Filing summary
Entity and period: The supplied filing is Eastside Distilling, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2015, not a Beeline Holdings, Inc. filing. The financial statements cover Eastside and, through February 3, 2015, its former subsidiary MWWD. Comparisons with 2014 reflect the LLC’s operations and may not be fully comparable.
Financial performance and position
- Revenue: Third-quarter net sales were $352,081, up 37.7% from $255,750. Nine-month net sales were $981,565, up 60.7% from $610,703.
- Profit and margins: Third-quarter gross profit was $184,557, with a 52.4% gross margin, versus $92,815 and 36.3% a year earlier. Nine-month gross profit was $463,209, but margin declined to 47.2% from 52.5%. Net loss was $1,412,612 for the quarter and $2,931,690 for nine months, compared with $251,577 and $267,088, respectively, in 2014. Nine-month basic and diluted loss per share was $0.06, versus $0.01.
- Expenses: Nine-month selling, general and administrative expense increased to $3,431,143 from $584,447. Management attributed the increase principally to professional fees, staffing, advertising, rent, and stock-based compensation.
- Cash flow: Nine-month operating cash use was $1,241,924; investing cash use was $42,856; financing provided $287,868. Cash fell by $996,912 to $85,378.
- Liquidity and debt: Current assets were $1,176,619 against current liabilities of $1,841,380; stockholders’ deficit was $509,457. Convertible notes had $475,000 face principal and a $441,500 carrying amount after discount; total notes payable, including the vehicle note, were approximately $498,199 in face principal. The 14% secured convertible note is secured by inventory and includes a potential conversion-price reset under specified conditions.
- Other balance-sheet items: Inventory increased to $813,585 from $377,020; accounts payable rose to $988,823 from $206,630. Operating lease commitments totaled approximately $1,422,000 through 2020.
Material changes and management outlook
- Management linked sales growth mainly to Oregon wholesale and retail sales, including newly opened retail locations, and described expansion into additional states. It anticipated improved margins as sales grow and fixed facility costs are better absorbed; however, nine-month margin had declined year over year.
- The company reported a $52,890 gain from transferring MWWD and its net liabilities in February 2015. Nine-month other income was $36,244, principally reflecting that gain offset by interest expense.
- Management said existing cash and operating cash flows were insufficient to support the current level of operations for the next 12 months. It estimated needing up to $3.5 million for expansion, including working capital and inventory, facility readiness, and sales and marketing. Management expected to seek debt and equity financing, but stated there was no assurance of raising capital on acceptable terms; failure could materially reduce operations and constrain growth.
- Concentration risk remains: the Oregon Liquor Control Commission represented about 65%–67% of receivables at September 30, 2015, and about 35% of nine-month revenue. The filing also cites reliance on distributors, demand and customer acceptance, inventory, financing, and industry conditions as risks.
- Management concluded disclosure controls and procedures were ineffective, citing material weaknesses involving control evaluation and documentation, lack of an audit committee, undocumented review procedures, and insufficient IT backup procedures. No material control changes during the quarter were reported.
- Management said ordinary-course legal matters were not expected to significantly affect financial position or results; Part II reports no legal proceedings. Subsequent events included appointment of a CFO under an agreement providing $195,000 annual salary and options; a separate public-relations agreement was terminated before its shares or options were issued.
Important facts to verify
- Confirm the filing identity: the supplied document names Eastside Distilling, Inc., although the request metadata names Beeline Holdings, Inc.
- Reconcile MD&A SG&A figures with the financial statements: MD&A reports approximately $1.571 million for the quarter and $3.415 million for nine months, while the statements report $1,587,260 and $3,431,143.
- Review cash runway, financing availability, and the assumptions behind the stated $3.5 million funding requirement.
- Review the convertible-note maturity, repayment schedule, collateral, covenants, and conversion-price provisions, as well as related-party advances of approximately $83,000 owed to the CEO.
- Assess distributor concentration, inventory growth, lease obligations, and remediation of the disclosed control weaknesses.