Is this grifting? How did the distributor benefit?
This sounds like the business equivalent of college advisors. They had an advisor who was probably well meaning but couldn't fully accommodate the young company because of ignorance/inability/whatever and now they're deep in a decision they never would have made.
$5-10k in a decent retainer would likely have prevented this.
This is the classic "if you owe the bank $1000 you have a problem, if you owe the bank $1 billion the bank has a problem". And thanks to the net N terms + control of the end client, you're the bank.
Why did the potential buyer have a sudden inability to sell any part of a large order, what changed? Presumably, if they're got the product for free they somehow would have found a way to sell it all. Maybe they (the potential buyer) were just using the small company to force a price with a different supplier.
I'm not sure if one can tell if it's grift or not; it certainly seems immoral. Like going into a small restaurant, ordering loads of food and then saying "oh, I ate before I came out, I'm not hungry" and just leaving without paying.