Beeline Holdings, Inc. annual report, FY2015

Business context and reporting period

Entity mismatch: The filing is for Eastside Distilling, Inc., not Beeline Holdings, Inc. It is a Form 10-K for the fiscal year ended December 31, 2015, filed April 13, 2016—not a standalone Q4 report.

Eastside makes and markets craft spirits and related products, with tasting-room and retail sales. It reported distribution in 15 states. The financial statements reflect the spirits business and, through February 3, 2015, the former MWW subsidiary. The 2014 comparison is affected by the reverse acquisition and is not a like-for-like full-year comparison in all respects.

Financial results and liquidity

Sales rose approximately 62%, attributed to expanded distribution and stronger Pacific Northwest sales. Excise taxes were $624,046. Cost of sales increased 76%, including approximately $240,000 of higher fixed facility costs; SG&A rose approximately 220%, driven by staffing, retail/event activity, public-company costs, and national expansion. Gross margin declined year over year. The smaller net loss largely reflects the absence of the $3.246 million goodwill impairment recorded in 2014; operating expenses remained well above gross profit.

Total assets were $1.292 million and liabilities were $2.355 million at December 31, 2015, producing a stockholders’ deficit of $1.064 million. Inventory was $684,000. Accounts payable increased to $1.301 million from $207,000, and accrued liabilities to $564,000 from $73,000. The filing reports no off-balance-sheet arrangements.

Material changes and unusual items

• The company spun off MWW in February 2015, transferring its assets and liabilities in exchange for releases; it recorded a $52,890 gain in 2015. The separation had prompted a $3.246 million goodwill impairment in 2014.
• Operating cash outflow remained substantial while cash fell by approximately $941,000 during 2015. Financing cash inflow was only $297,000, compared with $2.174 million in 2014, when the company completed a $2.205 million common-stock offering.
• Eastside issued $275,000 principal of secured convertible notes in September 2015 at 14% interest, with a conversion-price discount tied to the stock’s trading price and a security interest in inventory. The filing also describes a $150,000 5% convertible note and a $50,000 zero-interest note.
• Stock issued for services and trade debt totaled approximately $815,000 in recorded value in 2015; stock-based compensation was $140,370. These are material noncash items in interpreting expenses and cash flow.

Outlook, risks, and contingencies

Management described 2015 as a record sales year and targeted nationwide distribution within 36 months. It expected distribution to expand to 23 states in the coming months, planned approximately $100,000 of 2016 capital expenditures, and estimated that up to $3.5 million of additional capital would be needed for expansion, including working capital/inventory, facility readiness, and sales and marketing. These are plans and estimates, not assurances. In March 2016, Burnside Bourbon was approved for sale in Ontario.

The auditor issued an unqualified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. The company reported recurring losses, negative operating cash flow, a $7.562 million accumulated deficit, and insufficient cash for expected near-term needs. Management planned to seek debt or equity financing, renegotiate debt, increase sales, and reduce expenses; success was not assured.

After year-end, an April 4, 2016 preferred-stock and warrant financing covered 880 units at $1,000 each: $407,000 was cash proceeds, $423,000 represented accrued officer salary, and $50,000 cancelled debt. The cash proceeds were reduced by $28,560 of placement fees and approximately $25,000 of debt repayment. The preferred shares carry an 8% cumulative dividend and enhanced voting and liquidation rights; warrants are also convertible/exercisable into common shares. Separately, a 5% note maturity was extended to May 31, 2016 with scheduled installment payments.

Key risks include dependence on the Oregon Liquor Control Commission, which accounted for 32% of 2015 revenue and 50% of year-end receivables; reliance on distributors without minimum-purchase obligations; limited suppliers; financing and dilution risk; and a thinly traded OTC stock. Management reported ineffective disclosure controls and internal controls over financial reporting, citing limited segregation of duties, inadequate control documentation, and no audit committee. Ordinary-course legal matters were disclosed; management did not expect them to materially affect results.

Important facts for investors to verify

• Confirm the issuer and period: this is Eastside Distilling’s FY2015 10-K, not a Beeline Holdings filing or a Q4-only report.
• Review the going-concern disclosure, cash runway, working-capital deficit, and whether subsequent financing or debt amendments resolved near-term liquidity needs.
• Reconcile the April 2016 financing: distinguish cash proceeds from salary conversion and debt cancellation, and assess the preferred stock’s voting, dividend, liquidation, and dilution effects.
• Check debt maturities, conversion terms, collateral, covenants, and required installment payments, including the inventory-secured note and Crystal Falls note.
• Assess customer and distributor concentration, particularly OLCC exposure, and whether the planned expansion to additional states translated into sustained sales and improved margins.
• Review remediation of the disclosed material weaknesses and the company’s controls, financial reporting, and related-party transactions.