UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the quarterly period ended | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ______________ to _________________ |
Commission
File No.:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
Registrant’s
telephone number: (
Securities registered pursuant to Section 12(b) of the Act:
| The
| ||||
| (Title of Each Class) | (Trading Symbol) | (Name of Each Exchange on Which Registered) |
Indicate
by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 14, 2023, shares of our common stock, $0.0001 par value, were outstanding.
NOTE REGARDING REVERSE STOCK SPLIT
On May 15, 2023, Eastside Distilling, Inc. implemented a one-for-twenty reverse split of its common stock. To facilitate comparative analysis, all statements in this Report regarding numbers of shares of common stock and all references to prices of a share of common stock, if referencing events or circumstances occurring prior to May 15, 2023, have been modified to reflect the effect of the reverse stock split on a pro forma basis.
EASTSIDE DISTILLING, INC.
FORM 10-Q
September 30, 2023
TABLE OF CONTENTS
| 2 |
PART I: FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
Eastside Distilling, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except shares and per share amounts)
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Trade receivables, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Other assets, net | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Deferred revenue | ||||||||
| Current portion of secured credit facilities, net of debt issuance costs | ||||||||
| Current portion of note payable, related party | ||||||||
| Current portion of notes payable | ||||||||
| Current portion of lease liabilities | ||||||||
| Other current liability, related party | ||||||||
| Total current liabilities | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Secured credit facilities, related party | ||||||||
| Secured credit facilities, net of debt issuance costs | ||||||||
| Note payable, related party | ||||||||
| Notes payable, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | ||||||||
| Preferred stock, $ par value; shares authorized; Series B shares issued and outstanding as of both September 30, 2023 and December 31, 2022 | ||||||||
| Preferred stock, $ par value; shares authorized; Series C shares issued and outstanding as of September 30, 2023 and issued and outstanding as of December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2023 and 2022
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Less customer programs and excise taxes | ||||||||||||||||
| Net sales | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| (Gain) loss on disposal of property and equipment | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on debt to equity conversion | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic net loss per common share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Basic weighted average common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Stockholder’s Equity (Deficit)
For the Nine Months Ended September 30, 2023 and 2022
(Dollars and shares in thousands)
| Series
B Preferred Stock | Series
C Preferred Stock | Common Stock | Paid-in | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| (Shares and dollars in thousands) | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Issuance of common stock for services by third parties | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services by employees | ||||||||||||||||||||||||||||||||||||
| Issuance of detachable warrants on notes payable | - | - | - | |||||||||||||||||||||||||||||||||
| Preferred stock dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Issuance of common stock for services by third parties | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services by employees | ||||||||||||||||||||||||||||||||||||
| Issuance of detachable warrants on notes payable | - | - | - | |||||||||||||||||||||||||||||||||
| Shares issued for cash | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Issuance of detachable warrants on notes payable | - | - | - | |||||||||||||||||||||||||||||||||
| Preferred stock dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| 5 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Stockholder’s Equity (Deficit) - Continued
For the Nine Months Ended September 30, 2023 and 2022
(Dollars and shares in thousands)
| Series
B Preferred Stock | Series
C Preferred Stock | Common Stock | Paid-in | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Issuance of common stock for services by third parties | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services by employees | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Shares issued for cash | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Issuance of common stock for services by third parties | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services by employees | ||||||||||||||||||||||||||||||||||||
| Shares issued for cash | ||||||||||||||||||||||||||||||||||||
| Debt to equity conversion | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2023 and 2022
(Dollars in thousands)
(Unaudited)
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | - | |||||||
| Depreciation and amortization | ||||||||
| Bad debt expense | ||||||||
| Other income | ( | ) | ||||||
| (Gain) loss on disposal of assets | ( | ) | ||||||
| Inventory reserve | ( | ) | ( | ) | ||||
| Loss on debt to equity conversion | ||||||||
| Stock dividend payable | ( | ) | ( | ) | ||||
| Amortization of debt issuance costs | ||||||||
| Interest accrued to secured credit facilities | ||||||||
| Payment of accrued interest on secured credit facilities | ( | ) | ||||||
| Interest accrued for amounts due to related parties | ||||||||
| Payment of accrued interest on amounts due to related parties | ( | ) | ||||||
| Issuance of common stock in exchange for services of related parties | ||||||||
| Issuance of common stock in exchange of services of third parties | ||||||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables, net | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Right-of-use assets | ||||||||
| Accounts payable | ||||||||
| Accrued liabilities | ( | ) | ||||||
| Other liabilities, related party | ||||||||
| Deferred revenue | ||||||||
| Net lease liabilities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Proceeds from sale of fixed assets | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from issuance of stock | ||||||||
| Proceeds from secured credit facilities | ||||||||
| Proceeds from note payable, related party | ||||||||
| Payments of principal on notes payable, related party | ( | ) | ||||||
| Payments of principal on secured credit facilities | ( | ) | ||||||
| Payments of principal on notes payable | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash at the beginning of the period | ||||||||
| Cash at the end of the period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash paid for amounts included in measurement of lease liabilities | $ | $ | ||||||
| Supplemental Disclosure of Non-Cash Financing Activity | ||||||||
| Debt exchanged for equity | $ | $ | ||||||
| Accrued interest rolled into notes payable | $ | $ | ||||||
| Exchange of assets for services | $ | $ | ||||||
| Future proceeds related to installment sales of equipment | $ | $ | ||||||
| Issuance of detachable warrants on notes payable | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 7 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
1. Description of Business
Eastside Distilling (the “Company” or “Eastside Distilling”) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, the Company changed its corporate name to Eastside Distilling, Inc. to reflect the acquisition of Eastside Distilling, LLC. The Company manufactures, acquires, blends, bottles, imports, markets and sells a wide variety of alcoholic beverages under recognized brands. The Company currently employs 51 people in the United States.
The Company operates a beverage packaging and services business that operates in the beverage segment. During 2022, the Company made substantial investments to expand its product offerings to include digital can printing in the Pacific Northwest (together Craft Canning + Printing, “Craft C+P”). Craft C+P operates mobile filling lines and offers co-packing services with end-to-end production capabilities in Portland, Oregon.
The Company’s spirits’ brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila. The Company sells products on a wholesale basis to distributors in open states and through brokers in control states.
2. Liquidity
The Company’s primary capital requirements are for cash used in operating activities and the repayment of debt. Funds for the Company’s cash and liquidity needs have historically not been generated from operations but rather from loans as well as from convertible debt and equity financings. The Company has been dependent on raising capital from debt and equity financings to meet the Company’s operating needs.
The
Company had an accumulated deficit of $
The Company’s ability to meet its ongoing operating cash needs over the next 12 months depends on growing revenues and gross margins, and generating positive operating cash flow primarily through increased sales, improved profit growth, and controlling expenses. In addition, the Company has been negotiating with creditors to reduce the interest burden and improve cash flow. If the Company is unable to reach an agreement with creditors or obtain additional financing, or additional financing is not available on acceptable terms, the Company may seek to sell assets, reduce operating expenses, reduce or eliminate marketing initiatives, and take other measures that could impair its ability to be successful.
Although the Company’s audited financial statements for the year ended December 31, 2022 were prepared under the assumption that it would continue operations as a going concern, the report of its independent registered public accounting firm that accompanied the financial statements for the year ended December 31, 2022 contained a going concern explanatory paragraph in which such firm expressed substantial doubt about the Company’s ability to continue as a going concern, based on the financial statements at that time. If the Company cannot continue as a going concern, its stockholders would likely lose most or all of their investment in it.
| 8 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
3. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements for Eastside Distilling, Inc. and subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements in accordance with GAAP have been condensed or eliminated as permitted under the SEC’s rules and regulations. In management’s opinion, the unaudited consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2023, its operating results for the three and nine months ended September 30, 2023 and 2022 and its cash flows for the nine months ended September 30, 2023 and 2022. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Interim results are not necessarily indicative of the results that may be expected for an entire fiscal year. The consolidated financial statements include the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiaries, including Craft Canning + Bottling, LLC (doing business as Craft Canning + Printing) and its wholly-owned subsidiary Galactic Unicorn Packaging, LLC (the Company’s newly acquired fixed co-packing assets) and MotherLode LLC. All intercompany balances and transactions have been eliminated on consolidation.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Net sales include product sales, less excise taxes and customer programs and incentives. The Company recognizes revenue by applying the following steps in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
The Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment sales, which include sales to the Oregon Liquor Control Commission, the Company recognizes sales upon the consignee’s shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary rights of return.
Customer Programs
Customer
programs, which include customer promotional discount programs, are a common practice in the alcoholic beverage industry. The Company
reimburses wholesalers for an agreed amount to promote sales of products and to maintain competitive pricing. Amounts paid in connection
with customer programs are recorded as reductions to net sales in accordance with ASC 606 - Revenue from Contracts with Customers.
Amounts paid in customer programs totaled $
Excise Taxes
The
Company is responsible for compliance with the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) regulations, which includes
making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also
impose excise taxes on alcoholic beverages in varying amounts. The Company calculates its excise tax expense based upon units produced
and on its understanding of the applicable excise tax laws. Excise taxes totaled $
| 9 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
Cost of Sales
Cost of sales consists of all direct costs related to both spirits and canning for service, labor, overhead, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs.
Sales and Marketing Expenses
Sales
and marketing expenses consist of sponsorships, agency fees, digital media, salary and benefit expenses, travel and entertainment expenses.
Sales and marketing costs are expensed as incurred. Advertising and marketing expenses totaled $
General and Administrative Expenses
General and administrative expenses consist of salary and benefit expenses, travel and entertainment expenses for executive and administrative staff, rent and utilities, professional fees, insurance, and amortization and depreciation expense. General and administrative costs are expensed as incurred.
Stock-Based Compensation
The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest.
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of September
30, 2023, one distributor represented
Fair Value Measurements
GAAP defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAAP permits an entity to choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation and disclosure requirements for assets and liabilities for which the fair value option is elected. As of September 30, 2023 and December 31, 2022, management has not elected to report any of the Company’s assets or liabilities at fair value under the “fair value option” provided by GAAP.
The hierarchy of fair value valuation techniques under GAAP provides for three levels: Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, generally would require significant management judgment. The three levels for categorizing assets and liabilities under GAAP’s fair value measurement requirements are as follows:
| Level 1: | Fair value of the asset or liability is determined using cash or unadjusted quoted prices in active markets for identical assets or liabilities. | |
| Level 2: | Fair value of the asset or liability is determined using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. | |
| Level 3: | Fair value of the asset or liability is determined using unobservable inputs that are significant to the fair value measurement and reflect management’s own assumptions regarding the applicable asset or liability. |
| 10 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
None of the Company’s assets or liabilities were measured at fair value as of September 30, 2023 or December 31, 2022. However, GAAP requires the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments consist principally of trade receivables, accounts payable, accrued liabilities, notes payable, and the secured credit facilities. The estimated fair value of trade receivables, accounts payable, and accrued liabilities approximate their carrying value due to the short period of time to their maturities. As of September 30, 2023 and December 31, 2022, the principal amounts of the Company’s notes approximate fair value.
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities acquired in a business acquisition are valued at fair value at the date of acquisition due to having indefinite lives. The Company, on an annual basis, tests the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then the Company will estimate its useful life and amortize the asset over the remainder of its useful life.
Inventories
Inventories primarily consist of bulk and bottled liquor and raw materials and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (“FIFO”) method. A portion of the Company’s finished goods inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory.
Property and Equipment
Property
and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, ranging from to
Intangible Assets / Goodwill
The Company accounts for certain intangible assets at cost. Management reviews these intangible assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative assessment of certain of its intangible assets as of September 30, 2023 and determined that they were not impaired.
| 11 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
Long-lived Assets
The Company accounts for long-lived assets, including certain intangible assets, at amortized cost. Management reviews long-lived assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount of the asset, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative assessment of certain of its long-lived assets as of September 30, 2023 and determined that they were not impaired.
Comprehensive Income
The
Company did
Accounts Receivable Factoring Program
The
Company had two accounts receivable factoring programs: one for its spirits customers (the “spirits program”) that had a
zero balance at September 30, 2023 and another for its co-packing customers (the “co-packing program”) that terminated in
August 2023.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
4. Business Segment Information
The
Company’s internal management financial reporting consists of Craft C+P, Eastside spirits and corporate. Craft C+P offers digital
can printing and co-packing services in Portland, Oregon allowing it to offer end-to-end production capabilities. Craft C+P operates
13 mobile lines in Washington and Oregon. The spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum,
and tequila and are sold on a wholesale basis to distributors in open states, and brokers in control states. The Company’s principal
area of operation is in the U.S. and has one spirits customer that represents
The measure of profitability reviewed are condensed statements of operations and gross margins. These business segments reflect how operations are managed, operating performance is evaluated and the structure of internal financial reporting. Total asset information by segment is not provided to, or reviewed by, the chief operating decision maker (“CODM”) as it is not used to make strategic decisions, allocate resources or assess performance. The accounting policies of the segments are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 3.
| 12 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
Segment information was as follows for the nine months ended September 30, 2023 and 2022:
| (Dollars in thousands) | 2023 | 2022 | ||||||
| Craft C+P | ||||||||
| Sales | $ | $ | ||||||
| Net sales | ||||||||
| Cost of sales | ||||||||
| Gross profit | ( | ) | ||||||
| Total operating expenses | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Gross margin | % | - | % | |||||
| Interest expense | $ | $ | ||||||
| Depreciation and amortization | ||||||||
| Significant noncash items: | ||||||||
| (Gain) loss on disposal of property and equipment | ( | ) | ||||||
| Stock compensation | ||||||||
| Spirits | ||||||||
| Sales | $ | $ | ||||||
| Net sales | ||||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Total operating expenses | ||||||||
| Net income (loss) | ( | ) | ||||||
| Gross margin | % | % | ||||||
| Depreciation and amortization | $ | $ | ||||||
| Significant noncash items: | ||||||||
| (Gain) loss on disposal of property and equipment | ( | ) | ||||||
| Corporate | ||||||||
| Total operating expenses | $ | $ | ||||||
| Net loss | ( | ) | ( | ) | ||||
| Interest expense | $ | $ | ||||||
| Significant noncash items: | ||||||||
| Stock compensation | ||||||||
| Loss on debt to equity conversion | ||||||||
Craft
C+P’s sales increased due to new digital can printing revenues, offset by lower mobile revenues. Spirits’ sales in 2022
included bulk inventory sales of $
5. Inventories
Inventories consisted of the following:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
| 13 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Prepayment of fixed assets | $ | $ | ||||||
| Prepayment of inventory | ||||||||
| Other | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
7. Property and Equipment
Property and equipment consisted of the following:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Furniture and fixtures | $ | $ | ||||||
| Digital can printer | ||||||||
| Leasehold improvements | ||||||||
| Vehicles | ||||||||
| Total cost | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Purchases
of property and equipment totaled $
During
the nine months ended September 30, 2023, the Company disposed of fixed assets for proceeds of $
During
the nine months ended September 30, 2022, the Company entered into a master equity lease agreement with Enterprise FM Trust (“Enterprise”).
Per the agreement, the Company delivered to Enterprise the titles to certain vehicles resulting in a loss on disposal of $
8. Intangible Assets
Intangible assets consisted of the following:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Permits and licenses | $ | |
$ | |||||
| Azuñia brand | ||||||||
| Customer lists | ||||||||
| Total intangible assets | ||||||||
| Less accumulated amortization | ( |
) | ( |
) | ||||
| Intangible assets, net | $ | |
$ | |||||
| 14 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
The
customer list is being amortized over a life. Amortization expense totaled $
The permits and licenses, and Azuñia brand have all been determined to have an indefinite life and will not be amortized. The Company, on an annual basis, tests the indefinite life assets for impairment. If the carrying value of an indefinite life asset is found to be impaired, then the Company will record an impairment loss and reduce the carrying value of the asset.
9. Other Assets
Other assets consisted of the following:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Product branding | $ | $ | ||||||
| Deposits | ||||||||
| Total other assets | ||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Other assets, net | $ | $ | ||||||
As
of September 30, 2023, the Company had $
Amortization
expense totaled $
The deposits represent office lease deposits.
10. Leases
The
Company has various lease agreements in place for facilities, equipment and vehicles. Terms of these leases include, in some instances,
scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various
dates through 2027. The Company determines if an arrangement is a lease at inception. As the rate implicit in each lease is not readily
determinable, the Company uses its incremental borrowing rate based on information available at commencement to determine the present
value of the lease payments. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value
of lease payments over the lease term. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded
on the balance sheet and are recognized on a straight-line basis over the lease term. As of September 30, 2023, the amount of right-of-use
assets and lease liabilities were $
Maturities of lease liabilities as of September 30, 2023 were as follows:
| (Dollars in thousands) | Operating Leases | Weighted- Average Remaining Term in Years | ||||||
| 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less imputed interest (based on | ( | ) | ||||||
| Present value of lease liability | $ | |||||||
| 15 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
11. Notes Payable
Notes payable consisted of the following:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Promissory notes payable bearing interest of | $ | $ | ||||||
| Amended and restated promissory notes payable bearing interest of | ||||||||
| Total notes payable | ||||||||
| Less current portion | ( | ) | ||||||
| Long-term portion of notes payable | $ | $ | ||||||
The
Company paid $
Maturities on notes payable as of September 30, 2023 were as follows:
| (Dollars in thousands) | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ |
12. Secured Credit Facilities
Note Purchase Agreement
On October 7, 2022, the Company
entered into a Note Purchase Agreement dated as of October 6, 2022 with Aegis Security Insurance Company (“Aegis”). Pursuant
to the Note Purchase Agreement, Aegis purchased from the Company a secured promissory note in the principal amount of $
| 16 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
On
September 29, 2023, the Company entered into a Debt Satisfaction Agreement with Aegis and other creditors, pursuant to which the Aegis
Note was amended and restated. See: Note 15, Stockholders Equity – Debt Satisfaction Agreement. Principal and interest of
$
6% Secured Convertible Promissory Notes
On
April 19, 2021, the Company entered into a securities purchase agreement (“Purchase Agreement”) with accredited investors
(“Subscribers”) for their purchase of up to $
Roth
Capital, LLC acted as placement agent in the private offering, and the Company paid the Placement Agent a cash fee of five percent (
Interest
on the Notes accrued at a rate of
All
amounts due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional
shares), at the option of the holders into the Company’s common stock at a fixed conversion price, which is subject to adjustment
as summarized below. The Notes were initially convertible into the Company’s common stock at an initial fixed conversion price
of $
The Notes contain customary triggering events including but not limited to: (i) failure to make payments when due under the Notes; and (ii) bankruptcy or insolvency of the Company. If a triggering event occurs, each holder may require the Company to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash.
The Notes are secured by a subordinated security interest in the Company’s assets pursuant to the terms of a Security Agreement entered into between the Company and the Subscribers.
On
October 13, 2022, the Company entered into an Amendment Agreement with the holders of the
On
September 29, 2023, the Company entered into a Debt Satisfaction Agreement with the Subscribers and other creditors, pursuant to which
the Maturity Date of the Notes was extended from November 18, 2022 to March 31, 2025 and interest accrues at
| 17 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
13. Commitments and Contingencies
Legal Matters
On
March 1, 2023, Sandstrom Partners, Inc. filed a complaint in the Circuit Court of the State of Oregon for the County of Multnomah alleging
the Company failed to pay for its services pursuant to an agreement entered into on October 16, 2019. The complaint seeks damages of
$
On December 15, 2020, Grover Wickersham filed a complaint in the United States District Court for the District Court of Oregon against the Company. Mr. Wickersham, the former CEO and Chairman of the Board of the Company, has asserted causes of action for fraud in the inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, defamation, interference with economic advantage, elder financial abuse, and dissemination of false and misleading proxy materials. The Company disputes the allegations and intends to defend the case vigorously.
The Company is not currently subject to any other material legal proceedings; however, it could be subject to legal proceedings and claims from time to time in the ordinary course of its business, or legal proceedings it considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and can divert management resources.
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Potentially dilutive securities consist of the incremental common stock issuable upon exercise of stock options, convertible notes and warrants. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. There were anti-dilutive common shares included in the calculation of income (loss) per common share as of September 30, 2023 and December 31, 2022.
15. Stockholders’ Equity
Reverse Stock Split
All
shares and per share information in these financial statements has been adjusted to give effect to the
Debt Satisfaction Agreement
Pursuant
to the DSA, on September 29, 2023, the Company issued to the SPV
shares of the Company’s common stock and
shares of its Series C Preferred Stock, and executed a Registration Rights Agreement providing that the Company will register for
public resale that common stock and the common stock issuable upon conversion of the Series C Preferred Stock. In exchange for that
equity, the Company’s debts to the members of the SPV were reduced by a total of $
| ● | the
principal balance of the Secured Promissory Note issued by the Company to Aegis on October
6, 2022 was reduced by $ |
| ● | the
Company’s debt to LDI of $ |
| ● | the
aggregate principal balance of the Secured Convertible Promissory Notes issued by the Company
to Bigger in April and May of 2021 was reduced by $ |
| ● | the
aggregate principal balance of the Secured Convertible Promissory Notes issued by the Company
to District 2 in April and May of 2021 was reduced by $ |
| 18 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
Further pursuant to the DSA:
| ● | the
maturity date of the secured debt listed above as well as unsecured notes issued by the Company
and held by Bigger and District 2 in the aggregate amount of $ |
| ● | the Company, Aegis, Bigger and District 2 entered into an Intercreditor Agreement, pursuant to which the remaining secured debt obligations of the Company to Aegis, Bigger and District 2 were made pari passu; |
| ● | the
Common Stock Purchase Warrant issued by the Company to TQLA LLC on March 21, 2022, which
permits TQLA LLC to purchase up to |
The
DSA mandates that the Company obtain shareholder approval of an increase in the Company’s authorized common stock from
shares to shares. If the increase is not approved by the earlier of the first date on which the Company has no authorized and
unissued common stock or March 31, 2024, the Company will be required to pay the SPV liquidated damages of $
Issuance of Common Stock
During the nine months ended September 30, 2023, the Company issued shares of common stock to directors and employees for stock-based compensation of $ million. The shares were valued using the closing share price of the Company’s common stock on the date of grant, within the range of $ to $ per share.
During
the nine months ended September 30, 2023, the Company sold shares of common stock for net proceeds of $
On
September 29, 2023, pursuant to the DSA (see discussion above), the Company issued to the SPV shares of common stock and
shares of its Series C Preferred Stock. In exchange for that equity, the Company’s debts to the members of the SPV were reduced
by a total of $
During
the year ended December 31, 2022, the Company issued shares of common stock to directors and shares of its common stock
to each of the Subscribers of the
On
April 5, 2022, the Company sold shares of common stock to its Chief Executive Officer for proceeds of $
On February 4, 2022, shares were issued at $ per share to the Company’s former Chief Executive Officer pursuant to his separation agreement for stock-based compensation of $ million.
| 19 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
Issuance of Series B Preferred Stock
On
October 19, 2021, Company entered into a securities purchase agreement (“Purchase Agreement”) with an accredited investor
(“Subscriber”) for its purchase of million shares (“Preferred Shares”) of Series B Convertible Preferred
Stock (“Series B Preferred Stock”) at a purchase price of $ per Preferred Share, which Preferred Shares are convertible
into shares of the Company’s common stock pursuant to the terms and conditions set forth in a Certificate of Designation Establishing
Series B Preferred Stock of the Company with an initial conversion price of $
The
Series B Preferred Stock accrues dividends at a rate of
Issuance of Series C Preferred Stock
On
September 29, 2023, the Company entered into the DSA, pursuant to which the Company issued to the SVP shares of its Series C
Preferred Stock. Each share of Series C Preferred Stock has a stated value of $ and is convertible into shares of the Company’s
common stock pursuant to the terms and conditions set forth in a Certificate of Designation Establishing Series C Preferred Stock with
an initial conversion price of $
Stock-Based Compensation
On September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). Pursuant to the terms of the plan, on January 1, 2022 the number of shares available for grant under the 2016 Plan reset to shares, equal to % of the number of outstanding shares of the Company’s capital stock, calculated on an as-converted basis, on March 31 of the preceding calendar year, and then added to the prior year plan amount. As of September 30, 2023, there were options and restricted stock units (“RSUs”) outstanding under the 2016 Plan, with .
| # of Options | Weighted- Average Exercise Price | |||||||
| Outstanding as of December 31, 2022 | $ | |||||||
| Options canceled | ( | ) | ||||||
| Outstanding as of September 30, 2023 | $ | |||||||
| Exercisable as of September 30, 2023 | $ | |||||||
The aggregate intrinsic value of options outstanding as of September 30, 2023 was $. As of September 30, 2023, all options vested.
| 20 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
The Company uses the Black-Scholes valuation model to measure the grant-date fair value of stock options. The grant-date fair value of stock options issued to employees is recognized on a straight-line basis over the requisite service period. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments as the underlying stock-based awards vest.
To determine the fair value of stock options using the Black-Scholes valuation model, the calculation takes into consideration the effect of the following:
| ● | Exercise price of the option | |
| ● | Fair value of the Company’s common stock on the date of grant | |
| ● | Expected term of the option | |
| ● | Expected volatility over the expected term of the option | |
| ● | Risk-free interest rate for the expected term of the option |
The calculation includes several assumptions that require management’s judgment. The expected term of the options is calculated using the simplified method described in GAAP. The simplified method defines the expected term as the average of the contractual term and the vesting period. Estimated volatility is derived from volatility calculated using historical closing prices of common shares of similar entities whose share prices are publicly available for the expected term of the options. The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the options.
The Company did not issue any additional options during the nine months ended September 30, 2023.
For
the nine months ended September 30, 2023 and 2022, net compensation expense related to stock options was $
Warrants
On
March 21, 2022, the Company entered into a promissory note with TQLA LLC to accept a one year loan of $
From
April 19, 2021 through May 12, 2021, the Company issued in a private placement Existing Warrants to purchase up to
On
January 15, 2020, the Company and its subsidiaries entered into a loan agreement (the “Loan Agreement”) between the Company
and Live Oak Banking Company (“Live Oak”), a North Carolina banking corporation (the “Lender”) to refinance existing
debt of the Company and to provide funding for general working capital purposes In connection with the Loan Agreement, the Company issued
to the Lender a warrant to purchase up to
| 21 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2023
(Unaudited)
A summary of all warrant activity as of and for the nine months ended September 30, 2023 is presented below:
| Warrants | Weighted- Average Remaining Life (Years) | Weighted- Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of December 31, 2022 | $ | $ | ||||||||||||||
| Outstanding as of September 30, 2023 | $ | $ | ||||||||||||||
16. Related Party Transactions
The
following is a description of transactions since January 1, 2022 as to which the amount involved exceeds the lesser of $
TQLA, LLC
During
2022, the Company entered into a Secured Line of Credit Promissory Note (the “TQLA Note”) with TQLA LLC and amended it twice
for total borrowing of $
Aegis Security Insurance Company
On
October 7, 2022, the Company entered into a Note Purchase Agreement with Aegis. Pursuant to the Note Purchase Agreement, Aegis purchased
from the Company a secured promissory note in the principal amount of $
LD Investments LLC
On
September 29 2023, the Company entered into a Secured Promissory Note with LDI in the principal amount of $
On
September 29, 2023, the Company entered into the DSA with LDI and other creditors. See: Note 15, Stockholders Equity – Debt
Satisfaction Agreement. The entire principal and interest on the LDI Note million were exchanged for equity issued to the SPV,
in which LDI holds a
17. Subsequent Events
Subsequent
to September 30, 2023, the Company sold shares of common stock for net proceeds of $
| 22 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This section of the Quarterly Report includes “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events about the company or our outlook and involve uncertainties that could significantly impact results. You can identify forward-looking statements by the fact they do not relate to historical or current facts and by the use of words indicating anticipation or speculation such as “believe,” “expect,” “estimate,” “anticipate,” “will be,” “should,” “plan,” “project,” “intend,” “could” and similar words or expressions.
You should not place undue certainty on these forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that could cause our expectations to be unfulfilled include those discussed in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2022 entitled “Risk Factors” as well as factors we have not yet anticipated.
Overview
Eastside Distilling, Inc. (the “Company,” “Eastside Distilling,” “we,” “us,” or “our,” below) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, we changed our corporate name to Eastside Distilling, Inc. to reflect our acquisition of Eastside Distilling, LLC. We operate in three segments. Our Craft Canning + Printing (“Craft C+P”) segment provides digital can printing and canning services to the craft beverage industry in Washington and Oregon. In addition to mobile co-packing services we offer co-packing services from a single fixed site in Portland, Oregon. Our Spirits segment manufactures, blends, bottles, markets and sells a wide variety of alcoholic beverages under recognized brands in 30 U.S. states. Our corporate segment consists of key accounting personnel and corporate expenses such as public company and board costs, as well as interest on debt. We employ 51 people in the United States.
Mission-What We Do
Our mission is to source, make and deliver the best in class, end-to-end craft spirits brands and product portfolio. In addition, we offer advanced digital can printing decoration with custom graphics and co-packing services with distinct capability and craftsmanship.
Strategy
Craft C+P primarily services the craft beer, cider and kombucha beverage segments. Craft C+P offers digital can printing to customers and co-packing services, as well as operates 13 mobile lines in Seattle and Spokane, Washington; and Portland, Oregon. Our spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum and tequila. We sell our products on a wholesale basis to distributors through open states, and brokers in control states.
Our strategy is to utilize our public company stature to our advantage and position to expand our two distinct businesses – Craft C+P and Spirits. We look to grow and vertically integrate our Craft C+P business to expand our product offerings and improve our competitive position. Our spirits portfolio is to be positioned as a leading regional craft spirits provider that develops brands, expands geographic presence growing revenue and cash flow. These two segments are detailed below.
| 23 |
Segments
Craft Canning + Printing
Digital Can Printing
In April 2022, we initiated operations of an innovative digital can printing facility that allows us to customer-design four sizes of popular aluminum beverage cans. This flexibility allows for custom graphics of limited releases, vintages, partnerships, and special events. This new acquisition of technology gives Craft C+P the ability to offer unparalleled customization and flexibility to craft beverage producers seeking direct printing for canning projects of all sizes, while having an annual production capacity of over 20 million cans.
 |
 |
 |
Co-packing Facility
We offer co-packing services for non-alcoholic canned beverages including CBD soda waters in Portland, Oregon through our recent asset acquisition, allowing us to offer end-to-end production capabilities. We are currently the exclusive provider of can printing and co-packing services for a local CBD and wellness water maker.
Mobile Canning
Our mobile canning business is located in Portland, Oregon. We use extensive proprietary and data-driven quality control measures and a robust clean-in-place procedure in order to provide the best packaging service for our customers. We take great pride in helping local beverage producers expand their distribution reach by using our service to offer industry-top quality and branding. Our greatest asset is the unmatched expertise of our talented group of printing and packaging professionals who show up every day to go above and beyond to get the job done.
Our Craft mobile team offers a variety of services and products, including:
| ● | High Mobile Canning Capacity – We operate 13 Wild Goose MC-250 machines, with the capacity to can over 150,000 barrels per year. In addition to the canning lines, we use custom in-house designed fully automated depalletizers and twist rinses. | |
| ● | Dedicated Team – All of our employees are carefully and rigorously trained. A fully insured workforce is ready to take on any and all of the customer’s packaging needs. We believe in continuous improvement and we understand the value of our clients’ products and dedicate ourselves to making every run a successful run. | |
| ● | Quality Control – Hach Orbispheres measure our dissolved oxygen (“DO”) during packaging to ensure the lowest Total Packaged Oxygen for the customer’s can. We use luminometers and ATP swabs to ensure sanitation of our equipment. We can provide Zahm & Nagel volume meters to measure carbon dioxide (“CO2”) volumes in carbonated products before packaging. As masters of the “double seam” we frequently take on-site measurements with micrometers. We also offer CMC Kuhnke technology to generate even more accurate measurements in the form of visual seam reports. |
| 24 |
| ● | Velcorin and Nitrogen Dosing – We have both velcorin and nitrogen dosing capabilities that supports microbial control and allows packaging of still products in addition to carbonated and nitrogenated beverages. | |
| ● | Pre-printing and Outfeed Labeling – Bringing on advanced digital can printing technology from Hinterkopf allows us to offer customers both world-class aesthetics and full sustainability in an end-to-end branding and packaging solution, accessible from our smallest to our largest customers. We also provide outfeed labeling and the ability to package customer-provided branded cans of all varieties. | |
| ● | Location Flexibility – We allow our customers to choose the location of canning. We bring our mobile equipment to their facility, or our customers can bring their product to us for co-packing. |
Spirits
Since 2014 we have developed or acquired many award-winning spirits while evolving to meet the growing demand for quality products and services associated within the burgeoning craft and premium beverage trade. Our portfolio includes originals like the Quercus garryana barrel-finished Burnside Whiskey family, Portland Potato Vodka, Hue-Hue Coffee Rum, and Azuñia Tequilas.
| ● | Burnside Whiskey Family – Our Burnside Whiskey Family celebrates the unique attributes of the native Oregon Oak tree (Quercus garryana). The unique complexity of each distinct whiskey comes from blending Oregon Oak barrels of differing sizes, char levels, and ages. | |
| ● | Portland Potato Vodka – Our award-winning premium craft vodka is distilled four times to ensure a smooth finish. While most vodka is made from grain, we source award winning premium potato ethanol and blend it with pristine water sourced from Oregon. |
| ● | Hue-Hue (pronounced “way-way”) Coffee Rum – Premium silver rum is blended with concentrated cold-brewed coffee and a small amount of Demerara sugar. We source fair-trade, single-origin Arabica coffee beans from the Finca El Paternal Estate in Huehuetenango, Guatemala that are lightly roasted for us by Portland Coffee Roasters. | |
| ● | Azuñia Tequilas – Smooth, clean, additive-free tequilas crafted by Rancho Miravalle, a second generation, family-owned-and-operated estate, bursting with authentic flavor from the local terroir of Tequila Valley, Mexico. 100% pure Weber Blue Agave is harvested by hand, roasted in traditional clay hornos, and finished with a natural, open-air fermentation process. It is bottled on-site in small batches using a consistent process to deliver consistent field-to-bottle quality and exclusively exported by Agaveros Unidos de Amatitán. | |
| ● | Eastside Brands – Craft inspired high-quality limited-edition products, which focus on innovation, craftsmanship and curiosity, and creativity. |
Recent Developments
During 2023, we grew sales at Craft C+P and printed over 11 million cans. Digital can printing represents the majority of our revenue as our customer base and excitement grows. Mobile canning sales continue to decrease as we focus on our digital can printing opportunity. We have undertaken a restructuring of our spirits business decreasing overhead costs and unproductive sales activities.
We have supplemented cash flow with bulk spirit sales, as we have in other quarters. The decline in sales was partially offset by direct sales of 272 barrels for $0.7 million during 2023 and nearly 1,500 barrels for $4.4 million during 2022.
At the beginning of 2023, we started a restructuring plan to lower costs and prepare the brands for reinvestment. While a substantial amount of our raw materials, such as our whiskey, is owned and not susceptible to price inflation, the inflated prices of shipping and other materials, such as glass, are expected to continue through 2023.
| 25 |
Results of Operations
Overview
Three and Nine Months Ended September 30, 2023 Compared to the Three and Nine Months Ended September 30, 2022
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | Variance | 2023 | 2022 | Variance | ||||||||||||||||||
| Sales | $ | 3,081 | $ | 3,064 | $ | 17 | $ | 8,717 | $ | 11,967 | $ | (3,250 | ) | |||||||||||
| Less customer programs and excise taxes | 98 | 87 | 11 | 220 | 393 | (173 | ) | |||||||||||||||||
| Net sales | 2,983 | 2,977 | 6 | 8,497 | 11,574 | (3,077 | ) | |||||||||||||||||
| Cost of sales | 2,471 | 2,787 | (316 | ) | 7,318 | 8,985 | (1,667 | ) | ||||||||||||||||
| Gross profit | 512 | 190 | 322 | 1,179 | 2,589 | (1,410 | ) | |||||||||||||||||
| Sales and marketing expenses | 381 | 702 | (321 | ) | 1,261 | 2,078 | (817 | ) | ||||||||||||||||
| General and administrative expenses | 832 | 1,438 | (606 | ) | 3,390 | 5,116 | (1,726 | ) | ||||||||||||||||
| (Gain) loss on disposal of property and equipment | (39 | ) | - | (39 | ) | (168 | ) | 101 | (269 | ) | ||||||||||||||
| Total operating expenses | 1,174 | 2,140 | (966 | ) | 4,483 | 7,295 | (2,812 | ) | ||||||||||||||||
| Loss from operations | (662 | ) | (1,950 | ) | 1,288 | (3,304 | ) | (4,706 | ) | 1,402 | ||||||||||||||
| Interest expense | (207 | ) | (808 | ) | 601 | (862 | ) | (1,976 | ) | 1,114 | ||||||||||||||
| Loss on debt to equity conversion | (1,321 | ) | - | (1,321 | ) | (1,321 | ) | - | (1,321 | ) | ||||||||||||||
| Other income | 34 | 25 | 9 | 90 | 125 | (35 | ) | |||||||||||||||||
| Net loss | (2,156 | ) | (2,733 | ) | 577 | (5,397 | ) | (6,557 | ) | 1,160 | ||||||||||||||
| Preferred stock dividends | (38 | ) | (38 | ) | - | (113 | ) | (113 | ) | - | ||||||||||||||
| Net loss attributable to common shareholders | $ | (2,194 | ) | $ | (2,771 | ) | $ | 577 | $ | (5,510 | ) | $ | (6,670 | ) | $ | 1,160 | ) | |||||||
| Gross margin | 17 | % | 6 | % | 11 | % | 14 | % | 22 | % | -8 | % | ||||||||||||
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Segment information was as follows for the three and nine months ended September 30, 2023 and 2022:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | Variance | 2023 | 2022 | Variance | ||||||||||||||||||
| Craft C+P | ||||||||||||||||||||||||
| Sales | $ | 2,232 | $ | 1,876 | $ | 356 | $ | 5,637 | $ | 4,381 | $ | 1,256 | ||||||||||||
| Net sales | 2,177 | 1,876 | 301 | 5,558 | 4,281 | 1,277 | ||||||||||||||||||
| Cost of sales | 1,833 | 2,000 | (167 | ) | 5,378 | 4,809 | 569 | |||||||||||||||||
| Gross profit | 344 | (124 | ) | 468 | 180 | (528 | ) | 708 | ||||||||||||||||
| Total operating expenses | 699 | 866 | (167 | ) | 2,013 | 2,813 | (800 | ) | ||||||||||||||||
| Net loss | $ | (350 | ) | $ | (1,001 | ) | $ | 651 | $ | (1,812 | ) | $ | (3,273 | ) | $ | 1,461 | ||||||||
| Gross margin | 16 | % | -7 | % | 23 | % | 3 | % | -12 | % | 15 | % | ||||||||||||
| Spirits | ||||||||||||||||||||||||
| Sales | $ | 849 | $ | 1,188 | $ | (339 | ) | $ | 3,080 | $ | 7,586 | $ | (4,506 | ) | ||||||||||
| Net sales | 806 | 1,101 | (295 | ) | 2,939 | 7,293 | (4,354 | ) | ||||||||||||||||
| Cost of sales | 638 | 787 | (149 | ) | 1,940 | 4,176 | (2,236 | ) | ||||||||||||||||
| Gross profit | 168 | 314 | (146 | ) | 999 | 3,117 | (2,118 | ) | ||||||||||||||||
| Total operating expenses | 303 | 616 | (313 | ) | 1,183 | 1,963 | (780 | ) | ||||||||||||||||
| Net income (loss) | $ | (110 | ) | $ | (278 | ) | $ | 168 | $ | (127 | ) | $ | 1,179 | $ | (1,306 | ) | ||||||||
| Gross margin | 21 | % | 29 | % | -8 | % | 34 | % | 43 | % | -9 | % | ||||||||||||
| Corporate | ||||||||||||||||||||||||
| Total operating expenses | $ | 172 | $ | 658 | $ | (486 | ) | $ | 1,287 | $ | 2,519 | $ | (1,232 | ) | ||||||||||
| Net loss | $ | (1,696 | ) | $ | (1,454 | ) | $ | (242 | ) | $ | (3,458 | ) | $ | (4,463 | ) | $ | 1,005 | |||||||
Sales
Sales were $8.7 million and $12.0 million for the nine months ended September 30, 2023 and 2022, respectively, and $3.1 million for both the three months ended September 30, 2023 and 2022.
Craft C+P
Sales increased for both the three and nine months ended September 30, 2023 due to growth in digital can printing sales, offset by lower mobile canning sales. We have reduced mobile canning operations to focus on digital can printing, improving sales and operating profit.
Spirits
Sales decreased for both the three and nine months ended September 30, 2023 due to significant bulk spirits sales during 2022. For the nine months ended September 30, 2023, we sold 272 barrels for gross proceeds of $0.7 million. For the nine months ended September 30, 2022, we sold nearly 1,500 barrels for gross proceeds of $4.4 million.
Sales decreased $0.1 million and $0.7 million for the three and nine months ended September 30, 2023, respectively, excluding bulk spirits sales, due to lower marketing spend and increased competition. During the nine months ended September 30, 2023, we undertook restructuring actions to reduce volumes in unprofitable market segments and focusing investment to achieve profitability.
Customer programs and excise taxes
Customer programs and excise taxes were $0.2 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively, and $0.1 million for both the three months ended September 30, 2023 and 2022. Spirits discounts were lower for both the three and nine months ended September 30, 2023 due to lower volumes. During the second quarter of 2022, as part of Craft’s asset acquisition, we offered a discount of $0.1 million to the beverage maker for our printing and canning services.
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Cost of Sales
Cost of sales consists of all direct costs related to both spirits and canning for service, labor, overhead, packaging, and in-bound freight charges. Cost of sales were $7.3 million and $9.0 million for the nine months ended September 30, 2023 and 2022, respectively, and $2.5 million and $2.8 million for the three months ended September 30, 2023 and 2022, respectively.
Craft C+P
Cost of sales increased for the nine months ended September 30, 2023 due to growth in printing sales volumes and related inventory costs and scrap related to the printer, partially offset by decreased labor costs. Cost of sales decreased for the three months ended September 30, 2023 due to labor costs and an adjustment to depreciation based on the digital can printer’s hours of production, offset by increased scrap related to the printer.
Spirits
Cost of sales decreased for the three and nine months ended September 30, 2023 due to lower bulk spirits and distributor sales, in addition to lower tequila volumes.
Gross Profit
Gross profit is calculated by subtracting the cost of products sold and services rendered from net sales. Gross profit was $1.2 million and $2.6 million for the nine months ended September 30, 2023 and 2022, respectively, and $0.5 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively. Bulk sales gross profit was $0.5 million and $2.4 million for the nine months ended September 30, 2023 and 2022, respectively, and $0 and $0.1 million for the three months ended September 30, 2023 and 2022, respectively.
Gross margin is gross profit stated as a percentage of net sales. Our gross margin was 14% and 28% for the nine months ended September 30, 2023 and 2022, respectively, and 17% and 6% for the three months ended September 30, 2023 and 2022, respectively.
Craft C+P
Craft C+P’s gross margin significantly increased for both the three and nine months ended September 30, 2023 primarily due to continued rapid growth in can printing and related sales.
Spirits
Gross margin decreased for the nine months ended September 30, 2023 primarily due to higher bulk spirits gross margins achieved in the prior year, as well as the negative portfolio mix with higher sales of low margin Portland Potato Vodka. Gross margin decreased for the three months ended September 30, 2023 primarily due to bulk spirits and distributor profits.
Sales and Marketing Expenses
Sales and marketing expenses were $1.3 million and $2.1 million for the nine months ended September 30, 2023 and 2022, respectively, and $0.4 million and $0.7 million for the three months ended September 30, 2023 and 2022, respectively, due to lower sponsorship costs and reduced headcount as part of spirits restructuring.
General and Administrative Expenses
General and administrative expenses were $3.4 million and $5.1 million for the nine months ended September 30, 2023 and 2022, respectively, and $0.8 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively, primarily due to decreased professional fees and compensation from reduced headcount.
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Interest Expense
Interest expense was $0.9 million and $2.0 million for the nine months ended September 30, 2023 and 2022, respectively, and $0.2 million and $0.8 million for the three months ended September 30, 2023 and 2022, respectively. The decrease was primarily due to the amortization of debt issuance costs on agreements that matured during 2022.
Loss on Debt to Equity Conversion
On September 29, 2023, we issued to the SPV 296,722 shares of common stock and 200,000 shares of its Series C Preferred Stock. In exchange for that equity, our debts to the members of the SPV were reduced by a total of $6.5 million and we recognized a loss on the debt to equity conversion was $1.3 million for both the three and nine months ended September 30, 2023.
Net Income (Loss)
Net loss was $5.4 million and $6.6 million for the nine months ended September 30, 2023 and 2022, respectively, and $2.2 million and $2.7 million for the three months ended September 30, 2023 and 2022, respectively.
Preferred Stock Dividends
Preferred stock dividends were $37,500 and $0.1 million for the three and nine months ended September 30, 2023 and 2022, respectively, and related to the Series B preferred stock dividend of 6% per annum.
Liquidity and Capital Resources
Our primary capital requirements are for cash used in operating activities and the repayment of debt. Funds for our cash and liquidity needs have historically not been generated from operations but rather from short-term credit in the form of extended payment terms from suppliers as well as proceeds from loans and the sale of convertible debt and equity. We have been dependent on raising capital from debt and equity financings to meet our operating needs.
We had an accumulated deficit of $80.5 million as of September 30, 2023, having incurred a net loss of $5.4 million during the nine months ended September 30, 2023.
On September 29, 2023 we entered into a Debt Satisfaction Agreement with our four principal creditors (the “DSA”). Pursuant to the DSA, $6.5 million of secured debt classified as current liabilities was cancelled in exchange for the issuance of 296,722 shares of common stock and 200,000 shares of Series C Preferred Stock. As a result, as of September 30, 2023, we had $0.4 million of cash on hand with working capital of $1.7 million, an increase of $8.1 million from negative working capital of $(6.4) million as of December 31, 2022.
Our ability to meet our ongoing operating cash needs over the next 12 months depends on receipt of additional financing, which in turn depends on our growing revenues and gross margins, and generating positive operating cash flow, primarily through increased sales, profitable operations, and controlling expenses. None of this is assured, as we currently anticipate recording a net loss for 2023. If we are unable to obtain additional financing, or additional financing is not available on acceptable terms, we may seek to sell assets, reduce operating expenses, reduce or eliminate marketing initiatives and take other measures that could impair our ability to be successful.
Our cash flow results for the nine months ended September 30, 2023 and 2022 were as follows:
| (Dollars in thousands) | 2023 | 2022 | ||||||
| Net cash flows provided by (used in): | ||||||||
| Operating activities | $ | (1.7 | ) | $ | 0.2 | |||
| Investing activities | $ | - | $ | (2.5 | ) | |||
| Financing activities | $ | 1.4 | $ | (0.5 | ) | |||
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Operating Activities
Total cash used in operating activities was $1.7 million during the nine months ended September 30, 2023 compared to cash provided of $0.2 million during the nine months ended September 30, 2022. The increase in cash used was primarily attributable to our continued net losses, payment of accrued interest and challenges investing in working capital.
Investing Activities
Total cash provided by investing activities was $23,546 during the nine months ended September 30, 2023 representing net proceeds from purchases and sales of fixed assets. Total cash used in investing activities was $2.5 million during the nine months ended September 30, 2022 representing our investment in digital can printing equipment.
Financing Activities
Total cash provided by financing activities was $1.4 million during the nine months ended September 30, 2023 primarily consisted of proceeds from the issuance of stock. Total cash used in financing activities was $0.5 million during the nine months ended September 30, 2022 primarily consisted of $2.9 million of principal payments of our secured credit facilities and $1.0 million of payments on principal of notes payable, offset by the net proceeds from a note payable with a related party of $3.2 million and the issuance of common stock of $0.2 million.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.
In connection with the preparation of our financial statements for the nine months ended September 30, 2023, there was one accounting estimate we made that was subject to a high degree of uncertainty and was critical to our results, as follows:
Intangible Assets
On September 12, 2019, we purchased the Azuñia brand, the direct sales team, existing product inventory, supply chain relationships and contractual agreements from Intersect Beverage, LLC, an importer and distributor of tequila and related products. The Azuñia brand has been determined to have an indefinite life and will not be amortized. We do, however, on an annual basis, test the indefinite life assets for impairment. If the carrying value of the indefinite life assets are found to be impaired, then we will record an impairment loss and reduce the carrying value of the asset’s estimate the useful life of the brand and amortize the asset over the remainder of its useful life.
We estimate the brand’s fair value using market information to estimate future cash flows and will impair it when its carrying amount exceeds its estimated fair value, in which case we will write it down to its estimated fair value. We consider market values for similar assets when available. Considerable management judgment is necessary to estimate fair value, including making assumptions about future cash flows, net sales and discount rates.
We have the option, before quantifying the fair value, to evaluate qualitative factors to assess whether it is more likely than not that our brand is impaired. If we determine that is not the case, then we are not required to quantify the fair value. That assessment also takes considerable management judgment.
As of December 31, 2022, as a result of the review described above, we found the Azuñia brand to be impaired and reduced its carrying cost by $7.5 million.
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
ITEM 4 – CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) that are designed to provide reasonable assurances that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that these disclosure controls and procedures were effective as of September 30, 2023.
There were no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
On March 1, 2023, Sandstrom Partners, Inc. filed a complaint in the Circuit Court of the State of Oregon for the County of Multnomah alleging the Company failed to pay for its services pursuant to an agreement entered into on October 16, 2019. The complaint seeks damages of $285,000, plus a judicial declaration, due to the Company’s failure to pay for the services. The Company believes that it paid for services rendered and, if any balance is outstanding, it is minimal. The Company intends to defend the case vigorously.
On December 15, 2020, Grover Wickersham filed a complaint in the United States District Court for the District Court of Oregon against the Company. Mr. Wickersham, the former CEO and Chairman of the Board of the Company, has asserted causes of action for fraud in the inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, defamation, interference with economic advantage, elder financial abuse, and dissemination of false and misleading proxy materials The Company disputes the allegations and intends to defend the case vigorously.
We are not currently subject to any other material legal proceedings; however, we could be subject to legal proceedings and claims from time to time in the ordinary course of our business, or legal proceedings we considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and divert management resources.
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ITEM 1A – RISK FACTORS
There have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 31, 2022, except for the following additions:
The B.A.D. Company, LLC owns shares of Series C Preferred Stock that can be converted over time into 1,838,000 shares of common stock, which could depress the market price of our common stock.
On September 29, 2023, the Company issued 296,722 shares of common stock and 200,000 shares of Series C Preferred Stock to The B.A.D. Company, LLC (the “SPV”) in exchange for cancellation by the four members of the SPV of $6.5 million in debt owned to them by the Company. The 200,000 shares of Series C Preferred Stock can be converted into a total of 1,838,000 shares of the Company’s common stock; provided, however, that Series C Preferred Stock can only be converted if, upon completion of the conversion, the common stock owned by the SPV and its affiliates would be less than 9.9% of the total outstanding common stock. Therefore, since the SPV and its affiliates presently own 19.9% of the outstanding common stock, the SPV cannot convert any of the Series C shares. If in the future, however, the SPV sells common stock and reduces its ownership of the outstanding common stock below 9.9%, it will be able to convert its Series C Preferred shares from time to time and offer the common shares for sale. The possibility of this large number of shares coming into the market over time could have a depressing effect on the market price of our common stock.
If the Company continues to record net losses, its common stock may be removed from Nasdaq.
On April 5, 2023, the Staff of the Listing Qualifications Department of the Nasdaq Stock Market notified the Company that it had fallen out of compliance with the requirements for continued listing of the Company’s common stock on Nasdaq. Specifically, Nasdaq Listing Rule 5550(b)(1) requires that the stockholders’ equity of a listed company must exceed $2.5 million. As of December 31, 2022, the Company had a stockholders’ equity deficit of $(1.5) million. Subsequently, as of June 30, 2023, the Company’s stockholders’ equity deficit had fallen to $(4.0) million. On June 8, 2023, the Staff advised the Company that it must increase its stockholders’ equity to $2.5 million by September 30, 2023 or the Company’s common stock would be removed from Nasdaq.
This Quarterly Report shows that, as of September 30, 2023, the exchange of debt for equity mentioned in the preceding Risk Factor, along with other actions taken by the Company’s management, has increased the Company’s stockholders’ equity to $2.7 million. Nevertheless, if the Company continues to be unprofitable, its stockholders’ equity may again fall below the requirement for continued listing, which could result in the Company’s common stock being removed from NASDAQ to the facilities of OTC Markets. Many institutional investors will not provide financing to a company that does not have a listing on Nasdaq or an exchange. Therefore, the delisting of the Company’s common stock from Nasdaq would make it more difficult for the Company to secure equity-based financing when needed for business.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the third quarter of 2023 that have not been previously reported.
The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the third quarter of fiscal year 2023.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None
ITEM 6 – EXHIBITS
| Exhibit No. | Description | |
| 31.1 * | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a). | |
| 32.1 * | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Schema Linkbase Document | |
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Labels Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith. |
| 32 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| EASTSIDE DISTILLING, INC. | ||
| Date: November 14, 2023 | By: | /s/ Geoffrey Gwin |
| Geoffrey Gwin | ||
| Chief Executive Officer | ||
| Date: November 14, 2023 | By: | /s/ Geoffrey Gwin |
| Geoffrey Gwin | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 33 |