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) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 day.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, 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, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 if the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Smaller reporting company | |
Emerging growth company |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No
As of May 13, 2024, shares of our common stock were outstanding.
Documents Incorporated by Reference: None.
EASTSIDE DISTILLING, INC.
FORM 10-Q
March 31, 2024
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)
March 31, 2024 | December 31, 2023 | |||||||
(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, related party | ||||||||
Current portion of secured credit facilities, net of debt issuance costs | ||||||||
Current portion of notes payable | ||||||||
Current portion of notes payable, related party | ||||||||
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 | ||||||||
Notes payable, net of current portion | ||||||||
Total liabilities | ||||||||
Commitments and contingencies (Note 13) | ||||||||
Stockholders’ equity (deficit): | ||||||||
Common stock, $ | par value; shares authorized as of March 31, 2024 and December 31, 2023; and shares and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively||||||||
Preferred stock, $ | par value; shares authorized; Series B shares issued and outstanding as of both March 31, 2024 and December 31, 2023||||||||
Preferred stock, $ | par value; shares authorized; Series C shares issued and outstanding as of both March 31, 2024 and December 31, 2023||||||||
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 Months Ended March 31, 2024 and 2023
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
2024 | 2023 | |||||||
Sales | $ | $ | ||||||
Less customer programs and excise taxes | ||||||||
Net sales | ||||||||
Cost of sales | ||||||||
Gross profit | ||||||||
Operating expenses: | ||||||||
Sales and marketing expenses | ||||||||
General and administrative expenses | ||||||||
(Gain) loss on disposal of property and equipment | ( | ) | ||||||
Total operating expenses | ||||||||
Loss from operations | ( | ) | ( | ) | ||||
Other income (expense), net | ||||||||
Interest expense | ( | ) | ( | ) | ||||
Other income (expense) | ( | ) | ||||||
Total other expense, net | ( | ) | ( | ) | ||||
Loss before income taxes | ( | ) | ( | ) | ||||
Provision for income taxes | ||||||||
Net loss | ( | ) | ( | ) | ||||
Preferred stock dividends | ( | ) | ( | ) | ||||
Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | ||
Basic and diluted net loss per common share | $ | ) | $ | ) | ||||
Basic and diluted weighted average common shares outstanding |
The accompanying notes are an integral part of these consolidated financial statements.
4 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Three Months Ended March 31, 2024 and 2023
(Dollars and shares in thousands)
(Unaudited)
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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) |
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, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
Issuance of common stock for services by third parties | ||||||||||||||||||||||||||||||||||||
Preferred stock dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
Balance, March 31, 2024 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
Eastside Distilling, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2024 and 2023
(Dollars in thousands)
(Unaudited)
2024 | 2023 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation and amortization | ||||||||
Bad debt expense | ( | ) | ( | ) | ||||
(Gain) loss on disposal of assets | ( | ) | ||||||
Write off of obsolete fixed assets | ||||||||
Inventory reserve | ( | ) | ( | ) | ||||
Stock dividend payable | ( | ) | ( | ) | ||||
Amortization of debt issuance costs | ||||||||
Interest accrued to secured credit facilities | ||||||||
Payment of accrued interest on secured credit facilities | ( | ) | ||||||
Interest accrued to notes payable | ||||||||
Interest accrued to secured credit facilities, related party | ||||||||
Payment of accrued interest on secured credit facilities, related party | ( | ) | ( | ) | ||||
Issuance of common stock in exchange for services for third parties | ||||||||
Issuance of common stock in exchange for services of related parties | ||||||||
Changes in operating assets and liabilities: | ||||||||
Trade receivables, net | ( | ) | ||||||
Inventories | ||||||||
Prepaid expenses and other assets | ( | ) | ||||||
Right-of-use assets | ||||||||
Accounts payable | ||||||||
Accrued liabilities | ( | ) | ||||||
Other liabilities, related party | ||||||||
Deferred revenue | ( | ) | ||||||
Net lease liabilities | ( | ) | ( | ) | ||||
Net cash used in operating activities | ( | ) | ( | ) | ||||
Cash Flows From Investing Activities: | ||||||||
Proceeds from sale of fixed assets | ||||||||
Purchases of property and equipment | ( | ) | ||||||
Net cash provided by (used in) investing activities | ( | ) | ||||||
Cash Flows From Financing Activities: | ||||||||
Net cash provided by 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 | ||||||||
Future proceeds related to installment sales of equipment | $ | $ | ||||||
Exchange of assets for services | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
6 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(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 46 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 financing. The Company has been dependent on raising capital from debt and equity financing to meet the Company’s operating needs.
The
Company had an accumulated deficit of $
The Company reduced debt in 2023 through a debt for preferred equity swap. However, 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, 2023 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, 2023 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.
7 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(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 March 31, 2024, its operating results for the three months ended March 31, 2024 and 2023 and its cash flows for the three months ended March 31, 2024 and 2023. 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, 2023. 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 acquired fixed co-packing assets). 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 spirits 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.
In the Craft C+P segment, sales are recognized when printed cans are delivered or when mobile filling services are performed.
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 recorded 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 $
8 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(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. Raw materials 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 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 March
31, 2024, one customer 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 March 31, 2024 and December 31, 2023, 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. |
9 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
Level 2: | Fair value of the asset or liability is determined using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. | |
Level 3: | Fair value of the asset or liability is determined using unobservable inputs that are significant to the fair value measurement and reflect management’s own assumptions regarding the applicable asset or liability. |
None of the Company’s assets or liabilities were measured at fair value as of March 31, 2024 or December 31, 2023. However, GAAP requires the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments consist principally of trade receivables, accounts payable, accrued liabilities, notes payable, and the secured credit facilities. The estimated fair value of trade receivables, accounts payable, and accrued liabilities approximate their carrying value due to the short period of time to their maturities. As of March 31, 2024 and December 31, 2023, 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.
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.
10 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
Comprehensive Income
The Company did not have any other comprehensive income items in either the three months ended March 31, 2024 or 2023.
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 as of March 31, 2024 and another for its co-packing customers (the “co-packing program”) that terminated in
August 2023.
Recently Issued Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 seeks to improve disclosures about a public entity’s reportable segments and add disclosures around a reportable segment’s expenses. The updated guidance is effective for the Company for annual periods beginning January 1, 2024, and interim periods within fiscal years beginning January 1, 2025. The Company does not expect the adoption of this ASU to have a material impact on its financial statements and disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 seeks to improve transparency in income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disclosures. The updated guidance is effective for the Company on January 1, 2025. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its financial statements and disclosures.
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 multiple mobile lines in 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 to brokers in control states. The Company’s principal area of operation is in the U.S. It has one Craft C+P customer that represents 15% of its revenue. Corporate consists of key executive and accounting personnel and corporate expenses such as public company and board costs, as well as interest on debt.
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.
11 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
Segment information was as follows for the three months ended March 31:
(Dollars in thousands) | 2024 | 2023 | ||||||
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 | ( | ) | ||||||
Spirits | ||||||||
Sales | $ | $ | ||||||
Net sales | ||||||||
Cost of sales | ||||||||
Gross profit | ||||||||
Total operating expenses | ||||||||
Net income (loss) | ( | ) | ||||||
Gross margin | % | % | ||||||
Depreciation and amortization | $ | $ | ||||||
Corporate | ||||||||
Total operating expenses | $ | $ | ||||||
Net loss | ( | ) | ( | ) | ||||
Interest expense | $ | $ | ||||||
Significant noncash items: | ||||||||
Stock compensation |
5. Inventories
Inventories consisted of the following:
(Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
Raw materials | $ | $ | ||||||
Finished goods | ||||||||
Total inventories | $ | $ |
12 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
(Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
Prepayment of inventory | $ | $ | ||||||
Future proceeds related to installment sales of equipment | ||||||||
Other | ||||||||
Total prepaid expenses and other current assets | $ | $ |
7. Property and Equipment
Property and equipment consisted of the following:
(Dollars in thousands) | March 31, 2024 | December 31, 2023 | Useful Life (in years) | |||||||||
Furniture and fixtures | $ | $ | ||||||||||
Digital can printer | ||||||||||||
Support of digital can printer | ||||||||||||
Leasehold improvements | ||||||||||||
Vehicles | ||||||||||||
Total cost | ||||||||||||
Less accumulated depreciation | ( | ) | ( | ) | ||||||||
Total property and equipment, net | $ | $ |
Purchases
of property and equipment for the three months ended March 31, 2024 and 2023 were $ and $
During
the three months ended March 31, 2024, the Company disposed of fixed assets for proceeds of $
8. Intangible Assets
Intangible assets consisted of the following:
(Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
Permits and licenses | $ | $ | ||||||
Azuñia brand | ||||||||
Customer lists | ||||||||
Total intangible assets | ||||||||
Less accumulated amortization | ( | ) | ( | ) | ||||
Intangible assets, net | $ | $ |
The
customer list is being amortized over a life. Amortization expense totaled $
The
permits and licenses and the 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. As of December
31, 2023, the Company determined that the Azuñia assets were impaired and recorded an impairment cost of $
13 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
9. Other Assets
Other assets consisted of the following:
(Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
Product branding | $ | $ | ||||||
Deposits | ||||||||
Future proceeds related to installment sales of equipment | ||||||||
Total other assets | ||||||||
Less accumulated amortization | ( | ) | ( | ) | ||||
Other assets, net | $ | $ |
As
of March 31, 2024, 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 March 31, 2024, the amount of right-of-use
assets and lease liabilities were $
Maturities of lease liabilities as of March 31, 2024 were as follows:
(Dollars in thousands) | Operating Leases | Weighted- Average Remaining Term in Years | ||||||
2024 | $ | |||||||
2025 | ||||||||
2026 | ||||||||
2027 | ||||||||
2028 | ||||||||
Thereafter | ||||||||
Total lease payments | ||||||||
Less imputed interest (based on | ( | ) | ||||||
Present value of lease liability | $ |
14 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
11. Notes Payable
Notes payable consisted of the following:
(Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
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 March 31,2024 were as follows:
(Dollars in thousands) | ||||
2024 | $ | |||
2025 | ||||
2026 | ||||
2027 | ||||
2028 | ||||
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 $
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
$
15 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
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
16 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(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 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 March 31, 2024 and 2023.
15. Stockholders’ Equity
Debt Satisfaction Agreement
Pursuant
to the DSA, on September 29, 2023, the Company issued to the SPV
● | 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 $ |
17 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(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 | |
● | Upon the liquidation, dissolution and winding up of the Company, or upon the effective date of a consolidation, merger or statutory share exchange in which the Company is not the surviving entity, the holder of each share of the Series C Preferred Stock shall be entitled to a distribution prior to and in preference of the holders of the common stock. | |
● | In the event | |
● | The |
Issuance of Common Stock
During the three months ended March 31, 2024, the Company issued shares of common stock to directors and employees for stock-based compensation of $ . The shares were valued for accounting purposes using the closing share price of the Company’s common stock on the date of grant of $ per share and issued at $ per share.
On
September 29, 2023, pursuant to the DSA (see discussion above), the Company issued to the SPV
During the year ended December 31, 2023, the Company issued shares of common stock to directors and employees for stock-based compensation of $ million. The shares were valued for accounting purposes using the closing share price of the Company’s common stock on the date of grant, within the range of $ to $ per share and issued within the range of $ to $ per share
During
the year ended December 31, 2023, the Company sold
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
18 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
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
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, 2023 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 March 31, 2024, 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, 2023 | $ | |||||||
Outstanding and Exercisable as of March 31, 2024 | $ |
The aggregate intrinsic value of options outstanding as of March 31, 2024 was $ . As of March 31, 2024, all options had vested.
The Company uses the Black-Scholes valuation model to measure the grant-date fair value of stock options. The grant-date fair value of stock options issued to employees is recognized on a straight-line basis over the requisite service period. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments as the underlying stock-based awards vest.
19 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
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 three months ended March 31, 2024.
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
20 |
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2024
(Unaudited)
A summary of all warrant activity as of and for the three months ended March 31, 2024 is presented below:
Warrants | Weighted- Average Remaining Life (Years) | Weighted- Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||
Outstanding as of December 31, 2023 | $ | $ | ||||||||||||||
Outstanding as of March 31, 2024 | $ | $ |
16. Related Party Transactions
The
following is a description of transactions since January 1, 2023 as to which the amount involved exceeds the lesser 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
During
February 2024, LDI advanced the Company $
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 were exchanged for equity issued to the SPV, in
which LDI holds a
17. Subsequent Events
Subsequent
to March 31, 2024, the Company was advanced $
21 |
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, 2023 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 two segments. Our Craft Canning + Printing (“Craft C+P”) segment provides digital can printing to customers in the craft beverage industry operating throughout the Pacific Northwest as well as other states. We also provide mobile canning services to the craft beverage industry in Oregon. In addition to these 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 23 U.S. states. Across both businesses we employ 46 people in the United States.
Mission and Strategy
Our mission is to offer great products and services in the craft beverage space.
This includes advanced digital can printing decoration with custom graphics and co-packing services with distinct capability and craftsmanship serving the craft beer, cider, and kombucha among other beverage segments. Craft C+P offers digital can printing to customers and co-packing services.
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 expand our two distinct businesses – Craft C+P and Spirits in our regional market where our brand equity and concentration of investment will have the greatest return. 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.
22 |
Segments
Craft Canning + Printing
Digital Can Printing
We operate an innovative digital can printing facility that allows us to digitally print high quality graphics on aluminum beverage cans. This technology offers greater flexibility than traditional decoration methods and initially was directed toward smaller craft beverage manufacturers seeking custom graphics of limited releases, vintages, partnerships, and special events. This investment in digital printing at Craft C+P allows us 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. One of Craft C+P’s many goals for 2024 is to significantly increase its production capacity.
Co-packing Facility
We offer co-packing services for non-alcoholic canned beverages including CBD soda waters in Portland, Oregon through a mobile co-packing network and one fixed co-packing location.
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.
Spirits
Since 2014 we have developed or acquired 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. |
23 |
Recent Developments
During March 31, 2024, Craft C+P printed 4.8 million cans compared to 2.5 million during the first quarter of 2023. We have improved our efficiency and throughput of production compared to the prior year period. In addition, Craft C+P has won significant new business from a number of beverage manufacturers during 2024. Spirits did not sell any bulk barrels in the first quarter of 2024 and saw total volume decline by 4% in the quarter. This is an improvement from the previous twelve months and is driven by strategic pricing moves in key markets.
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 2024.
Results of Operations
Overview
Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
(Dollars in thousands) | 2024 | 2023 | Variance | |||||||||
Sales | $ | 2,487 | $ | 2,879 | $ | (392 | ) | |||||
Less customer programs and excise taxes | 76 | 26 | 50 | |||||||||
Net sales | 2,411 | 2,853 | (442 | ) | ||||||||
Cost of sales | 2,225 | 2,212 | 13 | |||||||||
Gross profit | 186 | 641 | (455 | ) | ||||||||
Sales and marketing expenses | 251 | 511 | (260 | ) | ||||||||
General and administrative expenses | 1,105 | 1,364 | (259 | ) | ||||||||
(Gain) loss on disposal of property and equipment | (120 | ) | 6 | (126 | ) | |||||||
Total operating expenses | 1,236 | 1,881 | (645 | ) | ||||||||
Loss from operations | (1,050 | ) | (1,240 | ) | 190 | |||||||
Interest expense | (248 | ) | (329 | ) | 81 | |||||||
Other income (expense) | 5 | (29 | ) | 34 | ||||||||
Net loss | (1,293 | ) | (1,598 | ) | 305 | |||||||
Preferred stock dividends | (38 | ) | (38 | ) | - | |||||||
Net loss attributable to common shareholders | $ | (1,331 | ) | $ | (1,636 | ) | $ | 305 | ||||
Gross margin | 8 | % | 22 | % | -14 | % |
Segment information is as follows for the three months ended March 31, 2024 and 2023:
(Dollars in thousands) | 2024 | 2023 | Variance | |||||||||
Craft C+P | ||||||||||||
Sales | $ | 1,849 | $ | 1,456 | $ | 393 | ||||||
Net sales | 1,814 | 1,477 | 337 | |||||||||
Cost of sales | 1,765 | 1,578 | 187 | |||||||||
Gross profit | 49 | (101 | ) | 150 | ||||||||
Total operating expenses | 638 | 749 | (111 | ) | ||||||||
Net loss | $ | (590 | ) | $ | (884 | ) | $ | 294 | ||||
Spirits | ||||||||||||
Sales | $ | 638 | $ | 1,423 | $ | (785 | ) | |||||
Net sales | 597 | 1,376 | (779 | ) | ||||||||
Cost of sales | 460 | 634 | (174 | ) | ||||||||
Gross profit | 137 | 742 | (605 | ) | ||||||||
Total operating expenses | 234 | 522 | (288 | ) | ||||||||
Net income (loss) | $ | (92 | ) | $ | 221 | $ | (313 | ) | ||||
Corporate | ||||||||||||
Total operating expenses | $ | 364 | $ | 610 | $ | (246 | ) | |||||
Net loss | $ | (611 | ) | $ | (935 | ) | $ | 324 |
Corporate consists of key executive and accounting personnel and corporate expenses such as public company and board costs, as well as interest on debt.
24 |
Sales
Sales were $2.5 million and $2.9 million for the three months ended March 31, 2024 and 2023, respectively.
Craft C+P
Sales increased 27% for the three months ended March 31, 2024 attributable to growth in digital can printing sales, partially offset by reduced mobile service revenues and the sales of undecorated cans that have been replaced with digital printing sales. Craft printed 4.8 million cans in the quarter compared to 2.5 million cans in the prior year. The increase was a result of incremental sales to both existing and new customers and improved throughput of production.
Spirits
Spirits sales decreased for the three months ended March 31, 2024. The primary reason for the reduction was significant bulk spirits sales that we completed during 2023. For the three months ended March 31, 2023, we sold 250 barrels for gross proceeds of $0.6 million. In the first quarter of 2024, spirits sold 5,684 cases compared to 5,941 in the prior year, which included a large one-time direct-to-retail sale of 164 cases of Burnside. We have focused investment in spirits on profitable sales channels and regions. As a result, tequila sales decreased through last year and into this year.
Customer programs and excise taxes
Customer programs and excise taxes were $0.1 million and $25,754 for the three months ended March 31, 2024 and 2023, respectively. Craft C+P discounts were higher for the three months ended March 31, 2024 as we on-boarded customers with larger printing runs. Spirits discounts were lower for the three months ended March 31, 2024 due to lower sales volumes.
Cost of Sales
Cost of sales consists of all direct costs related to both spirits and canning for raw materials, service, labor, overhead, packaging, and in-bound freight charges. Cost of sales were $2.2 million and $2.2 million for the three months ended March 31, 2024 and 2023, respectively.
Craft C+P
Cost of sales increased in the quarter due to higher can volume and incremental inventory costs. We also invested in spare parts in anticipation of higher volumes later in the year.
Spirits
Cost of sales decreased for the three months ended March 31, 2024 due to lower bulk spirits and distributor sales, in addition to lower tequila volumes and a shift to a higher mix of vodka sales.
25 |
Gross Profit
Gross profit is calculated by subtracting the cost of products sold and services rendered from net sales. Gross profit was $0.2 million and $0.6 million for the three months ended March 31, 2024 and 2023, respectively. Bulk sales gross profit was $0.2 million for the three months ended March 31, 2023. Gross margin is gross profit stated as a percentage of net sales. Our gross margin was 8% and 22% for the three months ended March 31, 2024 and 2023, respectively. The prior years gross profit was positively impacted by high margins related to bulk spirits sales.
Craft C+P
Craft C+P’s gross margin increased for the three months ended March 31, 2024 primarily due to continued growth in can printing activities. Margins were negatively impacted by incremental expense in the quarter required to continue to improve production throughput and sustain a 24-hour 7 day a week printing schedule. Margins were also negatively impacted by scrap and inflated can prices.
Spirits
Gross margin decreased for the three months ended March 31, 2024 primarily due to sales of bulk spirits in 2023 and a greater mix of lower margin products in 2024.
Sales and Marketing Expenses
Sales and marketing expenses were $0.3 million and $0.5 million for the three months ended March 31, 2024 and 2023, respectively, due to reduced headcount.
General and Administrative Expenses
General and administrative expenses were $1.1 million and $1.4 million for the three months ended March 31, 2024 and 2023, respectively, primarily due to the related costs of closing unprofitable operations, including reducing staff and exiting leasing agreements at Craft C+P.
Interest Expense
Interest expense was $0.2 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively.
Net Income (Loss)
Net loss was $1.3 million and $1.6 million for the three months ended March 31, 2024 and 2023, respectively.
Preferred Stock Dividends
Preferred stock dividends were $37,500 million for both three months ended March 31, 2024 and 2023, representing 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 financing to meet our operating needs.
We had an accumulated deficit of $84.0 million as of March 31, 2024, having incurred a net loss of $1.3 million during the three months ended March 31, 2024. As of March 31, 2024, we had $0.3 million of cash on hand with negative working capital of $11.2 million.
Our ability to meet our ongoing operating cash needs over the next 12 months depends on asset sales, external financing and improving operating results. The availability of external financing will be largely dependent on improvement in performance, including higher digital can printing revenues and improved gross margins at Craft C+P as well as operational improvements in our Spirits segment.
26 |
We have deferred paying interest in the first quarter of 2024 and are engaged in discussions with creditors to resolve a number of outstanding issues. There can be no assurances that we will successfully conclude these discussions and have the cash resources to fund operations.
Our cash flow results for the three months ended March 31, 2024 and 2023 were as follows:
(Dollars in thousands) | 2024 | 2023 | ||||||
Net cash flows provided by (used in): | ||||||||
Operating activities | $ | (0.1 | ) | $ | (0.4 | ) | ||
Investing activities | $ | - | $ | - | ||||
Financing activities | $ | - | $ | - |
Operating Activities
Total cash used in operating activities was $0.1 million during the three months ended March 31, 2024 compared to $0.4 million used during the three months ended March 31, 2023 primarily due to decreases in net losses.
Investing Activities
Our investing activities in the three months ended March 31, 2024 or 2023 were minimal.
Financing Activities
There were no financing activities during the three months ended March 31, 2024 or 2023.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.
In connection with the preparation of our financial statements for the three months ended March 31, 2024, 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.
27 |
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, 2023, as a result of the review described above, we found the Azuñia brand to be impaired and reduced its carrying cost by $0.4 million.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
ITEM 4 – CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) that are designed to provide reasonable assurances that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that these disclosure controls and procedures were effective as of March 31, 2024.
There were no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended March 31, 2024, 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, 2023, except for the following additions:
If the Company is unable to remedy its shareholder equity deficiency, its common stock may be removed from Nasdaq.
On April 8, 2024, 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 March 31, 2024, the Company had a stockholders’ deficit of $0.5 million. Nasdaq has advised the Company that it has until May 23, 2024 to submit a plan to restore stockholders’ equity to sufficient levels or the Company’s common stock would be removed from Nasdaq. The Company can give no assurances that it will be able to submit a sufficient plan on time to be granted an extension.
On March 7, 2024, the Staff of the Listing Qualifications Department of the Nasdaq Stock Market notified the Company that it no longer complies with Nasdaq’s independent director and audit committee requirements as set forth in Listing Rule 5605. Nasdaq however, has provided a cure period to regain compliance prior to the earlier of the Company’s next annual shareholders’ meeting or January 22, 2025.
The Company has deferred paying interest to certain creditors in the first quarter of 2024 and is engaged in discussions with creditors to resolve a number of outstanding issues. There can be no assurances that the Company will successfully conclude these discussions and have the cash resources to fund operations.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the first quarter of 2024 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 quarter of fiscal year 2024.
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. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EASTSIDE DISTILLING, INC. | ||
Date: May 13, 2024 | By: | /s/ Geoffrey Gwin |
Geoffrey Gwin | ||
Chief Executive Officer | ||
Date: May 13, 2024 | By: | /s/ Geoffrey Gwin |
Geoffrey Gwin | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
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