Filing summary
Entity discrepancy: The supplied filing is Eastside Distilling, Inc.’s Form 10-Q, not a filing identified as Beeline Holdings, Inc. Verify the issuer before relying on this summary.
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2016; balance-sheet comparisons are with December 31, 2015. Eastside manufactures and markets craft spirits, distributes in 20 states, and also earns revenue from its Portland tasting room and related activities.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $504,311 | $304,414 | $967,785 | $629,484 |
| Gross profit / margin | $236,095 / 47% | $146,763 / 48% | $443,400 / 46% | $278,652 / 44% |
| Operating loss | $(1,077,534) | $(685,276) | $(1,921,155) | $(1,565,231) |
| Net loss | $(1,309,500) | $(688,060) | $(2,324,179) | $(1,519,078) |
| Net loss per common share | $(0.02) | $(0.02) | $(0.05) | $(0.03) |
- Revenue and margins: Net sales rose 66% in Q2 and 54% for the half year. Six-month gross margin improved to 46% from 44%, which management attributed to better fixed-facility-cost coverage at higher sales volumes; Q2 margin edged down to 47% from 48%.
- Expenses: Six-month SG&A increased to $2.365 million from $1.844 million, primarily due to higher professional fees. Other expense was $403,024 versus $46,153 of other income in the prior-year period; 2016 expense included debt-discount and beneficial-conversion-feature amortization and interest.
- Cash flow: Six-month operating cash use was $1.560 million, compared with $920,623 in 2015. Investing cash use was $7,052. Financing provided $2.439 million, and cash increased by $872,279 to $1.014 million.
- Liquidity and debt: Current assets were $2.125 million and current liabilities $1.846 million; working capital was approximately $279,000. Total liabilities were $1.996 million. Notes and convertible notes had $324,343 of stated principal at June 30, including $105,000 of convertible notes; the balance sheet presents debt discounts. A $120,552 convertible-note payoff followed on July 1.
- Equity: Stockholders’ equity was $285,348, versus a $1.064 million deficit at year-end 2015. The company issued 40 million common shares for $2 million during the half year. Series A preferred stock had a stated liquidation value of $2.43 million and an 8% cumulative dividend.
Material changes, outlook, and risks
- Management attributed sales growth to Oregon and expansion into other states. Oregon represented approximately 58% of Q2 sales, down from more than 85% in Q2 2015 as newer markets grew. The Oregon Liquor Control Commission (OLCC) accounted for 35% of six-month revenue and 48% of period-end receivables.
- Management said it expected improved performance in the remainder of 2016 and planned approximately $100,000 of capital expenditures, primarily for manufacturing capacity. It identified increased distribution, improved gross profit, and expense control as important to reaching positive operating cash flow. No quantified revenue or earnings guidance is provided.
- Going concern: The filing states that recurring losses, a $9.904 million accumulated deficit, and operating cash outflows raise substantial doubt about the company’s ability to continue as a going concern. Management planned to seek further debt or equity financing and reduce expenses; there is no assurance financing will be available on acceptable terms or that operations will become profitable.
- Financing and dilution: During the half year, the company raised cash through common-stock, preferred-stock, and debt offerings and repaid or converted substantial convertible debt. It had 55.1 million warrants outstanding at June 30, generally with a $0.10 exercise price; preferred shares were convertible at $0.075. These instruments may materially dilute common shareholders. Additional 8% notes and warrants were issued after quarter-end.
- Other risks and unusual items: Management cited dependence on distributors, customer and product acceptance, changing demand, inventory needs, and reliance on external financing. Interest and legal costs of approximately $275,000 associated with repayment of prior notes affected operating cash flow; management did not expect certain of these costs to recur. The filing reports no significant off-balance-sheet arrangements. Routine-course legal matters are disclosed, while management said it did not expect a significant effect on financial position or results.
- Controls: Management concluded disclosure controls were ineffective, citing insufficiently rigorous control-evaluation procedures, no audit committee, inadequate documentation of review procedures, and insufficient IT backup procedures.
Important facts for investors to verify
- Confirm that Eastside Distilling, Inc.—rather than Beeline Holdings, Inc.—is the intended issuer and that the filing matches the investment being reviewed.
- Review the going-concern disclosure, cash burn, subsequent financing, and the company’s ability to fund operations without further dilution or costly borrowing.
- Assess the potential dilution and economic terms of the 55.1 million warrants, Series A conversion rights, cumulative dividends, and preferred-stock liquidation preference.
- Verify debt balances and subsequent repayments against the debt notes and post-quarter events; the filing describes multiple refinancings, conversions, and repayments.
- Evaluate distributor and customer concentration, especially the OLCC’s share of receivables and revenue, alongside expansion and gross-margin trends.
- Track remediation of the disclosed material weaknesses in internal control over financial reporting.