the U.S., trademark registrations need to be renewed every ten years. We expect to register our trademarks in additional markets as we expand our distribution territories.

 

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Seasonality

 

Our industry is subject to seasonality with peak retail sales generally occurring in the fourth calendar quarter, primarily due to seasonal holiday buying. Historically, this holiday demand typically resulted in higher sales for us in our second and/or third fiscal quarters.

 

Competition

 

The beverage alcohol industry is highly competitive. We believe that we compete on the basis of quality, price, brand recognition and distribution strength. Our premium brands compete with other alcoholic and nonalcoholic beverages for consumer purchases, retail shelf space, restaurant presence and wholesaler attention. We compete with numerous multinational producers and distributors of beverage alcohol products. Many of our current and potential competitors have longer operating histories and have substantially greater financial, sales, marketing and other resources than we do, as well as larger installed customer bases, greater name recognition and broader product offerings. Some of these competitors can devote greater resources to the development, promotion, sale and support of their products. As a result, it is possible that our competitors may either respond to industry conditions or consumer trends more rapidly or effectively or resort to price competition to sustain market share, which could adversely affect our sales and profitability.

 

Over the past ten years, the U.S. wine and spirits industry has undergone dramatic consolidation and realignment of brands and brand ownership. The number of major importers in the U.S. has declined significantly. Today there are eight major importers: Diageo PLC, Pernod Ricard S.A., Bacardi Limited, Brown-Forman Corporation, Beam Suntory Inc., Davide Campari Milano-S.p.A., and Remy Cointreau S.A.

 

By focusing on the premium and super-premium segments of the market, which typically have higher margins, and having an established, experienced sales force, we believe we are able to gain relatively significant attention from our distributors for a company of our size. Also, the continued consolidation among the major companies is expected to create an opportunity for small to mid-size wine and spirits companies, such as ourselves, as the major companies contract their portfolios to focus on fewer brands.

 

Government Regulation

 

We are subject to the jurisdiction of the Federal Alcohol Administration Act, U.S. Customs Laws, Internal Revenue Code of 1986 and the Alcoholic Beverage Control laws of all fifty states.

 

The U.S. Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau regulates the production, blending, bottling, sales and advertising and transportation of alcohol products. Also, each state regulates the advertising, promotion, transportation, sale and distribution of alcohol products within its jurisdiction. We are also required to conduct business in the U.S. only with holders of licenses to import, warehouse, transport, distribute and sell spirits.

 

We are subject to U.S. regulations on the advertising, marketing and sale of beverage alcohol products. In addition, recent developments in the industry may compel us to identify the source and location of our distillate products, and notify the consumer of whether the product was distilled by us and where the product was distilled. These regulations range from a complete prohibition of the marketing of alcohol in some states to restrictions on the advertising style, media and messages used.

 

Labeling of spirits is also regulated in many markets, varying from health warning labels to importer identification, alcohol strength and other consumer information. All beverage alcohol products sold in the U.S. must include warning statements related to risks of drinking beverage alcohol products.

 

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In the U.S. control states, the state liquor commissions act in place of distributors and decide which products are to be purchased and offered for sale in their respective states. Products are selected for purchase and sale through listing procedures which are generally made available to new products only at periodically scheduled listing interviews. Consumers may purchase products not selected for listings only through special orders, if at all.

 

The distribution of alcohol-based beverages is also subject to extensive federal and state taxation in the U.S. and internationally. Most foreign countries impose excise duties on wines and distilled spirits, although the form of such taxation varies from a simple application on units of alcohol by volume to intricate systems based on the imported or wholesale value of the product. Several countries impose additional import duty on distilled spirits, often discriminating between categories in the rate of such tariffs. Once we begin distributing our products internationally, import and excise duties could have a significant effect on our sales, both through reducing the consumption of alcohol and through encouraging consumer switching into lower-taxed categories of alcohol.

 

We believe that we are in material compliance with applicable federal, state and other regulations. However, we operate in a highly regulated industry which may be subject to more stringent interpretations of existing regulations. Future compliance costs due to regulatory changes could be significant.

 

Employees

 

As of May 1, 2017, we had 20 full-time employees, 10 of whom were in sales and marketing and three of whom were in management and seven in administration and production.

 

Geographic Information

 

We operate in one business segment – premium beverage alcohol products. Our product categories are rum, whiskey, vodka and specialty liquors, with an intent to sell gin and private label tequila in the future. We currently sell our products in 22 states (Oregon, California, Washington, Florida, Nevada, Texas, Virginia, Indiana, Illinois, New York, New Jersey, Massachusetts, Connecticut, Minnesota, Georgia, Pennsylvania, Rhode Island, New Hampshire, Maine, Idaho, Vermont and Maryland) and are authorized to distribute our products in Ontario, Canada as well.

 

Facilities

 

Our corporate headquarters are currently located in Portland, Oregon, where we lease and occupy approximately 10,000 square feet of office and industrial space that was originally Motherlode’s facility. On February 17, 2017, the Company entered into a Commercial Sublease Agreement with MotherLode, LLC which we subsequently acquired. In June 2017 we consolidated our production operations into the MotherLode facility. The Company anticipates relocating to new corporate offices that will be sufficient to maintain its current operations. We also lease and occupy approximately 2,500 square feet of industrial space in Hillsboro, Oregon as part of our BBD operations.

 

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. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and divert management resources.

 

Corporate History

 

We were incorporated in Nevada in February 2004 under the name Eurocan Holdings, Ltd. Until the closing of the Eastside Distilling, LLC acquisition (described below), Eurocan operated solely as an online marketing and media solutions firm specializing in digital interactive media, which business was conducted through Eurocan’s wholly-owned subsidiary, Michael Williams Web Design Inc. of New York, New York (“MWW”).

 

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The Acquisition of Eastside Distilling, LLC

 

In October 2014, Eurocan Holdings Ltd. consummated the acquisition (the “Acquisition”) of Eastside Distilling, LLC (“Eastside”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Eurocan, Eastside and Eastside Distilling, Inc., our wholly-owned subsidiary. Pursuant to the Merger Agreement, Eastside merged with and into Eastside Distilling, Inc. The merger consideration for the Acquisition consisted of 533,334 shares (the “Shares”) of our common stock. In addition, certain of our stockholders cancelled an aggregate of 415,167 shares of our common stock held by them. As a result, upon consummation of the Merger Agreement on October 31, 2014, we had 666,667 shares of our common stock issued and outstanding, of which 533,334 shares were held by the former members of Eastside.

 

Following the Acquisition, we conduct the business of Eastside as our primary business.

 

Spin-Off of MWW

 

Following consummation of the Acquisition, our new management conducted an evaluation of the MWW business and an analysis of the business going forward. Management determined that due to MWW’s operating and net losses in each of the two fiscal years preceding the Acquisition, its working capital deficit as of the end of the latest fiscal year and as of the latest fiscal quarter preceding the Acquisition, and its accumulated deficit, it was not in our best interest to continue the operation of MWW going forward. Accordingly, in February 2015, we transferred all of the outstanding shares of MWW held by us, along with all assets and liabilities related to MWW, to Michael Williams in consideration of MWW’s and Mr. Williams’ full release of all claims and liabilities related to MWW and the MWW business. Mr. Williams was the sole officer, director and employee of MWW at the time of the transaction. The spinoff of MWW resulted in the impairment of goodwill related to the Acquisition of approximately $3.2 million in December 2014. Additionally, as a result of the spin-off, we recorded a net gain of approximately $52,890 on February 3, 2015. This gain is primarily the result of the transfer of net liabilities to Mr. Williams, which is reflected in our consolidated financial statements for the year ending on December 31, 2015.

 

MotherLode Acquisition Agreement

 

On March 8, 2017, we acquired all of the outstanding membership interests of MotherLode in exchange for 86,667 shares of the Company’s common stock (the “MotherLode Acquisition”). In connection with the MotherLode Acquisition, we entered into a three-year employment agreement with the founder of Motherlode, Allen Barteld, as described in the “Management” section below under the heading “Employment Agreements.”

 

Big Bottom Distilling Acquisition Agreement

 

On May 1, 2017 we acquired 90% of the ownership of Big Bottom Distilling (“BBD”), a Hillsboro, Oregon-based distiller and producer of super premium gins, whiskeys, brandies, rum, and vodka. Pursuant to the agreement governing the acquisition of BBD, we agreed to exchange 28,096 shares of our common stock for 90% of the outstanding limited liability company units of BBD. Following the acquisition of BBD, we will maintain the independence of BBD as a separate entity underneath our operational umbrella.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following is a brief description of the principal occupation and recent business experience of each of our executive officers and directors and their ages as of July 3, 2017:

 

Name   Age   Position
         
Grover T. Wickersham   68   Chief Executive Officer and Chairman of the Board
Trent D. Davis (1)(2)(3)   48   Director
Michael M. Fleming (1)(2)(3)   68   Director
Steven Shum   46   Chief Financial Officer
Melissa Heim   33   Executive Vice President Operations and Master Distiller
Allen Barteld   51   President and Chief Executive Officer of MotherLode

 

 

(1) Member of the audit committee.

(2) Member of the compensation committee.

(3) Member of the nominating and corporate governance committee.

 

Our Board of Directors currently consists of three members. All directors hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification, or removal. Board vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority vote of the directors then in office, even if less than a quorum, or by a sole remaining director. Our board may establish the authorized number of directors from time to time by resolution.

 

Our executive officers are each appointed by the board and serve at the board’s discretion.

 

There are no family relationships among our officers or directors.

 

Executive Officers

 

Grover Wickersham was appointed to our Board of Directors and as our chairman in July 2016, and as our chief executive officer in November 2016. Mr. Wickersham currently serves on the boards of directors of S&W Seed Company (NASDAQ: SANW), an agricultural products company; Verseon Corporation, a London AIM-listed pharmaceutical development company; Arbor Vita Corporation, a private company that has developed a test for cervical cancer; and SenesTech, Inc. (NASDAQ: SNES), an animal health company that has developed proprietary technology for managing animal pest populations through fertility control. Mr. Wickersham has been a director and portfolio advisor of Glenbrook Capital Management, the general partner of a partnership that invests primarily in the securities of public companies, from 1996 to the present. For more than five years, Mr. Wickersham has served as the chairman of the board of trustees of Purisima Fund, a mutual fund advised by Fisher Investments of Woodside, California, which fund has assets under management of approximately $375 million. Between 1976 and 1981, Mr. Wickersham served as a staff attorney, and then as a branch chief, of the U.S. Securities and Exchange Commission (the “SEC”). He holds a B.A. from the University of California at Berkeley, an M.B.A. from Harvard Business School and a J.D. from University of California, Hastings College of Law. We believe that Mr. Wickersham is qualified to serve as a member of our Board of Directors because of his experience and knowledge of corporate finance and legal matters, his experience and knowledge of operational matters gained as a past and present director of other public and private companies, and his knowledge of our company.

 

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Steven Shum has served as our chief financial officer since October 2015. Prior to joining us, Mr. Shum served as an officer and director of XZERES Corp, a publicly-traded global renewable energy company, from October 2008 until April 2015 in various officer roles, including chief operating officer from September 2014 until April 2015, chief financial officer, principal accounting officer and secretary from April 2010 until September 2014 (under former name, Cascade Wind Corp) and chief executive officer and president from October 2008 to August 2010. Mr. Shum also serves as the managing principal of Core Fund Management, LP and the Fund Manager of Core Fund, LP. He was a founder of Revere Data LLC (now part of Factset Research Systems, Inc.) and served as its executive vice president for four years, heading up the product development efforts and contributing to operations, business development, and sales. He spent six years as an investment research analyst and portfolio manager of D.N.B. Capital Management, Inc. His previous employers include Red Chip Review and Laughlin Group of Companies. He earned a B.S. in Finance and a B.S. in General Management from Portland State University in 1992.

 

Melissa Heim has served as our master distiller since June 2012. In November 2016, she was appointed our Executive Vice President Operations. We believe Ms. Heim is the first female commercial master distiller and blender west of the Mississippi River. Prior to joining our company, she apprenticed at and then served as head distiller at Rogue Distillery and Public House in Portland’s Pearl District, holding the position of head distiller from 2008 to 2010. Also, Ms. Heim co-founded and served as president of the Clear Boots Society, an organization that supports women’s leadership in the spirits industry. Ms. Heim studied Liberal Arts with emphasis on English at the University of Oregon.

 

Allen Barteld has served as President and Chief Executive Officer of MotherLode, our wholly-owned subsidiary acquired in March 2017, since June 2014. Prior to forming MotherLode in 2013, Mr. Barteld served as CEO of LawWerx, a software company, from 2009 to 2012. Mr. Barteld earned a Juris Doctor and Masters of Business Administration from Willamette University in 1997.

 

Non-Employee Directors

 

Trent Davis was appointed to our Board of Directors in August 2016. Mr. Davis is currently President and chief operating officer of Whitestone Investment Network, Inc., which specializes in providing executive advisory services to small entrepreneurial companies, as well as restructuring, recapitalizing, and making strategic investments in small to midsize companies. Mr. Davis is also currently Lead Director, Chairman of the Nominating and Governance and Special Investments Committees and is a Member of the Audit and Compensation Committees of Dataram Corporation (NASDAQ: DRAM), which develops, manufactures, and markets memory products primarily used in enterprise servers and workstations worldwide. Previously, from December 2014 to July 2015, Mr. Davis was Chairman of the Board for Majesco Entertainment Company (NASDAQ: COOL), which is an innovative developer, marketer, publisher, and distributor of interactive entertainment for consumers around the world. From November 2013 until July 2014, Mr. Davis served as the President and a Director of Paulson Capital Corp. (NASDAQ: PLCC) until he successfully completed the reverse merger of Paulson with VBI Vaccines, (NASDAQ: VBIV). He went on to serve as a Member of its Board of Directors and Audit Committee until May 2016. Mr. Davis was also the Chief Executive Officer of Paulson Investment Company. Inc., a subsidiary of Paulson Capital Corp, from July 2005 until October 2014, where he supervised all operations and over 200 investment representatives overseeing $1.5 billion in client assets. Prior to that, commencing in 1996, Mr. Davis served as Senior Vice President of Syndicate and National Sales of Paulson Investment Company, Inc. He has extensive experience in capital markets and brokerage operations and is credited with overseeing the syndication of approximately $600 million for over 50 client companies in both public and private transactions. In 2003, Mr. Davis served as a Chairman of the Board of the National Investment Banking Association. Mr. Davis holds a B.S. in Business and Economics from Linfield College and an M.B.A. from the University of Portland and held the following FINRA Licenses: Series 7, 24, 63, 66, and 79. We believe Mr. Davis is qualified to serve on the Board because of his deep knowledge of finance and public company issues, capital market, advisory and entrepreneurial experiences, and extensive expertise in operational and executive management.

 

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Michael (Mick) Fleming was appointed to our Board of Directors in August 2016. Mr. Fleming is currently an attorney with the law firm Ryan, Swanson & Cleveland, PLLC specializing in real estate, dispute resolution, securities and environmental matters, a position he has held since 2013. Mr. Fleming previously was an attorney with the law firm of Lane Powell PC from 2000 to 2013. Mr. Fleming is the Chairman of the Board of Directors of Jones Soda Co. (OTC: JSDA), a premium beverage company. Mr. Fleming also serves on the Board of Directors of S&W Seed Co. (NASDAQ: SANW), an agricultural products company, where he serves as, Lead Independent Director, Chairman of the audit committee, and as a member of the compensation committee. Mr. Fleming has served on the Board of Directors of Big Brothers and Big Sisters of Puget Sound since 2002 and was Chairman of the Board of Directors for 2008/2009. He has also been the President and owner of Kidcentre, Inc., a company in the business of providing child care services in downtown Seattle, Washington, since 1988. Since 1985, he has also been the President and owner of Fleming Investment Co., an investment company. Mr. Fleming holds a Bachelor of Arts degree from University of Washington and a law degree from the University of California, Hastings College of the Law. We believe Mr. Fleming is qualified to serve on our Board of Directors because of his experience serving on public company boards, as president and owner of two businesses as well as his legal expertise in matters of business and securities law.

 

Board Composition

 

Our Board of Directors currently consists of three members, which were last elected at our annual meeting in December 2016. All directors hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification, or removal. Board vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority vote of the directors then in office, even if less than a quorum, or by a sole remaining director. Our board may establish the authorized number of directors from time to time by resolution.

 

Director Independence

 

While our shares are quoted on the OTCQB and are not listed on one of the national securities exchanges, we employ the NASDAQ stock market’s standards for determining the independence of directors. Generally, under the listing requirements and rules of NASDAQ, independent directors must comprise a majority of a listed company’s Board of Directors within one year of the closing of this offering. Our Board of Directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Our Board of Directors has determined that Messrs. Davis and Fleming are independent within the meaning of NASDAQ listing standards. Accordingly, a majority of our directors is independent, as required under applicable NASDAQ rules. In making this determination, the Board of Directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our Board of Directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director and all transactions set forth herein under the heading “Certain Relationships and Related Transactions.”

 

Board Committees

 

Our Board of Directors has established the following three standing committees: an audit committee, a compensation committee and a corporate governance and nominating committee, all of which are comprised solely of independent board members. The Board of Directors determined that establishing standing audit, compensation, and nominating and corporate governance committees is an important element of sound corporate governance.

 

Audit Committee

 

Our audit committee oversees the engagement of our independent public accounts, reviews our audited financial statements, meets with our independent public accounts to review internal controls and reviews our financial plans. Our audit committee currently consists of Michael Fleming, who is the chair of the committee, and Trent Davis, each of whom has been determined by our Board of Directors to be independent in accordance with NASDAQ and SEC standards. Our Board of Directors has also designated Mr. Fleming as an “audit committee financial expert” as the term is defined under SEC regulations and has determined that Mr. Fleming possesses the requisite “financial sophistication” under applicable NASDAQ rules. The audit committee operates under a written charter which is available on the Company’s website. Both our independent registered accounting firm and internal financial personnel will regularly meet with our audit committee and have unrestricted access to the audit committee. Each member of the audit committee is able to read and understand fundamental financial statements, including our consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows. Further, no member of the audit committee has participated in the preparation of our consolidated financial statements, or those of any of our current subsidiaries, at any time during the past three years.

 

Compensation Committee

 

Our compensation committee reviews and recommends policies, practices and procedures relating to compensation for our directors, officers and other employees and advising and consulting with our officers regarding managerial personnel and development. Our compensation committee currently consists of Trent Davis, who is the chair of the committee and Michael Fleming, each of whom has been determined by our Board of Directors to be independent in accordance with NASDAQ standards. Each member of our compensation committee is also a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended. The compensation committee operates under a written charter which is available on the Company’s website. The compensation committee has not yet established processes and procedures for the consideration and determination of executive and director compensation, except as set forth in the compensation committee charter.

 

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Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee evaluates the composition, size and governance of our Board of Directors and its committees, evaluating and recommending candidates for election to our Board of Directors, establishing a policy for considering stockholder nominees and reviewing our corporate governance principles and providing recommendations to the Board of Directors. Our nominating and corporate governance committee currently consists of Michael Fleming, who is the chair of the committee, and Trent Davis, each of whom has been determined by our Board of Directors to be independent in accordance with NASDAQ standards. The nominating and corporate governance committee operates under a written charter which is available on the Company’s website.

 

Risk Oversight

 

One of the key functions of our Board of Directors is informed oversight of our risk management process. Our Board of Directors will not have a standing risk management committee, but rather intends to administer this oversight function directly through our Board of Directors as a whole, as well as through our other various standing committees. In particular, our Board of Directors is responsible for monitoring and assessing strategic risk exposure, and discusses with management our major risk exposures, their potential impact on us and the steps we take to manage them. While our Board is ultimately responsible for risk oversight, our Board committees assist the Board of Directors in fulfilling its oversight responsibilities in certain areas of risk. In particular, our audit committee focuses on financial, accounting and investment risks. Our nominating and corporate governance committee focuses on the management of risks associated with Board organization, membership, structure and corporate governance. In addition, our compensation committee assists the Board of Directors in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs and related to succession planning for our executive officers.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of the compensation committee is or has ever been one of our officers or employees. None of our executive officers serves, or in the past has served, as a member of the compensation committee or on the Board of Directors of any entity that has one or more executive officers serving on our Board of Directors or compensation committee.

 

Code of Conduct and Ethics

 

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors. We will provide to any person without charge, upon request, a copy of our code of business conduct and ethics. Requests may be directed to our principal executive offices at 2150 SE Hanna Harvester Drive, Portland, OR 97222. Also, a copy of our code of business conduct and ethics is available on our website. We will disclose, on our website, any amendment to, or a waiver from, a provision of our Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of the Code of Business Conduct and Ethics enumerated in applicable rules of the SEC. 

Director Compensation

 

On October 13, 2016, the Company’s Board of Directors approved the grant of non-qualified stock options under the 2016 Plan (as defined below) to purchase up to 11,667 shares of common stock at an exercise price of $5.40 per share (each on a post-reverse split basis) to each of our non-employee directors as of that date, Messrs. Davis, Fleming, Hirson and Wickersham. All directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending Board of Director and any committee meetings, provided that we have the resources to pay these expenses. Currently, directors receive no other compensation for their services on our Board. The following table sets forth information regarding compensation earned by or paid to our non-employee directors during the year ended December 31, 2016.

 

Name  Option
Awards
($)(1)  
  Total
($)
Trent Davis  $31,500   $31,500 
Michael Fleming  $31,500   $31,500 
Lawrence Hirson  $31,500   $31,500 
Grover Wickersham (2)  $31,500   $31,500 

 

 

  (1) Represents a grant of non-qualified stock options under the 2016 Plan to purchase up to 11,667 shares of common stock at an exercise price of $5.40 per share to each of our non-employee directors as of October 13, 2016.
  (2)

The option awards to Mr. Wickersham were made prior to his employment with us as chief executive officer in November 2016.

 

Following the closing of this offering, we intend to implement a formal policy pursuant to which our non-employee directors will be eligible to receive compensation for service on our Board of Directors and committees of our Board of Directors.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth the compensation paid to our named executive officers for services rendered during the fiscal years ended December 31, 2016, and 2015.

 

   Summary Compensation Table 
                   All Other     
Name and Position  Year   Salary   Bonus   Options   Compensation   Total ($) 
Grover T. Wickersham   2016   $   $   $31,500 (1)  $   $31,500 
President, Chief Executive Officer, Director (From November 2016)   2015   $                 
                               
Steve Shum   2016   $   183,942 (2)  $   $     63,600 (3)  $   $247,542 
Chief Financial Officer, (Since October 1, 2015)   2015   $48,750 (2)      $      198,050 (4)  $   $246,800 
                               
Melissa Heim   2016   $57,538   $5,000   $31,800 (10)  $   $94,338 
Exec V.P. Operations and Master Distiller   2015   $41,346   $   $22,500 (11)  $   $63,846 
                               
Steven Earles   2016   $   180,673 (5)  $       $30,000 (6)  $210,673 
President, Chief Executive Officer, Director (From October 31, 2014 to January 2017)   2015   $  152,083  (5)          $   $152,083 
                               
Martin Kunkel   2016   $   70,000 (7)  $   $       $   $70,000 
Chief Marketing Officer, Secretary and Director (From January 13, 2015 to November 2016)   2015   $   63,333 (7)      $      192,000  (8)  $   $255,333 
                               
Lenny Gotter   2016   $   $       $   $ 
Director and Founder (From October 31, 2014 to February 26, 2015)   2015   $   71,500 (9)            $   $71,500 

 

 

  (1) Amounts reflect the aggregate grant date fair value of the 11,667 shares of common stock underlying the stock option on the date of grant ($5.40 per share) without regards to forfeitures, computed in accordance with ASC Topic 718 – Stock Compensation (“ASC 718”). This amount does not reflect the actual economic value realized by the named executive officer. The options issued to Mr. Wickersham vest monthly over a 6-month period.
  (2)

$48,750 and $48,250 for 2015 and 2016, respectively, was converted into series A convertible preferred stock.

  (3) Amounts reflect the aggregate grant date fair value of the 20,000 shares of common stock underlying the stock option on the date of grant ($4.80 per share) without regards to forfeitures, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the named executive officer. The options issued to Mr. Shum vest quarterly over a 3-year period.
  (4) Amounts reflect the aggregate grant date fair value of the 14,167 shares of common stock underlying the stock option on the date of grant ($27.00 per share) without regards to forfeitures, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the named executive officer. The options issued to Mr. Shum vest over a 2-year period with 25% vesting in the first year following date of grant, with no options vesting during the first six months and 1/24th per month vesting during the second six months, and 75% vesting in the second year following date of grant (3/48th/month).
  (5)

$119,519 and $65,481 for 2015 and 2016, respectively, was converted into series A convertible preferred stock.

  (6) Amounts reflect the aggregate grant date fair value of 5,406 restricted stock units on the date of grant ($5.55 per share) without regards to forfeitures.
  (7)

$42,500 and $16,000 for 2015 and 2016, respectively, was converted into series A convertible preferred stock.

  (8) Amounts reflect the aggregate grant date fair value of the 3,334 shares of common stock underlying the stock option on the date of grant ($111.00 per share) without regards to forfeitures, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the named executive officer. The options issued to Mr. Kunkel vest over a 2-year period with 25% vesting in the first year following date of grant, with no options vesting during the first six months and 1/24th per month vesting during the second six months, and 75% vesting in the second year following date of grant (3/48th/month).
  (9)

$10,500 accrued but not paid during the period.

  (10) Amounts reflect the aggregate grant date fair value of the 10,000 shares of common stock underlying the stock option on the date of grant ($4.80 per share) without regards to forfeitures, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the named executive officer. The options issued to Ms. Heim vest quarterly over a 3-year period.
  (11) Amounts reflect the aggregate grant date fair value of the 417 shares of common stock underlying the stock option on the date of grant ($105.00 per share) without regards to forfeitures, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the named executive officer. The options issued to Ms. Heim vest over a 2-year period with 25% vesting in the first year following date of grant, with no options vesting during the first six months and 1/24th per month vesting during the second six months, and 75% vesting in the second year following date of grant (3/48th per month).

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information concerning the number of shares of common stock underlying restricted stock awards and stock options granted to our named executive officers in the year ended December 31, 2016.

 

                Estimated     Estimated                       Grant   
                Future     Future                       Date  
                Payouts     Payouts                 Exercise or     Fair Value  
                Under Non-     Under                 Base Price     of Stock  
                Equity     Equity     All Other     All Other     of Option     and  
    Grant     Approval     Incentive     Incentive     Stock     Option     Awards     Option  
Name   Date     Date     Plan Awards     Plan Awards     Awards:     Awards:     ($/Sh)     Awards (1)  
                            Number of     Number of              
                            Shares of     Securities              
                            Stock or     Underlying              
                            Units (#)     Options (#)              
Grover T. Wickersham     10/13/2016       10/13/2016                         11,667 (2)   $ 5.40     $ 63,000  
                                                                 
Steven
Earles
    11/4/2016       11/4/2016                       5,406 (3)           $ 5.55     $ 30,000  
                                                                 
Steven Shum     9/20/2016       9/20/2016                         20,000 (4)   $ 4.80     $ 96,000  

 

 

  (1) Represents the grant date fair value of each equity award calculated in accordance with FASB Statement No. 123R – Accounting for Stock-Based Compensation.
  (2) Options vest monthly over a 6-month period.
  (3) Restricted stock units (“RSUs”) vest in four equal installments with 25% vesting on the grant date and 25% vesting on each of January 1, 2017, April 1, 2017 and July 1, 2017.
  (4) Options vest quarterly over a 3-year period.

 

Employment Agreements

 

We have agreements with certain of our named executive officers, which include provisions regarding post-termination compensation. We do not have a formal severance policy or plan applicable to our executive officers as a group. The following summaries of the employment agreements are qualified in their entirety by reference to the text of the employment agreements, as amended, which were filed as exhibits to the registration statement of which this prospectus is a part.

 

Employment Agreement with Steven Earles

 

On February 6, 2015, we entered into an employment agreement with Steven Earles to serve as president, chief executive officer, chief financial officer and chairman of our Board of Directors. The agreement had an initial term that was set to end on February 5, 2018 and provided for an annual base salary during the term of the agreement of $104,000 per year. Mr. Earles is eligible to receive an annual bonus of at the discretion of the Board of Directors. On August 12, 2015, we amended Mr. Earles’ employment agreement to increase his annual base salary to $245,000. On October 5, 2015, Mr. Earles resigned as our chief financial officer.

 

The agreement also contains the following material provisions: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment; (ii) two weeks paid vacation leave; (iii) medical, dental and life insurance benefits; (iv) 36-month non-compete/non-solicitation terms; and (v) a severance payment equal to six months of base salary upon termination without cause (as defined in the agreement).

 

Effective November 4, 2016, we entered into a Second Amendment to Employment Agreement (the “Earles Amendment”) with Mr. Earles. Under the Earles Amendment, Mr. Earles’ base salary was decreased to $120,000 per annum. In addition, Mr. Earles agreed to waive prior accrued and unpaid salary totaling approximately $182,000. He was granted a restricted stock units award pursuant to the our 2016 Equity Incentive Plan equal to the quotient obtained by dividing $30,000 by the closing price of our common stock on the effective date of the Earles Amendment, which our Board deemed to be the fair market value of such shares as of the date of the Earles Amendment. The shares of common stock subject to the restricted stock units vest in four equal quarterly installments on each of November 4, 2016, January 1, 2017, April 1, 2017 and July 1, 2017. We also agreed to indemnify Mr. Earles to the fullest extent allowed by our Articles of Incorporation, as amended (the “Articles”), our Amended and Restated Bylaws (the “Bylaws”), and applicable law, and notwithstanding Section 7.14 of our Bylaws, to the extent permitted by applicable law, the rights granted pursuant to the Earles Amendment will apply to acts and actions occurring since October 31, 2014.

 

Mr. Earles resigned as our president and director effective January 19, 2017. Mr. Earles had previously resigned as our chief executive officer on November 22, 2016.

 

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Employment Agreement with Steven Shum

 

On October 5, 2015, we entered into an employment agreement with Mr. Shum. The agreement has an initial term ending on October 5, 2018 and provides for an annual base salary during the term of the agreement of $195,000 per year. Mr. Shum is eligible to receive an annual bonus of at the discretion of the Board of Directors. In addition, Mr. Shum received an option to purchase 14,167 shares of our common stock. This option has a five-year term and vests as described above.

 

The agreement also contains the following material provisions: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment; (ii) two weeks paid vacation leave; (iii) medical, dental and life insurance benefits; (iv) 36-month non-compete/non-solicitation terms; and (v) a severance payment equal to six months of base salary upon termination without cause (as defined in the agreement).

 

Effective November 4, 2016, we entered into a First Amendment to Employment Agreement (the “Shum Amendment”) with Mr. Shum. Under the Shum Amendment, Mr. Shum’s base salary was decreased to $135,000 per annum. In addition, Mr. Shum is entitled to quarterly bonuses based on individual and company performance at the discretion of our Board of Directors as well as quarterly bonuses based on the achievement by us of certain quarterly EBITDA targets. We agreed to pay Mr. Shum $4,250 for accrued and unpaid salary, which will be paid on the earlier of a qualified equity financing or six months from the effective date of the Shum Amendment. We also agreed to indemnify Mr. Shum to the fullest extent allowed by the Articles, the Bylaws and applicable law, and notwithstanding Section 7.14 of our Bylaws, to the extent permitted by applicable law, the rights granted pursuant to the Shum Amendment shall apply to acts and actions occurring since October 31, 2014.

 

Employment Agreement with Melissa Heim

 

On February 27, 2015, we entered into an employment agreement with Ms. Heim. The agreement has an initial term ending on February 27, 2020 and provides for an annual base salary during the term of the agreement of $40,000 per year. Ms. Heim is eligible to receive an annual bonus of at the discretion of the Board of Directors. In addition, Ms. Heim received an option to purchase 417 shares of our common stock. This option has a five-year term and vests as described above.

 

The agreement also contains the following material provisions: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment; (ii) ten business days paid vacation leave; (iii) medical, dental and life insurance benefits; and (iv) 36-month non-compete/non-solicitation terms.

 

We have increased Ms. Heim’s annual base salary during the course of her employment, and she now earns an annual base salary of $85,000.

 

Employment Agreement with Allen Barteld

 

In connection with our acquisition of MotherLode, on March 8, 2017, we entered into a three-year employment agreement with Mr. Barteld. Under the terms of Mr. Barteld’s employment agreement, Mr. Barteld will be employed as the President and Chief Executive Officer of MotherLode, and will continue to serve as its manager. Mr. Barteld will initially be paid an annual base salary of $85,000, subject to review from time to time by the compensation committee. Upon the earlier of December 31, 2017 or the closing of a registered public offering of our common stock that results in net proceeds to us of at least $3,000,000, Mr. Barteld’s base salary will be increased to $120,000 per year, subject to review from time to time by the compensation committee. Mr. Barteld’s employment agreement further provides that Mr. Barteld is eligible to participate in our annual bonus plan, the actual payment of which will be determined based upon a combination of our results and individual performance against applicable performance goals fixed by the compensation committee.

 

In addition to salary and bonuses as summarized above, Mr. Barteld’s employment agreement provides that Mr. Barteld is eligible to participate in employee benefits plans as we may institute from time to time at the discretion of the compensation co