Business context and reporting period
Filing identity: The supplied filing is Eastside Distilling, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2020; this does not match the request metadata naming Beeline Holdings, Inc. Verify the issuer before relying on this summary.
Eastside manufactures and distributes spirits and ready-to-drink beverages, and provides contract canning and bottling services. It sells primarily through wholesale distributors. During the quarter it closed all four Portland tasting rooms, shifting focus to nationally branded products. The company reported one operating segment.
Key financial results
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Sales before customer programs and excise taxes | $3.746 million | $3.461 million |
| Net sales | $3.384 million | $3.356 million |
| Gross profit / margin | $875,000 / 26% | $1.101 million / 33% |
| Operating loss | $3.010 million | $2.714 million |
| Net loss | $3.509 million; $0.36 per share | $2.943 million; $0.32 per share |
| Cash used in operations | $1.319 million | $3.877 million |
| Cash at period end | $1.255 million | $342,678 at Dec. 31, 2019 |
At March 31, 2020, working capital was approximately $2.8 million. Inventory was $11.1 million and trade receivables were $1.17 million. Total assets were $34.3 million, total liabilities $30.0 million, and stockholders’ equity $4.28 million. Notes payable totaled $4.34 million; the secured trade credit facility was reported at $6.30 million current. Deferred consideration for the Azuñia acquisition was $15.45 million long term. Interest expense was $304,000, versus $107,000 a year earlier.
Cash from financing activities was $2.267 million, primarily reflecting new secured-facility proceeds and debt repayments. Investing cash outflow was $35,000. Inventory declined by $1.28 million during the quarter.
Material changes versus the prior comparable period
- Sales before deductions rose 8.2%, but net sales increased only 0.8%, as customer programs and excise taxes rose to $362,000 from $105,000.
- Wholesale sales increased to $2.25 million from $1.47 million, including approximately $1.0 million of Azuñia sales. Private-label sales declined to $1.50 million from $1.99 million. Redneck Riviera Whiskey sales fell to $0.6 million from $0.9 million.
- Gross profit fell 20.5% and margin contracted seven percentage points. Management attributed this to product and service mix, higher raw-material costs, lower wholesale production and unabsorbed manufacturing overhead; Azuñia’s lower margin contributed to the decline.
- Sales and marketing expense rose 39% to $1.70 million, while general and administrative expense fell 15.8% to $2.18 million. Higher interest expense and operating costs contributed to the larger net loss.
- Operating cash use improved from $3.88 million to $1.32 million, but the company remained loss-making and reliant on financing and inventory utilization.
Outlook, risks and unusual items
- Liquidity and going concern: Management said the next 12 months’ cash needs depend on expense reductions, inventory and receivables utilization, additional financing and improved operating cash flow. The company reiterated that its 2019 auditor’s report contained a going-concern qualification expressing substantial doubt. Management warned that unavailable or unacceptable financing could require asset sales, expense cuts or reduced marketing.
- COVID-19: Bar and restaurant closures affected on-premise demand, particularly for Azuñia, and disrupted customer interactions and operations. Management noted increased canned-beer demand for mobile canning and stronger sales of a large-format Portland Potato Vodka product in Oregon, but said the pandemic’s overall effects were uncertain.
- Secured facility covenant notice: On May 13, 2020, Live Oak Bank notified the company of covenant defaults involving late information delivery and the lender’s belief that certain taxes were owed. The lender had not declared an event of default by the filing date; an event of default could permit acceleration and a 2% default-rate premium. The company said it was working with the lender.
- Subsequent PPP loans: In April 2020, Eastside and subsidiary Craft Canning received PPP loans of $1.045 million and $394,000, respectively, at 1% interest, with 2022 maturities and potential forgiveness subject to program requirements. The filing warned of possible audit, repayment, fines or penalties related to eligibility and forgiveness.
- Azuñia consideration: The $15.45 million deferred acquisition consideration is contingent and payable primarily in shares, subject to terms and Nasdaq rules; additional consideration may depend on revenue targets.
- Other items: The company settled a former-employees’ discrimination and harassment lawsuit after mediation and paid a $100,000 retention. It also reported $450,000 in notes receivable from Wineonline.com and said collectability was under discussion. Redneck Riviera marketing reimbursement is contingent on a future brand sale; it is not an assured near-term cash recovery.
- No numerical revenue or earnings guidance was provided. Management described plans to control expenses, grow sales, improve margins and consider outsourced production to reduce costs.
Most important facts for investors to verify
- Confirm the filing’s issuer and ticker: the document identifies Eastside Distilling (EAST), not Beeline Holdings.
- Check the resolution and status of Live Oak’s covenant-default notice, including any waiver, cure, acceleration or effect on facility availability.
- Assess near-term liquidity, refinancing needs and the company’s ability to fund operations given recurring losses, the going-concern qualification and dependence on financing.
- Review the impact of COVID-19 on on-premise sales, Azuñia demand, co-packing activity and gross margins.
- Verify PPP loan eligibility, use of proceeds and forgiveness status, as well as the contingent Azuñia consideration and Wineonline.com receivable collectability.