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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Eastside Distilling Inc    EAST

EASTSIDE DISTILLING INC

(EAST)
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EASTSIDE DISTILLING : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/14/2019 | 04:21pm EDT

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes. This section of the Quarterly Report includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like "believe", "expect", "estimate", "anticipate", "intend", "project", "plan" and similar expressions, or words which, by their nature, refer to future events. Forward-looking statements may include, among other things, statements about:



  ? General industry, market and economic conditions (including consumer spending
    patterns and preferences) and our expectations regarding growth in the markets
    in which we operate;
  ? Our ability to introduce competitive new products on a timely basis and
    continue to make investments in product development and our expectations
    regarding the effect of new products on our operating results;
  ? Our realizing the results of our competitive strengths;
  ? Our continuing to focus on and ability to realize our strategic objectives;
  ? Our intention to implement actions to improve profitability, manage expenses,
    increase sales and utilize inventory and accounts receivable balances to help
    satisfy our working capital needs;
  ? Our continuing to follow our product approach;
  ? Our ability to retain, market and grow our existing brands, including Redneck
    Riviera Whiskey and the effect that may have on other brands;
  ? Our ability to protect our intellectual property, including trademarks related
    to our brands;
  ? The effects of competition and consolidation in the markets in which we
    operate;
  ? The ability of our production capabilities to support our business and
    operations and our ability to continue to expand our production capabilities
    to meet demand;
  ? Our ability to cultivate our distribution network and maintain relationships
    with our major distributors;
  ? Application of and changes in applicable laws, regulations and taxes in
    jurisdictions in which we operate and the impact of newly enacted laws;
  ? Our tax position, including any change to federal excise taxes;
  ? The availability of financing;
  ? Our expectations regarding our direct-to-consumer sales and retail stores;
  ? Our ability to expand our operations by acquisitions, including our ability to
    identify, complete, an and finance acquisitions, and our ability to integrate
    and realize the benefits of our acquisitions;
  ? Our ability to realize the anticipated benefits of our canned beverage and
    bottling operations;
  ? Our plan and ability to exploit cannabidiol ("CBD") products;
  ? Our liquidity and capital needs and ability to meet our liquidity needs; and
  ? Our operations, financial performance and results of operations.



You should not place undue certainty on these forward-looking statements which speak only as of the date made, and except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that could cause differences include, but are not limited to, customer acceptance risks for current and new brands, reliance on external sources on financing, development risks for new products and brands, dependence on wholesale distributors, inventory carrying issues, fluctuations in market demand and customer preferences, as well as general conditions of the alcohol and beverage industry, and other factors discussed in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018 entitled "Risk Factors," similar discussions in subsequently filed Quarterly Reports on Form 10-Q, including this Form 10-Q, as applicable, and those contained from time to time in our other filings with the Securities and Exchange Commission.



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Business Overview


We are an Oregon-based producer and marketer of craft spirits, founded in 2008. Our products span several alcoholic beverage categories, including bourbon, American whiskey, vodka, gin and rum, as well as non-alcoholic CBD-based beverages. We sell our products on a wholesale basis to distributors, and we operate several retail tasting rooms in Oregon to market our brands directly to consumers. Our strategy for growth is to build on our local base in the Pacific Northwest and expand selectively to other markets, using major spirits distributors. In December 2016, we retained Sandstrom Partners, an internationally-known spirit branding firm that branded St-Germain and Bulleit Bourbon, to guide our marketing strategy and branding. Sandstrom Partners subsequently became an investor in our company. With the assistance of Sandstrom Partners and using our in-house spirits expertise, during 2017, we created Redneck Riviera Whiskey ("RRW"), in collaboration with Country Music superstar John Rich, of the duo "Big & Rich." Supported by John Rich's marketing efforts, we launched RRW in early 2018.

Operating as a small business in a large, international spirits marketplace occupied by massive conglomerates, we seek to utilize our small size to our advantage. As the success of our RRW launch and Sandstrom Partners collaboration demonstrate, our team can leverage its smaller size to launch new brands more quickly than larger conglomerates because we are able to dedicate more of our attention and resources to developing innovative products. We believe that the dominance of Canadian whiskeys in the light-whiskey segment is vulnerable to a light whiskey that is 100% American, and we are exploiting that vulnerability with RRW, a product that went from idea, to celebrity collaboration, to design and formulation, to market roll-out in less than nine months. We are innovative in targeting emerging trends with our other products as well; for example, we developed our Coffee Rum with cold brew coffee and low sugar, as well as our gluten-free potato vodka. We seek to be both a leader in creating spirits that offer better value than comparable spirits (for example, our value-priced Portland Potato Vodka), and an innovator in creating imaginative spirits that offer a unique taste experience, like our Coffee Rum, Oregon oak-aged whiskeys, our Portland Mule drink (a ready-to-drink ("RTD") cocktail in a single serving can), and most recently Outlandish (a non-alcoholic beverage line that contains CBD).

As a Nasdaq-traded company, we have access to public capital markets to support our growth initiatives, including strategic acquisitions. In May 2017, we used our shares to acquire 90% of Big Bottom Distillery, LLC ("BBD"), known for its award-winning, super-premium gins and whiskeys, including The Ninety One Gin, Navy Strength Gin, Oregon Gin, Delta Rye and American Single Malt Whiskey. BBD's super-premium spirits give us a presence at the "high end" of the market. In December of 2018, we acquired the remaining 10% of BBD. In addition, through MotherLode Craft Distillery ("MotherLode"), our wholly-owned subsidiary acquired in March 2017, and Craft Canning + Bottling, LLC (formerly known as Craft Canning, LLC) ("Craft Canning") acquired on January 11, 2019, we also provide contract bottling, canning, and packaging services for existing and emerging beer, wine and spirits producers. We intend to use our canning equipment, at MotherLode and Craft Canning, to profit from the rapid growth in canned beverages (Beer, Wine, Spirit-based RTD's and CBD). We believe our significant capacity expansion (and regional reputation) due to the more recent acquisition of Craft Canning, is a competitive advantage.



Results of Operations



Overview


Our first half 2019 results benefitted from continued growth in key parts of the business as well as from the newly acquired Craft Canning in January of this year. Gross sales increased 157% over the comparable period of the prior year, primarily due to: 1) the continued sales momentum of RRW, 2) the addition of Craft Canning; and 3) increased wholesale sales traction within the Pacific Northwest, especially with our various vodka products and our Burnside product line.

In order to support our key initiatives, we have continued to invest heavily in our infrastructure (facilities, people, and marketing programs). We believe we are well positioned from a capacity and infrastructure standpoint to leverage these investments and experience improved performance throughout the balance of 2019.



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Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018




Our sales for the three months ended June 30, 2019 increased to $4,252,415, or
approximately 154%, from $1,675,067 for the three months ended June 30, 2018.
The following table compares our sales in the three months ended June 30, 2019
and 2018:



                                       Three Months Ended June 30,
                                2019                      2018
Wholesale                    $ 1,280,012        30 %   $   829,738        50 %
Private Label (Co-packing)     2,723,000        64 %       557,259        34 %
Retail / Special Events          249,403         6 %       268,070        16 %
Total                        $ 4,252,415       100 %   $ 1,675,067       100 %



The increase in sales in the three months ended June 30, 2019 is primarily attributable to: the RRW product, increased wholesale sales traction within the Pacific Northwest and our acquisition of Craft Canning and the related expansion of our private label/co-packing business and canning abilities.

Excise taxes, customer programs and incentives for the three months ended June 30, 2019 increased to $357,237, or approximately 137.6%, from $150,380 for the comparable 2018 period. The increase was attributable to higher excise taxes as a result of the increase in spirit sales, as well as an increase in customer programs and incentives due to increased distribution.

Cost of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs. During the three months ended June 30, 2019, cost of sales increased to $2,413,240, or approximately 216%, from $763,768 for the three months ended June 30, 2018. The increase is attributable to the costs associated with our increased sales in the period, as well as higher facilities costs.

Gross profit is calculated by subtracting the cost of sales from net sales. Gross margin is gross profits stated as a percentage of net sales.

The following table compares our gross profit and gross margin in the three months ended June 30, 2019 and three months ended June 30, 2018:



                                    Three Months Ended June 30,
                                        2019               2018

                   Gross profit   $      1,481,938$ 760,919
                   Gross margin                 38 %            50 %



Our gross margin of 38% of net sales in the three months ended June 30, 2019 decreased from our gross margin of 50% for the three months ended June 30, 2018 primarily due to a change in product and business mix as well as higher raw material costs and higher facilities costs. While our goal is to ultimately improve our overall gross margin and improve the efficiencies of our now larger production facility as we generate increased volumes, our margins may continue to fluctuate as a result of other key factors: raw material costs which tend to fluctuate, product sales mix and the related customer programs and incentives, which are subject to seasonal fluctuations and the competitive environment.

Advertising, promotional and selling expenses for the three months ended June 30, 2019 increased to $1,236,143, or approximately 15.9%, from $1,066,847 for the three months ended June 30, 2018. This increase is primarily due to our efforts to expand our product sales both regionally in the Pacific Northwest as well as target national markets, particularly with the newer RRW product.

General and administrative expenses for the three months ended June 30, 2019 increased to $3,077,174, or approximately 106%, from $1,495,486 for the three months ended June 30, 2018. This increase is primarily due to increased headcount and the associated compensation and benefits, higher depreciation and amortizations costs, and certain one-time costs related to bonuses paid and acquisition-related expenses.



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Total other expense, net was $117,108 for the three months ended June 30, 2019, compared to $104,515 for the three months ended June 30, 2018, an increase of 12%. This increase was primarily due to higher interest expense on an increased notes payable balance in 2019.

Net loss attributable to common shareholders during the three months ended June 30, 2019 was $2,948,487 as compared to a loss of $1,906,625 for the three months ended June 30, 2018. The increase in our net loss was primarily attributable to our higher general and administrative expenses and advertising, promotional and selling expenses during 2019, partially offset by an increase in gross profit.

Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018




Our sales for the six months ended June 30, 2019 increased to $7,938,115, or
approximately 157%, from $3,088,249 for the six months ended June 30, 2018. The
following table compares our sales in the six months ended June 30, 2019 and
2018:



                                        Six Months Ended June 30,
                                2019                      2018
Wholesale                    $ 2,747,200        35 %   $ 1,585,452        51 %
Private Label (Co-packing)     4,716,591        59 %       883,069        29 %
Retail / Special Events          474,324         6 %       619,728        20 %
Total                        $ 7,938,115       100 %   $ 3,088,249       100 %



The increase in sales in the six months ended June 30, 2019 is primarily attributable to: the RRW product, increased wholesale sales traction within the Pacific Northwest and our acquisition of Craft Canning and the related expansion of our private label/co-packing business and canning abilities.

Excise taxes, customer programs and incentives for the six months ended June 30, 2019 increased to $546,638, or approximately 59.3%, from $343,229 for the comparable 2018 period. The increase was attributable to higher excise taxes as a result of the increase in spirit sales, as well as an increase in customer programs and incentives due to increased distribution.

Cost of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs. During the six months ended June 30, 2019, cost of sales increased to $4,734,538, or approximately 240%, from $1,391,291 for the six months ended June 30, 2018. The increase is attributable to the costs associated with our increased sales in the period, as well as higher facilities costs.

The following table compares our gross profit and gross margin in the six months ended June 30, 2019 and six months ended June 30, 2018:



                                     Six Months Ended June 30,
                                        2019             2018

                    Gross profit   $    2,656,939$ 1,353,729
                    Gross margin               36 %            49 %



Our gross margin of 36% of net sales in the six months ended June 30, 2019 decreased from our gross margin of 49% for the six months ended June 30, 2018 primarily due to a change in product and business mix as well as higher raw material costs and higher facilities costs. While our goal is to ultimately improve our overall gross margin and improve the efficiencies of our now larger production facility as we generate increased volumes, our margins may continue to fluctuate as a result of other key factors: raw material costs which tend to fluctuate, product sales mix and the related customer programs and incentives, which are subject to seasonal fluctuations and the competitive environment.



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Advertising, promotional and selling expenses for the six months ended June 30, 2019 increased to $2,569,418, or approximately 50.3%, from $ 1,709,824 for the six months ended June 30, 2018. This increase is primarily due to our efforts to expand our product sales both regionally in the Pacific Northwest as well as target national markets, particularly with the newer RRW product.

General and administrative expenses for the six months ended June 30, 2019 increased to $5,754,929, or approximately 112.5%, from $2,707,998 for the six months ended June 30, 2018. This increase is primarily due to increased headcount and the associated compensation and benefits.

Total other expense, net was $224,518 for the six months ended June 30, 2019, compared to $160,953 for the six months ended June 30, 2018, an increase of 39.5%. This increase was primarily due to higher interest expense on an increased notes payable balance in 2019.

Net loss attributable to common shareholders during the six months ended June 30, 2019 was $5,891,926 as compared to a loss of $3,225,149 for the six months ended June 30, 2018. The increase in our net loss was primarily attributable to our higher general and administrative expenses and advertising, promotional and selling expenses during 2019, partially offset by an increase in gross profit.

Liquidity and Capital Resources

Our primary capital requirements are for the financing of inventories, cash used in operating activities and financing acquisitions. Funds for our cash and liquidity needs have historically not been generated from operations but rather from short-term credit in the form of extended payment terms from suppliers as well as from convertible debt and equity financings.

For the six months ended June 30, 2019 and 2018, we incurred a net loss of approximately $5.9 million and $3.2 million, respectively, and had an accumulated deficit of approximately $33.2 million as of June 30, 2019. We have been dependent on raising capital from debt and equity financings to meet our needs for cash flow used in operating activities. For the six months ended June 30, 2019, we did not raise additional capital.

At June 30, 2019, the Company had $0.8 million of cash on hand with a positive working capital of $12.2 million. The Company's ability to meet its ongoing operating cash needs over the next 12 months is dependent on raising additional debt or equity capital, generating positive operating cash flow, primarily through increased sales, improved profit growth and controlling expenses. Management intends to implement additional actions to improve profitability, by managing expenses while continuing to increase sales. Additionally, management intends to utilize the large inventory and accounts receivable balances to help satisfy its working capital needs over the next twelve months.

The Company's cash flows for the six months ended June 30, 2019 and six months ended June 30, 2018 are as follows:




                                          Six Months Ended June 30,
                                            2019              2018
Net cash flows provided by (used in):
Operating activities                    $  (6,177,347 )$ (6,811,495 )
Investing activities                    $  (3,608,887 )$   (697,056 )
Financing activities                    $     (87,932 )$  7,274,894




Operating Activities


During the six months ended June 30, 2019, our net loss plus non-cash adjustments and changes in operating assets and liabilities used was approximately $6.2 million compared to using $6.8 million cash in operating activities in 2018. There was an increase of $0.7 million in inventory, a $0.5 million increase in trade receivables and a $0.3 million reduction in accounts payable and accrued liabilities in 2019. In 2018, there was an increase of $3.8 million in inventory, a $0.3 million increase in trade receivables and a $0.3 million net reduction in accounts payable and accrued liabilities.



Investing Activities


Cash used in investing activities consists primarily of acquisitions and purchases of property and equipment. We incurred capital expenditures of $3,608,887 and $697,056 in the six months ended June 30, 2019 and 2018, respectively. The increase in cash used in investing activities in the six months ended June 30, 2019 was also largely due to the $1,449,917 Craft Canning acquisition, net of cash acquired, in January 2019.



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Financing Activities


During the six months ended June 30, 2019, our operating losses and working capital needs were primarily funded by existing cash on hand. Net cash flows provided by financing activities during the six months ended June 30, 2018 primarily consisted of $1.8 million in proceeds from warrant exercises, $3.6 million in proceeds from the issuance of promissory notes and $2.0 million in proceeds from a secured credit facility.



Critical Accounting Policies


The discussion and analysis of our financial condition and results of operations is based upon its condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Our critical accounting policies are highly dependent upon subjective or complex judgements, assumptions and estimates. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from the Company's estimates if past experience or other assumptions do not turn out to be substantially accurate.

Other than our adoption and beginning to apply Topic 842 (Leases) and Topic 718 (Improvements to Nonemployee Share-Based Payment Accounting) as discussed in "Note 3 - Summary of Significant Accounting Policies" under Part 1, Item 1 of this Report), management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2019 18,7 M
EBIT 2019 -9,83 M
Net income 2019 -10,00 M
Debt 2019 -
Yield 2019 -
P/E ratio 2019 -3,76x
P/E ratio 2020 -6,72x
Capi. / Sales2019 2,02x
Capi. / Sales2020 1,42x
Capitalization 37,7 M
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Consensus
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Mean consensus UNDERPERFORM
Number of Analysts 2
Average target price 10,50  $
Last Close Price 4,10  $
Spread / Highest target 217%
Spread / Average Target 156%
Spread / Lowest Target 95,1%
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Managers
NameTitle
Grover T. Wickersham Chairman & Chief Executive Officer
Robert Manfredonia President
Melissa Heim Executive Vice President-Operations
Steven M. Shum Chief Financial & Accounting Officer
Trent D. Davis Independent Director
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