The accompanying notes are an integral part of these condensed consolidated financial statements.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017March 31, 2020

(unaudited)

Eastside Distilling (the “Company,” “Eastside,” “Eastside Distilling,” “we,” “us,” or “our, below) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, we changed our corporate name to Eastside Distilling, Inc. (“Eastside” orto reflect our acquisition of Eastside Distilling, LLC. We manufacture, acquire, blend, bottle, import, export, market and sell a wide variety of alcoholic beverages under recognized brands. We currently employ 91 people in the “Company”) is an Oregon-based producer and marketer of craft spirits, founded in 2008. United States.

Our productsbrands span several alcoholic beverage categories, including bourbon, American whiskey, vodka, gin, rum, tequila and rum. Unlike many, if not most, distillers,Ready-to-Drink (RTD). We sell our products on a wholesale basis to distributors, and until March 2020, we operate severaloperated four retail tasting rooms in Portland, Oregon to market our brands directly to consumers.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(unaudited)

Our growth strategymission as a craft spirits company is to buildbecome capable of building unique brands and authentic craft spirits culminating in a loyal consumer base through unique differentiation on a local, regional, and potentially, national basis, leading to potential opportunities to sell our local base inmost mature brands to the Pacific Northwesttier 1 spirits houses. This strategy was first demonstrated by our licensing and expand selectivelylaunch of our Redneck Riviera Brand (RRW). This demonstrated how our team can leverage its position to other markets by using major spirits distributors, such as Southern Glazer Wineslaunch nascent or new brands and Spirits, and regional distributors that focus on craft brands. As a small business in the large, international spirits marketplace populated with massive conglomerates,grow them because we are able to focus and dedicate more of our attention to developing innovative products. Our RRW brand went from idea, to market roll-out in exploitingless than nine months and achieved national distribution in 49 states in 18 months. In September 2019, we acquired the Azuñia tequila brand and have begun to distribute this brand regionally through our national platform.

Recent Developments

Introduction of new trendsRedneck Riviera Whiskey “Granny Rich Reserve”.In February 2019, we announced the introduction of our newest product under the Redneck Riviera trademark - Redneck Riviera Whiskey “Granny Rich Reserve”. Representing the first line extension with the Redneck Riviera Brand, Granny Rich Reserve is a premium priced blend of traditional corn whiskey, aged three years or more, blended with American single malt aged at least four years.

Introduction of new Portland Mule Ready-to-Drink (RTD) Cocktail.In January 2019, we announced our products, for example, our Coffee Rumlandmark entry into the fast growing Ready-to-Drink (RTD) market with cold brew coffee and low sugar and our gluten-free potato vodka. In December 2016 we retainedthe introduction of the Portland Mule Ready-to-Drink Cocktail. Portland Mule comes in a 250ml, or 8.4 oz can, designed by the award-winning design team at Sandstrom Partners, (an internationally known spirit branding firm that branded St Germain and Bulleit Bourbon)has a 10.5% alcohol by volume. In August 2019, we announced the Portland Mule – Marionberry flavor Ready-to-Drink Cocktail.

Acquisition of Craft Canning & Bottling – creates significant increase in canning operations. In January 2019, we completed the acquisition of Portland-based Craft Canning + Bottling (“Craft Canning”) a leading provider of mobile canning and bottling services in Oregon, Washington and Colorado. Craft Canning will combine operations with Eastside’s MotherLode co-packing subsidiary, positioning the combined business unit to guide our marketing strategybe a preeminent local provider to the fast-growing wine and branding.Ready-to-Drink (RTD) cocktail segments.

Acquisition of the high-end, luxury tequila brand, Azuñia. In September 2019, we completed the acquisition of Azuñia Tequila from Intersect Beverage. Azuñia Tequila offers four premium tequila products; Blanco Organic Tequila, Reposado Organic Tequila, Añejo Tequila, and Azuñia Black Tequila. These tequila products are primarily sold into on-premise locations throughout the western and southeastern United States. The Azuñia tequila brand provides Eastside Distilling with a second national anchor brand, along with Eastside’s Redneck Riviera Whiskey portfolio.

Introduction of new Redneck Riviera “Howdy Dew!”In October 2019, we announced the Redneck Riviera Ready-to-Drink Cocktail “Howdy Dew!”. Representing the second line extension with the Redneck Riviera Brand, Howdy Dew! comes in a 12 oz can, designed by the award-winning design team at Sandstrom Partners, subsequently became an investor in our Company. We seek to be bothand has 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, for example our cold-brewed Coffee Rum, Oregon oak aged whiskeys, Marionberry Whiskey and Peppermint Bark holiday liqueur. On May 1, 2017, we acquired 90% of the ownership of Big Bottom Distillery (“BBD”) for its excellent, award winning range of super premium gins and whiskeys, including The Ninety One Gin, Navy Strength Gin, Oregon Gin, Delta Rye and initial production of American Single Malt Whiskey. BBD’s super premium spirits will expand our tasting room offerings and give us a presence at the “high end” of the market. In addition, through MotherLode Craft Distillery (“MotherLode”), our wholly-owned subsidiary acquired in March 2017, we also provide contract bottling and packaging services for existing and emerging spirits producers, some of whom contract with us to blend or distill spirits. MotherLode has also launched a new canning line of Ready-to-Drink (RTD) products, primarily designed for the wine and pre-mixed alcoholic drink industry. As a publicly-traded craft spirit producer, we have access to the public capital markets to support our long-term growth initiatives, including strategic acquisitions.5.5% alcohol by volume.

We currently sell our products in 25 states (Oregon, California, Washington, Florida, New York, Illinois, Texas, Georgia, Pennsylvania, Alaska, Connecticut, Idaho, Indiana, Iowa, Kansas, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, North Carolina, Rhode Island, Virginia, West VirginiaEastside Distilling, Inc. and Wyoming) as well as Washington D.C. and Ontario, Canada. The Company also generates revenue from tastings, tasting room tours, private parties, and merchandise sales from its facilities in Oregon. The Company is subjectSubsidiaries

Notes to the Oregon Liquor Control Commission (OLCC) and the Alcohol and Tobacco Tax and Trade Bureau (TTB).Condensed Consolidated Financial Statements

March 31, 2020

(unaudited)

Historically, the Company has funded its cash and liquidity needs through the issuance ofoperating cash flow convertible notes, extended credit terms, and the sale of equity.equity financings. The Company has incurred a net loss of $3,602,104$3.5 million and has an accumulated deficit of $16,419,011 for the nine months ended September 30, 2017.$47.7 million as of March 31, 2020. The Company has been dependent on raising capital from debt and equity financings to fund its operating activities. Foras well as the nine months ended September 30, 2017, the Company raised $8,033,942 in proceeds from financing activitiesutilization of our inventory to meet its needs for cash flow used in operating activities. For the three months ended March 31, 2020, we raised approximately $2.3 million in additional capital through debt financing (net of repayments).

At September 30, 2017,March 31, 2020, the Company had $4,190,085$1.3 million of cash on hand with a positive working capital of $6,469,391. The Company’s$2.8 million. Our ability to meet itsour ongoing operating cash needs is dependentover the next 12 months depends on reducing our operating costs, utilizing our inventory, raising additional debt or equity capital and generating positive operating cash flow, primarily through increased sales, improved profit growth and controlling expenses. Management has takenWe intend to implement actions to improve profitability, by managing expenses while increasingcontinuing to increase sales. Also,Additionally, we are seeking to leverage our $11.1 million inventory balance and our $1.1 million accounts receivable balance to help satisfy our working capital needs over the next 12 months. See Notes 10 and 11 to our financial statements for a description of our debt and the debt refinancing initiatives completed in Marchthe first quarter of 2020. If we are unable to obtain additional financing, or additional financing is not available on acceptable terms, we may seek to sell assets, reduce operating expenses or reduce or eliminate marketing initiatives, and May 2017,take other measures that could impair our ability to be successful.

Although our audited financial statements for the Company acquired two businesses, a contract bottling and packaging services company and a small distillery business (both stock purchase transactions),year ended December 31, 2019 were prepared under the assumption that are expected to improve operating results. Management believes that cash on hand, including proceeds generated from the most recent equity financing, along with revenue that the Company expects to generate fromwe would continue our operations including as a resultgoing concern, the report of its two recent acquisitions, will be sufficientour independent registered public accounting firm that accompanies our financial statements for the year ended December 31, 2019 contains a going concern qualification in which such firm expressed substantial doubt about our ability to meetcontinue as a going concern, based on the Company’s cash needsfinancial statements at that time. Specifically, as noted above, we have incurred operating losses since our inception, and even though we have reduced our operating expenses and increased our available capacity under our lines of credit, and have large inventory balances to drawn from, we expect to continue to incur significant expenses and operating losses for the foreseeable future.

Eastside Distilling, Inc. These prior losses and Subsidiaries

Notesexpected future losses have had, and will continue to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)have, an adverse effect on our financial condition. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements for Eastside Distilling, Inc. and Subsidiariessubsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP)(“GAAP”) for interim financial information and in accordance with instructions for Form 10-Qthe rules and therefore, do not include allregulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures necessary for a complete presentation ofnormally included in financial condition, results of operations,statements in accordance with GAAP have been condensed or eliminated as permitted under the SEC’s rules and cash flows in conformity with GAAP.regulations. In our opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of September 30, 2017,March 31, 2020, our operating results for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 and our cash flows for the ninethree months ended September 30, 2017March 31, 2020 and 2016.2019. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019. Interim results are not necessarily indicative of the results that may be expected for thean entire fiscal year ending December 31, 2017.year. The condensed consolidated financial statements include the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiarysubsidiaries, including, MotherLode, BBD, Outlandish, LLC, Redneck Riviera Whiskey Co., LLC, Craft Canning (beginning as of March 8, 2017),January 11, 2019) and majority-owned subsidiary BBDthe Azuñia tequila assets (beginning as of May 1, 2017)September 12, 2019). All intercompany balances and transactions have been eliminated in consolidation.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(unaudited)

Segment Reporting

The Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company has one business activity, producing, packaging, marketing and distributing hand-crafted spirits,alcoholic beverages and operates as one segment. The Company’s chief operating decision makers, its chief executive officer, president and chief financial officer, review the Company’s operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Net revenue includessales include product sales, less excise taxes and customer programs and incentives.excise taxes. The Company recordsrecognizes revenue by applying the following steps in accordance with Accounting Standards Codification (“ASC”) Topic 606 –Revenue from Contracts with Customers: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when all four of the following criteria are met: (i) thereeach performance obligation is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.satisfied.

The Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment sales, which include sales to the Oregon Liquor Control Commission (OLCC), the Company recognizes sales upon the consignee’s shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary rights of return. The Company excludes sales tax collected and remitted to various states from sales and cost of sales. Sales from items sold through the Company’s retail locationlocations are recognized at the time of sale.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

Revenue received from online merchants who sell discounted gift certificates for the Company’s merchandise and tastings at its tasting rooms, is deferred until the customer has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier.

Customer Programs and Incentives

Customer programs, and incentives, which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcohol beverage industry. The Company makes these payments to customers and incurs these costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net sales or as advertising, promotionalsales and sellingmarketing expenses in accordance with Accounting Standards Codification (“ASC”) Topic 605-50, ASC 606 -Revenue Recognition - Customer Payments and Incentives,from Contracts with Customers, based on the nature of the expenditure. Amounts paid to customers totaled $118,389$0.3 million and $72,918$0.1 million for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.

Advertising, Promotional and Selling Expenses

The following expenses are included in advertising, promotions and selling expenses in the accompanying consolidated statements of operations: media advertising costs, special event costs, tasting room costs, sales and marketing expenses, salary and benefit expenses, travel and entertainment expenses for the sales, brand and sales support workforce and promotional activity expenses. Advertising, promotional and selling costs are expensed as incurred. Advertising, promotional and selling expense was $1,499,751 and $951,293 for the nine months ended September 30, 2017 and 2016, respectively.

Cost of Sales

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.

Shipping and Fulfillment Costs

Freight costs incurred related to shipment of merchandise from the Company’s distribution facilities to customers are recorded in cost of sales.

Cash and Cash Equivalents

Cash equivalents are considered to be highly liquid investments with maturities of three months or less at the time of the purchase. The Company had no cash equivalents at September 30, 2017 and December 31, 2016.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At September 30, 2017, four customers represented 82% of trade receivables, and at December 31, 2016, three customers represented 91% of trade receivables. Sales to two customers accounted for approximately 48% of consolidated net sales for the nine months ended September 30, 2017. Sales to three customers accounted for approximately 57% of net sales for the nine months ended September 30, 2016.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

Fair Value Measurements

GAAP defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAAP permits an entity to choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation and disclosure requirements for assets and liabilities for which the fair value option is elected. At September 30, 2017 and December 31, 2016, management has not elected to report any of the Company’s assets or liabilities at fair value under the “fair value option” provided by GAAP.

The hierarchy of fair value valuation techniques under GAAP provides for three levels: Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, generally would require significant management judgment. The three levels for categorizing assets and liabilities under GAAP’s fair value measurement requirements are as follows:

None of the Company’s assets or liabilities were measured at fair value at September 30, 2017 and December 31, 2016. However, GAAP requires the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments consist principally of trade receivables, accounts payable, accrued liabilities, note payable, and convertible note payable. The estimated fair value of trade receivables, accounts payable, and accrued liabilities approximates their carrying value due to the short period of time to their maturities. At September 30, 2017 and December 31, 2016, the Company’s note payable and convertible notes payable are at fixed rates and their carrying value approximates fair value.

Items Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities acquired in a business acquisition are valued at fair value at the date of acquisition.

Inventories

Inventories primarily consist of bulk and bottled liquor and merchandise and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (FIFO) method. A portion of inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. The Company has recorded no write-downs of inventory for the nine months ended September 30, 2017 and 2016.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the life of the lease or the useful lives of the assets, whichever is shorter. The cost and related accumulated depreciation and amortization of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is reported as current period income or expense. The costs of repairs and maintenance are expensed as incurred.

Intangible Assets / Goodwill

The Company accounts for long-lived assets, including property and equipment, at amortized cost. Management reviews long-lived assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount of the asset, an impairment loss would be recognized to write down the asset to its estimated fair value. At September 30, 2017 and December 31, 2016, no impairment loss was recognized.

Income Taxes

The provision for income taxes is based on income and expenses as reported for financial statement purposes using the “asset and liability method” for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. At September 30, 2017 and December 31, 2016, the Company established valuation allowances against its net deferred tax assets.

Income tax positions that meet the “more-likely-than-not” recognition threshold are measured at the largest amount of income tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized income tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized income tax benefits would be classified as additional income taxes in the accompanying condensed consolidated statements of operations. There were no unrecognized income tax benefits, nor any interest and penalties associated with unrecognized income tax benefits, accrued or expensed at and for the nine months ended September 30, 2017 and 2016.

The Company files federal income tax returns in the U.S. and various state income tax returns. The Company is no longer subject to examinations by the related tax authorities for the Company’s U.S. federal and state income tax returns for years prior to 2011.

Comprehensive Income

The Company does not have any reconciling other comprehensive income items for the nine months ended September 30, 2017 and 2016.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

Excise Taxes

The Company is responsible for compliance with the TTB regulations, which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying amounts. The Company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws. Excise taxes totaled $654,136$0.1 million and $469,936$0.05 million for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(unaudited)

Cost of Sales

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.

Shipping and Fulfillment Costs

Freight costs incurred related to shipment of merchandise from the Company’s distribution facilities to customers are recorded in cost of sales.

Sales and Marketing Expenses

The following expenses are included in sales and marketing expenses in the accompanying condensed consolidated statements of operations: media advertising costs, sales and marketing expenses, promotional costs of value added packaging, salary and benefit expenses, travel and entertainment expenses for the sales, brand and sales support workforce and promotional activity expenses. Sales and marketing costs are expensed as incurred. Sales and marketing expense totaled $1.7 million and $1.2 million for the three months ended March 31, 2020 and 2019. The sales and marketing expenses for Redneck Riviera Whiskey in the first quarter of 2020 were $0.2 million compared to $0.9 million in 2019 for which 50% of these charges are expected to be reimbursed upon the eventual sale of the brand by the licensor if the licensing agreement remains in force. The reimbursement is payable upon the sale of the brand within the term of the agreement, which is 10 years, with a renewable option for any additional 10 years, by the licensor.

General and Administrative Expenses

The following expenses are included in general and administrative expenses in the accompanying condensed consolidated statements of operations: salary and benefit expenses, travel and entertainment expenses for executive and administrative staff, rent and utilities, professional fees, insurance and amortization and depreciation expense. General and administrative costs are expensed as incurred. General and administrative expense totaled $2.2 million and $2.6 million for the three months ended March 31, 2020 and 2019, respectively, of which $1.0 million and $0.6 million were non-cash expenses, respectively.

Stock-Based Compensation

The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest. Stock-based compensation was $900,130$0.4 and $427,947$0.2 million for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.

Discontinued Operations

The Company reports discontinued operations by applying the following criteria in accordance with Accounting Standards Codification (“ASC”) Topic 205-20 – Presentation of Financial Statements – Discontinued Operations: (1) Component of an entity; (2) Held for sale criteria; (3) Strategic shift. During the first quarter of 2020, management made a strategic shift to focus the Company’s sale and marketing efforts on the nationally branded product platform, resulting in the decision to close / abandon all four of its retail stores in the Portland, Oregon area by March 31, 2020. This decision meets the criteria (1) - (3) for reporting discontinued operations, and as a result, the retail operations have been reported as discontinued operations in the accompanying unaudited condensed consolidated financial statements. In the current year, the income, expense and cash flows from retail operations during the period they were consolidated have been classified as discontinued operations. For comparative purposes amounts in the prior periods have been reclassified to conform to current year presentation. Additionally, the assets and liabilities from retail operations are shown on the balance sheet as assets and liabilities for discontinued operations.

Income and expense related to discontinued retail operations

Under the new guidance, lessor accounting iswill be largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606,ASU No. 2014-09, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. WeIn July 2018, the FASB issued ASU 2018-11,Leases (Topic 842).This guidance provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. In addition, this ASU provides a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease and instead account for the lease as a single component if both the timing and pattern of transfer of the nonlease component(s) are currently evaluatingthe same, and if the lease would be classified as an operating lease. These amendments have the same effective date as ASU 2016-02. On January 1, 2019, the Company adopted the new accounting standard using the modified retrospective approach and elected to not adjust comparative periods. Upon adoption, the Company recognized right-of-use assets of $0.9 million, lease liabilities of $1.1 million, and a net adjustment to retained earnings of $0.2 million. The Company considers the impact ASU 2016-02 will have onof the Company’s condensedadoption to be immaterial to its consolidated financial statements.statements on an ongoing basis.

In May 2014,June 2018, the FASB issued ASU No. 2014-09,2018-07,Revenue from Contracts with CustomersCompensation – Stock Compensation (Topic 606)718) – Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2014-09”2018-07”)., which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU 2014-092018-07, the existing employee guidance will supersede virtually all existing revenue guidance. Under this update, an entityapply to nonemployee share-based transactions (as long as the transaction is requirednot effectively a form of financing), with the exception of specific guidance related to recognize revenue upon transferthe attribution of promised goods or servicescompensation cost. The cost of nonemployee awards will continue to customers, in an amount that reflectsbe recorded as if the expected consideration received in exchangegrantor had paid cash for thosethe goods or services. As such, an entityIn addition, the contractual term will need to use more judgment and make more estimates than under the current guidance. ASU 2014-09 isbe able to be applied retrospectively either to each prior reporting period presentedused in lieu of an expected term in the financial statements, or onlyoption-pricing model for nonemployee awards. The new standard became effective on January 1, 2019 and should be applied to all new awards granted after the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings.date of adoption. The Company will elect to apply the impact (if any) of applyingadopted ASU 2014-09 to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. In August 2015, the FASB issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date(“ASU 2015-14”). ASU 2015-14 deferred the effective date of ASU 2014-09 for one year, making it effective for the year beginning December 31, 2017, with early adoption permitted2018-07 as of January 1, 2017. The Company currently expects to adopt ASU 2014-09 in the first quarter of 2018. The Company does not expect adoption of ASU 2014-09 to have a material impact on its condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15,Presentation of Financial Statements - Going Concern(“ASU 2014-15”). The new guidance explicitly requires that management assess an entity’s ability to continue as a going concern and may require additional detailed disclosures. ASU 2014-15 was effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We adopted ASU 2014-15 as of December 31, 2016.2019. The Company does not believe the adoption of ASU 2014-152018-07 had any material impact on its condensed consolidated financial statements.

In July 2015,January 2017, the FASB issued ASU No. 2015-11,2017-04,InventoryIntangibles-Goodwill and Other (Topic 330),350) – Simplifying the Measurement of InventoryTest for Goodwill Impairment (“ASU 2015-11”2017-04”). ASU 2015-11 is part2017-04 will simplify the subsequent measurement of goodwill by eliminating Step 2 from the FASB’s initiative to simplify accounting standards. Thegoodwill impairment test. Current guidance requires an entitythat companies compute the implied fair value of goodwill under Step 2 by performing procedures to recognize inventory within scope ofdetermine the standardfair value at the lowerimpairment testing date of costits assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. ASU 2017-04 will require companies to perform annual or net realizable value. Net realizableinterim goodwill impairment tests by comparing the fair value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposala reporting unit with its carrying amount and transportation. ASU 2015-11 was effective prospectivelyrecognize an impairment charge for the yearamount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and will be applied prospectively. Early adoption of this standard is permitted. The Company adopted ASU 2017-04 as of January 1, 2017. We adopted ASU 2015-11 as of March 31, 2017.2020. The Company does not believe the adoption of ASU 2015-112017-04 had any material impact on its condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, simplifying the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 was effective for annual and interim periods beginning after December 15, 2015 and early application was permitted. We early adopted ASU 2015-03 as of December 31, 2015. The Company does not believe the adoption of ASU 2015-03 had any material impact on its condensed consolidated financial statements.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017March 31, 2020

(unaudited)

Reclassifications

Certain prior period amounts have been reclassified to conform to the September 30, 2017 presentation with no changes to net loss or total stockholders’ equity previously reported.

During the nine months ended September 30, 2017,fiscal year 2019, the Company completed the following acquisitions:

MotherLode Craft Distillery, LLCCanning + Bottling

On March 8, 2017,January 11, 2019, the Company completed the acquisition of MotherLode Craft Distillery,Canning + Bottling, LLC (“MotherLode”Craft Canning”), a small Portland, Oregon-based provider of bottling services and production support to craft distilleries.canning services. The Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2017March 31, 2020 include MotherLode’sCraft Canning’s results of operations. For the three months ended March 31, 2019, Craft Canning’s results of operations are included from the acquisition date of January 11, 2019 through March 8, 2017 through September 30, 2017.31, 2019. The Company’s condensed consolidated financial statements reflect the final purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. MotherLode had approximately $375,000 in revenues (unaudited) in 2016.

The following allocation of the purchase price is as follows:

Intangible assets are recorded at estimated fair value, as determined by management based on available information. The fair value assigned to the customer list intangible asset was determined through the use of the income approach, specifically the relief from royalty and the multi-period excess earning methods. The major assumptions used in arriving at the estimated identifiable intangible asset value included management’s estimates of future cash flows, discounted at an appropriate rate of return which is based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the tangible assets that are expected to contribute directly or indirectly to future cash flows. The customer relationships estimated useful life is seven years.

The fair values assigned toCompany incurred acquisitions costs of $0.1 million during the license intangible asset were determined throughthree months ended March 31, 2019 that have been recorded in general and administrative expenses on the useconsolidated statement of operations. The results of the cost approach.Craft acquisition are included in our consolidated financial statements from the date of acquisition through March 31, 2019. The license has an indefinite liferevenue and will not be amortized.net loss of Craft operations included in our condensed consolidated statements of operations were $1.5 million and ($0.1) million, for the three months ended March 31, 2020. The revenue and net income (including transaction costs) of Craft operations included in our condensed consolidated statements of operations were $1.5 million and $0.1 million, for the period from January 11, 2019 through March 31, 2019.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017March 31, 2020

(unaudited)

Big Bottom Distillery, LLCAzuñia Tequila

On May 1, 2017,September 12, 2019, the Company acquired 90%completed the acquisition of the ownershipAzuñia Tequila brand, the direct sales team, existing product inventory, supply chain relationships and contractual agreements from Intersect Beverage, LLC, an importer and distributor of Big Bottom Distillery, LLC (“BBD”), a Hillsboro, Oregon-based distiller of super premium spirits.tequila and related products. The Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2017March 31, 2020 include BBD’sthe Azuñia Tequila assets and results of operations fromoperations.

The acquisition was structured as an all-stock transaction, provided that the acquisition dateCompany may, at its election, pay a portion of May 1, 2017 through September 30, 2017.the consideration in cash or by executing a three-year promissory note if the issuance of stock would require the Company to hold a vote of its stockholders under the applicable Nasdaq rules. Subject to compliance with applicable Nasdaq rules, the initial consideration, will be payable approximately 18 months following the closing and will consist of 850,000 shares of the Company’s common stock at a stipulated value of $6.00 per share, 350,000 shares of the Company’s common stock based on the Company’s stock price twelve months after the close of the transaction, and additional shares based on the Azuñia business achieving certain revenue targets and the Company’s stock price 18 months after the close of the transaction. The Company has also agreed to issue additional stock consideration (subject to compliance with applicable Nasdaq rules) of up to $1.5 million upon the Azuñia business achieving revenue of at least $9.45 million in the period commencing on the 13th month following the closing and ending on the 24th month following the closing.

The Company’s condensed consolidated financial statements reflect the final purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. BBD had approximately $201,000The Company estimated the purchase price based on weighted probabilities of future results and recorded deferred consideration payable of $12.8 million on the acquisition date that will be remeasured to fair value at each reporting date until the contingencies are resolved, with the changes in revenues (unaudited)fair value recognized in 2016.earnings. The Company remeasured the deferred consideration payable for the period ended December 31, 2019 and increased the liability by $2.7 million to a balance of $15.5 million. No adjustment was made to the deferred consideration payable for the period ended March 31, 2020.

The following allocation of the purchase price is as follows:

Intangible assets are recorded at estimated fair value, as determined by management based on available information. The fair value assigned to the licensebrand intangible asset was determined through the use of the costmarket approach. The licensemajor assumptions used in arriving at the estimated identifiable intangible asset value included category averages for comparable acquisitions, including multiples of annual sales and dollars per case sold. The brand has an indefinite life and will not be amortized.

The results of the Azuñia Tequila asset acquisition are included in our consolidated financial statements for the three months ended March 31, 2020. The sales of Azuñia Tequila products included in our condensed consolidated statements of operations were $1.0 million for the three months ended March 31, 2020.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(unaudited)

Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations for the three months ended March 31, 2019 assume that both acquisitions of Craft Canning + Bottling and Azuñia Tequila were completed on January 1, 2019:

Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results. The share and per share data have been retroactively reflected for the acquisitions.

Inventories consist of the following at September 30, 2017 and December 31, 2016:following:

Property and equipment consists of the following at September 30, 2017 and December 31, 2016:following:

Purchases of property and equipment totaled $381,837$0.04 million and $6,952$1.1 million for the ninethree months ended September 30, 2017March 31, 2020 and 2016,March 31, 2019, respectively. Depreciation expense totaled $25,736$0.5 million and $16,579$0.2 million for the ninethree months ended September 30, 2017March 31, 2020 and 2016,March 31, 2019, respectively.

Intangible assets and goodwill at March 31, 2020 and December 31, 2019 consists of the following:

Amortization expense totaled $0.1 million and $0.1 million for the three months ended March 31, 2020 and March 31, 2019, respectively. The permits and license, Azuñia brand and goodwill have all been determined to have indefinite life and will not be amortized. The customer list is being amortized over a seven-year life.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017March 31, 2020

(unaudited)

There were no intangibleOther assets or goodwill at December 31, 2016. At September 30, 2017, intangible assets and goodwill consist of the following:

As of March 31, 2020, the Company had $0.9 million of capitalized costs related to services provided for the rebranding of its existing product line and branding of new product lines. This amount is being amortized over a seven-year life. The deposits represent office lease deposits.

As of March 31, 2020, the Company had notes receivable from Wineonline.com for $450,000 which mature on August 25, 2020. The interest rate on these notes is 5% and will be payable at maturity. The Company is currently in discussion with Wineonline.com to determine collectability.

Amortization expense totaled $28,033$0.02 million and nil$0.01 million for the ninethree months ended September 30, 2017March 31, 2020 and 2016,March 31, 2019, respectively.

Notes payable consists of the following at September 30, 2017 and December 31, 2016:

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

Maturities on notes payable as of September 30, 2017, are as follows:

Year ending December 31:

The provisionCompany has various lease agreements in place for income taxes resultsfacilities and equipment. Terms of these leases include, in effective tax rates which are different thansome instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2023. As the federal income tax statutory rate. The nature of the differences for the nine months ended September 30, 2017 and 2016 were as follows:

The components of the net deferred tax assets and liabilities at September 30, 2017 and December 31, 2016 consisted of the following:

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

At September 30, 2017,rate implicit in each lease is not readily determinable, the Company has a cumulative net operating loss carryforward (NOL) of approximately $12.2 million,uses its incremental borrowing rate based on information available at commencement to offset against future income for federal and state tax purposes. These federal and state NOLs can be carried forward for 20 and 15 years, respectively. The federal NOLs begin to expire in 2034, anddetermine the state NOLs begin to expire in 2029. The utilization of the NOL carryforwards may be subject to substantial annual limitation due to ownership change provisions of the Internal Revenue Code of 1986 and similar state provisions. In general, if the Company experiences a greater than 50 percentage aggregate change in ownership of certain significant stockholders over a three-year period (a “Section 382 ownership change”), utilization of its pre-change NOL carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code (and similar state laws). The annual limitation generally is determined by multiplying thepresent value of the Company’s stock atlease payments. Based on the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portionpresent value of the NOL carryforwards before utilization and may be substantial.

In assessinglease payments for the realizable of deferred tax assets, management considers whether it is more likely than not that some portion or allremaining lease term of the deferred taxCompany’s existing leases, the Company recognized right-of-use assets will not be realized. The ultimate realization of deferred tax$920,805, lease liabilities of $1,110,445, and a net adjustment to retained earnings of $187,353 upon adoption on January 1, 2019. Right-of-use assets is dependent upon generationand lease liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of future taxable income during the periods in which those temporary differences become deductible. Due to the uncertainty of the realizability of the deferred tax assets, management has determined a full valuation allowance is appropriate.

Operating Leases

The Company leases its warehouse, kiosks and tasting room space under operating lease agreements, which expire through October 2021. Monthly lease payments range from $1,802 to $6,400 over the termslease term. As of March 31, 2020, the leases. For operating leases which contain fixed escalations in rental payments,right-of-use assets and lease liabilities were $0.6 million and $0.7 million, respectively. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the Company records the total rent expensebalance sheet and are recognized on a straight-line basis over the lease term. The difference betweenAggregate lease expense for the three-months ended March 31, 2020 was $0.2 million, consisting of $0.2 million in lease expense computed on a straight-line basis and actual payments for rent represents deferred rent which is included within accruedlease liabilities recorded on the accompanying consolidatedCompany’s balance sheets. Retail spaces undersheet and $0.0 million in short-term lease are subject to monthly percentage rent adjustments when gross sales exceed certain minimums.expense.

At September 30, 2017, future minimumMaturities of lease payments required under the operating leasesliabilities as of March 31, 2020 are approximately as follows:

Total rent expense was $248,535 and $304,000 for the nine months ended September 30, 2017 and 2016, respectively.

On February 7, 2017, we entered into a Lease Termination Agreement with PJM BLDG. II LLC (the “Termination Agreement”), the landlord of our current headquarters and production facilities located at 1805 SE Martin Luther King Jr. Blvd., Portland, Oregon. The Termination Agreement provides that the original lease agreement dated July 17, 2014 terminated on June 30, 2017 rather than October 30, 2020.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017March 31, 2020

(unaudited)

Notes payable consists of the following:

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(unaudited)

The Company paid $0.06 million and $0.03 million in interest on notes for the three months ended March 31, 2020 and 2019, respectively.

Maturities on notes payable as of March 31, 2020, are as follows:

Year ending December 31:

On January 15, 2020, the Company entered into a loan agreement (the “Loan Agreement”) between the Company which includes its wholly-owned subsidiaries MotherLode LLC, an Oregon limited liability company, Big Bottom Distilling, LLC, an Oregon limited liability company, Craft Canning + Bottling, LLC, an Oregon limited liability company, Redneck Riviera Whiskey Co., LLC, a Tennessee limited liability company, and Outlandish Beverages LLC, an Oregon limited liability company collectively, (the “Borrowers” and each a “Borrower”) and Live Oak Banking Company, a North Carolina banking corporation (the “Lender”) to refinance existing debt of the Borrowers and to provide funding for general working capital purposes. Under the Loan Agreement, the Lender has committed to make up to two loan advances to the Borrowers in an aggregate principal amount not to exceed the lesser of (i) $8,000,000 and (ii) a borrowing base equal to 85% of the appraised value of the Borrowers’ eligible inventory of whisky in barrels or totes less an amount equal to all service fees or rental payments owed by the Borrowers during the 90 day period immediately succeeding the date of determination to any warehouses or bailees holding eligible inventory (the “Loan”).

The Loan matures on January 14, 2021 (the “Maturity Date”). On the Maturity Date, all amounts outstanding under the Loan will become due and payable. The Lender may at any time demand repayment of the Loan in whole or in part, in which case the Borrowers will be obligated to repay the Loan (or portion thereof for which repayment is demanded) within 30 days following the date of demand. The Borrowers may prepay the Loan, in whole or in part, at any time without penalty or premium.

The Loan bears interest at a rate equal to the prime rate plus a spread of 2.49%, adjusted quarterly. Accrued interest is payable monthly, with the final installment of interest being due and payable on the Maturity Date. The Borrowers are also obligated to pay a servicing fee, unused commitment fee and origination fee in connection with the Loan. The Company paid $0.06 million in interest as of March 31, 2020.

The Loan Agreement contains affirmative and negative covenants that include covenants restricting each Company’s ability to, among other things, incur indebtedness, grant liens, dispose of assets, merge or consolidate, make investments, or enter into restrictive agreements, subject to certain exceptions.

The obligations of the Borrowers under the Loan Agreement are secured by substantially all of their respective assets, except for accounts receivable and certain other specified excluded property.

The Loan Agreement includes customary events of default that include among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults and change in control defaults. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Loan Agreement at a per annum rate equal to 2.00% above the applicable interest rate.

In connection with the Loan Agreement, the Company issued to the Lender a warrant to purchase up to 100,000 shares of the Company’s common stock at an initial exercise price of $3.9425 per share (the “Warrant”). The Warrant expires on January 15, 2025. In connection with the issuance of the Warrant, the Company granted the Lender piggy-back registration rights with respect to the shares of common stock issuable upon exercise of the Warrant, subject to certain exceptions.

On January 16, 2020, in connection with the Company’s consummation of the Loan Agreement, Eastside repaid in full and terminated the Secured Line of Credit Promissory Note that Eastside had issued to TQLA, LLC (“Holder”) on November 29, 2019 (the “TQLA Note”). Since Eastside repaid the TQLA Note in full prior to its maturity date, the Common Stock Purchase Warrant that Eastside had issued to Holder on November 29, 2019 is not be exercisable and is cancelled. No prepayment or early termination penalties were incurred by Eastside as a result of repaying the TQLA Note. In addition, Eastside repaid in full and terminated the $3,000,000 credit and security agreement (the “Credit and Security Agreement”), by and between the Company and The KFK Children’s Trust, Jeffrey Anderson – Trustee (the “Lender”). The Company paid $27,015 in interest on the TQLA Note and $17,117 in interest on the Credit and Security Agreement during the first quarter of 2020.

On May 13, 2020, Live Oak Banking Company (the “Lender”) notified the Company that it was in default under certain covenants in a loan agreement, dated January 15, 2020, between the Company, Motherlode LLC, Big Bottom Distilling, LLC, Craft Canning + Bottling LLC, Redneck Riviera Whiskey Co., LLC, Outlandish Beverages LLC, and Live Oak Bank (the “Loan Agreement”). Those defaults included the failure to timely deliver information and its belief that we owe certain taxes and did not relate to any failure to pay amounts owing under the Loan Agreement. However, the Lender did not declare an event of default as of the filing date of this Form 10-Q. The Loan Agreement provides that upon an event of default, the Lender may, at its option, declare the entire loan to be immediately due and payable. Further, a default interest rate may apply on all obligations during the existence of an event of default at a per annum rate equal to 2.00% above the applicable interest rate. The Company is currently working with the Lender for resolution.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(unaudited)

Legal Matters

Except asWe were party to the legal proceeding described below, we are not currently subject to any material legal proceedings, howeverbelow. In addition, we could be subject to legal proceedings and claims from time to time in the ordinary course of our business.business, or legal proceedings we considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and divert management resources.

On October 10, 2017, we received22, 2019, a letter from a law firm purporting to represent acomplaint was filed against the Company stockholderin the Circuit Court of Oregon, County of Multnomah by two former employees, Laurie Branch and Justina Thoreson. The complaint also named Jason Price.as defendants certain current and former officers and employees of the Company. The letter stated that such representative was launching an “investigation” into certain grants of stock optionscomplaint is captionedBranch et al. v. Eastside Distilling, Inc. et al., case number 19-CV-45716, and restricted stock units that exceeded applicable limits under the Company’s 2016 Equity Incentive Plan (the “2016 Plan”) (collectively, the “Additional Grants”). The representative stated the beliefalleged, among other things, that the Board had violatedCompany and certain current and former officers and employees engaged in sex discrimination, retaliation for reporting sexual discrimination, sexual harassment, and aiding and abetting unlawful discrimination. This litigation was successfully mediated on March 20, 2020 and has been settled. The Company’s insurer accepted initial defense of this matter, with a reservation of rights. The Company paid $100,000 retention for the terms of the 2016 Plan by approving the Additional Grants, and such approval constituted a breach of fiduciary duty and possible evidence of material weaknesses in internal controls. The Board rejects any such contentions. Although we acknowledge that the Additional Grants were made despite the stated limits in the 2016 Plan, we believe that the Additional Grants were in the best interests of our stockholders. We believe that our existing corporate governance mechanisms are sufficiently robust as to be able to review and take a proper response to Mr. Price’s letter. We are seeking stockholder approval of the Additional Grants and of certain amendments to the 2016 Plan to increase such limits at the upcoming annual stockholder meeting on December 8, 2017.claim.

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted net loss per common share is computed by dividing net loss by the sum of the weighted average number of common shares outstanding and the potential number of any dilutive common shares outstanding during the period. Potentially dilutive securities consist of the incremental common stock issuable upon exercise of stock options and convertible notes. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. There were no dilutive common shares at September 30, 2017March 31, 2020 and 2016.2019. The numerators and denominators used in computing basic and diluted net loss per common share in 20172020 and 20162019 are as follows:

��

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017March 31, 2020

(unaudited)

Reverse Stock Splits

All shares related and per share information in these financial statements has been adjusted to give effect to the 20-for-1 reverse stock split of the Company’s common stock effected on October 18, 2016, and the 3-for-1 reverse stock split of the Company’s common stock effected on June 15, 2017.

Issuance of Common Stock

FromIn January 4, 2017 to January 22, 2017,2020, the Company sold 15,001issued 90,798 shares of common stock to accredited investors at a pricedirectors, employees and consultants for stock-based compensation of $3.90 per share for aggregate cash proceeds of $58,500.

From March 31, 2017 to June 2, 2017, the Company issued 400,019 shares of its common stock for aggregate cash proceeds of $1,560,000, including 400,019 warrants for common stock.

From January 15, 2017 through February 16, 2017, the Company received warrant exercises and common stock subscriptions for 40,834 shares for aggregate cash proceeds of $159,250.

In March 2017, the Company issued 19,796 shares of common stock to four third-party consultants in exchange for services rendered.$290,547. The shares were valued using the closing share price of our common stock on the date of grant with the range of $3.90 - $4.35$3.20 per share.

In March 2017, the Company issued 575 shares of common stock to employees for stock-based compensation of $2,517. The shares were valued using the $4.38 closing share price of our common stock on the date of grant.

On March 8, 2017, the Company completed the acquisition of MotherLode. We issued 86,667 shares of common stock to the owners of MotherLode as consideration for the acquisition. Based on the closing share price of our common stock of $4.35 on March 8, 2017, the value of the transaction was $377,000. Issuance costs incurred were $5,580.

In March 2017, the Company issued 22,436 shares of its common stock upon conversion of 8% convertible promissory notes with an aggregate principal amount converted of $87,500. No gain or loss recorded on the transactions.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

In March 2017, the Company issued 83,334 shares of its common stock upon conversion of 250 shares of preferred stock.

In April 2017, the Company issued 16,667 shares of its common stock upon conversion of 50 shares of preferred stock.

In April 2017, the Company approved a restricted stock unit grant of 33,334 shares of common stock to the Company’s Chief Executive Officer, Grover Wickersham. The grant vested on April 5, 2017, of which 10,218 shares were not issued in order to satisfy Mr. Wickersham’s personal tax withholding responsibility. The shares were valued using the $4.80 closing share price of our common stock on the date of grant.

In April 2017, the Company issued 50,335 shares of common stock to three third-party consultants in exchange for services rendered. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $4.35 - $4.50 per share.

In April 2017, the independent directors, Messrs. Trent Davis and Michael Fleming, respectively, each exercised 4,630 stock options to purchase common stock at $5.40 per share.

In May 2017, the Company completed the acquisition of a majority stake in BBD. We issued 28,096 shares of common stock to the owners of BBD as consideration for 90% of the BBD LLC units. Based on the closing share price of our common stock of $4.80 on May 1, 2017, the value of the transaction was $134,858. Issuance costs incurred were $14,400.

In June 2017, the Company issued 2,716 shares of common stock to employees for stock-based compensation of $15,943, all of which were fully vested upon issuance. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $4.38 - $6.00 per share.

In August 2017, the Company completed an underwritten public offering of 1,200,000 units consisting of 1,200,000 shares of its common stock and warrants to purchase up to an aggregate of 1,200,000 shares of its common stock (each, a “Unit”) at a public offering price of $4.50 per Unit. The warrants have a per share exercise price of $5.40, are exercisable immediately, and will expire five years from the date of issuance. The gross proceeds to the Company from this offering were $5.4 million, before deducting underwriting discounts and commissions and other estimated offering expenses. On August 24, 2017, the underwriters exercised their option to purchase an additional 180,000 Units to cover over-allotments, that resulted in additional gross proceeds to the Company of $810,000, before deducting offering expenses.

In August 2017, the Company issued 5,209 shares of common stock to a third-party consultant in exchange for services rendered. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $3.40 - $3.50 per share.

In August 2017, the Company issued 83,334 shares of its common stock upon conversion of a 6% convertible promissory note with an aggregate principal amount converted of $500,000. No gain or loss recorded on the transactions.

In September 2017, the Company issued 14,760 shares of common stock to directors and employees for stock-based compensation of $56,221. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $3.78 - $4.38 per share.

Issuance of Convertible Preferred Stock

From April 4, 2016 to June 17, 2016, the Company sold 972 shares of its series A convertible preferred stock (“Series A Preferred”) for an aggregate purchase price of $972,000, of which (i) 499 shares of Series A Preferred were purchased for $499,000 in cash (ii) 423 shares of Series A Preferred were purchased by certain of our officers in consideration of $423,000 accrued and unpaid salary and (iii) 50 shares of Series A Preferred were purchased in consideration of cancellation of $50,000 of outstanding indebtedness net of issuance costs of $69,528.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

Each share of Series A Preferred has a stated value of $1,000, which is convertible into shares of the Company’s common stock at a fixed conversion price equal to $4.50 per share. The Series A Preferred accrue dividends at a rate of 8% per annum, cumulative. Dividends are payable quarterly in arrears at the Company’s option either in cash or “in kind” in shares of common stock; provided, however that dividends may only be paid in cash following the fiscal year in which the Company has net income (as shown in its audited financial statements contained in its Annual Report on Form 10-K for such year) of at least $500,000, to the extent permitted under applicable law out of funds legally available therefore. For “in-kind” dividends, holders will receive that number of shares of common stock equal to (i) the amount of the dividend payment due such stockholder divided by (ii) 90% of the average of the per share market values during the twenty (20) trading days immediately preceding a dividend date.

In the event of any voluntary or involuntary liquidation, dissolution or winding up, or sale of the Company, each holder of Series A Preferred shall be entitled to receive its pro rata portion of an aggregate payment equal to: (i) $1,000 multiplied by (ii) the total number of shares of Series A Preferred issued under the Series A Certificate of Designation multiplied by (iii) 2.5.

For all matters submitted to a vote of the Company’s stockholders, the holders of the Series A Preferred as a class shall have an aggregate number of votes equal to the product of (x) the number of shares of Common Stock (rounded to the nearest whole number) into which the total shares of Series A Preferred Stock issued under the Series A Certificate of Designation on such date of determination are convertible multiplied by (y) 2.5 (the “Total Series A Votes”), with each holder of Series A Preferred entitled to vote its pro rata portion of the Total Series A Votes. Holders of Common Stock do not have cumulative voting rights. In addition, the holders of Series A Preferred shall vote separately a class to change any of the rights, preferences and privileges of the Series A Preferred.

As of September 30, 2017, the Company has zero shares of preferred stock outstanding.

Stock-Based Compensation

On September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). The total numberPursuant to the terms of shares available for the grant of either stock options or compensation stock under the 2016 Plan is 166,667 shares, subject to adjustment. Onplan, on January 1, 2017,2020, the number of shares available for grant under the 2016 Plan reset to 307,1392,887,005 shares, equal to 8% of the number of outstanding shares of the Company’s capital stock, calculated on an as-converted basis, on December 31 of the preceding calendar year. On October 18, 2017, the Board of Directors (the “Board”) approved amendmentsyear, and then added to the 2016 Plan to (i) increase the numberprior year plan amount. As of shares of the common stock that may be issued under the 2016 Plan (the “Aggregate Limit”) by an additional 192,861 shares of common stock, for a total of 500,000 shares of common stock, (ii) increase the number of shares of common stock that may be granted to any participant pursuant to options to purchase common stock and stock appreciation rights under the 2016 Plan in any one year period (the “Individual Option Limit”) from 8,333 shares to 200,000 shares, (iii) increase the number of shares of common stock that may be granted to any participant pursuant to other awards (the “Individual Award Limit”) under the 2016 Plan in any one year period from 8,333 shares to 200,000 shares and (iv) increase the number of shares of common stock that may be paid to any one participant under the 2016 Plan for a performance period pursuant to performance compensation awards under the 2016 Plan (the “Individual Performance Award Limit”) from 8,333 shares to 200,000 shares, which amendments are contingent upon stockholder adoption and approval of these amendments at the next annual meeting of stockholders. The exercise price per share of each stock option shall not be less than 100 percent of the fair market value of the Company’s common stock on the date of grant. At September 30, 2017,March 31, 2020, there were 354,936have been 640,825 options and 89,185618,135 restricted stock units (“RSUs”) issued under the 2016 Plan, with vesting schedules varying between immediate and five (5) years from the grant date.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

On January 29, 2015, the Company adopted the 2015 Stock Incentive Plan (the “2015 Plan”)2015 Plan). The total number of shares available for the grant of either stock options or compensation stock under the 2015 Plan is 50,000 shares, subject to adjustment. The exercise price per share of each stock option shallwill not be less than 20 percent of the fair market value of the Company’s common stock on the date of grant. At September 30, 2017,March 31, 2020, there were 14,5845,417 options issued under the 2015 Plan outstanding, which options vest at the rate of at least 25 percent in the first year, starting 6-months after the grant date, and 75% in year two.

The Company also issues, from time to time, options whichthat are not issuedregistered under or subject to a formal option plan. At September 30, 2017,March 31, 2020, there were 16,667no options outstanding that were not issued under the 2015 Plan or the 2016 Plan.Plans.

A summary of all stock option activity at and for the ninethree months ended September 30, 2017March 31, 2020 is presented below: