Eastside distilling part 2: review Q1 results
lol
I believe EAST might be a 0, or basically 0, before the end of this year and equity holders (as well as preferred equity holders) are going to be wiped out.
Here is my analysis of the latest results. Please note that this is after my 3rd (but not last) whiskey shot so there is a chance this will just be a stream of disorganized consciousness
Let’s start with the earnings press release.
EAST has $2.6 million of cash as of March 31st, but that is after raising $2 million of working capital financing during the quarter offset by paying off $900K of the Live Oak debt facility. Absent the working capital financing, the company would have had only $600K of cash and probably insolvent today.
So they say they managed to improve spirits gross profit by over $800K during the quarter. The issue is all of the profit improvement came from their sale of spirits barrels. As a reminder, EAST sold 798 barrels of Rye Whiskey in Q1 and booked a sale of $1.5 million. Management commented that this sale came with a good amount of profit.
Funny enough the company did NOT tell us how much profit they made on the sale, but it is really not too hard for us to estimate.
Over the 3 quarters of Spirits-only financials, we can estimate that the spirits division has historically generated a gross profit of $300K per quarter. Q1 gross profit was nearly $1M so I think it is fair to assume that EAST made a $700K profit on their barrel sales. This is consistent with what management had to say that “we’ve sold them significantly above where we — were out costs are”.
So what does this mean? Well…while it looked like the company was able to lower its operating losses year over year from $2.3 million to $1.6 million, if we add back the gain on sale on the barrels, operating losses in this quarter would actually be the same at $2.3 million.
This also means that without the working capital financing AND the barrel sale, the company would have run out of cash in Q1.
So normalised operating losses is $2.3 million and the company has to pay roughly $400K per quarter in interest expense. So total losses of $2.7 million run-rate. EAST has $2.6 million of cash so this means the company would basically be insolvent by end June. Luckily the company managed to raise another $1.2 million of working capital financing after the quarter end which will give them another month. So they are going to run out of cash by July.
Oh, let’s not forget that the company has a $3.3M debt maturity due October 2022.
Oh yeah, total cases of spirits continue its downwards march to nothingness. Fun.
Let’s look at that magical canning business that apparently will save the day.
Till date the company has 350K cans booked. They are not all printed yet, but they are queued up. So the company begin production on cans in April. Management didn’t specify the date but let’s say it is mid April. So over the course of a month, the company has only managed to book 350K cans. I believe that is a run-rate of about 4M cans…far short from the 25M that was promised.
And the CEO/CFO that can’t speak to normalized margins. They don’t even have a sense of the unit economics of this digital printing business! As a reminder, Hart Printing which is a business which has a similar printer was sold for $5M after it went into full production. I like how Geoff is now walking back on his comments on margin stated before.
The company will likely end the June quarter with a million in cash, and unless they find new source of financing, they would run out of cash before their Q2 earnings call. And then they have $3.3M of debt maturity this October. There are still many shares to short. I plan to do so.