Filing summary
Entity and period: The supplied filing is Eastside Distilling, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed March 30, 2020. This differs from the request metadata naming Beeline Holdings, Inc.; the filing itself identifies Eastside Distilling, Inc. and reports annual, not quarterly, results.
Business context
Eastside produces, markets and distributes spirits and ready-to-drink beverages, and provides contract canning, bottling and packaging services. Its strategy is to build a portfolio of nationally distributed brands and potentially sell mature brands to larger industry participants. In 2019 it acquired Craft Canning and the Azuñia tequila brand. It reported distribution in 49 U.S. states and Ontario, Canada.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Sales | $17.02 million | $7.20 million |
| Net sales | $15.60 million | $6.12 million |
| Gross profit / margin | $5.46 million / 35% | $2.31 million / 38% |
| Operating loss | $13.72 million | $8.26 million |
| Net loss | $16.91 million | $9.05 million |
| Basic and diluted loss per share | $1.82 | $1.49 |
| Operating cash flow | $(9.13) million | $(13.92) million |
| Investing cash flow | $(3.63) million | $(1.30) million |
| Financing cash flow | $2.46 million | $23.27 million |
Sales rose 136%, led by co-packing revenue, which increased to $8.43 million from $1.64 million, and wholesale sales, which rose to $7.48 million from $4.35 million. Retail sales declined to $1.11 million from $1.21 million. Management attributed wholesale growth to wider Redneck Riviera distribution, the Azuñia acquisition and continued Pacific Northwest growth. Redneck Riviera generated approximately $3.8 million in 2019 brand sales, versus $2.3 million in 2018.
Gross margin declined three percentage points, which management attributed to sales mix, raw-material and facility costs, obsolete inventory, and lower-margin Azuñia sales. The company wrote off $0.3 million of obsolete inventory. Operating expenses increased 85% to $19.17 million, including higher brand promotion, sales compensation, acquisition-related costs and amortization. Other expense included a $2.67 million loss from remeasurement of Azuñia deferred consideration.
Balance sheet, liquidity and debt
At December 31, 2019, cash was $0.34 million, working capital was positive $8.3 million, total assets were $35.87 million, total liabilities were $28.53 million and stockholders’ equity was $7.33 million. Inventory was $12.39 million, including $9.34 million of raw materials. The accumulated deficit was $44.23 million.
Year-end notes payable totaled $5.41 million, and the secured trade credit facility was reported at $2.96 million net of debt issuance costs. The balance sheet also included $15.45 million of long-term deferred consideration for Azuñia and $0.87 million of lease liabilities. In January 2020, Eastside obtained a Live Oak inventory-backed loan with a commitment of up to $8 million; the filing reports $6.5 million drawn as of March 30, 2020, used in part to refinance existing debt and for working capital. A $0.25 million private-investor note due December 31, 2019 was in default at year-end; management expected an extension.
Cash used in operations remained substantial despite improving from 2018. Management said near-term liquidity depended on cost reductions, increased sales and margins, additional financing and use of inventory and receivables. The auditor’s report expressed substantial doubt about Eastside’s ability to continue as a going concern without additional capital.
Outlook, risks and unusual items
- Management priorities: Improve profitability, control expenses, grow national brands, improve production efficiency and use outsourced production where it reduces costs. No quantified financial guidance was provided.
- Acquisitions and obligations: Azuñia consideration is contingent and subject to future share, cash or note payments, including earnouts. Its exclusive tequila supply agreement runs through 2039 and requires minimum purchases of 24,000 cases in 2020 and 35,000 in 2021; the filing cites a potential $2 million penalty for breach, including minimum-purchase breaches.
- Brand and channel exposure: Redneck Riviera depends on its relationship with John Rich and has license sales thresholds beginning in 2020. One customer accounted for 16% of 2019 sales; two distributors accounted for 25% of 2019 sales, and two distributors held 40% of year-end trade receivables.
- COVID-19 and operations: The filing warns that pandemic-related closures, supply-chain disruption and changes in consumer purchasing could materially affect results. Eastside closed its four Portland retail stores effective March 23, 2020 and planned to focus on national brands.
- Other matters: A lawsuit by two former employees alleging discrimination and harassment was mediated in March 2020 and was in final settlement stages; the company’s insurance included a $100,000 retention per claim. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not audit internal controls.
- Governance and financing risks: The company experienced executive and board turnover, prior periods of Nasdaq governance noncompliance, and limited available authorized common shares. Additional financing could dilute shareholders; the stock was described as thinly traded.
Important facts for investors to verify
- Confirm the issuer and period: this is Eastside Distilling’s 2019 annual filing, not a Beeline Holdings filing or a standalone 2019 Q4 report.
- Review the going-concern qualification and the company’s post-year-end financing, including Live Oak loan terms, borrowing-base limits, covenants and current outstanding balance.
- Assess cash runway, operating cash burn, debt maturities and whether inventory and receivables can reliably support liquidity needs.
- Verify Azuñia earnout and deferred-consideration assumptions, purchase commitments, supplier concentration and the potential penalty under the tequila supply contract.
- Track gross-margin recovery, acquisition contribution, customer and distributor concentration, Redneck Riviera license requirements, and any final settlement terms for the employment litigation.