Business context and reporting period
This is an unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The filing identifies the registrant as Eastside Distilling, Inc., a Portland-based maker, marketer and distributor of craft spirits—not Beeline Holdings, Inc. Verify that this is the intended filing. Eastside reports one operating segment. The 2014 acquisition was accounted for as a reverse acquisition, and the 2015 results include the former MWWD subsidiary only through its February 3, 2015 separation, limiting direct comparability with 2014.
Financial results and position
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 | Prior-year comparable |
|---|---|---|---|
| Sales before excise taxes | $427,591 | $852,501 | $257,622 and $439,972 |
| Net sales | $304,414 | $629,484 | $207,840 and $354,953 |
| Gross profit / margin | $146,763 / 48.2% | $278,652 / 44.3% | $175,676 / 84.5%; $227,852 / 64.2% |
| SG&A | $832,039 | $1,843,883 | $165,444 and $242,505 |
| Net income (loss) | $(688,060) | $(1,519,078) | $9,768 and $(15,511) |
| Net loss per share | $(0.02) | $(0.03) | $0.00 and $(0.00) |
Net sales rose about 46% in the quarter and 77% for the half year. Gross margin declined sharply, while SG&A increased substantially; the company reported operating losses of $685,276 for the quarter and $1,565,231 for the half year. Six-month other income was $46,153, principally attributed in MD&A to a gain on the MWWD separation, partly offset by interest expense. No income tax provision was recorded; management cites a full valuation allowance on deferred tax benefits.
At June 30, cash was $145,950, current assets $1.30 million, current liabilities $1.26 million, and working capital approximately $39,556. Inventory was $849,970, up from $377,020 at year-end. Accounts payable increased to $914,245 from $206,630. Total liabilities were $1.28 million, including a $150,000 convertible note and $24,434 of other notes payable; stockholders’ equity was $212,030.
Six-month operating cash use was $920,623, investing cash use was $13,320, and financing cash use was $2,397; cash fell by $936,340 from year-end. The operating cash outflow reflected the net loss and inventory build, partly offset by increased payables and accrued liabilities.
Material changes and management commentary
- Management attributes sales growth mainly to increased Oregon wholesale and retail sales, including new shopping-center stores, and initial shipments into additional markets. Products were authorized in 11 states, with distribution active in all but Idaho.
- Management says the margin decline reflects a changed sales-channel mix and higher facility costs from a larger facility. It expects improved margins as higher fixed costs are spread over more sales.
- SG&A growth reflected higher professional, accounting, legal and marketing fees; added sales, event and office staff; advertising; and rent. Approximately $112,000 of the quarterly increase and $186,000 of the six-month increase was noncash stock and option expense.
- The company estimates it needs up to an additional $3.5 million for expansion: $1.1 million for working capital and inventory, $0.9 million for facility readiness, and $1.5 million for sales and marketing. It intends to pursue sales growth and debt and equity financing; no assurance is given that financing will be available on acceptable terms.
- Management states existing cash and operating cash flows are insufficient to sustain current operations for the next 12 months. Failure to raise capital could materially harm the company and force a less aggressive growth plan or reduced operations.
Risks, contingencies and unusual items
- Customer and credit concentration: the Oregon Liquor Control Commission represented 72% of receivables at June 30 and about 37% of six-month revenue. Nine customers represented all receivables.
- The $150,000 convertible note bears 5% interest, converts at $0.40 per share, and may be prepaid at 150% of principal. Its maturity was extended after quarter-end to December 13, 2015.
- Operating lease commitments totaled approximately $1.451 million through 2020. The company reported ordinary-course legal matters but did not expect a significant financial effect.
- After quarter-end, Eastside issued 225,000 consultant shares valued at approximately $463,000 and increased two executives’ base salaries to $245,000 and $104,000. The CEO also had approximately $35,000 of interest-free, payable-on-demand expense advances included in accounts payable.
- Management found disclosure controls and procedures ineffective, citing material weaknesses in control-evaluation procedures, lack of an audit committee, inadequate documentation of review procedures, and insufficient IT backup procedures.
- The filing reports 45.55 million common shares outstanding at June 30 and 45.775 million as of August 14. It also reports 1.8 million options outstanding at June 30.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for Eastside Distilling, Inc., not Beeline Holdings, Inc.
- Assess financing needs, near-term cash runway, and the likelihood and terms of raising the stated additional capital.
- Track inventory conversion, accounts payable growth, sales-channel mix, and whether gross margins improve as management expects.
- Review the convertible note’s maturity, conversion and prepayment terms, and potential dilution from options and subsequent share issuance.
- Evaluate customer concentration, lease obligations, executive compensation changes, and remediation of the disclosed control weaknesses.
- Reconcile the filing’s differing references to the MWWD separation gain: the cash flow statement shows $52,890, while MD&A describes a net gain of $48,937.