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 March 31, 2024

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

	For the transition period from ______________ to _________________

Commission File No.: 001-38182

EASTSIDE DISTILLING, INC.

(Exact name of registrant as specified in its charter)

Nevada

20-3937596

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

2321 NE Argyle Street, Unit D

Portland, Oregon 97211

(Address of principal executive offices)

Registrant’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)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required 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 day. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, 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, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 if the Exchange Act.

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

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 May 13, 2024, 1,707,751 shares of our common stock were outstanding.

Documents Incorporated by Reference: None.

EASTSIDE DISTILLING, INC.

FORM 10-Q

March 31, 2024

TABLE OF CONTENTS

		Page
PART I— FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023	4
	Consolidated Statements of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2024 and 2023	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023	6
	Notes to the Consolidated Financials Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4	Controls and Procedures	28

PART II— OTHER INFORMATION		28

Item 1	Legal Proceedings	28
Item 1A	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29

SIGNATURES		30

PART I: FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Eastside Distilling, Inc. and Subsidiaries

Consolidated Balance Sheets

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

	March 31, 2024			December 31, 2023
		(unaudited)
Assets
Current assets:
Cash	$	336		$	403
Trade receivables, net		673			559
Inventories		3,189			3,212
Prepaid expenses and other current assets		498			363
Total current assets		4,696			4,537
Property and equipment, net		4,571			4,768
Right-of-use assets		2,388			2,602
Intangible assets, net		4,902			5,005
Other assets, net		465			568
Total Assets	$	17,022		$	17,480

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	2,392		$	2,076
Accrued liabilities		739			575
Deferred revenue		66			88
Current portion of secured credit facilities, related party		2,680			-
Current portion of secured credit facilities, net of debt issuance costs		364			-
Current portion of notes payable		8,079			486
Current portion of notes payable, related party		92			92
Current portion of lease liabilities		903			888
Other current liability, related party		587			-
Total current liabilities		15,902			4,205
Lease liabilities, net of current portion		1,596			1,824
Secured credit facilities, related party		-			2,700
Secured credit facilities, net of debt issuance costs		-			342
Notes payable, net of current portion		-			7,556
Total liabilities		17,498			16,627

Commitments and contingencies (Note 13)		-			-

Stockholders’ equity (deficit):
Common stock, $0.0001 par value; 6,000,000 shares authorized as of March 31, 2024 and December 31, 2023; and 1,707,751 shares and 1,705,987 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively		-			-
Preferred stock, $0.0001 par value; 100,000,000 shares authorized; 2,500,000 Series B shares issued and outstanding as of both March 31, 2024 and December 31, 2023		-			-
Preferred stock, $0.0001 par value; 240,000 shares authorized; 200,000 Series C shares issued and outstanding as of both March 31, 2024 and December 31, 2023		-			-
Preferred stock, value		-			-
Additional paid-in capital		83,561			83,559
Accumulated deficit		(84,037	)		(82,706	)
Total stockholders’ equity (deficit)		(476	)		853
Total Liabilities and Stockholders’ Equity (Deficit)	$	17,022		$	17,480

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

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three Months Ended March 31, 2024 and 2023

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

(Unaudited)

	2024			2023

Sales	$	2,487		$	2,879
Less customer programs and excise taxes		76			26
Net sales		2,411			2,853
Cost of sales		2,225			2,212
Gross profit		186			641
Operating expenses:
Sales and marketing expenses		251			511
General and administrative expenses		1,105			1,364
(Gain) loss on disposal of property and equipment		(120	)		6
Total operating expenses		1,236			1,881
Loss from operations		(1,050	)		(1,240	)
Other income (expense), net
Interest expense		(248	)		(329	)
Other income (expense)		5			(29	)
Total other expense, net		(243	)		(358	)
Loss before income taxes		(1,293	)		(1,598	)
Provision for income taxes		-			-
Net loss		(1,293	)		(1,598	)
Preferred stock dividends		(38	)		(38	)
Net loss attributable to common shareholders	$	(1,331	)	$	(1,636	)

Basic and diluted net loss per common share	$	(0.78	)	$	(2.00	)
Basic and diluted weighted average common shares outstanding		1,706			824

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

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

For the Three Months Ended March 31, 2024 and 2023

(Dollars and shares in thousands)

(Unaudited)

	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			(Deficit)
	Series B Preferred Stock				Series C Preferred Stock				Common Stock				Paid-in		Accumulated			Total Stockholders’ Equity
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			(Deficit)
Balance, December 31, 2022		2,500	$	-		-	$	-		810	$	-	$	73,505	$	(75,021	)	$	(1,516	)
Issuance of common stock for services by third parties		-		-		-		-		11		-		83		-			83
Issuance of common stock for services by employees		-		-		-		-		12		-		60		-			60
Preferred stock dividends		-		-		-		-		-		-		-		(38	)		(38	)
Net loss		-		-		-		-		-		-		-		(1,598	)		(1,598	)
Balance, March 31, 2023		2,500	$	-		-	$	-		833	$	-	$	73,648	$	(76,657	)	$	(3,009	)

	Series B Preferred Stock				Series C Preferred Stock				Common Stock				Paid-in		Accumulated			Total Stockholders’ Equity
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			(Deficit)
Balance, December 31, 2023		2,500	$	-		200	$	-		1,706	$	-	$	83,559	$	(82,706	)	$	853
Balance		2,500	$	-		200	$	-		1,706	$	-	$	83,559	$	(82,706	)	$	853
Issuance of common stock for services by third parties		-		-		-		-		2		-		2		-			2
Preferred stock dividends		-		-		-		-		-		-		-		(38	)		(38	)
Net loss		-		-		-		-		-		-		-		(1,293	)		(1,293	)
Balance, March 31, 2024		2,500	$	-		200	$	-		1,708	$	-	$	83,561	$	(84,037	)	$	(476	)
Balance		2,500	$	-		200	$	-		1,708	$	-	$	83,561	$	(84,037	)	$	(476	)

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

Eastside Distilling, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2024 and 2023

(Dollars in thousands)

(Unaudited)

	2024			2023
Cash Flows From Operating Activities:
Net loss	$	(1,293	)	$	(1,598	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		306			407
Bad debt expense		(5	)		(2	)
(Gain) loss on disposal of assets		(120	)		6
Write off of obsolete fixed assets		-			54
Inventory reserve		(24	)		(19	)
Stock dividend payable		(38	)		(38	)
Amortization of debt issuance costs		13			-
Interest accrued to secured credit facilities		9			78
Payment of accrued interest on secured credit facilities		-			(142	)
Interest accrued to notes payable		164			-
Interest accrued to secured credit facilities, related party		61			123
Payment of accrued interest on secured credit facilities, related party		(81	)		(141	)
Issuance of common stock in exchange for services for third parties		2			83
Issuance of common stock in exchange for services of related parties		-			60
Changes in operating assets and liabilities:
Trade receivables, net		(108	)		-
Inventories		47			471
Prepaid expenses and other assets		68			(390	)
Right-of-use assets		214			290
Accounts payable		195			350
Accrued liabilities		164			(104	)
Other liabilities, related party		581			279
Deferred revenue		(23	)		96
Net lease liabilities		(213	)		(291	)
Net cash used in operating activities		(81	)		(428	)
Cash Flows From Investing Activities:
Proceeds from sale of fixed assets		14			-
Purchases of property and equipment		-			(28	)
Net cash provided by (used in) investing activities		14			(28	)
Cash Flows From Financing Activities:
Net cash provided by financing activities		-			-

Net decrease in cash		(67	)		(456	)
Cash at the beginning of the period		403			723
Cash at the end of the period	$	336		$	267

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	81		$	323
Cash paid for amounts included in measurement of lease liabilities		158			318

Supplemental Disclosure of Non-Cash Financing Activity
Future proceeds related to installment sales of equipment	$	114		$	-
Exchange of assets for services	$	-		$	42

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

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

1. Description of Business

Eastside Distilling (the “Company” or “Eastside Distilling”) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, the Company changed its corporate name to Eastside Distilling, Inc. to reflect the acquisition of Eastside Distilling, LLC. The Company manufactures, acquires, blends, bottles, imports, markets and sells a wide variety of alcoholic beverages under recognized brands. The Company currently employs 46 people in the United States.

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

The Company’s spirits’ brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila. The Company sells products on a wholesale basis to distributors in open states and through brokers in control states.

2. Liquidity

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

The Company had an accumulated deficit of $84.0 million as of March 31, 2024, having incurred a net loss of $1.3 million during the three months ended March 31, 2024.

The Company reduced debt in 2023 through a debt for preferred equity swap. However, the Company’s ability to meet its ongoing operating cash needs over the next 12 months depends on growing revenues and gross margins, and generating positive operating cash flow primarily through increased sales, improved profit growth, and controlling expenses. In addition, the Company has been negotiating with creditors to reduce the interest burden and improve cash flow. If the Company is unable to reach an agreement with creditors or obtain additional financing, or additional financing is not available on acceptable terms, the Company may seek to sell assets, reduce operating expenses, reduce or eliminate marketing initiatives, and take other measures that could impair its ability to be successful.

Although the Company’s audited financial statements for the year ended December 31, 2023 were prepared under the assumption that it would continue operations as a going concern, the report of its independent registered public accounting firm that accompanied the financial statements for the year ended December 31, 2023 contained a going concern explanatory paragraph in which such firm expressed substantial doubt about the Company’s ability to continue as a going concern, based on the financial statements at that time. If the Company cannot continue as a going concern, its stockholders would likely lose most or all of their investment in it.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

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 March 31, 2024, its operating results for the three months ended March 31, 2024 and 2023 and its cash flows for the three months ended March 31, 2024 and 2023. 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, 2023. 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 Craft Canning + Bottling, LLC (doing business as Craft Canning + Printing) and its wholly-owned subsidiary Galactic Unicorn Packaging, LLC (the Company’s acquired fixed co-packing assets). All intercompany balances and transactions have been eliminated on consolidation.

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 spirits 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.

In the Craft C+P segment, sales are recognized when printed cans are delivered or when mobile filling services are performed.

Customer Programs

Customer programs, which include customer promotional discount programs, are a common practice in the alcoholic beverage industry. The Company reimburses wholesalers for an agreed amount to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs are recorded as reductions to net sales in accordance with ASC 606 - Revenue from Contracts with Customers. Amounts recorded in customer programs totaled $48,146 and $(6,382), the latter due to the reversal of a customer discount for the three months ended March 31, 2024 and 2023, 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 $28,158 and $32,136 for the three months ended March 31, 2024 and 2023, respectively.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

Cost of Sales

Cost of sales consists of all direct costs related to both spirits and canning for service, labor, overhead, packaging, and in-bound freight charges. Raw materials account for the largest portion of the cost of sales, followed by packaging and production costs.

Sales and Marketing Expenses

Sales and marketing expenses consist of sponsorships, agency fees, digital media, salary and benefit expenses, travel and entertainment expenses. Sales and marketing costs are expensed as incurred. Advertising expenses totaled $26,327 and $0.1 million for the three months ended March 31, 2024 and 2023, respectively.

General and Administrative Expenses

General and administrative expenses consist of salary and benefit expenses, travel and entertainment expenses for executive and administrative staff, rent and utilities, professional fees, insurance, and amortization and depreciation expense. General and administrative costs are expensed as incurred.

Stock-Based Compensation

The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. As of March 31, 2024, one customer represented 15% of trade receivables. As of December 31, 2023, one distributor represented 18% of trade receivables. Sales to one distributor accounted for 17% of consolidated sales for the three months ended March 31, 2024. Sales to one distributor and one wholesale customer accounted for 37% of consolidated sales for the three months ended March 31, 2023.

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 March 31, 2024 and December 31, 2023, 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.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

	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 March 31, 2024 or December 31, 2023. 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 March 31, 2024 and December 31, 2023, the principal amounts of the Company’s notes approximate fair value.

Items Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities acquired in a business acquisition are valued at fair value at the date of acquisition due to having indefinite lives. The Company, on an annual basis, tests the indefinite life assets for impairment. If an indefinite life asset is found to be impaired, then the Company will estimate its useful life and amortize the asset over the remainder of its useful life.

Inventories

Inventories primarily consist of bulk and bottled liquor and raw materials and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (“FIFO”) method. A portion of the Company’s finished goods inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to 12.5 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.

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.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

Comprehensive Income

The Company did not have any other comprehensive income items in either the three months ended March 31, 2024 or 2023.

Accounts Receivable Factoring Program

The Company had two accounts receivable factoring programs: one for its spirits customers (the “spirits program”) that had a zero balance as of March 31, 2024 and another for its co-packing customers (the “co-packing program”) that terminated in August 2023. Under the programs, the Company had 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 was charged against the greater of $0.5 million or the total funds advanced at a rate of 1% plus the prime rate published in the Wall Street Journal. Under the terms of both agreements, the factoring provider had full recourse against the Company should the customer fail to pay the invoice. In accordance with ASC Topic 860 – Transfers and Servicing, the Company has concluded that these agreements have met all three conditions identified in ASC Topic 860-10-40-5 (a) – (c) and have accounted for this activity as a sale. Given the quality of the factored accounts, the Company had not recognized a recourse obligation. In certain limited instances, the Company may provide collection services on the factored accounts but did not receive any fees for acting as the collection agent, and as such, the Company had not recognized a service obligation asset or liability. The Company factored $0.1 million of invoices and incurred $12,244 in fees associated with the factoring programs during the three months ended March 31, 2023.

Recently Issued Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 seeks to improve disclosures about a public entity’s reportable segments and add disclosures around a reportable segment’s expenses. The updated guidance is effective for the Company for annual periods beginning January 1, 2024, and interim periods within fiscal years beginning January 1, 2025. The Company does not expect the adoption of this ASU to have a material impact on its financial statements and disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 seeks to improve transparency in income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disclosures. The updated guidance is effective for the Company on January 1, 2025. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its financial statements and disclosures.

4. Business Segment Information

The Company’s internal management financial reporting consists of Craft C+P, Eastside spirits and corporate. Craft C+P offers digital can printing and co-packing services in Portland, Oregon, allowing it to offer end-to-end production capabilities. Craft C+P operates multiple mobile lines in Oregon. The spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum, and tequila and are sold on a wholesale basis to distributors in open states, and to brokers in control states. The Company’s principal area of operation is in the U.S. It has one Craft C+P customer that represents 15% of its revenue. Corporate consists of key executive and accounting personnel and corporate expenses such as public company and board costs, as well as interest on debt.

The measure of profitability reviewed are condensed statements of operations and gross margins. These business segments reflect how operations are managed, operating performance is evaluated and the structure of internal financial reporting. Total asset information by segment is not provided to, or reviewed by, the chief operating decision maker (“CODM”) as it is not used to make strategic decisions, allocate resources or assess performance. The accounting policies of the segments are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 3.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

Segment information was as follows for the three months ended March 31:

Schedule of Segment Information

(Dollars in thousands)	2024			2023
Craft C+P
Sales	$	1,849		$	1,456
Net sales		1,814			1,477
Cost of sales		1,765			1,578
Gross profit		49			(101	)
Total operating expenses		638			749
Net loss		(590	)		(884	)
Gross margin		3	%		-7	%

Interest expense	$	-		$	4
Depreciation and amortization		270			368
Significant noncash items:
(Gain) loss on disposal of property and equipment		(120	)		6

Spirits
Sales	$	638		$	1,423
Net sales		597			1,376
Cost of sales		460			634
Gross profit		137			742
Total operating expenses		234			522
Net income (loss)		(92	)		221
Gross margin		23	%		54	%

Depreciation and amortization	$	36		$	39

Corporate
Total operating expenses	$	364		$	610
Net loss		(611	)		(935	)
Net Income (loss)		(611	)		(935	)

Interest expense	$	248		$	325
Significant noncash items:
Stock compensation		67			111

5. Inventories

Inventories consisted of the following:

Schedule of Inventories

(Dollars in thousands)	March 31, 2024		December 31, 2023
Raw materials	$	2,054	$	2,253
Finished goods		1,135		959
Total inventories	$	3,189	$	3,212

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

6. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

(Dollars in thousands)	March 31, 2024		December 31, 2023
Prepayment of inventory	$	125	$	52
Future proceeds related to installment sales of equipment		189		89
Other		184		222
Total prepaid expenses and other current assets	$	498	$	363

7. Property and Equipment

Property and equipment consisted of the following:

Schedule of Property and Equipment

(Dollars in thousands)	March 31, 2024			December 31, 2023			Useful Life (in years)
Furniture and fixtures	$	3,281		$	3,410			3.0 - 7.0
Digital can printer		3,649			3,649			12.5
Support of digital can printer		695			695			7.0
Leasehold improvements		1,529			1,529			3.5 - 5.0
Vehicles		156			156			5.0
Total cost		9,310			9,439
Less accumulated depreciation		(4,739	)		(4,671	)
Total property and equipment, net	$	4,571		$	4,768

Purchases of property and equipment for the three months ended March 31, 2024 and 2023 were $0 and $28,098, respectively. Depreciation expense totaled $0.2 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively.

During the three months ended March 31, 2024, the Company disposed of fixed assets for proceeds of $0.1 million, including future proceeds of installment sales of $0.1 million, with a net book value of $0.3 million resulting in a gain of $0.1 million. During the three months ended March 31, 2023, the Company disposed of fixed assets resulting in a loss of $5,901 and wrote off obsolete fixed assets with a net book value of $0.1 million.

8. Intangible Assets

Intangible assets consisted of the following:

Schedule of Intangible Assets

(Dollars in thousands)	March 31, 2024			December 31, 2023
Permits and licenses	$	25		$	25
Azuñia brand		4,153			4,153
Total intangible assets		4,153			4,153
Customer lists		2,895			2,895
Total intangible assets		7,073			7,073
Less accumulated amortization		(2,171	)		(2,068	)
Intangible assets, net	$	4,902		$	5,005

The customer list is being amortized over a seven-year life. Amortization expense totaled $0.1 million for both the three months ended March 31, 2024 and 2023.

The permits and licenses and the Azuñia brand have all been determined to have an indefinite life and will not be amortized. The Company, on an annual basis, tests the indefinite life assets for impairment. If the carrying value of an indefinite life asset is found to be impaired, then the Company will record an impairment loss and reduce the carrying value of the asset. As of December 31, 2023, the Company determined that the Azuñia assets were impaired and recorded an impairment cost of $0.4 million. No further impairment charge was recorded during the three months ended March 31, 2024.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

9. Other Assets

Other assets consisted of the following:

Schedule of Other Assets

(Dollars in thousands)	March 31, 2024			December 31, 2023
Product branding	$	396		$	396
Deposits		248			240
Future proceeds related to installment sales of equipment		179			276
Total other assets		823			912
Less accumulated amortization		(358	)		(344	)
Other assets, net	$	465		$	568

As of March 31, 2024, the Company had $0.4 million of capitalized costs related to services provided for the rebranding of its existing product line. This amount is being amortized over a seven-year life.

Amortization expense totaled $13,750 and $14,286 for the three months ended March 31, 2024 and 2023, respectively.

The deposits represent office lease deposits.

10. Leases

The Company has various lease agreements in place for facilities, equipment and vehicles. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2027. The Company determines if an arrangement is a lease at inception. As the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate based on information available at commencement to determine the present value of the lease payments. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. As of March 31, 2024, the amount of right-of-use assets and lease liabilities were $2.4 million and $2.5 million, respectively. Aggregate lease expense for the three months ended March 31, 2024 was $0.3 million, consisting of $0.2 million in operating lease expense for lease liabilities and $0.1 million in short-term lease cost.

Maturities of lease liabilities as of March 31, 2024 were as follows:

(Dollars in thousands)	Operating Leases			Weighted- Average Remaining Term in Years
2024	$	774
2025		1,020
2026		808
2027		135
2028		-
Thereafter		-
Total lease payments		2,737
Less imputed interest (based on 6.6% weighted-average discount rate)		(238	)
Present value of lease liability	$	2,499			2.57

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

11. Notes Payable

Notes payable consisted of the following:

Schedule of Notes Payable

(Dollars in thousands)	March 31, 2024			December 31, 2023
		486			486
Promissory notes payable bearing interest of 6.0%. The notes have a 36-month term with maturity in April 2024. Accrued interest is paid in accordance with a monthly amortization schedule.	$	486		$	486
Amended and restated promissory notes payable bearing interest of 8.0%. The notes mature in March 2025. Accrued interest is paid in accordance with an amortization schedule.		7,593			7,556
Total notes payable		8,079			8,042
Less current portion		(8,079	)		(486	)
Long-term portion of notes payable	$	-		$	7,556

The Company paid $0.1 million and $0.5 million in interest on notes for the three months ended March 31, 2024 and 2023, respectively.

Maturities on notes payable as of March 31,2024 were as follows:

Schedule of Maturities on Notes payable

(Dollars in thousands)
2024	$	486
2025		7,593
2026		-
2027		-
2028		-
Thereafter		-
Total	$	8,079

12. Secured Credit Facilities

Note Purchase Agreement

On October 7, 2022, the Company entered into a Note Purchase Agreement dated as of October 6, 2022 with Aegis Security Insurance Company (“Aegis”). Pursuant to the Note Purchase Agreement, Aegis purchased from the Company a secured promissory note in the principal amount of $4.5 million (the “Aegis Note”). Aegis paid for the Aegis Note by paying $3.3 million to TQLA to fully satisfy a secured line of credit promissory note that the Company issued to TQLA on March 21, 2022; and the remaining $1.2 million was paid in cash to the Company. The Aegis Note bears interest at 9.25% per annum, payable every three months. The principal amount of the Aegis Note will be payable on March 31, 2025. The Company pledged substantially all of its assets to secure its obligations to Aegis under the Aegis Note.

On September 29, 2023, the Company entered into a Debt Satisfaction Agreement with Aegis and other creditors, pursuant to which the Aegis Note was amended and restated. See: Note 15, Stockholders Equity – Debt Satisfaction Agreement. Principal and interest of $1.9 million were exchanged for equity issued to a special purpose vehicle, The B.A.D. Company, LLC (the “SPV”), in which Aegis holds a 29% interest. As of March 31, 2024, the principal balance of the Aegis Note was $2.6 million and interest expense accrued was $42,122.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

6% Secured Convertible Promissory Notes

On April 19, 2021, the Company entered into a securities purchase agreement (“Purchase Agreement”) with accredited investors (“Subscribers”) for their purchase of up to $3.3 million of principal amount of 6% secured convertible promissory notes of the Company (“Note” or “Notes”), which notes are convertible into shares (“Conversion Shares”) of the Company’s common stock, par value $0.0001 per share pursuant to the terms and conditions set forth in the Notes with an initial conversion price of $44.00. In connection with the purchase of such Notes, each Subscriber received a warrant (“Existing Warrant”), to purchase a number of shares of common stock (“Warrant Shares”) equal to 60% of the principal amount of any Note issued to such Subscriber divided by the conversion price of the Note issued to such Subscriber, at an exercise price equal to $52.00. In connection with the Purchase Agreement, the Company entered into a Security Agreement under which it granted the Subscribers a security interest in certain assets of the Company (the “Security Agreement”) and a Registration Rights Agreement under which the Company agreed to register for resale the Conversion Shares and the Warrant Shares. Concurrently therewith, the Company and the investors closed $3.3 million of the private offering.

Roth Capital, LLC acted as placement agent in the private offering, and the Company paid the Placement Agent a cash fee of five percent (5%) of the gross proceeds therefrom. The Company received $3.1 million in net proceeds from the closing, after deducting the fee payable to the Placement Agent and the legal fees of the Subscribers in connection with the transaction. The Company used the proceeds to repay prior outstanding notes payable and for working capital and general corporate purposes.

Interest on the Notes accrued at a rate of 6% per annum and was payable either in cash or in shares of the Company’s common stock at the conversion price in the Note on each of the six and twelve month anniversaries of the issuance date and on the maturity date of October 18, 2022.

All amounts due under the Notes are convertible at any time after the issuance date, in whole or in part (subject to rounding for fractional shares), at the option of the holders into the Company’s common stock at a fixed conversion price, which is subject to adjustment as summarized below. The Notes were initially convertible into the Company’s common stock at an initial fixed conversion price of $44.00 per share. This conversion price is subject to adjustment for stock splits, combinations, or similar events, among other adjustments. On April 1, 2022, the Company and the holders agreed to a reduction of the conversion price of the 6% secured convertible promissory notes to $26.00 per share in connection with the Company’s issuance of a common stock purchase warrant to TQLA covering its loan amount of $3.5 million with a common stock value of $24.00 per share.

The Notes contain customary triggering events including but not limited to: (i) failure to make payments when due under the Notes; and (ii) bankruptcy or insolvency of the Company. If a triggering event occurs, each holder may require the Company to redeem all or any portion of the Notes (including all accrued and unpaid interest thereon), in cash.

The Notes are secured by a subordinated security interest in the Company’s assets pursuant to the terms of a Security Agreement entered into between the Company and the Subscribers.

On October 13, 2022, the Company entered into an Amendment Agreement with the holders of the 6% Secured Convertible Promissory Notes. The Amendment Agreement changed the Maturity Date of the Notes from October 18, 2022 to November 18, 2022. In consideration of the extension, the Company issued 4,808 shares of its common stock to each of the Subscribers.

On September 29, 2023, the Company entered into a Debt Satisfaction Agreement with the Subscribers and other creditors, pursuant to which the Maturity Date of the Notes was extended from November 18, 2022 to March 31, 2025 and interest accrues at 9% per annum. See: Note 15, Stockholders Equity – Debt Satisfaction Agreement. Principal and interest on the Notes of $3.3 million was exchanged for equity issued to the SPV, in which the Subscribers held a 50% ownership interest, and the Notes were then amended and restated. As of March 31, 2024, the principal balance was $0.4 million and interest expense accrued was $18,367.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

13. Commitments and Contingencies

Legal Matters

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

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

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

14. Net Income (Loss) per Common Share

Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Potentially dilutive securities consist of the incremental common stock issuable upon exercise of stock options, convertible notes and warrants. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. There were no anti-dilutive common shares included in the calculation of income (loss) per common share as of March 31, 2024 and 2023.

15. Stockholders’ Equity

Debt Satisfaction Agreement

On September 29, 2023, the Company entered into a Debt Satisfaction Agreement (the “DSA”) with the SPV, Aegis, Bigger Capital Fund, LP (“Bigger”), District 2 Capital Fund, LP (“District 2”), LDI Investments, LLC (“LDI”) and TQLA, LLC. The SPV is a special purpose vehicle whose equity is shared 50% by Bigger and District 2 and 50% by Aegis and LDI.

Pursuant to the DSA, on September 29, 2023, the Company issued to the SPV 296,722 shares of the Company’s common stock and 200,000 shares of its Series C Preferred Stock, and executed a Registration Rights Agreement providing that the Company will register for public resale that common stock and the common stock issuable upon conversion of the Series C Preferred Stock. In exchange for that equity, the Company’s debts to the members of the SPV were reduced by a total of $6.5 million and the Company recognized a loss on the conversion of $1.3 million for the year ended December 31, 2023. Specifically, the debt was reduced as follows:

●

the principal balance of the Secured Promissory Note issued by the Company to Aegis on October 6, 2022 was reduced by $1.9 million;

●

the Company’s debt to LDI of $1.4 million arising from advances made by LDI to the Company during the past 10 months was eliminated;

●

the aggregate principal balance of the Secured Convertible Promissory Notes issued by the Company to Bigger in April and May of 2021 was reduced by $1.6 million; and

●

the aggregate principal balance of the Secured Convertible Promissory Notes issued by the Company to District 2 in April and May of 2021 was reduced by $1.6 million.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

Further pursuant to the DSA:

	●	the maturity date of the secured debt listed above as well as unsecured notes issued by the Company and held by Bigger and District 2 in the aggregate amount of $7.4 million was deferred to March 31, 2025 and the interest rate on all such debt was increased to 8% per annum;

	●	the Company, Aegis, Bigger and District 2 entered into an Intercreditor Agreement, pursuant to which the remaining secured debt obligations of the Company to Aegis, Bigger and District 2 were made pari passu;

	●	the Common Stock Purchase Warrant issued by the Company to TQLA LLC on March 21, 2022, which permits TQLA LLC to purchase up to 145,834 shares of the Company’s common stock, was amended to prevent any exercise of the Warrant that would result in the portion of the cumulative voting power in the Company that the holder and its affiliates may own after the conversion to 9.99%. The Beneficial Ownership Limitation may be increased to 19.99% by the holder upon 61 days advance notice to the Company.

	●	Upon the liquidation, dissolution and winding up of the Company, or upon the effective date of a consolidation, merger or statutory share exchange in which the Company is not the surviving entity, the holder of each share of the Series C Preferred Stock shall be entitled to a distribution prior to and in preference of the holders of the common stock.

	●	In the event the Company declares a dividend payable in cash or stock to holders of any class of stock, the holder of each share of Series C Preferred Stock shall be entitled to receive a dividend equal in amount and kind to that payable to the holder of the number of shares of the Company’s common stock into which that holder’s Series C Preferred Stock could be converted on the record date for the distribution common stock. The dividends issued on the Company s outstanding Series B Preferred Stock are excluded from this provision.

	●	The holders of Series C Preferred Stock shall have no voting rights; except that nothing will limit a holder’s voting rights with respect to shares of any other class of the Company’s common stock held from time to time.

Issuance of Common Stock

During the three months ended March 31, 2024, the Company issued 1,764 shares of common stock to directors and employees for stock-based compensation of $2,046. The shares were valued for accounting purposes using the closing share price of the Company’s common stock on the date of grant of $1.16 per share and issued at $3.05 per share.

On September 29, 2023, pursuant to the DSA (see discussion above), the Company issued to the SPV 296,722 shares of common stock and 200,000 shares of its Series C Preferred Stock. In exchange for that equity, the Company’s debts to the members of the SPV were reduced by a total of $6.5 million.

During the year ended December 31, 2023, the Company issued 162,849 shares of common stock to directors and employees for stock-based compensation of $0.7 million. The shares were valued for accounting purposes using the closing share price of the Company’s common stock on the date of grant, within the range of $1.29 to $7.40 per share and issued within the range of $3.05 to $7.40 per share

During the year ended December 31, 2023, the Company sold 343,495 shares of common stock for net proceeds of $1.4 million in at-the-market public placements.

Issuance of Series B Preferred Stock

On October 19, 2021, Company entered into a securities purchase agreement (“Purchase Agreement”) with an accredited investor (“Subscriber”) for its purchase of 2.5 million shares (“Preferred Shares”) of Series B Convertible Preferred Stock (“Series B Preferred Stock”) at a purchase price of $1.00 per Preferred Share, which Preferred Shares are convertible into shares of the Company’s common stock pursuant to the terms and conditions set forth in a Certificate of Designation Establishing Series B Preferred Stock of the Company with an initial conversion price of $62.00 per share. 42,500 shares of common stock were reserved for issuance in the event of conversion of the Preferred Shares.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

The Series B Preferred Stock accrues dividends at a rate of 6% per annum, payable annually on the last day of December of each year. Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends are payable at the Company’s option either in cash or “in kind” in shares of common stock; provided, however that dividends may only be paid in cash following the fiscal year in which the Company has net income (as shown in its audited financial statements contained in its Annual Report on Form 10-K for such year) of at least $0.5 million. For “in-kind” dividends, holders will receive that number of shares of common stock equal to (i) the amount of the dividend payment due such stockholder divided by (ii) the volume weighted average price of the common stock for the 90 trading days immediately preceding a dividend date (“VWAP”). For the the year ended December 31, 2023, the Company issued dividends of 92,957 shares of common stock at a VWAP of $1.61 per share to its Series B Preferred stockholders. For both the three months ended March 31, 2024 and 2023, the Company accrued $37,500 of preferred dividends.

Issuance of Series C Preferred Stock

On September 29, 2023, the Company entered into the DSA, pursuant to which the Company issued to the SVP 200,000 shares of its Series C Preferred Stock. Each share of Series C Preferred Stock has a stated value of $28.025 and is convertible into shares of the Company’s common stock pursuant to the terms and conditions set forth in a Certificate of Designation Establishing Series C Preferred Stock with an initial conversion price of $3.05 per share.

Stock-Based Compensation

On September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). Pursuant to the terms of the plan, on January 1, 2023 the number of shares available for grant under the 2016 Plan reset to 437,993 shares, equal to 8% of the number of outstanding shares of the Company’s capital stock, calculated on an as-converted basis, on March 31 of the preceding calendar year, and then added to the prior year plan amount. As of March 31, 2024, there were 2,120 options and 196,619 restricted stock units (“RSUs”) outstanding under the 2016 Plan, with vesting schedules varying between immediate or three (3) years from the grant date.

A summary of all stock option activity as of and for the three months ended March 31, 2024 is presented below:

Summary of Stock Options Activity

	# of Options		Weighted- Average Exercise Price
Outstanding as of December 31, 2023		2,120	$	57.95

Outstanding and Exercisable as of March 31, 2024		2,120	$	57.95

The aggregate intrinsic value of options outstanding as of March 31, 2024 was $0. As of March 31, 2024, all options had vested.

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

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

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

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

The calculation includes several assumptions that require management’s judgment. The expected term of the options is calculated using the simplified method described in GAAP. The simplified method defines the expected term as the average of the contractual term and the vesting period. Estimated volatility is derived from volatility calculated using historical closing prices of common shares of similar entities whose share prices are publicly available for the expected term of the options. The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the options.

The Company did not issue any additional options during the three months ended March 31, 2024.

Warrants

On March 21, 2022, the Company entered into a promissory note with TQLA LLC to accept a one year loan of $3.5 million. In addition, the Company issued a common stock purchase warrant to TQLA covering the loan amount with an exercise price of $24.00 per share. The note payable was fully repaid in October 2022. The common stock purchase warrant expires in March 2027. The warrants were amended pursuant to the Debt Satisfaction Agreement (See discussion above) to prevent any exercise that would result in the warrant-holder and affiliates acquiring cumulative voting power in excess of 9.99%. This Beneficial Ownership Limitation may be increased to 19.99% upon 61 days advance notice to the Company.

From April 19, 2021 through May 12, 2021, the Company issued in a private placement Existing Warrants to purchase up to 45,000 shares of common stock at an exercise price of $52.00 per Warrant Share. On July 30, 2021, the Company entered into Inducement Letters with the holders of the Existing Warrants whereby such holders agreed to exercise for cash their Existing Warrants to purchase the 45,000 Warrant Shares in exchange for the Company’s agreement to issue new warrants (the “New Warrants”) to purchase up to 45,000 shares of common stock (the “New Warrant Shares”). The New Warrants have substantially the same terms as the Existing Warrants, except that the New Warrants have an exercise price of $60.00 per share and are exercisable until August 19, 2026. On September 29, 2023, pursuant to the Debt Satisfaction Agreement (see above), the exercise price of the Existing Warrants was reduced to $33.08 per share and the term during which the Existing Warrants may be exercised was extended to June 23, 2028.

On January 15, 2020, the Company and its subsidiaries entered into a loan agreement (the “Loan Agreement”) between the Company and Live Oak Banking Company (“Live Oak”), a North Carolina banking corporation (the “Lender”) to refinance existing debt of the Company and to provide funding for general working capital purposes In connection with the Loan Agreement, the Company issued to the Lender a warrant to purchase up to 5,000 shares of the Company’s common stock at an exercise price of $78.80 per share (the “Warrant”). The Warrant expires on January 15, 2025. In connection with the issuance of the Warrant, the Company granted the Lender piggy-back registration rights with respect to the shares of common stock issuable upon exercise of the Warrant, subject to certain exceptions.

Eastside Distilling, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

A summary of all warrant activity as of and for the three months ended March 31, 2024 is presented below:

Summary of Warrant Activity

	Warrants		Weighted- Average Remaining Life (Years)		Weighted- Average Exercise Price		Aggregate Intrinsic Value
Outstanding as of December 31, 2023		201,667		3.4	$	34.87	$	-

Outstanding as of March 31, 2024		201,667		3.4	$	34.87	$	-

16. Related Party Transactions

The following is a description of transactions since January 1, 2023 as to which the amount involved exceeds the lesser of $0.1 million or one percent (1%) of the average of total assets at year-end for the last two completed fiscal years, which was $0.2 million, and in which any related person has or will have a direct or indirect material interest, other than equity, compensation, termination and other arrangements.

Aegis Security Insurance Company

On October 7, 2022, the Company entered into a Note Purchase Agreement with Aegis. Pursuant to the Note Purchase Agreement, Aegis purchased from the Company a secured promissory note in the principal amount of $4.5 million (the “Aegis Note”). $3.3 million of the purchase price was paid to TQLA, LLC to satisfy a Note purchased from TQLA earlier in 2022. See discussion of the Aegis transaction in Note 12. Patrick Kilkenny is the principal owner of Aegis. TQLA LLC is owned by Stephanie Kilkenny, a member of the Company’s Board of Directors, and her husband, Patrick Kilkenny.

LD Investments LLC

During February 2024, LDI advanced the Company $0.6 million. On September 29 2023, the Company entered into a Secured Promissory Note with LDI in the principal amount of $1.4 million, representing advances made by LDI to the Company between December 2022 and August 2023. Patrick Kilkenny is the principal owner of LDI.

On September 29, 2023, the Company entered into the DSA with LDI and other creditors. See: Note 15, Stockholders Equity – Debt Satisfaction Agreement. The entire principal and interest on the LDI Note were exchanged for equity issued to the SPV, in which LDI holds a 21% interest.

17. Subsequent Events

Subsequent to March 31, 2024, the Company was advanced $0.6 million from Bigger and District 2.

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

Forward-Looking Statements

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

You should not place undue certainty on these forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that could cause our expectations to be unfulfilled include those discussed in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2023 entitled “Risk Factors” as well as factors we have not yet anticipated.

Overview

Eastside Distilling, Inc. (the “Company,” “Eastside Distilling,” “we,” “us,” or “our,” below) was incorporated under the laws of Nevada in 2004 under the name of Eurocan Holdings, Ltd. In December 2014, we changed our corporate name to Eastside Distilling, Inc. to reflect our acquisition of Eastside Distilling, LLC. We operate in two segments. Our Craft Canning + Printing (“Craft C+P”) segment provides digital can printing to customers in the craft beverage industry operating throughout the Pacific Northwest as well as other states. We also provide mobile canning services to the craft beverage industry in Oregon. In addition to these services we offer co-packing services from a single fixed site in Portland, Oregon. Our Spirits segment manufactures, blends, bottles, markets and sells a wide variety of alcoholic beverages under recognized brands in 23 U.S. states. Across both businesses we employ 46 people in the United States.

Mission and Strategy

Our mission is to offer great products and services in the craft beverage space.

This includes advanced digital can printing decoration with custom graphics and co-packing services with distinct capability and craftsmanship serving the craft beer, cider, and kombucha among other beverage segments. Craft C+P offers digital can printing to customers and co-packing services.

Our spirits brands span several alcoholic beverage categories, including whiskey, vodka, rum and tequila. We sell our products on a wholesale basis to distributors through open states, and brokers in control states.

Our strategy is to expand our two distinct businesses – Craft C+P and Spirits in our regional market where our brand equity and concentration of investment will have the greatest return. Our spirits portfolio is to be positioned as a leading regional craft spirits provider that develops brands, expands geographic presence growing revenue and cash flow. These two segments are detailed below.

Segments

Craft Canning + Printing

Digital Can Printing

We operate an innovative digital can printing facility that allows us to digitally print high quality graphics on aluminum beverage cans. This technology offers greater flexibility than traditional decoration methods and initially was directed toward smaller craft beverage manufacturers seeking custom graphics of limited releases, vintages, partnerships, and special events. This investment in digital printing at Craft C+P allows us the ability to offer unparalleled customization and flexibility to craft beverage producers seeking direct printing for canning projects of all sizes, while having an annual production capacity of over 20 million cans. One of Craft C+P’s many goals for 2024 is to significantly increase its production capacity.

Co-packing Facility

We offer co-packing services for non-alcoholic canned beverages including CBD soda waters in Portland, Oregon through a mobile co-packing network and one fixed co-packing location.

Mobile Canning

Our mobile canning business is located in Portland, Oregon. We use extensive proprietary and data-driven quality control measures and a robust clean-in-place procedure in order to provide the best packaging service for our customers. We take great pride in helping local beverage producers expand their distribution reach by using our service to offer industry-top quality and branding.

Spirits

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

	●	Burnside Whiskey Family – Our Burnside Whiskey Family celebrates the unique attributes of the native Oregon Oak tree (Quercus garryana). The unique complexity of each distinct whiskey comes from blending Oregon Oak barrels of differing sizes, char levels, and ages.

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

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

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

	●	Eastside Brands – Craft inspired high-quality limited-edition products, which focus on innovation, craftsmanship and curiosity, and creativity.

Recent Developments

During March 31, 2024, Craft C+P printed 4.8 million cans compared to 2.5 million during the first quarter of 2023. We have improved our efficiency and throughput of production compared to the prior year period. In addition, Craft C+P has won significant new business from a number of beverage manufacturers during 2024. Spirits did not sell any bulk barrels in the first quarter of 2024 and saw total volume decline by 4% in the quarter. This is an improvement from the previous twelve months and is driven by strategic pricing moves in key markets.

At the beginning of 2023, we started a restructuring plan to lower costs and prepare the brands for reinvestment. While a substantial amount of our raw materials, such as our whiskey, is owned and not susceptible to price inflation, the inflated prices of shipping and other materials, such as glass, are expected to continue through 2024.

Results of Operations

Overview

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

(Dollars in thousands)	2024			2023			Variance
Sales	$	2,487		$	2,879		$	(392	)
Less customer programs and excise taxes		76			26			50
Net sales		2,411			2,853			(442	)
Cost of sales		2,225			2,212			13
Gross profit		186			641			(455	)
Sales and marketing expenses		251			511			(260	)
General and administrative expenses		1,105			1,364			(259	)
(Gain) loss on disposal of property and equipment		(120	)		6			(126	)
Total operating expenses		1,236			1,881			(645	)
Loss from operations		(1,050	)		(1,240	)		190
Interest expense		(248	)		(329	)		81
Other income (expense)		5			(29	)		34
Net loss		(1,293	)		(1,598	)		305
Preferred stock dividends		(38	)		(38	)		-
Net loss attributable to common shareholders	$	(1,331	)	$	(1,636	)	$	305
Gross margin		8	%		22	%		-14	%

Segment information is as follows for the three months ended March 31, 2024 and 2023:

(Dollars in thousands)	2024			2023			Variance
Craft C+P
Sales	$	1,849		$	1,456		$	393
Net sales		1,814			1,477			337
Cost of sales		1,765			1,578			187
Gross profit		49			(101	)		150
Total operating expenses		638			749			(111	)
Net loss	$	(590	)	$	(884	)	$	294

Spirits
Sales	$	638		$	1,423		$	(785	)
Net sales		597			1,376			(779	)
Cost of sales		460			634			(174	)
Gross profit		137			742			(605	)
Total operating expenses		234			522			(288	)
Net income (loss)	$	(92	)	$	221		$	(313	)

Corporate
Total operating expenses	$	364		$	610		$	(246	)
Net loss	$	(611	)	$	(935	)	$	324

Corporate consists of key executive and accounting personnel and corporate expenses such as public company and board costs, as well as interest on debt.

Sales

Sales were $2.5 million and $2.9 million for the three months ended March 31, 2024 and 2023, respectively.

Craft C+P

Sales increased 27% for the three months ended March 31, 2024 attributable to growth in digital can printing sales, partially offset by reduced mobile service revenues and the sales of undecorated cans that have been replaced with digital printing sales. Craft printed 4.8 million cans in the quarter compared to 2.5 million cans in the prior year. The increase was a result of incremental sales to both existing and new customers and improved throughput of production.

Spirits

Spirits sales decreased for the three months ended March 31, 2024. The primary reason for the reduction was significant bulk spirits sales that we completed during 2023. For the three months ended March 31, 2023, we sold 250 barrels for gross proceeds of $0.6 million. In the first quarter of 2024, spirits sold 5,684 cases compared to 5,941 in the prior year, which included a large one-time direct-to-retail sale of 164 cases of Burnside. We have focused investment in spirits on profitable sales channels and regions. As a result, tequila sales decreased through last year and into this year.

Customer programs and excise taxes

Customer programs and excise taxes were $0.1 million and $25,754 for the three months ended March 31, 2024 and 2023, respectively. Craft C+P discounts were higher for the three months ended March 31, 2024 as we on-boarded customers with larger printing runs. Spirits discounts were lower for the three months ended March 31, 2024 due to lower sales volumes.

Cost of Sales

Cost of sales consists of all direct costs related to both spirits and canning for raw materials, service, labor, overhead, packaging, and in-bound freight charges. Cost of sales were $2.2 million and $2.2 million for the three months ended March 31, 2024 and 2023, respectively.

Craft C+P

Cost of sales increased in the quarter due to higher can volume and incremental inventory costs. We also invested in spare parts in anticipation of higher volumes later in the year.

Spirits

Cost of sales decreased for the three months ended March 31, 2024 due to lower bulk spirits and distributor sales, in addition to lower tequila volumes and a shift to a higher mix of vodka sales.

Gross Profit

Gross profit is calculated by subtracting the cost of products sold and services rendered from net sales. Gross profit was $0.2 million and $0.6 million for the three months ended March 31, 2024 and 2023, respectively. Bulk sales gross profit was $0.2 million for the three months ended March 31, 2023. Gross margin is gross profit stated as a percentage of net sales. Our gross margin was 8% and 22% for the three months ended March 31, 2024 and 2023, respectively. The prior years gross profit was positively impacted by high margins related to bulk spirits sales.

Craft C+P

Craft C+P’s gross margin increased for the three months ended March 31, 2024 primarily due to continued growth in can printing activities. Margins were negatively impacted by incremental expense in the quarter required to continue to improve production throughput and sustain a 24-hour 7 day a week printing schedule. Margins were also negatively impacted by scrap and inflated can prices.

Spirits

Gross margin decreased for the three months ended March 31, 2024 primarily due to sales of bulk spirits in 2023 and a greater mix of lower margin products in 2024.

Sales and Marketing Expenses

Sales and marketing expenses were $0.3 million and $0.5 million for the three months ended March 31, 2024 and 2023, respectively, due to reduced headcount.

General and Administrative Expenses

General and administrative expenses were $1.1 million and $1.4 million for the three months ended March 31, 2024 and 2023, respectively, primarily due to the related costs of closing unprofitable operations, including reducing staff and exiting leasing agreements at Craft C+P.

Interest Expense

Interest expense was $0.2 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively.

Net Income (Loss)

Net loss was $1.3 million and $1.6 million for the three months ended March 31, 2024 and 2023, respectively.

Preferred Stock Dividends

Preferred stock dividends were $37,500 million for both three months ended March 31, 2024 and 2023, representing the Series B preferred stock dividend of 6% per annum.

Liquidity and Capital Resources

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

We had an accumulated deficit of $84.0 million as of March 31, 2024, having incurred a net loss of $1.3 million during the three months ended March 31, 2024. As of March 31, 2024, we had $0.3 million of cash on hand with negative working capital of $11.2 million.

Our ability to meet our ongoing operating cash needs over the next 12 months depends on asset sales, external financing and improving operating results. The availability of external financing will be largely dependent on improvement in performance, including higher digital can printing revenues and improved gross margins at Craft C+P as well as operational improvements in our Spirits segment.

SEC Form 10-Q filed by Eastside Distilling Inc.