UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the transition period from ______________ to _________________

Commission File No.:001-38182

EASTSIDE DISTILLING, INC.

(Exact name of registrant as specified in its charter)

1001 SE Water Avenue, Suite 3902321 NE Argyle Street, Unit D

Portland, Oregon 9721497211

(Address of principal executive offices)

Issuer’s telephone number:(971)888-4264

2150 SE Hanna Harvester DriveSecurities registered pursuant to Section 12(b) of the Act:

Portland, Oregon 97222

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] ☒ No [  ]☐

Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] ☒ No [  ]☐

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] ☐ No [X] ☒

As of November 14, 2017, 4,824,9902022, 15,739,179 shares of our common stock, $0.0001 par value, were outstanding.

EASTSIDE DISTILLING, INC.

FORM 10-Q

September 30, 20172022

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

ITEM 1 –FINANCIAL– FINANCIAL STATEMENTS (unaudited)

Eastside Distilling, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 20172022 and December 31, 20162021

(Dollars in thousands, except shares and per share amounts)

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

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Operations

For the threeThree and nine months endedNine Months Ended September 30, 20172022 and 20162021

(unaudited)(Dollars and shares in thousands, except per share amounts)

(Unaudited)

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

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the nine months endedNine Months Ended September 30, 20172022 and 20162021

(unaudited)(Dollars in thousands)

(Unaudited)

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, 20172022

(unaudited)(Unaudited)

1. Description of Business

Eastside Distilling (the “Company” or “Eastside Distilling”) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, the Company changed its corporate name to Eastside Distilling, Inc. (“Eastside” orto reflect the “Company”) is an Oregon-based produceracquisition of Eastside Distilling, LLC. The Company manufactures, acquires, blends, bottles, imports, markets and marketersells a wide variety of craft spirits, foundedalcoholic beverages under recognized brands. The Company currently employs 75 people in 2008. Our productsthe United States.

The Company’s spirits’ brands span several alcoholic beverage categories, including bourbon, American whiskey, vodka, rum, and rum. Unlike many, if not most, distillers, we operate several retail tasting roomstequila. The Company sells products on a wholesale basis to distributors in Oregonopen states and through brokers in control states.

The Company operates a mobile craft canning business that primarily services the craft beer and craft cider industries. During 2022, the Company made substantial investments to market our brands directlyexpand its product offerings to consumers. Our growth strategy is to build on our local baseinclude digital can printing activities in the Pacific Northwest (together Craft Canning + Printing, “Craft C+P”). Craft C+P operates 14 mobile filling lines in Seattle, Washington; Spokane, Washington; Portland, Oregon; and expand selectivelyDenver, Colorado. The Company now offers co-packing services in Portland, Oregon through its recent asset acquisition, allowing it to other markets by using major spirits distributors, such as Southern Glazer Winesoffer end-to-end production capabilities.

2. Liquidity

The Company’s primary capital requirements are for cash used in operating activities and Spirits, and regional distributors that focus on craft brands. As a small business in the large, international spirits marketplace populated with massive conglomerates, we are innovative in exploiting new trends with our products, for example, our Coffee Rum with cold brew coffee and low sugar and our gluten-free potato vodka. 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. 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, 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%repayment 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 designeddebt. Funds 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.

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 Virginia 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 subject to the Oregon Liquor Control Commission (OLCC) and the Alcohol and Tobacco Tax and Trade Bureau (TTB).

Historically, the Company has funded itsCompany’s cash and liquidity needs through the issuance ofhave historically not been generated from operations but rather from loans as well as from convertible notes, extended credit termsdebt and the sale of equity. The Company has incurred a net loss of $3,602,104 and has an accumulated deficit of $16,419,011 for the nine months ended September 30, 2017.equity financings. The Company has been dependent on raising capital from debt and equity financings to fund itsmeet the Company’s operating activities. Forneeds.

The Company had an accumulated deficit of $65.3 million as of September 30, 2022, having incurred a net loss of $6.6 million during the nine months ended September 30, 2017,2022. The net loss, combined with a reclassification from current assets to equipment of $4.3 million in prepayments related to the Company’s purchase of a digital can printer, resulted in a $8.5 million reduction in working capital.

During the nine months ended September 30, 2022, the Company raised $8,033,942$3.7 million in proceeds fromadditional capital through debt financing activities to meet cash flow used in operating activities.

At September 30, 2017, the Company had $4,190,085 of cash on hand with a positive working capital of $6,469,391.and an equity raise. The Company’s ability to meet its ongoing operating cash needs is dependentover the next 12 months depends on growing revenues and gross margins, and generating positive operating cash flow primarily through increased sales, improved profit growth, and controlling expenses. Management has taken actions to improve profitability, by managing expenses while increasing sales. Also, in March and May 2017,If the Company acquired two businesses, a contract bottling and packaging services company and a small distillery business (both stock purchase transactions), that are expectedis unable to improve operating results. Management believes that cashobtain additional financing, or additional financing is not available on hand, including proceeds generated from the most recent equity financing, along with revenue thatacceptable terms, the Company expectsmay seek to generate fromsell assets, reduce operating expenses, reduce or eliminate marketing initiatives, and take other measures that could impair its ability to be successful.

Although the Company’s audited financial statements for the year ended December 31, 2021 were prepared under the assumption that it would continue operations including as a resultgoing concern, the report of its two recent acquisitions, will be sufficient to meetindependent registered public accounting firm that accompanied the financial statements for the year ended December 31, 2021 contained a going concern explanatory paragraph in which such firm expressed substantial doubt about the Company’s cash needs forability to continue as a going concern, based on the foreseeable future.financial statements at that time. If the Company cannot continue as a going concern, its stockholders would likely lose most or all of their investment in it.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 20172022

(unaudited)(Unaudited)

3. Summary of Significant Accounting Policies

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 ourmanagement’s 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 ourthe Company’s financial position as of September 30, 2017, our2022, its operating results for the three and nine months ended September 30, 20172022 and 20162021 and ourits cash flows for the nine months ended September 30, 20172022 and 2016.2021. 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, 2016.2021. 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 subsidiaries, including, MotherLode LLC, Redneck Riviera Whiskey Co., LLC (a discontinued operation), Craft Canning + Bottling, LLC (doing business as Craft Canning + Printing) and its wholly-owned subsidiary MotherLode (beginning as of March 8, 2017),Galactic Unicorn Packaging LLC (the Company’s newly acquired fixed co-packing assets) and majority-owned subsidiary BBD (beginning as of May 1, 2017).the Azuñia tequila assets. All intercompany balances and transactions have been eliminated inon consolidation.

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, marketing and distributing hand-crafted spirits, and operates as one segment. The Company’s chief operating decision makers, its chief executive officer 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. 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 location 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 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 alcoholalcoholic beverage industry. The Company makes these payments to customers and incurs these costsreimburses wholesalers for an agreed amount 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, promotional and selling expenses in accordance with Accounting Standards Codification (“ASC”) Topic 605-50, ASC 606 - Revenue Recognition - Customer Payments and Incentives, based on the nature of the expenditure.from Contracts with Customers. Amounts paid to customersin customer programs totaled $118,389 and $72,918$0.2million for both the nine months ended September 30, 20172022 and 2016, respectively.2021.

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 TTBAlcohol and Tobacco Tax and Trade Bureau (“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 alcoholalcoholic 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$0.2 million and $469,936$0.1 million for the nine months ended September 30, 20172022 and 2016,2021, respectively.

Cost of Sales

Cost of sales consists of all direct costs related to both spirits and canning for service, labor, overhead, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2022

(Unaudited)

Sales and Marketing Expenses

Sales and marketing expenses consist of sponsorships, agency fees, digital media, salary and benefit expenses, travel and entertainment expenses. Sales and marketing costs are expensed as incurred. Advertising and marketing expenses totaled $0.6 million for both the nine months ended September 30, 2022 and 2021.

General and Administrative Expenses

General and administrative expenses consist of 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.

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

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of September 30, 2022, two distributors represented 37% of trade receivables. As of December 31, 2021, four wholesale customers represented 42% of trade receivables. Sales to one distributor and $427,947one wholesale customer accounted for 43% of consolidated sales for the nine months ended September 30, 20172022. Sales to two wholesale customers accounted for 24% of consolidated sales for the nine months ended September 30, 2021.

Fair Value Measurements

GAAP defines fair value, establishes a framework for measuring fair value, and 2016, respectively.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. As of September 30, 2022 and December 31, 2021, 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:

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2022

(Unaudited)

None of the Company’s assets or liabilities were measured at fair value as of September 30, 2022 or December 31, 2021. 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, notes payable, and the secured credit facilities. The estimated fair value of trade receivables, accounts payable, and accrued liabilities approximate their carrying value due to the short period of time to their maturities. As of September 30, 2022 and December 31, 2021, the principal amounts of the Company’s notes approximate 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 due to having indefinite lives. The Company, on an annual basis, tests the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then the Company will estimate its useful life and amortize the asset over the remainder of its useful life.

Inventories

Inventories primarily consist of bulk and bottled liquor and raw materials 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 the Company’s finished goods 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.

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 certain intangible assets at cost. Management reviews these intangible 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, an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative assessment of certain of its intangible assets as of September 30, 2022 and determined that they were not impaired.

Long-lived Assets

The Company accounts for long-lived assets, including certain intangible assets, 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. The Company performed a qualitative assessment of certain of its long-lived assets as of September 30, 2022 and determined that they were not impaired.

Comprehensive Income

The Company did not have any other comprehensive income items for both the nine months ended September 30, 2022 and 2021.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2022

(Unaudited)

Accounts Receivable Factoring Program

During the three months ended June 30, 2017, we terminated our previousThe Company has two accounts receivable factoring program. programs. One for its spirits customers (the “spirits program”) and another for its co-packing customers (the “co-packing program”). Under the prior program, we hadprograms, the Company has the option to sell certain customer account receivables in advance of payment for 75%75% (spirits program) or 85% (co-packing program) of the amount due. When the customer remittedremits payment, we would receivethe Company receives the remaining 25%. We werebalance. For the spirits program, interest is charged interest on the advanced 75% payment at a rate of 1.5% per month.2.4% for the first 30 days plus 1.44% for each additional ten-day period. For the co-packing program, interest is charged against the greater of $0.5 million or the total funds advanced at a rate of 1% plus the prime rate published in the Wall Street Journal. Under the terms of the agreement withboth agreements, the factoring provider any factored invoices hadhas full recourse against the Company should the customer fail to pay the invoice. Thus, we recorded factored amountsIn accordance with ASC Topic 860 – Transfers and Servicing, the Company has concluded that these agreements have met all three conditions identified in ASC Topic 860-10-40-5 (a) – (c) and have accounted for this activity as a liability untilsale. Given the customer remitted payment and we received the remaining 25%quality of the non-factored amount. We didfactored accounts, the Company has not factorrecognized a recourse obligation. In certain limited instances, the Company may provide collection services on the factored accounts but does not receive any fees for acting as the collection agent, and as such, the Company has not recognized a service obligation asset or liability. The agreement with the spirits program had a zero balance as of September 30, 2022. The Company factored $0.3 million of invoices and incurred $3,150 in fees associated with the co-packing program during the nine months ended September 30, 2017. At2022. As of September 30, 2017, we2022, the Company had a balance of $0.1 million of factored co-packing invoices outstanding.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no factored invoices outstanding, and we incurred fees associated witheffect on the factoring programreported results of $63,238 during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, we factored invoices totaling $560,172 and received total proceeds of $420,129. At September 30, 2016, we had $184,875 in open factored invoices, and we incurred fees associated with the factoring program of $21,500 during the nine months ended September 30, 2016.operations.

RecentRecently Adopted Accounting Pronouncements

In March 2016,October 2021, the Financial Accounting Standard Boards (the “FASB”Standards Board (“FASB”) issued Accounting StandardStandards Update (“ASU”) No. 2016-09,2021-08, Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures,Contract Assets and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 was effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We have adopted ASU 2016-09 as of March 31, 2017.

In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842) (“ASU 2016-02”). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, 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. We are currently evaluating the impact ASU 2016-02 will have on the Company’s condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09,RevenueContract Liabilities from Contracts with Customers (Topic 606), (“ASU 2014-09”2021-08”).ASU 2014-09 will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. ASU 2014-09 is to be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. The Company will elect to apply the impact (if any) of applying 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 permitted 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. The Company does not believe the adoption of ASU 2014-15 had any material impact on its condensed consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11,Inventory (Topic 330), Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 is part of the FASB’s initiative to simplify accounting standards. The guidance which requires an entity to recognize inventory within scope of the standard at the lower of cost or net realizable value. Net realizable valueand measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue Recognition. This ASU is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. ASU 2015-11 was effective prospectively for the year beginning January 1, 2017. We adopted ASU 2015-11 as of March 31, 2017. The Company does not believe the adoption of ASU 2015-11 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, 20152022. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2021-08 will have on its consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, (“ASU 2020-06”) which simplifies the accounting for convertible instruments by eliminating the beneficial conversion feature and cash conversion models. Certain convertible instruments will be accounted for as a single unit of account, unless the conversion feature requires bifurcation and recognition as a derivative. Additionally, this ASU simplifies the earnings per share calculation, by eliminating the treasury stock method and requiring entities to use the if-converted method. This guidance is effective for annual periods beginning after December 31, 2021 with early application wasadoption permitted. WeThe Company early adopted ASU 2015-03 as of2020-06 for the year ended December 31, 2015.2021.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”). The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and will apply to trade receivables. The new guidance will be effective for the Company’s annual and interim periods beginning after December 15, 2022. The Company does not believeis currently evaluating the impact of the adoption of ASU 2015-03 had any material impactthe standard on its condensedthe consolidated financial statements.

4. Discontinued Operations

The Company reports discontinued operations by applying the following criteria in accordance with ASC Topic 205-20, Presentation of Financial Statements – Discontinued Operations: (1) Component of an entity; (2) Held for sale criteria; and (3) Strategic shift.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 20172022

(unaudited)(Unaudited)

ReclassificationsOn December 31, 2019, management made a strategic shift to focus the Company’s sales and marketing efforts on the nationally branded product platform, resulting in the decision to close all four of its retail stores in the Portland, Oregon area. The retail stores were closed or abandoned by March 31, 2020.

Certain priorOn February 2, 2021, Redneck Riviera Whiskey Co, LLC (“RRWC”) entered into a Termination and Inventory Purchase Agreement (the “Termination Agreement”) with Rich Marks, LLC, John D. Rich Tisa Trust and Redneck Spirits Group, LLC (collectively the buyers referred to as “RSG”), pursuant to which, on February 5, 2021, RRWC sold all of its inventory of Redneck Riviera, Granny Rich, and Howdy Dew distilled spirits products, including finished goods, raw materials, and barrel inventory, as well as all assignable certificates of label approval/exemption, branding, permits, and registrations relating thereto, for $4.7 million. In addition, the Company terminated its Amended and Restated License Agreement (the “License Agreement”) dated May 31, 2018 by and among Eastside, RRWC, Rich Marks, LLC, and John D. Rich TISA Trust U/A/D March 27, 2018, Dwight P. Miles, Trustee in exchange for $3.0 million. In connection with the Termination Agreement, the Company entered into a Supplier Agreement dated as of February 2, 2021 with RSG, pursuant to which the Company will produce certain products and perform specified services for RSG for a six (6) month period amountson the terms and conditions set forth in the Supplier Agreement. The Company did not incur any penalties as a result of the termination of the License Agreement.

For the nine months ended September 30, 2021, the revenue, expenses and cash flows from retail operations and the RRWC business have been reclassifiedclassified as discontinued operations separately from continuing operations. As of December 31, 2021, there were no assets and liabilities related to conformdiscontinued retail operations and the Redneck Riviera Spirits business.

Income and expense related to discontinued retail operations and the Redneck Riviera Spirits business were as follows for the nine months ended September 30, 2017 presentation with no changes2022 and 2021:

Schedule of Discontinued Retail Operations

5. Business Segment Information

The Company’s internal management financial reporting consists of Eastside spirits and Craft C+P. The spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila and are sold on a wholesale basis to net lossdistributors in open states, and brokers in control states. The Company’s principal area of operation is in the U.S. and has two spirits customers that represents 42% of its revenue.

Craft C+P offers digital can printing and co-packing services in Portland, Oregon allowing it to offer end-to-end production capabilities. Craft C+P operates 14 mobile lines in Washington, Oregon and Colorado.

The measure of profitability reviewed is condensed statements of operations, and gross margin. These business segments reflect how operations are managed, operating performance is evaluated and the structure of internal financial reporting. Total asset information by segment is not provided to, or total stockholders’ equity previously reported.reviewed by, the chief operating decision maker (“CODM”) as it is not used to make strategic decisions, allocate resources or assess performance. The accounting policies of the segments are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 3. Spirits allocates 50% of certain general and administrative expenses to Craft C+P, which is included in the segments’ financial data below.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2022

(Unaudited)

Segment information was as follows for the nine months ended September 30, 2022 and 2021:

Schedule of Segment Information

Craft C+P’s gross margin decreased primarily due to lower sales of services, a change in product and service mix, and higher raw material costs. In addition, Craft C+P’s digital printer commenced operations in April, 2022 and Craft C+P now bears the operating costs. Although printing revenues significantly increased through the quarter, the printer is not yet operating at full capacity.

6. Inventories

Inventories consisted of the following:

Schedule of Inventories

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2022

(Unaudited)

7. Prepaid Expenses and Current Assets

Prepaid expenses and current assets consisted of the following:

Schedule of Prepaid Expenses and Current Assets

During the nine months ended September 30, 2017,2022, the Company completedbegan operations of its new digital can printer. This resulted in a decrease in prepayment of fixed assets, as the following acquisitions:printer was reclassified to property and equipment.

MotherLode Craft Distillery, LLC8. Property and Equipment

On March 8, 2017,Property and equipment consisted of the Company completed the acquisitionfollowing:

Schedule of MotherLode Craft Distillery, LLC (“MotherLode”), a small Portland, Oregon-based providerProperty and Equipment

Purchases of bottling servicesproperty and production support to craft distilleries. The Company’s condensed consolidated financial statementsequipment totaled $2.5 million and $0.2 million for the three and nine months ended September 30, 2017 include MotherLode’s results2022 and 2021, respectively. Depreciation expense totaled $0.8 million and $0.6 million for the nine months ended September 30, 2022 and 2021, respectively.

During the nine months ended September 30, 2022, the Company disposed of operationsfixed assets with a net book value of $0.1 million resulting in a loss on disposal of fixed assets of $0.1 million. During the nine months ended September 30, 2021, the Company disposed of fixed assets with a net book value of $0.5 million resulting in a loss on disposal of fixed assets of $0.4 million. As a result of these disposals, the Company received funds of $0.1 million from the acquisition datesales of March 8, 2017 throughthe disposed assets.

During the nine months ended September 30, 2017. The Company’s condensed consolidated financial statements reflect2022, the final purchase accounting adjustmentsCompany entered into a master equity lease agreement with Enterprise FM Trust (“Enterprise”). Per the agreement, the Company delivered to Enterprise the titles to certain vehicles, which resulted in accordance with ASC 805 “Business Combinations”, wherebya loss on disposal of $0.1 million. In return, the purchase price was allocated toCompany directly leases the vehicles from Enterprise, which will also manage the maintenance of the vehicles.

During the nine months ended September 30, 2022, the Company acquired the assets acquiredof a production facility for a cash payment of $0.2 million and liabilities assumed based upon their estimated fair valuesconcessions on the acquisition date. MotherLode had approximately $375,000 in revenues (unaudited) in 2016.service pricing.

The following allocation

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2022

(Unaudited)

9. Intangible Assets

Intangible assets consisted of the purchase price is as follows:following:

Schedule of Intangible Assets

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 capitalbeing amortized over a seven-year life. Amortization expense totaled $0.3 million for both the Companynine months ended September 30, 2022 and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. 2021.

The useful lives for intangible assets werepermits and licenses, and Azuñia brand have all been 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 to the license intangible asset were determined through the use of the cost approach. The license hashave an indefinite life and will not be amortized. The Company, on an annual basis, tests the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then the Company will estimate its useful life and amortize the asset over the remainder of its useful life.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements10. Other Assets

Other assets consisted of the following:

Schedule of Other Assets

As of September 30, 2017

(unaudited)

Big Bottom Distillery, LLC

On May 1, 2017,2022, the Company acquired 90%had $0.4 million of the ownership of Big Bottom Distillery, LLC (“BBD”), a Hillsboro, Oregon-based distiller of super premium spirits. The Company’s condensed consolidated financial statementscapitalized costs related to services provided for the three andrebranding of its existing product line. This amount is being amortized over a seven-year life.

Amortization expense totaled $42,857 for both the nine months ended September 30, 20172022 and 2021.

The deposits represent office lease deposits.

11. Leases

The Company has various lease agreements in place for facilities, equipment and vehicles. Terms of these leases include, BBD’s resultsin some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2027. The Company determines if an arrangement is a lease at inception. As the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate based on information available at commencement to determine the present value of operations from the acquisitionlease payments. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of May 1, 2017 throughlease payments over the lease term. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. As of September 30, 2017. The Company’s condensed consolidated financial statements reflect2022, the final purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to theamount of right-of-use assets acquired and lease liabilities assumed based upon their estimated fair values on the acquisition date. BBD had approximately $201,000 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 license intangible asset was determined through the use of the cost approach. The license has an indefinite lifewere $3.0 million and will not be amortized.

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

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

Purchases of property and equipment totaled $381,837 and $6,952$3.2 million, respectively. Aggregate lease expense for the nine months ended September 30, 20172022 was $0.9 million, consisting of $0.2 million in operating lease expense for lease liabilities and 2016, respectively. Depreciation expense totaled $25,736$0.7 million in short-term lease cost.

Maturities of lease liabilities as of September 30, 2022 were as follows:

Schedule of Maturities of Operating Lease Liabilities

Eastside Distilling, Inc. and $16,579Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2022

(Unaudited)

12. Notes Payable

Notes payable consisted of the following:

Schedule of Notes Payable

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2022

(Unaudited)

The Company paid $0.4 million and $0.5 million in interest on notes for the nine months ended September 30, 20172022 and 2016,2021, respectively.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

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

Amortization expense totaled $28,033 and nil for the nine months ended September 30, 2017 and 2016, 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, are2022 were as follows:

Schedule of Maturities on Notes Payable

Year ending December 31:13. Secured Credit Facilities

The provision6% Secured Convertible Promissory Notes

On April 19, 2021, the Company entered into a securities purchase agreement (“Purchase Agreement”) with accredited investors (“Subscribers”) for income taxes results in effective tax rates which are different than the federal income tax statutory rate. The naturetheir purchase of up to $3.3 million of principal amount of 6% secured convertible promissory notes of the differencesCompany (“Note” or “Notes”), which notes are convertible into shares (“Conversion Shares”) of the Company’s common stock, par value $0.0001 per share pursuant to the terms and conditions set forth in the Notes with an initial conversion price of $2.20. In connection with the purchase of such Notes, each Subscriber received a warrant (“Existing Warrant”), to purchase a number of shares of common stock (“Warrant Shares”) equal to 60% of the principal amount of any Note issued to such Subscriber divided by the conversion price of the Note issued to such Subscriber, at an exercise price equal to $2.60. In connection with the Purchase Agreement, the Company entered into a Security Agreement under which it granted the Subscribers a security interest in certain assets of the Company (the “Security Agreement”) and a Registration Rights Agreement under which the Company agreed to register for resale the Conversion Shares and the Warrant Shares. Concurrently therewith, the Company and the investors closed $3.3 million of the private offering.

Roth Capital, LLC acted as placement agent in the private offering, and the Company paid the Placement Agent a cash fee of five percent (5%) of the gross proceeds therefrom. The Company received $3.1 million in net proceeds from the closing, after deducting the fee payable to the Placement Agent and the legal fees of the Subscribers in connection with the transaction. The Company used the proceeds to repay prior outstanding notes payable and for working capital and general corporate purposes.

Interest on the Notes accrues at a rate of 6% per annum and is payable either in cash or in shares of the Company’s common stock at the conversion price in the Note on each of the six and twelve month anniversaries of the issuance date and on the maturity date of October 18, 2022. The Company paid $0.2 million in interest during the nine months ended September 30, 2017 and 2016 were as follows:2022.

The componentsAll amounts due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional shares), at the option of the net deferred tax assetsholders into the Company’s common stock at a fixed conversion price, which is subject to adjustment as summarized below. The Notes were initially convertible into the Company’s common stock at an initial fixed conversion price of $2.20 per share. This conversion price is subject to adjustment for stock splits, combinations, or similar events, among other adjustments. On April 1, 2022, the Company and liabilities at September 30, 2017 and December 31, 2016 consistedthe holders agreed to a reduction of the following:conversion price of the 6% secured convertible promissory notes to $1.30 per share in connection with the Company’s issuance of a common stock purchase warrant to TQLA covering its loan amount of $3.5 million with a common stock value of $1.20 per share.

The Company may prepay the Notes at any time in whole or in part by paying a sum of money equal to 100% of the principal amount to be redeemed, together with accrued and unpaid interest, plus a prepayment fee equal to five percent (5%) of the principal amount to be repaid.

The Notes contain customary triggering events including but not limited to: (i) failure to make payments when due under the Notes; and (ii) bankruptcy or insolvency of the Company. If a triggering event occurs, each holder may require the Company to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 20172022

(unaudited)(Unaudited)

At September 30, 2017,The Notes are secured by a subordinated security interest in the Company’s assets pursuant to the terms of a Security Agreement entered into between the Company has a cumulative net operating loss carryforward (NOL) of approximately $12.2 million, 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, and the state NOLs begin to expire in 2029. The utilizationSubscribers.

On July 30, 2021, the Company entered into warrant exercise inducement offer letters (“Inducement Letters”) with the holders of the NOL carryforwards may be subjectExisting Warrants to substantial annual limitation due to ownership change provisionsexercise for cash their Existing Warrants. During the year ended December 31, 2021, the Company received gross proceeds of $2.4 million on the exercise of the Internal Revenue Codeoutstanding warrants, and recognized a deemed dividend of 1986 and similar state provisions. In general, if$2.3 million based on the Black Scholes valuation as a result of the higher strike price on the July 2021 issued warrants. See additional discussion in Note 16.

Live Oak Loan Agreement

On January 15, 2020, the Company experiencesand its subsidiaries entered into a greater than 50 percentage aggregate change in ownership of certain significant stockholders overloan agreement (the “Loan Agreement”) between the Company and Live Oak Banking Company (“Live Oak”), a three-year period (a “Section 382 ownership change”North Carolina banking corporation (the “Lender”), utilization of its pre-change NOL carryforwards are subject to an annual limitation under Section 382refinance existing debt of the Internal Revenue Code (and similar state laws). The annual limitation generally is determined by multiplyingCompany and to provide funding for general working capital purposes. Under the Loan Agreement, the Lender committed to make up to two loan advances to the Company in an aggregate principal amount not to exceed the lesser of (i) $8.0 million and (ii) a borrowing base equal to 85% of the appraised value of the Company’s stock at the timeeligible inventory of such ownership change (subjectwhisky in barrels or totes less an amount equal to certain adjustments)all service fees or rental payments owed by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization and may be substantial.