| Summary of Significant Accounting Policies | 3. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The accompanying unaudited condensed consolidated
financial statements for Eastside Distilling, Inc. and subsidiaries were prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules
and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures
normally included in financial statements in accordance with GAAP have been condensed or eliminated as permitted under the SEC’s
rules and regulations. In our opinion, the unaudited condensed consolidated financial statements include all material adjustments,
all of which are of a normal and recurring nature, necessary to present fairly our financial position as of March 31, 2020, our
operating results for the three months ended March 31, 2020 and 2019 and our cash flows for the three months ended March 31, 2020
and 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Interim results
are not necessarily indicative of the results that may be expected for an entire fiscal year. The condensed consolidated financial
statements include the accounts of Eastside Distilling, Inc.’s wholly-owned subsidiaries, including, MotherLode, BBD, Outlandish,
LLC, Redneck Riviera Whiskey Co., LLC, Craft Canning (beginning as of January 11, 2019) and the Azuñia tequila assets (beginning
September 12, 2019). All intercompany balances and transactions have been eliminated in consolidation. The Company determined its operating segment
on the same basis that it uses to evaluate its performance internally. The Company has one business activity, producing, packaging,
marketing and distributing alcoholic beverages and operates as one segment. The Company’s chief operating decision makers,
its chief executive officer, president and chief financial officer, review the Company’s operating results on an aggregate
basis for purposes of allocating resources and evaluating financial performance. Use of Estimates The preparation of financial statements in
accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Net sales include product sales, less customer
programs and excise taxes. The Company recognizes revenue by applying the following steps in accordance with Accounting Standards
Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers 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 locations are recognized at the time of sale. Revenue received from online merchants who
sell discounted gift certificates for the Company’s merchandise and tastings at its tasting rooms, is deferred until the
customer has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier. Customer Programs Customer programs, 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 sales and marketing expenses
in accordance with ASC 606 - Revenue from Contracts with Customers 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 $0.1
million and $0.05 million for the three months ended March 31, 2020 and 2019, respectively. Cost of Sales Cost of sales consists of the costs of ingredients
utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and in-bound freight charges.
Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs. Shipping and Fulfillment Costs Freight costs incurred related to shipment of merchandise from the
Company’s distribution facilities to customers are recorded in cost of sales. Sales and Marketing Expenses The following expenses are included in sales
and marketing expenses in the accompanying condensed consolidated statements of operations: media advertising costs, sales and
marketing expenses, promotional costs of value added packaging, salary and benefit expenses, travel and entertainment expenses
for the sales, brand and sales support workforce and promotional activity expenses. Sales and marketing costs are expensed as incurred.
Sales and marketing expense totaled $1.7 million and $1.2 million for the three months ended March 31, 2020 and 2019. The sales
and marketing expenses for Redneck Riviera Whiskey in the first quarter of 2020 were $0.2 million compared to $0.9 million in 2019
for which 50% of these charges are expected to be reimbursed upon the eventual sale of the brand by the licensor if the licensing
agreement remains in force. The reimbursement is payable upon the sale of the brand within the term of the agreement, which is
10 years, with a renewable option for any additional 10 years, by the licensor. General and Administrative Expenses The following expenses are included in general
and administrative expenses in the accompanying condensed consolidated statements of operations: salary and benefit expenses, travel
and entertainment expenses for executive and administrative staff, rent and utilities, professional fees, insurance and amortization
and depreciation expense. General and administrative costs are expensed as incurred. General and administrative expense totaled
$2.2 million and $2.6 million for the three months ended March 31, 2020 and 2019, respectively, of which $1.0 million and $0.6
million were non-cash expenses, respectively. Stock-Based Compensation The Company recognizes as compensation expense
all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related
stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting
period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of
each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of
the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded
at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as
the underlying stock-based awards vest. Stock-based compensation was $0.4 and $0.2 million for the three months ended March 31,
2020 and 2019, respectively. Discontinued Operations The Company reports discontinued operations
by applying the following criteria in accordance with Accounting Standards Codification (“ASC”) Topic 205-20 –
Presentation of Financial Statements – Discontinued Operations: (1) Component of an entity; (2) Held for sale criteria; (3)
Strategic shift. During the first quarter of 2020, management made a strategic shift to focus the Company’s sale and marketing
efforts on the nationally branded product platform, resulting in the decision to close / abandon all four of its retail stores
in the Portland, Oregon area by March 31, 2020. This decision meets the criteria (1) - (3) for reporting discontinued operations,
and as a result, the retail operations have been reported as discontinued operations in the accompanying unaudited condensed consolidated
financial statements. In the current year, the income, expense and cash flows from retail operations during the period they were
consolidated have been classified as discontinued operations. For comparative purposes amounts in the prior periods have been reclassified
to conform to current year presentation. Additionally, the assets and liabilities from retail operations are shown on the balance
sheet as assets and liabilities for discontinued operations. Income and expense related to discontinued retail operations
March 31, 2020 March 31, 2019
Sales $ 143,490 $ 224,921
Less excise taxes, customer programs and incentives 46,342 84,332
Net sales 97,148 140,589
Cost of sales 64,101 66,572
Gross profit 33,047 74,017
Operating expenses:
Advertising, promotional and selling expenses 2,534 114,099
General and administrative expenses 152,737 81,519
Loss on disposal of property and equipment 72,751 -
Total operating expenses 228,022 195,618
Loss from operations (194,975 ) (121,601 ) Assets and liabilities related to discontinued
retail operations
March 31, 2020 December 31, 2019
Assets
Current assets:
Cash - $ 615
Trade receivables - 1,734
Inventories - 62,102
Prepaid expenses and current assets - 10,441
Total current assets - 74,892
Property and equipment, net - 86,059
Right of use asset 117,614 164,952
Other assets 3,189 10,855
Total Assets $ 120,803 $ 336,758
Liabilities
Current liabilities:
Accounts payable $ 2,721 $ 56,241
Accrued liabilities - 7,763
Deferred revenue - 1,734
Current portion of lease liability 26,073 59,540
Total current liabilities 28,794 125,278
Lease Liability - less current portion 96,535 112,760
Total liabilities $ 125,329 $ 238,038 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, 2020 and December 31, 2019. 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, 2020 and December 31, 2019, 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. None of the Company’s assets or liabilities
were measured at fair value at March 31, 2020 and December 31, 2019. 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, 2020 and December 31, 2019, the Company’s 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, raw packaging material for bottling, raw cans for Craft Canning and merchandise and are stated at the lower of cost or
market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (FIFO) method.
A portion of 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, 2020 and 2019. Property and Equipment Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives
of the assets, ranging from three to seven years. Amortization of leasehold improvements is computed using the straight-line method
over the life of the lease or the useful lives of the assets, whichever is shorter. The cost and related accumulated depreciation
and amortization of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is
reported as current period income or expense. The costs of repairs and maintenance are expensed as incurred. Intangible Assets / Goodwill The Company accounts for long-lived assets,
including property and equipment and 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,
an impairment loss would be recognized to write down the asset to its estimated fair value. The Company performed a qualitative
assessment of goodwill at March 31, 2020 and determined that goodwill was not impaired. 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, 2020 and December 31, 2019, the Company established valuation
allowances against its net deferred tax assets. Income tax positions that meet the “more-likely-than-not”
recognition threshold are measured at the largest amount of income tax benefit that is more than 50% likely to be realized upon
settlement with the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds
the amount measured as described above would be reflected as a liability for unrecognized income tax benefits in the accompanying
consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon
examination. Interest and penalties associated with unrecognized income tax benefits would be classified as additional income taxes
in the accompanying condensed consolidated statements of operations. There were 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,
2020 and 2019. 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 2012. Comprehensive Income The Company does not have any reconciling other
comprehensive income items for the three months ended March 31, 2020 and 2019. Accounts Receivable Factoring Program The Company has entered into two accounts receivable
factoring programs. One for its spirits customers (the “spirits program”) and another for its co-packing customers
(the “co-packing program”). Under the programs, the Company has the option to sell certain customer account receivables
in advance of payment for 75% (spirits program) or 85% (co-packing program) of the amount due. When the customer remits payment,
the Company receives the remaining balance. For the spirits program, interest is charged on the advanced 75% payment at a rate
of 2.4% for the first 30 days plus 1.44% for each additional ten-day period. For the co-packing program, interest is charged against
the greater of $500,000 or the total funds advanced at a rate of 5% plus the prime rate published in the Wall Street Journal. Under
the terms of both agreements, the factoring provider has full recourse against the Company should the customer fail to pay the
invoice. In accordance with ASC 860, we have concluded that these agreements have met all three conditions identified in ASC 860-10-40-5
(a) – (c) and have accounted for this activity as a sale. Given the quality of the factored accounts, the Company has not
recognized a recourse obligation. In certain limited instances, the Company may provide collection services on the factored accounts
but does not receive any fees for acting as the collection agent, and as such, the Company has not recognized a service obligation
asset or liability. The Company factored $2.5 million of invoices and incurred $0.04 million in fees associated with the factoring
programs during the three months ended March 31, 2020. At March 31, 2020, the Company had $1.0 million factored invoices outstanding. Recently Adopted Accounting Pronouncements 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 will
be largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting
model and ASU No. 2014-09, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and
leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided
with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year
entity). 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842). In June 2018, the FASB issued ASU No. 2018-07,
Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment |
