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 September 30, 2021

☐	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

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Description automatically generated

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.)

8911 NE Marx Dr, Suite A2

Portland, Oregon 97220

(Address of principal executive offices)

Issuer’s telephone number: (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 November 15, 2021, 15,525,811 shares of our common stock, $0.0001 par value, were outstanding.

EASTSIDE DISTILLING, INC.

FORM 10-Q

September 30, 2021

TABLE OF CONTENTS

		Page
PART I— FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020	5
	Notes to the Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4	Controls and Procedures	30

PART II— OTHER INFORMATION		30

Item 1	Legal Proceedings	30
Item 1A	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	31

SIGNATURES		32

PART I: FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Eastside Distilling, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2021 and December 31, 2020

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

	September 30, 2021			December 31, 2020
		*Unaudited*
Assets
Current assets:
Cash	$	2,770		$	836
Trade receivables, net		1,338			694
Inventories		6,058			6,728
Prepaid expenses and current assets		1,897			750
Current assets held for sale		-			3,833
Total current assets		12,063			12,841
Property and equipment, net		2,455			3,109
Right-of-use assets		881			1,270
Intangible assets, net		13,728			14,038
Other assets, net		239			285
Non-current assets held for sale		74			189
Total Assets	$	29,440		$	31,732

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	1,399		$	1,864
Accrued liabilities		922			1,452
Deferred revenue		-			23
Current portion of secured credit facilities, net of debt issuance costs		2,977			6,405
Deferred consideration for Azuñia acquisition		-			15,452
Other current liabilities, related party		-			700
Current portion of notes payable		918			3,830
Current portion of lease liabilities		332			515
Current liabilities held for sale		20			18
Total current liabilities		6,568			30,259
Lease liabilities, net of current portion		583			817
Secured credit facilities, net of debt issuance costs		2,722			-
Notes payable, related parties		6,963			-
Notes payable, net of current portion		1,256			1,693
Non-current liabilities held for sale		46			71
Total liabilities		18,138			32,840

Commitments and contingencies (Note 13)		-

Stockholders’ equity (deficit):
Common stock, $0.0001 par value; 35,000,000 and 15,000,000 shares authorized; 14,087,028 and 10,382,015 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		1			1
Additional paid-in capital		67,653			52,985
Accumulated deficit		(56,352	)		(54,094	)
Total Stockholders’ Equity (Deficit)		11,302			(1,108	)
Total Liabilities and Stockholders’ Equity (Deficit)	$	29,440		$	31,732

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 Nine Months Ended September 30, 2021 and 2020

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

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020

Sales	$	3,277		$	4,275		$	10,138		$	11,242
Less customer programs and excise taxes		114			257			525			673
Net sales		3,163			4,018			9,613			10,569
Cost of sales		2,017			2,614			6,575			7,019
Gross profit		1,146			1,404			3,038			3,550
Operating expenses:
Sales and marketing expenses		489			806			1,900			3,289
General and administrative expenses		1,801			2,346			5,913			6,789
(Gain) loss on disposal of property and equipment		360			(112	)		421			(131	)
Total operating expenses		2,650			3,040			8,234			9,947
Loss from operations		(1,504	)		(1,636	)		(5,196	)		(6,397	)
Other income (expense), net
Interest expense		(414	)		(252	)		(885	)		(875	)
Other income		25			37			2,242			37
Total other income (expense), net		(389	)		(215	)		1,357			(838	)
Loss before income taxes		(1,893	)		(1,851	)		(3,839	)		(7,235	)
Provision for income taxes		-			-			-			-
Net loss from continuing operations		(1,893	)		(1,851	)		(3,839	)		(7,235	)
Net income (loss) from discontinued operations		(17	)		84			3,869			(227	)
Net income (loss)		(1,910	)		(1,767	)		30			(7,462	)
Deemed dividend-warrant price protection-revaluation adjustment		(2,288	)		-			(2,288	)		-
Net loss attributable to common shareholders	$	(4,198	)	$	(1,767	)	$	(2,258	)	$	(7,462	)

Basic net loss per common share	$	(0.32	)	$	(0.17	)	$	(0.19	)	$	(0.75	)
Basic weighted average common shares outstanding		13,055			10,104			12,145			9,947

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

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

(Unaudited)


	2021			2020
Cash Flows From Operating Activities:
Net income (loss)	$	30		$	(7,462	)
Net (income) loss from discontinued operations		(3,869	)		227
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization		903			1,858
Bad debt expense		1			69
Forgiveness of debt - Paycheck Protection Program		(1,448	)		-
(Gain) loss on disposal of assets		421			(131	)
Inventory allowance		-			250
Remeasurement of deferred consideration		(750	)		-
Amortization of debt issuance costs		222			226
Interest accrued to secured credit facilities		91			-
Issuance of common stock in exchange for services for related parties		131			468
Issuance of common stock in exchange for services for third parties		263			234
Stock-based compensation		25			243
Changes in operating assets and liabilities:
Trade receivables, net		(644	)		(57	)
Inventories		669			1,756
Prepaid expenses and other assets		(1,565	)		88
Right-of-use assets		362			370
Accounts payable		(467	)		(1,376	)
Accrued liabilities		(531	)		835
Other liabilities, related party		(700	)		250
Deferred revenue		(23	)		316
Net lease liabilities		(390	)		(427	)
Net cash used in operating activities		(7,269	)		(2,263	)
Net cash provided by (used in) operating activities of discontinued operations		4,617			(592	)
Net cash used in operating activities		(2,652	)		(2,855	)
Cash Flows From Investing Activities:
Proceeds from sale of fixed assets		110			621
Purchases of property and equipment		(189	)		(414	)
Net cash provided by (used in) investing activities of continuing operations		(79	)		207
Net cash provided by investing activities of discontinued operations		3,362			28
Net cash provided by investing activities		3,283			235
Cash Flows From Financing Activities:
Issuance of common stock from warrant exercise for cash, net of expenses		2,375			-
Proceeds from issuance of common stock		2,009			-
Proceeds from secured credit facilities		3,300			6,337
Proceeds from notes payable		-			1,538
Payments of principal on secured credit facilities		(3,601	)		-
Payments of principal on notes payable		(2,780	)		(4,639	)
Net cash provided by financing activities of continuing operations		1,303			3,236
Net cash provided by financing activities		1,303			3,236
Net increase in cash		1,934			616
Cash at the beginning of the period		836			343
Cash at the end of the period	$	2,770		$	959

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	654		$	636
Cash paid for amounts included in measurement of lease liabilities	$	540		$	519

Supplemental Disclosure of Non-Cash Financing Activity
Issuance of common stock pursuant to Azuñia earn-out	$	6,860		$	-
Issuance of notes payable pursuant to Azuñia final earn-out	$	7,842		$	-
Warrants issued in relation to secured credit facilities	$	717		$	98
Deemed dividend - warrant price protection-revaluation adjustment	$	2,288		$	-
Right-of-use assets obtained in exchange for lease obligations	$	-		$	1,153

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

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2021

(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, exports, markets and sells a wide variety of alcoholic beverages under recognized brands. The Company currently employs 70 people in the United States.

The Company’s brands span several alcoholic beverage categories, including whiskey, vodka, gin, rum, tequila and Ready-to-Drink (“RTD”). The Company sells products on a wholesale basis to distributors in open states, and brokers in control states, and until March 2020, operated four retail tasting rooms in Portland, Oregon to market our brands directly to consumers. The Company operates a mobile craft canning and bottling business (“Craft Canning”) that primarily services the craft beer and craft cider industries. Craft Canning operates 14 mobile lines in Seattle, Portland and Denver.

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 short-term credit in the form of extended payment terms from suppliers 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.

As of September 30, 2021, the Company had $2.8 million of cash on hand with working capital of $5.5 million. The Company’s working capital has increased $22.9 million from December 31, 2020 as cash and prepaid balances have increased and it has repaid or refinanced current debt since year-end. 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. If the Company is unable to 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.

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 September 30, 2021, its operating results for the three and nine months ended September 30, 2021 and 2020 and its cash flows for the nine months ended September 30, 2021 and 2020. 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, 2020. 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, and Craft Canning + Bottling, LLC and the Azuñia tequila assets. All intercompany balances and transactions have been eliminated on consolidation.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2021

(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. 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, based on the nature of the expenditure. Amounts paid to customers totaled $0.4 million and $0.5 million for the nine months ended September 30, 2021 and 2020, 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 $0.1 and $0.2 million for the nine months ended September 30, 2021 and 2020, 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. Sales and marketing costs are expensed as incurred.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2021

(Unaudited)

General and Administrative Expenses

The following expenses are included in general and administrative expenses in the accompanying 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 million and $0.9 million for the nine months ended September 30, 2021 and 2020, respectively.

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 September 30, 2021 and December 31, 2020.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of September 30, 2021, two wholesale customers represented 27% of trade receivables. As of December 31, 2020, one wholesale customer represented 14% of trade receivables. Sales to two wholesale customers accounted for 24% of consolidated sales for the period ended September 30, 2021. Sales to one wholesale customer accounted for 18% of consolidated sales for the year ended December 31, 2020.

Fair Value Measurements

GAAP defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAAP permits an entity to choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation and disclosure requirements for assets and liabilities for which the fair value option is elected. As of September 30, 2021 and December 31, 2020, management has not elected to report any of the Company’s assets or liabilities at fair value under the “fair value option” provided by GAAP.

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

September 30, 2021

(Unaudited)

None of the Company’s assets or liabilities were measured at fair value as of September 30, 2021 or December 31, 2020. However, GAAP requires the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments consist principally of trade receivables, accounts payable, accrued liabilities, notes payable, and 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 September 30, 2021 and December 31, 2020, 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.

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 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.

SEC Form 10-Q filed by Eastside Distilling, Inc.