Eastside Distilling(EAST) - 2024 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION Financial Statements Eastside Distilling reported Q1 2024 net sales of $2.4 million, a net loss of $1.3 million, and a $0.5 million stockholders' deficit Consolidated Balance Sheets As of March 31, 2024, total assets were $17.0 million, total liabilities increased to $17.5 million, and stockholders' equity shifted to a $0.5 million deficit Consolidated Balance Sheet Summary | Financial Item | March 31, 2024 (unaudited, Thousands of USD) | December 31, 2023 (Thousands of USD) | | :--- | :--- | :--- | | Total Assets | $17,022 | $17,480 | | Total Current Assets | $4,696 | $4,537 | | Total Liabilities | $17,498 | $16,627 | | Total Current Liabilities | $15,902 | $4,205 | | Total Stockholders' Equity (Deficit) | ($476) | $853 | - Cash on hand decreased to $336 thousand from $403 thousand at the end of 2023[11] - Current liabilities surged due to reclassification of previously long-term secured credit facilities and notes payable as current[11] Consolidated Statements of Operations Q1 2024 net sales decreased to $2.4 million, gross profit declined to $186 thousand, and net loss improved to $1.3 million year-over-year Consolidated Statements of Operations Summary | Metric | Q1 2024 (Thousands of USD) | Q1 2023 (Thousands of USD) | | :--- | :--- | :--- | | Net Sales | $2,411 | $2,853 | | Gross Profit | $186 | $641 | | Loss from Operations | ($1,050) | ($1,240) | | Net Loss | ($1,293) | ($1,598) | | Net Loss Attributable to Common Shareholders | ($1,331) | ($1,636) | | Basic and Diluted Net Loss per Share | ($0.78) | ($2.00) | | Weighted Average Shares Outstanding (Thousands) | 1,706 | 824 | Consolidated Statements of Cash Flows Q1 2024 net cash used in operations significantly improved to $81 thousand, with cash balance decreasing to $336 thousand Consolidated Statements of Cash Flows Summary | Cash Flow Activity | Q1 2024 (Thousands of USD) | Q1 2023 (Thousands of USD) | | :--- | :--- | :--- | | Net cash used in operating activities | ($81) | ($428) | | Net cash provided by (used in) investing activities | $14 | ($28) | | Net cash provided by financing activities | $0 | $0 | | Net decrease in cash | ($67) | ($456) | | Cash at end of period | $336 | $267 | Notes to Consolidated Financial Statements Notes detail the company's segment operations, severe liquidity issues, $84.0 million accumulated deficit, and debt restructuring - The company operates in two segments: Craft Canning + Printing (Craft C+P) and Spirits, including brands like Burnside Whiskey and Azuñia Tequila[23][24] - The company has an accumulated deficit of $84.0 million as of March 31, 2024, with auditors expressing substantial doubt about its going concern ability[26][28] - In September 2023, the company executed a Debt Satisfaction Agreement (DSA), exchanging $6.5 million of debt for equity and extending other debt maturities to March 31, 2025[94][95][96] Segment Performance Summary | Segment Performance (Q1 2024 vs Q1 2023, Thousands of USD) | Craft C+P | Spirits | | :--- | :--- | :--- | | Sales | $1,849 vs $1,456 | $638 vs $1,423 | | Gross Profit (Loss) | $49 vs ($101) | $137 vs $742 | | Net Loss | ($590) vs ($884) | ($92) vs $221 (Income) | Management's Discussion and Analysis (MD&A) MD&A covers segment strategy, Q1 2024 sales decline to $2.4 million, gross margin contraction, severe liquidity issues, and Azuñia brand impairment Results of Operations Q1 2024 consolidated sales decreased to $2.5 million due to a 55% drop in Spirits sales, partially offset by 27% Craft C+P growth - Craft C+P sales grew 27% in Q1 2024, printing 4.8 million cans versus 2.5 million in Q1 2023, driven by new customers and improved throughput[133][138] - Spirits sales decreased significantly due to the absence of $0.6 million in bulk spirits sales from Q1 2023[139] - Gross margin fell from 22% to 8% year-over-year, primarily due to the non-recurrence of high-margin bulk spirits sales from the prior year[145] - General and administrative expenses decreased from $1.4 million to $1.1 million, primarily due to cost-cutting measures including staff reductions and lease exits[149] Liquidity and Capital Resources The company faces precarious liquidity with $0.3 million cash, $11.2 million negative working capital, and deferred interest payments, relying on asset sales and financing - As of March 31, 2024, the company had $0.3 million in cash, $11.2 million negative working capital, and an $84.0 million accumulated deficit[154] - The company's survival depends on asset sales, external financing, and operational improvements, especially in digital can printing revenues and gross margins[155] - The company deferred interest payments in Q1 2024 and is negotiating with creditors, with no assurance of a successful outcome[156] Critical Accounting Policies Critical accounting policy involves Azuñia brand intangible asset valuation, which was impaired as of December 31, 2023, resulting in a $0.4 million write-down - The valuation of the Azuñia brand, an indefinite-lived intangible asset, is a critical accounting estimate requiring significant management judgment for impairment assessment[162][163] - As of December 31, 2023, the Azuñia brand was impaired, and its carrying cost was reduced by $0.4 million[164] Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal controls - The CEO and CFO concluded the company's disclosure controls and procedures were effective as of quarter-end[167] - No material changes were made to internal controls over financial reporting during Q1 2024[168] PART II: OTHER INFORMATION Legal Proceedings The company is defending against two primary legal actions, including a $285 thousand claim from Sandstrom Partners and a lawsuit from former CEO Grover Wickersham - The company is being sued by Sandstrom Partners, Inc. for $285 thousand in alleged unpaid service fees from a 2019 agreement[170] - Former CEO Grover Wickersham has filed a complaint against the company alleging fraud, breach of contract, and defamation[171] Risk Factors New material risks include Nasdaq non-compliance for minimum stockholders' equity and independent director rules, plus deferred interest payments to creditors - The company is non-compliant with Nasdaq's $2.5 million minimum stockholders' equity requirement, having a $0.5 million deficit, facing potential delisting[173] - The company is also non-compliant with Nasdaq's independent director and audit committee composition rules, with a cure period to regain compliance[174] - Significant risk arises from deferred interest payments in Q1 2024, as unsuccessful creditor negotiations could jeopardize funding for operations[175]