Beeline Holdings, Inc. annual report, FY2014

Filing summary

Issuer identification: The supplied filing is Eastside Distilling, Inc.’s Form 10-K, not a Beeline Holdings, Inc. filing. It reports the fiscal year ended December 31, 2014; it is an annual report, not a standalone fourth-quarter report. The statements present Eastside Distilling, LLC as the accounting acquirer in a reverse acquisition completed October 31, 2014. The 2013 comparison is Eastside’s prior-year result.

Business context and reporting period

Eastside makes and markets craft bourbon, whiskey, rum, vodka and specialty spirits, with tasting-room, event, merchandise and retail-store sales. At year-end, products were distributed in seven states. In October 2014, the company acquired Eastside Distilling, LLC in a stock transaction and changed its name from Eurocan Holdings Ltd. The company spun off its online-marketing subsidiary, MWW, on February 3, 2015.

Financial performance and position

Sales increased approximately 63%, attributed to new retail locations and stronger distribution and sales in the Pacific Northwest. Cost of sales rose to $494,889 from $303,220. SG&A increased substantially, including higher personnel, marketing, legal and accounting costs; advertising expense was approximately $303,000 versus $56,000. The goodwill impairment followed the decision to spin off MWW. Excluding that impairment, the reported net loss was still affected by higher operating expenses.

At December 31, 2014, cash was $1,082,290; current assets were $1,771,498 and current liabilities were $441,075, yielding reported working capital of $1,330,423. Total assets were $2,046,454 and total liabilities were $464,346. Debt included a $150,000 convertible note due June 2015, bearing 5% interest and convertible at $0.40 per share, plus $26,831 of notes payable, of which $3,560 was current. The filing reports no cash dividends and no off-balance-sheet arrangements.

Operating cash use and inventory growth were funded in part by $2,158,152 net proceeds from common-stock issuance; financing activities provided $2,173,820 overall. Investing activities used $37,505. Cash increased by $1,052,506 to $1,082,290. The December 31 offering sold 5,512,500 shares at $0.40 for gross proceeds of $2,205,000. Shares outstanding at December 31 were 45,512,500.

Changes, outlook, risks and unusual items

• Management said cash and available capital were sufficient for the existing operating level for the next 12 months, but estimated that up to $3.5 million more would be needed for nationwide expansion: $1.15 million for inventory, $850,000 to operationalize the new facility and $1.5 million for sales and marketing. Failure to raise funds could slow expansion.
• The planned 41,000-square-foot distillery was expected to support production capacity of up to 1 million cases annually, compared with 6,400 cases produced in 2014. These are forward-looking targets, not reported achieved capacity.
• Key risks include limited capital, dependence on distributors and suppliers, customer concentration, competition, alcohol-industry regulation and taxes, limited brand recognition, and thin OTC trading. The Oregon Liquor Control Commission accounted for approximately 40% of revenue in both 2014 and 2013 and 70% of year-end 2014 trade receivables.
• Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end and disclosed material weaknesses involving control evaluation and documentation, lack of an audit committee, review procedures and IT controls. The financial-statement audit expressed an unqualified opinion; the auditor did not audit internal-control effectiveness.
• Future minimum operating-lease payments were approximately $1.517 million. Management said ordinary-course legal matters were not expected to have a material impact. The filing also reports the replacement of the prior auditor in December 2014; prior auditor reports had raised substantial doubt about the predecessor’s ability to continue as a going concern.

Important facts for investors to verify

• Confirm issuer identity and filing period: this is Eastside Distilling’s 2014 annual report, not Beeline Holdings’ filing or a Q4-only report.
• Review the need, timing and terms of additional financing, including potential dilution and the convertible note’s maturity and conversion provisions.
• Assess whether the new facility, inventory build and distribution expansion can be funded and executed, and whether projected capacity and nationwide reach are attainable.
• Examine the customer and distributor concentration, especially OLCC’s share of revenue and receivables, and the absence of minimum-sales commitments from distributors.
• Track remediation of disclosed control weaknesses and confirm the status of the MWW spin-off and goodwill impairment.
• Reconcile the narrative cash-flow discussion with the audited statements: the MD&A gives 2013 investing cash use of $21,845 and net cash increase of $29,784, while the cash-flow statement reports $21,845 and $6,739, respectively; the filing text does not clearly explain the discrepancy.