Filing summary
Entity note: The supplied filing is Eastside Distilling, Inc.’s Form 10-Q, not a Beeline Holdings, Inc. filing. It covers the quarter ended March 31, 2017; the financial statements are unaudited.
Business context and reporting period
Eastside is a Portland-based craft spirits producer and marketer, selling through wholesalers and Oregon tasting rooms and retail locations. It reported one operating segment. MotherLode Craft Distillery, a bottling and production-services business, was acquired March 8, 2017, and is included in results from that date.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 or prior balance-sheet date |
|---|---|---|
| Sales | $829,669 | $621,882 |
| Net sales, after excise taxes and customer programs | $612,481 | $454,762 |
| Gross profit / margin | $289,568 / 47% | $198,593 / 44% |
| Operating loss | $(858,494) | $(843,621) |
| Net loss | $(901,818) | $(1,014,679) |
| Net loss attributable to common shareholders; loss per share | $(906,855); $(0.12) | $(1,014,679); $(0.45) |
| Cash and working capital at March 31, 2017 | $883,715; $1,700,325 | Cash at Dec. 31, 2016: $1,088,066 |
| Net cash used in operating activities | $(1,126,203) | $(271,477) |
| Net cash used in investing activities | $(32,569) | $(6,954) |
| Net cash provided by financing activities | $954,421 | $149,914 |
| Notes payable | $460,000 principal; $365,160 carrying amount after debt discount | $564,142 principal at Dec. 31, 2016 |
Sales increased approximately 33% and net sales approximately 35% year over year. Gross margin improved, which management attributed partly to higher-margin private-label products. The company remained loss-making; operating loss widened modestly, while net loss narrowed mainly due to lower interest expense and general and administrative costs. Advertising, promotional and selling expense rose to $386,132 from $156,203. Cash declined by $204,351 during the quarter, and operating cash use increased substantially, including an inventory build and a reduction in accrued liabilities.
At March 31, notes payable were due in 2018, with no current portion reported. The balance sheet showed $686,051 of current liabilities and $1,051,211 of total liabilities. The company reported an accumulated deficit of approximately $13.7 million.
Material changes and unusual items
- MotherLode was acquired for 260,000 Eastside shares valued at approximately $377,000. The acquisition added about $373,502 of net intangible assets, principally customer lists.
- A $35,534 loss on disposal of property and equipment related primarily to writing off construction in progress after the company agreed to end its existing facility lease early. The lease was amended to terminate June 30, 2017 rather than October 2020.
- During the quarter, Eastside raised $750,000 in a common-stock-and-warrant offering and received $159,250 from warrant exercises. It also issued shares for services and acquisitions and converted $87,500 of notes and 250 preferred shares into common stock.
- After quarter-end, Eastside acquired 90% of Big Bottom Distilling for 84,286 shares. It also completed the remaining $333,815 of the private offering and entered into a $500,000 convertible note. The filing reports that the company had raised an additional $833,815 through equity and debt offerings by May 12.
- All preferred shares were converted by April 24, 2017, according to the filing. Common shares outstanding were 9,010,352 at March 31 and 9,623,546 as of May 12.
Outlook, commentary and risks
Management said first-quarter growth reflected stronger Pacific Northwest wholesale sales, MotherLode’s private-label business and a new retail location. Oregon represented approximately 78% of first-quarter sales versus 58% in 2016; national distribution sales were described as flat quarter over quarter. Management expected newer markets to contribute more over time and anticipated improved performance during the rest of 2017, citing planned facility, production, staffing and marketing investments. It also expected larger production runs and a new facility to support scale economies, but provided no quantified earnings or revenue guidance.
Management stated that cash on hand, post-quarter financing and acquisitions were expected to cover near-term cash needs for the next twelve months. That outlook is subject to execution and financing risks: the company has recurring losses and relies on external capital, while its ability to meet operating needs depends on sales growth, improved profitability and expense control. Other disclosed risks include reliance on distributors that have no minimum purchase obligations, customer concentration (three customers represented 57% of Q1 net sales and three customers held 79% of receivables), seasonality, competition, inventory demand, alcohol-industry regulation and possible limits on tax-loss carryforwards. No material legal proceedings or significant off-balance-sheet arrangements were reported. Management said disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Confirm the filing issuer: the document identifies Eastside Distilling, Inc., despite the request metadata naming Beeline Holdings, Inc.
- Reconcile the reported $833,815 of post-quarter financing with the offering’s $333,815 remaining proceeds and the separate $500,000 convertible note; assess subsequent cash use and runway.
- Review the terms, dilution potential and priority of the convertible note, offering warrants, outstanding options and other equity awards.
- Assess whether the MotherLode and Big Bottom acquisitions deliver the anticipated sales, margins and operational synergies, including the effects of integration and facility relocation.
- Track operating cash burn, inventory growth, gross-margin sustainability, customer concentration and progress in expanding sales beyond Oregon.