| Summary of Significant Accounting Policies | 3. Summary of Significant
Accounting Policies Basis of Presentation and
Consolidation The accompanying condensed
consolidated financial statements for Eastside Distilling, Inc. and Subsidiary were prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial information and with instructions for Form 10-Q
and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations,
and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management, necessary for a fair
presentation of the interim condensed consolidated financial statements have been included. All such adjustments are of a normal
recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The unaudited
condensed consolidated results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results
that may be expected for the entire fiscal year ending December 31, 2017. The condensed consolidated financial statements include
the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiary, MotherLode (beginning as of March 8, 2017). All intercompany
balances and transactions have been eliminated in consolidation. Segment Reporting The Company determined its
operating segment on the same basis that it uses to evaluate its performance internally. The Company has one business activity,
producing, marketing and distributing hand-crafted spirits, and operates as one segment. The Company’s chief operating decision
makers, its chief executive officer and chief financial officer, review the Company’s operating results on an aggregate basis
for purposes of allocating resources and evaluating financial performance. Use of Estimates The preparation of financial
statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Net revenue includes product
sales, less excise taxes and customer programs and incentives. The Company records revenue when all four of the following criteria
are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred;
(iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. The Company recognizes sales
when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment
sales, which include sales to the Oregon Liquor Control Commission (OLCC), the Company recognizes sales upon the consignee’s
shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related
merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment
or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s
shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other
than customary rights of return. The Company excludes sales tax collected and remitted to various states from sales and cost of
sales. Sales from items sold through the Company’s retail location are recognized at the time of sale. Revenue received from online
merchants who sell discounted gift certificates for the Company’s merchandise and tastings is deferred until the customer
has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier. Customer Programs and Incentives Customer programs and incentives,
which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcohol
beverage industry. The Company makes these payments to customers and incurs these costs to promote sales of products and to maintain
competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net sales or
as advertising, promotional and selling expenses in accordance with ASC Topic 605-50, Revenue Recognition - Customer Payments and
Incentives, based on the nature of the expenditure. Amounts paid to customers totaled $40,772 and $8,712 for the three months ended
March 31, 2017 and 2016, respectively. Advertising, Promotional
and Selling Expenses The following expenses are
included in advertising, promotions and selling expenses in the accompanying consolidated statements of operations: media advertising
costs, special event costs, tasting room costs, sales and marketing expenses, salary and benefit expenses, travel and entertainment
expenses for the sales, brand and sales support workforce and promotional activity expenses. Cost of Sales Cost of sales consists of the
costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and
in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production
costs. Shipping and Fulfillment
Costs Freight costs incurred related
to shipment of merchandise from the Company’s distribution facilities to customers are recorded in cost of sales. Cash and Cash Equivalents Cash equivalents are considered
to be highly liquid investments with maturities of three months or less at the time of the purchase. The Company had no cash equivalents
at March 31, 2017 and December 31, 2016. Concentrations Financial instruments that
potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At March 31, 2017 and
December 31, 2016, three customers represented 79% and 91% of trade receivables, respectively. Sales to three customers accounted
for approximately 57% of consolidated net sales for the three months ended March 31, 2017. Sales to one customer, the OLCC, accounted
for approximately 32% of net sales for the three months ended March 31, 2016. Fair Value Measurements GAAP defines fair value, establishes
a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAAP permits an entity to
choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation
and disclosure requirements for assets and liabilities for which the fair value option is elected. At March 31, 2017 and December
31, 2016, management has not elected to report any of the Company’s assets or liabilities at fair value under the “fair
value option” provided by GAAP. The hierarchy of fair value
valuation techniques under GAAP provides for three levels: Level 1 provides the most reliable measure of fair value, whereas Level
3, if applicable, generally would require significant management judgment. The three levels for categorizing assets and liabilities
under GAAP’s fair value measurement requirements are as follows:
Level 1:
Fair value of the asset or
liability is determined using 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. None of the Company’s
assets or liabilities were measured at fair value at March 31, 2017 and December 31, 2016. However, GAAP requires the disclosure
of fair value information about financial instruments that are not measured at fair value. Financial instruments consist principally
of trade receivables, accounts payable, accrued liabilities, note payable, and convertible note payable. The estimated fair value
of trade receivables, accounts payable, and accrued liabilities approximates their carrying value due to the short period of time
to their maturities. At March 31, 2017 and December 31, 2016, the Company’s note payable and convertible notes payable are
at fixed rates and their carrying value approximates fair value. Items Measured at Fair Value
on a Nonrecurring Basis Certain assets and liabilities
acquired in a business acquisition are valued at fair value at the date of acquisition. Inventories Inventories primarily consist
of bulk and bottled liquor and merchandise and are stated at the lower of cost or market. Cost is determined using an average costing
methodology, which approximates cost under the first-in, first-out (FIFO) method. A portion of inventory is held by certain independent
distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and
records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand
and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. The Company has
recorded no write-downs of inventory for the three months ended March 31, 2017 and 2016. 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. Long-lived Assets The Company accounts for long-lived
assets, including property and equipment, at amortized cost. Management reviews long-lived assets for probable impairment whenever
events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment,
management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the
use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount of the asset, an
impairment loss would be recognized to write down the asset to its estimated fair value. Income Taxes The provision for income taxes
is based on income and expenses as reported for financial statement purposes using the “asset and liability method”
for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized. At March 31, 2017 and December 31, 2016, the Company established valuation allowances against
its net deferred tax assets. Income tax positions that
meet the “more-likely-than-not” recognition threshold are measured at the largest amount of income tax benefit that
is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits
associated with income tax positions taken that exceeds the amount measured as described above would be reflected as a liability
for unrecognized income tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized income tax
benefits would be classified as additional income taxes in the accompanying condensed consolidated statements of operations. There
were no unrecognized income tax benefits, nor any interest and penalties associated with unrecognized income tax benefits, accrued
or expensed at and for the three months ended March 31, 2017 and 2016. The Company files federal income
tax returns in the U.S. and various state income tax returns. The Company is no longer subject to examinations by the related tax
authorities for the Company’s U.S. federal and state income tax returns for years prior to 2011. Advertising Advertising costs are expensed
as incurred. Advertising expense was $386,132 and $156,203 for the three months ended March 31, 2017 and 2016, respectively. Comprehensive Income The Company does not have any
reconciling other comprehensive income items for the three months ended March 31, 2017 and 2016. Excise Taxes The Company
is responsible for compliance with the TTB regulations, which includes making timely and accurate excise tax payments. The Company
is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying
amounts. The Company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise
tax laws. Excise taxes totaled $176,416 and $158,408 for the three months ended March 31, 2017 and 2016, respectively. Stock-Based Compensation The Company recognizes as compensation
expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the
related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the
vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair
value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected
terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are
recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period
and as the underlying stock-based awards vest. Stock-based compensation was $158,658 and $105,839 for the three months ended March
31, 2017 and 2016, respectively. Accounts Receivable Factoring Program We use an accounts receivable
factoring program with certain customer accounts. Under this program, we have the option to sell those customer receivables in
advance of payment for 75% of the amount due. When the customer remits payment, we then receive the remaining 25%. We are charged
interest on the advanced 75% payment at a rate of 1.5% per month. Under the terms of the agreement with the factoring provider,
any factored invoices have recourse should the customer fail to pay the invoice. Thus, we record factored amounts as a liability
until the customer remits payment and we receive the remaining 25% of the non-factored amount. We did not factor any invoices during
the three months ended March 31, 2017. At March 31, 2017, we had factored invoices outstanding of $59,547, and we incurred fees
associated with the factoring program of $2,582 during the three months ended March 31, 2017. During the three months ended March
31, 2016, we factored invoices totaling $117,933 and received total proceeds of $88,450. At March 31, 2016, we had factored invoices
outstanding of $79,120, and we incurred fees associated with the factoring program of $4,269 during the three months ended March
31, 2016. Recent Accounting Pronouncements In March 2016, the Financial
Accounting Standard Boards (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09, Stock
Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
● A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and
● A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor
accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the
lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting
for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no
longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019,
for a calendar year entity). Early application is permitted for all public business entities upon issuance. Lessees (for capital
and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We
are currently evaluating the impact ASU 2016-02 will have on the Company’s condensed consolidated financial statements. In May 2014, the FASB issued
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date In August 2014, the FASB issued
ASU No. 2014-15, Presentation of Financial Statements - Going Concern In July 2015, the FASB issued
ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory In April 2015, the FASB issued
ASU 2015-03, simplifying the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03
is effective for annual and interim periods beginning after December 15, 2015 and early application is permitted. We have early
adopted as of December 31, 2015. Reclassifications Certain prior period amounts
have been reclassified to conform to the March 31, 2017 presentation with no changes to net loss or total stockholders’
equity previously reported. | 3. Summary of Significant Accounting Policies Basis of Presentation and
Consolidation The accompanying consolidated
financial statements for Eastside Distilling, Inc. were prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP). The consolidated financial statements include the accounts of Eastside Distilling, Inc. and
its wholly-owned subsidiary MWWD (through February 3, 2015). All intercompany balances and transactions have been eliminated in
consolidation. Segment Reporting The Company determined its
operating segment on the same basis that it uses to evaluate its performance internally. The Company has one business activity,
marketing and distributing hand-crafted spirits, and operates as one segment. The Company’s chief operating decision makers,
its chief executive officer and chief financial officer, review the Company’s operating results on an aggregate basis for
purposes of allocating resources and evaluating financial performance. Use of Estimates The preparation of financial
statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Net revenue includes product
sales, less excise taxes and customer programs and incentives. The Company records revenue when all four of the following criteria
are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred;
(iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. The Company recognizes sales
when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment
sales, which include sales to the Oregon Liquor Control Commission (OLCC), the Company recognizes sales upon the consignee’s
shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related
merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment
or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s
shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other
than customary rights of return. The Company excludes sales tax collected and remitted to various states from sales and cost of
sales. Sales from items sold through the Company’s retail location are recognized at the time of sale. Revenue received from online
merchants who sell discounted gift certificates for the Company’s merchandise and tastings is deferred until the customer
has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier. Customer Programs and Incentives Customer programs and incentives,
which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcohol
beverage industry. The Company makes these payments to customers and incurs these costs to promote sales of products and to maintain
competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net revenue
or as advertising, promotional and selling expenses in accordance with ASC Topic 605-50, Revenue Recognition - Customer Payments
and Incentives, based on the nature of the expenditure. Amounts paid to customers totaled $136,786 and $3,184 in years 2016 and
2015, respectively. Advertising, Promotional
and Selling Expenses The following expenses are
included in advertising, promotions and selling expenses in the accompanying consolidated statements of operations: media advertising
costs, special event costs, tasting room costs, sales and marketing expenses, salary and benefit expenses, travel and entertainment
expenses for the sales, brand and sales support workforce and promotional activity expenses. Cost of Sales Cost of sales consists of the
costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and
in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production
costs. Shipping and Fulfillment
Costs Freight costs incurred related
to shipment of merchandise from the Company’s distribution facilities to customers are recorded in cost of sales. Cash and Cash Equivalents Cash equivalents are considered
to be highly liquid investments with maturities of three months or less at the time of the purchase. The Company had no cash equivalents
at December 31, 2016 and 2015. Concentrations Financial instruments that
potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At December 31, 2016,
three distributors represented 91% of trade receivables. At December 31, 2015, one distributor, the Oregon Liquor Control Commission
(OLCC), represented 67% of trade receivables. Sales to two distributors accounted for approximately 46% of consolidated net sales
for the year ended December 31, 2016. Sales to one distributor, the OLCC, accounted for approximately 40% of consolidated net sales
for the year ended December 31, 2015. Fair Value Measurements GAAP defines fair value, establishes
a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAAP permits an entity to
choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation
and disclosure requirements for assets and liabilities for which the fair value option is elected. At December 31, 2016 and December
31, 2015, 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 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. None of the Company’s
assets or liabilities were measured at fair value at December 31, 2016 and 2015. However, GAAP requires the disclosure of fair
value information about financial instruments that are not measured at fair value. Financial instruments consist principally of
trade receivables, accounts payable, accrued liabilities, note payable, and convertible note payable. The estimated fair value
of trade receivables, accounts payable, and accrued liabilities approximates their carrying value due to the short period of time
to their maturities. At December 31, 2016 and 2015, the Company’s note payable and convertible notes payable are at fixed
rates and their carrying value approximates fair value. Inventories Inventories primarily consist
of bulk and bottled liquor and merchandise and are stated at the lower of cost or market. Cost is determined using an average costing
methodology, which approximates cost under the first-in, first-out (FIFO) method. A portion of inventory is held by certain independent
distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and
records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand
and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. The Company has
recorded no write-downs of inventory for the years ended December 31, 2016 and 2015. 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. Long-lived Assets The Company accounts for long-lived
assets, including property and equipment, at amortized cost. Management reviews long-lived assets for probable impairment whenever
events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment,
management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the
use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount of the asset, an
impairment loss would be recognized to write down the asset to its estimated fair value. Income Taxes The provision for income
taxes is based on income and expenses as reported for financial statement purposes using the “asset and liability method”
for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized. At December 31, 2016 and 2015, the Company established valuation allowances against its
net deferred tax assets. Income tax positions that
meet the “more-likely-than-not” recognition threshold are measured at the largest amount of income tax benefit that
is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits
associated with income tax positions taken that exceeds the amount measured as described above would be reflected as a liability
for unrecognized income tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized income tax
benefits would be classified as additional income taxes in the accompanying consolidated statements of operations. There were no
unrecognized income tax benefits, nor any interest and penalties associated with unrecognized income tax benefits, accrued or expensed
at and for the years ended December 31, 2016 and 2015. The Company files federal income
tax returns in the U.S. and various state income tax returns. The Company is no longer subject to examinations by the related tax
authorities for the Company’s U.S. federal and state income tax returns for years prior to 2011. Advertising Advertising costs are expensed
as incurred. Advertising expense was approximately $297,000 and $389,000 for the years ended December 31, 2016 and 2015, respectively. Comprehensive Income The Company does not have any
reconciling other comprehensive income (expense) items for the years ended December 31, 2016 and 2015. Excise Taxes The Company is responsible
for compliance with the TTB regulations, which includes making timely and accurate excise tax payments. The Company is subject
to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying amounts. The
Company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws.
Excise taxes totaled $797,435 and $620,862 in years 2016 and 2015, respectively. Stock-Based Compensation The Company recognizes as
compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair
value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the
same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates
the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility,
expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees
are recorded at fair value on the measurement date and are subject to periodic market adjustments as the underlying stock-based
awards vest. Stock-based compensation was $374,687 and $140,370 in fiscal years 2016 and 2015, respectively. Accounts Receivable Factoring Program We use an accounts receivable
factoring program with certain customer accounts. Under this program, we have the option to sell those customer receivables in
advance of payment for 75% of the amount due. When the customer remits payment, we then receive the remaining 25%. We are charged
interest on the advanced 75% payment at a rate of 1.5% per month. Under the terms of the agreement with the factoring provider,
any factored invoices have recourse should the customer fail to pay the invoice. Thus, we record factored amounts as a liability
until the customer remits payment and we receive the remaining 25% of the non-factored amount. During the year ended December 31,
2016, we factored invoices totaling $542,083 and received total proceeds of $406,562. At December 31, 2016, we had factored invoices
outstanding of $171,150, and we incurred fees associated with the factoring program of $48,601 during 2016. Comparatively, during
the year ended December 31, 2015, we factored invoices totaling $99,258 and received total proceeds of $74,444. At December 31,
2015, we had $17,601 in factored invoices outstanding, and we incurred fees associated with the factoring program of $5,867 during
2015. Recent Accounting Pronouncements In March 2016, the Financial
Accounting Standard Boards (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09, Stock
Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. In February 2016, the FASB
issued ASU No. 2016-02, Leases (Topic 842).
- A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and
- A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor
accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the
lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting
for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no
longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019,
for a calendar year entity). Early application is permitted for all public business entities upon issuance. Lessees (for capital
and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We
are currently evaluating the impact ASU 2016-02 will have on the Company’s condensed consolidated financial statements. In May 2014, the FASB issued
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date In August 2014, the FASB issued
ASU No. 2014-15, Presentation of Financial Statements - Going Concern In July 2015, the FASB issued
ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory In April 2015, the FASB issued
ASU 2015-03, simplifying the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03
is effective for annual and interim periods beginning after December 15, 2015 and early application is permitted. We have early
adopted as of December 31, 2015. Reclassifications Certain prior period amounts
have been reclassified to conform to the December 31, 2016 presentation with no changes to net loss or total stockholders’
equity (deficit) previously reported. |
