Eastside Distilling, Inc. - Annual Report: 2015 (Form 10-K)

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2015

For the transition period from ___________ to _____________

Commission File Number 000-30291

EASTSIDE DISTILLING, inc.

(Name of small business issuer as specified in its charter)

1805 SE Martin Luther King Jr. Blvd.

Portland, Oregon 97214

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (971) 888-4264

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: ¨    Yes No x

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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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” and “smaller reporting company” in Rule 12b-2 if 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 x

The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2015 was approximately $42,255,625.

As of April 12, 2016, 46,726,000 shares of our common stock were outstanding.

Documents Incorporated by Reference:

None.

PART I

Eastside Distilling, Inc., is referred to herein as “Eastside,” “ESDI,” “the Company,” “us,” or “we”.

Item 1. DESCRIPTION OF BUSINESS

Overview

We were incorporated on February 11, 2008 in Nevada as Eurocan Holdings, Ltd. Until closing of the Acquisition (described below), Eurocan operated solely as an online marketing and media solutions firm specializing in digital interactive media, which business was conducted through Eurocan’s wholly-owned subsidiary, Michael Williams Web Design Inc. of New York, NY (“MWW”).

On December 1, 2014, we changed our corporate name to “Eastside Distilling, Inc.” from Eurocan Holdings Ltd, to reflect our recent acquisition of Eastside Distilling, LLC resulting in us primarily conducting Eastside’s business (See “The Acquisition of Eastside Distilling, LLC” below).   Until February 3, 2015, we continued to operate our online marketing and media solutions’ business through MWW (See “Spin-Off of MWW” below).

The Acquisition of Eastside Distilling, LLC

On October 31, 2014, Eurocan Holdings Ltd. (“we,” “us,” or the “Company”) consummated the acquisition (the “Acquisition”) of Eastside Distilling, LLC (“Eastside”) pursuant to an Agreement and Plan of Merger (the “Agreement”) by and among the Company, Eastside, and Eastside Distilling, Inc., our wholly-owned subsidiary. Pursuant to the Agreement, Eastside merged with and into Eastside Distilling, Inc. The merger consideration for the acquisition consisted of 32,000,000 shares (the “Shares”) of our common stock.   In addition, certain of our stockholders cancelled an aggregate of 24,910,000 shares of our common stock held by them. As a result, upon consummation of the Agreement on October 31, 2014, we had 40,000,000 shares of our common stock issued and outstanding, of which 32,000,000 shares are held by the former members of Eastside.  The issuance of these Shares was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to exemptions afforded by Section 4(a)(2) of the Securities Act, Rule 506 of Regulation D promulgated thereunder, and/or Regulation S promulgated thereunder.

At the effective time of the Acquisition, our officers and directors resigned, and appointed Steven Earles and Lenny Gotter as directors to our board of directors. In addition, concurrent with the closing of the Acquisition, the Company appointed Mr. Earles as Chief Executive Officer, Chief Financial Officer and Chairman and Mr. Gotter as Chief Operating Officer and Secretary. Mr. Gotter resigned as an officer in February 2015.

Following the Acquisition, we conduct the business of Eastside as our primary business.

Eastside is a manufacturer, developer, producer and marketer of master-crafted spirits in the following beverage alcohol categories: bourbon, whiskey, rum and vodka. Eastside currently distributes its products in fifteen states (Oregon, Washington, Nevada, Texas, Virginia, Indiana, Illinois, New York, New Jersey, Massachusetts, Connecticut, Minnesota, Georgia, Pennsylvania, and Maryland) and is authorized to distribute its products in Idaho and Ontario, Canada as well.  Eastside also generates revenue from tastings, tasting room tours, private parties and merchandise sales from its distillery and showroom located on the Distillery Row in Portland, Oregon.

Spin-Off of MWW

Following the consummation of the Acquisition, our new management conducted an evaluation of the MWW business and an analysis of the business going forward. Management determined that due to MWW’s operating and net losses in each of the last two fiscal years, its working capital deficit as of the end of the latest fiscal year and the first fiscal quarter, and its accumulated deficit, it was not in the best interest of our company and our stockholders to continue the operation of MWW going forward. Accordingly, on February 3, 2015, we transferred all shares of MWW held by us along with all assets and liabilities related to MWW to Michael Williams in consideration of MWW’s and Mr. Williams’ full release of all claims and liabilities related to MWW and the MWW business. Mr. Williams is the sole officer, director and employee of MWW. The spinoff of MWW resulted in an impairment of goodwill related to the Acquisition of approximately $3.2 million in December of 2014. Additionally, as a result of the Spin-Off, we recorded a net gain of approximately $52,890 on February 3, 2015. This gain is primarily the result of the transfer of net liabilities to Michael Williams, which is reflected in our financial statements for the year ended December 31, 2015.

Recent Developments

Series A Preferred Stock and Warrant Offering. On April 4, 2016, we conducted an initial closing for 880 units (“Units”) to 12 accredited investors at a price of $1,000 per Unit for an aggregate purchase price of $880,000, of which (i) 407 Units were purchased for cash (ii) 423 Units were purchased by certain of our officers in consideration of $423,000 accrued and unpaid salary and (iii) 50 Units were purchased in consideration of cancellation of outstanding indebtedness.. Each Unit consists of (i) 1 share of our Series A Convertible Preferred Stock convertible into shares of our common stock, $0.0001 par value per share (“Common Stock”) at a rate of $0.15 per share and (ii) one Warrant, exercisable for 3-years, to purchase six thousand six hundred sixty six (6,666) shares of Common Stock at an exercise price of $0.18 per whole share.  We received gross proceeds of $407,000 from the sale of the 407 Units for cash. We used $28,560 of these proceeds as payment for non-exclusive placement agent fees to FINRA registered broker-dealers.  In addition, approximately $25,000 was used to repay outstanding indebtedness under 5% promissory notes.  The remaining proceeds will be used for working capital and general corporate purposes and to fund growth opportunities.

National Rollout progress. Our national rollout plan continue to progress. We currently sell our products into fifteen states which represents an increase in the number of states of over 100% from March 2015 and is largely attributable addition of additional distributors. We expect to expand distribution to 23 states in the coming months based on our distributors near-term expansion plans.

Canadian Product Sale Approval. In March 2016, our Burnside Bourbon product was approved for sale in the province of Ontario, Canada.

Corporate Information

Our executive offices are located at 1805 SE Martin Luther King Jr. Blvd., Portland, Oregon 97214. Our telephone number is (971) 888-4264 and our internet address is www.eastsidedistilling.com. The information on, or that may be, accessed from our website is not part of this annual report.

OUR BUSINESS

We are a manufacturer, developer, producer and marketer of master-crafted spirits in the following beverage alcohol categories: bourbon, whiskey, rum and vodka. We currently distribute our products in fifteen states (Oregon, Washington, Nevada, Texas, Virginia, Indiana, Illinois, New York, New Jersey, Massachusetts, Connecticut, Minnesota, Georgia, Pennsylvania, and Maryland) and are authorized to distribute its products in Idaho and Ontario, Canada as well.  We also generate revenues from tastings, tasting room tours, private parties and merchandise sales from our distillery and showroom located on the Distillery Row in Portland, Oregon. In addition, we maintain retail stores in shopping centers in the Portland area which provides additional revenues of our products.

Industry Overview

U.S. Distilled Spirits Industry Overview

The global distilled spirits industry is very competitive. We compete based on taste, product quality, brand image, and price. While the industry is highly fragmented, major competitors include Bacardi Limited, Beam, Inc., Brown-Forman Corporation, Davide Campari Milano-S.p.A., Diageo PLC, LVMH Moët Hennessy Louis Vuitton S.A, Pernod Ricard S.A., and Rémy Cointreau S.A.

According to the Distilled Spirits Council, domestic alcoholic beverage sales in the U.S. have grown from $37.86 billion in 1999 to nearly $70 billion in 2014. Sales of distilled spirits have the highest compound annual growth rate in recent years at a rate of approximately 5% 2000-2014 as compared to approximately 4% for wine and 3% for beer during that same period.

The global spirits market had total revenues of $316 billion in 2013, representing a compound average growth rate (CAGR) of 3.4% between 2009 and 2013, according to MarketLine. The performance of the market is forecast to accelerate with an anticipated CAGR of 4.2% for the five year period 2013-2018, which is expected to drive the market to a value of approximately $388 billion by the end of 2018.

Craft distillers, such as Eastside, (i.e. distilled spirits plants (DSP) bottling less than 100,000 gallons annually) rose to 729 DSPs in 2014 from less than 100 DSPs in the first quarter of 2010. In addition, craft distillers produced 3.5 million 9-Liter cases in the 12 months ended 2014 from 700,000 cases in 2010.

Regulatory modernization over the course of the last decade has contributed to the increase in revenues for the industry in general. Since 2002, over 16 states have adopted Sunday sales of distilled spirits for a total of 36 nationally. Also since 2002, more than 17 states have passed legislation to allow distilled spirits tastings at liquor stores for a total of 44 states that allow some form of tasting. Council data show that while 2003-2012 supplier sales of value–priced products have grown from $3.75 billion to $4.08 billion, a 24.5% rate of growth, super-premium products have grown from $1.48 billion to $3.90 billion, a 163% rate of growth.

Our brands:

We manufacture, develop, produce and market the premium brands listed below.

Burnside Bourbon. We develop, market and produce two premium, barrel–aged bourbons: Burnside Bourbon and Oregon Oak Burnside Bourbon. Our Burnside Bourbon is aged in oak barrels, is 96 proof and won a Gold Medal in the MicroLiquor Spirt Awards in 2014 and another from Beverage Tasting Institute. Our Oregon Oak Burnside Bourbon is produced in limited quantities and aged for an additional 90 days in Oregon heavily charred oak barrels and we consider it an “ultra-premium” brand. Our Burnside Bourbon brands accounted for approximately 35% and 40% of our revenues for fiscal years 2015 and 2014 , respectively.

Barrel Hitch American Whiskey. We develop, market and produce two premium whiskey’s: Barrel Hitch American Whiskey and Barrel Hitch Oregon Oaked Whiskey. Our whiskey is 80 proof and won a triple-Gold Medal and best of show in the MicroLiquor Spirt Awards in 2015. Our Oregon Oak version is produced in limited quantities and aged for an additional 90 days in Oregon heavily charred oak barrels and we consider it an “ultra-premium” brand. Our Whiskey brand was introduced in July of 2015 and accounted for approximately 7% of our revenues for 2015.

Distinctive Specialty Whiskeys. We develop, market and produce two distinctive whiskeys: Cherry Bomb Whiskey and Marionberry Whiskey. Our Cherry Bomb Whiskey combines handcrafted small batch whiskey with a blast of real Oregon cherries. Our Cherry Bomb Whiskey won a gold medal from the American Wine Society and was also awarded a gold medal for taste and a silver medal for package design in the MircroLiquor Spirit Awards. Our Marionberry whiskey combines Oregon marionberries (a hybrid blackberry) with premium aged whiskey and was awarded two silver medals in the MicroLiquor Spirit Awards for taste and package design. Our distinctive whiskeys accounted for approximately 15% and 10% of our revenues for fiscal years 2015 and 2014, respectively.

Below Deck Rums. We develop, market and produce 4 rums under the Below Deck brand name: Below Deck Silver Rum, Below Deck Spiced Rum, Below Deck Coffee Rum and Below Deck Ginger Rum. Below Deck’s Silver Rum is Eastside’s original rum. Below Deck Spiced Rum is double-distilled from molasses and infused with exotic spices and won a triple gold medal for taste and a bronze medal for package design in the MicroLiquor Spirit Awards. Our Below Deck Coffee Rum is double-distilled and infused with coffee flavors from Arabica bean and won a silver medal at the San Francisco World Spirits Competition. Below Deck Ginger Rum is infused with natural ginger. Our Below Deck Rums accounted for approximately 12% and 10% of our revenues for fiscal years 2015 and 2014, respectively.

Premium Vodka. Eastside develops, markets and produces a premium potato vodka under the brand name Portland Potato Vodka which is distilled from potatoes rather than grain and as such is gluten free. Eastside Portland Potato Vodka was awarded a silver medal from the American Wine Society as well as a gold medal from the Beverage Tasting Institute which also gave it a “Best Buy” rating. Our Portland Premium Vodka accounted for approximately 14% and 30% of our revenues for fiscal years 2015 and 2014, respectively.

Seasonal/Limited Edition Spirits. In addition to our premium bourbons, whiskeys, rum and vodka, Eastside creates seasonal and limited-edition handmade products such as Advocaat (eggnog) Liqueur, Peppermint Bark Liqueur, Bier Schnapps and Holiday Spiced Liqueur. Our Seasonal/Limited Edition Spirits accounted for approximately 10% of our revenues for each of our 2015 and 2014 fiscal years.

Special Events

We also generate revenues from hosting special events, such as tastings. We have generated as much as $95,000 in revenues from special events in a single month during the holiday season (November/December). Our new facility is substantially larger and in addition to potential increased tasting room revenues, we expect to have space to host private parties, food tasting events and concerts once we complete the facility remodel. We also sell merchandise and in-store bottle sales at special events.

Retail Stores

We have retail stores in shopping centers in the Portland, Oregon area which provides us with additional revenues for sales of our products. In December 2014, we opened a 1,200 square foot retail store in Clackamas Town Center (Happy Valley Town Center) and in January 2015, entered into a lease for 3,100 square feet of retail space in the Washington Square Center in Portland, Oregon. We also had two additional holiday season retail locations within high-traffic shopping malls in the Portland, Oregon metro region during the 2015 period.

Our Strengths

We believe the following competitive strengths will enable the implementation of our growth strategies:

Award Winning Diverse Product Line: We have a diverse product line offering of more than eleven (11) premium craft spirits, many of which have won awards for taste and/or product design. In addition, premium craft spirits have experienced a compound annual growth rate of 7.6% over the last decade, which is higher than the 5.5% compound annual growth rate for mass produced spirits. Our sales of premium brands has increased over 1,000% since 2010. We believe our diverse, recognized and profitable product line in this growing market will enable us to establish a presence in new geographic markets and enable us to procure additional distributors for our products.

High Product Margin. Our high-end spirits have high profit margins, many of which exceed 40%. High profit margins on our products should contribute to a strong balance sheet, which we expect potential financing sources and strategic partners, such as distributors and suppliers, will find attractive.

New Distillery: We signed a lease for a new 41,000 square foot distillery in late 2014 that when fully operational is expected to be capable of producing up to 1 million cases per year, representing a significant increase in production capability from of our previous facility (6,400 cases in 2014). Our expected production of cases is expected to increase each year after moving into our new facility, which is currently capable of producing approximately 100,000 cases per year. In addition, this new distillery should enable us to recognize additional income from tastings and other special events.

Key Relationships: We have signed distribution agreements with several of the largest wine and spirits distributors in the United States. We have also engaged Blackheath Beverage Group, an outsource sales and marketing company, and Park Street Imports, a provider of back-office administrative and logistical services for alcohol and beverage distributors. We believe these relationships will facilitate our goal of having our premium spirits sold and distributed nationwide.

Experienced Management Team: Our Management team possesses significant recent experience in the premium liquor brand industry as well as developing start-up companies. Our senior management team has worked together in the premium beverage industry for over 5 years.

Our Strategy

Our objective is to continue building Eastside into a profitable national spirits company, with a distinctive portfolio of premium and super premium spirits brands. Our goal includes achieving nationwide distribution of our products within the next 36 months. With the rapidly growing list of states where we are now selling, we believe we are well positioned to meet that goal. To help achieve this, we expect to:

Grow our distribution network. We currently have a formal relationship with several national distributors as well as regional distributors covering various locations. We are also in discussions with several other national distributors. We believe continuing to expand our distribution network will enable us to penetrate additional geographic markets more quickly.

Increase production. Our new facility should ultimately be capable of producing up to 1 million cases per year. We are currently able to produce 100,000 cases per year and we expect our annual production of cases to increase each year. We believe our increased production capacity will make us more attractive to distribution partners and will also generate additional revenues and profits.

Listing of Products in Control States and Top Consumption States. While we plan to ultimately distribute our products in all states, we have initially focused our efforts on both the 18 liquor control states where distilled spirits are sold through state-owned and operated stores known as ABC (alcohol beverage control) stores as well as the top consumption states, such as California, Florida, Illinois, New York and Texas.

Selectively add new brands to our portfolio. We intend to continue to introduce new brands to our current portfolio of products. For example, during late 2015, we introduced our new American whiskey product, named Barrel Hitch.

Build Consumer Awareness. We intend to use our existing assets, expertise and resources to build consumer awareness and market penetration for our brands.

In-House Tasting Room. We will continue to host tasting and private parties in our current facility and our new facility. In addition to the revenues these tastings generate, we value the immediate customer feedback during these events which is instrumental in creating better products and testing new flavors.

Retail Stores and Kiosks. In December 2014 we opened a 1,200 square foot retail store in Clackamas Town Center mall, and in January 2015 we signed a lease for 3,001 square foot retail store in the Washington Town Center in Portland, Oregon. In addition, we also had two additional holiday season retail locations within high-traffic shopping malls in the Portland, Oregon metro region. We intend to maintain these retail stores and kiosks to build local brand awareness and direct-to-consumer retail sales. Some of these stores will contain in-store tastings which we believe will lead to additional product purchases.

Production and supply

There are several steps in the production and supply process for beverage alcohol products. First, all of our spirits products are distilled. This is a multi-stage process that converts basic ingredients, such as grain, sugar cane or agave, into alcohol. Next, the alcohol is processed and/or aged in various ways depending on the requirements of the specific brand. For our vodka, this processing is designed to remove all other chemicals, so that the resulting liquid will be odorless and colorless, and have a smooth quality with minimal harshness. Achieving a high level of purity involves a series of distillations and filtration processes.

For our spirits brands, rather than removing flavor, various complex flavor profiles are achieved through one or more of the following techniques: infusion of fruit, addition of various flavoring substances, and, in the case of rums and whiskeys, aging of the brands in various types of casks for extended periods of time, and the blending of several rums or whiskeys to achieve a unique flavor profile for each brand. After the distillation, purification and flavoring processes are completed, the various liquids are bottled. This involves several important stages, including bottle and label design and procurement, filling of the bottles and packaging the bottles in various configurations for shipment.

We rely on a limited number of suppliers for the sourcing of our products and raw materials. However, we produce and bottle our spirits for distribution.

Distribution network

We believe that the distribution network that we have developed with our sales team and our independent distributors and brokers is one of our key strengths. We currently have distribution and brokerage relationships with third-party distributors in fifteen (15) U.S. states and expect that number to further expand throughout 2016.

U.S. distribution

Background. Importers of beverage alcohol in the U.S. must sell their products through a three-tier distribution system. Typically, an imported brand is first sold to a U.S. importer, who then sells it to a network of distributors, or wholesalers, covering the U.S., in either “open” states or “control” states. In the 33 open states, the distributors are generally large, privately-held companies. In the 18 control states, the states themselves function as the distributor, and regulate suppliers such as us. The distributors and wholesalers in turn sell to individual retailers, such as liquor stores, restaurants, bars, supermarkets and other outlets licensed to sell beverage alcohol. In larger states such as New York, more than one distributor may handle a brand in separate geographical areas. In control states, importers sell their products directly to state liquor authorities, which distribute the products and either operate retail outlets or license the retail sales function to private companies, while maintaining strict control over pricing and profit.

The U.S. spirits industry has consolidated dramatically over the last ten years due to merger and acquisition activity. There are currently eight major spirits companies, each of which own and operate their own importing businesses. All companies, including these large companies, are required by law to sell their products through wholesale distributors in the U.S. The major companies are exerting increasing influence over the regional distributors and as a result, it has become more difficult for smaller companies to get their products recognized by the distributors.

Importation. We hold the federal importer and wholesaler license required by the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury Department, and the requisite state licenses within the states we conduct business.

Our inventory is maintained in our warehouse and shipped nationally by our network of licensed and bonded carriers.

Wholesalers and distributors. In the U.S., we are required by law to use state-licensed distributors or, in the control states, state-owned agencies performing this function, to sell our brands to retail outlets. As a result, we depend on distributors for sales, for product placement and for retail store penetration. We have no distribution agreements or minimum sales requirements with any of our U.S. alcohol distributors, and they are under no obligation to place our products or market our brands. All of the distributors also distribute our competitors’ products and brands. As a result, we must foster and maintain our relationships with our distributors. Through our internal sales team, we have established relationships for our brands with wholesale distributors in the fifteen states we sell our products, and our products are sold in the U.S. by seven wholesale distributors, as well as by various state beverage alcohol control agencies.

Significant customers

Sales to one distributor, the Oregon Liquor Control Commission, accounted for approximately 32% and 40% of our consolidated revenues for fiscal years 2015 and 2014 respectively.

Sales team

We have a total sales force of three people, with an average of over ten years of industry experience with premium beverage alcohol brands.

Our sales personnel are engaged in the day-to-day management of our distributors, which includes setting quotas, coordinating promotional plans for our brands, maintaining adequate levels of stock, brand education and training and sales calls with distributor personnel. Our sales team also maintains relationships with key retail customers through independent sales calls. They also schedule promotional events, create local brand promotion plans, host in-store tastings, where permitted, and provide wait staff and bartender training and education for our brands.

In addition, we have also engaged Blackheath Beverage Group, an outsource sales and marketing company to assist in the development of additional brands, as well as, development and execution of a national roll-out strategy. We have also engaged Park Street Imports, a provider of back-office administrative and logistical services for alcohol and beverage distributors, which services include state compliance, logistics planning, order processing, distributor chargeback and bill-support management and certain accounting and reporting services.

Advertising, marketing and promotion

To build our brands, we must effectively communicate with three distinct audiences: our distributors, the retail trade and the end consumer. Advertising, marketing and promotional activities help to establish and reinforce the image of our brands in our efforts to build substantial brand value.

We employ three in-house marketing, sales and customer service personnel who work together with third party design and advertising firms to maintain a high degree of focus on each of our product categories and build brand awareness through innovative marketing activities. We use a range of marketing strategies and tactics to build brand equity and increase sales, including consumer and trade advertising, price promotions, point-of-sale materials, event sponsorship, in-store and on-premise promotions and public relations, as well as a variety of other traditional and non-traditional marketing techniques, including social media marketing, to support our brands.

Besides traditional advertising, we also employ three other marketing methods to support our brands: public relations, event sponsorships and tastings. Our significant U.S. public relations efforts have helped gain editorial coverage for our brands, which increases brand awareness. Event sponsorship is an economical way for us to have influential consumers taste our brands. We actively contribute product to trend-setting events where our brand has exclusivity in the brand category. We also conduct hundreds of in-store and on-premise promotions each year.

We support our brand marketing efforts with an assortment of point-of-sale materials. The combination of trade and consumer programs, supported by attractive point-of-sale materials, also establishes greater credibility for us with our distributors and retailers.

Intellectual property

Trademarks are an important aspect of our business. We sell our products under a number of trademarks, which we own or use under license. Our brands are protected by trademark registrations or are the subject of pending applications for trademark registration in the U.S where we distribute, or plan to distribute, our brands. The trademarks may be registered in the names of our Subsidiary. In the U.S., trademark registrations need to be renewed every ten years. We expect to register our trademarks in additional markets as we expand our distribution territories.

Seasonality

Our industry is subject to seasonality with peak retail sales generally occurring in the fourth calendar quarter primarily due to seasonal holiday buying. Historically, this holiday demand typically resulted in higher sales for us in our second and/or third fiscal quarters.

Competition

The beverage alcohol industry is highly competitive. We believe that we compete on the basis of quality, price, brand recognition and distribution strength. Our premium brands compete with other alcoholic and nonalcoholic beverages for consumer purchases, retail shelf space, restaurant presence and wholesaler attention. We compete with numerous multinational producers and distributors of beverage alcohol products, many of which have greater resources than us.

Over the past ten years, the U.S. wine and spirits industry has undergone dramatic consolidation and realignment of brands and brand ownership. The number of major importers in the U.S. has declined significantly. Today there are eight major companies: Diageo PLC, Pernod Ricard S.A., Bacardi Limited, Brown-Forman Corporation, Beam Suntory Inc., Davide Campari Milano-S.p.A., and Remy Cointreau S.A.

We believe that we are sometimes in a better position to partner with small to mid-size brands than the major importers. Despite our relative capital position and resources, we have been able to compete with these larger companies in pursuing agency distribution agreements and acquiring brands by being more responsive to private and family-owned brands, offering flexible transaction structures and providing brand owners the option to retain local production and “home” market sales. Given our size relative to our major competitors, most of which have multi-billion dollar operations, we believe that we can provide greater focus on smaller brands and tailor transaction structures based on individual brand owner preferences. However, our relative capital position and resources may limit our marketing capabilities, limit our ability to expand into new markets and limit our negotiating ability with our distributors.

By focusing on the premium and super-premium segments of the market, which typically have higher margins, and having an established, experienced sales force, we believe we are able to gain relatively significant attention from our distributors for a company of our size. Also, the continued consolidation among the major companies is expected to create an opportunity for small to mid-size wine and spirits companies, such as ourselves, as the major companies contract their portfolios to focus on fewer brands.

Government regulation

We are subject to the jurisdiction of the Federal Alcohol Administration Act, U.S. Customs Laws, Internal Revenue Code of 1986, and the Alcoholic Beverage Control Laws of all fifty states.

The U.S. Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau regulates the production, blending, bottling, sales and advertising and transportation of alcohol products. Also, each state regulates the advertising, promotion, transportation, sale and distribution of alcohol products within its jurisdiction. We are also required to conduct business in the U.S. only with holders of licenses to import, warehouse, transport, distribute and sell spirits.

We are subject to U.S. regulations on the advertising, marketing and sale of beverage alcohol. These regulations range from a complete prohibition of the marketing of alcohol in some states to restrictions on the advertising style, media and messages used.

Labeling of spirits is also regulated in many markets, varying from health warning labels to importer identification, alcohol strength and other consumer information. All beverage alcohol products sold in the U.S. must include warning statements related to risks of drinking beverage alcohol products.

In the U.S. control states, the state liquor commissions act in place of distributors and decide which products are to be purchased and offered for sale in their respective states. Products are selected for purchase and sale through listing procedures which are generally made available to new products only at periodically scheduled listing interviews. Consumers may purchase products not selected for listings only through special orders, if at all.

The distribution of alcohol-based beverages is also subject to extensive federal and state taxation in the U.S. and internationally. Most foreign countries impose excise duties on wines and distilled spirits, although the form of such taxation varies from a simple application on units of alcohol by volume to intricate systems based on the imported or wholesale value of the product. Several countries impose additional import duty on distilled spirits, often discriminating between categories in the rate of such tariffs. Once we begin distributing our products internationally, import and excise duties could have a significant effect on our sales, both through reducing the consumption of alcohol and through encouraging consumer switching into lower-taxed categories of alcohol.

We believe that we are in material compliance with applicable federal, state and other regulations. However, we operate in a highly regulated industry which may be subject to more stringent interpretations of existing regulations. Future compliance costs due to regulatory changes could be significant.

Employees

As of March 30, 2016, we had 16 full-time employees, 6 of which were in sales and marketing and 4 of which were in management and 6 in administration and production.

Geographic Information

Eastside operates in one business — premium beverage alcohol. Eastside’s product categories are rum, whiskey, vodka and specialty liquors with an intent to sell gin and private label tequila in the future. Eastside currently sells its products in fifteen states (Oregon, Washington, Nevada, Texas, Virginia, Indiana, Illinois, New York, New Jersey, Massachusetts, Connecticut, Minnesota, Georgia, Pennsylvania, and Maryland) and is authorized to distribute our products in Idaho and Ontario, Canada as well.

Item 1A. RISK FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The statements in this section describe the most significant risks to our business and should be considered carefully in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Notes to Consolidated Financial Statements” to this Form 10-K. In addition, the statements in this section and other sections of this Form 10-K include “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 and involve uncertainties that could significantly impact results. Forward-looking statements give current expectations or forecasts of future events about the company or our outlook. You can identify forward-looking statements by the fact they do not relate to historical or current facts and by the use of words such as “believe,” “expect,” “estimate,” “anticipate,” “will be,” “should,” “plan,” “project,” “intend,” “could” and similar words or expressions.

Forward-looking statements are based on assumptions and on known risks and uncertainties. Although we believe we have been prudent in our assumptions, any or all of our forward-looking statements may prove to be inaccurate, and we can make no guarantees about our future performance. Should known or unknown risks or uncertainties materialize or underlying assumptions prove inaccurate, actual results could materially differ from past results and/or those anticipated, estimated or projected.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult any subsequent disclosures we make in our filings with the SEC on Form 10-Q or Form 8-K.

The following is a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our business. In addition to the factors discussed elsewhere in this report, the following are some of the important factors that, individually or in the aggregate, we believe could make our actual results differ materially from those described in any forward-looking statements. It is impossible to predict or identify all such factors and, as a result, you should not consider the following factors to be a complete discussion of risks, uncertainties and assumptions.

RISKS RELATING TO OUR BUSINESS

We may be unable to continue as a going concern

Our independent auditor has noted in their audit report concerning our financial statements as of December 31, 2015 and 2014, that we have incurred recurring losses and negative cash flows from operations and have an accumulated deficit of approximately $7.6 million as of December 31, 2015, which raises substantial doubt about our ability to continue as a going concern.  We have incurred recurring losses and negative cash flows from operations in 2015 and 2014. We have an accumulated deficit of approximately $7.6 million as of December 31, 2015.  These conditions raise substantial doubt as to our ability to continue as a going concern.

If our brands do not achieve more widespread consumer acceptance, our growth may be limited.

Although our brands have achieved acceptance in the Pacific Northwest, most of our brands are early in their growth cycle and have not achieved extensive national brand recognition. Also, brands we may develop and/or acquire in the future are unlikely to have established extensive brand recognition. Accordingly, if consumers do not accept our brands, we will not be able to penetrate our markets and our growth may be limited.

We will require additional capital, which we may not be able to obtain on acceptable terms.  Our inability to raise such capital, as needed, on beneficial terms or at all could restrict our future growth and severely limit our operations.

We have limited capital compared to other companies in our industry.  As we continue to pursue our efforts to expand from a local/regional company to a national company, our cash flows from operations and available capital are presently not sufficient to sustain our current level of operations over the next twelve months. We currently estimate that we will require up to an additional $3.5 million to expand and market our business to become a nationwide distributor. Of this amount, we require $1.5 million for working capital and to increase inventory to allow for nationwide distribution, $0.6 million to make our new facility fully operational to support production of up to one million cases per year, and $1.0 million for sales and marketing to facilitate nationwide distribution. We plan to improve our cash position by focusing on increasing sales, improving profitability and accessing a combination of capital sources including debt and equity financings. Failure to secure these additional funds will result in a less aggressive growth plan and could also result in a reduction in the current scope of our operations. This may limit our operations and growth, including our ability to continue to develop existing brands, service our debt obligations, maintain adequate inventory levels, fund potential acquisitions of new brands, penetrate new markets, attract new customers and enter into new distribution relationships. If we have not generated sufficient cash from operations to finance additional capital needs, we will need to raise additional funds through private or public equity and/or debt financing. We cannot assure you that additional financing will be available to us on acceptable terms or at all. Our operations and growth may be limited as we may need to change our business strategy to slow the rate of, or eliminate, our expansion or reduce or curtail our operations. Also, any additional financing we undertake could impose covenants upon us that restrict our operating flexibility, and, if we issue equity securities to raise capital our existing shareholders may experience dilution and the new securities may have rights, preferences and privileges senior to those of our common stock.

We are an "emerging growth company" and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an "emerging growth company," as defined in the Jumpstart our Business Startups Act of 2012, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We depend on a limited number of suppliers. Failure to obtain satisfactory performance from our suppliers or loss of our existing suppliers could cause us to lose sales, incur additional costs and lose credibility in the marketplace.

We depend on a limited number of third-party suppliers for the sourcing of all of our products. These suppliers consist of third-party producers in the U.S. We do not have long-term written agreements with any of our suppliers. The termination of our agreements/relationships or an adverse change in the terms of these agreements could have a negative impact on our business. If our suppliers increase their prices, we may not have alternative sources of supply and may not be able to raise the prices of our products to cover all or even a portion of the increased costs. Also, our suppliers’ failure to perform satisfactorily or handle increased orders, delays in shipments of products from suppliers or the loss of our existing suppliers, especially our key suppliers, could cause us to fail to meet orders for our products, lose sales, incur additional costs and/or expose us to product quality issues. In turn, this could cause us to lose credibility in the marketplace and damage our relationships with distributors, ultimately leading to a decline in our business and results of operations. If we are not able to renegotiate these contracts on acceptable terms or find suitable alternatives, our business could be negatively impacted.

We depend on our independent wholesale distributors to distribute our products. The failure or inability of even a few of our distributors to adequately distribute our products within their territories could harm our sales and result in a decline in our results of operations.

We are required by law to use state licensed distributors or, in 18 states known as “control states,” state-owned agencies performing this function, to sell our products to retail outlets, including liquor stores, bars, restaurants and national chains in the U.S. We have established relationships for our brands with a limited number of wholesale distributors; however, failure to maintain those relationships could significantly and adversely affect our business, sales and growth. We currently are authorized to distribute our products in five control states—Oregon, Pennsylvania, Idaho, Virginia and Maryland, and are actively distributing in all of these states except Idaho. Over the past decade there has been increasing consolidation, both intrastate and interstate, among distributors. As a result, many states now have only two or three significant distributors. Also, there are several distributors that now control distribution for several states. For the years ended December 31, 2015 and 2014, sales to one customer (Oregon Liquor Control Commission) accounted for 32% and 40% of consolidated revenues, respectively. As a result, if we fail to maintain good relations with a distributor, our products could in some instances be frozen out of one or more markets entirely. The ultimate success of our products also depends in large part on our distributors’ ability and desire to distribute our products to our desired U.S. target markets, as we rely significantly on them for product placement and retail store penetration. In addition, all of our distributors also distribute competitive brands and product lines. We cannot assure you that our U.S. alcohol distributors will continue to purchase our products, commit sufficient time and resources to promote and market our brands and product lines or that they can or will sell them to our desired or targeted markets. If they do not, our sales will be harmed, resulting in a decline in our results of operations.

The sales of our products could decrease significantly if we cannot secure and maintain listings in the control states.

In the control states, the state liquor commissions act in place of distributors and decide which products are to be purchased and offered for sale in their respective states. We currently are authorized to to distribute our products in five control states—Oregon, Pennsylvania, Idaho, Virginia and Maryland and are actively distributing in all of these states except Idaho. Products selected for listing must generally reach certain volumes and/or profit levels to maintain their listings. Products are selected for purchase and sale through listing procedures which are generally made available to new products only at periodically scheduled listing interviews. Products not selected for listings can only be purchased by consumers in the applicable control state through special orders, if at all. If, in the future, we are unable to maintain our current listings in the control states, or secure and maintain listings in those states for any additional products we may acquire, sales of our products could decrease significantly.

We must maintain a relatively large inventory of our products to support customer delivery requirements, and if this inventory is lost due to theft, fire or other damage or becomes obsolete, our results of operations would be negatively impacted.

We must maintain relatively large inventories to meet customer delivery requirements for our products. We are always at risk of loss of that inventory due to theft, fire or other damage, and any such loss, whether insured against or not, could cause us to fail to meet our orders and harm our sales and operating results. Also, our inventory may become obsolete as we introduce new products, cease to produce old products or modify the design of our products’ packaging, which would increase our operating losses and negatively impact our results of operations.

Existing stockholders may experience significant dilution from the issuance of our common stock pursuant to our WWOD promissory note or pursuant to additional financings.

The conversion price on our WWOD Holdings convertible note is equal to the lesser of (i) the Fixed Conversion Price (currently $0.15) or (ii) 65% of the lowest trading price of the Company’s common stock during the 5 trading days prior to conversion. The issuance and sale of our common stock to WWOD Holdings for conversions, may have a dilutive impact on our shareholders. In addition, we may be required to consider similar financings which could also have a dilutive impact on our shareholders. As a result, our net income per share could decrease in future periods and the market price of our common stock could decline. In addition, the lower our stock price is at the time WWOD Holdings converts its promissory notes, the more shares of our common stock we will have to issue to WWOD Holdings in order to repay our note with them. If our stock price decreases, then our existing shareholders would experience greater dilution for any given dollar amount raised through the Offering.

The perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.

WWOD Holdings may pay less than the then-prevailing market price of our common stock which could cause the price of our common stock to decline.

WWOD Holdings can convert any outstanding principal and interest under such note at a price equal to the lesser of (i) the Fixed Conversion Price (currently $0.15) or (ii) 65% of the lowest trading price of the Company’s common stock during the 5 trading days prior to conversion.

WWOD Holdings could have a financial incentive to sell our shares immediately upon receiving the shares (if allowed under the federal securities law) to realize the profit between the discounted price and the market price. If WWOD Holdings were to sell our shares, the price of our common stock may decrease. If our stock price decreases, WWOD Holdings could have a further incentive to sell such shares. Accordingly, the potential discounted sales price in the WWOD Holdings note may cause the price of our common stock to decline.

Our convertible note with WWOD Holdings contains numerous restrictive covenants which limit management’s discretion to operate our business.

In order to receive funds from WWOD Holdings, we agreed to certain covenants that place significant restrictions on, among other things, our ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments and investments, and to sell or otherwise dispose of assets and merge or consolidate with other entities.

If an event of default is declared under agreements with WWOD Holdings, we could lose possession of our assets, including our inventory, which would have a material adverse effect on our business.

In connection with our financing with WWOD Holdings, we entered into a security agreement under which we granted WWOD Holdings a security interest in our inventory. Any event of default under our agreements with WWOD Holdings could trigger an acceleration of the related debt. If we were unable to repay the debt upon any such acceleration, our lenders could seek to foreclose on our assets, including our inventory, in an effort to seek repayment under the loans.  If our lenders were successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected.

Our failure to protect our respective trademarks and trade secrets could compromise our competitive position and decrease the value of our brand portfolio.

Our business and prospects depend in part on our, ability to develop favorable consumer recognition of our brands and trademarks. Although we apply for registration of our brands and trademarks, they could be imitated in ways that we cannot prevent. Also, we rely on trade secrets and proprietary know-how, concepts and formulas. Our methods of protecting this information may not be adequate. Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future and result in a judgment or monetary damages being levied against us. We do not maintain non-competition agreements with all of our key personnel or with some of our key suppliers. If competitors independently develop or otherwise obtain access to our trade secrets, proprietary know-how or recipes, the appeal, and thus the value, of our brand portfolio could be reduced, negatively impacting our sales and growth potential.

A failure of one or more of our key information technology systems, networks, processes, associated sites or service providers could have a material adverse impact on our business.

We rely on information technology (IT) systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist us in the management of our business. The various uses of these IT systems, networks, and services include, but are not limited to: hosting our internal network and communication systems; ordering and managing materials from suppliers; supply/demand planning; production; shipping product to customers; hosting our branded websites and marketing products to consumers; collecting and storing customer, consumer, employee, investor, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing, and sharing confidential and proprietary research, business plans, and financial information; complying with regulatory, legal or tax requirements; providing data security; and handling other processes necessary to manage our business.

Increased IT security threats and more sophisticated cyber crime pose a potential risk to the security of our IT systems, networks, and services, as well as the confidentiality, availability, and integrity of our data. If the IT systems, networks, or service providers we rely upon fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information, due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our business continuity plans do not effectively address these failures on a timely basis, we may suffer interruptions in our ability to manage operations and reputational, competitive and/or business harm, which may adversely affect our business operations and/or financial condition. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, customers, suppliers or consumers. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and IT systems.

Our failure to attract or retain key executive or employee talent could adversely affect our business.

Our success depends upon the efforts and abilities of our senior management team, other key employees, and a high-quality employee base, as well as our ability to attract, motivate, reward, and retain them. We do not maintain and do not intend to obtain key man insurance on the life of any executive or employee. Difficulties in hiring or retaining key executive or employee talent, or the unexpected loss of experienced employees could have an adverse impact our business performance. In addition, we could experience business disruption and/or increased costs related to organizational changes, reductions in workforce, or other cost-cutting measures.

RISKS RELATED TO OUR INDUSTRY

Demand for our products may be adversely affected by many factors, including changes in consumer preferences and trends.

Consumer preferences may shift due to a variety of factors including changes in demographic and social trends, public health initiatives, product innovations, changes in vacation or leisure activity patterns and a downturn in economic conditions, which may reduce consumers’ willingness to purchase distilled spirits or cause a shift in consumer preferences toward beer, wine or non-alcoholic beverages. Our success depends in part on fulfilling available opportunities to meet consumer needs and anticipating changes in consumer preferences with successful new products and product innovations.

We face substantial competition in our industry and many factors may prevent us from competing successfully.

We compete on the basis of product taste and quality, brand image, price, service and ability to innovate in response to consumer preferences. The global spirits industry is highly competitive and is dominated by several large, well-funded international companies. It is possible that our competitors may either respond to industry conditions or consumer trends more rapidly or effectively or resort to price competition to sustain market share, which could adversely affect our sales and profitability.

Adverse public opinion about alcohol could reduce demand for our products.

Anti-alcohol groups have, in the past, advocated successfully for more stringent labeling requirements, higher taxes and other regulations designed to discourage alcohol consumption. More restrictive regulations, negative publicity regarding alcohol consumption and/or changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease sales and consumption of alcohol and thus the demand for our products. This could, in turn, significantly decrease both our revenues and our revenue growth, causing a decline in our results of operations.

Class action or other litigation relating to alcohol abuse or the misuse of alcohol could adversely affect our business.

Our industry faces the possibility of class action or similar litigation alleging that the continued excessive use or abuse of beverage alcohol has caused death or serious health problems. It is also possible that governments could assert that the use of alcohol has significantly increased government funded health care costs. Litigation or assertions of this type have adversely affected companies in the tobacco industry, and it is possible that we, as well as our suppliers, could be named in litigation of this type.

Also, lawsuits have been brought in a number of states alleging that beverage alcohol manufacturers and marketers have improperly targeted underage consumers in their advertising. Plaintiffs in these cases allege that the defendants’ advertisements, marketing and promotions violate the consumer protection or deceptive trade practices statutes in each of these states and seek repayment of the family funds expended by the underage consumers. While we have not been named in these lawsuits, we could be named in similar lawsuits in the future. Any class action or other litigation asserted against us could be expensive and time-consuming to defend against, depleting our cash and diverting our personnel resources and, if the plaintiffs in such actions were to prevail, our business could be harmed significantly.

Regulatory decisions and legal, regulatory and tax changes could limit our business activities, increase our operating costs and reduce our margins.

Our business is subject to extensive government regulation. This may include regulations regarding production, distribution, marketing, advertising and labeling of beverage alcohol products. We are required to comply with these regulations and to maintain various permits and licenses. We are also required to conduct business only with holders of licenses to import, warehouse, transport, distribute and sell beverage alcohol products. We cannot assure you that these and other governmental regulations applicable to our industry will not change or become more stringent. Moreover, because these laws and regulations are subject to interpretation, we may not be able to predict when and to what extent liability may arise. Additionally, due to increasing public concern over alcohol-related societal problems, including driving while intoxicated, underage drinking, alcoholism and health consequences from the abuse of alcohol, various levels of government may seek to impose additional restrictions or limits on advertising or other marketing activities promoting beverage alcohol products. Failure to comply with any of the current or future regulations and requirements relating to our industry and products could result in monetary penalties, suspension or even revocation of our licenses and permits. Costs of compliance with changes in regulations could be significant and could harm our business, as we could find it necessary to raise our prices in order to maintain profit margins, which could lower the demand for our products and reduce our sales and profit potential.

Also, the distribution of beverage alcohol products is subject to extensive taxation (at both the federal and state government levels), and beverage alcohol products themselves are the subject of national import and excise duties in most countries around the world. An increase in taxation or in import or excise duties could also significantly harm our sales revenue and margins, both through the reduction of overall consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol.

We could face product liability or other related liabilities that increase our costs of operations and harm our reputation.

Although we maintain liability insurance and will attempt to limit contractually our liability for damages arising from our products, these measures may not be sufficient for us to successfully avoid or limit liability. Our product liability insurance coverage is limited to $1 million per occurrence and $5 million in the aggregate and our general liability umbrella policy is capped at $15 million. Further, any contractual indemnification and insurance coverage we have from parties supplying our products is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by these suppliers. In any event, extensive product liability claims could be costly to defend and/or costly to resolve and could harm our reputation.

Contamination of our products and/or counterfeit or confusingly similar products could harm the image and integrity of, or decrease customer support for, our brands and decrease our sales.

The success of our brands depends upon the positive image that consumers have of them. Contamination, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for our brands, could affect the demand for our products. Contaminants in raw materials purchased from third parties and used in the production of our products or defects in the distillation and fermentation processes could lead to low beverage quality as well as illness among, or injury to, consumers of our products and could result in reduced sales of the affected brand or all of our brands. Also, to the extent that third parties sell products that are either counterfeit versions of our brands or brands that look like our brands, consumers of our brands could confuse our products with products that they consider inferior. This could cause them to refrain from purchasing our brands in the future and in turn could impair our brand equity and adversely affect our sales and operations.

RISKS RELATED TO OUR SECURITIES

Our Series A Preferred is newly issued and does not have an established trading market. Holders of Series A Preferred may not be able to sell their shares of Series A Preferred if they need money.

The shares of Series A Preferred Stock are a new issue of securities with no established trading market. We do not plan to register our Series A Preferred for trading on any exchange. An active trading market for the shares may not develop, or, if it develops, may not last, in which case stockholders may experience difficulty selling their shares if they choose to do so or the market price of the Series A Preferred may decline.

There is a limited trading market for our common stock.

Our common stock is traded on the OTC Markets (QB Marketplace Tier) under the symbol “ESDI.” During the three-months ended April 5, 2016, the average daily trading volume of our common stock was approximately 44,350 shares. There has been limited trading activity in our stock recently, and when it has traded, the price has fluctuated widely. We consider our common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the common stock. A consistently active trading market for our stock may not develop at any time in the future. Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid market and limited public float for our stock. Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid market and limited public float for our common stock.

Our common stock is considered to be a “penny stock” and, as such, the market for our common stock may be further limited by certain SEC rules applicable to penny stocks.

As long as the price of our common stock remains below $5.00 per share or we have net tangible assets of $2,000,000 or less, our shares of common stock are likely to be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations make it more difficult for brokers to sell our shares of our common stock and limit the liquidity of our securities.

Transfers of our securities may be restricted by virtue of state securities “blue sky” laws which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.

Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as “blue sky” laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.

We may not be able to pay cash dividends on our Series A Preferred. Moreover, we have not previously paid dividends on our common stock into which our Series A Preferred and Warrants are convertible and do not anticipate doing so in the foreseeable future.

We have not paid any cash dividends to date and do not expect to pay dividends for the foreseeable future on our common stock. In addition, the terms of our September 2015 convertible note with WWOD Holdings prohibit us from paying cash dividends on our equity securities without lender consent.

The shares of the Series A Preferred are entitled to dividends at a rate of 8% per annum, cumulative, and payable either in cash or “in kind” in shares of common stock, at the Company’s option, provided that dividends are payable in cash only following the fiscal year in which we have net income of at least $500,000, to the extent permitted under applicable law out of funds legally available therefor.

Our officers and directors collectively own a substantial portion of our outstanding common stock, and as long as they do, they may be able to control the outcome of stockholder voting.

Our officers and directors, are collectively the beneficial owners of approximately 58% of the outstanding shares of our common stock and have voting power of approximately 52% of all votes on matters to be presented to stockholders as of April 12, 2016. Accordingly, officers and directors as a group, may be able to control us and direct our affairs and business, including any determination with respect to a change in control, future issuances of common stock or other securities, declaration of dividends on the common stock and the election of directors.

We have the ability to issue additional shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause your investment to be diluted.

Our Articles of Incorporation authorizes the Board of Directors to issue up to 900,000,000 shares of common stock and up to 100,000,000 shares of preferred stock. We have designated 3,000 shares of our preferred as Series A Preferred and have 9,997,000 shares of preferred stock available for future designation and issuance. The power of the Board of Directors to issue shares of common stock, preferred stock or warrants or options to purchase shares of common stock or preferred stock is generally not subject to stockholder approval. Accordingly, any additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting your investment.

By issuing preferred stock, we may be able to delay, defer, or prevent a change of control. Series A Preferred have significant voting rights on matters presented to the stockholders for a vote, including election of directors.

Our Articles of Incorporation permits us to issue, without approval from our stockholders, a total of 100,000,000 shares of preferred stock. We have designated 3,000 shares of our preferred as Series A Preferred and have 9,997,000 shares of preferred stock available for future designation and issuance. Our Board of Directors can determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series. It is possible that our Board of Directors, in determining the rights, preferences and privileges to be granted when the preferred stock is issued, may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights of the holders of our common stock.

On all matters submitted to a vote of our stockholders, including any meetings of our stockholders for the purpose of electing members to our Board of Directors, the holders of our Series A Preferred as a class will be entitled to an aggregate number of votes equal to the product of (x) the number of shares of Common Stock (rounded to the nearest whole number) into which the total shares of Series A Preferred Stock outstanding on the Final Closing Date are convertible on the Final Closing Date multiplied by (y) 2.5 (the “Total Series A Votes”), with each holder of Series A Preferred entitled to vote its pro rata portion of the Total Series A Votes. Our Articles of Incorporation do not provide for cumulative voting with respect to the election of directors. Based on the 880 shares of Series A Preferred outstanding on April 12, 2016, our Series A Preferred will represent approximately 24% of our voting securities and should all 3,000 shares of designated Series A Preferred be issued, such holders will be able to elect a majority of the Board of Directors.

If we fail to remain current on our reporting requirements, we could be removed from the OTC Marketplace which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

Companies quoted on the OTC Marketplace must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Marketplace. If we fail to remain current on our reporting requirements, we could be removed from the OTC Marketplace. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. In addition, we may be unable to get re-quoted on the OTC Bulletin Board, which may have an adverse material effect on our Company.

We face risks related to compliance with corporate governance laws and financial reporting standard.

The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the SEC and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and financial reporting standards for public companies. These new laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting (“Section 404”), will materially increase the Company's legal and financial compliance costs and make some activities more time-consuming, burdensome and expensive. Any failure to comply with the requirements of the Sarbanes-Oxley Act of 2002, our ability to remediate any material weaknesses that we may identify during our compliance program, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

Our internal controls over financial reporting were determined to be ineffective at December 31, 2015 and we identified material weaknesses in our internal controls over financial reporting as of December 31, 2015, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. As a result of developing, improving and expanding our core information technology systems as well as implementing new systems to support our sales, engineering, supply chain and manufacturing activities, all of which require significant management time and support, we may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion. For the period ended December 31, 2015, we identified material weaknesses in our internal control over financial reporting. As such we were unable to assert that our internal controls are effective. This could result in the loss of investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will incur significant legal, accounting and other expenses that we would not incur as a private company, including costs associated with public company reporting requirements. We will also incur costs associated with the Sarbanes-Oxley Act of 2002, as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented or to be implemented by the SEC and the NYSE AMEX. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Substantial sales of our stock may impact the market price of our common stock.

Future sales of substantial amounts of our common stock, including shares that we may issue upon exercise of options and warrants, could adversely affect the market price of our common stock. Further, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock, the percentage ownership of our stockholders will be reduced and the price of our common stock may fall.

Our stock price is volatile.

The trading price of our common stock has been and continues to be subject to fluctuations. The stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, the operating and stock performance of other companies that investors may deem as comparable and news reports relating to trends in the marketplace, among other factors. Significant volatility in the market price of our common stock may arise due to factors such as:

As long as there is only a limited public market for our common stock, the sale of a significant number of shares of our common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered, and could cause a severe decline in the price of our common stock.

There are limitations in connection with the availability of quotes and order information on the OTC Markets.

Trades and quotations on the OTC Markets involve a manual process and the market information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available. The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price. Execution of trades, execution reporting and the delivery of legal trade confirmation may be delayed significantly. Consequently, one may not be able to sell shares of our Common Stock at the optimum trading prices.

There are delays in order communication on the OTC Markets.

Electronic processing of orders is not available for securities traded on the OTC Marketplace and high order volume and communication risks may prevent or delay the execution of one's OTC Marketplace trading orders. This lack of automated order processing may affect the timeliness of order execution reporting and the availability of firm quotes for shares of our Common Stock. Heavy market volume may lead to a delay in the processing of OTC Marketplace security orders for shares of our Common Stock, due to the manual nature of the market. Consequently, one may not able to sell shares of our Common Stock at the optimum trading prices.

There is a risk of market fraud on the OTC Marketplace.

OTC Marketplace securities are frequent targets of fraud or market manipulation. Not only because of their generally low price, but also because the OTC Marketplace reporting requirements for these securities are less stringent than for listed or NASDAQ traded securities, and no exchange requirements are imposed. Dealers may dominate the market and set prices that are not based on competitive forces. Individuals or groups may create fraudulent markets and control the sudden, sharp increase of price and trading volume and the equally sudden collapse of the market price for shares of our Common Stock.

There is a limitation in connection with the editing and canceling of orders on the OTC Markets.

Orders for OTC Markets securities may be canceled or edited like orders for other securities. All requests to change or cancel an order must be submitted to, received and processed by the OTC Markets. Due to the manual order processing involved in handling OTC Markets trades, order processing and reporting may be delayed, and one may not be able to cancel or edit one's order. Consequently, one may not be able to sell its shares of our Common Stock at the optimum trading prices.

Increased dealer compensation could adversely affect our stock price.

The dealer's spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of shares of our Common Stock on the OTC Markets if the stock must be sold immediately. Further, purchasers of shares of our Common Stock may incur an immediate "paper" loss due to the price spread. Moreover, dealers trading on the OTC Markets may not have a bid price for shares of our Common Stock on the OTC Markets. Due to the foregoing, demand for shares of our Common Stock on the OTC Markets may be decreased or eliminated.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Our executive offices are located at 1805 SE Martin Luther King Jr. Blvd., Portland, Oregon 97214. We lease these premises under a lease agreement with a 6-year term starting on November 1, 2014 and ending October 31, 2020, subject to our option to extend the lease for an additional 5-years. Monthly lease payments range from $6,000 to $24,000 after a $90,000 rental prepayment in November 2014 and a period of free rent from November 2014 through January 2015. The lease is guaranteed by our chief executive officer.

We lease additional office space and a tasting room at 1512 SE 7^th Avenue, Portland, Oregon 97214. This lease has a current monthly lease rate of $1,750 per month and expires on November 30, 2015, provided, that, we have two one year options to renew. Our monthly lease rate will increase 3% for each option.

We also lease retail space in two separate locations, one in Washington Square (Portland, Oregon) and the other in Clackamas Town Center (Happy Valley Town Center). For Washington Square, we are currently leasing a temporary cart at a monthly rate of $3,750 and a monthly percentage rent equal to 15% of the excess of gross sales and revenues made at the retail space for any month in excess of $25,000. We expect that we will be leasing a new permanent store front at the Washington Square mall by May of this year. The retail space in the Clackamas Town center is rented pursuant to a License Agreement under which we lease 1,200 square feet of retail space and currently pay monthly license fees of $4,200 per month and monthly percentage rent equal to 15% of the excess of gross sales and revenues made at the retail space for any month in excess of $20,000.

Item 3. LEGAL PROCEEDINGS

We are party to claims and litigation that arise in the normal course of business. Management believes that the ultimate outcome of these claims and litigation will not have a material impact on our financial position or results of operations.

Item 4. MINE SAFETY DISCLOSURES.

None.

PART II

Item 5. MARKET FOR COMMON EQUITY

Our common stock trades on the OTC Markets (QB Marketplace Tier) under the symbol “ESDI.” Very limited trading of our common stock has occurred during the past two years; therefore, only limited historical price information is available. The following table sets forth the high and low closing bid prices of our common stock (USD) for the last two fiscal years, as reported by OTC Markets Group Inc. and represents inter dealer quotations, without retail mark-up, mark-down or commission and may not be reflective of actual transactions:

We consider our stock to be “thinly traded” and any reported sale prices may not be a true market-based valuation of our stock.  Some of the bid quotations from the OTC Bulletin Board set forth below may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Shareholders

Our shares of common stock are issued in registered form. The registrar and transfer agent for our shares of common stock is Pacific Stock Transfer Company, 4045 South Spencer Street Suite 403 Las Vegas, NV 89119 (Telephone: (702) 361-3033; Facsimile: (800) 785-7782).

As of April 12, 2016, there were 46,726,000 shares of our common stock outstanding, which were held by approximately 25 record stockholders. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of shares of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.

Dividend Policy

We have not paid cash dividends on our common stock since our inception and we do not contemplate paying dividends in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans. The following provides information concerning compensation plans under which our equity securities are authorized for issuance as of December 31, 2015:

Non-plan Options

In October 2014, Eastside Distilling, LLC agreed to grant an option to purchase 1,000,000 shares of our common stock to a third-party consultant at an exercise price of $0.40 per share in consideration of services rendered, which agreement was assumed by us upon closing of our acquisition of Eastside Distilling on October 31, 2014. The option was granted on February 10, 2015 and expires on February 10, 2017.

Dividend Policy

We have not paid cash dividends on our common stock since our inception and we do not contemplate paying dividends in the foreseeable future.

Recent Sales of Unregistered Securities

We received gross proceeds of $407,000 from the sale of the 407 Units for cash. We used $28,560 of these proceeds as payment for non-exclusive placement agent fees to FINRA registered broker-dealers. In addition, approximately $25,000 was used to repay outstanding indebtedness under 5% promissory notes. The remaining proceeds will be used for working capital and general corporate purposes and to fund growth opportunities. The issuance and sale of the shares of Series A Preferred, the Warrants, the Warrant Shares and the Conversion Shares (collectively, the “Securities”) have not been registered under the Securities Act of 1933, as amended and the Securities have been sold and will be issued in reliance on exemptions from the registration requirements of the Securities Act afforded by Rule 506 of Regulation D thereunder based on the following facts: each of the purchasers has represented that it is an accredited investor as defined in Regulation D and that it is acquiring the securities for its own account and not with a view to or for distributing or reselling the Securities and that it has sufficient investment experience to evaluate the risks of the investment; the Company used no advertising or general solicitation in connection with the issuance and sale of the Securities; and the securities will be issued as restricted securities with a legend stating the shares have not been registered under the Securities Act and setting forth or referring to the restrictions on transferability and the sale of the shares under the Securities Act. In addition, we issued 5-year warrants to purchase 71,400 shares of common stock with an exercise price of $0.15 to broker-dealers in connection with the initial closing of this private placement.

Steven Earles, our president and chief executive officer, purchased 185 Units in consideration of $185,000 in accrued and unpaid salary. Steven Shum our chief financial officer purchased 97 Units in consideration of $97,000 in accrued and unpaid salary. Martin Kunkel our chief marketing officer and secretary purchased 58 Units in consideration of $58,000 in accrued and unpaid salary. Carrie Earles our chief branding officer and wife of Steven Earles purchased 83 Units in consideration of $83,000 in accrued and unpaid salary.

Item 6. SELECTED FINANCIAL DATA

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

This section of the Registration Statement includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.

The following discussion should be read in conjunction with the consolidated financial statements and notes. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management's expectations. Factors that could cause differences include, but are not limited to, continued reliance on external sources on financing, development risks for new products and services, commercialization delays and customer acceptance risks when introducing new products and services, fluctuations in market demand, pricing for raw materials as well as general conditions of the energy and oilfield marketplace.

Overview

We were incorporated on February 11, 2004 in Nevada as Eurocan Holdings, Ltd. Until closing of the Acquisition (described below), Eurocan operated solely as an online marketing and media solutions firm specializing in digital interactive media, which business was conducted through Eurocan’s wholly-owned subsidiary, Michael Williams Web Design Inc. of New York, NY (“MWW”).

On December 1, 2014, we changed our corporate name to “Eastside Distilling, Inc.” from Eurocan Holdings Ltd, to reflect our recent acquisition of Eastside Distilling, LLC resulting in us primarily conducting Eastside’s business (See “The Acquisition of Eastside Distilling, LLC” below).   Until February 3, 2015, we continued to operate our online marketing and media solutions’ business through MWW (See “Spin-Off of MWW” below).

The Acquisition of Eastside Distilling, LLC

On October 31, 2014, Eurocan Holdings Ltd. (“we,” “us,” or the “Company”) consummated the acquisition (the “Acquisition”) of Eastside Distilling, LLC (“Eastside”) pursuant to an Agreement and Plan of Merger (the “Agreement”) by and among the Company, Eastside, and Eastside Distilling, Inc., our wholly-owned subsidiary. Pursuant to the Agreement, Eastside merged with and into Eastside Distilling, Inc. The merger consideration for the acquisition consisted of 32,000,000 shares (the “Shares”) of our common stock.   In addition, certain of our stockholders cancelled an aggregate of 24,910,000 shares of our common stock held by them. As a result, upon consummation of the Agreement on October 31, 2014, we had 40,000,000 shares of our common stock issued and outstanding, of which 32,000,000 shares were held by the former members of Eastside.  The issuance of these Shares was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to exemptions afforded by Section 4(a)(2) of the Securities Act, Rule 506 of Regulation D promulgated thereunder, and/or Regulation S promulgated thereunder.

At the effective time of the Acquisition, our officers and directors resigned, and appointed Steven Earles and Lenny Gotter as directors to our board of directors. In addition, concurrent with closing of the Acquisition, the Company appointed Mr. Earles as Chief Executive Officer, Chief Financial Officer and Chairman and Mr. Gotter as Chief Operating Officer and Secretary. Mr. Gotter resigned as an officer in February 2015.

Following the Acquisition, we conduct the business of Eastside as our primary business.

Eastside is a manufacturer, developer, producer and marketer of master-crafted spirits in the following beverage alcohol categories: bourbon, whiskey, rum and vodka. Eastside currently distributes its products in fifteen states (Oregon, Washington, Nevada, Texas, Virginia, Indiana, Illinois, New York, New Jersey, Massachusetts, Connecticut, Minnesota, Georgia, Pennsylvania, and Maryland) and is authorized to distribute our products in Idaho and Ontario Canada as well.  Eastside also generates revenue from tastings, tasting room tours, private parties and merchandise sales from its distillery and showroom located on the Distillery Row in Portland, Oregon.

Spin-Off of MWW

Following consummation of the Acquisition, our new management conducted an evaluation of the MWW business and an analysis of the business going forward. Management determined that due to MWW’s operating and net losses in each of the last two fiscal years, its working capital deficit as of the end of the latest fiscal year and as of the latest fiscal quarter, and its accumulated deficit, it was not in the best interest of the company and its stockholders to continue the operation of MWW going forward. Accordingly, on February 3, 2015, we transferred all shares of MWW held by us along with all assets and liabilities related to MWW to Michael Williams in consideration of MWW’s and Mr. Williams’ full release of all claims and liabilities related to MWW and the MWW business. Mr. Williams is the sole officer, director and employee of MWW. The spinoff of MWW resulted in the impairment of goodwill related to the Acquisition of approximately $3.2 million in December 2014. Additionally, as a result of the Spin-Off, we recorded a net gain of approximately $52,890 on February 3, 2015. This gain is primarily the result of the transfer of net liabilities to Michael Williams, which is reflected in our financial statements for the year ended December 31, 2015.

Recent Developments

Series A Preferred Stock and Warrant Offering. On April 4, 2016, we conducted an initial closing for 880 units (“Units”) to 12 accredited investors at a price of $1,000 per Unit for an aggregate purchase price of $880,000, of which (i) 407 Units were purchased for cash (ii) 423 Units were purchased by certain of our officers in consideration of $423,000 accrued and unpaid salary and (iii) 50 Units were purchased in consideration of cancellation of outstanding indebtedness.. Each Unit consists of (i) 1 share of our Series A Convertible Preferred Stock convertible into shares of our common stock, $0.0001 par value per share (“Common Stock”) at a rate of $0.15 per share and (ii) one Warrant, exercisable for 3-years, to purchase six thousand six hundred sixty six (6,666) shares of Common Stock at an exercise price of $0.18 per whole share.  We received gross proceeds of $407,000 from the sale of the 407 Units for cash. We used $28,560 of these proceeds as payment for non-exclusive placement agent fees to FINRA registered broker-dealers.   In addition, approximately $25,000 was used to repay outstanding indebtedness under 5% promissory notes.  The remaining proceeds will be used for working capital and general corporate purposes and to fund growth opportunities.

National Rollout progress. Our national rollout plan continues to progress. We currently sell our products into fifteen states which represents an increase of over 100% from March 2015 and is largely attributable to our addition of additional distributors. In addition, we expect to expand distribution to 23 states in the coming months based on our distributors near-term expansion plans.

Canadian Product Sale Approval. In March 2016, our Burnside Bourbon product was approved for sale in the province of Ontario, Canada.

Corporate Information

Our executive offices are located at 1805 SE Martin Luther King Jr. Blvd., Portland, Oregon 97214. Our telephone number is (971) 888-4264 and our internet address is www.eastsidedistilling.com. The information on, or that may be, accessed from our website is not part of this annual report.

Results of Operations

Overview

Fiscal year 2015 represented another record sales year for the Company. Even more important, we made significant progress toward our goal of becoming a nationwide brand. At the beginning of the year, Oregon represented our key market with limited sales in just a couple of additional states. By the end of the year, Oregon still represented a major market, but we had begun selling across 14 additional states and that figure is expected to expand beyond 20 states in the very near future. Working with the major distributors has been a key factor in that expansion. At the beginning of 2015, we had begun to work with one of the major distributors and by the end of the year, we were working with four of the major distributors. As we look ahead, we anticipate growing sales penetration in the existing states as well as an increase in the number of states where we sell our products.

During 2015, we also invested heavily in our infrastructure (facilities, people, and marketing programs) in order to support our planned expansion. While we will require additional working capital, we believe we have positioned the Company well for improved performance in 2016.

Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014

Our sales for the year ended December 31, 2015 increased to $2,326,664, or approximately 62%, from $1,435,416 for the year ended December 31, 2014. The increase in revenue in the year ended 2015 is primarily attributable to our increased national distribution as well as further sales traction within the Pacific Northwest.

Excise taxes for the year ended December 31, 2015 increased to $624,046, or approximately 64%, from $379,972 for the comparable 2014 period. The increase is attributable to the increase in liquor sales due to our increased distribution and sales traction during the period.

During the year ended December 31, 2015, cost of sales increased to $870,390, or approximately 76%, from $494,889 for the comparable 2014 period. The increase is primarily attributable to the costs associated with our increased liquor sales in the period. We also incurred higher fixed facility costs totaling $240,000 associated with our larger production facility. As our volumes continue to increase, we anticipate improved coverage on those fixed facility costs and hence improved margins.

Selling, general and administrative expenses for the year ended December 31, 2015 increased to $4,373,746, or approximately 220%, from $1,366,341for the year ended December 31, 2014. This increase is primarily due to the hiring of additional sales personnel and event coordinators related to our new retail locations, an increase in production staff as well as increased legal, accounting, and professional costs related to becoming a public company in late 2014 and our efforts to expand our product sales nationally.

Goodwill impairment was $3,246,149 in the year ended December 31, 2014. This impairment was a direct result of our spin-off of our online marketing and media solutions subsidiary in February 2015, which caused us to determine that the goodwill recorded in our October 2014 acquisition should be impaired. There was no similar transaction in the comparable 2015 period.

Other expense was $59,548 during 2015 due to interest expense which was partially offset by a gain on the spin-off of MWWD, compared to an expense of $3,736 during the year ended December 31, 2014.

Net loss during the year ended December 31, 2015 was $3,601,066 as compared to a loss of $4,057,171 for the year ended December 31, 2014. Our net loss was primarily attributable to our increased selling, general and administrative expenses relating to increased personnel, professional, legal and accounting expenses during the year which amounts were offset by our increased sales during the year.

Liquidity and Capital Resources

The Company's primary capital requirements are for the financing of inventories and, sales and marketing efforts. Funds for such purposes have historically been generated from Company's operations, extended payment terms from suppliers for inventory purchases, notes payable and equity raisings.

We have a history of losses over the two year period ended December 31, 2015. During the years ended December  31, 2015 and 2014, the Company had net losses of $3.6 million and $4.1 million, respectively and net cash used in operating activities for the corresponding periods was $(1.2) million and $(1.1), respectively. As a result, since fiscal 2014, it has been necessary to rely on raising new equity or extended payment terms from vendors for our capital and working capital needs.

At December 31, 2015, the Company had outstanding convertible notes payable and another note payable indebtedness of $0.5 million compared to $0.2 million as of December 31, 2014. As a consequence of our indebtedness as of December 31, 2015, a portion of our cash flow from operations must be dedicated to interest and principal payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures or other growth initiatives and other general corporate requirements, see “Part II, Item 1A. Risk Factors − Risks Related to Our Business −  We will require additional capital, which we may not be able to obtain on acceptable terms. Our inability to raise such capital, as needed, on beneficial terms or at all could restrict our future growth and severely limit our operations. ” below. In addition, at December 31, 2015, the Company had limited cash resources, with cash of $141 thousand see “Part II, Item 1A. Risk Factors − Risks Related to Our Business −  Our current cash resources might not be sufficient to meet our expected near-term cash needs ”.

Our short-term and long-term liquidity needs arise primarily from our working capital and debt service requirements. We anticipate that capital expenditures for the fiscal year ending December 31, 2016 will be approximately $100,000, primarily for increased manufacturing capacity. As of December 31, 2015, we have cash of approximately $141,000.

For the year ended December 31, 2015, the Company has generated a net loss of $3.6 million, resulting in a shareholders’ deficit of approximately $1.0 million as of December 31, 2015. Additionally, for the year ended December 31, 2015, the Company has used $1.2 million in cash to fund its operations. These matters, along with our the absence of a revolving credit agreement and recurring losses in prior years, raise substantial doubt as to the ability of the Company to continue as a going concern.

In order to meet its cash and liquidity needs, the Company intends to raise additional financing and/or renegotiate its various debt obligations. There is no assurance that the Company will be successful in obtaining additional financing and/or be able to renegotiate the terms of its existing debt obligations on terms which are satisfactory to the Company, or at all. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty. See “Part II, Item 1A. Risk Factors − Risks Related to Our Business −  This Annual Report on Form 10-K includes a liquidity note to our consolidated financial statements for the quarter ended October 31, 2015 which may make capital raising more difficult for us and may require us to scale back” below.

Our ability to improve our liquidity in future periods and continue as a going concern will depend on generating positive operating cash flow, primarily through increased distribution into other states, improved gross profit and controlling our expenses, which in turn, may be impacted by prevailing economic conditions and other financial and business factors, some of which are beyond our control, see “Part II, Item 1A. Risk Factors”.

We have incurred a loss of $3,601,066 and have an accumulated deficit of $7,561,751 for the fiscal year ended December 31, 2015, and expect to incur further losses in the development of our business and have been dependent on funding operations through the issuance of debt, convertible debt and private sale of equity securities. These conditions raise substantial doubt about our ability to continue as a going concern.

Series A Preferred Stock and Warrant Financing (April 2016)

On April 4, 2016, we conducted an initial closing for 880 units (“Units”) to 12 accredited investors at a price of $1,000 per Unit for an aggregate purchase price of $880,000, of which (i) 407 Units were purchased for cash (ii) 423 Units were purchased by certain of our officers in consideration of $423,000 accrued and unpaid salary and (iii) 50 Units were purchased in consideration of cancellation of outstanding indebtedness. Each Unit consists of (i) 1 share of our Series A Convertible Preferred Stock convertible into shares of our common stock, $0.0001 par value per share at a rate of $0.15 per share, and (ii) one Warrant, exercisable for 3-years, to purchase six thousand six hundred sixty six (6,666) shares of Common Stock at an exercise price of $0.18 per whole share (the “Warrant Shares”).   We received gross proceeds of $407,000 from the sale of the 407 Units for cash. We used $28,560 of these proceeds as payment for non-exclusive placement agent fees to FINRA registered broker-dealers.   In addition, approximately $25,000 was used to repay outstanding indebtedness under 5% promissory notes.  The remaining proceeds will used for working capital and general corporate purposes and to fund growth opportunities. In addition, we issued 5-year warrants to purchase 71,400 shares of common stock with an exercise price of $0.15 to broker-dealers in connection with the initial closing of this private placement.

Common Stock Offering (December 2014)

On December 31, 2014, we completed an offering (the “Offering”) of 5,512,500 shares of our common stock, par value $0.0001 per share (“Common Stock”) at a price of $0.40 per share for an aggregate purchase price of $2,205,000. The Offering was made to accredited investors and was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder. We intend to use the net proceeds from the Offering for the build-out of new facility, marketing expenditures, repayment of indebtedness and working capital and general corporate purposes. Steven Earles, our president and chief executive officer, purchased 37,500 shares of Common Stock in the Offering for $15,000 in cash in the Offering.

Convertible Notes

On September 10, 2015, we issued and sold a convertible promissory note bearing interest at 14% per annum in the principal amount of $275,000 to a single accredited investor. This note has a maturity date of May 10, 2016 and an original issue discount of $33,500. Accordingly, we received gross proceeds of $241,500. After paying the investors expenses, we received net proceeds of $239,000, which proceeds were used for working capital and general corporate purposes. The conversion price for this note is equal to the lesser of (i) the Fixed Conversion Price (currently $0.15) or (ii) 65% of the lowest trading price of our common stock during the 5-trading days prior to conversion. This note contains certain covenants and restrictions including, among others, that for so long as this note is outstanding we will not incur indebtedness, permit liens, pay dividends or dispose of certain assets. Events of default under the note include, among others, failure to pay principal or interest on the note or comply with certain covenants under the note. This note is secured by our inventory pursuant to the terms and conditions of Security Agreement.

On June 13, 2014, we issued Crystal Falls Investments, LLC a demand promissory note in the amount of approximately $150,000, which note was amended on September 19, 2014 to be a 5% convertible promissory note. The amended note bears interest at 5% per annum and had a maturity date of June 13, 2015. The amended note may be converted into shares of our common stock at a fixed conversion price of $0.40 per share. This amended note may be prepaid upon payment of 150% of the outstanding principal amount to the holder. The amended note was further amended on July 24, 2015 to extend the maturity date to December 13, 2015. Effective December 13, 2015, this note was further amended to: (i) provide for partial repayment of the Note ($110,000) following a Qualified Financing; (ii) extend the Maturity Date under the Note until the earlier of (A) 45-days after the initial closing of a Qualified Financing or (B) April 1, 2016; and (iii) remove the prepayment provision requiring 150% of the Note upon prepayment. “Qualified Financing” means either (i) a sale of the Company’s equity securities pursuant to which the Company receives aggregate gross cash proceeds of at least two-hundred fifty thousand dollars ($250,000) or (ii) a credit facility of up to three-million five hundred thousand dollars ($3,500,000) pursuant to which the Company receives aggregate gross cash proceeds of at least four-hundred thousand dollars ($400,000) upon the initial closing of such facility.Effective April 1, 2016, the note was further amended to extend the Maturity Date until May 31, 2016 and provide for installment payments of the principal amount beginning April 5, 2016 to the May 31, 2016 maturity date.

Critical Accounting Policies

Acquisition

The acquisition of Eastside Distilling LLC by Eurocan Holdings, Ltd. (now known as Eastside Distilling Inc.) on October 31, 2014, was accounted for as a reverse acquisition with Eastside Distilling LLC as the acquirer of Eurocan. The financial statements presented in this Annual Report on Form 10-K are presented as a continuation of the operations of Eastside Distilling LLC with one adjustment to retroactively adjust the legal common stock shares of Eastside Distilling Inc. to reflect the legal capital of Eurocan prior to the October 31, 2014 acquisition.

Revenue Recognition

The Company records revenue when all four of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

The Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment sales, which include sales to the Oregon Liquor Control Commission (OLCC), the Company recognizes sales upon the consignee’s shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary rights of return. The Company excludes sales tax collected and remitted to various states from sales and cost of sales. Sales from items sold through the Company’s retail location are recognized at the time of sale.

Revenue received from online merchants who sell discounted gift certificates for the Company’s merchandise and tastings is deferred until the customer has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier.

Shipping and Fulfillment Costs

Freight costs incurred related to shipment of merchandise from Eastside’s distribution facilities to customers are recorded in cost of sales.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At December 31, 2015, and December 31, 2014, one distributor, the Oregon Liquor Control Commission (OLCC), represented 50% and 67% of trade receivables, respectively. Sales to one distributor, the OLCC, accounted for approximately 32% and 40% of consolidated revenues for each of the years ended December 31, 2015 and 2014, respectively.

Inventories

Inventories primarily consist of bulk and bottled liquor and merchandise and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (FIFO) method. A portion of inventory is held by the OLCC on consignment until it is sold to a third party. Eastside regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. The Company has recorded no write-downs of inventory for the years ended December 31, 2015 and 2014.

Advertising

Advertising costs are expensed as incurred. Advertising expense was approximately $389,000 and $303,000 for the years ended December 31, 2015 and 2014, respectively, and is included in selling, general and administrative expenses in the accompanying statements of income.

Excise Taxes

Stock-Based Compensation

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

Off-Balance Sheet Arrangements

None.

Item 7A QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 8. FINANCIAL STATEMENTS

The Board of Directors

Eastside Distilling, Inc. and Subsidiary

Portland, Oregon

We have audited the accompanying consolidated balance sheets of Eastside Distilling, Inc. and Subsidiary (prior to November 1, 2014, Eastside Distilling, LLC) (collectively, the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eastside Distilling, Inc. and Subsidiary (prior to November 1, 2014, Eastside Distilling, LLC) as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations and has an accumulated deficit of approximately $7.6 million as of December 31, 2015. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Burr Pilger Mayer, Inc. 

San Francisco, California

April 13, 2016

Eastside Distilling, Inc. and Subsidiary

Consolidated Balance Sheets

December 31, 2015 and 2014

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

Eastside Distilling, Inc. and Subsidiary

Consolidated Statements of Operations

Years ended December 31, 2015 and 2014

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

Eastside Distilling, Inc. and Subsidiary

Consolidated Statements of Stockholder's (Deficit) Equity

Years ended December 31, 2015 and 2014

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

Eastside Distilling, Inc. and Subsidiary

Consolidated Statements of Cash Flows

Years ended December 31, 2015 and 2014

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

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

The Company was formed in 2008 and is a manufacturer, developer, producer, and marketer of hand-crafted spirits in the following beverage alcohol categories: bourbon, whiskey, rum, and vodka. The Company currently distributes its products in fifteen states (Oregon, Washington, Nevada, Texas, Virginia, Indiana, Illinois, New York, New Jersey, Massachusetts, Connecticut, Minnesota, Georgia, Pennsylvania, and Maryland). The Company also generates revenue from tastings, tasting room tours, private parties, and merchandise sales from its facilities in Oregon. The Company is subject to the Oregon Liquor Control Commission (OLCC) and the Alcohol and Tobacco Tax and Trade Bureau (TTB). The Company is headquartered in Portland, Oregon.

On October 31, 2014, Eurocan Holdings Ltd. (Eurocan) consummated the acquisition (the Acquisition) of Eastside Distilling, LLC (the LLC) pursuant to an Agreement and Plan of Merger (the Agreement) by and among Eurocan, the LLC, and Eastside Distilling, Inc., Eurocan's wholly-owned subsidiary. Pursuant to the Agreement, the LLC merged with and into Eastside Distilling, Inc. The merger consideration for the Acquisition consisted of 32,000,000 shares of Eurocan's common stock. In addition, certain of Eurocan's stockholders cancelled an aggregate of 24,910,000 shares of Eurocan's common stock held by them. As a result, on October 31, 2014, Eurocan had 40,000,000 shares of common stock issued and outstanding, of which 32,000,000 shares were held by the former members of the LLC. Consequently, for accounting purposes, the transaction was accounted for as a reverse acquisition, with the LLC as the acquirer of Eurocan. These consolidated financial statements are presented as a continuation of the operations of the LLC with one adjustment to retroactively adjust the legal common stock of Eastside Distilling, Inc. to reflect the legal capital of Eurocan prior to the Acquisition.

Subsequent to the Acquisition, Eastside Distilling, Inc. merged with and into Eurocan, and Eurocan's name was officially changed to Eastside Distilling, Inc. (Eastside). Prior to the Acquisition, Michael Williams Web Design, Inc. (MWWD) was a wholly-owned subsidiary of Eurocan and constituted the majority of Eurocan's operations. Pursuant to the Agreement and subsequent activity, MWWD became a wholly-owned subsidiary of Eastside on October 31, 2014. MWWD's operations were not significant. Eastside and MWWD are collectively referred to herein as "the Company".

On February 3, 2015, the Company entered into a Separation and Share Transfer Agreement (Share Transfer) with MWWD under which substantially all assets and liabilities of MWWD were transferred to Michael Williams in consideration of MWWD's and Mr. Williams' full release of all claims and liabilities related to MWWD and the MWWD business. Following the Transfer, MWWD ceased to be a subsidiary. As a result of the Share Transfer, the Company recorded a gain of approximately $53,000, which is included in other income (expense) in the accompanying consolidated statement of operations for the year ended December 31, 2015. This gain is primarily the result of the transfer of net liabilities to Michael Williams.

The results for the year ended December 31, 2015 referred to in these consolidated financial statements include both the results of Eastside and MWWD (through February 3, 2015). The results for fiscal 2014 referred to in these consolidated financial statements include the results of the LLC.

Our financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred a loss of $3,601,066 and have an accumulated deficit of $7,561,751 for the fiscal year ended December 31, 2015, and expect to incur further losses in the development of our business, we have negative working capital of $1.2 million at December 31, 2015, and have been dependent on funding operations through the issuance of debt, convertible debt and private sale of equity securities. These conditions raise substantial doubt about our ability to continue as the going concern. Management’s plans include continuing to finance operations through the private or public placement of debt and/or equity securities and the reduction of expenses. The financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

Management believes that its successful ability to raise capital and increases in revenues will provide the opportunity for the Company to continue as a going concern. The Company's ultimate success depends on its ability to achieve profitable operations and generate positive cash flow from operations. There can be no assurance that the Company will achieve profitable operations or raise additional capital or financing at acceptable terms.

Basis of Presentation and Consolidation

The accompanying consolidated financial statements for Eastside Distilling, Inc. were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The consolidated financial statements include the accounts of Eastside Distilling, Inc. and its wholly-owned subsidiary MWWD (through February 3, 2015). All intercompany balances and transactions have been eliminated in consolidation.

Segment Reporting

The Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company has one business activity, marketing and distributing hand-crafted spirits, and operates as one segment. The Company's chief operating decision makers, its chief executive officer and chief financial officer, review the Company's operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company records revenue when all four of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

The Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment sales, the Company recognizes sales upon the consignee’s (typically the OLCC) 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. 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

Revenue received from online merchants who sell discounted gift certificates for the Company's merchandise and tastings is deferred until the customer has redeemed the discounted gift certificate or the gift certificate has expired, whichever occurs earlier.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

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 contract production fees and packaging.

Shipping and Fulfillment Costs

Freight costs incurred related to shipment of merchandise from the Company’s distribution facilities to customers are recorded in cost of sales.

Cash and Cash Equivalents

Cash equivalents are considered to be highly liquid investments with maturities of three months or less at the time of the purchase. The Company had no cash equivalents at December 31, 2015 and 2014.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At December 31, 2015 and December 31, 2014, one distributor, the Oregon Liquor Control Commission (OLCC), represented 50% and 67% of trade receivables, respectively. Sales to one distributor, the OLCC, accounted for approximately 32% and 40% of consolidated revenues for each of the years ended December 31, 2015 and 2014, respectively.

Fair Value Measurements

GAAP defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAAP permits an entity to choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation and disclosure requirements for assets and liabilities for which the fair value option is elected. At December 31, 2015 and December 31, 2014, 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:

None of the Company's assets or liabilities were measured at fair value at December 31, 2015 and 2014. However, GAAP requires the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments consist principally of trade receivables, accounts payable, accrued liabilities, note payable, and convertible note payable. The estimated fair value of trade receivables, accounts payable, and accrued liabilities approximates their carrying value due to the short period of time to their maturities. At December 31, 2015 and 2014, the Company’s note payable and convertible notes payable are at fixed rates and their carrying value approximates fair value.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

Inventories

Inventories primarily consist of bulk and bottled liquor and merchandise and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (FIFO) method. A portion of inventory is held by the OLCC on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. The Company has recorded no write-downs of inventory for the years ended December 31, 2015 and 2014.

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 two to seven years. Amortization of leasehold improvements is computed using the straight-line method over the life of the lease or the useful lives of the assets, whichever is shorter. The cost and related accumulated depreciation and amortization of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is reported as current period income or expense. The costs of repairs and maintenance are expensed as incurred.

Long-lived Assets

The Company accounts for long-lived assets, including property and equipment, at amortized cost. Management reviews long-lived assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount of the asset, an impairment loss would be recognized to write down the asset to its estimated fair value.

Goodwill

Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identifiable tangible and intangible assets acquired. Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment. An annual review is performed during the fourth quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. At December 31, 2014, the Company determined that its goodwill recorded as a result of the Acquisition was fully impaired.

Income Taxes

The provision for income taxes is based on income and expenses as reported for financial statement purposes using the "asset and liability method" for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. At December 31, 2015 and 2014, the Company established valuation allowances against its net deferred tax assets.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

Income tax positions that meet the "more-likely-than-not" recognition threshold are measured at the largest amount of income tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized income tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized income tax benefits would be classified as additional income taxes in the accompanying consolidated statements of operations. There were no unrecognized income tax benefits, nor any interest and penalties associated with unrecognized income tax benefits, accrued or expensed at and for the years ended December 31, 2015 and 2014.

The Company files federal income tax returns in the U.S. and various state income tax returns. The Company is no longer subject to examinations by the related tax authorities for the Company's U.S. federal and state income tax returns for years prior to 2011.

Advertising

Advertising costs are expensed as incurred. Advertising expense was approximately $389,000 and $303,000 for the years ended December 31, 2015 and 2014, respectively, and is included in selling, general, and administrative expenses in the accompanying consolidated statements of operations.

Comprehensive Income

Comprehensive (loss) income consists of net (loss) income and other comprehensive income. The Company does not have any reconciling other comprehensive income items for the years ended December 31, 2015 and 2014.

Excise Taxes

The Company is responsible for compliance with the TTB regulations, which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying amounts. The Company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws.

Stock-Based Compensation

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

Accounts Receivable Factoring Program

We use an accounts receivable factoring program with certain customer accounts. Under this program, we have the option to sell those customer receivables in advance of payment for 75% of the amount due. When the customer remits payment, we then receive the remaining 25%. We are charged interest on the advanced 75% payment at a rate of 1.5% per month. This program has improved our liquidity, but there can be no assurance that these programs will continue in the future. Under the terms of the agreement with the factoring provider, any factored invoices have recourse should the customer fail to pay the invoice. Thus, we record factored amounts as a liability until the customer remits payment and we receive the remaining 25% of the non-factored amount. During the fiscal year ended December 31, 2015, we factored invoices totaling $99,258 and received total proceeds of $74,444. At December 31, 2015, we had factored invoices outstanding of $17,601. We incurred interest expense associated with the factoring program of $5,867 during the year ended December 31, 2015. We did not factor any invoices during fiscal year 2014.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standard Boards (the “FASB”) issued Accounting Standards Update No. 2016-02 —Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Though permitted, the Company does not plan to early adopt. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.

In May 2014, FASB issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for annual and interim reporting periods beginning after December 15, 2016. The Company does not plan to early adopt. We are currently evaluating the impact ASU 2014-09 will have on the Company's consolidated financial statements.

In August 2014, the FASB issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements - Going Concern ("ASU 2014-15"). The new guidance explicitly requires that management assess an entity's ability to continue as a going concern and may require additional detailed disclosures. ASU 2014-15 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Though permitted, the Company does not plan to early adopt. The Company does not believe that this standard will have a significant impact on its consolidated financial statements.

In July 2015, the FASB issued Accounting Standard Update No. 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"), which requires entities to measure most inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for annual and interim periods beginning after December 15, 2016. Though permitted, the Company does not plan to early adopt. We are currently evaluating the impact ASU 2015-11 will have on the Company's consolidated financial statements.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

In April 2015, the FASB issued ASU 2015-03, simplifying the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015 and early application is permitted. We have early adopted as of December 31, 2015.

Reclassifications

Certain prior period amounts have been reclassified to conform to the December 31, 2015 presentation with no changes to net loss or total stockholders' equity previously reported.

Inventories consist of the following at December 31:

Property and equipment consists of the following at December 31:

Depreciation and amortization expense totaled $19,277 and $5,889 for the years ended December 31, 2015 and 2014, respectively.

Note payable consists of the following at December 31:

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

At December 31, convertible notes payable consisted of:

Amortization of the debt discount was $16,750 for the year ended December 31, 2015 and was recorded as other expense in the consolidated statement of operations.

Maturities on notes payable as of December 31, 2015, are as follows:

Year ending December 31:

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

The provision for income taxes results in effective tax rates which are different than the federal income tax statutory rate. The nature of the differences for the year ended December 31 were as follows:

The components of the net deferred tax assets and liabilities at December 31 consisted of the following:

At December 31, 2015, the Company has a cumulative net operating loss carryforward (NOL) of approximately $1.6 million, to offset against future income for federal and state tax purposes. These federal and state NOLs can be carried forward for 20 and 15 years, respectively. The federal NOLs begins to expire in 2034, and the state NOLs begins to expire in 2029.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Due to the uncertainty of the realizability of the deferred tax assets, management has determined a full valuation allowance is appropriate.

Operating Leases

The Company leases its warehouse, kiosks, and tasting room space under operating lease agreements which expire through October 2020. Monthly lease payments range from $1,300 to $24,000 over the terms of the leases. For operating leases which contain fixed escalations in rental payments, the Company records the total rent expense on a straight-line basis over the lease term. The difference between the expense computed on a straight-line basis and actual payments for rent represents deferred rent which is included within accrued liabilities on the accompanying consolidated balance sheets. Retail spaces under lease are subject to monthly percentage rent adjustments when gross sales exceed certain minimums.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

At December 31, 2015, future minimum lease payments required under the operating leases are approximately as follows:

Total rent expense was approximately $384,000 and $144,000 for the years ended December 31, 2015 and 2014, respectively.

Legal Matters

The Company is involved in certain legal matters arising from the ordinary course of business. Management does not believe that the outcome of these matters will have a significant effect on the Company's consolidated financial position or results of operations.

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted net loss per common share is computed by dividing net loss by the sum of the weighted average number of common shares outstanding and the potential number of any dilutive common shares outstanding during the period. Potentially dilutive securities consist of the incremental common stock issuable upon exercise of stock options and convertible notes. Potentially dilutive securities are excluded from the computation if their effective is anti-dilutive. There were no dilutive common shares at December 31, 2015 and 2014. The numerators and denominators used in computing basic and diluted net loss per common share in 2015 and 2014 are as follows:

In April 2015, the Company issued 37,500 shares of common stock to a third-party consultant in exchange for services rendered.

In July 2015, the Company issued 225,000 shares of common stock to two third-party consultants in exchange for services rendered.

In August 2015, the Company issued 135,000 shares of common stock to two third-party consultants in exchange for services rendered.

In August 2015, the Company issued 45,000 shares of common stock to employees.

In October 2015, the Company entered into a consulting agreement under which it agreed to issue 100,000 shares of common stock to a consultant for services. These shares have not been issued.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

In November 2015, the Company entered into management consulting agreements under which it agreed to issue 90,000 shares of common stock to third-party consultants in exchange for services rendered. These shares were issued in February 2016.

In December 2015, the Company entered into management consulting agreements under which it agreed to issue 50,000 shares of common stock to third-party consultants in exchange for services rendered. These shares were issued effective February 18, 2016.

All shares were fully vested upon issuance.

On January 29, 2015, the Company adopted the 2015 Stock Incentive Plan (the Plan). The total number of shares available for the grant of either stock options or compensation stock under the Plan is 3,000,000 shares, subject to adjustment. The exercise price per share of each stock option shall not be less than 20 percent of the fair market value of the Company's common stock on the date of grant. Stock options shall vest at the rate of at least 25 percent in the first year, starting 6-months after the grant date, and 75% in year two. At December 31, 2015, there were 1,200,000 options issued under the Plan outstanding.

The Company also issues, from time to time, options which are not registered under a formal option plan. At December 31, 2015, there were 1,000,000 options outstanding that were not issued under the Plan.

A summary of all stock option activity at and for the twelve months ended December 31, 2015 is presented below:

(1) Non-Plan options

(2) 1,200,000 options granted under 2015 Stock Incentive Plan; 450,000 non-plan options, which were subsequently canceled under an agreement with the holder.

The aggregate intrinsic value of options outstanding at December 31, 2015 was $0.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

At December 31, 2015, there were 1,147,917 unvested options with an aggregate grant date fair value of $476,175. The unvested options will vest in accordance with the vesting schedule in each respective option agreement, which is generally over a period of 6 to 24 months. The aggregate intrinsic value of unvested options at December 31, 2015 was $0. During the twelve months ended December 31, 2015, 52,083 options became 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. To determine the fair value of stock options using the Black-Scholes valuation model, the calculation takes into consideration the effect of the following:

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 following weighted-average assumptions were used in the Black-Scholes valuation model for options granted during the year ended December 31, 2015:

The weighted-average grant-date fair value per share of stock options granted during the twelve months ended December 31, 2015 was $0.46. The aggregate grant date fair value of the 1,650,000 options granted during the twelve months ended December 31, 2015 was $763,550.

For the twelve months ended December 31, 2015, total stock option expense related to stock options was $140,370. At December 31, 2015, the total compensation cost related to stock options not yet recognized is approximately $395,169, which is expected to be recognized over a weighted-average period of approximately 1.60 years.

During the years ended December 31, 2015 and 2014, the Company's chief executive officer paid expenses on behalf of the Company on his personal credit card. These related party advances do not bear interest and are payable on demand. At December 31, 2015 and 2014, the balance due to the chief executive officer was approximately $27,075 and $3,000, respectively, and is included in accounts payable on the accompanying consolidated balance sheets.

Eastside Distilling, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2015 and 2014

On February 18, 2016, the Company issued 90,000 shares of common stock under consulting agreements entered into by the Company in November 2015.

Effective February 18, 2016, the Company issued 50,000 shares of common stock under consulting agreements entered into by the Company in December 2015.

On March 9, 2016, the Company filed with the Nevada Secretary of State a Certificate of Designation of Series A Convertible Preferred Stock (the “Series A Certificate of Designation”) which sets forth the rights, preferences and privileges of the Series A Convertible Preferred Stock (the “Series A Preferred”).  Three thousand (3,000) shares of Series A Preferred with a stated value of $1,000 per share were authorized under the Series A Certificate of Designation. Each share of Series A Preferred has a stated value of $1,000, which is convertible into shares of the Company’s common stock (the “Common Stock”) at a fixed conversion price equal to $0.15 per share. The Series A Preferred accrue dividends at a rate of 8% per annum, cumulative. Dividends are payable quarterly in arrears 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 $500,000, to the extent permitted under applicable law out of funds legally available therefor. 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) 90% of the average of the per share market values during the twenty (20) trading days immediately preceding a dividend date. In the event of any voluntary or involuntary liquidation, dissolution or winding up, or sale of the Company, each holder of Series A Preferred shall be entitled to receive its pro rata portion of an aggregate payment equal to: (i) $1,000 multiplied by (ii) the total number of shares of Series A Preferred Stock issued under the Series A Certificate of Designation multiplied by (iii) 2.5. For all matters submitted to a vote of the Company’s stockholders, the holders of the Series A Preferred as a class shall have an aggregate number of votes equal to the product of (x) the number of shares of Common Stock (rounded to the nearest whole number) into which the total shares of Series A Preferred Stock issued under the Series A Certificate of Designation on such date of determination are convertible multiplied by (y) 2.5 (the “Total Series A Votes”), with each holder of Series A Preferred entitled to vote its pro rata portion of the Total Series A Votes. Holders of Common Stock do not have cumulative voting rights. In addition, the holders of Series A Preferred shall vote separately a class to change any of the rights, preferences and privileges of the Series A Preferred.

On April 1, 2016, the Company’s 5% convertible note with Crystal Falls Investments, LLC was further amended to extend the maturity date thereunder to May 31, 2016 and to provide for installment payments on the principal amount on such note as follows: $25,000 on April 5, 2016; $35,000 on April 29, 2016; $40,000 on May 16, 2016 and $50,000 on May 31, 2016. Failure to make the installment payments on the prescribed due dates will constitute an event of default under such note.

On April 4, 2016, the Company conducted an initial closing for 880 units (“Units”) to 12 accredited investors at a price of $1,000 per Unit for an aggregate purchase price of $880,000, of which (i) 407 Units were purchased for cash (ii) 423 Units were purchased by certain of its officers in consideration of $423,000 accrued and unpaid salary and (iii) 50 Units were purchased in consideration of cancellation of outstanding indebtedness.. Each Unit consists of (i) 1 share of our Series A Convertible Preferred Stock convertible into shares of our common stock, $0.0001 par value per share at a rate of $0.15 per share, and (ii) one Warrant, exercisable for 3-years, to purchase six thousand six hundred sixty six (6,666) shares of Common Stock at an exercise price of $0.18 per whole share.  The Company received gross proceeds of $407,000 from the sale of the 407 Units for cash. We used $28,560 of these proceeds as payment for non-exclusive placement agent fees to FINRA registered broker-dealers.   In addition, approximately $25,000 was used to repay outstanding indebtedness under 5% promissory notes.  The remaining proceeds will be used for working capital and general corporate purposes and to fund growth opportunities. In addition, we issued 5-year warrants to purchase 71,400 shares of common stock with an exercise price of $0.15 to broker-dealers in connection with the initial closing of this private placement. Steven Earles, the Company’s president and chief executive officer, purchased 185 Units in the Offering in consideration of $185,000 in accrued and unpaid salary. Steven Shum the Company’s chief financial officer purchased 97 Units in the Offering in consideration of $97,000 in accrued and unpaid salary. Martin Kunkel the Company’s chief marketing officer and secretary purchased 58 Units in the Offering in consideration of $58,000 in accrued and unpaid salary. Carrie Earles the Company’s chief branding officer and wife of Steven Earles purchased 83 Units in the Offering in consideration of $83,000 in accrued and unpaid salary.

Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

Item 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this annual report on Form 10-K, an evaluation was carried out by our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of December 31, 2015. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

Based on that evaluation, the Company’s management concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective. Management intends to improve the adequacy of its disclosure controls and procedures during the course of 2016, subject to available resources.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

The Company’s management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment, management identified a material weakness in internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness identified is described below.

Procedures for Control Evaluation. Management has not established with appropriate rigor the procedures for evaluating internal controls over financial reporting. Due to limited resources and lack of segregation of duties, documentation of the limited control structure has not been accomplished.

Lack of Audit Committee. To date, the Company has not established an Audit Committee. It is management’s view that such a committee, including a financial expert, is an utmost important entity level control over the financial reporting process.

Insufficient Documentation of Review Procedures. The Company employs policies and procedures for reconciliation of its financial statements and note disclosures, however, these processes are not appropriately documented.

As a result of the material weaknesses in internal control over financial reporting described above, the Company’s management has concluded that, as of December 31, 2015, the Company’s internal control over financial reporting was not effective based on the criteria in Internal Control – Integrated Framework issued by COSO.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we, engaged our independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

On October 1, 2015, we appointed Steven Shum as our Chief Financial Officer. Prior to Mr. Shum’s appointment, Mr. Earles served as both Chief Executive Officer and Chief Financial Officer. Mr. Shum has served as principal accounting officer for a publicly traded entity previously as well. We believe the segregation of duties as well as Mr. Shum’s prior public company accounting experience will improve our internal control over financial reporting.

CEO and CFO Certifications

Appearing immediately following the Signatures section of this report there are Certifications of our CEO and CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this report is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

Item 9B. OTHER INFORMATION.

On April 1, 2016, our 5% convertible note with Crystal Falls Investments, LLC was further amended to extend the maturity date thereunder to May 31, 2016 and to provide for installment payments on the principal amount on such note as follows: $25,000 on April 5, 2016; $35,000 on April 29, 2016; $40,000 on May 16, 2016 and $50,000 on May 31, 2016. Failure to make the installment payments on the prescribed due dates will constitute an event of default under such note.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Set forth below is certain information concerning our directors and executive officers:

Steven Earles

President Chief Executive Officer and director (Chairman)

Mr. Earles has served as our President, Chief Executive Officer, and director (Chairman) since October 31, 2014. Previously, Mr. Earles served as Eastside Distilling LLC’s Chief Executive Officer since January 2014. Prior to joining Eastside, Mr. Earles served as managing director of CRM Land Development LLC, a land development company from 2010 to 2014. From 2000 to 2010, Mr. Earles served as Chief Executive Officer for SD Earles Inc., a southern California real estate development company. In addition, Mr. Earles served as Chief Executive Officer for several start-up companies from 2000 to 2010.

Steve Shum

Chief Financial Officer

Mr. Shum has served as our Chief Financial Officer since October 1, 2015. Prior to joining Eastside, Mr. Shum served as an officer and director of XZERES Corp from October 2008 until April 3, 2015, a publicly-traded global renewable energy company. At XZERES, Mr. Shum’s officer roles included; Chief Operating Officer from September 9, 2014 until April 3, 2015, Chief Financial Officer, Principal Accounting Officer and Secretary (alternate name: Cascade Wind Corp) from April 2010 until September 9, 2014, as the Chief Executive Officer of Cascade Wind Corp., Inc. (now XZERES Corp.) from October 2008 to August 2010, and as the President of Cascade Wind Corp., Inc. (formerly, A.R.E. Wind Corp.) from October 2008 to April 12, 2010. Mr. Shum also serves as the Managing Principal of Core Fund Management, LP and the Fund Manager of Core Fund, LP. He was a Founder of Revere Data LLC (now part of Factset Research Systems, Inc.) and served as its Executive Vice President for four years, heading up the product development efforts and contributing to operations, business development, and sales. He spent six years as an Investment Research Analyst and Portfolio Manager of D.N.B. Capital Management, Inc. His previous employers include Red Chip Review and Laughlin Group of Companies. He earned a BS in Finance and a BS in General Management from the Portland State University in 1992.

Martin Kunkel

Chief Marketing Officer, Secretary and director

Mr. Kunkel has served as our Chief Marketing Officer and director since January 13, 2015 and as our Secretary since February 27, 2015. Since April 2014, Mr. Kunkel has also served as Director of Player Development and Casino Marketing at the Hard Rock Hotel/Casino in Las Vegas, Nevada. From June 2011 to April 2014, Mr. Kunkel served as Executive Casino Host and Casino Marketing for the Cosmopolitan in Las Vegas, Nevada. From October 2010 to June 2011, Mr. Kunkel served as Casino Host for the Hard Rock Hotel/Casino in Hollywood, Florida.

Lenny Gotter

Director and Founder

Mr. Gotter has served as a director since October 31, 2014. In addition, Mr. Gotter served as Chief Operating Officer and from October 31, 2014 to February 26, 2015. Mr. Gotter founded Eastside Distilling, LLC, our wholly-owned subsidiary in 2008 and has served in management positions since its founding, most recently as Chief Operating Officer. Mr. Gotter has a degree in economics from the University of Wisconsin.

Director Qualifications

We considered Mr. Earles’ prior experience with Eastside as well as experience with other start-up businesses as well as his experience as CEO for a real estate development company as important factors in concluding that he was qualified to serve as one of our directors. Regarding Mr. Gotter, we considered his experience founding Eastside and being employed in various management capacities at Eastside since 2008 as important factors in concluding that he was qualified to serve as one of our directors. Regarding Mr. Kunkel, we considered his marketing and player development positions as important factors in concluding that he was qualified to serve as one of our directors.

Involvement in Certain Legal Proceedings

None of our directors or executive officers has, during the past ten years:

Family Relationships

None.

Stockholders can send communications to the Board of Directors by sending a certified or registered letter to the Chairman of the Board, care of the Secretary, at our main business address set forth above. Communications that are threatening, illegal, or similarly inappropriate, and advertisements, solicitations for periodical or other subscriptions, and other similar communications will generally not be forwarded to the Chairman.

Item 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid to our executive officers for services rendered during the fiscal years ended December 31, 2015, and 2014.

All Other Compensation

None

Grants of Plan-Based Awards

The following table sets forth information concerning the number of shares of common stock underlying restricted stock awards and stock options granted to the Named Executive Officers in the year ended December 31, 2015.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth all outstanding equity awards made to each of the Named Executive Officers that are outstanding as of December 31, 2015.

Option Exercises and Stock Vested

None.

Employment Agreements

We have employment agreements with each of Steven Earles, Steven Shum, Lenny Gotter and Martin Kunkel. Descriptions of the material terms of each agreement are set forth below.

Employment Agreement with Steven Earles

On February 6, 2015, we entered into an employment agreement with Steven Earles to serve as President, Chief Executive Officer, Chief Financial Officer and Chairman of our Board of Directors.  The agreement is for an initial term ending on February 5, 2018 and provides for an annual base salary during the term of the agreement of $104,000 per year. Mr. Earles is eligible to receive a bonus of at the discretion of the board of directors.  On August 12, 2015, we amended Mr. Earles’ employment agreement to increase his annual base salary to $245,000

The agreement also contains the following material provisions: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment; (ii) two (2) weeks paid vacation leave; (iii) medical, dental and life insurance benefits (iii) 36-month non-compete/non-solicitation terms; and(iv) a severance payment equal to the six months base salary upon termination without cause.

Employment Agreement with Steve Shum

On October 5, 2015, we entered into an employment agreement with Mr. Shum. The agreement is for an initial term ending on October 5, 2018 and provides for an annual base salary during the term of the agreement of $195,000 per year, Mr. Shum is eligible to receive a bonus of at the discretion of the board of directors.  In addition, Mr. Shum received an option to purchase 850,000 shares of our common stock.  This option has a 5 year term and the securities issued thereunder will be vest over 2-years with 25% vesting in the first year and 75% vesting in the second year, provided, however, that the options will not begin vesting until 6-months after the date of grant.

The agreement also contains the following material provisions: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment; (ii) two (2) weeks paid vacation leave; (iii) medical, dental and life insurance benefits (iii) 36-month non-compete/non-solicitation terms; and (iv) a severance payment equal to the six months base salary upon termination without cause.

Employment Agreement with Lenny Gotter

On February 6, 2015, we entered into an employment agreement with Lenny Gotter to serve as Chief Operating Officer.  The agreement is for an initial term ending on February 5, 2018 and provides for an annual base salary during the term of the agreement of $78,000 per year, Mr. Gotter received a $5,000 one-time bonus upon execution of the agreement and is eligible to receive a bonus of at the discretion of the board of directors.  On February 26, 2015, Mr. Gotter’s agreement was amended to reflect his resignation as Chief Operating Officer. Mr. Gotter will continue to be employed by us in his role as a founder.

The agreement also contains the following material provisions: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment; (ii) two (2) weeks paid vacation leave; (iii) medical, dental and life insurance benefits (iii) 36-month non-compete/non-solicitation terms; (iv) a severance payment equal to the six months base salary upon termination without cause. Mr. Gotter also agreed to a 5-year lock-up with respect to his shares.

Employment Agreement with Martin Kunkel

On February 6, 2015, we entered into an employment agreement with Martin Kunkel to serve as Chief Marketing Officer.  The agreement is for an initial term ending on February 5, 2018 and provides for an annual base salary during the term of the agreement of $40,000 per year, Mr. Kunkel is eligible to receive a bonus of at the discretion of the board of directors.  In addition, Mr. Kunkel received an option to purchase 200,000 shares of our common stock.  This option has a 5 year term and the securities issued thereunder will be vest over 2-years with 25% vesting in the first year and 75% vesting in the second year provided, however, that the options will not begin vesting until 6-months after the date of grant. On August 12, 2015, we amended Mr. Kunkel’s employment agreement to increase his annual base salary to $104,000.

The agreement also contains the following material provisions: (i) reimbursement for all reasonable travel and other out-of-pocket expenses incurred in connection with his employment; (ii) two (2) weeks paid vacation leave; (iii) medical, dental and life insurance benefits (iii) 36-month non-compete/non-solicitation terms; and (iv) a severance payment equal to the six months base salary upon termination without cause.

Potential Payments upon Termination

Under the terms of Messrs.’ Earles, Shum, Gotter, and Kunkel’s employment agreements, each of them is entitled to a severance payment of six (6) month’s salary at the then-applicable base salary rate in the event that we terminate their employment without cause.

The following table sets forth quantitative information with respect to potential payments to be made to each of Messrs. Earles, Gotter and Kunkel upon termination without cause. The potential payments are based on the terms of each of the Employment Agreements discussed above. For a more detailed description of the particular Employment Agreement, see the “Employment Agreements” section above. 

Compensation of Directors

Currently, directors receive no compensation for their services on our Board. All directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending board of director and committee meetings provided that we have the resources to pay these expenses.

Code of Ethics

We have adopted a code of ethics that applies to the principal executive officer and principal financial and accounting officer.  We will provide to any person without charge, upon request, a copy of our code of ethics.  Requests may be directed to our principal executive offices at 1805 SE Martin Luther King Jr. Blvd., Portland, Oregon 97214.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MAATERS

The following table sets forth information as of April 12, 2016 as to each person or group who is known to us to be the beneficial owner of more than 5% of our outstanding voting securities and as to the security and percentage ownership of each of our executive officers and directors and of all of our officers and directors as a group.  As of April 12, 2016, we had 46,726,000 shares of common stock outstanding.

Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power over securities.  Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder.

  Shares of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of the date of this Registration Statement are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the year ended December 31, 2014, a former officer of the Company advanced us $8,358. The amount is non-interest bearing, unsecured and due on demand. This advance was forgiven in October 2014 in connection with the Acquisition.

During 2014, our President, Mr. Earles, paid expenses on behalf of Eastside Distilling on his personal credit card totaling $345,212. During 2015, Mr. Earles paid expenses on behalf of Eastside Distilling on his personal credit card totaling $731,899. These related party advances do not bear interest and are payable on demand. We have repaid $704,824 of these advances leaving a balance due as of December 31, 2015 of $27,075.

In December 2014, our President, Mr. Earles, purchased 37,500 shares of common stock for $15,000 in our December 2014 Offering.

On April 4, 2016, Steven Earles, our president and chief executive officer, purchased 185 Units in our Series A Preferred Stock and Warrant Unit Offering in consideration of $185,000 in accrued and unpaid salary. Steven Shum our chief financial officer purchased 97 Units in the in our Series A Preferred Stock and Warrant Unit Offering in consideration of $97,000 in accrued and unpaid salary. Martin Kunkel our chief marketing officer and secretary purchased 58 Units in in our Series A Preferred Stock and Warrant Unit Offering in consideration of $58,000 in accrued and unpaid salary. Carrie Earles our chief branding officer and wife of Steven Earles purchased 83 Units in in our Series A Preferred Stock and Warrant Unit Offering in consideration of $83,000 in accrued and unpaid salary. These issuances were unanimously approved by our board of directors, including all disinterested directors.

We believe that the foregoing transactions were in our best interests. Consistent with Section 78.140 of the Nevada Revised Statutes, it is our current policy that all transactions between us and our officers, directors and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders, or are fair to us as a corporation as of the time it is authorized, approved or ratified by the board. We will conduct an appropriate review of all related party transactions on an ongoing basis, and, where appropriate, we will utilize our audit committee for the review of potential conflicts of interest.

Director Independence

Our Board of Directors has determined that none of our directors are “independent” as defined under the standards set forth in Section 121A of the American Stock Exchange Company Guide.  In making this determination, the Board of Directors considered all transactions set forth under “Certain Relationships and Related Transactions” above.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

Burr Pilger Mayer, Inc., LLP billed us $52,500 in fees for our 2015 annual audit and $37,800 in fees for the review of our quarterly financial statements in 2015. Burr Pilger Mayer, Inc., LLP billed us $25,000 in fees for our 2014 annual audit. MaloneBailey LLP billed us $12,000 in fees for the review of our quarterly financial statements in 2014.

Audit Related Fees

We paid fees to Burr Pilger Mayer, Inc. for assurance and related services of $35,000 related to other SEC filings in 2015.

We did not pay any fees to Burr Pilger Mayer, Inc. for assurance and related services that are not reported under Audit Fees above in 2014. We did not pay any fees to MaloneBailey, LLP for assurance and related services that are not reported under Audit Fees above in 2014

Tax Fees

For the fiscal years ended each of December 31, 2015 and 2014, the aggregate fees billed for tax compliance, by Burr Pilger Mayer, Inc. were $0. For the fiscal year ended December 31, 2014, the aggregate fees billed for tax compliance, by MaloneBailey LLP were $0.

Pre-Approval Policies and Procedures

We have implemented pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, our audit committee pre-approves all services to be provided by Burr Pilger Mayer, Inc. and the estimated fees related to these services.

All audit, audit related, and tax services were pre-approved by the audit committee, which concluded that the provision of such services by Burr Pilger Mayer Inc. was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. Our pre-approval policies and procedures provide for the audit committee’s pre-approval of specifically described audit, audit-related, and tax services on an annual basis, but individual engagements anticipated to exceed pre-established thresholds must be separately approved. The policies and procedures also require specific approval by the audit committee if total fees for audit-related and tax services would exceed total fees for audit services in any fiscal year. The policies and procedures authorize the audit committee to delegate to one or more of its members pre-approval authority with respect to permitted services.

Item 15. EXHIBITS.

(1) Filed herewith

Signatures

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this amended report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.