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)

8911 NE Marx Dr, Suite A2

Portland, Oregon97220

(Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the Act:

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, every Interactive Data File required to be submitted 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 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 NovemberAugust 12, 2020, 10,149,252 2021, 13,317,577shares of our common stock, $0.0001 par value, were outstanding.

EASTSIDE DISTILLING, INC.

FORM 10-Q

SeptemberJune 30, 20202021

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS (unaudited)

Eastside Distilling, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

SeptemberJune 30, 20202021 and December 31, 20192020

(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

Condensed Consolidated Statements of Operations

For the Three and NineSix Months Ended SeptemberJune 30, 20202021 and 20192020

(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

Condensed Consolidated Statements of Cash Flows

For the nine months ended SeptemberSix Months Ended June 30, 20202021 and 20192020

(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

SeptemberJune 30, 20202021

(Unaudited)

1.Description of Business

Eastside Distilling (the “Company,”“Company” or “Eastside” “Eastside Distilling,”, below) 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. to reflect itsthe acquisition of Eastside Distilling, LLC. Eastside Distilling is a manufacturer and marketer of nationally recognized alcoholic beverage brand and as Craft Canning + Bottling the West coast leader in premier mobile packaging. The Company currently employs 82 people in the United States.

The Company manufactures, acquires, blends, bottles, imports, exports, markets and marketssells a wide variety of crafts spirits and cocktailsalcoholic beverages under recognized brands whichbrands. The Company currently employs 74 people in the Company sells on a wholesale basis to distributors. United States.

The Company’s portfolio consists of high-growthbrands span several alcoholic beverage products complemented by high-end, luxury spirits,categories, including bourbon, American whiskey, vodka, gin, rum, tequila and cocktails. In addition, theReady-to-Drink (RTD). The Company specializessells products on a wholesale basis to distributors in open states, and brokers in control states, and until March 2020, operated four retail tasting rooms in Portland, Oregon to market our brands directly to consumers. The Company operates a mobile craft canning and independent bottling of spirits.business (“Craft Canning”) that primarily services the craft beer and craft cider industries. Craft Canning operates 13 mobile lines in Seattle, Portland and Denver.

Eastside Distilling, Inc. and Subsidiaries2.Liquidity

Notes to Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

Historically, the Company has funded its cash and liquidity needs through operating cash flow, convertible notes, extended credit terms, and equity financings. TheAs of June 30, 2021, the Company has incurred a net loss of $7.5 million for the nine months ended September 30, 2020 and hashad an accumulated deficit of $51.7 million as of September 30, 2020.$52.2 million. The Company has been dependent on raising capital from debt and equity financings as well as the utilization of our inventory to meet its needs for cash flow used in operating activities. For the nine months ended September

As of June 30, 2020, the Company raised approximately $3.2 million in additional capital through debt financing (net of repayments).

At September 30, 2020,2021, the Company had $1 $1.1 million of cash on hand with a negative working capital of $16.6 $2.0million. The Company’s ability to meet its ongoing operating cash needs over the next 12 months depends on reducing its operating costs utilizing our inventory, raising additional debt or equity capital, selling assets and generating positive operating cash flow, primarily through increased sales, improved profit growth and controlling expenses. The Company intendintends to implement actions to improve profitability, by managing expenses while continuing to increase sales. See Notes 10 and 11 to the consolidated financial statements for a description of our debt and the debt refinancing initiatives completed in the first half of 2020.Company’s debt. If the Company is unable to obtain additional financing, or additional financing is not available on acceptable terms, itthe Company may seek to sell assets, reduce operating expenses, or 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, 2019 were prepared under the assumption that the Company would continue its operations as a going concern, the report3.Summary of our 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 the Company’s ability to continue as a going concern, based on the financial statements at that time. Specifically, as noted above, the Company has incurred operating losses since our inception, and even though the Company has reduced its operating expenses and increased its available capacity under its lines of credit, and has large inventory balances from which to draw, the Company expects to continue to incur significant expenses and operating losses for the foreseeable future. These prior losses and expected future losses have had, and will continue to have, an adverse effect on the Company’s financial condition. If the Company cannot continue as a going concern, its stockholders would likely lose most or all of their investment in us.Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements for Eastside Distilling, Inc. and subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements in accordance with GAAP have been condensed or eliminated as permitted under the SEC’s rules and regulations. In management’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 the Company’s financial position as of SeptemberJune 30, 2020,2021, its operating results for the ninethree and six months ended SeptemberJune 30, 20202021 and 20192020 and its cash flows for the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020. 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, 2019.2020. Interim results are not necessarily indicative of the results that may be expected for an entire fiscal year.year). The condensed consolidated financial statements include the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiaries, including, MotherLode LLC, Big Bottom Distilling, LLC, Outlandish Beverages LLC, Redneck Riviera Whiskey Co., LLC, and Craft Canning + Bottling, LLC (beginning as of January 11, 2019) and the Azuñia tequila assets (beginning September 12, 2019).assets. All intercompany balances and transactions have been eliminated on consolidation.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

SeptemberJune 30, 20202021

(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 alcoholic beverages 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 sales include product sales, less excise taxes and customer programs and excise taxes.incentives. The Company recognizes 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 each performance obligation is 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.

Customer Programs

Customer programs, which include customer promotional discount programs, customer incentives, and other payments,broker commissions, are a common practice in the alcoholalcoholic 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 sales and marketing expenses in accordance with ASC 606 - Revenue from Contracts with Customers,, based on the nature of the expenditure. Amounts paid to customers totaled $0.7 million and $0.4$0.3 million for both the ninesix months ended SeptemberJune 30, 20202021 and 2019, respectively.2020.

Excise Taxes

The Company is responsible for compliance with the Alcohol 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 sold and on its understanding of the applicable excise tax laws. Excise taxes totaled $0.2 million and $0.2$0.1 million for both the ninesix months ended SeptemberJune 30, 20202021 and 2019, respectively.2020.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

SeptemberJune 30, 20202021

(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, 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 $3.7 million and $4.4 million for the nine months ended September 30, 2020 and 2019, respectively.

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 $6.9 million and $8.6 million for the nine months ended September 30, 2020 and 2019, respectively, of which $2.7 million and $2.4 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 $0.9$0 million and $1.3$0.7 million for the ninesix months ended SeptemberJune 30, 2021 and 2020, and 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 sales and marketing efforts on the nationally branded product platform, resulting in the decision to close / abandon all four of its retail tasting rooms 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 period, 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 period presentation. Additionally, the assets and liabilities from retail operations are shown on the balance sheet as assets and liabilities for discontinued operations.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

Income and expense related to discontinued retail operations for the nine months ended September 30, 2020 and 2019:

Assets and liabilities related to discontinued retail operations

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 no0 cash equivalents at Septemberas of June 30, 20202021 and December 31, 2019.2020.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of June 30, 2021, two distributors represented 23% of trade receivables. As of December 31, 2020, one distributor represented 14% of trade receivables. Sales to two distributors accounted for 24% of consolidated sales for the period ended June 30, 2021. Sales to one distributor accounted for 18% of consolidated sales for the year ended December 31, 2020.

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 SeptemberAs of June 30, 20202021 and December 31, 2019,2020, 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.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

SeptemberJune 30, 20202021

(Unaudited)

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 Septemberas of June 30, 2020 and2021 or December 31, 2019.2020. 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 convertible notes payable.the secured credit facilities. The estimated fair value of trade receivables, accounts payable, and accrued liabilities approximatesapproximate their carrying value due to the short period of time to their maturities. At SeptemberAs of June 30, 20202021 and December 31, 2019,2020, the Company’s notes payable are at fixed rates and their carrying value approximatesapproximate 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 raw packaging material for bottling, raw cans for Craft Canning, 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 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. The Company recorded an inventory allowance of $0.3 million for obsolete inventory for the nine months ended September 30, 2020 and no write-downs of inventory for the nine months ended September 30, 2019.

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 andcertain intangible assets at amortized cost. Management reviews long-livedthese 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 goodwill at Septembercertain of its intangible assets as of June 30, 20202021 and determined that goodwill wasthey were not impaired.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

SeptemberJune 30, 20202021

(Unaudited)

Long-lived Assets

The Company accounts for long-lived assets, including property and equipment,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 June 30, 2021 and determined that they were not impaired.

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 SeptemberAs of June 30, 20202021 and December 31, 2019,2020, 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% 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 no0 unrecognized income tax benefits, nor any interest and penalties associated with unrecognized income tax benefits, accrued or expensed atas of and for the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.

The Company files federal income tax returns in the U.S.United States. 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 2012.2014.

Comprehensive Income

The Company does notdid 0t have any reconciling other comprehensive income items for the ninethree and six months ended SeptemberJune 30, 20202021 and 2019.2020.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

Accounts Receivable Factoring Program

The Company has entered into two accounts receivable factoring programs. One for its spirits customers (the “spirits program”) and another for its co-packing customers (the “co-packing program”). Under the programs, 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 remits payment, the Company receives the remaining balance. For the spirits program, interest is charged on the advanced 75% payment at a rate of 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 $500,000$0.5 million or the total funds advanced at a rate of 5%5% plus the prime rate published in the Wall Street Journal. Under the terms of both agreements, the factoring provider has full recourse against the Company should the customer fail to pay the invoice. In accordance with ASC Topic 860 we have– 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 sale. Given the quality of the factored accounts, the Company has not recognized 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 Company factored $6.7 $1.0million of invoices and incurred $0.14 $0 million in fees associated with the factoring programs during the ninesix months ended SeptemberJune 30, 2020. At September2021. As of June 30, 2020,2021, the Company had $0.9 $0.1 million of factored invoices outstanding.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

SeptemberJune 30, 20202021

(Unaudited)

Recently Adopted Accounting Pronouncements

In January 2017,None.

4.Discontinued Operations

Discontinued Operations

The Company reports discontinued operations by applying the FASB issued ASU 2017-04,following criteria in accordance with ASC Topic 205-20 – Intangibles-GoodwillPresentation of Financial Statements – Discontinued Operations: (1) Component of an entity; (2) Held for sale criteria; and Other (Topic 350) – Simplifying(3) Strategic shift.

On December 31, 2019, management made a strategic shift to focus the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 will simplifyCompany’s sales and marketing efforts on the subsequent measurement of goodwill by eliminating Step 2 fromnationally branded product platform, resulting in the goodwill impairment test. Current guidance requires that companies compute the implied fair value of goodwill under Step 2 by performing proceduresdecision to determine the fair value at the impairment testing dateclose all four of its assetsretail stores in the Portland, Oregon area. The retail stores were closed or abandoned by March 31, 2020.

On February 2, 2021, Redneck Riviera Whiskey Co, LLC (“RRWC”) entered into a Termination and liabilities followingInventory Purchase Agreement (the “Termination Agreement”) with Rich Marks, LLC, John D. Rich Tisa Trust and Redneck Spirits Group, LLC (collectively the procedure that would be requiredbuyers 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 determiningexchange for $3.0 million. In connection with the fair valueTermination Agreement, the Company entered into a Supplier Agreement dated as of assets acquiredFebruary 2, 2021 with RSG, pursuant to which the Company will produce certain products and liabilities assumedperform specified services for RSG for a six (6) month period on the terms and conditions set forth in the Supplier Agreement. The Company did not incur any penalties as a business combination. ASU 2017-04 will require companies to perform annual or interim goodwill impairment tests by comparingresult of the fair valuetermination of a reporting unit with its carrying amountthe License Agreement.

As of and recognize an impairment charge for the amount by whichsix months ended June 30, 2021, the carrying amount exceedsassets, liabilities, revenue, expenses and cash flows from retail operations and the reporting unit’s fair value. However,RRWC business have been classified as discontinued operations separately from continuing operations. For comparative purposes, prior period amounts have been reclassified to conform to current period presentation.

Income and expense related to discontinued retail operations and the loss recognized should not exceedRedneck Riviera Spirits business were as follows for the total amountsix months ended June 30, 2021 and 2020:

Schedule 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, 2020. The Company does not believe the adoption of ASU 2017-04 had any material impact on its consolidated financial statements.Discontinued Retail Operations

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

SeptemberJune 30, 20202021

(Unaudited)

During the fiscal year 2019, the Company completed the following acquisitions:

Craft Canning + Bottling

On January 11, 2019, the Company completed the acquisition of Craft Canning + Bottling, LLC (“Craft Canning”), a Portland, Oregon-based provider of bottling and canning services. The Company’s consolidated financial statements for the nine months ended September 30, 2020 include Craft Canning’s results of operations. For the nine months ended September 30, 2019, Craft Canning’s results of operations are included from the acquisition date of January 11, 2019 through September 30, 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 acquiredAssets and liabilities assumed based upon their estimated fair values onrelated to discontinued retail operations and the acquisition date.Redneck Riviera Spirits business were as follows:

5.Inventories

The allocation

Inventories consisted of the purchase price is as follows:following:

Schedule of Inventories

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

6.Property and Equipment

Property and equipment consisted of the income approach, specifically the relief from royaltyfollowing:

Schedule of Property 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.Equipment

The Company incurred acquisition costs of $0.1 million during the nine months ended September 30, 2019 that have been recorded in general and administrative expenses on the consolidated statement of operations. The results of the Craft acquisition are included in the Company’s consolidated financial statements from the date of acquisition through September 30, 2020. The revenue and net profit of Craft operations included in our condensed consolidated statements of operations were $6.7 million and $0.7 million, for the nine months ended September 30, 2020. The revenue and net income (including transaction costs) of Craft operations included in the Company’s condensed consolidated statements of operations were $5.9 million and $0.5 million for the period from January 11, 2019 through September 30, 2019.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

SeptemberJune 30, 20202021

(Unaudited)

Azuñia TequilaPurchases of property and equipment totaled $0.2million for both the six months ended June 30, 2021 and 2020. Depreciation expense totaled $0.4 million and $1.0 million for the six months ended June 30, 2021 and 2020, respectively.

On September 12, 2019,During the six months ended June 30, 2021, the Company completeddisposed of fixed assets with a net book value of $0.2 million resulting in a loss on disposal of fixed assets of $0.1 million. As a result of these disposals, the acquisitionCompany received funds of $0.1 million from the sales of the Azuñia Tequila brand, the direct sales team, existing product inventory, supply chain relationships and contractual agreements from Intersect Beverage, LLC, an importer and distributordisposed assets. Gain on disposal of tequila and related products. The Company’s consolidated financial statementsfixed assets was $0 million for the ninesix months ended SeptemberJune 30, 2020 include the Azuñia Tequila2020.

7.Intangible Assets

Intangible assets and results of operations.

The acquisition was structured as an all-stock transaction, provided that the Company may, at its election, pay a portionconsisted of the consideration in cash or by executingfollowing:

Schedule of Intangible Assets

The customer list is being amortized over a three-year promissory note ifseven-year life. Amortization expense totaled $0.2million for both the issuance of stock would require the Companysix months ended June 30, 2021 and 2020.

The permits and licenses, and Azuñia brand have all been determined 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 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 based upon their estimated fair values on the acquisition date. The 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 fair value recognized in 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 nine-month period ended September 30, 2020.

The 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 brand intangible asset was determined through the use of the market approach. The major 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 hashave an indefinite life and will not be amortized. We do, however, on an annual basis, test the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then we will estimate its useful life and amortize the asset over the remainder of its useful life.

The results8.Other Assets

Other assets consisted of the Azuñia Tequila asset acquisition are included in the Company’s consolidated financial statements for the nine months ended September 30, 2020. The salesfollowing:

Schedule of Azuñia Tequila products included in the Company’s condensed consolidated statements of operations were $2.4 million for the nine months ended September 30, 2020.Other Assets

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations for the nine months ended September 30, 2019 assume that both acquisitions of Craft Canning + Bottling and Azuñia Tequila were completed on January 1, 2019:

Pro forma sales and net loss exclude retail operations that have been classified as discontinued operations. 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:

(Dollars in thousands)

Property and equipment consist of the following:

(Dollars in thousands)

Purchases of property and equipment totaled $0.4 million and $2.3 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. Depreciation expense totaled $1.4 million and $0.6 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. Gain on disposal of fixed assets totaled $0.1 for the nine months ended September 30, 2020 compared to nil for the same period last year.

Intangible assets and goodwill at September 30, 2020 and December 31, 2019 consist of the following:

(Dollars in thousands)

Amortization expense totaled $0.4 million and $0.5 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. The permits and licenses, Azuñia brand, and goodwill have all been determined to have indefinite life and will not be amortized. The customer lists are being amortized over a seven-year life. In the third quarter of 2020 it was determined that the customer list associated with the MotherLode, LLC acquisition no longer had value and was written off. The net value of the MotherLode, LLC customer list at the time of the write down was $176,971.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

Other assets consist of the following:

(Dollars in thousands)

As of SeptemberJune 30, 2020,2021, the Company had $0.9$0.4 million of capitalized costs related to services provided for the rebranding of its existing product line and branding of new product lines.line. This amount is being amortized over a seven-year life.

Amortization expense totaled $0.08$0 million and $0.05$0.1 million for the ninesix months ended SeptemberJune 30, 2021 and 2020, and September 30, 2019, respectively.

In September 2020, the Company had received the remaining balance of the notes receivable from Wineonline.com.

The deposits represent office lease deposits.

The Company has various lease agreements in place for facilities and equipment. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2025.2025. The Company determines if an arrangement is a lease at inception. The Company does not currently have any finance leases. 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 the lease payments. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease 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. In September 2020, the Company entered into two new lease agreements for canning and bottling production facilities in Seattle and Denver. Both leases contain fixed payments that increase over the term of their respective agreement. As of SeptemberJune 30, 2020,2021, the amount of right-of-use assets and lease liabilities were both $1.4 million.$1.0 million and $1.1 million, respectively. Aggregate lease expense for the ninesix months ended SeptemberJune 30, 20202021 was $0.5 $0.4million, consisting of $0.4 $0.3 million in operating lease expense for lease liabilities and $0.1 $0.1 million in short-term lease cost.

Maturities of lease liabilities as of September 30, 2020 are as follows:

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

SeptemberJune 30, 20202021

(Unaudited)

Maturities of lease liabilities as of June 30, 2021 were as follows:

Schedule of Maturities of Operating Lease Liabilities

Notes payable consistsconsisted of the following:

Schedule of Notes Payable

The Company paid $0.3 million and $0.1 million in interest on notes for the six months ended June 30, 2021 and 2020, respectively.

Eastside Distilling, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

SeptemberJune 30, 20202021

(Unaudited)

The Company paid $0.2 million and $0.1 million in interest on notes for the nine months ended September 30, 2020 and 2019, respectively.

Maturities on notes payable as of SeptemberJune 30, 2020, are2021 were as follows:

Schedule of Maturities on Notes Payable

6% Secured Convertible Promissory Notes

Year ending December 31:On April 19, 2021, the Company entered into a securities purchase agreement (“Purchase Agreement”) with accredited investors (“Subscribers”) for their purchase of up to $3.3 million of principal amount of 6% secured convertible promissory notes of the Company (“Note” or “Notes”), which notes are convertible into shares (“Conversion Shares”) of the Company’s common stock, par value $0.0001 per share (“Common Stock”) 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 shall receive a warrant (a “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 hereunder 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 would grant the Subscribers a security interest in certain assets of the Company (the “Security Agreement”) and a Registration Rights Agreement under which the Company would agree to register for resale the Conversion Shares and the Warrant Shares (the “Registration Rights Agreement”). Concurrently therewith, the Company and the investors closed $3.3 million of the private offering.

Roth Capital, LLC acted as placement agent (the “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 “Maturity Date”). The Company paid $0 million in interest during the six months ended June 30, 2021.

All 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 holders into the Company’s common stock at a fixed conversion price, which is subject to adjustment as summarized below. The Notes are 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.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2021

(Unaudited)

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.

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 and the Subscribers.

Live Oak Loan Agreement

On January 15, 2020, the Company and its subsidiaries entered into a loan agreement (the “Loan Agreement”“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 (“Live Oak”), a North Carolina banking corporation (the “Lender”“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$8.0 million 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”“Loan”).