Filing summary
Important identity discrepancy: The supplied metadata names Beeline Holdings, Inc., but the filing text is Eastside Distilling, Inc.’s Form 10-Q for the quarter ended September 30, 2020. Verify the intended issuer before relying on this summary.
Business context and reporting period
Eastside manufactures and markets spirits and cocktails and provides mobile canning and bottling services. The unaudited report covers the three and nine months ended September 30, 2020, compared with the same 2019 periods. In the first quarter, the company closed its four Portland-area tasting rooms and reported those retail operations as discontinued operations.
Financial performance and position
| Metric | Third quarter 2020 | Nine months 2020 | Comparable 2019 |
|---|---|---|---|
| Net sales | $4.50 million | $11.90 million | $4.29 million; $11.38 million |
| Gross profit / margin | $1.60 million / 36% | $4.04 million / 34% | $1.69 million / 39%; $4.19 million / 37% |
| Operating loss | $1.55 million | $6.42 million | $3.34 million; $8.76 million |
| Net loss attributable to common shareholders | $1.77 million | $7.46 million | $3.54 million; $9.44 million |
| Basic and diluted loss per share | $0.17 | $0.75 | $0.38; $1.03 |
For the nine-month period, sales grew 5% and the net loss narrowed, but gross margin fell three percentage points. Interest expense rose to $875,000 from $339,000. The company attributed the margin decline to product and service mix, higher raw-material costs, and under-absorbed manufacturing overhead.
- Cash flow: Continuing-operations operating cash use was $2.71 million for the nine months, versus $7.56 million in 2019; total operating cash use, including discontinued operations, was $2.83 million. Investing activities provided $209,000, including $621,000 in asset-sale proceeds; financing activities provided $3.24 million.
- Liquidity: Cash was $959,000 at September 30, 2020, versus $343,000 at year-end 2019. Current assets were $13.20 million and current liabilities $29.77 million; management reported negative working capital of $16.6 million.
- Debt and obligations: Notes payable totaled $5.36 million, including $4.01 million current. A secured trade-credit facility had a $6.38 million current balance. The $15.45 million deferred Azuñia acquisition consideration was classified as current. Total liabilities were $32.08 million, versus $28.53 million at year-end 2019; stockholders’ equity fell to $914,000 from $7.33 million.
- Inventory: Inventory was $10.33 million, down from $12.33 million at year-end. The company recorded a $250,000 inventory allowance during the nine months.
Material changes versus the prior comparable period
- Third-quarter sales increased about 5% from $4.29 million to $4.50 million, driven mainly by canning and bottling revenue, which rose approximately $0.5 million. Nine-month net sales increased 5%; Azuñia contributed to wholesale growth, while Redneck Riviera Whiskey sales declined.
- Operating expenses fell 19% for the nine months, including lower sales and marketing and general and administrative costs. Reduced expenses helped narrow the operating and net losses, despite lower gross profit and higher interest expense.
- Cash used in continuing operations improved substantially, aided by lower marketing and administrative cash expenditures and a $2.0 million reduction in inventory.
- The company issued 474,224 net additional common shares from year-end through September 30, 2020. It also issued a 100,000-share warrant to Live Oak Bank in connection with its credit facility.
Outlook, commentary, risks, and unusual items
- Liquidity and going concern: Management said the next 12 months’ cash needs depend on cost reductions, inventory use, additional debt or equity, asset sales, and generating positive operating cash flow. The filing cites the prior-year auditor’s going-concern qualification and warns that inability to obtain financing could impair operations and threaten the company’s ability to continue as a going concern. No quantified revenue or earnings guidance is provided.
- Management priorities: The company aims for cash-neutral quarterly operations, debt and Azuñia earnout extensions, more working-capital liquidity, profitable growth in spirits with emphasis on Azuñia, and a growth plan for Craft Canning.
- COVID-19 and operations: Management reported increased demand for canning as customers shifted toward cans and off-premise consumption, but weaker on-premise sales and limits on customer interaction. Aluminum-can supply shortages were noted, although the company believed it had sourced enough for its business plan. The duration and financial impact of the pandemic remained uncertain.
- Credit covenant issue: Live Oak notified the company of technical defaults in May 2020 relating to reporting and alleged tax matters, not missed loan payments. The company said it satisfied waiver conditions and was compliant with the loan agreement and modification as of November 12, 2020.
- PPP loan: The company received a $1.4 million Paycheck Protection Program loan. It warned that a government review could require repayment and could bring additional costs or penalties.
- Subsequent developments: In October 2020, the company announced a nonbinding term sheet to divest its Redneck Riviera Spirits business, with estimated consideration of $8.1 million, including a $3 million termination fee and proceeds from inventory and raw materials; definitive agreements remained outstanding. Intersect and TQLA deposits related to possible changes to the Azuñia deferred consideration totaled $500,000 by November; the company said the funds might have to be returned if no agreement is reached.
- Other unusual items: The company wrote off a MotherLode customer-list intangible with a net value of $176,971 in the third quarter. It also closed its tasting rooms, recorded as discontinued operations, which generated a nine-month loss of $209,000.
Most important facts for investors to verify
- Confirm that Eastside Distilling, Inc.—not Beeline Holdings, Inc.—is the intended issuer and filing.
- Check the company’s subsequent cash position, financing availability, and progress toward cash-neutral operations given low cash and substantial negative working capital.
- Verify the status, maturity, covenants, and repayment capacity for the Live Oak facility, other notes, and the current Azuñia deferred consideration.
- Confirm whether the proposed Redneck Riviera divestiture closed and whether the stated consideration was received.
- Monitor the Azuñia consideration discussions, treatment of the $500,000 deposits, and any resulting cash or equity obligations.
- Assess whether canning growth and cost actions can restore gross margins while the company manages COVID-19-related demand shifts and customer-program costs.