Business context and reporting period
The supplied filing is Eastside Distilling, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. This does not match the request metadata naming Beeline Holdings, Inc.; the filing identifies Eastside Distilling as the registrant. Eastside produces and markets craft spirits and reported distribution in 22 states, with authorization to distribute in Ontario, Canada.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $607,847 | $352,081 | $1,575,632 | $981,565 |
| Gross profit | $236,993 | $184,557 | $680,393 | $463,209 |
| Gross margin | 39% | 52% | 43% | 47% |
| Operating loss | ($1,346,560) | ($1,402,703) | ($3,267,617) | ($2,967,934) |
| Net loss | ($1,436,449) | ($1,412,612) | ($3,760,629) | ($2,931,690) |
| Net loss per common share | ($0.31) | ($0.62) | ($1.14) | ($1.28) |
At September 30, 2016, cash was $400,178, current assets $1.74 million, current liabilities $1.64 million, total assets $1.89 million, total liabilities $2.57 million, and stockholders’ deficit $687,389. Inventory was $881,652 and trade receivables were $383,004.
For the first nine months, operating cash outflow was $3.13 million, investing outflow $6,952, and financing inflow $3.40 million; cash increased by $258,861 from year-end 2015. Cash interest paid was $294,240. The filing reports $1.25 million of 8% notes issued during the period, with a $334,046 warrant-related debt discount; notes payable totaled $1.27 million gross, of which $929,537 was reported long-term net of discount and $4,424 current. No convertible notes remained outstanding at quarter-end.
Changes versus prior period
- Q3 net sales grew 73% and nine-month net sales grew 60%, attributed to expansion into new states and growth in Oregon. Management said 42% of Q3 sales came from outside Oregon, versus 23% a year earlier; out-of-state case sales rose 182% in the quarter.
- Gross margin declined 13 percentage points in Q3 and 4 points year to date, primarily due to higher raw-material costs and, to a lesser extent, product mix.
- Nine-month SG&A increased $517,000 to $3.95 million, mainly from legal costs, stock-based compensation, and payroll. Q3 SG&A was nearly flat year over year at $1.58 million.
- Nine-month other expense was $493,012, versus $36,244 of other income in 2015, reflecting debt-related amortization and interest; the prior period included a one-time gain related to the MWW spin-off.
- Nine-month operating cash use rose to $3.13 million from $1.24 million.
Outlook, risks, contingencies and unusual items
- Going concern: The company reported substantial doubt about its ability to continue as a going concern, citing a $3.76 million nine-month loss, $11.36 million accumulated deficit, and negative operating cash flow. Management planned further debt or equity financing and expense reductions; continued operations depend on profitable operations, positive cash flow, and access to financing, with no assurance of success.
- Management expected approximately $20,000 of 2016 capital expenditures, primarily for manufacturing capacity, and said improved input costs could benefit future periods. It cited distribution growth, a largest-ever purchase order, and investments in people, facilities, and marketing as support for expansion; no quantified earnings or revenue guidance was provided.
- Management identified customer acceptance and product-development risks, reliance on external financing and wholesale distributors, inventory and demand risks, and broader alcohol-industry conditions. Two distributors represented 77% of receivables at September 30; three distributors accounted for 57% of nine-month revenue.
- The company used receivables factoring at 2.15% monthly; $184,875 of factored invoices remained open at quarter-end. It factored $560,172 of invoices and incurred $21,500 related interest expense in the nine-month period.
- Operating leases required approximately $1.17 million of future minimum payments through 2020. Management said ordinary-course legal matters were not expected to have a significant financial effect; Part II reported no legal proceedings.
- Management concluded disclosure controls were ineffective, citing material weaknesses in control-evaluation procedures, documentation of review procedures, and IT backup procedures, as well as limited resources and lack of segregation of duties. An audit committee was established in September 2016.
- Subsequent events included $300,000 of additional 8% notes issued through November 14, a 20-for-1 reverse stock split effective October 18, and November agreements involving preferred-stock conversions and executive compensation. The filing states share and per-share figures were adjusted for the reverse split.
Important facts for investors to verify
- Confirm the correct issuer: the supplied 10-Q is for Eastside Distilling, Inc., not Beeline Holdings, Inc.
- Assess near-term funding needs, cash burn, financing availability, and the terms and maturity profile of debt and warrants.
- Track whether sales growth translates into margin improvement and lower operating losses, particularly as raw-material costs and product mix change.
- Review distributor concentration, receivable collection, and the cost and continued use of factoring.
- Monitor dilution and preferred-stock rights, including the reverse split, warrant issuances, and subsequent conversions.
- Determine whether management remediates the disclosed material weaknesses in financial reporting controls.