| Summary of Significant Accounting Policies | 3. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The accompanying 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). The consolidated financial statements include the accounts of Eastside Distilling,
Inc.’s wholly-owned subsidiaries, including, MotherLode LLC, Big Bottom Distilling, LLC, Outlandish Beverages LLC, LLC, Redneck
Riviera Whiskey Co., LLC, and Craft Canning + Bottling, LLC (beginning as of January 11, 2019) and the Azuñia tequila assets
(beginning September 12, 2019). 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,
packaging, producing, marketing and distributing alcoholic beverages and operates as one segment. The Company’s chief operating
decision makers, its chief executive officer and chief financial officer, review the Company’s operating results on an aggregate
basis for purposes of allocating resources and evaluating financial performance. Use of Estimates The preparation of financial
statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Net sales include product
sales, less excise taxes and customer programs and incentives. 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. Customer Programs Customer programs, which
include customer promotional discount programs, customer incentives, and broker commissions, are a common practice in the alcoholic
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 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 $0.1 million and $0 million for the years ended
December 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. Sales and Marketing Expenses The following expenses
are included in sales and marketing expenses in the accompanying consolidated statements of operations: media advertising costs,
promotional costs of value-added packaging, salary and benefit expenses, travel and entertainment expenses for the sales, brand
and sales support workforce and promotional activity expenses. 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. 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 $0.3 million and $0.7 million for the years
ended December 31, 2020 and 2019, respectively. 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 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. Although this decision meets the criteria
(1) and (3) for reporting discontinued operations, it did not meet the (2) Held for sale criteria until the retail stores were
closed or abandoned, which occurred by March 31, 2020. On October 29, 2020, the
Company announced its intent to divest its Redneck Riviera Spirits business. The Company signed a non-binding term sheet between
Eastside and Rich Marks, LLC, Redneck Riviera Whiskey Co, LLC (“RRWC”), John D. Rich Tisa Trust and Redneck Spirits
Group, LLC (collectively the buyers referred to as “RSG”) whereby RSG would pay a termination fee as well as purchase
certain assets from the Company which could include raw materials and finished goods. The total consideration was estimated to
be $8.1 million inclusive of a $3 million dollar termination fee and the remainder of proceeds from selling RSG raw materials and
finished goods. The divesture is subject to negotiation and execution of definitive agreements. On February 8, 2021, the Company
completed the sale of its Redneck Riviera Spirits business. As of and for the year
ended December 31, 2020, the assets, liabilities, revenue, expenses and cash flows from retail operations and the RRWC business
have been classified as discontinued operations separately from continuing operations. For comparative purposes, prior period amounts
have been reclassified to conform to current period presentation. Income and expense related
to discontinued retail operations and the Redneck Riviera Spirits business were as follows for the years ended December 31, 2020
and 2019:
(Dollars in thousands) 2020 2019
Sales $ 2,195 $ 4,829
Less customer programs and excise taxes 432 858
Net sales 1,763 3,971
Cost of sales 1,142 2,572
Gross profit 621 1,399
Operating expenses:
Sales and marketing expenses 578 4,264
General and administrative expenses 180 748
Loss on disposal of property and equipment 76 148
Total operating expenses 834 5,160
Loss from operations (213 ) (3,761 )
Other expense, net
Interest expense - (16 )
Total other expense, net - (16 )
Net loss $ (213 ) $ (3,777 ) Assets and liabilities
related to discontinued retail operations and the Redneck Riviera Spirits business were as follows as of December 31, 2020 and
2019:
(Dollars in thousands) 2020 2019
Assets
Current assets:
Cash $ - $ 1
Trade receivables - 2
Inventories 3,833 5,253
Prepaid expenses and current assets - 10
Total current assets 3,833 5,266
Property and equipment, net - 86
Right-of-use assets 96 165
Other assets 93 112
Total Assets $ 4,022 $ 5,629
Liabilities
Current liabilities:
Accounts payable $ (13 ) $ 616
Accrued liabilities - 37
Deferred revenue - 2
Current portion of lease liability 31 60
Total current liabilities 18 715
Lease liability - less current portion 71 113
Total Liabilities $ 89 $ 828 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
as of December 31, 2020 and 2019. Concentrations Financial instruments that
potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of December 31, 2020,
one distributor represented 14% of trade receivables. As of December 31, 2019, two distributors represented 40% of trade receivables.
Sales to one distributor accounted for 18% of consolidated sales for the year ended December 31, 2020. Sales to one distributor
accounted for 16% of consolidated sales for the year ended 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. As of December
31, 2020 and 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 as of December 31, 2020 or 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, notes payable, convertible note payable and the secured credit facility.
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. As of December 31, 2020 and 2019, the Company’s notes are payable 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. 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 December 31, 2020 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 intangible assets as of December 31, 2020 and determined that they were not impaired. Income Taxes The provision for income
taxes is based on income and expenses as reported for financial statement purposes using the “asset and liability method”
for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As changes in tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be realized. As of December 31, 2020 and 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 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, 2020 and 2019. The Company files federal
income tax returns in the United States. and various state income tax returns. The Company is no longer subject to examinations
by the related tax authorities for the Company’s U.S. federal and state income tax returns for years prior to 2013. Comprehensive Income The Company does not have
any reconciling other comprehensive income items for the years ended December 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 $0.5 million 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 Topic 860 – Transfers and Servicing Recently Adopted Accounting Pronouncements In January 2017, the FASB
issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment |
