~~0001534708 EAST:PurchaseAgreementMember EAST:AccreditedInvestorsMember EAST:SecuredConvertiblePromissoryNotesMember us-gaap:IPOMember 2021-04-18 2021-04-19~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended ~~June 30,~~March 31, ~~2022~~2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ______________ to _________________

Commission File No.: 001-38182

EASTSIDE DISTILLING, INC.

(Exact name of registrant as specified in its charter)

Nevada

20-3937596

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

2321 NE Argyle Street, Unit D

Portland, Oregon 97211

(Address of principal executive offices)

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

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

Common Stock, $0.0001 par value		EAST		The Nasdaq Stock Market LLC
(Title of Each Class)		(Trading Symbol)		(Name of Each Exchange on Which Registered)

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 ☒ 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 ☒ 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.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
Emerging growth company ☐

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 ☒

As of ~~August 11, 2022,~~May 12, 2023, ~~15,446,694~~16,660,171 shares of our common stock, $0.0001 par value, were outstanding.

EASTSIDE DISTILLING, INC.

FORM 10-Q

~~June 30, 2022~~March 31, 2023

TABLE OF CONTENTS

		Page
PART I— FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	3
	Consolidated Statements of Operations for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~	4
	Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~	5
	Notes to the Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2319
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3228
Item 4	Controls and Procedures	3228

PART II— OTHER INFORMATION		3329

Item 1	Legal Proceedings	3329
Item 1A	Risk Factors	3329
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3329
Item 3.	Defaults Upon Senior Securities	3329
Item 4.	Mine Safety Disclosures	3329
Item 5.	Other Information	3330
Item 6.	Exhibits	3330

SIGNATURES		3431

PART I: FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Eastside Distilling, Inc. and Subsidiaries

Consolidated Balance Sheets

~~June 30, 2022 and December 31, 2021~~

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


	June 30, 2022			December 31, 2021
	(Unaudited)						March 31, 2023			December 31, 2022
Assets								(Unaudited)
Current assets:
Cash	$	1,023		$	3,276		$	267		$	723
Trade receivables, net		1,253			1,446			860			876
Inventories		5,231			6,510			3,989			4,442
Prepaid expenses and current assets		749			2,873			941			579
Total current assets		8,256			14,105			6,057			6,620
Property and equipment, net		6,470			2,163			5,489			5,741
Right-of-use assets		3,219			3,211			2,698			2,988
Intangible assets, net		13,418			13,624			5,655			5,758
Other assets, net		411			457			354			369
Total Assets	$	31,774		$	33,560		$	20,253		$	21,476

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,565		$	1,265		$	2,077		$	1,728
Accrued liabilities		1,406			833			1,429			1,509
Deferred revenue		22			-			115			18
Current portion of secured credit facilities, net of debt issuance costs		3,108			5,725			3,377			3,442
Note payable, related party, net of debt issuance costs		1,904			-
Current portion of note payable, related party								4,651			4,598
Current portion of notes payable		931			894			7,749			-
Current portion of lease liabilities		1,024			781			870			991
Other current liability, related party								1,024			725
Total current liabilities		9,960			9,498			21,292			13,011
Lease liabilities, net of current portion		2,383			2,498			1,970			2,140
Note payable, related party		92			92			-			92
Notes payable, net of current portion		7,749			8,073			-			7,749
Total liabilities		20,184			20,161			23,262			22,992

Commitments and contingencies (Note 14)		-
Commitments and contingencies (Note 13)								-

Stockholders’ equity:
Common stock, $0.0001 par value; 35,000,000 shares authorized; 15,446,694 and 14,791,449 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		2			1
Preferred stock, $0.0001 par value; 100,000,000 shares authorized; 2,500,000 issued and outstanding as of both June 30, 2022 and December 31, 2021		-			-
Stockholders’ equity (deficit):
Common stock, $0.0001 par value; 35,000,000 shares authorized; 16,660,171 and 16,199,269 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively								2			2
Preferred stock, $0.0001 par value; 100,000,000 shares authorized; 2,500,000 shares issued and outstanding as of both March 31, 2023 and December 31, 2022								-			-
Additional paid-in capital		74,092			72,003			73,646			73,503
Accumulated deficit		(62,504	)		(58,605	)		(76,657	)		(75,021	)
Total stockholders’ equity		11,590			13,399
Total stockholders’ equity (deficit)								(3,009	)		(1,516	)
Total Liabilities and Stockholders’ Equity	$	31,774		$	33,560		$	20,253		$	21,476

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

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021			2023			2022

Sales	$	5,123		$	3,618		$	8,903		$	6,861		$	2,879		$	3,780
Less customer programs and excise taxes		266			173			306			268			26			40
Net sales		4,857			3,445			8,597			6,593			2,853			3,740
Cost of sales		3,405			2,536			6,198			5,141			2,212			2,793
Gross profit		1,452			909			2,399			1,452			641			947
Operating expenses:
Sales and marketing expenses		729			697			1,376			1,554			511			647
General and administrative expenses		1,748			1,605			3,678			3,529			1,364			1,930
Loss on disposal of property and equipment		101			-			101			61			6			-
Total operating expenses		2,578			2,302			5,155			5,144			1,881			2,577
Loss from operations		(1,126	)		(1,393	)		(2,756	)		(3,692	)		(1,240	)		(1,630	)
Other income (expense), net
Interest expense		(762	)		(345	)		(1,168	)		(471	)		(329	)		(406	)
Other income		100			17			100			2,217
Total other income (expense), net		(662	)		(328	)		(1,068	)		1,746
Other expense														(29	)		-
Total other expense, net														(358	)		(406	)
Loss before income taxes		(1,788	)		(1,721	)		(3,824	)		(1,946	)		(1,598	)		(2,036	)
Provision for income taxes		-			-			-			-			-			-
Net loss from continuing operations		(1,788	)		(1,721	)		(3,824	)		(1,946	)
Net income (loss) from discontinued operations		-			(47	)		-			3,886
Net income (loss)		(1,788	)		(1,768	)		(3,824	)		1,940
Net loss														(1,598	)		(2,036	)
Preferred stock dividends		(36	)		-			(75	)		-			(38	)		(38	)
Net income (loss) attributable to common shareholders	$	(1,824	)	$	(1,768	)	$	(3,899	)	$	1,940
Net loss attributable to common shareholders													$	(1,636	)	$	(2,074	)

Basic net income (loss) per common share	$	(0.12	)	$	(0.14	)	$	(0.26	)	$	0.17
Diluted net income (loss) per common share	$	(0.12	)	$	(0.14	)	$	(0.26	)	$	0.13
Basic weighted average common shares outstanding		15,270			12,262			15,090			11,683
Diluted weighted average common shares outstanding		15,270			12,262			15,090			14,401
Basic and diluted net loss per common share													$	(0.10	)	$	(0.14	)
Basic and diluted weighted average common shares outstanding														16,475			14,901

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

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~

(Dollars in thousands)

(Unaudited)


	2022			2021			2023			2022
Cash Flows From Operating Activities:
Net income (loss)	$	(3,824	)	$	1,940
Net (income) from discontinued operations		-			(3,886	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Net loss							$	(1,598	)	$	(2,036	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		686			606			407			263
Bad debt expense		28			8
Forgiveness of debt - Paycheck Protection Program (“PPP”)		-			(1,448	)
(Recovery of) bad debt expense								(2	)		43
Loss on disposal of assets		101			61			6			-
Inventory allowance		(32	)		-
Remeasurement of deferred consideration		-			(750	)
Write off of obsolete fixed assets								54			-
Inventory reserve								(19	)		(32	)
Stock dividend payable		(75	)		-			(38	)		(38	)
Amortization of debt issuance costs		673			38			-			180
Interest accrued to secured credit facilities		17			40			78			50
Issuance of common stock in exchange for services for related parties		206			71
Issuance of common stock in exchange for services for third parties		230			176
Payment of accrued interest on secured credit facilities								(142	)		-
Interest accrued for amounts due to related parties								123			-
Payment of accrued interest on amounts due to related parties								(141	)		-
Issuance of common stock in exchange for services of related parties								60			207
Issuance of common stock in exchange for services of third parties								83			119
Stock-based compensation		3			23			-			2
Changes in operating assets and liabilities:
Trade receivables, net		166			(838	)		-			148
Inventories		1,311			445			471			457
Prepaid expenses and other assets		(233	)		188			(390	)		(924	)
Right-of-use assets		470			240			290			229
Accounts payable		300			(237	)		350			1,102
Accrued liabilities		573			(495	)		(104	)		205
Other liability, related party		-			(700	)
Other liabilities, related party								279			-
Deferred revenue		22			(23	)		96			-
Net lease liabilities		(351	)		(258	)		(291	)		(111	)
Net cash provided by (used in) operating activities		271			(4,799	)
Net cash provided by operating activities of discontinued operations		-			4,640
Net cash provided by (used in) operating activities		271			(159	)
Net cash used in operating activities								(428	)		(136	)

Cash Flows From Investing Activities:
Proceeds from sale of fixed assets		12			89
Purchases of property and equipment		(2,497	)		(172	)		(28	)		(1,389	)
Net cash used in investing activities of continuing operations		(2,485	)		(83	)
Net cash provided by investing activities of discontinued operations		-			3,353
Net cash (used in) provided by investing activities		(2,485	)		3,270
Net cash used in investing activities								(28	)		(1,389	)

Cash Flows From Financing Activities:
Proceeds from issuance of stock		197			-
Proceeds from secured credit facilities		-			3,300
Proceeds from note payable, related party		3,000			-			-			2,000
Payments of principal on secured credit facilities		(2,949	)		(3,601	)		-			(940	)
Payments of principal on notes payable		(287	)		(2,577	)		-			(205	)
Net cash used in financing activities		(39	)		(2,878	)
Net (decrease) increase in cash		(2,253	)		233
Net cash provided by financing activities								-			855

Net decrease in cash								(456	)		(670	)
Cash at the beginning of the period		3,276			836			723			3,276
Cash at the end of the period	$	1,023		$	1,069		$	267		$	2,606

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	593		$	360		$	323		$	215
Cash paid for amounts included in measurement of lease liabilities		475			370		$	318		$	177

Supplemental Disclosure of Non-Cash Financing Activity
Issuance of detachable warrants on notes payable	$	1,454		$	-
Exchange of assets for services							$	42		$	-
Right-of-use assets obtained in exchange for lease obligations							$	-		$	320
Warrants issued in relation to secured credit facilities		-			717		$	-		$	948
Right-of-use assets obtained in exchange for lease obligations		478			-
Issuance of common stock pursuant to Azuñia earn-out		-			6,860
Issuance of notes payable pursuant to Azuñia final earn-out		-			7,842

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

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

~~June 30, 2022~~March 31, 2023

(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. to reflect the acquisition of Eastside Distilling, LLC. The Company manufactures, acquires, blends, bottles, imports, markets and sells a wide variety of alcoholic beverages under recognized brands. The Company currently employs 6949 people in the United States.

The Company operates a beverage packaging and services business that operates in the beverage segment. During 2022, the Company made substantial investments to expand its product offerings to include digital can printing in the Pacific Northwest (together Craft Canning + Printing, “Craft C+P”). Craft C+P operates 13 mobile filling lines in Seattle, Washington; Spokane, Washington; and Portland, Oregon. The Company also offers co-packing services in Portland, Oregon offering end-to-end production capabilities.

The Company’s spirits’ brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila. The Company sells products on a wholesale basis to distributors in open 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 expand its product offerings to include 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 Denver, Colorado. The Company now offers co-packing services in Portland, Oregon through its recent asset acquisition, allowing it to offer end-to-end production capabilities.

2. Liquidity

The Company’s primary capital requirements are for cash used in operating activities and the repayment of debt. Funds for the Company’s cash and liquidity needs have historically not been generated from operations but rather from loans as well as from convertible debt and equity financings. The Company has been dependent on raising capital from debt and equity financings to meet the Company’s operating needs.

The Company had an accumulated deficit of $~~62.5~~ 76.7million as of ~~June 30, 2022,~~March 31, 2023, having incurred a net loss of $~~3.8~~1.6 million during the ~~six~~three months ended ~~June 30, 2022. The net loss, combined with a reclassification from current assets to equipment of $4.3~~ ~~million in prepayments related to the digital can printer, resulted in a $6.3~~ ~~million reduction in working capital.~~March 31, 2023.

~~During the six months ended June 30, 2022, the Company raised $3.0~~ ~~million in additional capital through debt financing.~~ The Company’s ability to meet its ongoing operating cash needs over 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. In addition, the Company has been negotiating with creditors to reduce the interest burden and improve cash flow. If the Company is unable to reach an agreement with creditors or obtain additional financing, or additional financing is not available on acceptable terms, the Company may seek to sell 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~~2022 were prepared under the assumption that it would continue operations as a going concern, the report of its independent registered public accounting firm that accompanied the financial statements for the year ended December 31, ~~2021~~2022 contained a going concern explanatory paragraph 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. If the Company cannot continue as a going concern, its stockholders would likely lose most or all of their investment in it.

3. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited 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 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 ~~June 30, 2022,~~March 31, 2023, its operating results for the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ and its cash flows for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021.~~2022. The unaudited 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, ~~2021.~~2022. Interim results are not necessarily indicative of the results that may be expected for an entire fiscal year. The 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 Galactic Unicorn Packaging, LLC (the Company’s newly acquired fixed co-packing assets) and ~~the Azuñia tequila assets.~~MotherLode LLC. All intercompany balances and transactions have been eliminated on consolidation.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

~~June 30, 2022~~March 31, 2023

(Unaudited)

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 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, 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.

Customer Programs

Customer programs, which include customer promotional discount programs, are a common practice in the alcoholic beverage industry. The Company reimburses wholesalers for an agreed amount to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs are recorded as reductions to net sales in accordance with ASC 606 - Revenue from Contracts with Customers. Amounts paid in customer programs totaled $~~0.1~~(6,382) ~~million~~due to the reversal of a customer discount and $~~0.2~~3,812 ~~million~~ for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

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 alcoholic 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 $~~0.2~~32,136 ~~million~~ and $~~0.1~~40,062 ~~million~~ for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 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~~

~~June 30, 2022~~

~~(Unaudited)~~

Sales and Marketing Expenses

Sales and marketing expenses consist of sponsorships, agency fees, ~~social~~digital media, salary and benefit expenses, travel and entertainment expenses. Sales and marketing costs are expensed as incurred. Advertising and marketing expenses totaled $~~0.4~~0.1 million and $~~0.5~~0.2 million for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2023

(Unaudited)

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.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of ~~June 30, 2022, two distributors~~March 31, 2023, one distributor represented 239% of trade receivables. As of December 31, ~~2021, four wholesale customers~~2022, one distributor represented 4215% of trade receivables. Sales to one distributor and one wholesale customer accounted for 4937% of consolidated sales for the ~~six~~three months ended ~~June 30, 2022.~~March 31, 2023. Sales to ~~two distributors~~one distributor and one wholesale customer accounted for 2440% of consolidated sales for the ~~six months~~year ended ~~June 30, 2021.~~December 31, 2022.

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. As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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:

	Level 1:	Fair value of the asset or liability is determined using cash or unadjusted quoted prices in active markets for identical assets or liabilities.

	Level 2:	Fair value of the asset or liability is determined using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

	Level 3:	Fair value of the asset or liability is determined using unobservable inputs that are significant to the fair value measurement and reflect management’s own assumptions regarding the applicable asset or liability.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

~~June 30, 2022~~March 31, 2023

(Unaudited)

None of the Company’s assets or liabilities were measured at fair value as of ~~June 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022. 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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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 ~~June 30, 2022~~March 31, 2023 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 ~~June 30, 2022~~March 31, 2023 and determined that they were not impaired.

Comprehensive Income

The Company did not have any other comprehensive income items in either the three months ended March 31, 2023 or 2022.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

~~June 30, 2022~~March 31, 2023

(Unaudited)

~~Comprehensive Income~~

~~The Company did~~ 0~~t have any other comprehensive income items for the six months ended June 30, 2022 and 2021.~~

Accounts Receivable Factoring Program

~~During 2021, the~~The Company ~~participated in~~has 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% (spirits program) or ~~85%~~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.~~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 51% 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 – 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. ~~In December 2021, the agreement~~The Company factored $0.1 million of invoices and incurred $12,244 in fees associated with the ~~co-packing program expired. The agreement with~~factoring programs during the ~~spirits program~~three months ended March 31, 2023. As of March 31, 2023, the Company had ~~a zero balance as of June 30, 2022.~~$0.1 million factored 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 effect on the reported results of operations.

~~Recently Adopted Accounting Pronouncements~~

~~In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08,~~ ~~Accounting for Contract Assets and Contract Liabilities from Contracts with Customers~~~~, (“ASU 2021-08”) which requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606,~~ ~~Revenue Recognition~~. This ASU is effective for annual and interim periods beginning after December 15, 2022. 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 adoption permitted. The Company early adopted ASU 2020-06 for the year ended December 31, 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 is currently evaluating the impact of the adoption of the standard on the 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 Consolidated Financial Statements~~

~~June 30, 2022~~

~~(Unaudited)~~

On 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.

On 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 on 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 six months ended June 30, 2021, the revenue, expenses and cash flows from retail operations and the RRWC business have been classified as discontinued operations separately from continuing operations. As of December 31, 2021, there were no assets and liabilities related to discontinued 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 six months ended June 30, 2022 and 2021:~~

~~Schedule of Discontinued Retail Operations~~

(Dollars in thousands) 2022 2021
(Unaudited) (Unaudited)
Sales $ - $ 283
Less customer programs and excise taxes          - 26
Net sales - 257
Cost of sales - 160
Gross profit - 97
Operating expenses:
Sales and marketing expenses - 22
General and administrative expenses - 28
Total operating expenses - 50
Income from operations - 47
Other income, net
Other income - 989
Gain on termination of license agreement - 2,850
Total other expense, net - 3,839
Net income $ - $ 3,886
5. Business Segment Information

The Company’s internal management financial reporting consists of Craft C+P, Eastside spirits and corporate. Craft C+P.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 13 mobile lines in Washington and Oregon. The spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila and are sold on a wholesale basis to distributors 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 49%37% of its revenue.
~~Craft C+P offers digital can printing~~ Corporate consists of key accounting personnel 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~~corporate expenses such as public company and ~~Colorado.~~
board costs, as well as interest on debt.
11
~~Eastside Distilling, Inc. and Subsidiaries~~
~~Notes to Consolidated Financial Statements~~
~~June 30, 2022~~
~~(Unaudited)~~
The measure of profitability reviewed is condensed statements of operations and gross ~~margin.~~margins. 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 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.~~

~~Segment information was as follows for the six months ended June 30, 2022 and 2021:~~
~~Schedule of Segment Information~~

(Dollars in thousands) 2022 2021
Spirits
Sales $ 6,398 $ 2,812
Net sales 6,192 2,544
Cost of sales 3,389 2,082
Gross profit 2,803 462
Total operating expenses 2,561 3,013
Net income (loss) (905 ) 2,707
Gross margin 45 % 18 %

Interest revenue $ - $ -
Interest expense 1,148 445
Depreciation and amortization 82 158
Income tax expense - -
Significant noncash items:
(Gain) loss on disposal of property and equipment (12 ) 61
Forgiveness of debt - PPP - (1,052 )
Remeasurement of deferred consideration - (750 )
Gain on disposal of offsite inventory - (1,047 )
One-time professional fees - 343
Stock compensation 254 203

Craft C+P
Sales $ 2,505 $ 4,049
Net sales 2,405 4,049
Cost of sales 2,809 3,059
Gross profit (404 ) 990
Total operating expenses 2,594 2,131
Net loss (2,919 ) (767 )
Gross margin -17 % 24 %

Interest revenue $ - $ -
Interest expense 21 26
Depreciation and amortization 604 448
Significant noncash items:
Loss on disposal of property and equipment 113 -
Forgiveness of debt - PPP - (396 )
Stock compensation 266 206
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, but the revenues it generated did not exceed the costs of its start-up during the six months ended June 30, 2022.
1210

Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
~~June 30, 2022~~March 31, 2023
(Unaudited)

Segment information was as follows for the three months ended March 31, 2023 and 2022:
Schedule of Segment Information
(Dollars in thousands) 2023 2022

Craft C+P
Sales $ 1,456 $ 1,076
Net sales 1,477 1,076
Cost of sales 1,578 1,111
Gross profit (101 ) (35 )
Total operating expenses 749 1,047
Net loss (884 ) (1,093 )
Gross margin -7 % -3 %

Interest expense $ 4 $ 11
Depreciation and amortization 368 221
Significant noncash items:
Loss on disposal of property and equipment 6 -
Stock compensation - 205

Spirits
Sales $ 1,423 $ 2,704
Net sales 1,376 2,664
Cost of sales 634 1,682
Gross profit 742 982
Total operating expenses 522 625
Net income 221 357
Gross margin 54 % 37 %

Depreciation and amortization $ 39 $ 42
Corporate
Total operating expenses $ 610 $ 905
Net loss (935 ) (1,300 )

Interest expense $ 325 $ 395
Significant noncash items:
Stock compensation 111 170
Craft C+P’s sales increased due to new digital printing revenues offset by lower mobile revenues. Gross margin decreased compared to the prior year as digital printing continues to ramp up and is not at sufficient capacity to offset related operating expense. The Company also incurred higher raw material costs in the quarter related to digital printing.
6.
5. Inventories

Inventories consisted of the following:
Schedule of Inventories

(Dollars in thousands) June 30, 2022 December 31, 2021 March 31,
2023 December 31,
2022
Raw materials $ 3,680 $ 4,768 $ 2,691 $ 3,127
Finished goods 1,551 1,742 1,298 1,315
Total inventories $ 5,231 $ 6,510 $ 3,989 $ 4,442

7.6. Prepaid Expenses and Current Assets

Prepaid expenses and current assets consisted of the following:
Schedule of Prepaid Expenses and Current Assets

(Dollars in thousands) June 30, 2022 December 31, 2021
Prepayment of fixed assets $ 346 $ 2,715
Prepayment of inventory 305 59
Other 98 99
Total prepaid expenses and current assets $ 749 $ 2,873
During the six months ended June 30, 2022, the Company began operations of its new digital can printer resulting in a decrease in prepayment of fixed assets as the printer was reclassified to property and equipment.
8. ~~Property and Equipment~~
~~Property and equipment consisted of the following:~~
(Dollars in thousands) March 31,
2023 December 31,
2022
Prepayment of fixed assets $ 350 $ 346
Prepayment of inventory 302 -
Other 289 233
Total prepaid expenses and current assets $ 941 $ 579

~~Schedule of Property and Equipment~~

(Dollars in thousands) June 30, 2022 December 31, 2021
Furniture and fixtures $ 4,281 $ 3,779
Digital can printer 4,216 -
Leasehold improvements 1,526 1,386
Vehicles 222 814
Total cost 10,245 5,979
Less accumulated depreciation (3,775 ) (3,816 )
Total property and equipment, net $ 6,470 $ 2,163
~~Purchases of property and equipment totaled $2.5~~ ~~million and $0.2~~ ~~million for the six months ended June 30, 2022 and 2021, respectively. Depreciation expense totaled $0.5~~ ~~million and $0.4~~ ~~million for the six months ended June 30, 2022 and 2021, respectively.~~
~~During the six months ended June 30, 2022, the Company disposed of fixed 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 six months ended June 30, 2021, the Company disposed 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 Company received funds of $0.1 million from the sales of the disposed assets.~~
During the six months ended June 30, 2022, the Company 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 a loss on disposal of $~~0.1~~ ~~million. In return, the Company directly leases the vehicles from Enterprise, which will also manage the maintenance of the vehicles.~~
~~During the six months ended June 30, 2022, the Company acquired the assets of a production facility for a cash payment of $0.2~~ ~~million and concessions on service pricing.~~
1311

Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
~~June 30, 2022~~March 31, 2023
(Unaudited)

9.7. Property and Equipment
Property and equipment consisted of the following:
Schedule of Property and Equipment
(Dollars in thousands) March 31,
2023 December 31,
2022
Furniture and fixtures $ 4,073 $ 4,093
Digital can printer 4,264 4,216
Leasehold improvements 1,529 1,529
Vehicles 222 222
Total cost 10,088 10,060
Less accumulated depreciation (4,599 ) (4,319 )
Total property and equipment, net $ 5,489 $ 5,741
Purchases of property and equipment totaled $0 million and $1.4 million for the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2022, the Company invested $1.3 million in the digital can printer that was not in operation at quarter-end. Depreciation expense totaled $0.3 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.
During the three months ended March 31, 2023, the Company disposed of fixed assets resulting in a loss of $5,901 and wrote off obsolete fixed assets with a net book value of $0.1million.
8. Intangible Assets

Intangible assets consisted of the following:
Schedule of Intangible Assets
(Dollars in thousands) June 30, 2022 December 31, 2021 March 31,
2023 December 31,
2022
Permits and licenses $ 25 $ 25 $ 25 $ 25
Azuñia brand 11,945 11,945 4,492 4,492
Customer lists 2,895 2,895 2,895 2,895
Total intangible assets 14,865 14,865 7,412 7,412
Less accumulated amortization (1,447 ) (1,241 ) (1,757 ) (1,654 )
Intangible assets, net $ 13,418 $ 13,624 $ 5,655 $ 5,758

The customer list is being amortized over a seven-year life. Amortization expense totaled $~~0.2~~0.1 million for both the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021.~~2022.

The permits and licenses, and Azuñia brand have all been determined to have an indefinite life and will not be amortized. The Company, on an annual basis, tests the indefinite life assets for impairment. If the carrying value of an indefinite life asset is found to be impaired, then the Company will ~~estimate its useful life~~record an impairment loss and ~~amortize~~reduce the ~~asset over~~carrying value of the ~~remainder of its useful life.~~asset.

~~10.~~9. Other Assets

Other assets consisted of the following:
Schedule of Other Assets
(Dollars in thousands) June 30, 2022 December 31, 2021 March 31,
2023 December 31,
2022
Product branding $ 400 $ 400 $ 400 $ 400
Deposits 269 286 256 256
Total other assets 669 686 656 656
Less accumulated amortization (258 ) (229 ) (302 ) (287 )
Other assets, net $ 411 �� $ 457 $ 354 $ 369
12
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2023
(Unaudited)

As of ~~June 30, 2022,~~March 31, 2023, the Company had $0.4 million of capitalized costs related to services provided for the rebranding of its existing product line. This amount is being amortized over a seven-year life.

Amortization expense totaled $~~28,571~~14,286 for both ~~six~~the three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021.~~2022.

The deposits represent office lease deposits.

~~11.~~10. Leases

The Company has various lease agreements in place for facilities, equipment and vehicles. 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 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 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. As of ~~June 30, 2022,~~March 31, 2023, the amount of right-of-use assets and lease liabilities were $~~3.2~~2.7 million and $~~3.4~~2.8 million, respectively. Aggregate lease expense for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 was $~~1.1~~0.3 million, consisting of $~~0.3~~0.1 million in operating lease expense for lease liabilities and $~~0.8~~0.2 million in short-term lease cost.

Maturities of lease liabilities as of March 31, 2023 were as follows:
Schedule of Maturities of Operating Lease Liabilities
(Dollars in thousands) Operating Leases
Weighted-
Average
Remaining
Term in Years

2023 $ 833
2024 797
2025 795
2026 632
2027 141
Thereafter -
Total lease payments 3,198
Less imputed interest (based on 6.7% weighted-average discount rate) (358 )
Present value of lease liability $ 2,840 3.29
11. Notes Payable
Notes payable consisted of the following:
Schedule of Notes Payable
(Dollars in thousands) March 31,
2023 December 31,
2022
Promissory notes payable bearing interest of 6.0%. The notes have a 36-month term with maturity in April 2024. Accrued interest is paid in accordance with a monthly amortization schedule. $ 7,749 $ 7,749

Promissory notes payable bearing interest of 6.0%. The notes have a 36-month term with maturity in April 2024. Accrued interest is paid in accordance with a monthly amortization schedule. $ 7,749 $ 7,749
Total notes payable 7,749 7,749
Less current portion (7,749 ) -
Long-term portion of notes payable $ - $ 7,749
1413

Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
~~June 30, 2022~~
~~(Unaudited)~~
~~Maturities of lease liabilities as of June 30, 2022 were as follows:~~
~~Schedule of Maturities of Operating Lease Liabilities~~
(Dollars in thousands) Operating Leases
Weighted-
Average
Remaining
Term in Years

2022 $ 665
2023 1,091
2024 730
2025 725
2026 602
Thereafter 141
Total lease payments 3,954
Less imputed interest (based on 6.7% weighted-average discount rate) (547 )
Present value of lease liability $ 3,407 3.77
~~12.~~ ~~Notes Payable~~
~~Notes payable consisted of the following:~~
~~Schedule of Notes Payable~~
(Dollars in thousands) June 30, 2022 December 31, 2021
Notes payable bearing interest at 5.00%. Principal and accrued interest was payable in six equal installments on each six-month anniversary of the issuance date of January 11, 2019. The notes were secured by the security interests and subordinated to the Company’s senior indebtedness. $ - $ 124
Promissory note payable bearing interest of 5.2%. The note had a maturity of May 2023, but was accelerated to December 30, 2022 in accordance with the forbearance agreement entered into on May 24, 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft C+P. 53 79
Promissory note payable bearing interest of 4.45%. The note matured in May 2022. Principal and accrued interest were paid in accordance with a monthly amortization schedule. The note was secured by the assets of Craft C+P and included certain affirmative and financial covenants. - 56
Promissory note payable under a revolving line of credit bearing variable interest starting at 3.25%. The note had a 15-month term with principal and accrued interest due in lump sum in January 2022. The borrowing limit is $0.5 million. The note is secured by the assets of Craft C+P and includes certain affirmative and financial covenants. Craft C+P signed a forbearance agreement with First International Bank (“FIB”) and is in discussions to extend the maturity. 500 500
Promissory note payable bearing interest of 4.14%. The note had a maturity of July 2024, but was accelerated to December 30, 2022 in accordance with the forbearance agreement entered into on May 24, 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft C+P. 88 108
Promissory note payable bearing interest of 3.91%. The note had a maturity of August 2024, but was accelerated to December 30, 2022 in accordance with the forbearance agreement entered into on May 24, 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft C+P. 137 167
Promissory note payable bearing interest of 3.96%. The note had a maturity of November 2024, but was accelerated to December 30, 2022 in accordance with the forbearance agreement entered into on May 24, 2022. Principal and accrued interest are paid in accordance with a monthly amortization schedule. The note is secured by the assets of Craft C+P. 152 182
Promissory notes payable bearing interest of 6.0%. The notes have a 36-month term with maturity in April 2024. Accrued interest is paid in accordance with a monthly amortization schedule. 7,750 7,751
Total notes payable 8,680 8,967
Less current portion (931 ) (894 )
Long-term portion of notes payable $ 7,749 $ 8,073
15
~~Eastside Distilling, Inc. and Subsidiaries~~
~~Notes to Consolidated Financial Statements~~
~~June 30, 2022~~March 31, 2023
(Unaudited)

The Company paid $~~0.8~~0.1 million and $~~0.3~~0.2 million in interest on notes for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

Maturities on notes payable as of ~~June 30, 2022~~March 31, 2023 were as follows:
Schedule of Maturities on Notes Payable

(Dollars in thousands)
2022 $ 931
2023 - $ -
2024 7,749 7,749
2025 - -
2026 - -
2027 -
Thereafter - -
Total $ 8,680 $ 7,749

~~13.~~12. Secured Credit Facilities
Note Purchase Agreement
On October 7, 2022, the Company entered into a Note Purchase Agreement dated as of October 6, 2022 with Aegis Security Insurance Company (“Aegis”). Pursuant to the Note Purchase Agreement, Aegis purchased from the Company a secured promissory note in the principal amount of $4.5 million (the “Aegis Note”). Aegis paid for the Aegis Note by paying $3.3 million to TQLA to fully satisfy a secured line of credit promissory note that the Company issued to TQLA on March 21, 2022; and the remaining $1.2 million was paid in cash to the Company. The Company pledged substantially all of its assets to secure its obligations to Aegis under the Aegis Note.
The Aegis Note bears interest at 9.25% per annum, payable every three months. The principal amount of the Aegis Note and a Commitment Fee of $45,000 will be payable on October 6, 2023. The Company has a conditional right to twice extend the maturity date of the Aegis Note by six months upon payment on each occasion of an extension fee of one percent of the principal balance. As of March 31, 2023, the Company had accrued $0.1 million of interest expense.
See additional discussion in Note 16.

6% Secured Convertible Promissory Notes

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 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.

14
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2023
(Unaudited)
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~~As of March 31, 2023, the Company ~~paid~~had accrued $~~0.2~~0.1 million inof interest ~~during the six months ended June 30, 2022.~~
16
~~Eastside Distilling, Inc. and Subsidiaries~~
~~Notes to Consolidated Financial Statements~~
~~June 30, 2022~~
~~(Unaudited)~~expense.

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 were initially convertible into the Company’s common stock at an initial fixed conversion price of $2.20per 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 the holders agreed to a reduction of the conversion price of the 6% secured convertible promissory notes to $1.30per share in connection with the Company’s issuance of a common stock purchase warrant to TQLA covering its loan amount of $~~3.0~~ 3.5million with a common stock value of $1.20per 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.

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.

On ~~July 30, 2021,~~October 13, 2022, the Company entered into ~~warrant exercise inducement offer letters (“Inducement Letters”)~~an Amendment Agreement with the holders of the ~~Existing Warrants~~6% Secured Convertible Promissory Notes. The Amendment Agreement changed the Maturity Date of the Notes from October 18, 2022 to ~~exercise for cash their Existing Warrants. During~~November 18, 2022. In consideration of the ~~year ended December 31, 2021,~~extension, the Company ~~received gross proceeds~~issued 96,153 shares of $~~2.4~~ ~~million on the exercise~~its common stock to each of the ~~outstanding warrants, and recognized a deemed dividend of $2.3~~ ~~million based on~~Subscribers. The Company is in discussions to further extend the ~~Black Scholes valuation as a result of the higher strike price on the July 2021 issued warrants. See additional discussion in Note 16.~~maturity date.

~~Live Oak Loan Agreement~~
On January 15, 2020, the Company and its subsidiaries entered into a loan agreement (the “Loan Agreement”) between the Company and Live Oak Banking Company (“Live Oak”), a North Carolina banking corporation (the “Lender”) to refinance existing debt of the Company 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 eligible inventory of whisky in barrels or totes less an amount equal to all service fees or rental payments owed by the Company during the 90 day period immediately succeeding the date of determination to any warehouses or bailees holding eligible inventory (the “Loan”).
~~The Loan bore interest at a rate equal to the prime rate plus a spread of~~ ~~2.49~~%, adjusted quarterly. Accrued interest was payable monthly, with the final installment of interest being due and payable on the Maturity Date. The Company was also obligated to pay a servicing fee, unused commitment fee and origination fee in connection with the Loan. The Company paid $~~0.1~~ ~~million in interest during the six months ended June 30, 2022. In February 2022, the Company paid $0.9~~ ~~million of the secured credit facility with Live Oak. In June 2022, the Company paid the remaining balance of $1.9~~ ~~million.~~
The Loan Agreement contained affirmative and negative covenants that include covenants restricting the Company’s ability to, among other things, incur indebtedness, grant liens, dispose of assets, merge or consolidate, make investments, or enter into restrictive agreements, subject to certain exceptions.
The obligations of the Company under the Loan Agreement were secured by substantially all of its spirits respective assets, except for accounts receivable and certain other specified excluded property.
17
~~Eastside Distilling, Inc. and Subsidiaries~~
~~Notes to Consolidated Financial Statements~~
~~June 30, 2022~~
~~(Unaudited)~~
The Loan Agreement included customary events of default that included among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, cross default to material indebtedness, bankruptcy and insolvency defaults and change in control defaults. Under certain circumstances, a default interest rate would have applied on all obligations during the existence of an event of default under the Loan Agreement at a per annum rate equal to ~~2.00% above the applicable interest rate.~~
~~In connection with the Loan Agreement, the Company issued to the Lender a warrant to purchase up to~~ ~~100,000~~ ~~shares of the Company’s common stock at an exercise price of $3.94~~ ~~per share (the “Warrant”). The Warrant expires on~~ ~~January 15, 2025~~. In connection with the issuance of the Warrant, the Company granted the Lender piggy-back registration rights with respect to the shares of common stock issuable upon exercise of the Warrant, subject to certain exceptions.
~~14.~~13. Commitments and Contingencies

Legal Matters
On March 1, 2023, Sandstrom Partners, Inc. filed a complaint in the Circuit Court of the State of Oregon for the County of Multnomah alleging the Company failed to pay for its services pursuant to an agreement entered into on October 16, 2019. The complaint seeks damages of $285,000, plus a judicial declaration, due to the Company’s failure to pay for the services. The Company believes that it paid for services rendered and, if any balance is outstanding, it is minimal. The Company intends to defend the case vigorously.

On December 15, 2020, Grover Wickersham filed a complaint in the United States District Court for the District Court of Oregon against the Company. Mr. Wickersham, the former CEO and Chairman of the Board of the Company, has asserted causes of action for fraud in the inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, defamation, interference with economic advantage, elder financial abuse, and dissemination of false and misleading proxy materials. The Company disputes the allegations and intends to defend the case vigorously.

The Company is not currently subject to any other material legal proceedings; however, it could be subject to legal proceedings and claims from time to time in the ordinary course of its business, or legal proceedings it considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and can divert management resources.

15
~~15.~~Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2023
(Unaudited)
14. Net Income (Loss) per Common Share

Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Potentially dilutive securities consist of the incremental common stock issuable upon exercise of stock options, convertible notes and warrants. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. There were 0no anti-dilutive common shares included in the calculation of income (loss) per common share as of ~~June 30,~~March 31, 2023 and December 31, 2022. ~~As of June 30, 2021, the Company had~~ ~~2,717,988~~ ~~dilutive common shares.~~

~~16.~~15. Stockholders’ Equity
Schedule of Stockholders’ Equity

Series B
Preferred Stock Common Stock Paid-in Accumulated Total
Stockholders’
(Shares and dollars in thousands) Shares Amount Shares Amount Capital Deficit Equity
Balance, December 31, 2021 2,500 $ - 14,791 $ 1 $ 72,003 $ (58,605 ) $    13,399
Beginning balance 2,500 $ - 14,791 $ 1 $ 72,003 $ (58,605 ) $    13,399
Stock-based compensation - - -    - 3 - 3
Issuance of common stock for services by third parties - - 286 - 230 - 230
Issuance of common stock for services by employees - - 170 - 206 - 206
Issuance of detachable warrants on notes payable - - - - 1,454 - 1,454
Shares issued for cash - - 200
1
196 - 197
Preferred stock dividends
-

-

-

-

-

(75
)
(75
)
Net loss - - - - - (3,824 ) (3,824 )
Balance, June 30, 2022 2,500 $ - 15,447 $ 2 $ 74,092 $ (62,504) $ 11,590
Ending balance 2,500 $ - 15,447 $ 2 $ 74,092 $ (62,504) $ 11,590
18
~~Eastside Distilling, Inc. and Subsidiaries~~
~~Notes to Consolidated Financial Statements~~
(Shares and dollars in thousands) Shares Amount Shares Amount Capital Deficit
Equity

Series B
Preferred Stock Common Stock Paid-in Accumulated
Total
Stockholders’

(Shares and dollars in thousands) Shares Amount Shares Amount Capital Deficit
Equity

Balance, December 31, 2021 2,500 $            - 14,791 $           1 $ 72,003 $ (58,605 ) $   13,399

Stock-based compensation - - - - 2 - 2
Issuance of common stock for services by third parties - - 125 - 119 - 119
Issuance of common stock for services by employees - - 170 1 206 - 207
Issuance of detachable warrants on notes payable - - - - 948 - 948
Net loss

-

-

-

-

-

(38
) (38 )
Net loss - - - - - (2,036 ) (2,036 )
Balance, March 31, 2022 2,500 $ - 15,086 $ 2 $ 73,278 $ (60,679 ) $ 12,601
~~June 30, 2022~~
~~(Unaudited)~~

Series B
Preferred Stock
Common Stock Paid-in Accumulated Total
Stockholders’ Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
Balance, December 31, 2022 2,500 $ - 16,199 $ 2 $ 73,503 $ (75,021 ) $ (1,516 )
Beginning balance 2,500 $ - 16,199 $ 2 $ 73,503 $ (75,021 ) $ (1,516 )
Issuance of common stock for services by third parties - - 225 - 83 - 83
Issuance of common stock for services by employees - - 236 - 60 - 60
Preferred stock dividends
-

-

-

-

-

(38
)
(38
)
Net loss - - - - - (1,598 ) (1,598 )
Balance, March 31, 2023 2,500 $ - 16,660 $ 2 $ 73,646 $ (76,657 ) $ (3,009 )
Ending balance 2,500 $ - 16,660 $ 2 $ 73,646 $ (76,657 ) $ (3,009 )

Issuance of Common Stock

During the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, the Company issued ~~455,245~~460,899 shares of common stock to directors and employees for stock-based compensation of $~~0.4~~0.1 million. The shares were valued using the closing share price of the Company’s common stock on the date of grant, within the range of $~~0.69~~0.25 to $~~1.21~~0.37 per share. ~~Of these~~
During the year ended December 31, 2022, the Company issued 385,306 shares of common stock to directors and ~~170,000~~96,153 shares of its common stock to each of the Subscribers of the 6% Secured Convertible Promissory Notes for stock-based compensation of $0.3 million These shares were tovalued using the closing share price of the Company’s ~~former Chief Executive Officer pursuant~~common stock on the date of grant, within the range of $0.28 to ~~his separation agreement.~~ $0.96 per share.
On April 5, 2022, the Company sold 200,000 shares of common stock to its Chief Executive Officer for proceeds of $0.2 million based on the market price of the stock at that date.

~~During 2021, the Company issued~~On February 4, 2022, ~~313,442~~170,000 shares ~~of common stock~~were issued at $1.21 per share to ~~directors and employees~~the Company’s former Chief Executive Officer pursuant to his separation agreement for stock-based compensation of $~~0.6~~0.2 million. ~~The shares were valued using the closing share price of the Company’s common stock on the date of grant, within the range of $1.28~~ ~~to $2.98~~ ~~per share.~~
~~On February 10, 2021 and April 19, 2021, the Company issued~~ ~~1.2~~ ~~million shares and~~ ~~682,669~~ shares, respectively, of its common stock (the “Shares”) to certain affiliates of Intersect pursuant to an Asset Purchase Agreement dated September 12, 2019 by and between the Company and Intersect in respect of the Azuñia Tequila acquisition at a weighted-average of $~~4.67~~ ~~per share and $1.82~~ ~~per share, respectively. The Shares constitute the “Fixed Shares” due to Intersect pursuant to the Asset Purchase Agreement.~~
~~On July 30, 2021, the Company entered into Inducement Letters with the holders of the Existing Warrants to exercise their Existing Warrants and purchased~~ ~~900,000~~ ~~shares of common stock for gross proceeds of $2.4~~ ~~million.~~
~~During 2021, the Company sold~~ ~~1,297,653~~ ~~shares of common stock for net proceeds of $3.6~~ ~~million in at-the-market public placements. In addition, the Company issued~~ ~~5,000~~ ~~shares of its common stock upon the exercise of stock options at $1.23~~ ~~per share.~~

Issuance of Series B Preferred Stock

On October 19, 2021, Company entered into a securities purchase agreement (“Purchase Agreement”) with an accredited investor (“Subscriber”) for its purchase of 2.5million shares (“Preferred Shares”) of Series B Convertible Preferred Stock (“Series B Preferred Stock”) at a purchase price of $1.00 per Preferred Share, which Preferred Shares are convertible into shares of the Company’s common stock pursuant to the terms and conditions set forth in a Certificate of Designation Establishing Series B Preferred Stock of the Company with an initial conversion price of $3.10 per share. 850,000 shares of common stock were reserved for issuance in the event of conversion of the Preferred Shares.
16
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2023
(Unaudited)

The Series B Preferred Stock accrues dividends at a rate of 6% per annum, payable annually on the last day of December of each year. Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends are payable at the Company’s option either in cash or “in kind” in shares of common stock; provided, however that dividends may only be paid in cash following the fiscal year in which the Company has net income (as shown in its audited financial statements contained in its Annual Report on Form 10-K for such year) of at least $0.5 million. For “in-kind” dividends, holders will receive that number of shares of common stock equal to (i) the amount of the dividend payment due such stockholder divided by (ii) the volume weighted average price of the common stock for the 90 trading days immediately preceding a dividend date (“VWAP”). For the year ended December 31, ~~2021,~~2022, the Company issued as dividends of ~~10,670~~460,093 shares of common stock at a VWAP of $~~2.57~~0.33 per share. For the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, the Company accrued $~~0.1~~37,500 ~~million~~ of preferred dividends.

Stock-Based Compensation

On September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). Pursuant to the terms of the plan, on January 1, 2022 the number of shares available for grant under the 2016 Plan reset to 5,225,141 shares, equal to 8% of the number of outstanding shares of the Company’s capital stock, calculated on an as-converted basis, on March 31 of the preceding calendar year, and then added to the prior year plan amount. As of ~~June 30, 2022,~~March 31, 2023, there were ~~51,752~~61,752 options and ~~1,818,120~~7,115,483 restricted stock units (“RSUs”) outstanding under the 2016 Plan, with vesting schedules varying between immediate or three (3)(3) years from the grant date.
19
~~Eastside Distilling, Inc. and Subsidiaries~~
~~Notes to Consolidated Financial Statements~~
~~June 30, 2022~~
~~(Unaudited)~~

The Company also issues, from time to time, options that are not registered under a formal option plan. As of ~~June 30, 2022,~~March 31, 2023, there were no options outstanding that were not issued under the Plans.

A summary of all stock option activity as of and for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 is presented below:
Summary of Stock Option Activity
# of Options Weighted-
Average
Exercise Price
Outstanding as of December 31, 2021 57,586 $ 3.29

Options canceled (5,834 ) 4.43
Outstanding as of June 30, 2022 51,752 $ 3.16

Exercisable as of June 30, 2022 51,585 $ 3.16
~~On December 7, 2021, the Company issued~~ ~~5,000~~ ~~shares of common stock at $1.23~~ ~~per share upon the exercise of stock options for proceeds of $6,150~~.
# of Options Weighted-
Average
Exercise Price
Outstanding as of December 31, 2022 51,752 $ 3.16

Outstanding as of March 31, 2023 51,752 $ 3.16

Exercisable as of March 31, 2023 51,752 $ 3.16

The aggregate intrinsic value of options outstanding as of ~~June 30, 2022~~March 31, 2023 was $0.
As of ~~June 30, 2022, there were~~ ~~167~~ ~~unvested options with an aggregate grant date fair value of $~~0. The unvested options will vest in accordance with the vesting schedule in each respective option agreement, which varies between immediate and three years from the grant date. The aggregate intrinsic value of unvested options as of JuneMarch 31, ~~2022 was $~~0~~. During the six months ended June 30, 2022,~~ ~~3,417~~2023, all options vested.

The Company uses the Black-Scholes valuation model to measure the grant-date fair value of stock options. The grant-date fair value of stock options issued to employees is recognized on a straight-line basis over the requisite service period. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments as the underlying stock-based awards vest.

To determine the fair value of stock options using the Black-Scholes valuation model, the calculation takes into consideration the effect of the following:

● Exercise price of the option
● Fair value of the Company’s common stock on the date of grant
● Expected term of the option
● Expected volatility over the expected term of the option
● Risk-free interest rate for the expected term of the option

The calculation includes several assumptions that require management’s judgment. The expected term of the options is calculated using the simplified method described in GAAP. The simplified method defines the expected term as the average of the contractual term and the vesting period. Estimated volatility is derived from volatility calculated using historical closing prices of common shares of similar entities whose share prices are publicly available for the expected term of the options. The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the options.
~~The Company did not issue any additional options during the six months ended June 30, 2022.~~
~~For the six months ended June 30, 2022 and 2021, net compensation expense related to stock options was $2,859~~ ~~and $0.1~~ ~~million, respectively. As of June 30, 2022, the total compensation expense related to stock options not yet recognized was approximately $0.1~~ ~~million, which is expected to be recognized over a weighted-average period of approximately~~ ~~0.3~~ ~~years.~~
2017
Eastside Distilling, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
~~June 30, 2022~~March 31, 2023
(Unaudited)
The Company did not issue any additional options during the three months ended March 31, 2023.
For the three months ended March 31, 2023 and 2022, net compensation expense related to stock options was $0 and $1,614, respectively.

Warrants

On March 21, 2022, the Company entered into a promissory note with TQLA LLC to accept a one year loan of $~~2.0~~3.5 ~~million with a conditional additional loan of $1.0~~ ~~million and a conditional term extension of six months. The loan bears interest at~~ ~~9.25% and carries a commitment fee of~~ ~~2.5~~%.million. In addition, the Company issued a common stock purchase warrant to TQLA covering the loan amount with a common stock value of $1.20 per share. ~~As of June 30, 2022, the Company has drawn down $3.0~~ ~~million of the~~The note payable ~~and issued~~ ~~2.5~~ ~~million warrants.~~was fully repaid in October 2022. The ~~estimated fair value of the warrants of $1.5~~ ~~million was recorded as debt issuance cost and is being amortized to interest expense over the maturity period of the promissory note, with $0.4~~ ~~million recorded during the six months ended June 30, 2022.~~common stock purchase warrant expires in March 2027.
The estimated fair value of the new warrants issued was based on a combination of closing market trading price on the date of issuance for the public offering warrants, and the Black-Scholes option-pricing model, using the assumptions below:
~~Schedule of Weighted-average Assumptions for New Warrants~~
Volatility 75 %
Risk-free interest rate 2.5 %
Expected term (in years) 5.0
Expected dividend yield -
Fair value of common stock $ 0.80

From April 19, 2021 through May 12, 2021, the Company issued in a private placement Existing Warrants to purchase up to 900,000 shares of common stock at an exercise price of $2.60 per Warrant Share. ~~The estimated fair value of the warrants of $0.7~~ ~~million was recorded as debt issuance cost and is being amortized to interest expense over the maturity period of the secured credit facility, with $0.1~~ ~~million recorded during the six months ended June 30, 2022.~~
On July 30, 2021, the Company entered into Inducement Letters with the holders of the Existing Warrants whereby such holders agreed to exercise for cash their Existing Warrants to purchase the 900,000Warrant Shares in exchange for the Company’s agreement to issue new warrants (the “New Warrants”) to purchase up to900,000 shares of common stock (the “New Warrant Shares”). The New Warrants have substantially the same terms as the Existing Warrants, except that the New Warrants have an exercise price of $3.00 per share and are exercisable until August 19, 2026. ~~The~~
On January 15, 2020, the Company ~~received gross proceeds~~and its subsidiaries entered into a loan agreement (the “Loan Agreement”) between the Company and Live Oak Banking Company (“Live Oak”), a North Carolina banking corporation (the “Lender”) to refinance existing debt of the Company and to provide funding for general working capital purposes In connection with the Loan Agreement, the Company issued to the Lender a warrant to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $~~2.4~~3.94 ~~million~~per share (the “Warrant”). The Warrant expires on January 15, 2025. In connection with the issuance of the Warrant, the Company granted the Lender piggy-back registration rights with respect to the shares of common stock issuable upon exercise of the ~~outstanding warrants, and recognized a deemed dividend of $2.3~~ million based on the Black Scholes valuation as a result of the higher strike price on the July 2021 issued warrants, which is included in additional paid-in capital in the consolidated balance sheets.Warrant, subject to certain exceptions.

A summary of all warrant activity as of and for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 is presented below:
Summary of ~~Warrants~~Warrant Activity
Warrants Weighted-
Average
Remaining
Life (Years) Weighted-
Average
Exercise
Price Aggregate
Intrinsic
Value
Outstanding as of December 31, 2021 1,256,944 4.0 $ 3.42 $        -

Granted 2,500,000 4.6 1.20 -
Outstanding as of June 30, 2022 3,756,944 4.2 $ 1.86 $ -
Warrants Weighted-
Average
Remaining
Life (Years) Weighted-
Average
Exercise
Price Aggregate
Intrinsic
Value
Outstanding as of December 31, 2022 4,033,333 3.8 $ 1.67 $ -

Outstanding as of March 31, 2023 4,033,333 3.8 $ 1.67 $ -

~~17.~~16. Related Party Transactions

The following is a description of transactions since January 1, ~~2021~~2022 as to which the amount involved exceeds the lesser of $0.1 million or one percent (1%) of the average of total assets at year-end for the last two completed fiscal years, which was $0.3 million, and in which any related person has or will have a direct or indirect material interest, other than equity, compensation, termination and other arrangements.

21
~~Eastside Distilling, Inc. and Subsidiaries~~
~~Notes to Consolidated Financial Statements~~
~~June 30, 2022~~
~~(Unaudited)~~
On October 24, 2019, the Company’s Board appointed Stephanie Kilkenny to the Board to fill an existing vacancy on the Board effective immediately. Stephanie Kilkenny was the former managing director of Azuñia Tequila, and together with her spouse, owns and controls TQLA, the majority owner of Intersect. Effective June 15, 2020, the Company’s Board appointed Robert Grammen to the Board to fill an existing vacancy, Mr. Grammen is also a member of Intersect.
~~In connection with the acquisition of Azuñia Tequila from Intersect, TQLA was entitled to receive up to 93.88% of the aggregate consideration payable under the Asset Purchase Agreement. On February 10, 2021 and April 19, 2021, the Company issued~~ ~~1.2~~ ~~million shares and~~ ~~682,669~~ shares, respectively, of its common stock (the “Shares”) to certain affiliates of Intersect pursuant to an Asset Purchase Agreement dated September 12, 2019 by and between the Company and Intersect in respect of the Azuñia Tequila acquisition at a weighted-average of $~~4.67~~ ~~per share and $1.82~~ ~~per share, respectively. The Shares constituted the “Fixed Shares” due to Intersect pursuant to the Asset Purchase Agreement. As of December 31, 2021, all shares held by TQLA were sold.~~
~~On April 19, 2021, the Company issued $7.8~~ ~~million in principal amount of promissory notes as the Earnout Consideration. The loans mature in full on~~ ~~April 1, 2024~~ ~~and accrue interest at a rate of~~ ~~6.0% annually. TQLA received a total of~~ ~~598,223~~ ~~shares of common stock and a promissory note in the principal amount of $6.9~~ ~~million. Robert Grammen received a total of~~ ~~22,027~~ ~~shares of the Company’s common stock and a promissory note in the principal amount of $0.1~~ ~~million. The notes have a~~ 36~~-month term with maturity in April 2024. In October 2021, TQLA sold its promissory note in the principal amount of $6.9~~ ~~million.~~
~~On February 5, 2021, the Company paid other liabilities of $0.7~~ ~~million due to Intersect and TQLA.~~
~~On March 21,~~During 2022, the Company entered into a Secured Line of Credit Promissory Note with TQLA LLC and amended it twice for total borrowing of $3.3 million. On October 7, 2022, the Company entered into a Note Purchase Agreement with Aegis Security Insurance Company, and repaid the TQLA Note with a portion of the $4.5 million proceeds. As of March 31, 2023, the principal balance was $4.5 million and is included in note payable, ~~with~~related party on the consolidated balance sheets.
Details regarding the Aegis transactions are set forth in Note 12. TQLA ~~to accept~~LLC is owned by Stephanie Kilkenny and her husband, Patrick Kilkenny. Patrick Kilkenny is also the principal owner of Aegis Security Insurance Company. Stephanie Kilkenny is a ~~one year loan~~member of the Eastside Board of Directors.
Short-term Advance
During December 2022, LD Investments advanced the Company $~~2.0~~0.7 million ~~with a conditional~~and an additional ~~loan~~$0.3 million during the three months ended March 31, 2023. As of March 31, 2023, the principal balance was $1.0 million and ~~a conditional term extension~~is included in current liability, related party on the consolidated balance sheets. The principal owner of ~~six months. The loan bears interest at~~ ~~9.25% and carries a commitment fee of~~ ~~2.5%. In addition, the Company issued a common stock purchase warrant to TQLA covering the loan amount with a common stock value of $1.20~~ ~~per share. As of June 30, 2022, the Company has drawn down $3.0~~ ~~million of the note payable and issued~~ ~~2.5~~ ~~million warrants.~~
~~18.~~ ~~Subsequent Events~~
~~On August 4, 2022, the Company and TQLA amended and restated the note payable entered into on March 21, 2022 to increase the line of credit to $3.5~~ ~~million and issued an additional~~ ~~416,666~~ ~~warrants.~~
~~The Company~~LD Investments is ~~in discussions with FIB to extend the maturity of its line of credit.~~Patrick Kilkenny.

2218
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This section of the Quarterly Report includes “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events about the company or our outlook and involve uncertainties that could significantly impact results. You can identify forward-looking statements by the fact they do not relate to historical or current facts and by the use of words indicating anticipation or speculation such as “believe,” “expect,” “estimate,” “anticipate,” “will be,” “should,” “plan,” “project,” “intend,” “could” and similar words or expressions.

You should not place undue certainty on these forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that could cause our expectations to be unfulfilled include those discussed in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, ~~2021~~2022 entitled “Risk Factors” as well as factors we have not yet anticipated.

Overview

Eastside Distilling, Inc. (the “Company,” “Eastside Distilling,” “we,” “us,” or “our,” below) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, we changed our corporate name to Eastside Distilling, Inc. to reflect our acquisition of Eastside Distilling, LLC. We operate in ~~two~~three segments. Our Craft Canning + Printing (“Craft C+P”) segment provides digital can printing and canning services to the craft beverage industry in Washington and Oregon. In addition to mobile co-packing services we offer co-packing services from a single fixed site in Portland, Oregon. Our Spirits segment manufactures, blends, bottles, markets and sells a wide variety of alcoholic beverages under recognized brands in 3430 U.S. states. Our ~~Craft Canning + Printing (“Craft C+P”)~~corporate segment ~~provides digital can printing~~consists of key accounting personnel and ~~canning services to the craft beer~~corporate expenses such as public company and ~~cider industries in Washington, Oregon and Colorado. We now offer co-packing services in Portland, Oregon through our recent asset acquisition, allowing us to offer end-to-end production capabilities.~~board costs, as well as interest on debt. We employ 6949 people in the United States.

Mission-What We Do

Our mission is to source, make and deliver the best in class, end-to-end craft spirits brands and product portfolio. In addition, we ~~contract pack and decorate cans and bottles with distinct capability and craftsmanship, as well as now~~ offer advanced digital can printing decoration with custom graphics and co-packing ~~services.~~services with distinct capability and craftsmanship.

Strategy

Craft C+P primarily services the craft beer, cider and kombucha beverage segments. Craft C+P offers digital can printing to customers and co-packing services, as well as operates 13 mobile lines in Seattle and Spokane, Washington; and Portland, Oregon. Our spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum and tequila. We sell our products on a wholesale basis to distributors inthrough open states, and brokers in control states. Craft C+P primarily services the craft beer, cider and kombucha business. Craft C+P operates 14 mobile lines in Seattle and Spokane, Washington; Portland, Oregon; and Denver, Colorado, as well as now offers digital can printing to customers and co-packing services.
Eastside Distilling is unique in several specific areas: (1) to our knowledge, we are the only craft spirits company listed on Nasdaq, (2) we do not function as a traditional craft distillery with store fronts relying on local sales, (3) our contract manufacturing division is diversified, and (4) we have a diversified portfolio of spirits brands. We are similar to other craft distillers in that (1) we have concentrated local volume, (2) we produce small batches and remain within the volume definition of “Craft”, and (3) our brands achieve success through differentiation, discovery and distribution.
The U.S. spirits market is occupied by large multi-national conglomerates with substantially more resources than Eastside Distilling. However, we can use our small size to be fast, focused, and flexible in our strategy. If we attempt to grow too quickly, we may lack the underlying strength required to build scale with loyalty via strong unaided awareness and powerfully derived attributes. Moreover, attempting to focus our “frame-of-reference” to compete with the biggest brands in the most expensive venues, is likely to fail unless we first establish underlying brand equity.
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Our strategy is to utilize our public company stature to our advantage and position to expand our two distinct businesses – ~~Spirits~~Craft C+P and Craft C+P. Our spirits portfolio is to be positioned as a leading regional craft spirits provider that develops brands, expands geographic presence and positions for either a sale to a tier 1 supplier or continued ownership with growth in revenue and cash flow.Spirits. We look to grow and vertically integrate our Craft C+P business to expand our product offerings and improve our competitive position. Our spirits portfolio is to be positioned as a leading regional craft spirits provider that develops brands, expands geographic presence growing revenue and cash flow. These two segments are detailed below.

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Segments

Craft Canning + Printing
Digital Can Printing
In April 2022, we initiated operations of an innovative digital can printing facility that allows us to customer-design four sizes of popular aluminum beverage cans. This flexibility allows for custom graphics of limited releases, vintages, partnerships, and special events. This new acquisition of technology gives Craft C+P the ability to offer unparalleled customization and flexibility to craft beverage producers seeking direct printing for canning projects of all sizes, while having a production capacity of over 20 million cans.

Co-packing Facility
We offer co-packing services for non-alcoholic canned beverages including CBD soda waters in Portland, Oregon through our recent asset acquisition, allowing us to offer end-to-end production capabilities. We are currently the exclusive provider of can printing and co-packing services for a local CBD and wellness water maker.
Mobile Canning
Our mobile canning business has locations in Washington and Oregon. We use extensive proprietary and data-driven quality control measures and a robust clean-in-place procedure in order to provide the best packaging service for our customers. We take great pride in helping local beverage producers expand their distribution reach by using our service to offer industry-top quality and branding. Our greatest asset is the unmatched expertise of our talented group of printing and packaging professionals who show up every day to go above and beyond to get the job done.
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Our Craft mobile team offers a variety of services and products, including:
● High Mobile Canning Capacity – We operate 13 Wild Goose MC-250 machines, with the capacity to can over 150,000 barrels per year. In addition to the canning lines, we use custom in-house designed fully automated depalletizers and twist rinses.
●
Large Craft Volumes – With capabilities of around 600-800 cases per shift, we can manage any volume. Averaging 40 cans per minute, each machine can do 100 cases per hour.
●
Dedicated Team – All of our employees are carefully and rigorously trained. A fully insured workforce is ready to take on any and all of the customer’s packaging needs. We believe in continuous improvement and we understand the value of our clients’ products and dedicate ourselves to making every run a successful run.
● Quality Control – Hach Orbispheres measure our dissolved oxygen (“DO”) during packaging to ensure the lowest Total Packaged Oxygen for the customer’s can. We use luminometers and ATP swabs to ensure sanitation of our equipment. We can provide Zahm & Nagel volume meters to measure carbon dioxide (“CO2”) volumes in carbonated products before packaging. As masters of the “double seam” we frequently take on-site measurements with micrometers. We also offer CMC Kuhnke technology to generate even more accurate measurements in the form of visual seam reports.
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●
Velcorin and Nitrogen Dosing – We have both velcorin and nitrogen dosing capabilities that supports microbial control and allows packaging of still products in addition to carbonated and nitrogenated beverages.
● Pre-printing and Outfeed Labeling – Bringing on advanced digital can printing technology from Hinterkopf allows us to offer customers both world-class aesthetics and full sustainability in an end-to-end branding and packaging solution, accessible from our smallest to our largest customers. We also provide outfeed labeling and the ability to package customer-provided branded cans of all varieties.
● Location Flexibility – We allow our customers to choose the location of canning. We bring our mobile equipment to their facility, or our customers can bring their product to us for co-packing.
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Spirits

~~Over the years,~~Since 2014 we have developed ~~matured, perfected,~~ or acquired ~~then launched~~ many award-winning spirits while evolving to meet the growing demand for quality products and services associated with the burgeoning craft and premium beverage trade. Our portfolio includes originals like the Quercus garryana barrel-finished Burnside Whiskey family, Portland Potato Vodka, Hue-Hue Coffee Rum, and Azuñia Tequilas.

●
Burnside Whiskey Family – Our Burnside Whiskey Family celebrates the unique attributes of the native Oregon Oak tree (Quercus garryana). The unique complexity of each distinct whiskey comes from blending Oregon Oak barrels of differing sizes, char levels, and ages. ~~After an initial experiment in 2012, we made it our mission to turn the Burnside program into a one-of-a-kind oak study.~~

●
Portland Potato Vodka – Our award-winning premium craft vodka is distilled four times to ensure a smooth finish. While most vodka is made from grain, we source award winning premium potato ethanol and blend it with pristine water sourced from Oregon.

●
Hue-Hue (pronounced “way-way”) Coffee Rum – Premium silver rum is blended with concentrated cold-brewed coffee and a small amount of Demerara sugar. We source fair-trade, single-origin Arabica coffee beans from the Finca El Paternal Estate in Huehuetenango, Guatemala that are lightly roasted for us by Portland Coffee Roasters.

●
Azuñia Tequilas – Smooth, clean, additive-free tequilas crafted by Rancho Miravalle, a second generation, family-owned-and-operated estate, bursting with authentic flavor from the local terroir of Tequila Valley, Mexico. 100% pure Weber Blue Agave is harvested by hand, roasted in traditional clay hornos, and finished with a natural, open-air fermentation process. It is bottled on-site in small batches using a consistent process to deliver consistent field-to-bottle quality and exclusively exported by Agaveros Unidos de Amatitán.

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●
~~Eastside Brands~~ – We make the unique by blending together the unusual, craft inspired, experiential brands and high-quality artisan, in-and-out, seasonal and ongoing limited-edition products. Each Eastside-branded product is rare and hard-to-get with a peculiar balance of age and innovation, craftsmanship and curiosity, creativity and restraint.
~~Craft Canning + Printing~~
With 10 years of experience in the mobile canning business, we’ve become the West’s most trusted and premier mobile packaging provider. We serve locations in Oregon, Washington and Colorado. Our team of professionals have packaged hundreds of award-winning products across both established and innovative beverage segments - beer, wine, cider, RTD cocktails, kombucha, seltzer, and many more. We use extensive proprietary and data-driven quality control measures and a robust clean-in-place procedure in order to provide the best packaging service for our customers. We take great pride in helping local beverage producers expand their distribution reach by using our service to offer industry-top quality and branding. Our greatest asset is the unmatched expertise of our talented group of packaging professionals who show up every day to go above and beyond to get the job done.
~~Digital Can Printing~~
We now operate an innovative digital can printer that will revolutionize the growing custom canning operation. Our new printer, the German-made Hinterkopf D240.2, is the only one of its kind on the West Coast and one of ten in the world. The new acquisition gives Craft C+P the ability to offer unparalleled customization and flexibility to craft beverage producers seeking direct printing for canning projects of all sizes while having a production capacity of over 28 million cans. The new printer began operations in April 2022.
~~We print 12-ounce or 16-ounce cans in any quantity with any image. This flexibility allows for custom graphics of limited releases, vintages, partnerships, and special events.~~
In connection with the can printer, we partnered with a leading can provider to provide quality canning services from end to end. The new partnership guarantees a current and future supply of domestically manufactured Crown cans, cost-effective solutions for our customers, and improved logistics for beverage producers.
~~Co-packing Facility~~
We now offer co-packing services in Portland, Oregon through our recent asset acquisition, allowing us to offer end-to-end production capabilities. We currently are the exclusive provider of can printing and co-packing services for a CBD and wellness water maker.
~~Mobile Canning~~
~~Our Craft mobile team offers a variety of services and products, including:~~
● ~~High Mobile Canning Capacity –~~ We operate 14 Wild Goose MC-250 machines, with the capacity to can over 150,000 barrels per year. In addition to the canning lines, we use custom in-house designed fully automated depalletizers and twist rinses.

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●
~~Large Craft Volumes~~ ~~– With capabilities of around 600-800 cases per shift, we can manage any volume. Averaging 40 cans per minute, each machine can do 100 cases per hour.~~

●
~~Dedicated Team~~Eastside Brands – ~~All of our employees are carefully~~Craft inspired high-quality limited-edition products. which focus on innovation, craftsmanship and ~~rigorously trained. A fully insured workforce is ready to take on any~~curiosity, and ~~all of the customer’s packaging needs. We believe in continuous improvement, and we understand the value of our clients’ products and dedicate ourselves to making every run a successful run.~~creativity.

●
~~Quality Control~~ – Hach Orbispheres measure our dissolved oxygen (“DO”) during packaging to ensure the lowest Total Packaged Oxygen for the customer’s can. We use luminometers and ATP swabs to ensure sanitation of our equipment. We can provide Zahm & Nagel volume meters to measure carbon dioxide (“CO2”) volumes in carbonated products before packaging. As masters of the “double seam” we frequently take on-site measurements with micrometers. We also offer CMC Kuhnke technology to generate even more accurate measurements in the form of visual seam reports.

●
~~Velcorin and Nitrogen Dosing~~ ~~– We have both velcorin and nitrogen dosing capabilities that supports microbial control and allows packaging of still products in addition to carbonated and nitrogenated beverages.~~

● ~~Pre-printing and Outfeed Labeling~~ – Bringing on advanced digital can printing technology from Hinterkopf in Q2 2022 allows us to offer customers both world-class aesthetics and full sustainability in an end-to-end branding and packaging solution, accessible from our smallest to our largest customers. We also provide outfeed labeling and the ability to package customer-provided branded cans of all varieties.
● ~~Location Flexibility~~ ~~– We allow our customers to choose the location of canning. We bring our mobile equipment to their facility, or our customers can bring their product to us for co-packing.~~
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Recent Developments
During the ~~second~~first quarter of ~~2022,~~2023, we ~~began operating our new digital can printer providing our customers with photo-realistic graphics and the ability to make label changes~~grew sales at ~~the last minute, as well as a sustainable product that is 100% recyclable, unlike the traditional craft label and shrink sleeve. These capabilities are game changers~~Craft C+P. During March 2023, we printed over one million cans in the ~~craft beverage space, offered~~month. Digital printing represents a growing percentage of revenue and we expect that to ~~all makers of beverages not only brewers. During~~continue in the ~~quarter, we printed almost 750,000 cans with orders of almost 750,000 for the next one~~foreseeable future. We are continuing to restructure our business to decrease our overhead costs and ~~half months. In July 2022, we printed nearly 650,000 cans.~~general and administrative expenses.

~~In addition,~~We have supplemented cash flow with bulk spirit sales, as we purchased the assets of a maker of wellness beverages during the second quarter and we are contracted to be its exclusive provider of can printing and co-packing services. This asset purchase allows us to offer end-to-end production capabilities to customers across all canning needs whether it is water, craft brews, wine, kombucha or anyhave in other ~~liquid.~~
However, we faced a number of challenges in both business segments in 2021 that have continued into 2022. The COVID-19 pandemic presented significant operational challenges for both the mobile canning operation as well as spirits division. Increased competition, supply change issues and restructuring activities added to performance challenges in 2021 that have continued into 2022.
~~Our spirits volume was soft~~quarters. Spirits volumes sold through wholesale declined in the first ~~half of 2022, primarily due~~quarter. We began a restructuring plan to ~~terminating deep discounting of Azuñia tequila in chains in 2021. In addition, we faced challenges with distribution partners that resulted in out of stocks at retail~~lower costs and ~~missed programming windows. These issues are behind us as we head into~~prepare the ~~second half. Finally, we saw cost increases across much of our direct and indirect costs.~~brands for reinvestment. While a substantial amount of our raw materials, ~~is owned,~~ such as our ~~whisky,~~whiskey, is owned and not susceptible to price inflation, ~~imported tequila~~the prices of shipping and other materials, such as glass, increased through ~~the year.~~2022. These challenges are expected to continue ~~in the second half.~~through 2023. The decline in ~~distributed~~ sales was partially offset by a direct ~~sale~~sales of ~~nearly 800~~250 barrels ~~of rye whiskey sold~~ for ~~$1.5~~$0.6 million during ~~the first quarter and an additional direct sale of 651 barrels for $2.6 million during the second quarter.~~2023.
Craft C+P also continues to face unique challenges and opportunities. In the beginning of the second quarter, we started a new business activity decorating craft beverage cans. The first half of 2022 involved substantial investment and planning to launch the technology in a new Portland, Oregon based printing facility. This new initiative has helped us improve our competitive position and deal with a number of industry challenges. Beginning mid-year 2020 and throughout 2021, the craft beverage industry faced a shortage of aluminum cans. Domestic aluminum can manufacturers continue to make adjustments to manage a supply demand imbalance into 2022. As a result, buyers of aluminum cans continue to face uncertainties. We believe we have sourced an adequate supply of cans to supply our current business plan. In addition, suppliers have successfully passed through price increases, which we did not immediately pass through to our customers. Moreover, this period of rapidly escalating prices left us at a competitive disadvantage to others that had a superior source of cans. Digital printing has allowed us to improve our ability to pass through aluminum can inflation. In addition, we have faced workforce challenges related to retention and hiring.
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Results of Operations

Overview

Three ~~and Six~~ Months Ended ~~June 30, 2022~~March 31, 2023 Compared to the Three ~~and Six~~ Months Ended ~~June 30, 2021~~March 31, 2022

Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2022 2021 Variance 2022 2021 Variance
Sales $ 5,123 $ 3,618 $ 1,505 $ 8,903 $ 6,861 $ 2,042
Less customer programs and excise taxes 266 173 93 306 268 38
Net sales 4,857 3,445 1,412 8,597 6,593 2,004
Cost of sales 3,405 2,536 869 6,198 5,141 1,057
Gross profit 1,452 909 543 2,399 1,452 947
Sales and marketing expenses 729 697 32 1,376 1,554 (178 )
General and administrative expenses 1,748 1,605 143 3,678 3,529 149
Loss on disposal of property and equipment 101 - 101 101 61 40
Total operating expenses 2,578 2,302 276 5,155 5,144 11
Loss from operations (1,126 ) (1,393 ) 267 (2,756 ) (3,692 ) 936
Interest expense (762 ) (345 ) (417 ) (1,168 ) (471 ) (697 )
Other income 100 17 83 100 2,217 (2,117 )
Loss from continuing operations (1,788 ) (1,721 ) (67 ) (3,824 ) (1,946 ) (1,878 )
Income (loss) from discontinued operations - (47 ) 47 - 3,886 (3,886 )
Net income (loss) (1,788 ) (1,768 ) (20 ) (3,824 ) 1,940 (5,764 )
Preferred stock dividends (36 ) - (36 ) (75 ) - (75 )
Net income (loss) attributable to common shareholders $ (1,824 ) $ (1,768 ) $ (56 ) $ (3,899 ) $ 1,940 $ (5,839 )
Gross margin 30 % 26 % 4 % 28 % 22 % 6 %
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(Dollars in thousands) 2023 2022 Variance
Sales $ 2,879 $ 3,780 $ (901 )
Less customer programs and excise taxes 26 40 (14 )
Net sales 2,853 3,740 (887 )
Cost of sales 2,212 2,793 (581 )
Gross profit 641 947 (306 )
Sales and marketing expenses 511 647 (136 )
General and administrative expenses 1,364 1,930 (566 )
Loss on disposal of property and equipment 6 - 6
Total operating expenses 1,881 2,577 (696 )
Loss from operations (1,240 ) (1,630 ) 390
Interest expense (329 ) (406 ) 77
Other expense (29 ) - (29 )
Net loss (1,598 ) (2,036 ) 438
Preferred stock dividends (38 ) (38 ) 1
Net loss attributable to common shareholders $ (1,636 ) $ (2,074 ) $ 439
Gross margin 22 % 25 % -3 %

Segment information ~~was~~is as follows for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~2021:~~2022:

Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2022 2021 Variance 2022 2021 Variance 2023 2022 Variance
Spirits
Sales $ 3,694 $ 1,478 $ 2,216 $ 6,398 $ 2,812 $ 3,586
Net sales 3,528 1,305 2,223 6,192 2,544 3,648
Cost of sales 1,707 1,028 679 3,389 2,082 1,307
Gross profit 1,821 277 1,544 2,803 462 2,341
Total operating expenses 1,292 1,318 (26 ) 2,561 3,013 (452 )
Net income (loss) $ (223 ) $ (1,406 ) $ 1,183 $ (905 ) $ 2,707 $ (3,612 )
Gross Margin 52 % 21 % 31 % 45 % 18 % 27 %

Craft C+P
Sales $ 1,429 $ 2,140 $ (711 ) $ 2,505 $ 4,049 $ (1,544 ) $ 1,456 $ 1,076 $ 380
Net sales 1,329 2,140 (811 ) 2,405 4,049 (1,644 ) 1,477 1,076 401
Cost of sales 1,698 1,508 190 2,809 3,059 (250 ) 1,578 1,111 467
Gross profit (369 ) 632 (1,001 ) (404 ) 990 (1,394 ) (101 ) (35 ) (66 )
Total operating expenses 1,286 984 302 2,594 2,131 463 749 1,047 (298 )
Net loss $ (1,565 ) $ (362 ) $ (1,203 ) $ (2,919 ) $ (767 ) $ (2,152 ) $ (884 ) $ (1,093 ) $ 209
Gross Margin -28 % 30 % -58 % -17 % 24 % -41 %
Gross margin -7 % -3 % -4 %
Spirits
Sales $ 1,423 $ 2,704 $ (1,281 )
Net sales 1,376 2,664 (1,288 )
Cost of sales 634 1,682 (1,048 )
Gross profit 742 982 (240 )
Total operating expenses 522 625 (103 )
Net income $ 221 $ 357 $ (136 )
Gross margin 54 % 37 % 17 %

Corporate
Total operating expenses $ 610 $ 905 $ (295 )
Net loss $ (935 ) $ (1,300 ) $ 365
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Sales
Sales were ~~$8.9~~$2.9 million and ~~$6.9 million for the six months ended June 30, 2022 and 2021, respectively, and $5.1 million and $3.6~~$3.8 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

Craft C+P
Sales ~~of spirits~~ increased for the three month ended March 31, 2023 due to ~~the sale of 651~~digital can printing sales, partially offset by soft mobile canning sales.
Spirits
We sold 250 barrels ~~of Tennessee whiskey and Indiana bourbon~~ for gross proceeds of ~~$2.6~~$0.6 million ~~during~~for the three months ended ~~June 30, 2022~~March 31, 2023 and ~~a prior sale~~798 barrels for gross proceeds of ~~nearly 800 barrels of rye whiskey for~~ $1.5 ~~million during the first quarter, for a total of $4.1~~ million for the ~~six~~three months ended ~~June 30, 2022, partially offset by weaker Azuñia volume~~March 31, 2022. In addition, sales decreased on a quarter-to-quarter basis in the three months ended March 31, 2023, due to ~~a reduction in discounting. The following table presents volumes by nine-liter cases~~two large one-time inventory sales for the three ~~and six~~ months ended ~~June 30, 2022 and 2021:~~March 31, 2022.

Three Months Ended June 30,

Six Months Ended June 30,

9 Liter Cases 2022 2021 Variance 2022 2021 Variance
Azuñia 1,730 3,237 (1,507 ) 3,789 6,147 (2,358 )
Burnside 933 1,184 (251 ) 1,938 2,209 (271 )
Hue-Hue 138 81 57 222 202 20
Portland Potato Vodka 4,457 4,682 (225 ) 8,758 9,346 (588 )
Eastside Brands 171 46 125 239 46 193
Legacy Brands 2 97 (95 ) 13 272 (259 )
7,431 9,327 (1,896 ) 14,959 18,222 (3,263 )
Craft C+P sales decreased for both the three and six months ended June 30, 2022 due to a combination of factors including cycling the end of the pandemic where on-premise consumption had yet to open up in 2021, a trend to insource can purchasing and filling by larger customers, increased competition and starting our new digital can printing business.
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Customer programs and excise taxes

Customer programs and excise taxes were $0.3 million for both the six months ended June 30, 2022 and 2021, and $0.3 million and $0.2 million for the three months ended June 30, 2022 and 2021, respectively. Spirits discounts were $0.2 million lower than the prior year due to a reduction in Azuñia Tequila discounting. During the second quarter of 2022, as part of our asset acquisition, we offered a discount of $0.1 million to the beverage maker for our printing and canning services.flat from March 31, 2022.

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. Cost of sales were $2.2 million and $2.8 million for the three months ended March 31, 2023 and 2022, respectively.
Craft C+P

Cost of sales ~~were $6.2 million and $5.1 million for the six months ended June 30, 2022 and 2021, respectively, and $3.4 million and $2.5 million~~increased for the three ~~months~~month ended ~~June 30, 2022~~March 31, 2023 due to inventory costs, scrap related to the printer and ~~2021, respectively. Spirit’s cost~~printer depreciation, partially offset by decreased labor costs.
Spirits
Cost of sales ~~increased~~decreased for ~~both~~ the three ~~and six months~~month ended ~~June 30, 2022~~March 31, 2023 due to bulk sales ~~partially offset by savings from lower Azuñia Tequila~~and two large one-time inventory sales ~~volume. Craft C+P cost~~in the first quarter of ~~sales decreased for both the three and six months ended June 30, 2022 due to lower sales and lower compensation costs.~~2022.

Gross Profit
Gross profit is calculated by subtracting the cost of products sold and services rendered from net sales. Gross profit was ~~$2.4~~$0.6 million and ~~$1.5 million for the six months ended June 30, 2022 and 2021, respectively, and $1.5 million and $0.9~~$1.0 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

Gross margin is gross profit stated as a percentage of net sales. Our gross margin was ~~28%~~22% and ~~22% for the six months ended June 30, 2022 and 2021, respectively, 30% and 26%~~25% for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. ~~Spirits gross margin increased for both the three and six months ended June 30, 2022 primarily due to the carryforward of fall 2021 price increases and excess bulk spirits sales.~~
Craft C+P
Craft C+P’s gross margin decreased for ~~both~~ the three ~~and six months~~month ended ~~June 30, 2022~~March 31, 2023 primarily due to ~~lower sales~~the high cost of ~~services, a change in product and service mix, and higher raw material costs. In addition, Craft C+P launched its digital can printing business at~~goods sold.
Spirits
Gross margin increased for the ~~end of April 2022. While printing revenues have increased through the quarter, low print volumes during the initial startup period has contributed~~three month ended March 31, 2023 primarily due to ~~negative margins.~~bulk spirits profits.

Sales and Marketing Expenses
Sales and marketing expenses were ~~$1.4~~$0.5 million and ~~$1.6~~$0.6 million for ~~the six months ended June 30, 2022 and 2021, respectively, and $0.7 million for both~~ the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021. The decrease for the six months ended June 30, 2022 was primarily~~respectively, due to ~~a decrease in compensation related to~~ lower ~~headcount in our spirits segment as we continue to focus our sales efforts in key markets of Oregon, California, Arizona, Colorado, Texas, Florida, and Washington.~~marketing costs.
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General and Administrative Expenses
General and administrative expenses were ~~$3.7~~$1.4 million and ~~$3.5 million for the six months ended June 30, 2022 and 2021, respectively, and $1.7 million and $1.6~~$1.9 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively, primarily due to ~~increased rent as we entered into new leases, offset by compensation as our overall headcount decreased.~~decreased professional fees and compensation.
~~Other Income~~
Other income was $0.1 million for both the three and six months ended June 30, 2022 and was attributable to our co-packing asset acquisition. Other income was $2.2 million for the six months ended June 30, 2021 and was attributable to the forgiveness of our loans under the U.S. government Paycheck Protection Program (“PPP Loans”) and the remeasurement of deferred consideration for the final Azuñia earn-out.
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Net Income (Loss)

Net loss was ~~$(3.8)~~$1.6 million and ~~net income of $1.9~~$2.0 million for ~~the six months ended June 30, 2022 and 2021, respectively, and $(1.8) million for both~~ the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021.~~respectively. The primary reason for the reduction in net loss was that decreased barrels sales during the three months ended March 31, 2023 were offset by decreased operating expenses.

Preferred Stock Dividends

Preferred stock dividends were $37,500 ~~and $75,000~~ for both the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~respectively,~~ and related to the Series B preferred stock dividend of 6% per annum.

Liquidity and Capital Resources

Our primary capital requirements are for cash used in operating activities and the repayment of debt. Funds for our cash and liquidity needs have historically not been generated from operations but rather from short-term credit in the form of extended payment terms from suppliers as well as proceeds from loans and the sale of convertible debt and ~~equity financings.~~equity. We have been dependent on raising capital from debt and equity financings to meet our operating needs.

During 2021, our working capital position improved by $22.0 million, primarily due to the conversion of a large portion of debt into equity related to our acquisition of the Azuñia brand. In addition, during 2021, the Small Business Administration (“SBA”) notified us that it approved our request for full forgiveness of the PPP Loans that we took in 2020 in the principal amount of $1.4 million.
We had an accumulated deficit of ~~$62.5~~$76.7 million as of ~~June 30, 2022,~~March 31, 2023, having incurred a net loss of ~~$3.8~~$1.6 million during the ~~six months~~three month ended June 30, 2022. The net loss, combined with a reclassification from current assets to equipment of $4.3 million in prepayments related to the digital can printer, resulted in a $6.3 million reduction in working capital.March 31, 2023. As of ~~June 30, 2022,~~March 31, 2023, we had ~~$1.0~~$0.3 million of cash on hand with negative working capital of ~~$1.7~~$15.2 million.

~~During the six months ended June 30, 2022, we raised $3.0 million in additional capital through debt financing to invest in our three year growth plan.~~ Our ability to meet our ongoing operating cash needs over the next 12 months depends on receipt of additional financing, which in turn depends on our growing revenues and gross margins, and generating positive operating cash flow, primarily through increased sales, profitable operations, and controlling expenses. None of this is assured, as we currently anticipate recording a net loss for 2023. If we are unable to obtain additional financing, or additional financing is not available on acceptable terms, we may seek to sell assets, reduce operating expenses, reduce or eliminate marketing ~~initiatives.~~initiatives and take other measures that could impair our ability to be successful.

We continue to make substantial investments in Craft C+P, which we believe will deliver improved results during ~~2022,~~2023, in part due to our acquisition of a state-of-the-art digital can printer that will add incremental services and revenue.

Our cash flow results for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ were as follows:

(Dollars in thousands) 2022 2021
Net cash flows provided by (used in):
Operating activities $ 0.3 $ (0.2 )
Investing activities $ (2.5 ) $ 3.3
Financing activities $ (0.1 ) $ (2.9 )
30
(Dollars in thousands) 2023 2022
Net cash flows provided by (used in):
Operating activities $ (0.4 ) $ (0.1 )
Investing activities $ - $ (1.4 )
Financing activities $ - $ 0.9

Operating Activities

Total cash ~~provided by~~used in operating activities was ~~$0.3~~$0.4 million during the ~~six months~~three month ended ~~June 30, 2022~~March 31, 2023 compared to ~~cash used of $0.2~~$0.1 million during the ~~six months~~three month ended ~~June 30, 2021.~~March 31, 2022. The increase in cash used was primarily attributable to ~~a decrease in inventory as a result of~~the cash generated by our bulk spirits sales ~~offset by increases~~ in ~~accounts payable and accrued liabilities.~~the first quarter of 2022.

Investing Activities

Total cash used in investing activities was ~~$2.5~~$1.4 million during the ~~six~~three months ended ~~June 30,~~March 31, 2022 representing our investment in digital can printing equipment ~~compared to cash provided~~that was not operational until the second quarter of ~~$3.3 million during~~2022. Our investing activities in the ~~six~~three months ended ~~June 30, 2021, which consisted of $3.4 million received for the Termination Agreement with RSG.~~March 31, 2023 were negligible.
27

Financing Activities

Total cash ~~used in~~provided by financing activities was ~~$0.1~~$0.9 million during the ~~six~~three months ended ~~June 30, 2022 compared to $2.9 million during the six months ended June 30, 2021. Net cash flows used in financing activities during the six months ended June 30,~~March 31, 2022 consisted of the proceeds from a note payable with a related party of ~~$3.0~~$2.0 million; offset by ~~$2.9~~$0.9 million of principal payments of our secured credit facilities and ~~$0.3~~$0.2 million of payments on principal of notes payable. ~~Net cash flows used in~~There was no financing ~~activities~~activity during the ~~six~~three months ended ~~June 30, 2021 consisted of $3.6 million of payments reducing the balance of our secured trade credit facility and $2.6 million of payments reducing the principal balance of notes payable; offset by proceeds from secured credit facilities of $3.3 million~~.March 31, 2023.
~~Lines of Credit~~
From 2019 until December 2021, we utilized an existing accounts receivable factoring line of credit with ENGS that provided for a minimum of $0.5 million purchased accounts receivable and a maximum of $1.0 million of purchased accounts receivable. The advance rate was 85%, and interest was charged against the greater of $0.5 million or the total funds advanced at a rate of 5% plus the prime rate published in the Wall Street Journal. The Company factored $2.4 million of invoices during the year ended December 31, 2021. In December 2021, our agreement with ENGS expired and we are no longer factoring Craft C+P receivables.
Since 2019, we utilized an existing accounts receivable factoring line of credit with Park Street Financial Services, LLC. The advance rate is 75%, and interest is charged at a rate of 2.4% for the first 30 days plus 1.44% for each additional ten-day period. The Company factored $0.3 million of invoices during the year ended December 31, 2021. As of June 30, 2022, the Company had no factored invoices outstanding.
~~Inventory Line~~
In January 2020, we and our subsidiaries entered into a loan agreement with Live Oak Banking Company (“Live Oak”) for a loan in an aggregate principal amount not to exceed the lesser of (i) $8.0 million and (ii) a borrowing base of up 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 borrowers during the 90 day period immediately succeeding the date of determination to any warehouses or bailees holding eligible inventory (the “Live Oak Loan”). The Live Oak Loan was secured by all assets of the Company excluding accounts receivable and certain other specified excluded property. The Live Oak Loan bore interest at a variable rate of interest equal to (i) two and 49/100ths percent (2.49%) per annum plus (ii) the Prime Rate as published in The Wall Street Journal, adjusted on a calendar quarterly basis. Interest was payable monthly. Additionally, we issued to Live Oak 100,000 warrants to purchase common stock at an exercise price of $3.94 per share. The proceeds of the Live Oak Loan were used to pay off all principal and accrued interest under the TQLA Note of $0.9 million and all principal and interest under loan issued pursuant to that Credit and Security Agreement, by and between the Company and The KFK Children’s Trust, Jeffrey Anderson – Trustee of $3.0 million. The loan matured on November 11, 2021. On February 4, 2022, we paid $0.9 million of the loan. On February 28, 2022, Live Oak and the Company entered into a forbearance agreement while the parties finalized a further extension of the maturity date. In June 2022, we paid the remaining balance of $1.9 million.
31

Critical Accounting Policies

The discussion and analysis of ~~the Company’s~~our financial condition and results of operations is based upon ~~its~~our consolidated financial statements, which have been prepared in accordance with United States. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. ~~The Company bases its~~We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

In connection with the preparation of our financial statements for the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, there was one accounting estimate we made that was subject to a high degree of uncertainty and was critical to our results, as follows:

Intangible Assets

On September 12, 2019, we purchased the Azuñia brand, the direct sales team, existing product inventory, supply chain relationships and contractual agreements from Intersect Beverage, LLC, an importer and distributor of tequila and related products. The Azuñia brand has been determined to have an indefinite life and will not be amortized. We do, however, on an annual basis, test the indefinite life assets for impairment. If the carrying value of the indefinite life isassets are found to be impaired, then we will record an impairment loss and reduce the carrying value of the asset’s estimate the useful life of the brand and amortize the asset over the remainder of its useful life.

We estimate the brand’s fair value using market information to estimate future cash flows and will impair it when its carrying amount exceeds its estimated fair value, in which case we will write it down to its estimated fair value. We consider market values for similar assets when available. Considerable management judgment is necessary to estimate fair value, including making assumptions about future cash flows, net sales and discount rates.

We have the option, before quantifying the fair value, to evaluate qualitative factors to assess whether it is more likely than not that our brand is impaired. If we determine that is not the case, then we are not required to quantify the fair value. That assessment also takes considerable management judgment.

~~Based on our assumptions,~~As of December 31, 2022, as a result of the review described above, we ~~believe that, as of June 30, 2022,~~found the Azuñia brand ~~was not impaired.~~to be impaired and reduced its carrying cost by $7.5 million.
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

ITEM 4 – CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) that are designed to provide reasonable assurances that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

32
We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act)), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this report. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that these disclosure controls and procedures were effective as of ~~June 30, 2022.~~March 31, 2023.

There were no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended ~~June 30, 2022,~~March 31, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

28
PART II: OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS
On March 1, 2023, Sandstrom Partners, Inc. filed a complaint in the Circuit Court of the State of Oregon for the County of Multnomah alleging the Company failed to pay for its services pursuant to an agreement entered into on October 16, 2019. The complaint seeks damages of $285,000, plus a judicial declaration, due to the Company’s failure to pay for the services. The Company believes that it paid for services rendered and, if any balance is outstanding, it is minimal. The Company intends to defend the case vigorously.

On December 15, 2020, Grover Wickersham filed a complaint in the United States District Court for the District Court of Oregon against the Company. Mr. Wickersham, the former CEO and Chairman of the Board of the Company, has asserted causes of action for fraud in the inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, defamation, interference with economic advantage, elder financial abuse, and dissemination of false and misleading proxy ~~materials.~~materials The Company disputes the allegations and intends to defend the case vigorously.

We are not currently subject to any other material legal proceedings; however, we could be subject to legal proceedings and claims from time to time in the ordinary course of our business, or legal proceedings we considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and divert management resources.

ITEM 1A – RISK FACTORS

There have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 31, ~~2021.~~2022.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the ~~second~~first quarter of ~~2022~~2023 that have not been previously reported.
The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the first quarter of fiscal year 2023.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.
29

ITEM 5 – OTHER INFORMATION

None

ITEM 6 – EXHIBITS

Exhibit No. Description

31.1 * Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 * Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Schema Linkbase Document
101.CAL Inline XBRL Taxonomy Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Labels Linkbase Document
101.PRE Inline XBRL Taxonomy Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

3330

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EASTSIDE DISTILLING, INC.

Date: ~~August 11, 2022~~May 12, 2023 By: /s/ Geoffrey Gwin
Geoffrey Gwin
Chief Executive Officer

Date: ~~August 11, 2022~~May 12, 2023 By: /s/ Geoffrey Gwin
Geoffrey Gwin
Chief Financial Officer
(Principal Financial and Accounting Officer)

3431


(Dollars in thousands)	2022		2021
	(Unaudited)		(Unaudited)
Sales	$	-	$	283
Less customer programs and excise taxes		-		26
Net sales		-		257
Cost of sales		-		160
Gross profit		-		97
Operating expenses:
Sales and marketing expenses		-		22
General and administrative expenses		-		28
Total operating expenses		-		50
Income from operations		-		47
Other income, net
Other income		-		989
Gain on termination of license agreement		-		2,850
Total other expense, net		-		3,839
Net income	$	-	$	3,886

(Dollars in thousands)	March 31, 2023		December 31, 2022
Prepayment of fixed assets	$	350	$	346
Prepayment of inventory		302		-
Other		289		233
Total prepaid expenses and current assets	$	941	$	579

(Dollars in thousands)	Operating Leases			Weighted- Average Remaining Term in Years
2023	$	833
2024		797
2025		795
2026		632
2027		141
Thereafter		-
Total lease payments		3,198
Less imputed interest (based on 6.7% weighted-average discount rate)		(358	)
Present value of lease liability	$	2,840			3.29

(Dollars in thousands)	Operating Leases			Weighted- Average Remaining Term in Years
2022	$	665
2023		1,091
2024		730
2025		725
2026		602
Thereafter		141
Total lease payments		3,954
Less imputed interest (based on 6.7% weighted-average discount rate)		(547	)
Present value of lease liability	$	3,407			3.77


	Series B Preferred Stock				Common Stock				Paid-in		Accumulated			Total Stockholders’
(Shares and dollars in thousands)	Shares		Amount		Shares		Amount		Capital		Deficit			Equity
Balance, December 31, 2021		2,500	$	-		14,791	$	1	$	72,003	$	(58,605	)	$	13,399
Beginning balance		2,500	$	-		14,791	$	1	$	72,003	$	(58,605	)	$	13,399
Stock-based compensation		-		-		-		-		3		-			3
Issuance of common stock for services by third parties		-		-		286		-		230		-			230
Issuance of common stock for services by employees		-		-		170		-		206		-			206
Issuance of detachable warrants on notes payable		-		-		-		-		1,454		-			1,454
Shares issued for cash		-		-		200		1		196		-			197
Preferred stock dividends		-		-		-		-		-		(75	)		(75	)
Net loss		-		-		-		-		-		(3,824	)		(3,824	)
Balance, June 30, 2022		2,500	$	-		15,447	$	2	$	74,092		$ (62,504)		$	11,590
Ending balance		2,500	$	-		15,447	$	2	$	74,092		$ (62,504)		$	11,590

(Shares and dollars in thousands)	Shares		Amount		Shares		Amount		Capital		Deficit			Equity
	Series B Preferred Stock				Common Stock				Paid-in		Accumulated			Total Stockholders’
(Shares and dollars in thousands)	Shares		Amount		Shares		Amount		Capital		Deficit			Equity
Balance, December 31, 2021		2,500	$	-		14,791	$	1	$	72,003	$	(58,605	)	$	13,399

Stock-based compensation		-		-		-		-		2		-			2
Issuance of common stock for services by third parties		-		-		125		-		119		-			119
Issuance of common stock for services by employees		-		-		170		1		206		-			207
Issuance of detachable warrants on notes payable		-		-		-		-		948		-			948
Net loss		-		-		-		-		-		(38	)		(38	)
Net loss		-		-		-		-		-		(2,036	)		(2,036	)
Balance, March 31, 2022		2,500	$	-		15,086	$	2	$	73,278	$	(60,679	)	$	12,601

	# of Options			Weighted- Average Exercise Price
Outstanding as of December 31, 2021		57,586		$	3.29

Options canceled		(5,834	)		4.43
Outstanding as of June 30, 2022		51,752		$	3.16

Exercisable as of June 30, 2022		51,585		$	3.16

	# of Options		Weighted- Average Exercise Price
Outstanding as of December 31, 2022		51,752	$	3.16

Outstanding as of March 31, 2023		51,752	$	3.16

Exercisable as of March 31, 2023		51,752	$	3.16

	●	Exercise price of the option
	●	Fair value of the Company’s common stock on the date of grant
	●	Expected term of the option
	●	Expected volatility over the expected term of the option
	●	Risk-free interest rate for the expected term of the option

Volatility		75	%
Risk-free interest rate		2.5	%
Expected term (in years)		5.0
Expected dividend yield		-
Fair value of common stock	$	0.80

	Warrants		Weighted- Average Remaining Life (Years)		Weighted- Average Exercise Price		Aggregate Intrinsic Value
Outstanding as of December 31, 2021		1,256,944		4.0	$	3.42	$	-

Granted		2,500,000		4.6		1.20		-
Outstanding as of June 30, 2022		3,756,944		4.2	$	1.86	$	-

	●	Velcorin and Nitrogen Dosing – We have both velcorin and nitrogen dosing capabilities that supports microbial control and allows packaging of still products in addition to carbonated and nitrogenated beverages.
	●	Pre-printing and Outfeed Labeling – Bringing on advanced digital can printing technology from Hinterkopf allows us to offer customers both world-class aesthetics and full sustainability in an end-to-end branding and packaging solution, accessible from our smallest to our largest customers. We also provide outfeed labeling and the ability to package customer-provided branded cans of all varieties.

	●	Location Flexibility – We allow our customers to choose the location of canning. We bring our mobile equipment to their facility, or our customers can bring their product to us for co-packing.

	●	~~Large Craft Volumes~~ ~~– With capabilities of around 600-800 cases per shift, we can manage any volume. Averaging 40 cans per minute, each machine can do 100 cases per hour.~~
	●	~~Dedicated Team~~Eastside Brands – ~~All of our employees are carefully~~Craft inspired high-quality limited-edition products. which focus on innovation, craftsmanship and ~~rigorously trained. A fully insured workforce is ready to take on any~~curiosity, and ~~all of the customer’s packaging needs. We believe in continuous improvement, and we understand the value of our clients’ products and dedicate ourselves to making every run a successful run.~~creativity.
	●	~~Quality Control~~ – Hach Orbispheres measure our dissolved oxygen (“DO”) during packaging to ensure the lowest Total Packaged Oxygen for the customer’s can. We use luminometers and ATP swabs to ensure sanitation of our equipment. We can provide Zahm & Nagel volume meters to measure carbon dioxide (“CO2”) volumes in carbonated products before packaging. As masters of the “double seam” we frequently take on-site measurements with micrometers. We also offer CMC Kuhnke technology to generate even more accurate measurements in the form of visual seam reports.
	●	~~Velcorin and Nitrogen Dosing~~ ~~– We have both velcorin and nitrogen dosing capabilities that supports microbial control and allows packaging of still products in addition to carbonated and nitrogenated beverages.~~

	●	~~Pre-printing and Outfeed Labeling~~ – Bringing on advanced digital can printing technology from Hinterkopf in Q2 2022 allows us to offer customers both world-class aesthetics and full sustainability in an end-to-end branding and packaging solution, accessible from our smallest to our largest customers. We also provide outfeed labeling and the ability to package customer-provided branded cans of all varieties.

	●	~~Location Flexibility~~ ~~– We allow our customers to choose the location of canning. We bring our mobile equipment to their facility, or our customers can bring their product to us for co-packing.~~

	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in thousands)	2022			2021			Variance			2022			2021			Variance
Sales	$	5,123		$	3,618		$	1,505		$	8,903		$	6,861		$	2,042
Less customer programs and excise taxes		266			173			93			306			268			38
Net sales		4,857			3,445			1,412			8,597			6,593			2,004
Cost of sales		3,405			2,536			869			6,198			5,141			1,057
Gross profit		1,452			909			543			2,399			1,452			947
Sales and marketing expenses		729			697			32			1,376			1,554			(178	)
General and administrative expenses		1,748			1,605			143			3,678			3,529			149
Loss on disposal of property and equipment		101			-			101			101			61			40
Total operating expenses		2,578			2,302			276			5,155			5,144			11
Loss from operations		(1,126	)		(1,393	)		267			(2,756	)		(3,692	)		936
Interest expense		(762	)		(345	)		(417	)		(1,168	)		(471	)		(697	)
Other income		100			17			83			100			2,217			(2,117	)
Loss from continuing operations		(1,788	)		(1,721	)		(67	)		(3,824	)		(1,946	)		(1,878	)
Income (loss) from discontinued operations		-			(47	)		47			-			3,886			(3,886	)
Net income (loss)		(1,788	)		(1,768	)		(20	)		(3,824	)		1,940			(5,764	)
Preferred stock dividends		(36	)		-			(36	)		(75	)		-			(75	)
Net income (loss) attributable to common shareholders	$	(1,824	)	$	(1,768	)	$	(56	)	$	(3,899	)	$	1,940		$	(5,839	)
Gross margin		30	%		26	%		4	%		28	%		22	%		6	%

	Three Months Ended June 30,							Six Months Ended June 30,
9 Liter Cases	2022		2021		Variance			2022		2021		Variance
Azuñia		1,730		3,237		(1,507	)		3,789		6,147		(2,358	)
Burnside		933		1,184		(251	)		1,938		2,209		(271	)
Hue-Hue		138		81		57			222		202		20
Portland Potato Vodka		4,457		4,682		(225	)		8,758		9,346		(588	)
Eastside Brands		171		46		125			239		46		193
Legacy Brands		2		97		(95	)		13		272		(259	)
		7,431		9,327		(1,896	)		14,959		18,222		(3,263	)

Exhibit No.		Description

31.1 *		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 *		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Schema Linkbase Document
101.CAL		Inline XBRL Taxonomy Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Labels Linkbase Document
101.PRE		Inline XBRL Taxonomy Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

	EASTSIDE DISTILLING, INC.

Date: ~~August 11, 2022~~May 12, 2023	By:	/s/ Geoffrey Gwin
		Geoffrey Gwin
		Chief Executive Officer

Date: ~~August 11, 2022~~May 12, 2023	By:	/s/ Geoffrey Gwin
		Geoffrey Gwin
		Chief Financial Officer
		(Principal Financial and Accounting Officer)